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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF1934
For the quarterly period ended June 30, 2003
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 000-28052
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EN POINTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2467002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization):
100 N. SEPULVEDA BLVD., 19TH FLOOR
EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices) (ZIP CODE)
(310) 725-5200
(Registrant's telephone number, including area code)
-----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of August 13, 2003, 6,721,827 shares of common stock of the Registrant
were issued and outstanding.
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1
INDEX
EN POINTE TECHNOLOGIES, INC.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2003
(unaudited) and September 30, 2002
Condensed Consolidated June 30, 2003 Statements of Operations
- Three months and nine months ended June 30, 2003 and 2002
(unaudited)
Condensed Consolidated Statements of Cash Flows - Nine months
ended June 30, 2003 and 2002 (unaudited)
Notes to Condensed Consolidated Financial Statements - June
30, 2003
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk
Item 4 Controls and Procedures
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 6 Exhibits & Reports on Form 8-K
Signature and Certifications
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, September 30,
2003 2002
--------- ---------
(Unaudited)
ASSETS:
Current assets:
Cash $ 902 $ 4,629
Restricted cash 70 70
Accounts receivable, net 37,631 31,748
Inventories, net 9,791 5,611
Recoverable taxes -- 1,800
Prepaid expenses and other current assets 507 789
-------- --------
Total current assets 48,901 44,647
Property and equipment, net of accumulated
depreciation and amortization 6,269 7,002
Other assets 1,093 551
-------- --------
Total assets $ 56,263 $ 52,200
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable, trade $ 15,328 $ 9,860
Borrowings under lines of credit 13,939 12,421
Accrued liabilities 4,015 3,991
Other current liabilities 1,503 1,529
-------- --------
Total current liabilities 34,785 27,801
Long term liability 5,435 5,433
Losses in excess of investment in unconsolidated affilitates -- 143
-------- --------
Total liabilities 40,220 33,377
-------- --------
Stockholders' equity:
Common stock 7 7
Additional paid-in capital 41,241 41,241
Treasury stock (4) (4)
Accumulated deficit (25,201) (22,421)
-------- --------
Total stockholders' equity 16,043 18,823
-------- --------
Total liabilities and stockholders' equity $ 56,263 $ 52,200
======== ========
See Notes to Condensed Consolidated Financial Statements.
3
EN POINTE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended Nine months ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales:
Product $ 60,598 $ 57,832 $ 190,939 $ 175,846
Service 9,415 6,312 26,661 19,689
--------- --------- --------- ---------
Total net sales 70,013 64,144 217,600 195,535
--------- --------- --------- ---------
Cost of sales:
Product 55,620 54,307 176,076 162,920
Service 5,419 3,785 15,172 12,203
--------- --------- --------- ---------
Total cost of sales 61,039 58,092 191,248 175,123
--------- --------- --------- ---------
Gross profit:
Product 4,978 3,525 14,863 12,926
Service 3,996 2,527 11,489 7,486
--------- --------- --------- ---------
Total gross profit 8,974 6,052 26,352 20,412
--------- --------- --------- ---------
Selling and marketing expenses 6,748 5,758 21,321 17,389
General and administrative expenses 2,498 2,666 7,167 8,682
Legal settlement expense (recovery) -- -- 393 (848)
--------- --------- --------- ---------
Operating loss (272) (2,372) (2,529) (4,811)
--------- --------- --------- ---------
Interest expense, net 182 166 590 512
Other income, net (63) (100) (196) (221)
--------- --------- --------- ---------
Loss before income taxes and loss (391) (2,438) (2,923) (5,102)
--------- --------- --------- ---------
reversal income from affiliates
Benefit for income taxes -- (322) -- (1,807)
Loss reversal income from affiliates -- 180 143 621
--------- --------- --------- ---------
Net loss $ (391) $ (1,936) $ (2,780) $ (2,674)
========= ========= ========= =========
Net loss per share:
Basic $ (0.06) $ (0.29) $ (0.41) $ (0.40)
========= ========= ========= =========
Diluted $ (0.06) $ (0.29) $ (0.41) $ (0.40)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 6,720 6,698 6,720 6,639
========= ========= ========= =========
Diluted 6,720 6,698 6,720 6,639
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
4
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine months ended
June 30,
-------------------------
2003 2002
------- -------
Cash flows from operating activities:
Net loss $(2,780) $(2,674)
Adjustments to reconcile net loss
to net cash used by operations:
Deferred rent expense (2) 94
Depreciation and amortization 1,365 1,380
Loss reversal income from affiliates (143) (621)
Allowances for doubtful accounts, returns, and inventory 241 199
Net change in operating assets and liabilities (2,725) 1,302
------- -------
Net cash used by operating activities, net of effects of acquisition (4,044) (320)
------- -------
Cash flows from investing activities:
Acquisition of business (921) --
Purchase of property and equipment (198) (793)
------- -------
Net cash used by investing activities (1,119) (793)
------- -------
Cash flows from financing activities:
Net borrowings under lines of credit 1,518 6,330
Payment on long term liability (82) (64)
Proceeds from sales of stock to employees -- 194
------- -------
Net cash provided by financing activities 1,436 6,460
------- -------
(Decrease) increase in cash $(3,727) $ 5,347
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 652 $ 525
======= =======
Income taxes refunded $(1,958) $ (819)
======= =======
Equipment purchased under capitalized lease $ 86
=======
See Notes to Condensed Consolidated Financial Statements.
5
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In the opinion of management, the unaudited condensed consolidated balance
sheets of En Pointe Technologies, Inc. (the "Company" or "En Pointe") at June
30, 2003, and the unaudited condensed consolidated statements of operations and
unaudited condensed consolidated statements of cash flows for the interim
periods ended June 30, 2003 and 2002 include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly these financial
statements in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The year-end
balance sheet data was derived from audited financial statements, but does not
include disclosures required by generally accepted accounting principles.
