item 14 exhibits financial statements schedules reports form 8k following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits list exhibits accompanying exhibit index herein incorporated reference b reports form 8k company filed current reports form 8k last quarter period covered report en pointe technologies inc report independent accountants board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index page present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2000 1999 consolidated results operations cash flows three years period ended september 30 2000 conformity accounting principles generally accepted united states addition opinion consolidated financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 1 one companys working capital lines credit longer available february 9 2001 remaining working capital agreement expire september 30 2001 renewed pricewaterhousecoopers llp los angeles california november 20 2000 except notes 1 3 13 date january 17 2001 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc statements operations thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders equity thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company originally incorporated texas 1993 reincorporated delaware 1996 company reseller information technology products valueadded services large medium sized companies government entities sales service personnel 20 markets located throughout united states company headquartered el segundo california liquidity reflected accompanying financial statements company incurred significant losses operations fiscal years ended september 30 2000 1999 addition discussed note 3 december 11 2000 company advised one lenders finova capital corporation finova discontinuing financing segment business result company advised 39 million working capital line credit finova longer available 60 days february 9 2001 following expiration finova line credit agreement companys remaining working capital financing agreement ibm credit corporation ibmcc effective december 15 2000 company advised ibmcc maximum available amount companys working capital financing agreement reduced 44 million 30 million subsequently ibmcc effective january 17 2001 agreed increase amount available working capital financing agreement 30 million 35 million extend date expiration renewed april 14 2001 september 30 2001 company currently seeking additional financing various lenders replace finova line credit agreement believes successful securing financing although necessarily terms favorable current lenders june 2000 new executive management team took steps improve profitability including implementation restructuring plan included reduction work force 105 employees conversion five sales offices virtual sales locations addition company focusing efforts increasing revenues sale services yield higher gross margin product sales approximately 141 million 137 million companys operating losses years ended september 30 2000 1999 respectively arose companys investments certain former subsidiaries june 2000 quarter due reduction voting interest certain former subsidiaries company began account investments former subsidiaries equity method accounting see note 1 investment affiliates accordance equity method accounting company suspended recognition equity method losses adjusted basis reduced zero anticipate increasing investment affiliates assurance managements plans successful improving profitability management able obtain additional financing facility augment ibmcc financing arrangement ibmcc renew financing agreement company september 30 2001 however management believes increase amount available working capital financing agreement ibmcc 35 million extension date expiration september 30 2001 provide sufficient working capital year ending september 30 2001 en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany accounts transactions eliminated consolidated financial statements deconsolidation june 1998 companys previously whollyowned subsidiary firstsource previously named purchase pointe inc firstsourcecom commenced operations sell information technology products small medium sized businesses consumer markets via internet july 1999 firstsource raised 93 million private placement common stock resulting companys ownership percentage decreasing 714 september 30 1999 sales common stock firstsource accounted capital transactions consolidated financial statements company accordance staff accounting bulletins sab nos 51 84 sab nos 51 84 subsidiary sells stock third party price per share different parent companys carrying value per share parent companys share equity subsidiary changes due firstsource newly developed company changes recognized en pointe equity transaction consolidated statements stockholders equity gain loss statement operations fiscal year 2000 firstsource completed series private placements aggregated 8630197 shares convertible preferred stock ranging prices 350 per share 419 per share increase shares outstanding may 16 2000 companys 6645000 shares common stock firstsource represented 435 voting interest effective may 16 2000 company otherwise control firstsource company began account investment firstsource equity method accounting november 1999 company formed new subsidiary supplyaccess inc supplyaccess address larger corporate customers needs find product internet favorable prices supplyaccess designed internet portal charging transaction fees seller company transferred information technology department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction september 30 2000 balance note receivable supplyaccess 750000 concurrently agreed flat quarterly fee 500000 supplyaccess would provide company services would allow company customers access fulfillment engine future periods supplyaccess charge company transaction fee based volume services provided year ended september 30 2000 company paid supplyaccess 2000000 services february 2000 supplyaccess completed initial private placement 12000000 shares convertible preferred stock 150 per share reduced companys voting interest 54 addition april 2000 supplyaccess completed supplemental private placement 5088318 shares convertible preferred stock 150 per share reduced companys voting interest 4510 two subsequent private placements 5196000 shares convertible preferred stock 150 per share reduced companys voting interest even 3865 effective april 4 2000 companys voting interest supplyaccess dropped 50 company otherwise control supplyaccess company began account investment supplyaccess equity method accounting en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued periods prior reduction companys voting interest 50 company consolidated operating results assets liabilities firstsource supplyaccess dates deconsolidation company recognize gain approximately 100 million resulting accumulated losses recognized excess companys ownership interest former subsidiaries gain deferred due primarily companys continued guarantee certain debt obligations commitments considered increase companys investment basis adjusted basis equity method accounting investment unconsolidated affiliates explained two companys former subsidiaries supplyaccess firstsource issued additional shares stock june 2000 quarter resulting reduction en pointes voting control less 50 thereafter company deconsolidated subsidiaries accounted investment unconsolidated affiliates equity method accounting year ended september 30 2000 en pointe recognized equity losses unconsolidated affiliates 702000 company recognized accumulated losses excess companys ownership interest former subsidiaries periods former subsidiaries consolidated september 30 2000 companys adjusted basis equity method accounting reduced zero accordance equity method accounting company suspended recognition equity method losses adjusted basis reduced zero future losses generated monitored reported equity method income recognized future periods companys share equity method income equals previously unreported equity method losses accumulated periods recognition equity method losses suspended following summarizes recent combined financial information available unconsolidated affiliates thousands use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period significant en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued estimates preparation consolidated financial statements relate assessment carrying value accounts receivable including vendor purchase rebates volume purchasing incentives inventories actual results could differ estimates revenue recognition product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less estimated volume purchase incentives purchase rebates received company vendors cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 2000 1999 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise paid company yet shipped vendors companys customers stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lessor remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm liabilities debt also approximates fair value longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued assets less carrying value 1999 company recorded impairment charge 62 million ontario facility see note 6 included nonrecurring charges consolidated statements operations impairment losses recorded fiscal years 2000 1998 advertising company reports costs advertising periods costs incurred fiscal years ended september 30 2000 1999 advertising expense approximately 3343000 1955000 respectively year ended september 30 1998 advertising significant item expense company income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits years ended september 30 2000 1999 1998 one companys customers accounted approximately 14 19 21 net sales respectively september 30 2000 1999 customer accounted 21 18 accounts receivable respectively customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations year ended september 30 2000 purchases three vendors accounted 48 total purchases treasury stock company uses specific identification method accounting treasury stock fiscal year company purchased 88300 shares 1000000 subsequently issued 42522 shares employee stock benefit plans 312000 september 30 2000 45778 shares cost approximately 518000 remained treasury stock en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued stock based compensation company accounts stockbased employee compensation arrangements accordance provisions accounting principles board opinion apb 25 accounting stock issued employees complies disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation apb 25 compensation expense recognized vesting period based difference date grant deemed fair value companys stock accounting purposes exercise price company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force 9618 vendor programs company receives volume incentives purchase rebates certain manufacturers related sales certain products recorded reduction cost goods sold earned company also receives manufacturer reimbursement certain training promotional marketing activities offset expenses incurred company earnings per share basic net loss income per share computed dividing net loss income period weighted average number common shares outstanding period diluted net loss income per share computed dividing net loss income period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options warrants included calculation extent antidilutive comprehensive income sfas 130 reporting comprehensive income establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2000 1999 1998 segment reporting company discloses segment information accordance sfas 131 disclosures segments enterprise related information sfas 131 supercedes 14 financial reporting segments business enterprise replacing industry segment approach management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers see note 15 segment information recently issued accounting pronouncements june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities statement requires recognition en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation company currently hold derivative instruments engage hedging activities impact adoption sfas 133 currently expected material impact companys consolidated financial position results operations cash flows sfas 137 defers effective date sfas 133 fiscal years beginning june 30 2000 december 1999 sec issued staff accounting bulletin sab 101 revenue recognition financial statements provides guidance recognition presentation disclosure revenue financial statements filed sec sab 101 outlines basic criteria must met recognize revenue provides guidance disclosures related revenue recognition policies management currently assessing impact sab101 believes impact material impact companys consolidated financial position results operations cash flows march 2000 financial accounting standards board issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 effective july 1 2000 interpretation provides guidance applying apb opinion 25 accounting stock issued employees management believe adoption fin 44 material impact companys consolidated financial position results operations cash flows 2 property equipment property equipment consist following thousands depreciation expense 2278000 2296000 1706000 years ended september 30 2000 1999 1998 respectively 3 lines credit september 30 2000 1999 company outstanding borrowings 41198000 62289000 respectively lines credit various financial institutions line credit agreements provide total financing 83 million 121 million september 30 2000 1999 respectively annual interest rates prime less 25 periods total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited en pointe technologies inc notes consolidated financial statements continued 3 lines credit continued specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios company obtained waiver noncompliance covenant relating minimum percentage net income sales debt equity january 4 2001 connection obtaining waiver noncompliance ibmcc reduced credit available company 44 million 30 million increased interest rate prime plus 2 subsequently ibmcc effective january 17 2001 agreed increase amount available working capital financing agreement 30 million 35 million extend date expiration renewed april 14 2001 september 30 2001 finova company 39 million line credit part 830 million credit facility mentioned announced discontinue financing segment business part decision december 11 2000 company advised companys 39 million line credit finova longer available 60 days prime rate interest 950 825 september 30 2000 1999 respectively weighted average interest rates years ended september 30 2000 1999 1998 849 763 825 respectively interest expense years ended september 30 2000 1999 1998 2308000 3172000 2166000 respectively 4 nonrecurring charges nonrecurring charges fiscal year ended september 30 2000 include provision litigation 1173000 related adverse judgment received legal matter see note 13 restructuring charges 1544000 june 2000 company underwent restructuring charges result reorganizing certain aspects business elements restructuring plan included streamlining organization reducing costs expenses aligning resources accelerate growth potential companys core business executing restructure workforce reduced 105 employees independent contractors various levels five offices also closed converted virtual sales locations following table summarizes restructuring charges remaining reserves associated restructuring results operations year ended september 30 1999 included nonrecurring charges 7917000 charges consist provision litigation 1725000 related adverse judgment received legal matter see note 13 impairment loss 6192000 related companys ontario facility see note 6 en