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| ENPT > SEC Filings for ENPT > Form 10-Q/A on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
may cause us to alter our marketing, capital expenditure or other budgets, which
may in turn affect our 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 our most recent Annual Report on Form 10-K for the fiscal year
ended September 30, 2008. We undertake 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
There have been no major changes to our critical accounting policies since
the disclosure of critical accounting policies made in the September 30, 2008
Annual Report on Form 10-K.
The following table sets forth certain financial data as a percentage of net sales for the periods indicated:
Three Months Ended
December 31,
2008 2007
Net sales:
Product 95.5 % 85.3 %
Services 4.5 14.7
Total net sales 100.0 100.0
Gross profit:
Product 11.0 7.2
Services 1.4 6.5
Total gross profit 12.4 13.7
Selling and marketing expenses 9.0 10.3
General and administrative expenses 4.3 3.5
Operating loss (0.9 ) (0.1 )
Interest income, net 0.0 0.1
Other (loss) income, net (0.0 ) 0.1
(Loss) income before taxes and other items (0.9 ) 0.1
(Benefit) provision for income taxes (0.1 ) 0.0
(Loss) income before other items (0.8 ) 0.1
Allocated income in equity investment 0.1 -
Allocated loss (income) to noncontrolling interest 0.0 (0.1 )
Net loss (0.7 )% 0.0 %
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Comparison of the Results of Operations for the Three Months Ended December 31,
2008 and 2007
NET SALES
NET SALES COMPARISONS
(table in millions except percentages)
Three Months Ended
December 31,
Period-to-Period Comparison Change 2008 2007
Net sales:
Product $ (21.8 ) $ 52.4 $ 74.2
Services $ (10.2 ) $ 2.5 $ 12.7
Total $ (32.0 ) $ 54.9 $ 86.9
Percentage change (36.8 )%
December 31, September 30,
Sequential Comparison Change 2008 2008
Net sales:
Product $ (7.8 ) $ 52.4 $ 60.2
Services $ (0.4 ) $ 2.5 $ 2.9
Total $ (8.2 ) $ 54.9 $ 63.1
Percentage change (13.0 )%
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Net sales decreased $32.0 million, or 36.8%, in the December 2008 quarter as
compared to the December 2007 quarter, with decreases in net sales of both
product and services. Of the $32.0 million decline in net sales, $10.2 million
in service revenue decline for the quarter was anticipated as a result of the
divestiture of the IT services business in July 2008 (see "Note 7 - Equity
Investment"). The $21.8 million decline in net product sales is reflective of
the loss of major customers, including those customers that were adversely
affected by the banking crisis, as well as sharp reductions in spending by other
major customers.
Software sales in the December 2008 quarter were 33.4% of total net sales as
compared with 21.2% of total net sales in the December 2007 quarter. Software
sales, including licenses, maintenance, and agency commissions related thereto,
in the
December 2008 quarter decreased $0.3 million in the December 2008 quarter to
$18.9 million from $19.2 million in the December 2007 quarter.
The Company's non-core net sales (defined as sales of business process
outsourcing services and product and service revenue from foreign subsidiaries)
were essentially flat with $1.9 million of revenues recorded in the
December 2008 quarter as compared with $1.6 million revenues in the
December 2007 quarter.
On a sequential basis, net sales decreased $8.2 million, or 13.0%, when
compared with the September 2008 quarter, primarily as a result of decreased
product revenue.
While net sales to any one customer did not exceed 10% in the December 2008
quarter, there was nevertheless a concentration of net sales in the top ten
regular customers which amounted to $21.4 million, or 39.0% of total net sales
in the December 2008 quarter. This was a decline from the December 2007
quarter's concentration of net sales in the top ten customers of $36.5 million,
or 42.0% and indicative of the cutbacks in purchasing by the large customers.