Operating results for the three months and nine months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2003. It is suggested that these condensed statements be
read in conjunction with the Company's most recent Form 10-K for the fiscal year
ended September 30, 2002.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. On an on-going basis, management evaluates its estimates and judgments,
including those related to customer bad debts, product returns, vendor returns,
rebate reserves, inventories, restructuring costs, sales tax audit reserves,
other contingencies and litigation. Management bases its estimates and judgments
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------ ----------------------------
(In Thousands Except Per Share Amounts) 2003 2002 2003 2002
--------------- --------------- --------------- -------
Net loss $ (391) $ (1,936) $ (2,780) $(2,674)
=============== =============== =============== =======
Weighted average shares outstanding 6,720 6,698 6,720 6,639
Effect of dilutive securities:
Dilutive potential of options -- -- -- --
Weighted average shares and share equivalents
--------------- --------------- --------------- -------
outstanding $ 6,720 $ 6,698 $ 6,720 $ 6,639
=============== =============== =============== =======
Basic loss per share $ (0.06) $ (0.29) $ (0.41) $ (0.40)
=============== =============== =============== =======
Diluted loss per share $ (0.06) $ (0.29) $ (0.41) $ (0.40)
=============== =============== =============== =======
See Notes to Condensed Consolidated Financial Statements.
6
NOTE 3 - LOSS REVERSAL INCOME AND LOSSES OF UNCONSOLIDATED AFFILIATES
Under the equity method of accounting, the Company has recognized losses
in unconsolidated affiliates to the extent of its equity investment and to the
extent of its contingent exposure to losses from debt guarantees and other
indirect investments in its affiliates. The Company has recognized losses in
prior quarters in excess of its investment in affiliates principally because of
certain debt guarantees made to lenders of its affiliates. In addition, since
the Company could not recognize profit on past sales to affiliates to the extent
of its ownership in those entities, upon the termination of ownership in the
affiliates, such profits are being recognized.
As the Company was relieved of its debt guarantees, those losses generally
were reversed and reported as income except for the retention of a portion of
the income for the establishment of certain reserves for losses on past
transactions with the affiliates as well as estimated costs in transitioning
from IT services provided by SupplyAccess, Inc., a former affiliate, to
performing those functions in-house. With the final recognition in the quarter
ended December 31, 2002, of $143,000 of income from the reversal of such losses,
the Company has reversed all of the losses in excess of equity investments
previously established.
In the prior fiscal year for the three and nine months ended June 30, 2002,
the Company recognized approximately $180,000 and $621,000, respectively of
benefits from the reversal of losses of unconsolidated affiliates.
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement -- Obligations." This statement establishes standards for accounting
for obligations associated with the retirement of tangible long-lived assets.
The Company adopted this standard on January 1, 2003. Adoption of this standard
has had no impact on financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121 and
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effect of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Company adopted SFAS No. 144 effective October 1, 2002. Adoption of this
standard has had no impact on financial results.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The Company adopted this standard on January 1, 2003.
Adoption of this standard has had no impact on financial results.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", to require more prominent and additional disclosure in both
annual and interim financial statements on the method of accounting for
stock-based compensation. The interim disclosure provisions are effective for
financial reports for interim periods beginning after December 15, 2002. The
Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003.
The Company did not transition to the use of a fair value method for accounting
for stock-based compensation as permitted by SFAS No. 148. Adoption of this
standard has had no impact on financial results.
7
In November 2002, the EITF of the FASB issued EITF No. 02-16, "Accounting
by a Reseller for Cash Consideration Received from a Vendor" which addresses the
accounting treatment for discounts, rebates, price reductions and other similar
incentives which vendors offer their customers. This EITF consensus standardizes
the accounting treatment for these types of arrangements by requiring that
consideration received from a vendor be reflected as a reduction in the purchase
price of the item, or for the reimbursement of expenses received from a vendor,
be reflected as a reduction in the applicable expense item. The EITF also
concluded that rebates or refunds that are earned based upon a specified level
of purchases, or continued purchases over a specified period of time, should be
accrued if it is probable they will be earned and can be estimated. Adoption of
this standard has had no impact on financial results.
NOTE 5 - RESTRUCTURE
The following table summarizes the remaining reserves associated with the
two restructurings recognized in June 2000 and 2001:
Beginning Expensed Remaining
Accrual Through Cash Accrual
October 1, 2002 June 30, 2003 Payments June 30, 2003
----------------- -------------- ----------- --------------
(In Thousands)
Separation costs for terminated employees $ -- $ -- $ -- $ --
Facilities closing and downsizing 203 -- (174) 29
----------------- -------------- ------------ --------------
$ 203 $ -- $ (174) $ 29
================= ============== ============ ==============
NOTE 6 - LEGAL MATTERS
In January 2001, five of the Company's directors, one current officer, and
certain former officers along with four unrelated parties were named in a
stockholder's derivative complaint alleging that such persons improperly
benefited from the sales of shares of the Company's common stock and seeking a
recovery by the Company of the damages it sustained as a result of such
activities (Fredrick V. Din, et al., Superior Court of California, County of Los
Angeles Case No. YC 039456). In January of 2003, the Company-affiliated
individual defendants agreed to a conditional settlement of this matter with the
plaintiff. The settlement is conditioned upon and subject to court approval. The
Court approved the settlement and the Company related individual defendants were
dismissed with prejudice.
In February 2001, the Company and five of the Company's directors, one
current officer, and certain former officers along with seven unrelated parties
were named in a stockholder class action complaint alleging that the defendants
made misrepresentations regarding the Company and that the individual defendants
improperly benefited from the sales of shares of the Company's common stock and
seeking a recovery by the Company's stockholders of the damages sustained as a
result of such activities (In Re En Pointe Technologies Securities Litigation,
United States District Court, Southern District of California Case No. 01
CV0205L (CGA)). On February 19, 2002, the En Pointe defendants filed a Motion to
Dismiss on the grounds that the allegations failed to state any actionable
claims against the En Pointe defendants. The Motion to Dismiss was granted with
leave to amend. Plaintiffs have filed their amended complaint. In January 2003,
the En Pointe defendants filed another Motion to Dismiss. The Motion to Dismiss
has been fully briefed and is currently under submission with the Court. The En
Pointe defendants intend to continue to vigorously defend the allegations.