pointe technologies inc notes consolidated financial statements continued 5 gain sale investment conjunction former subsidiarys private placement marketable securities acquired produced gain 3938000 upon sale securities acquired february 23 2000 cost basis 6800000 gain sale investment 1999 resulted sale shares held company shoppingcom net proceeds received 4990000 adjusted carrying value shares 562000 6 saleleaseback ontario facility june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit company terminate lease cost penalty end seventh tenth year company currently occupies approximately 55 facility originally planned sublease remaining space however sfas 98 accounting leases subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property equipment estimated fair value related liability lease qualifies normal leaseback sfas 98 lease accounted sfas 98 financing lease aggregate noncancellable annual future minimum lease payments term company may terminate lease ontario facility follows thousands three months ended march 31 1999 company accordance sfas 121 recognized charge impairment relating ontario facility approximately 62 million 62 million impairment loss based 55 million estimated sale price less 111 million carrying costs less estimated selling expenses 02 million less capitalized interest loan fees 04 million approximately 73 impairment loss related property decline related special purpose improvements balance applicable personal property including warehouse computer equipment year ended september 30 2000 1999 ontario facility rent expense characterized interest expense sfas 98 551122 148000 en pointe technologies inc notes consolidated financial statements continued 7 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 8 income taxes components income tax benefit provision follows thousands benefit provision income taxes differs amount computed applying federal statutory rate loss income benefit provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset en pointe technologies inc notes consolidated financial statements continued 8 income taxes continued 47 million management provided valuation allowance significant components deferred taxes follows thousands company net operating loss nol 78 million may carried forward twenty years september 30 2020 since nol attributable exercise stock options employees realization income tax benefits nol considered adjustment additional paidin capital benefit future earnings 9 commitments contingencies company leases office facilities various office equipment leases extend period five years many contain renewal options andor escalation clauses accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancelable lease terms excess one year september 30 1999 approximately follows thousands rent expense years ended september 30 2000 1999 1998 operating leases approximately 2273000 2296000 1419000 respectively en pointe technologies inc notes consolidated financial statements continued 10 earnings per share following table sets forth computation basic diluted net loss income per share thousands except per share amounts dilutive potential stock options warrants excluded calculation diluted loss per share effect inclusion would antidilutive 11 stock options warrants march 1996 company instituted qualified incentive stock option plan nonqualified stock option plan provides currently options maximum 1260000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years september 30 2000 1999 shares available grant plan 88604 141718 respectively en pointe technologies inc notes consolidated financial statements continued 11 stock options warrants continued following summary stock option activity september 30 2000 warrants purchase 18668 shares companys common stock outstanding issued company underwriter companys initial public offering exercisable time may 7 2001 exercise price 960 per share company adopted disclosure provisions sfas 123 accounting stock based compensation expense stock options determined using fair value grant date awards 1999 1998 1997 consistent provisions sfas en pointe technologies inc notes consolidated financial statements continued 11 stock options warrants continued 123 companys net loss income net loss income per share would reduced pro forma amounts indicated thousands except per share amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2000 1999 1998 may 1999 firstsource adopted stock option plan year ended september 30 1999 firstsource issued options purchase 4196500 shares common stock exercise prices 013 700 per share options granted options purchase 3233061 shares common stock exercisable september 30 1999 connection stock options granted firstsource company recorded unearned deferred compensation 11801000 september 1999 firstsource modified vesting schedule stock options outstanding accelerate vesting fiscal year ended september 30 1999 10315000 expensed approximately 9600000 due accelerated vesting 12 employee stock plan company employee stock purchase plan remains authorized available sale employees aggregate 172145 shares companys common stock september 30 2000 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period 13 litigation march 1999 jury verdict los angeles county california superior court relating litigation brought novaquest infosystems resulted company owing total 1425000 court decree 375000 awarded intentional interference plaintiffs prospective en pointe technologies inc notes consolidated financial statements continued 13 litigation continued economic advantage tort claim 50000 awarded breach contract 1 million awarded punitive damages addition april 2000 court awarded plaintiffs attorneys fees costs breach contract claim approximately 1218000 company timely objected amount cost reimbursement allowed attorney fees intends appeal courts ruling however company recorded additional nonrecurring charge 1173000 increase litigation accrual quarter ended march 31 2000 march 2000 action brought company orange county superior court contending fraud breach contract arising purchase former subsidiary company certain assets company formerly known first source international fsi lawsuit filed behalf creditors defunct corporation paragon solutions inc formerly known fsi contended fsi unable obtain contingent earnout agreement faulty software provided company damages sought range 08 35 million plaintiff seeking punitive damages 10 million company successful compelling action moved arbitration since november 17 2000 court appeals rejected request plaintiff prohibit arbitration proceedings commenced company vigorously denies charges contends full disclosure made problems software former subsidiary date produced net income management consulting legal counsel determined potential adverse outcome litigation cannot estimated case preliminary stage october 2000 company one officers two several defendants arbitration matter new york stock exchange inc first union securities inc first union first union seeks recover defendants relating one customers acquired large position companys stock margin unable repay entire margin loan even upon eventual liquidation stock company vigorously denies allegations believes case without merit january 2001 five companys directors one current officer certain former officers along four unrelated parties named shareholders derivative complaint alleging persons improperly benefitted sales shares companys common stock seeking recovery company damages sustained result activities fredrick v din et al superior court california county los angeles case yc 039456 defendants intend vigorously defend allegations believe case without merit various claims litigation proceedings company involved ordinary course business outcome claims proceedings cannot predicted certainty consulting legal counsel management believe outcome matters material adverse affect companys business financial position results operations cash flows 14 segment information deconsolidation company consisted primarily three business units companies en pointe technologies firstsource supplyaccess companies separate management teams infrastructures facilities en pointe technologies inc notes consolidated financial statements continued 14 segment information continued en pointe technologies focuses efforts sales technology products services fortune 1000 government customers en pointe technologies utilizes traditional national sales force sales representatives major metropolitan areas well available electronic interfaces en pointe customers vendors firstsource focused efforts sale technology products services primarily via internet consumers small medium sized businesses supplyaccess offers hosted businesstobusiness web application integrated customized sapbased enterprise fulfillment engine supplyaccess pays flat quarterly fee 500000 services access customers supplyaccess fulfillment engine accounting policies segments described organization summary significant accounting policies included report form 10k year ended september 30 2000 company evaluates performances segment profit segments allocates resources based earnings income taxes quarter ended june 30 2000 company began account investments firstsource supplyaccess equity method accounting see note 1 en pointe technologies inc notes consolidated financial statements continued 14 segment information continued tables present information reported segments years ended september 30 2000 1999 1998 14 segment information continued company operates one geographic segment 15 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2000 1999 presented thousands except per share amounts net loss net loss per share restated previously reported amounts 9003000 138 per share described note 8 companys unaudited quarterly financial statements quarter ended june 30 2000 b net loss net loss per share restated previously reported amounts 4897000 078 per share described note 5 companys unaudited quarterly financial statements quarter ended march 31 2000 c net loss net loss per share restated previously reported amounts 5182000 085 per share described note 5 companys unaudited quarterly financial statements quarter ended december 31 1999 schedule ii valuation qualifying accounts signatures pursuant requirements securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized dated january 15 2001 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint michael r shabazian kevin ayers either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated index exhibits item 14 controls procedures within 90 days prior date report evaluation performed supervision participation companys management including ceo cfo effectiveness design operation companys disclosure controls procedures based evaluation companys management including ceo cfo concluded companys disclosure controls procedures effective timely alerting material information required included companys periodic filings exchange act 1934 significant changes en pointes internal controls factors occurred could significantly affect internal controls subsequent evaluation part iv item 15 item 14 principal accountant fees services hereby incorporated reference information appearing captions “principal accountant fees services” “policy audit committee preapproval audit services permissible nonaudit services independent auditors” definitive proxy statement 2006 annual meeting stockholders filed commission january 30 2006 part iv item 15 item 14 principal accountant fees services hereby incorporated reference information appearing captions principal accountant fees services” “policy audit committee preapproval audit services permissible nonaudit services independent auditors” definitive proxy statement 2008 annual meeting stockholders filed commission january 28 2008 part iv item 15 item 14 principal accountant fees services hereby incorporated reference information appearing captions principal accountant fees services” “policy audit committee preapproval audit services permissible nonaudit services independent auditors” definitive proxy statement 2009 annual meeting stockholders filed commission january 28 2009 part iv item 15 item 14 principal accountant fees services hereby incorporated reference information appearing captions principal accountant fees services” “policy audit committee preapproval audit services permissible nonaudit services independent auditors” definitive proxy statement 2007 annual meeting stockholders filed commission january 29 2007 part iv item 15 item 14 exhibits financial statements schedules reports form 8k following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits list exhibits accompanying exhibit index herein incorporated reference b reports form 8k july 30 1999 company filed report form 8k announced completed funding private placement common stock formerly whollyowned internet subsidiary purchase pointe inc dba firstsourcecom gross amount 9307431 less 160000 related costs funding resulted sale 2659266 shares 350 per share representing 2858 purchase pointe incs outstanding capital stock september 13 1999 company filed report form 8k announced august 31 1999 certain principal stockholders company affiliates aggregate longer owned beneficially owned 50 stock company result company would longer consider minority owned company purposes bidding sales contracts en pointe technologies inc page report independent accountants consolidated balance sheets september 30 1999 1998 consolidated statements operations three years period ended september 30 1999 consolidated statements stockholders equity three years period ended september 30 1999 consolidated statements cash flows three years period ended september 30 1999 notes consolidated financial statements schedule ii valuation qualifying accounts report independent accountants board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index page present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 1999 1998 consolidated results operations cash flows three years period ended september 30 1999 conformity generally accepted accounting principles addition opinion consolidated financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp los angeles california december 20 1999 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders equity thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company originally incorporated texas 1993 reincorporated delaware 1996 company reseller information technology products valueadded services large medium sized companies government entities currently configuration facility ontario california 20 sales offices including corporate headquarters throughout united states june 1998 companys previously whollyowned subsidiary firstsourcecom commenced operations sell information technology products small medium sized businesses consumer markets via internet july 1999 firstsourcecom raised gross proceeds 93 million private placement common stock resulting companys ownership percentage decreasing 714 november 1999 company formed new subsidiary supplyaccess inc address larger corporate customers needs find product internet favorable prices supplyaccess inc designed internet portal charging transaction fees seller company currently attempting raise capital business private placement supplyaccess incs capital stock september 30 1999 supplyaccess inc yet commenced operations principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany accounts transactions eliminated consolidated financial statements accounting sales stock subsidiary company accounts sales stock subsidiaries accordance statement accounting bulletins sab nos 51 84 sale stock firstsourcecom accounted capital transaction consolidated financial statements company fourth fiscal quarter ended september 30 1999 firstsourcecom previously wholly owned subsidiary