GROSS PROFIT
GROSS PROFIT COMPARISONS
(table in millions except percentages)
Three Months Ended
December 31,
Period-to-Period Comparison Change 2008 2007
Gross profit:
Product $ (0.2 ) $ 6.0 $ 6.2
Services $ (4.9 ) $ 0.8 $ 5.7
Total $ (5.1 ) $ 6.8 $ 11.9
Percentage change (42.9 )%
Gross margin percentage:
Product 3.1 % 11.5 % 8.4 %
Services (12.9 )% 32.0 % 44.9 %
Combined gross margin percentage (1.3 )% 12.4 % 13.7 %
December 31, September 30,
Sequential Comparison Change 2008 2008
Gross profit:
Product $ (0.3 ) $ 6.0 $ 6.3
Services $ (0.5 ) $ 0.8 $ 1.3
Total $ (0.8 ) $ 6.8 $ 7.6
Percentage change (10.5 )%
Gross margin percentage:
Product 2.9 % 11.5 % 8.6 %
Services 21.7 % 32.0 % 10.3 %
Combined gross margin percentage 3.7 % 12.4 % 8.7 %
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Gross profits decreased $5.1 million in the December 2008 quarter, or 42.9%, to $6.8 million as compared with the $11.9 million in the December 2007 quarter. The majority of the decrease in gross profits was attributable to the decline in service revenues resulting from the divestiture of the IT service business in the fourth quarter of fiscal 2008. The $4.9 million decline in service gross profits approximates the $4.2 million of service revenues recognized by the IT service business transferred to En Pointe Global Services, LLC (see "Note 7 - Equity Investment"). Product gross profits for the December 2008 quarter decreased $0.2 million to $6.0 million from the December 2007 quarter at $6.2 million. In spite of a $21.8 million decrease in product net sales, gross profits experienced less of a decline due to the 2.9% increase in the gross margin percentage to 11.5% from 8.4% in the December 2007 quarter that resulted, in part, from the outsourcing of the configuration process.
Software agency commissions, provided chiefly by Microsoft, Inc., are
recorded net of costs and have a major influence on gross profits. However, the
increase in software agency commissions for the December 2008 quarter was
relatively minor, increasing $0.1 million to $1.2 million over the December 2007
quarter. Furthermore, as a result of recent announcements from Microsoft, Inc.,
the Company anticipates future erosion of the agency commission fee structure.
Software gross profits combined with agency commissions amounted to $1.9 million
of the $6.8 million total gross profits for the December 2008 quarter.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
$3.9 million, or 44.2%, to $4.9 million in the December 2008 quarter, from
$8.8 million in the December 2007 quarter. Most of the $3.9 million decrease is
attributed to the absence of selling and marketing expenses for expenses related
to the services business.
Selling and marketing expenses as a percentage of net sales likewise
decreased 1.3% to 9.0% in the December 2008 quarter from the 10.3% recorded in
the December 2007 quarter. On a sequential basis, selling and marketing expenses
decreased $5.0 million in the December 2008 quarter from the $10.0 million
incurred in the September 2008 quarter. The sequential decrease is due to the
September 2008 quarter having been burdened by a series of non-recurring
expenses including, a large bad debt provision increase, an increase in the
reserve for sales and business tax audits, legal settlement costs, and
transactional bonuses related to the sale of the services business that together
approximated $5.0 million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $0.7 million, or 23.0%, to $2.4 million in the December 2008 quarter
from the $3.1 million in the December 2007 quarter. The decrease was principally
from the absence of general and administrative expenses related to the services
business.
On a sequential basis, general and administrative expenses decreased
$2.2 million in the December 2008 quarter from the $4.6 million incurred in the
September 2008 quarter. The sequential decrease is due to the September 2008
quarter having been burdened by a series of non-recurring expenses including
$1.8 million in transactional bonuses related to the sale of the services
business. Expressed as a percentage of net sales, general and administrative
expenses increased 0.8% to 4.3%. The percentage increase was caused by the
decrease in net sales base to spread the costs.
OPERATING LOSS. The operating loss increased to $471,000 in the December 2008
quarter compared with a $10,000 of operating loss in the December 2007 quarter.
The increase in the operating loss was a result of the decrease in gross profits
of $5.1 million partially offset by a $4.6 million decrease in operating
expenses.