NOTE 7 - ACQUISITION OF BUSINESS
On October 11, 2002, the Company completed the purchase of certain assets
of Tabin Corporation, a Chicago-based value-added reseller, providing the
Company with an established presence in one of the largest market places in the
U.S. Based on an independent preliminary valuation, the total purchase price of
approximately $921,000 has been allocated as follows (in thousands):
8
Inventory $76
Depreciable assets 145
Customer relationships 470
Goodwill 230
-----------
Purchase price $921
===========
The Company allocated the purchase price to the tangible and intangible
assets acquired, based on their estimated fair values. The excess purchase price
over those fair values was recorded as goodwill. The fair value assigned to the
intangible assets acquired was based on valuations prepared by an independent
third party appraisal firm using estimates and assumptions provided by
management. In accordance with SFAS No. 142, goodwill and purchased intangibles
with indefinite lives acquired after June 30, 2001 are not amortized but will be
reviewed periodically for impairment.
Of the purchase price, approximately $470,000 has been allocated to
amortizable intangible assets related to customer relationships. Customer
relationships are existing sales contacts that relate to underlying customer
relationships pertaining to the products and services provided by the Company.
The Company is amortizing the fair value of these assets on a straight-line
basis over an estimated useful life of approximately 5 years. Along with the
acquisition of these assets, En Pointe hired approximately 40 former Tabin
sales, service and operations personnel.
Under terms of the agreement, the stockholders of Tabin Corporation were
eligible to receive additional earn-out payments based upon achieving certain
profitability targets over a two-year period beginning November 1, 2002. On July
8, 2003, the stockholders of Tabin Corporation agreed to a modification of the
agreement that accepted a one-time payment of $5,000 as payment in full for any
sums owed under the earn-out provisions of the acquisition agreement.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the three and nine month periods ended
June 30, 2003 and June 30, 2002 as if the acquisition of Tabin Corporation's
operations had occurred on October 1, 2002 and 2001, respectively (in thousands,
except per share data).
Three months ended Nine months ended
June 30, June 30,
------------------------------- --------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 70,013 $ 70,973 $ 218,668 $ 214,131
Net loss $ (391) $ (1,873) $ (2,652) $ (2,579)
Net loss per share:
Basic $ (0.06) $ (0.28) $ (0.39) $ (0.39)
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what operating results would have been
had the acquisition actually taken place on October 1, 2002 and 2001. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
NOTE 8 - DEBT COVENANTS
The Company's revolving credit facilities are collateralized by
accounts receivable and all other assets of the Company. As of June 30, 2003,
approximately $13.9 million was outstanding, $13.6 million of which was
outstanding against the IBM Credit Corporation ("IBMCC") credit line. At June
30, 2003, the Company had additional borrowings available of approximately $7.9
million after taking into consideration the available collateral and borrowing
limitations under its financing agreements.
Both lines of credit contain certain financing and operating covenants
relating to, among other things, net worth, liquidity, profitability, repurchase
of indebtedness and prohibition on payment of dividends, as well as restrictions
on the use of proceeds obtained under the respective line. The Company foresaw
that it would be unable to meet its covenants related to liquidity and
profitability for the quarter ended March 31, 2003 and would be in default under
the terms of such agreements. To avert such a default, the Company renegotiated
its lines of credit with IBMCC to ease its covenant requirements and signed
amendments to each of its financing agreements with Foothill Capital Corporation
("Foothill") and IBMCC in May 2003.
9
Under the amendments to the loan agreements the "earnings before interest,
taxes, depreciation and amortization (EBITDA) and tangible net worth covenants
have been reset for both loan agreements. EBITDA is measured on a cumulative
rolling twelve-month basis ending on the last day of each fiscal quarter, with
the March 31, 2003 quarter set at a negative $3.5 million, the June 30, 2003
quarter set at a negative $1.9 million, the September 30, 2003 quarter set at a
negative $0.8 million, the December 31, 2003 quarter set at a positive $0.3
million, and all fiscal quarters thereafter set at a positive $2.5 million.
Tangible net worth is measured on the last day of each fiscal quarter. For the
quarter ended March 31, 2003 and for the three quarters thereafter, tangible net
worth may not be less than $15.0 million, $14.3 million, $14.3 million, and
$14.5 million, respectively. Beginning with quarter ending March 31, 2004 and
each quarter thereafter the tangible net worth may not be less than $14.6
million. In addition, IBMCC added a new covenant that limits product backlog to
$4 million at any given time.
As consideration for the amendments to the loan covenants, the lenders
increased some borrowing rates and IBMCC reduced the available IBMCC credit
line. The IBMCC amended credit line provides the Company with 30-day free
inventory flooring financing for up to $16.0 million (down from $20.0 million).
Borrowing availability on the Foothill credit facility is directly reduced by
any outstanding flooring financings. The financing agreement with Foothill
includes a guarantee to IBMCC for the amount outstanding on the flooring line up
to a maximum of $20.0 million. In consideration for providing the guarantee, the
amended Foothill agreement contains a 1.25% annual charge (up from 1.00%) on the
average outstanding balances owing to IBMCC. The Foothill financing agreement
also contains a 0.3% charge for any unused portion of the credit line. The
variable interest rate at the option of the Company is based on either the prime
rate or the LIBOR rate. Under the amended Foothill agreement, the maximum rate
for the interest, which is based on certain targets related to EBITDA, was
increased 0.5% to prime rate plus 2.50% and, under the LIBOR option, was
similarly increased 0.5% to the LIBOR rate plus 4.75%.
At June 30, 2003 the Company was in compliance with the amended EBITDA
covenants and the various other debt covenants contained in the loan agreements.
However, should the Company's current negative earnings trend continue, which is
possible, the Company may not meet its future EBITDA or tangible net worth
covenants. As a result, the Company would be in default under its amended loan
agreements. In such event, management would request a waiver of such defaults.
If such defaults were not waived by the lenders, the working capital and
flooring lines of credit could be revoked prior to their expiration dates.
Should the Company's working capital and flooring lines be revoked, management
believes that it has sufficient working capital to enable it to continue to
operate through at least the next twelve months. However, the Company would be
required to significantly scale down its operations if it were unable to obtain
alternative sources of financing.