raised gross proceeds 93 million private placement sold approximately 2660000 shares common stock 350 per share resulting companys ownership decreasing form 100 714 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period significant estimates preparation consolidated financial statements relate assessment carrying value accounts receivable including vendor purchase rebates volume purchasing incentives inventories actual results could differ estimates revenue recognition product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less estimated volume purchase incentives en pointe technologies inc notes consolidated financial statements purchase rebates received company vendors september 30 1999 1998 allowance returns price protection approximately 649000 784000 respectively cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 1999 represents deposits maintained certain government tax agencies september 30 1998 primarily represented unexpended equipment loan proceeds inventories consist principally merchandise configured customer orders merchandise paid company yet shipped vendors companys customers stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lessor remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred interest capitalized connection construction major facilities capitalized interest recorded part asset relates amortized assets estimated useful life year ended september 30 1998 interest approximately 354000 capitalized interest capitalized fiscal years 1999 1997 fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm liabilities debt also approximates fair value longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value 1999 company recorded impairment charge 62 million ontario facility see note 7 included nonrecurring charges consolidated statement operations impairment losses recorded fiscal years 1998 1997 en pointe technologies inc notes consolidated financial statements advertising company reports costs advertising periods costs incurred year ended september 30 1999 advertising expense approximately 1955000 years ended september 30 1998 1997 advertising significant item expense company income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits years ended september 30 1999 1998 1997 one companys customers accounted approximately 19 21 30 net sales respectively september 30 1999 1998 customer accounted 18 21 accounts receivable respectively customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations stock based employee compensation awards company accounts stockbased employee compensation arrangements accordance provisions accounting principles board opinion apb 25 accounting stock issued employees complies disclosure provisions statement financial accounting standards sfas 123 accounting awards stockbased compensation apb 25 compensation expense recognized vesting period based difference date grant deemed fair value companys stock accounting purposes exercise price company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force 9618 vendor programs company receives volume incentives purchase rebates certain manufacturers related sales certain products recorded reduction cost goods sold en pointe technologies inc notes consolidated financial statements earned company also receives manufacturer reimbursement certain training promotional marketing activities offset expenses incurred company earnings per share basic net loss income per share computed dividing net loss income period weighted average number common shares outstanding period diluted net loss income per share computed dividing net loss income period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options warrants included calculation extent antidilutive comprehensive income first quarter fiscal 1999 company adopted provisions sfas 130 reporting comprehensive income sfas 130 establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 1999 1998 1997 segment reporting first quarter 1999 company adopted sfas 131 disclosures segments enterprise related information sfas 131 supercedes 14 financial reporting segments business enterprise replacing industry segment approach management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers adoption sfas 131 affect results operations financial position affect disclosure segment information see note 15 segment information recently issued accounting pronouncements april 1998 aicpa issued sop 985 reporting costs startup activities sop 985 requires startup costs related new operations must expensed incurred addition startup costs capitalized past must written sop 985 adopted company expect adoption sop 985 material impact companys financial position results operations cash flows company wil required implement sop 985 first quarter fiscal 2000 june 1998 financial accounting standards board issued sfas 1333 accounting derivative instruments hedging activities statement requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation company currently hold derivative instruments engage hedging activities impact adoption sfas 133 currently expected material impact results operations financial position sfas 137 defers effective date sfas 133 fiscal years beginning june 30 2000 en pointe technologies inc notes consolidated financial statements 2 property equipment property equipment consist following thousands depreciation expense 2296000 1706000 248000 years ended september 30 1999 1998 1997 respectively 3 lines credit september 30 1999 1998 company outstanding borrowings 62289000 79598000 respectively lines credit various financial institutions line credit agreements provide total financing 121 million 105 million september 30 1999 1998 respectively annual interest rates prime less 25 periods total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios september 30 1999 company obtained waiver noncompliance covenant relating minimum percentage net income sales prime rate interest 825 850 september 30 1999 1998 respectively weighted average interest rates years ended september 30 1999 1998 1997 763 825 817 respectively principal line credit agreement 80 million expires april 13 2000 renewed en pointe technologies inc notes consolidated financial statements 4 notes payable notes payable consist following thousands conjunction saleleaseback ontario facility see note 7 company repaid full notes payable previously due 2005 2007 en pointe technologies inc notes consolidated financial statements 5 nonrecurring charges results operations year ended september 30 1999 included nonrecurring charges 7917000 charges consist provision litigation 1725000 related adverse judgement received legal matter see note 14 impairment loss 6192000 related companys ontario facility see note 7 6 gain sale investment gain sale investment resulted sale shares held company shoppingcom net proceeds received 4990000 adjusted carrying value shares 562000 7 saleleaseback ontario facility june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit company terminate lease cost penalty end seventh tenth year company currently occupies approximately 55 facility originally planned sublease remaining space however sfas 98 accounting leases subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property estimated fair value 54 million related liability lease qualifies normal leaseback sfas 98 management attempting restructure lease company longer financial interest property assurance restructuring successful lease accounted sfas 98 financing lease aggregate noncancellable annual future minimum lease payments term company may terminate lease ontario facility follows thousands en pointe technologies inc notes consolidated financial statements three months ended march 31 1999 company accordance sfas 121 recognized charge impairment relating ontario facility approximately 62 million 62 million impairment loss based 55 million estimated sale price less 111 million carrying costs less estimated selling expenses 02 million less capitalized interest loan fees 04 million approximately 73 impairment loss related property decline related special purpose improvements balance applicable personal property including warehouse computer equipment year ended september 30 1999 ontario facility rent expense characterized interest expense sfas 98 148000 8 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 9 income taxes components income tax benefit provision follows thousands en pointe technologies inc notes consolidated financial statements benefit provision income taxes differs amount computed applying federal statutory rate loss income benefit provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes follows thousands subsidiaries previously included filing consolidated federal tax return effective july 28 1999 reduction ownership percentage firstsourcecom company longer include firstsourcecom consolidated income tax filings result loss limitations due deconsolidation tax benefits 14 million representing operating losses firstsourcecom recognized prior fiscal quarters recaptured fourth fiscal quarter 1999 addition period july 28 1999 september 30 1999 tax benefit recognized operating loss approximately 11 million generated firstsourcecom period firstsourcecom net operating loss may carried forward twenty years september 30 2019 en pointe technologies inc notes consolidated financial statements 10 commitments contingencies company leases office facilities various office equipment leases extend period five years many contain renewal options andor escalation clauses accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancelable lease terms excess one year september 30 1999 approximately follows thousands rent expense years ended september 30 1999 1998 1997 operating leases approximately 2296000 1419000 1665000 respectively company entered employment contracts certain officers agreements provide annual base salary bonuses discretion board directors addition agreements two officers provide bonuses 3 12 2 12 pretax profit provided certain minimum pretax profit levels obtained agreements three five year terms ending various times fiscal 2001 provide guaranteed severance payments upon termination employment cause en pointe technologies inc notes consolidated financial statements 11 earnings per share following table sets forth computation basic diluted net loss income per share thousands except per share amounts dilutive potential stock options warrants excluded calculation diluted loss per share 1999 effect inclusion would antidilutive 12 stock options warrants march 1996 company instituted qualified incentive stock option plan nonqualified stock option plan provides currently options maximum 1260000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years addition plan september 2 1997 company issued options companys president connection employment agreement terms similar companys incentive stock option plan purchase 275000 shares 1438 per share market value common stock grant date none options issued former president ever exercised upon termination company options cancelled september 30 1999 1998 shares available grant plan 141718 150245 respectively en pointe technologies inc notes consolidated financial statements following summary stock option activity september 30 1999 warrants purchase 73100 shares companys common stock also outstanding total warrants outstanding 23100 issued company underwriter initial public offering exercisable time may 7 2001 exercise price 960 per share remaining 50000 warrants issued services exercisable time december 1999 five year life exercise price 5 per share company adopted disclosure provisions sfas 123 accounting stock based compensation expense stock options determined using fair value grant date awards 1999 1998 1997 consistent provisions sfas 123 companys net loss income net loss income per share would reduced pro forma amounts indicated thousands except per share amounts en pointe technologies inc notes consolidated financial statements fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1999 1998 1997 may 1999 firstsourcecom subsidiary company adopted stock option plan provides issuance nonstatutory incentive stock options employees officers directors consultants firstsourcecom parent en pointe technologies inc options vest determined firstsourcecoms board directors exercisable period longer ten years date grant 1999 september 30 1999 firstsourcecom issued options purchase 4196500 shares common stock exercise prices 013 700 per share options granted options purchase 3233061 shares common stock exercisable september 30 1999 connection stock options granted firstsourcecom company recorded unearned deferred compensation 11801000 september 1999 firstsourcecom modified vesting schedule stock options outstanding accelerate vesting fiscal year ended september 30 1999 10315000 expensed approximately 9600000 due accelerated vesting 13 employee stock plan company also employee stock purchase plan remains authorized available sale employees aggregate 208666 shares companys common stock september 30 1999 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period en pointe technologies inc notes consolidated financial statements 14 litigation company named along ceo bob din defendant lawsuit filed april 29 1997 los angeles county california superior court case bc 170234 captioned novaquest infosystems et al v en pointe technologies inc et al lawsuit alleged company knowingly accepted trade secret information interfered plaintiffs prospective economic advantage tort actions also constituted breach prior contract plaintiffs trade secret claim dropped eve trial remaining claims tried jury march 23 1999 jury arrived verdicts awarding 50000 breach contract claim 375000 intentional interference plaintiffs prospective economic advantage tort claim april 2 1999 jury arrived verdict awarding 1000000 punitive damages tort claim various posttrial motions judgement verdicts entered june 15 1999 plaintiffs prevailed contract claim entitled seek court jury award reasonable attorneys fees incurred enforcing contract receiving verdict 50000 contract plaintiffs entitled attorneys fees incurred enforcing tort claim obtaining punitive damages award plaintiffs entitled seek recovery costs defined california code civil procedure section 10335 eg filing fees deposition costs etc claims prevailed judgment entered june 15 1999 plaintiffs june 29 1999 served request court award approximately 100000 costs approximately 1800000 attorneys fees company timely objected one factors required considered court awarding reasonable attorneys fees amount recovery company believe judge would find reasonable expending 1800000 recover 50000 december 10 1999 court took submission plaintiffs claim costs attorneys fees set return hearing date january 21 2000 quarter ended march 31 1999 company recorded reserve litigation expense 1725000 included 50000 contract damages 375000 tort damages 1000000 punitive damages 300000 estimate costs attorneys fees might awarded plaintiffs company believes accrual made march 31 1999 remains reasonable estimate loss incurred respect matter company named defendant lawsuit filed august 4 1998 151st judicial district court harris county texas case 9836715 case name allstar systems inc v en pointe technologies inc et al complaint alleges company along individual defendant former employee plaintiff conspired steal allstars customers employees trade secrets company currently unable estimate loss event unfavorable outcome company named defendant two lawsuits filed santa clara county superior court case nos cv773074 cv774589 two cases virtually identical consolidated pursuant stipulation purposes trial cases involve three plaintiffs former employees en pointe three alleging fraud inducement breach contract failure set performance