INTEREST INCOME, NET. At December 31, 2008 and 2007 net interest income was
comprised of the following (in thousands):
Three Months Ended
December 31,
2008 2007
Interest income $ 57 $ 141
Interest expense (37 ) (75 )
$ 20 $ 66
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Interest income results principally from short-term money market investments
earned from excess cash holdings and short-term cash investments. Interest
expense results principally from lease financing.
BENEFIT FOR INCOME TAXES. For the December 2008 quarter, we estimated a net
income tax benefit of $26,000 for the quarter. The tax benefit reflects the
potential of a federal tax refund from the $114,000 of federal income taxes paid
in the prior fiscal year.
As of December 31, 2008, there were no available federal net operating loss
carry forwards as all net operating loss carryforwards were applied in full in
the prior fiscal year.
ALLOCATED LOSS (INCOME) TO NONCONTROLLING INTERESTS. Under FIN 46 and other
recent changes in consolidation principles, certain noncontrolling interests are
required to be consolidated. The Company owns an approximate 30% voting interest
in PBPO as of December 31, 2008 and under FIN 46 is required to consolidate
PBPO's financial results in our financial statements. In the first quarter of
fiscal 2009, PBPO was profitable and no profits were allocated to the
noncontrolling interest. This was due to prior period PBPO losses that were
allocated disproportionately to us and which were in excess of our investment in
PBPO. As a result of the excess losses taken by us, under Accounting Research
Bulletin 51, when future earnings materialize, we can recover those losses taken
in full before any allocation is made to the noncontrolling investors. In the
quarter ended December 31, 2007, PBPO incurred a loss that was allocated to
noncontrolling investors based on their remaining "at risk" capital and
percentage of ownership.
Ovex, which is 70% owned by us, incurred a loss for the first quarter of
fiscal 2009 of which 30% has been allocated to noncontrolling interest based on
"at risk" capital. However, Ovex incurred a profit in the first quarter of
fiscal 2008 of which 30% has been allocated to the noncontrolling interest.
Noncontrolling interest in thousands allocated by each affiliate for the
three months ended December 31, 2008 and 2007 was as follows:
Three Months Ended
December 31,
2008 2007
PBPO $ - $ 21
Ovex 19 (64 )
Loss (profit) allocations $ 19 $ (43 )
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NET (LOSS) INCOME. For the December 2008 quarter there was a $392,000 net
loss as compared with net income of $43,000 in the December 2007 quarter. The
increase approximate $0.4 million net loss for the December 2008 quarter was due
primarily to the decrease in operating income of $0.5 million reduced by a
$0.1 million increase in non-operating income.
Expressed as a percentage of net sales, the net loss in the December 2008
quarter was 0.7% of net sales.
Liquidity and Capital Resources
Sources of liquidity for us include cash and cash equivalents, cash flow from
operations, and amounts available under our GE and IBM financing facilities.
These sources have been adequate for day-to-day operations and for capital
expenditures. Although there can be no assurance, management believes that the
remaining cash balances, cash flows from operations, and availability of funds
under our financing facilities will be sufficient to satisfy our operating
requirements for the next fiscal year. As of December 31, 2008, we had
approximately $9.7 million in cash and working capital of $5.8 million.
Cash flows from operating activities:
During the three months ended December 2008, operating activities provided
cash totaling $5.5 million as compared with $17.8 million in the December 2007
quarter. The primary reason for the $12.3 million net decrease in cash from
operating activities was the presence of a $7.7 million reduction of accounts
receivable that generated cash in the December 2007 quarter whereas in the
December 2008 quarter there was a $0.5 million increase in accounts receivable.
In addition, the combined effect of increases in inventory and decreases in
accounts payable had a $5.4 million adverse effect on operating cash when
comparing the December 2008 and 2007 quarters.
Accounts receivable, net of allowances for returns and doubtful accounts, at
December 31, 2008 and 2007, was $35.6 million and $53.6 million, respectively, a
decrease of $18.0 million for the 2008 period. The number of days' sales
outstanding in accounts receivable was 59 and 56, as of December 31, 2008 and
2007, respectively.
Cash flows from investing activities:
Investing activities used cash totaling $0.5 million during the three
months ended December 2008, an increase of $0.4 million from that of the prior
fiscal year period. The $0.4 million increase resulted principally from the
absence in the December 2008 quarter of cash that was provided by the
disposition of a short-term cash investment of $1.0 million in the December 2007
quarter offset, in part, by the $0.6 million decline in the purchase of property
and equipment in the December 2008 quarter.