NOTE 9 - BENEFIT FOR INCOME TAXES
For the quarter ended June 30, 2003, the Company recognized a net $0.3
million federal income tax
10
benefit, which was a continuation of the $2.0 million tax benefit initially
recorded for the quarter ended June 30, 2002. The credit was based on the tax
bill, "Job Creation and Worker Assistance Act of 2002," that was signed into law
on March 9, 2002 that allowed a net operating loss ("NOL") arising in tax years
ending in 2001 and 2002 to be carried back 5 years instead of the traditional 2
years that was previously in effect under the old tax law.
No income tax benefit for the current NOL has been recognized for the
three and nine months ended June 30, 2003 because the Company has exhausted all
of its available carry back credits for federal tax refunds. Therefore, any
benefit to be realized from future NOLs will be dependent on future taxable
earnings. As of June 30, 2003, the Company had an estimated available NOL carry
forwards of approximately $12.0 million, of which $4.7 million would be
considered an increase to capital when utilized and would not benefit earnings.
NOTE 10 - ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard amends the
transition and disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 148, the Company accounts
for stock option grants and restricted stock awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, no compensation expense
has been recognized for stock options since all options granted had an exercise
price equal to the market value of the underlying stock on the grant date. The
Company currently does not intend to transition to the use of a fair value
method for accounting for stock-based compensation. The following table
illustrates the effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------------- ------------------------------
(In Thousands Except Per Share Amounts) 2003 2002 2003 2002
------------ ------------ ------------ ---------
Net loss, as reported $ (391) $ (1,936) $ (2,780) $ (2,674)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (196) (292) (589) (863)
------------ ------------ ------------ ---------
Pro forma net loss $ (587) $ (2,228) $ (3,369) $ (3,537)
============ ============ ============ =========
Net loss per share:
Basic-as reported $ (0.06) $ (0.29) $ (0.41) $ (0.40)
============ ============ ============ =========
Basic-pro forma $ (0.09) $ (0.33) $ (0.50) $ (0.53)
============ ============ ============ =========
Diluted-as reported $ (0.06) $ (0.29) $ (0.41) $ (0.40)
============ ============ ============ =========
Diluted-pro forma $ (0.09) $ (0.33) $ (0.50) $ (0.53)
============ ============ ============ =========
NOTE 11 - PURCHASE OFFER TO ACQUIRE COMPANY STOCK
On July 28, 2003, the Company announced in a press release that it had
received an offer from Bob Din, its Chairman and Chief Executive Officer, to
acquire the balance of the outstanding equity interests of the Company through a
negotiated merger at a price of $0.70 per share, including the equity in
outstanding in-the-money stock options (whether vested or unvested), in a
"going-private" transaction. The press release was not intended as a
solicitation of a proxy, an offer to purchase or a solicitation of an offer to
sell shares of the Company.
11
The press release was not intended as a solicitation of a proxy, an offer to
purchase or a solicitation of an offer to sell shares of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995:
(i) any statements contained or incorporated herein regarding possible or
assumed future results of operations of En Pointe's business, anticipated cost
savings or other synergies, the markets for En Pointe's services and products,
anticipated capital expenditures, regulatory developments or competition;
(ii) any statements preceded by, followed by or that include the words
"intends," "estimates," "believes," "expects," "anticipates," "should," "could,"
"projects," "potential," or similar expressions; and
(iii) other statements contained or incorporated by reference herein
regarding matters that are not historical facts.
Such forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, included in Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Form 10-Q, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements and their inclusion should not be regarded as a representation by the
Company or any other person that the objectives or plans will be achieved.
Factors that might cause such a difference include, but are not limited to: (i)
A significant portion of the Company's sales continuing to be to certain large
customers, (ii) Continued dependence by the Company on certain allied
distributors, (iii) Continued downward pricing pressures in the information
technology market, (iv) The ability of the Company to maintain inventory and
accounts receivable financing on acceptable terms, (v) Quarterly fluctuations in
results, (vi) Seasonal patterns of sales and client buying behaviors, (vii)
Changing economic influences in the industry, (viii) The development by
competitors of new or superior delivery technologies or entry in the market by
new competitors, (ix) Dependence on intellectual property rights, (x) Delays in
product development, (xi)The Company's dependence on key personnel, and
potential influence by executive officers and principal stockholders, (xii)
Volatility of the Company's stock price, (xiii) Delays in the receipt of orders
or in the shipment of products, (xiv) Any delay in execution and implementation
of the Company's system development plans, (xv) Loss of minority ownership
status, (xvi) Planned or unplanned changes in the quantity and/or quality of the
suppliers available for the Company's products, (xvii) Changes in the costs or
availability of products, (xviii) Interruptions in transport or distribution,
(xix) General business conditions in the economy, (xx) The ability of the
Company to prevail in litigation, (xxii) Increased risk from international
political and economic conditions relating to outsourcing of finance, IT, sales
support and other back-office functions outside the United States, (xxiii) The
impact of the Nasdaq delisting action, including decreased liquidity in the
Company's common stock as a result of delisting from the Nasdaq National Market,
decreased securities analyst and/or news media coverage of the Company as a
result of delisting from the Nasdaq National Market, increased regulation under
the SEC's "penny stock" rules if the Company's securities are traded on the
Over-the-Counter Bulletin Board, and (xxiv) The impact of the Company's decision
to accept or reject any buyout offer.
Assumptions relating to budgeting, marketing, and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
business, financial position, results of operations and cash flows. The reader
is therefore cautioned not to place undue reliance on forward-looking statements
contained herein and to consider other risks detailed more fully in the
12
Company's most recent Form 10-K and Annual Report as of September 30, 2002. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
CRITICAL ACCOUNTING POLICIES
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Revenue recognition. Product revenues are recognized upon transfer of title and
risk of loss and satisfaction of significant vendor obligations, if any. Service
revenues are recognized based on contracted hourly rates, as services are
rendered, or upon completion of specified contracted services. Net sales consist
of product and service revenues, less discounts and estimated allowances for
sales returns.