standards termination poor performance unpaid wages form commissions addition three plaintiffs en pointe technologies inc notes consolidated financial statements pursuing several claims business professions code section 17200 behalf general public regards complaints seek equitable relief company currently unable estimate loss event unfavorable outcome april 1996 company bob din naureen din entered settlement agreement former employee company pursuant former employee released company bob din naureen din claims respect companys use certain computerized information system software originally developed former employee prior employment company settlement agreement consideration entering settlement agreement company agreed pay former employee payments totaling 1225000 remaining unpaid balance september 30 1999 1998 135000 214000 respectively company filed suit insurance carrier order recoup legal costs incurred company connection defense foregoing litigation well amounts paid former employee pursuant settlement august 1996 insurance company settled company paying full amount original settlement company also subject legal proceedings claims arise normal course business outcome proceedings claims cannot predicted certainty consulting counsel management consulting counsel believe outcome matters material adverse effect companys business financial position results operations cash flows 15 segment information company consists primarily two business units companies en pointe technologies firstsourcecom companies separate management teams infrastructures facilities en pointe technologies focuses efforts sales technology products services fortune 1000 government customers en pointe technologies utilizes traditional national sales force branch offices major metropolitan areas along electronic interfaces en pointe customers vendors firstsourcecom focuses efforts sale technology products services primarily via internet consumers small medium sized businesses accounting policies segments described organization summary significant accounting policies included report form 10k year ended september 30 1999 company evaluates performances segment profit segments allocates resources based earnings income taxes en pointe technologies inc notes consolidated financial statements tables present information reported segments years ended september 30 1999 1998 one business segment 1997 firstsourcecom commence operations june 1998 company operates one geographic segment en pointe technologies inc notes consolidated financial statements 16 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 1999 1998 presented thousands except per share amounts schedule ii en pointe technologies inc valuation qualifying accounts signatures pursuant requirements securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized en pointe technologies inc bob din attiazaz bob din chairman board chief executive officer principal executive officer dated january 12 2000 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz bob din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated signature title date attiazaz bob din january 12 2000 attiazaz bob din chairman board chief executive officer director principal executive officer javed latif january 12 2000 javed latif chief financial officer principal financial principal accounting officer naureen din january 12 2000 naureen din director zubair ahmed january 12 2000 zubair ahmed director mark briggs january 12 2000 mark briggs director verdell garroutte january 12 2000 verdell garroutte director index exhibits exhibit number description 1018 ontario lease 231 consent pricewaterhousecoopers llp 271 financial data schedule item 14 exhibits financial statements schedules reports form 8k following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits list exhibits accompanying exhibit index herein incorporated reference b reports form 8k company filed current reports form 8k last quarter period covered report signatures pursuant requirements securities act 1933 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized city el segundo state california 29th day december 1998 en pointe technologies inc bob din bob din chairman board chief executive officer principal executive officer power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz bob din c stephen cordial either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 amended annual report form 10k signed following persons capacities dates indicated signature title date chairman board attiazaz bob din chief executive officer director principal december 28 1998 attiazaz bob din executive officer chief financial officer c stephen cordial principal financial principal accounting december 28 1998 c stephen cordial officer naureen din director december 28 1998 naureen din zubair ahmed director december 27 1998 zubair ahmed mark briggs director december 28 1998 mark briggs verdell garroutte director december 24 1998 verdell garroutte en pointe technologies inc index consolidated financial statements report independent accountants board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 1998 1997 consolidated results operations cash flows three years period ended september 30 1998 conformity generally accepted accounting procedures addition opinion consolidated financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp los angeles california november 24 1998 en pointe technologies inc consolidated balance sheets see notes consolidated financial statements en pointe technologies inc consolidated statements operations see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders equity see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company incorporated laws state texas january 25 1993 name infosystems inc name later changed infotech systems commenced operations march 1993 september 21 1995 company changed name en pointe technologies inc february 1996 companys board directors board authorized reincorporation company state delaware total authorized shares classes stock 20000000 shares consisting 15000000 shares common stock 001 par value per share 5000000 shares preferred stock 001 par value per share effected effective date registration statement initial public offering ipo common stock connection reincorporation company authorized forward stock split 2077 shares share issued outstanding common stock company share per share amounts adjusted retroactively reflect stock split may 8 1996 company successfully completed ipo 2250000 shares 8 per share company reseller computers computerrelated products services currently sales offices 21 locations within united states principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries en pointe technologies sales inc en pointe technologies canada inc purchase pointe inc material intercompany accounts transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts cost sales include product service costs current estimated allowances returns accepted companys suppliers less product credits september 30 1998 1997 allowance returns price protection approximately 785000 415000 respectively cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued restricted cash includes approximately 1938000 may used future equipment purchases inventories consist principally merchandise configured customer orders merchandise paid company yet shipped companys vendors customers stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lessor remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred interest capitalized connection construction major facilities capitalized interest recorded part asset relates amortized assets estimated useful life year ended september 30 1998 interest approximately 354000 capitalized fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm debt also assumed approximate fair value intangible longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value advertising company reports costs advertising periods costs incurred advertising costs significant item expense company income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued concentration credit risk major customers financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions years ended september 30 1998 1997 1996 one companys customers accounted approximately 21 30 28 net sales respectively september 30 1998 1997 customer accounted 21 24 accounts receivable respectively customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations stock based employee compensation awards statement financial accounting standards sfas 123 accounting awards stockbased compensation employees encourages require companies record compensation cost stockbased compensation plans fair value company adopted disclosure requirements sfas 123 involves proforma disclosure net income provisions sfas 123 detailed descriptions plan terms assumptions used valuing stock option grants company chosen continue account stockbased employee compensation awards accordance accounting principles board opinion 25 accounting stock issued employees vendor programs company receives volume incentives rebates certain manufacturers related sales certain products recorded reduction cost goods sold earned company also receives manufacturer reimbursement certain training promotional marketing activities offset expenses incurred company earnings per share statement financial accounting standards sfas 128 earnings per share effective financial statements issued periods ending december 15 1997 sfas 128 replaces accounting principles board opinion apb 15 simplifies computation earnings per share eps replacing presentation primary eps presentation basic eps basic eps includes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings company similar fully diluted eps apb 15 statement requires dual presentation basic diluted eps entities complex capital structures company adopted sfas 128 consolidated financial statements year ended september 30 1998 accordance sfas 128 prior periods restated adopt standard see note 8earnings per share en pointe technologies inc notes consolidated financial statements continued 1 organization summary significant accounting policies continued recently issued accounting standards june 1997 fasb issued sfas 130 reporting comprehensive income standard establishes guidelines reporting display comprehensive income components financial statements disclosure comprehensive income components required beginning companys 1999 fiscal year end also june 1997 fasb issued sfas 131 disclosures segments enterprise related information standard requires companies disclose operating segments based way management disaggregates company making internal operating decisions new standard effective companys 1999 fiscal year end company yet evaluated impact new standard 2 property equipment property equipment consist following 3 lines credit september 30 1998 1997 company outstanding borrowings 79597619 50692257 respectively lines credit various financial institutions line credit agreements provide total financing 105000000 81000000 september 30 1998 1997 respectively annual interest rates prime less 25 periods total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios september 30 1998 company obtained waiver noncompliance one ibmcc covenants relating minimum percentage net income sales remains compliance remaining covenants line credit en pointe technologies inc notes consolidated financial statements continued 3 lines credit continued agreements prime rate interest 850 825 september 30 1998 1997 1996 respectively weighted average interest rates years ended september 30 1998 1997 1996 825 817 1078 respectively principal line credit agreement 70000000 expires april 13 1999 renewed 4 notes payable notes payable consist following maturities longterm debt september 30 1998 follows 5 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan en pointe technologies inc notes consolidated financial statements continued 5 employee benefit plan continued discretion board directors vest seven years service contributions made company 401k plan fiscal years 1998 1997 1996 6 income taxes components income tax provision benefit follows provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes en pointe technologies inc notes consolidated financial statements continued 6 income taxes continued significant components deferred taxes follows 7 commitments contingencies company leases office facilities various office equipment leases extend period five years accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year september 30 1998 approximately follows rent expense years ended september 30 1998 1997 1996 operating leases approximately 2419000 1665000 1104000 respectively company entered employment contracts certain officers agreements provide annual base salary bonuses discretion board directors addition agreements two officers provide bonuses 3 12 2 12 pretax profit provided certain minimum pretax profit levels obtained agreements three five year terms ending various times fiscal 2001 provide guaranteed severance payments upon termination employment cause connection acquisition assets first source inc purchase pointe inc company obligated make contingent payments equal cumulative net income purchase pointe inc excess 500000 earned period june 1 1998 april 30 1999 en pointe technologies inc notes consolidated financial statements 8 earnings per share following table sets forth computation basic diluted net income per share 9 stock options warrants march 1996 company instituted qualified incentive stock option plan nonqualified stock option plan provides currently options maximum 1260000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date addition plan september 2 1997 company issued options company president connection employment agreement terms similar companys incentive stock option plan purchase 275000 shares 1438 per share market value common stock grant date september 30 1998 1997 shares available grant plan 150245 227627 respectively en pointe technologies inc notes consolidated financial statements continued 9 stock options warrants continued following summary stock option activity en pointe technologies inc notes consolidated financial statements continued 9 stock options warrants continued september 30 1998 warrants purchase 77500 shares companys common stock also outstanding warrants issued company underwriter initial public offering exercisable time five year life exercise price 960 per share en pointe adopted disclosure provisions sfas 123 accounting stock based compensation expense stock options determined using fair value en pointe technologies inc notes consolidated financial statements continued 9 stock options warrants continued grant date awards 1997 1998 consistent provisions sfas 123 companys net income net income per share would reduced pro forma amounts indicated fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1998 1997 10 employee stock plan company also employee stock purchase plan remains authorized available sale employees aggregate 95871 shares companys common stock plan intended qualify section 423 code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period 11 litigation company named along bob din defendant lawsuit filed april 29 1997 superior court county los angeles case name filing novaquest infosystems et al v en pointe technologies inc et al complaint alleges company bob din knowingly accepted trade secret information owned plaintiffs furthermore alleges company interfered plaintiffs prospective economic advantage company currently unable estimate loss event unfavorable outcome however consideration potential insurance recoveries company advice counsel believes claims suit material adverse effect companys business financial condition results operations company maintained various liability insurance