Cash flows from financing activities:
Financing activities provided net cash totaling $1.0 million in the three
months ended December 2008, $16.6 million more than the $15.6 million of net
cash that was used from financing activities in the prior year period. Most of
the $16.6 million increase in cash provided in the fiscal 2008 period was from
the reversal of a net repayment of $15.8 million in the debt under our line of
credit in the December 2007 quarter to the net borrowing of $1.2 million in the
December 2008 quarter, which had a total effect of $17.0 million in our cash
flows from financing activities.
Credit facilities:
The Company's two primary information technology sales subsidiaries, En
Pointe Technologies Sales, Inc. and En Pointe Gov, Inc., and GE Commercial
Distribution Finance Corporation ("GE") are parties to that certain Business
Financing Agreement and that certain Agreement for Wholesale Financing dated
June 25, 2004 with various subsequent amendments to date (collectively, the
"Agreements"). En Pointe Technologies, Inc. is the guarantor of the obligations
under the Agreements. Under the flooring arrangement, the two subsidiaries may
purchase and finance information technology products from GE-approved vendors on
terms that depend upon certain variable factors. The two subsidiaries may borrow
up to 85% of their collective eligible accounts receivable at an interest rate
of prime plus 1.0% per annum, subject to a minimum rate of 5.0%. Such purchases
from GE-approved vendors have historically been on terms that allow
interest-free flooring.
An addendum, effective July 25, 2007 provides for a $45.0 million accounts
receivable and flooring facility. The addendum also provides an extension of the
term of the facility for a period of three years from August 1, 2007 and for
successive one-year renewal periods thereafter, subject to termination at the
end of any such period on at least sixty days prior written notice by any party
to the other parties. Effective September 25, 2007, the parties entered into
another addendum to delete all prior financial covenants contained in the
Agreements and to restate them effective for the last day of each calendar
quarter as follows (as such terms are defined in the Agreements):
• Tangible Net Worth and Subordinated Debt in the combined amount of not less
than $12,750,000.
• Total Funded Indebtedness to EBITDA for the preceding four fiscal quarters then ended, shall be no more than 3.00:1.00.
The Company was in compliance with all of the debt covenants under the GE
Agreements, as amended and supplemented to date, as of December 31, 2008.
The GE facility is collateralized by accounts receivable, inventory and
substantially all of our other assets. As of December 31, 2008, approximately
$9.1 million in borrowings were outstanding under the $45.0 million financing
facility. At
December 31, 2008, there were additional borrowings available of approximately
$18.7 million after taking into consideration the borrowing limitations under
the Agreements, as amended to date.
In addition to the GE facility, on March 26, 2008 En Pointe Technologies
Sales, Inc. entered into an agreement for inventory financing with IBM that may
only be used to finance sales to International Business Machines Corporation
and/or IBM Global Services. Under the agreement the subsidiary may borrow up to
$25 million of certain eligible accounts receivable and inventory. Interest free
financing is provided with the number of days of interest free financing
depending on the vendor and product purchased. Beyond the interest free
financing period, interest is charged at the prime rate plus 6.5% per annum. The
agreement is collateralized by accounts receivable, inventory and substantially
all other assets. En Pointe Technologies, Inc., has provided its guarantee to
IBM for the inventory financing Agreement. In conjunction with this financing
Agreement, GE and IBM, have signed Intercreditor Agreements. The IBM financing
agreement contains numerous covenants including the method of financial
reporting to IBM. In addition there are two financial covenants:
Total subordinated debt and tangible net worth (both as defined under the
Agreement) must be equal to or greater than $12,250,000.
Funded debt (as defined under the Agreement) divided by EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization) must be less than or equal to
3.5:1.0
The Company was in compliance with all of the debt covenants under the IBM
financing agreement as of December 31, 2008.
Off-Balance Sheet Arrangements
The Company does not currently have any off-balance sheet arrangements within
the meaning of Item 303(a)(4) of Regulation S-K.
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