Allowance for doubtful accounts. The Company's estimate of its allowance for
doubtful accounts related to trade receivables is based on two methods. First,
the Company evaluates specific accounts over 90 days outstanding and applies
various levels of risk analysis to these accounts to determine a satisfactory
risk category to which given percentages are applied to establish a reserve.
Second, a general reserve is established for all other accounts over 90 days
outstanding, exclusive of the accounts identified for the specific reserve, in
which a percentage is applied that is supportable by historic collection
patterns.
Product returns. In general, the Company follows a strict policy of duplicating
the terms of its vendor or manufacturers' product return policies. However, in
certain cases the Company must deviate from this policy in order to satisfy the
requirements of certain sales contracts and/or to satisfy or maintain customer
relations. To establish a reserve for returns, outstanding Return Merchandise
Authorizations (RMA) are reviewed. Those RMAs issued for which the related
product has not been returned by the customer are considered future sale
reversals and are fully reserved. In addition, an estimate, based on historical
return patterns, is provided for probable future RMAs that relate to past sales.
Vendor returns. After product has been returned to vendors under authenticated
RMAs, the Company reviews such outstanding receivables from its vendors and
establishes a reserve on product that will not qualify for refund based on a
review of specific vendor receivables.
Rebates. Rebates result principally from satisfying various manufacturer sales
quotas under certain incentive programs. Rebate programs are subject to audit by
the manufacturer as to whether the sales requirements were actually fulfilled.
The Company establishes reserves to cover any losses resulting from subsequent
audits and the return of funds, based on historical patterns of audit results.
Inventory. Although the Company employs a virtual inventory model that generally
limits its exposure to inventory losses, with certain large customers the
Company contractually obligates itself to product availability terms that
require maintaining physical inventory, as well as configured product. Such
inventory is generally confined to a very limited range of product that applies
to specific customers or contracts. Included in the Company's inventory is
product that has been returned by customers but is not acceptable as returnable
by the vendor. As a result, the Company exposes itself to losses from such
inventory that requires reserves for losses to be established. The Company
records reserves on all returned product and inventory that is over six months
old.
COMPARISONS OF FINANCIAL RESULTS
The following table sets forth certain financial data as a percentage
of net sales for the periods indicated:
13
Three Months Ended Nine months ended
June 30, June 30,
------------------------ -----------------------
2003 2002 2003 2002
------ ------ ------ ------
Net sales:
Product ............................................. 86.6% 90.2% 87.7% 89.9%
Services ............................................ 13.4 9.8 12.3 10.1
------ ------ ------ ------
Total net sales ................................... 100.0 100.0 100.0 100.0
Gross profit:
Product ............................................. 7.1 5.5 6.8 6.6
Services ............................................ 5.7 3.9 5.3 3.8
------ ------ ------ ------
Total gross profit ................................ 12.8 9.4 12.1 10.4
Selling and marketing expenses ......................... 9.6 8.9 9.8 8.9
General and administrative expenses .................... 3.6 4.2 3.3 4.4
Legal settlement expense (recovery) .................... -- -- 0.2 (0.4)
------ ------ ------ ------
Operating loss .................................... (0.4) (3.7) (1.2) (2.5)
Interest expense, net .................................. 0.3 0.3 0.2 0.3
Other income, net ...................................... (0.1) (0.2) (0.1) (0.1)
------ ------ ------ ------
Loss before taxes and loss reversal income ......... (0.6) (3.8) (1.3) (2.7)
from affiliates
Benefit for income taxes ............................... -- (0.5) -- (1.0)
Loss reversal income from affiliates ................... -- 0.3 -- 0.3
------ ------ ------ ------
Net loss .......................................... (0.6)% (3.0)% (1.3)% (1.4)%
====== ====== ====== ======
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS
ENDED JUNE 30, 2003 (THE THIRD QUARTER OF FISCAL 2003) AND 2002 (THE THIRD
QUARTER OF FISCAL 2002)
NET SALES. Net sales increased $5.9 million, or 9.1%, to $70.0 million for
the three months ended June 30, 2003 from $64.1 million for the three months
ended June 30, 2002. The 9.1% net sales increase in the three months ended June
30, 2003 is the third consecutive increase in quarterly net sales over those of
the respective quarters of the prior fiscal year.
Service revenues continued to improve; increasing $3.1 million, or 49.2%,
to $9.4 million for the three months ended June 30, 2003 from $6.3 million
recorded for the three months ended June 30, 2002 and were 13.4% of total net
sales versus 9.8% for the three months ended June 30, 2002. Service revenues on
a sequential basis increased $0.7 million, or 8.6%, for the three months ended
June 30, 2003, from that for the three months ended March 31, 2003. The
increases in service revenues came from existing customers and several
short-term projects in which the Company is engaged.
Product revenues increased although at a slower rate than service,
increasing $2.8 million, or 4.8%, to $60.6 million for the three months ended
June 30, 2003 from the $57.8 million for the three months ended June 30, 2002
and were 86.6% of total net sales versus 90.2% in the prior fiscal year quarter.
Product revenues on a sequential basis decreased $2.7 million for the quarter
ended June 30, 2003 from the $63.3 million for the three months ended March 31,
2003.
Government sales in Southern California, which contribute a significant
portion of the Company's sales, continued to be adversely impacted by the
State's budget crisis and the consequential buying moratorium put in place,
resulting in a $3.1 million net sales decline from such business for the three
months ended June 30, 2003 when compared with the three months ended June 30,
2002. With Southern California government sales off, there were no other net
sales concentrations of 10% or greater to any one major customer in the quarter
ended June 30, 2003. In the three months ended June 30, 2002, three customers
with net sales of $8.7 million, $7.8 million, and $6.6 million accounted for
13.6%,
14
12.1%, and 10.3%, respectively, of net sales. For the nine months ended
June 30, 2003, one customer with net sales of $22.8 million accounted for 10.5%
of total net sales. For the nine months ended June 30, 2002, three customers
with net sales of $20.3 million, $19.5 million, and $19.2 million accounted for
10.4%, 10.0%, and 9.8%, respectively, of net sales during that period.