policies periods covering claims policies may limit coverage certain circumstances company believes adequately insured trial currently set february 1999 company named defendant lawsuit filed august 4 1998 complaint alleges company along individual defendant former employee plaintiff conspired steal customers employees trade secrets company currently unable estimate loss event unfavorable outcome however company believes claims suit en pointe technologies inc notes consolidated financial statements continued 11 litigation continued material adverse effect companys business financial condition results operations company named defendant two similar lawsuits cases involve plaintiffs former account executives company allege fraud inducement breach contract unpaid wages addition plaintiffs pursuing several claims business professions code behalf general public regards complaints seek equitable relief company currently unable estimate loss event unfavorable outcome june 3 1998 company named defendant lawsuit alleging company sufficiently pay services plaintiff suing breach contract case ordered binding arbitration los angeles superior court based petition company time company unable estimate loss event unfavorable outcome april 1996 company bob din naureen din entered settlement agreement former employee company pursuant former employee released company bob din naureen din claims respect companys use certain computerized information system software originally developed former employee prior employment company settlement agreement consideration entering settlement agreement company agreed pay former employee payments totaling 1225000 remaining unpaid balance september 30 1997 1998 287511 213773 respectively company filed suit insurance carrier order recoup legal costs incurred company connection defense foregoing litigation well amounts paid former employee pursuant settlement august 1996 insurance company settled company paying full amount original settlement addition company involved various claims litigation normal course business advice counsel opinion management ultimate resolution matters significant effect financial position cash flows company en pointe technologies inc notes consolidated financial statements continued 12 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 1998 1997 presented thousands except per share amounts schedule ii en pointe technologies inc valuation qualifying accounts item 14 exhibits financial statements schedules reports form 8k athe following documents filed part report 1financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3exhibits list exhibits accompanying exhibit index herein incorporated reference breports form 8k company filed current reports form 8k last quarter period covered report en pointe technologies inc report independent accountants board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index page present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2001 2000 consolidated results operations cash flows three years period ended september 30 2001 conformity accounting principles generally accepted united states america addition opinion consolidated financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp los angeles california november 29 2001 except notes 1 3 date december 28 2001 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements operations thousands except per share amounts en pointe technologies inc consolidated statements stockholders equity thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company reseller information technology products valueadded services large medium sized companies government entities sales service personnel 22 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity management plans reflected accompanying financial statements company experienced declining sales last two fiscal years incurred losses operations fiscal years ended september 30 2001 2000 1999 counter sales decline company conducted two restructurings sales administrative force fiscal years 2001 2000 leased sales offices converted virtual offices employees work home based offices home offices equipped dsl lines latest information technology equipment corporate headquarters committed full technical administrative support assisting field personnel improving customer support company focused efforts increasing sale services yield higher gross margin product sales losses 100 million 137 million incurred fiscal 2000 1999 respectively attributable losses former subsidiaries result companys voting interest former subsidiaries falling 50 companys former subsidiaries deconsolidated company began account investments former subsidiaries equity method accounting see note 1 investment affiliates september 30 2001 company future obligations provide financial support affiliates meet future financing needs december 28 2001 company entered 30 million line credit agreement three years foothill capital corporation foothill ibmcc part agreement ibmcc continues provide company 30day interest free inventory flooring financing 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc 20 million flooring line consideration providing guarantee foothill agreement contains 1 annual charge average outstanding balances owing ibmcc initially foothill agreement provide interest rate onehalf one percent prime rate future interest rate dependent upon company meeting certain earnings targets minimum variable interest rate 6 per annum option company could based prime libor rate maximum range interest based certain earnings targets prime plus 150 libor plus 375 spite efforts made companys management team improve operations assurance managements plans successful improving profitability however management believes amount available new line credit facility foothill ibmcc provide sufficient working capital year ending september 30 2002 principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany accounts transactions eliminated consolidated financial statements deconsolidation fiscal year 2000 firstsource previously wholly owned subsidiary completed series private placements aggregated 8630197 shares convertible preferred stock ranging prices 350 per share 419 per share increase shares outstanding may 16 2000 companys 6645000 shares common stock firstsource represented 435 voting interest effective may 16 2000 company otherwise control firstsource company began account investment firstsource equity method accounting november 1999 company formed new subsidiary supplyaccess inc supplyaccess address larger corporate customers needs find product internet favorable prices supplyaccess designed internet portal charging transaction fees seller company transferred information technology department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed flat quarterly fee 500000 supplyaccess would provide company services would allow company customers access fulfillment engine years ended september 30 2001 2000 company paid supplyaccess 1977341 2000000 respectively services february 2000 supplyaccess completed initial private placement 12000000 shares convertible preferred stock 150 per share reduced companys voting interest 54 addition april 2000 supplyaccess completed supplemental private placement 5088318 shares convertible preferred stock 150 per share reduced companys voting interest 4510 two subsequent private placements 5196000 shares convertible preferred stock 150 per share reduced companys voting interest even 3865 effective april 4 2000 companys voting interest supplyaccess dropped 50 company otherwise control supplyaccess company began account investment supplyaccess equity method accounting periods prior reduction companys voting interest 50 company consolidated operating results assets liabilities firstsource supplyaccess dates deconsolidation company recognize gain approximately 100 million resulting accumulated losses recognized excess companys ownership interest former subsidiaries gain deferred due primarily companys continued guarantee certain debt obligations commitments considered increase companys investment basis adjusted basis equity method accounting investment unconsolidated affiliates company recognized accumulated losses excess companys ownership interest former subsidiaries periods former subsidiaries consolidated september 30 2001 2000 companys adjusted basis equity method accounting reduced zero accordance equity method accounting company suspended recognition equity method losses adjusted basis reduced zero future losses generated monitored reported equity method income recognized future periods companys share equity method income equals previously unreported equity method losses accumulated periods recognition equity method losses suspended years ended september 30 2001 2000 en pointe recognized income affiliates 8392000 losses affiliates 702000 respectively following summarizes recent combined financial information available unconsolidated affiliates thousands effective april 10 2001 assets firstsource assigned sherwood partners inc assignee benefit creditors firstsource operations ceased therefore operations supplyaccess reported fiscal 2001 use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition product revenues recognized upon transfer title risk loss satisfaction significant obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less estimated volume purchase incentives purchase rebates received company vendors cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 2001 2000 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise paid company yet shipped vendors companys customers stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lesser remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm liabilities debt also approximates fair value longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value 1999 company recorded impairment charge 62 million ontario facility see note 6 included nonrecurring charges consolidated statements operations advertising company reports costs advertising periods costs incurred fiscal years ended september 30 2001 2000 1999 advertising expense approximately 299000 3343000 1955000 respectively income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits years ended september 30 2001 2000 1999 one companys customers accounted approximately 17 13 19 net sales respectively september 30 2001 2000 customer accounted 15 21 accounts receivable respectively single customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations year ended september 30 2001 2000 purchases three vendors accounted 63 48 total purchases respectively treasury stock company uses specific identification method accounting treasury stock fiscal year company purchased 120000 shares approximately 253000 subsequently issued approximately 64000 shares employee stock benefit plans approximately 163000 september 30 2001 remained approximately 102000 treasury shares cost approximately 214000 stock based compensation company accounts stockbased employee compensation arrangements accordance provisions accounting principles board opinion apb 25 accounting stock issued employees complies disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation apb 25 compensation expense recognized vesting period based difference date grant deemed fair value companys stock accounting purposes exercise price company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force issue 9618 vendor programs company receives volume incentives purchase rebates certain manufacturers related sales certain products recorded reduction cost goods sold earned company also receives manufacturer reimbursement certain training promotional marketing activities offset expenses incurred company earnings per share basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options warrants included calculation extent antidilutive comprehensive income sfas 130 reporting comprehensive income establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2001 2000 1999 segment reporting company discloses segment information accordance sfas 131 disclosures segments enterprise related information sfas 131 emphasizes management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers see note 14 segment information recently issued accounting pronouncements june 1998 financial accounting standards board fasb issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities statement requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation sfas 133 effective fiscal quarters fiscal years beginning june 15 2000 company hold derivative instruments engage hedging activities impact adoption sfas 133 impact results operations financial position december 1999 securities exchange commission released staff accounting bulletin 101 revenue recognition financial statements sab 101 providing secs view respect application generally accepted accounting principles selected revenue recognition issues company adopted sab 101 required fourth quarter fiscal 2001 impact adoption sab 101 companys consolidated financial statements material companys operating results financial position july 2000 emerging issues task force eitf reached final consensus issue 0010 accounting shipping handling fees costs eitf 0010 adopted eitf 0010 requires amounts billed customers sale transactions related shipping handling classified revenue addition eitf 0010 requires shipping handling fees costs financial statements prior periods presented comparative purposes reclassified eitf 0010 must adopted prior concurrent adoption sab 101 adoption eitf 0010 material impact companys results operations financial position june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations recorded value exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company expects adopt sfas 141 142 effective october 1 2002 company anticipate impact future financial results result adopting standard august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company required adopt sfas 144 effective october 1 2002 company anticipate impact resulting adoption sfas 144 2 property equipment property equipment consist following thousands depreciation expense 1414000 2278000 2296000 years ended september 30 2001 2000 1999 respectively 3 lines credit september 30 2001 2000 company outstanding borrowings 9440000 41198000 respectively lines credit various financial institutions september 30 2001 2000 line credit agreements provides financing cash advances flooring 35 million 83 million respectively flooring agreement interest free period approximately 30 days depending product sold thereafter cash advances made annual interest rates borrowings prime plus 2 beginning april 1 2001 prime less 25 prior total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios september 30 2001 company compliance various debt covenants contained financing agreement companys 35 million dollar line credit ibm credit corporation ibmcc expired september 30 2001 ibmcc extended line january 30 2002 december 28 2001 company entered 30 million line credit agreement three years foothill part separate one year agreement entered date ibmcc continues provide company 30day interest free inventory flooring financing 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 20 million consideration providing guarantee foothill agreement contains 1 annual charge average outstanding balances owing ibmcc initially foothill agreement provide interest rate onehalf one percent prime rate future interest rate dependent upon company meeting certain earnings targets minimum variable interest rate 6 per annum option company could based prime libor rate maximum range interest based certain earnings targets prime plus 150 libor plus 375 prime rate interest 650 950 september 30 2001 2000 respectively weighted average interest rates years ended september 30 2001 2000 1999 911 849 763 respectively interest expense years ended september 30 2001 2000 1999 1002000 2308000 3172000 respectively 4 nonrecurring charges nonrecurring charges 846000 fiscal year ended september 30 2001 include restructuring charges 1876000 legal settlement 225000 less reversal plaintiff legal fees recorded prior year result adverse judgment 1255000 see note 13 nonrecurring charges fiscal year ended september 30 2000 include provision litigation 1173000 related adverse judgment received legal matter see note 13 restructuring charges 1544000 june 2001 company underwent second restructuring part plan convert fixed sales offices virtual sales offices executing restructure workforce reduced sixtyfour employees nine rental locations either identified closure converted virtual sales locations reduced size june 2000 company underwent initial restructuring charge result reorganizing certain aspects business elements restructuring plan included streamlining organization reducing costs expenses aligning resources accelerate growth potential companys core business executing restructure workforce reduced one hundred five employees independent contractors various levels five offices also closed converted virtual sales locations following table summarizes restructuring charges remaining reserves associated two restructurings results operations year ended september 30 1999 included nonrecurring charges 7917000 charges consist provision litigation 1725000 related adverse judgment received legal matter see note 13 impairment loss 6192000 related companys ontario facility see note 6 5 gain sale assets fiscal 2000 conjunction former subsidiarys private placement marketable securities acquired produced gain 3938000 upon sale securities acquired february 23 2000 cost basis 6800000 fiscal 1999 gain sale assets resulted sale shares held company shoppingcom net proceeds received 4990000 adjusted carrying value shares 562000 6 saleleaseback ontario facility june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit company terminate lease cost penalty end seventh tenth year company currently occupies approximately 55 facility originally planned sublease remaining space however sfas 98 accounting leases subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property equipment estimated fair value related liability lease qualifies normal leaseback sfas 98 aggregate noncancellable annual future minimum lease payments term company may terminate lease ontario facility follows thousands three months ended march 31 1999 company accordance sfas 121 recognized charge impairment relating ontario facility approximately 62 million 62 million impairment loss based 55 million estimated sale price less 111 million carrying costs less estimated selling expenses 02 million less capitalized interest loan fees 04 million approximately 73 impairment loss related property decline related special purpose improvements balance applicable personal property including warehouse computer equipment year ended september 30 2001 2000 1999 ontario facility rent expense characterized financing lease sfas 98 approximately 568000 551000 148000 respectively 7 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 8 income taxes components income tax provision benefit follows thousands provision benefit income taxes differs amount computed applying federal statutory rate income loss provision benefit income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 59 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating loss nol available since fiscal 2000 nol attributable exercise stock options employees realization income tax benefits 4713 nol considered adjustment additional paidin capital benefit future earnings 9 commitments contingencies company leases office facilities various types office equipment leases extend period five years many contain renewal options andor escalation clauses accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancelable lease terms excess one year september 30 2001 approximately follows thousands rent expense years ended september 30 2001 2000 1999 operating leases approximately 1794000 2273000 2296000 respectively 10 earnings per share following table sets forth computation basic diluted net income loss per share thousands except per share amounts dilutive potential stock options warrants include 324004 shares 69090 shares respectively years ended september 30 2000 1999 excluded calculation diluted loss per share effect inclusion would antidilutive 11 stock options warrants march 1996 company instituted qualified incentive stock option plan nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years september 30 2001 2000 shares available grant plan 512985 88604 respectively following summary stock option activity company adopted disclosure provisions sfas 123 accounting stock based compensation expense stock options determined using fair value grant date awards 2001 2000 1999 consistent provisions sfas 123 companys net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2001 2000 1999 may 1999 firstsource former subsidiary adopted stock option plan year ended september 30 1999 firstsource issued options purchase 4196500 shares common stock exercise prices 013 700 per share options granted options purchase 3233061 shares common stock exercisable september 30 1999 connection stock options granted firstsource company recorded unearned deferred compensation 11801000 september 1999 firstsource modified vesting schedule stock options outstanding accelerate vesting fiscal year ended september 30 1999 10315000 expensed approximately 9600000 due accelerated vesting 12 employee stock plan company employee stock purchase plan remains authorized available sale employees aggregate 172145 shares companys common stock september 30 2001 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period 13 litigation march 1999 jury verdict los angeles county california superior court relating litigation brought novaquest infosystems resulted company owing total 1425000 court decree 375000 awarded intentional interference plaintiffs prospective economic advantage tort claim 50000 awarded breach contract 1 million awarded punitive damages company appealed court decision addition april 2000 court awarded plaintiffs attorneys fees costs breach contract claim approximately 1218000 company objected amount cost reimbursement allowed attorneys fees appealed courts ruling appellate court remanded en pointes appeal trial court redetermination prevailing party lower court subsequently ruled party prevailed matter result ruling en pointe required pay novaquests legal fees costs consequently accrued costs 13 million reversed included component nonrecurring charges june 8 2001 en pointe filed demand arbitration supplyaccess inc supplyaccess american arbitration association alleging supplyaccess render certain services agreement parties necessitated supplyaccesss threats discontinue contractually obligated services unless en pointe increased monthly payments supplyaccess counterclaims brought june 28 2001 supplyaccess alleged en pointe violated certain provisions agreements seeking 2000000 damages en pointe subsequently filed several new claims supplyaccess effective september 21 2001 en pointe supplyaccess reached settlement matter terms settlement supplyaccess sold en pointe enhancements upgrades modifications customizations derivative works related sap software used run en pointes business granted en pointe limited exclusive license accesspointe web site vehicle en pointe customers access information provided en pointe agreed provide various transition support services en pointe order educate en pointe information required transition services performed supplyaccess exchange en pointe agreed pay supplyaccess 1125000 included en pointe canceling 750000 note obligation owed supplyaccess consideration assignment transfer en pointe sap application software rights title interest several pieces equipment web servers hardware assets 100 license fee monthly payments 15000 november 28 2001 action brought company ameriserve food distribution inc et al debtor afd fund behalf substantively consolidated postconfirmation estate debtors ameriserve food distribution inc et al plaintiff united states bankruptcy court district delaware case 00358 pjw plaintiff alleges en pointe received 574069 preferential transfer payments ameriserve food distribution inc estate debtors entitled recover management consulting legal counsel determined potential adverse outcome litigation cannot estimated case preliminary stage september 18 2000 claim arbitration submitted first union securities new york stock exchange among others en pointe technologies inc president chief executive officer attiazaz din en pointe defendants first union alleges en pointe din violated federal state securities laws connection promotion sale en pointe stock last half 1999 first half 2000 en pointe defendants dispute jurisdiction intend vigorously defend allegations january 2001 five companys directors one current officer certain former officers along four unrelated parties named shareholders derivative complaint alleging persons improperly benefited form sales shares companys common stock seeking recovery company damages sustained result activities fredrick v din et superior court california county los angeles case yc 039456 defendants intend vigorously defend allegations believe case without merit february 2001 company five companys directors one current officer certain former officers along seven unrelated parties named shareholder class action complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys shareholders damages sustained result activities en pointe technologies securities litigation united states district court southern district california case 01 cv0205l cga en pointe defendants filed motion dismiss set heard february 19 2002 en pointe defendants intend vigorously defend allegations december 2000 company certain current former directors officers along several unrelated parties named complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys shareholders damages sustained result activities crosby v en pointe technologies al superior court california county san diego gic 759905 parties stipulated stay case pending class action en pointe defendants intend vigorously defend allegations october 5 2001 action brought company qamar zaidi san bernardino county superior court case rcv 058254 plaintiff former employee alleges breach contract anticipatory breach repudiation breach implied covenant good faith fair dealing conversion claim asks 710000 damages 500000 punitive damages penalties labor code 150000 management consulting legal counsel determined potential adverse outcome litigation cannot estimated case preliminary stage march 2000 action brought company orange county superior court contending fraud breach contract arising purchase former subsidiary company certain assets company formerly known first source international fsi lawsuit filed behalf creditors defunct corporation paragon solutions inc formerly known fsi contended fsi unable obtain contingent earnout agreement faulty software provided company damages sought range 08 35 million plaintiff seeking punitive damages 10 million company successful compelling action moved arbitration since november 17 2000 court appeals rejected request plaintiff prohibit arbitration proceedings commenced company vigorously denies charges contends full disclosure made problems software former subsidiary date produced net income legal counsel currently unable predict outcome litigation past fiscal year case remained dormant various claims litigation proceedings company involved ordinary course business outcome claims proceedings cannot predicted certainty consulting legal counsel management believe outcome matters material adverse affect companys business financial position results operations cash flows 14 segment information deconsolidation company consisted primarily three business units companies en pointe technologies firstsource supplyaccess companies separate management teams infrastructures facilities en pointe technologies focuses efforts sales technology products services fortune 1000 government customers en pointe technologies utilizes traditional national sales force sales representatives major metropolitan areas well available electronic interfaces en pointe customers vendors firstsource focused efforts sale technology products services primarily via internet consumers small medium sized businesses supplyaccess offers hosted businesstobusiness web application integrated customized sapbased enterprise fulfillment engine accounting policies segments described note 1 organization summary significant accounting policies included report form 10k year ended september 30 2001 company evaluates performances segment profit segments allocates resources based earnings income taxes quarter ended june 30 2000 company began account investments firstsource supplyaccess equity method accounting see note 1 tables present information reported segments years ended september 30 2000 1999 year ended september 30 2001 company operated one segment company operates one geographic segment 15 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2001 2000 presented thousands except per share amounts anet loss net loss per share restated previously reported amounts 9003000 138 per share described note 8 companys unaudited quarterly financial statements quarter ended june 30 2000 bnet loss net loss per share restated previously reported amounts 4897000 078 per share described note 5 companys unaudited quarterly financial statements quarter ended march 31 2000 cnet loss net loss per share restated previously reported amounts 5182000 085 per share described note 5 companys unaudited quarterly financial statements quarter ended december 31 1999 valuation qualifying accounts signatures pursuant requirements securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized en pointe technologies inc bob din attiazaz bob din chairman board chief executive officer principal executive officer dated december 28 2001 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint michael r shabazian kevin ayers either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated signature title date attiazaz bob din attiazaz bob din chairman board chief executive officer director principal executive officer december 28 2001 michael r shabazian michael r shabazian director president chief operating officer december 28 2001 kevin ayers kevin ayers chief financial officer principal financial principal accounting officer december 28 2001 naureen din naureen din director december 28 2001 zubair ahmed zubair ahmed director december 28 2001 mark briggs mark briggs director december 28 2001 verdell garroutte verdell garroutte director december 28 2001 barry abelson barry abelson director december 28 2001 index exhibits exhibit number description 21 agreement plan merger registrant en pointe technologies inc texas corporation effective february 29 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 31 certificate incorporation registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 32 bylaws registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 33 certificate amendment certificate incorporation registrant filed may 16 2000 incorporated reference numbered exhibit registrants registration statement form 10k filed january 18 2001 43 form common stock certificate incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 101 en pointe technologies inc 1996 stock incentive plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 102 en pointe technologies inc employee stock purchase plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 