Net sales for the nine months ended June 30, 2003 increased $22.1
million, or 11.3%, to $217.6 million from $195.5 million for the nine months
ended June 30, 2002. Service revenues for the nine month period ended June 30,
2003 increased $7.0 million, or 35.4%, to $26.7 million from $19.7 million
recorded for the nine months ended June 30, 2002.
Product revenues for the nine months ended June 30, 2003 increased
$15.1 million, or 8.6% to $190.9 million from $175.8 million for the nine months
ended June 30, 2002.
GROSS PROFIT. Total gross profits increased $2.9 million, or 48.3%, to
$9.0 million for the three months ended June 30, 2003 from $6.1 million for the
three months ended June 30, 2002. Product gross profits increased $1.5 million,
or 41.2% and service gross profits increased $1.5 million, or 58.1%.
As a percentage of net sales, gross profit margins improved to 12.8%
for the three months ended June 30, 2003 from 9.4% for the three months ended
June 30, 2002. The product gross profit margin percentage improved to 8.2% from
6.1% for the three months ended June 30, 2002, and the service gross profit
margin percentage increased to 42.4% from 40.0% for the three months ended June
30, 2002. It should be noted that service gross margins during the current
fiscal year have remained above the Company's targeted gross profit margin range
of 35% to 37% in large part because of a small number of short-term projects and
are not considered representative of anticipated future service margins. On a
sequential basis, the service profit margin percentage decreased 3.0% from 45.4%
for the three months ended March 31, 2003.
Total gross profits for the nine months ended June 30, 2003, increased
$6.0 million, or 29.1%, to $26.4 million from the $20.4 million for the nine
months ended June 30, 2002. When expressed as a percentage of net sales, the
gross profits percentage improved to 12.1% from 10.4% for the nine months ended
June 30, 2002.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased $0.9 million, or 17.2%, to $6.7 million for the three months ended
June 30, 2003, from $5.8 million for the three months ended June 30, 2002. The
increase is a continuation of additional selling and marketing expenses that
commenced late in fiscal 2002 and is a reflection of the Company's effort to
increase the size of its direct sales force. To help reduce sales overhead
expenses, during the three months ended June 30, 2003, the Company initiated an
outsourcing program for a part of its sales support functions that are
considered to be back-office to an overseas provider. The outsourcing program
was still in a transition stage during the three months ended June 30, 2003,
and, as a result, net savings under the program have not been quantified.
For the nine months ended June 30, 2003, selling and marketing expenses
increased $3.9 million, or 22.6%, to $21.3 million, from $17.4 million for the
nine months ended June 30, 2002. The increase was due to the same labor trends
noted above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative (G&A)
expenses were largely unchanged, decreasing by only $0.2 million, or 6.3%, to
$2.5 million for the three months ended June 30, 2003, from $2.7 million for the
three months ended June 30, 2002. On a sequential basis, while there was a
slight increase in G&A expenses of $0.1 million, or 2.8%, from that of the three
months ended March 31, 2003 related to legal and consulting services.
The slight G&A expense decline for the three months ended June 30, 2003
appears greater when measured as a percentage of net sales because of improving
sales volume, which indicates a 0.6% expense decline to 3.6% for the three
months ended June 30, 2003 from 4.2% for the three months ended June 30, 2002.
15
For the nine months ended June 30, 2003, G&A expenses decreased $1.5
million, or 17.4%, to $7.2 million, from the $8.7 million for the nine months
ended June 30, 2002. Approximately $0.7 million of the decrease was wage related
and another $0.6 million relates to reduction in facilities costs. Expressed as
a percentage of net sales, G&A for the nine months ended June 30, 2003 declined
1.1% from the 4.4% for the nine months ended June 30, 2002.
LEGAL SETTLEMENT (RECOVERY) EXPENSE. In February 2003 the court
approved the dismissal and settlement of the stockholder derivative litigation,
Fredrick V. Din, et al. As a part of the stipulation of the parties, it was
agreed that the defendants would pay the plaintiff's attorney fees of
approximately $0.4 million. After a review by selected members of the Company's
board of directors who were not defendants in the litigation, and based on the
board's review and recommendation, the Company paid the settlement and charged
the full amount to expense.
In February 2002, the Company recognized $0.8 million of income
resulting from the settlement of a litigation claim with NovaQuest InfoSystems,
now known as WebVision, Inc. The Company was liable for a total of $1.6 million
under various court decisions (including accrued interest) and settled for $1.2
million. In addition, there was a recovery of $0.8 million of insurance
reimbursement relating to previously expensed legal fees offset by other legal
costs of $0.4 million.
OPERATING LOSS. The operating loss decreased $2.1 million, or 88.5%, to
$0.3 million for the three months ended June 30, 2003 from $2.4 million for the
three months ended June 30, 2002. The decrease in the operating loss for the
three months ended June 30, 2003 was primarily due to the $2.9 million increase
in gross profits that resulted from both an increase in total net sales as well
as improved gross margins. The improvement in gross profits was offset by an
increase of $0.9 million in selling and marketing expense.
For the nine month period ended June 30, 2003, there was a similar
decrease of $2.3 million, or 47.4%, in operating loss as compared to the nine
month period ended June 30, 2002. Again, increased gross profits of $6.0 million
from increases in net sales and gross margins was the leading factor for the
decline, which was offset by $3.7 million increase in operating expenses,
chiefly from the $3.9 million of increase selling and marketing expense.
INTEREST EXPENSE, NET. Net interest expense remained stable at $0.2
million for the three months ended June 30, 2003 and 2002. The majority of the
interest expense incurred by the Company represents interest expense related to
the Ontario facility lease that has been capitalized as a part of the
sale-leaseback in 1999 and is presently carried as a long-term liability. The
remaining interest consisted of charges for guarantees of borrowings under the
IBMCC credit facility, unused line and float charges, and interest on borrowings
under the Foothill financing agreement.
Interest expense for the nine month period ended June 30, 2003
increased $0.1 million, or 15.2%, to $0.6 million from the $0.5 million during
the nine month period ended June 30, 2002.