103 form directors officers indemnity agreement incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 105 employment agreement registrant attiazaz bob din dated 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 1010 inventory working capital financing agreement registrant ibm credit corporation dated april 13 1997 incorporated reference numbered exhibit registrants form 10k filed december 29 1997 1011 sublease dated august 1996 ncr international inc registrant property located 100 n sepulveda blvd 19th floor el segundo california incorporated reference exhibit 28 registrants form 10q filed february 14 1997 1018 lease dated may 1999 us real estate consortium registrant property located 1040 vintage avenue ontario incorporated reference numbered exhibit registrants form 10k filed january 13 2000 1019 lease dated april 2001 pacific corporate towers llc registrant property located 100 n sepulveda blvd 19the floor el segundo california incorporated reference numbered exhibit registrants form 10q filed august 14 2001 1020 employment agreement registrant michael r shabazian dated july 1 2001 1021 separation agreement registrant michael r shabazian dated december 2001 1022 employment agreement registrant thomas scott dated august 1 2001 1023 employment agreement registrant kevin elliott dated september 19 2001 1024 assignment license agreement registrant supplyaccess inc dated september 21 2001 1025 loan security agreement among en pointe technologies sales inc lenders named therein foothill capital corporation dated december 28 2001 naming company guarantor 1026 inventory financing agreement en pointe technologies sales inc ibm credit corporation dated december 28 2001 211 subsidiaries company 231 consent pricewaterhousecoopers llp en pointe technologies inc form 10k year ended september 30 2001 table contents part forward looking statements part ii part iii part iv en pointe technologies inc index financial statements report independent accountants en pointe technologies inc consolidated balance sheets thousands except share per share amounts en pointe technologies inc consolidated statements operations thousands except per share amounts en pointe technologies inc consolidated statements stockholders equity thousands en pointe technologies inc consolidated statements cash flows thousands en pointe technologies inc consolidated statements cash flows thousands en pointe technologies inc notes consolidated financial statements signatures power attorney index exhibits item 14 principal accountant fees services hereby incorporated reference information appearing caption “principal accountant fees services” definitive proxy statement 2005 annual meeting stockholders filed commission january 28 2005 part iv item 15 item 14 principal accounting fees services hereby incorporated reference information appearing caption principal accounting fees services companys definitive proxy statement 2004 annual meeting stockholders filed commission january 28 2004 part iv item 15 item 14 exhibits financial statements schedules reports form 8k 1 financial statements financial statements included herein filed part report 2 financial statement schedules schedule iivaluation qualifying accounts reserves schedules omitted applicable required information shown financial statements notes thereto 3 exhibits incorporated reference numbered exhibit companys registration statement form s1 3332046 exhibits identified management contracts compensatory plans arrangements company pursuant item 13a form 10k b reports form 8k registrant file reports form 8k last quarter period covered report none required signatures pursuant requirements section 12 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunder duly authorized en pointe technologies inc attiazaz bob din attiazaz bob din december 13 chairman board directors president chief executive officer robert mercer robert mercer december 13 1996 chief financial officer chief accounting officer power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz bob din robert mercer either true lawful attorneys agents full powers substitution acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereto hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date attiazaz bob din director december 13 1996 attiazaz bob din director naureen din director december 13 1996 naureen din director december 1996 zubair ahmed director december 1996 mansoor ijaz director verdell garroutte director december 13 1996 verdell garroutte director item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statement schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits list exhibits accompanying exhibit index herein incorporated reference b reports form 8k company filed current reports form 8k last quarter period covered report en pointe technologies inc report independent accountants board directors stockholders en pointe technologies inc audited accompanying balance sheets en pointe technologies inc september 30 1997 1996 related statements operations stockholders equity cash flows three years period ended september 30 1997 also audited financial statement schedule listed index page financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position en pointe technologies inc september 30 1997 1996 results operations cash flows three years period ended september 30 1997 conformity generally accepted accounting principles addition opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp los angeles california november 11 1997 en pointe technologies inc balance sheets see notes financial statements en pointe technologies inc statements operations see notes financial statements en pointe technologies inc statements stockholders equity see notes financial statements en pointe technologies inc statements cash flows see notes financial statements en pointe technologies inc notes financial statements 1 organization summary significant accounting policies organization company incorporated laws state texas january 25 1993 name infosystems inc name later changed infotech systems commenced operations march 1993 september 21 1995 company changed name en pointe technologies inc february 1996 companys board directors board authorized reincorporation company state delaware total authorized shares classes stock 20000000 shares consisting 15000000 shares common stock 001 par value per share 5000000 shares preferred stock 001 par value per share effected effective date registration statement initial public offering ipo common stock connection reincorporation company authorized forward stock split 2077 shares share issued outstanding common stock company share per share amounts adjusted retroactively reflect stock split may 8 1996 company successfully completed ipo 2250000 shares 8 per share company reseller computers computerrelated products services currently sales offices 16 locations within united states use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts cost sales include product service costs current estimated allowances returns accepted companys suppliers less product credits september 30 1996 1997 allowance returns approximately 386600 300000 respectively cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits inventories consist principally merchandise configured customer orders merchandise paid company yet shipped companys vendors customers stated lower cost specific identification method market en pointe technologies inc notes financial statements continued 1 organization summary significant accounting policies continued property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lessor remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm debt also assumed approximate fair value intangible longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value advertising company reports costs advertising periods costs incurred advertising costs significant item expense company income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized concentration credit risk major customers financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions years ended september 30 1995 1996 1997 one companys customers accounted approximately 12 28 30 net sales respectively september 30 1996 1997 customer accounted 28 24 accounts receivable respectively customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations en pointe technologies inc notes financial statements continued 1 organization summary significant accounting policies continued stock based employee compensation awards statement financial accounting standards sfas 123 accounting awards stockbased compensation employees encourages require companies record compensation cost stockbased compensation plans fair value company adopted disclosure requirements sfas 123 involves proforma disclosure net income provisions sfas 123 detailed descriptions plan terms assumptions used valuing stock option grants company chosen continue account stockbased employee compensation awards accordance accounting principles board opinion 25 accounting stock issued employees earnings per share computation net income per common equivalent share based upon weighted average number common shares outstanding period plus periods dilutive effect common shares contingently issuable primarily outstanding stock options warrants fully diluted earnings per share also reflect additional dilution related stock options warrants due use end period market prices whenever ending period market prices exceed average market prices period recently issued accounting standards february 1997 financial accounting standards board fasb issued sfas 128 earnings per share sfas 128 requires dual presentation newly defined basic diluted earnings per share face income statement entities complex capital structures method considered compatible international accounting standards sfas 128 effective fiscal years ending december 15 1997 company currently evaluating impact sfas 128 june 1997 fasb issued sfas 130 reporting comprehensive income standard establishes guidelines reporting display comprehensive income components financial statements disclosure comprehensive income components required beginning companys 1999 fiscal year end also june 1997 fasb issued sfas 131 disclosures segments enterprise related information standard requires companies disclose operating segments based way management disaggregates company making internal operating decisions new standards effective companys 1999 fiscal year end company yet evaluated impact new standard en pointe technologies inc notes financial statements continued 2 property equipment property equipment consist following 3 lines credit september 30 1996 1997 company outstanding borrowings 36503838 50692257 respectively lines credit various financial institutions line credit agreements provide total financing 48550000 81000000 september 30 1996 1997 respectively annual interest rates 10 prime less 25 respectively total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios september 30 1997 company compliance covenants line credit agreements prime rate interest 875 825 850 september 30 1995 1996 1997 respectively weighted average interest rates years ended september 30 1995 1996 1997 1076 1078 817 respectively principal line credit 70000000 expires april 13 1998 one year anniversary agreement date parties may agree time en pointe technologies inc notes financial statements continued 4 notes payable notes payable consist following maturities longterm debt september 30 1997 follows 5 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service contributions made company 401k plan fiscal years 1995 1996 1997 6 income taxes components income tax provision benefit follows en pointe technologies inc notes financial statements continued 6 income taxes continued provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred taxes follows 7 commitments contingencies company leases office facilities various office equipment leases extend period five years accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year september 30 1997 approximately follows rent expense years ended september 30 1995 1996 1997 operating leases approximately 966000 1104000 1665000 respectively en pointe technologies inc notes financial statements continued 7 commitments contingencies continued company entered employment contracts certain officers agreements provide annual base salary bonuses discretion board directors addition agreements two officers provide bonuses 3 12 2 12 pretax profit provided certain minimum pretax profit levels obtained third officer earns quarterly bonus 31250 contingent company meeting certain financial targets agreements three five year terms ending various times fiscal 2001 provide guaranteed severance payments upon termination employment cause august 22 1996 company entered agreement distributor requires 55 million products purchased distributor 18 month period competitive market prices minimum quarterly purchases beginning october 1 1996 range 36 million 15 million guarantee performance agreement company placed 600000 escrow account september 30 1996 interest bearing pro rata portion escrowed funds released 5 million purchase levels achieved september 30 1997 amount remaining escrow account 402000 8 stock options warrants march 1996 company instituted qualified incentive stock option plan nonqualified stock option plan provides currently options maximum 960000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value computed date grant generally vest prorata basis ending third ninth twentyseventh months following grant date addition plan september 2 1997 company issued options company president connection employment agreement terms similar companys incentive stock option plan purchase 275000 shares 1438 per share market value common stock grant date september 30 1996 1997 shares available grant plan 74500 426231 respectively following summary stock option activity en pointe technologies inc notes financial statements continued 8 stock options warrants continued september 30 1997 warrants purchase 210540 shares companys common stock also outstanding warrants issued company underwriter initial public offering exercisable time five year life exercise price 960 per share en pointe adopted disclosure provisions sfas 123 accounting stock based compensation expense stock options determined using fair value en pointe technologies inc notes financial statements continued 8 stock options warrants continued grant date awards 1996 1997 consistent provisions sfas 123 companys net earnings per share would reduced pro forma amounts indicated fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1997 1996 9 employee stock plan company also employee stock purchase plan remains authorized available sale employees aggregate 158864 shares companys common stock plan intended qualify section 423 code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period 10 litigation company named defendant lawsuit filed august 8 1997 superior court county los angeles california case bc175991 case name cic systems inc v en pointe technologies inc et al complaint alleges company along one individual defendant former employee plaintiff conspired target persuade plaintiffs sales personnel leave plaintiffs employ become employed company alleges individual defendants former employees plaintiff diverted company sales customers plaintiff made false misleading statements regarding plaintiff misappropriated plaintiffs trade secrets proprietary information behalf company currently unable estimate loss event unfavorable outcome however consideration potential insurance recoveries company advice counsel believes claims suit material adverse effect companys business financial condition results operations company maintained various liability