16
PROVISION FOR INCOME TAXES. The Company has exhausted all of its
available carry back credits for federal tax refunds. Therefore, the benefit to
be realized from any future net operating losses will be dependent on future
taxable earnings. As of June 30, 2003, the Company had an estimated available
net operating loss carry forward of approximately $12.0 million, of which $4.7
million would be considered an increase to capital when utilized and would not
benefit earnings.
LOSS REVERSAL INCOME AND LOSSES OF UNCONSOLIDATED AFFILIATES. Under the
equity method of accounting, the Company has recognized losses in unconsolidated
affiliates to the extent of investment and certain other forms of investment
such as debt guarantees. Accordingly, upon being relieved of these obligations
and other forms of investment in the unconsolidated affiliates, the Company has
reversed a proportionate amount of affiliate losses previously recognized. See
Note 3 for an explanation of the transactions that occurred during the current
reporting periods.
NET LOSS. The net loss for the three month period ended June 30, 2003
decreased $1.5 million, or 79.8%, to $0.4 million from the $1.9 million for the
three month period ended June 30, 2002. The decrease in net loss for the three
month period ended June 30, 2003 can be attributed to the decreased operating
loss of $2.1 million discussed above reduced by the benefit resulting from $0.3
million of tax benefits and $0.2 million of loss reversal from affiliates that
that was present in the three month period ended June 30, 2002, but absent in
the three month period ended June 30, 2003.
For the nine months ended June 30, 2003, the net loss increased $0.1
million, or 4.0% to $2.8 million, from the $2.7 million in the prior fiscal year
period. This was despite a large, favorable decrease in operating loss of $2.3
million, and was chiefly due to the prior year benefiting from $1.8 million of
tax benefits and an additional $0.5 million of loss reversal from affiliates
that was not present to benefit the 2003 period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2003 operating activities used
cash of $4.0 million, $3.7 million more than the $0.3 million used in the for
the nine month period ended June 30, 2002. The principal reason for the use of
cash by operations was the $6.0 million increase accounts receivable.
The Company's accounts receivable balance at June 30, 2003 and
September 30, 2002, was $37.6 million and $31.7 million, respectively. The
number of days' sales outstanding in accounts receivable increased to 47 days
from 45 days, as of June 30, 2003 and September 30, 2002, respectively.
Inventories increased $4.2 million, from $5.6 million at September 30,
2002 to $9.8 million at June 30, 2003. Most of the Company's reported inventory
balances consisted of in-transit inventory, representing sales orders that are
in the process of being filled and become trade receivables within a few short
days. Actual physical inventories approximated $2.0 million at June 30, 2003, an
increase of $0.9 million from the $1.1 million on hand at September 30, 2002.
Most of the physical inventory was for product ordered by customers and in the
process of being configured before shipment and billing.
Investing activities used cash of $1.1 million during the nine months
ended June 30, 2003, principally for the $0.9 million business acquisition with
the balance related to the purchases of computer, software, and other
information technology products.
Financing activities provided net cash totaling $1.4 million during the
nine months ended June 30, 2003, most of which was attributable to net
borrowings under the Company's lines of credit.
The Company's revolving credit facilities are collateralized by
accounts receivable and all other
17
assets of the Company. As of June 30, 2003, approximately $13.9 million was
outstanding, $13.6 million of which was outstanding against the IBMCC credit
line. At June 30, 2003, the Company had additional borrowings available of
approximately $7.9 million after taking into consideration the available
collateral and borrowing limitations under its financing agreements.
Both lines of credit contain certain financing and operating covenants
relating to, among other things, net worth, liquidity, profitability, repurchase
of indebtedness and prohibition on payment of dividends, as well as restrictions
on the use of proceeds obtained under the respective line. The Company foresaw
that it would be unable to meet its covenants related to liquidity and
profitability for the three months ending March 31, 2003 and would be in default
under the terms of such agreements. To avert such a default, the Company
renegotiated its lines of credit to ease its covenant requirements and signed
amendments to each of its financing agreements with Foothill and IBMCC in May
2003.
Under the amendments to the loan agreements the "earnings before
interest, taxes, depreciation and amortization" (EBITDA) and tangible net worth
covenants have been reset for both loan agreements. EBITDA is measured on a
cumulative rolling twelve-month basis ending on the last day of each fiscal
quarter, with the March 31, 2003 quarter set at a negative $3.5 million, the
June 30, 2003 quarter set at a negative $1.9 million, the September 30, 2003
quarter set at a negative $0.8 million, the December 31, 2003 quarter set at a
positive $0.3 million, and all fiscal quarters thereafter set at a positive $2.5
million. Tangible net worth is measured on the last day of each fiscal quarter.
For the quarter ended March 31, 2003 quarter and for the three quarters
thereafter, tangible net worth is to be not less than $15.0 million, $14.3
million, $14.3 million, and $14.5 million, respectively. Beginning with the
quarter ending March 31, 2004 and each quarter thereafter the tangible net worth
is not to be less than $14.6 million. In addition, IBMCC added a new covenant
that limits product backlog to $4 million at any given time.
As consideration for the amendments to the loan covenants, the lenders
increased some borrowing rates and IBMCC reduced the available IBMCC credit
line. The IBMCC amended credit line provides the Company with 30-day free
inventory flooring financing for up to $16.0 million (down from $20.0 million).
Borrowing availability on the Foothill credit facility is directly reduced by
any outstanding flooring financings. The financing agreement with Foothill
includes a guarantee to IBMCC for the amount outstanding on the flooring line up
to a maximum of $20.0 million. In consideration for providing the guarantee, the
amended Foothill agreement contains a 1.25% annual charge (up from 1.00%) on the
average outstanding balances owing to IBMCC. The Foothill financing agreement
also contains a 0.3% charge for any unused portion of the credit line. The
variable interest rate at the option of the Company is based on either the prime
rate or the LIBOR rate. Under the amended Foothill agreement, the maximum rate
for the interest, which is based on certain targets related to EBITDA, was
increased 0.5% to prime rate plus 2.50% and, under the LIBOR option, was
similarly increased 0.5% to the LIBOR rate plus 4.75%..
At June 30, 2003 the Company was in compliance with the amended EBITDA
covenants and the various other debt covenants contained in the loan agreements.
However, should the Company's current negative earnings trend continue, which is
possible, the Company may not meet its future EBITDA or tangible net worth
covenants. As a result the Company would be in default under its amended loan
agreements. In such event, management would request a waiver of such defaults.
If such defaults were not waived by the lenders, the working capital and
flooring lines of credit could be revoked prior to their expiration dates.
Should the Company's working capital and flooring lines be revoked, management
believes that it has sufficient working capital to enable it to continue to
operate through at least the next twelve months. However, the Company would be
required to significantly scale down its business plans if it were unable to
obtain alternative sources of financing.
OBLIGATIONS AND COMMITMENTS
18
As of June 30, 2003, the Company had the following obligations and
commitments to make future payments, contracts, contractual obligations, and
commercial commitments:
Payments Due by Period (In Thousands)
-----------------------------------------------------------------------------
Less Than
Contractual Cash Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years
--------- ------------ ----------- ------------- ------------------
Capital leases $2,092 $ 723 $1,369 $ -- $ --
Operating leases 3,652 1,456 2,196 -- --
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has limited exposure to market risk from changes in
interest rates from borrowings under its lines of credit. While the Company's
primary working capital financing with Foothill provides for interest at a
maximum rate of 2.50% over prime, IBMCC, in a separate lending agreement,
provides 30-day free flooring, with the stipulation that Foothill guarantees any
Company borrowings. For the guarantee to IBMCC, Foothill charges the Company
1.25% on outstanding balances. The Company has been able to concentrate most of
its borrowings from such interest-free flooring in fiscal year 2003. Because of
the Company's ability to have available interest-free flooring, assuming
interest rates increase by an assumed percentage in the next fiscal year, there
would be no financial impact upon the Company for the incremental increase, so
long as the Company is successful in concentrating its borrowing on its $16
million 30-day interest-free flooring. Borrowings in excess of $16 million
would, of course, be subject to Foothill's borrowing rate of up to 2.50% over
prime (with the prime rate at 4.00% as of June 30, 2003).
RISK FACTOR FOR DELISTING
Because the Company was unable to meet certain Nasdaq National Market
listing requirements, its common stock was transferred from the Nasdaq National
Market to the Nasdaq SmallCap Market effective June 2, 2003. However, the
Company continues to be subject to the criteria for continuing inclusion in The
Nasdaq SmallCap Market, which includes, among other requirements, that the
Company maintain a minimum closing bid price per share of common stock of $1.00
for a period of ten consecutive trading days prior to July 14, 2003.
The Company failed to meet the $1.00 minimum bid requirement imposed
for the period ending July 14, 2003. However, Nasdaq SmallCap Market rules allow
for an extension of an additional 180 days provided any one of three
requirements is met. On July 21, 2003, the Company received notification that
the Nasdaq Listing Qualifications Panel had granted the Company an additional
180-day period, or until January 12, 2004, to comply with the $1.00 minimum bid
requirement. Should the Company not meet the Nasdaq SmallCap Market listing
criteria by January 12, 2004, the Company anticipates that its securities would
be delisted from the Nasdaq SmallCap Market and quoted on the Over-the-Counter
Bulletin Board.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the CEO and CFO, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective in timely
notification of material information required to be included in the Company's
periodic filings under the Exchange Act of 1934. No significant changes in the
Company's internal controls or in other factors have occurred that could
significantly affect these internal controls subsequent to the evaluation.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in
the normal course of business. While the outcome of proceedings and claims can
not be predicted with certainty, management, after consulting with counsel, does
not believe the outcome of any of these matters will have a material adverse
effect on the Company's business, financial position, and results of operations
or cash flows. Except as set forth below, there have been no material changes in
the legal proceedings reported in the Company's Annual Report on Form 10-K for
the year ended September 30, 2002.
In January 2001, five of the Company's directors, one current officer,
and certain former officers along with four unrelated parties were named in a
stockholder's derivative complaint alleging that such persons improperly
benefited from the sales of shares of the Company's common stock and seeking a
recovery by the Company of the damages it sustained as a result of such
activities (Fredrick V. Din, et al., Superior Court of California, County of Los
Angeles Case No. YC 039456). In January of 2003, the Company-affiliated
individual defendants agreed to a conditional settlement of this matter with the
plaintiff. The settlement is conditioned upon and subject to court approval. The
Court approved the settlement and the Company related individual defendants were
dismissed with prejudice.
In February 2001, the Company and five of the Company's directors, one
current officer, and certain former officers along with seven unrelated parties
were named in a stockholder class action complaint alleging that the defendants
made misrepresentations regarding the Company and that the individual defendants
improperly benefited from the sales of shares of the Company's common stock and
seeking a recovery by the Company's stockholders of the damages sustained as a
result of such activities (In Re En Pointe Technologies Securities Litigation,
United States District Court, Southern District of California Case No. 01
CV0205L (CGA)). On February 19, 2002, the En Pointe defendants filed a Motion to
Dismiss on the grounds that the allegations failed to state any actionable
claims against the En Pointe defendants. The Motion to Dismiss was granted with
leave to amend. Plaintiffs have filed their amended complaint. In January 2003,
the En Pointe defendants filed another Motion to Dismiss. The Motion to Dismiss
has been fully briefed and is currently under submission with the Court. The En
Pointe defendants intend to continue to vigorously defend the allegations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
31.1 Certification of the Chief Executive Officer, as required by Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer, as required by Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer, as required by Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer, as required by Section
906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K:
20
On May 7, 2003, the Company filed a report on Form 8-K announcing the
issuance of its financial results for the fiscal quarter ended March 31, 2003.
On June 6, 2003, the Company filed a report on Form 8-K announcing two
items. The first was that it had received a determination letter from the Nasdaq
indicating that its shares would be transferred to the Nasdaq SmallCap Market
effective immediately. The second was that the Company was the subject of an
audit report issued by the Controller's Office of the City of Los Angeles
alleging that it had over-billed the City between $698,000 and $2.9 million. The
Company has disputed the allegation and believes that it is in compliance with
the contract.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
En Pointe Technologies, Inc.
(REGISTRANT)
By: /s/ Kevin D. Ayers
----------------------------------------
Kevin D. Ayers, Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2003
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