insurance policies periods covering claims policies may limit coverage certain circumstances company believes adequately insured company named along bob din defendant lawsuit filed april 29 1997 superior court county los angeles case name filing novaquest infosystems et al v en pointe technologies inc et al complaint alleges company bob din en pointe technologies inc notes financial statements continued 10 litigation continued knowingly accepted trade secret information owned plaintiffs furthermore alleges company interfered plaintiffs prospective economic advantage company currently unable estimate loss event unfavorable outcome however consideration potential insurance recoveries company advice counsel believes claims suit material adverse effect companys business financial condition results operations company maintained various liability insurance policies periods covering claims policies may limit coverage certain circumstances company believes adequately insured april 1996 company bob din naureen din entered settlement agreement former employee company pursuant former employee released company bob din naureen din claims respect companys use certain computerized information system software originally developed former employee prior employment company settlement agreement consideration entering settlement agreementthe company agreed pay former employee payments totalling 1225000 remaining unpaid balance september 30 1996 1997 447512 287511 respectively company filed suit insurance carrier order recoup legal costs incurred company connection defense foregoing litigation well amounts paid former employee pursuant settlement august 1996 insurance company settled company paying full amount original settlement addition company involved various claims litigation normal course business advice counsel opinion management ultimate resolution matters significant effect financial position cash flows company 11 subsequent event effective october 1997 company completed purchase plant ontario california configuration assembly product plant purchased response industry changes distribution product improve customer service initial cost plant 48 million additional 22 million anticipated improvements 17 million operating equipment mortgage note payable habib bank zurich 40 million used finance portion plant improvements note matures october 31 2007 payable monthly installments approximately 40000 bearing interest 85 per annum en pointe technologies inc notes financial statements continued 12 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 1996 1997 presented thousands except per share amounts third quarter 1996 company settled lawsuit former employee 12 million less partial recovery 6 million insurance carrier 6 million net expense fourth quarter 1996 remaining insurance recovery 7 million received less related expenses 1 million 6 million net recovery income schedule ii en pointe technologies inc valuation qualifying accounts signatures pursuant requirements securities act 1933 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized city el segundo state california 29th day december 1997 en pointe technologies inc bob din bob din chairman board chief executive officer principal executive officer power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz bob din robert mercer either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 amended annual report form 10k signed following persons capacities dates indicated signature title date attiazaz bob din december 29 1997 attiazaz bob din chairman board chief executive officer director principal executive officer robert mercer december 23 1997 robert mercer chief financial officer principal financial principal accounting officer naureen din december 29 1997 naureen din director zubair ahmed december 29 1997 zubair ahmed director mansoor ijaz december 25 1997 mansoor ijaz director verdell garroutte december 26 1997 verdell garroutte director exhibit index item 7 managements discussion analysis financial condition results operations following discussion analysis companys financial condition results operations read conjunction financial statements notes thereto included elsewhere annual report form 10k overview company began operations march 1993 reseller information technology products fiscal 1999 company started emphasizing valueadded services customers valueadded services accounted 66 companys net sales fiscal 2000 gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology products reselling business firstsource corp firstsource formerly firstsourcecom purchase pointe inc internet call center based businesstobusiness provider products services information necessary operate small medium sized businesses began operations june 1998 whollyowned subsidiary july 1999 private placement reduced companys ownership percentage 714 subsequent private placements fiscal 2000 reduced companys ownership may 16 2000 voting interest percentage decreased 435 companys voting interest dropped 50 effective may 16 2000 company otherwise control company began account investment firstsource equity method accounting november 1999 company formed new subsidiary supplyaccess inc supplyaccess address larger corporate customers needs find product via internet favorable prices supplyaccess designed internet portal charging transaction fees seller company transferred department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed supplyaccess would provide company services would allow company customers access fulfillment engine initial year flat quarterly fee 500000 subsequent years fee would adjusted variable rate february 2000 supplyaccess completed initial private placement 12000000 shares convertible preferred stock 150 share reduced companys voting interest 54 april 4 2000 supplyaccess completed supplemental private placement stock 5088318 shares convertible preferred stock 150 share reduced companys voting interest 4510 subsequent private placements convertible preferred stock hare reduced companys voting interest 3869 companys voting interest dropped 50 effective april 4 2000 company otherwise control company began account investment supplyaccess equity method accounting companys net sales increased 1100 million fiscal 1994 companys first full year operations 4944 million fiscal 2000 representing compound annual growth rate 285 six year period past growth net sales principally driven sales new customers increased sales existing customers well geographic expansion opening additional sales offices however fiscal 2000 company experienced first annual decline 1738 million sales due softer pc market difficulties transitioning new business erp system softening impact sales decline overall improvement gross profit margins rising 98 fiscal 2000 80 year ago principally lessening competitive pricing higher margins companys expanding service business nevertheless increase gross profit margins insufficient offset loss margins sales volume decline total gross profits declined 52 million operating expenses exclusive nonrecurring charges 681 million comparable prior year operating expenses 687 million nonrecurring charges declined 52 million compensating gross profits decline resulting operating loss 223 million comparable 229 million prior year prior years nonrecurring charges higher large part due impairment charge 62 million operations writedown net book value companys ontario facility estimated fair value well litigation costs companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors yet shipped customers product revenues generally recognized upon shipment service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits companys effective tax rate credit losses varied significantly statutory rate current fiscal year attributable principally limitation available loss carryback prior years well nonrecognition deferred tax assets due uncertainty future use see note 8 consolidated financial statements explanation results operations following tables set forth certain financial data percentage net sales periods indicated first table presents financial data statement operations expressed percentage net sales second table presents type financial data statement operations giving proforma effect deconsolidation two previously controlled subsidiaries excluding operations three years presented excluding deconsolidated subsidiaries reader better able assess normalized core operations company comparison fiscal years ended september 30 2000 1999 net sales net sales decreased 1739 million 260 4944 million fiscal 2000 6683 million fiscal 1999 decrease sales attributable softness marketplace loss customer base implementation sap business system net sales ibm contract accounted 128 total net sales 214 total accounts receivable 2000 fiscal year compared 188 185 respectively prior fiscal year absolute dollars ibm net sales decreased 623 million 634 million fiscal 2000 1257 million fiscal 1999 reflecting conditions noted services revenues increased 72 million 313 302 million fiscal 2000 230 million fiscal 1999 66 total net sales versus 36 prior year firstsource internet call center based businesstobusiness provider products services information small medium sized businesses contributed 342 million net sales seven half month period former subsidiary consolidated company net sales firstsource seven onehalf month period prior deconsolidation consolidation period exceeded prior full fiscal year 1999 net sales 300 million supplyaccess startup internet portal businesstobusiness provider record net sales approximate six month period former subsidiary consolidated company net sales last two quarters fiscal 2000 increased sequential basis 53 million september quarter 22 million june quarter compared declines 201 million march quarter 336 million december quarter however future sequential gains net sales upcoming quarter challenged overall disappointing sales anticipated computer industry likely adversely affected gross profit gross profit decreased 52 million 96 486 million fiscal 2000 537 million 1999 increased percentage net sales 98 2000 compared 80 1999 increase gross profit percentage attributable lessening pricing pressures throughout industry information technology products well increased margins rising service revenues gross profits firstsource 31 million consolidation period compared 21 million twelve months fiscal year 1999 gross margins improved 90 69 fiscal 1999 selling marketing expenses selling marketing expenses increased 74 million 194 453 million fiscal 2000 379 million fiscal 1999 74 million increase 25 million increased marketing efforts firstsource consolidation period remainder primarily attributed hiring additional sales personnel percentage net sales selling marketing expense increased 35 92 2000 57 1999 24 attributed decline volume net sales 09 increased firstsource expenses remainder cost additional sales personnel hired general administrative expenses general administrative expenses decreased 79 million 258 228 million fiscal 2000 307 million fiscal 1999 79 million decline due less general administrative expenses incurred firstsource 2000 partial fiscal year former subsidiary consolidated result abnormally high prior year expense acceleration vesting firstsource stock options fourth quarter fiscal 1999 declining sales volume general administrative expenses percentage net sales remained constant 46 fiscal 2000 nonrecurring charges nonrecurring charges consist 15 million restructuring charges 12 million related legal suit attorney fees costs awarded court restructuring charges occurred june quarter workforce reduced 105 five sales offices converted virtual sales locations see note 4 consolidated financial statements nonrecurring charges declined 52 million 27 million 79 million fiscal 1999 62 million impairment charge write ontario configuration facility comprised charge operating loss operating loss decreased 06 million 28 loss 223 million fiscal 2000 229 million operating loss fiscal 1999 although total operating expenses decreased 57 million fiscal 2000 709 million 766 million fiscal 1999 decrease compensate 52 decline gross profits decline total operating expenses 52 million decrease nonrecurring charges explained operating loss percent net sales increased 45 fiscal 2000 34 fiscal 1999 due declining sales volume interest expense interest expense decreased 15 million 459 17 million fiscal 2000 32 million fiscal 1999 15 million decrease 06 million related interest income netted interest expense remaining 09 million decrease interest expense due decline borrowing lines credit gain sale investments conjunction supplyaccess private placement marketable securities acquired produced gain 39 million upon sale securities acquired february 23 2000 cost basis 68 million minority interest minority interest represents losses allocated minority shareholders december 31 1999 firstsource still majority owned subsidiary eligible consolidated company equity losses affiliates result deconsolidation two previously consolidated subsidiaries see note 1 consolidated financial statements june quarter 2000 company began using equity method accounting record interest losses related two affiliates company anticipate recognizing losses affiliates since additional financial support would considered additional investment planned future benefit income taxes benefit income taxes decreased 07 million 559 benefit 05 million fiscal 2000 12 million benefit fiscal 1999 reduction benefit fiscal 2000 due limitation available loss carry back well nonrecognition deferred tax assets due uncertainty future realization net loss income net loss increased 28 million 168 194 million net loss fiscal 2000 166 million net loss fiscal 1999 percentage net sales net loss increased 39 29 fiscal 1999 pro forma comparison fiscal years ended september 30 2000 1999 order meaningfully assess underlying operating trends management believes results operations fiscal 2000 analyzed excluding effects subsidiaries deconsolidated june 2000 quarter following discussion analysis focuses amounts trends adjusted exclude impact deconsolidated subsidiaries normal operations net sales net sales decreased 1781 million 279 4602 million fiscal 2000 6383 million fiscal 1999 decrease sales attributable softness marketplace loss customer base implementation sap business system net sales ibm contract accounted 138 total net sales 2000 fiscal year compared 197 prior fiscal year absolute dollars ibm net sales decreased 623 million 634 million fiscal 2000 1257 million fiscal 1999 reflecting conditions noted services revenues increased 72 million 313 302 million fiscal 2000 230 million fiscal 1999 61 total net sales versus 36 prior year gross profit gross profit decreased 58 million 112 458 million fiscal 2000 516 million 1999 increased percentage net sales 100 2000 compared 81 1999 increase gross margin percentage attributable lessening pricing pressures throughout industry information technology products well increased margins rising service revenues selling marketing expenses selling marketing expenses increased 49 million 146 386 million fiscal 2000 337 million fiscal 1999 primarily result hiring additional sales personnel percentage net sales selling marketing expense increased 32 85 2000 53 1999 24 attributed decline volume net sales remainder cost additional sales personnel hired general administrative expenses general administrative expenses decreased 36 million 230 121 million fiscal 2000 157 million fiscal 1999 percentage net sales general administrative expenses increased 26 fiscal 2000 25 fiscal 1999 due decline sales volume operating loss operating loss increased 19 million 331 loss 76 million fiscal 2000 57 million operating loss fiscal 1999 although total operating expenses decreased 39 million fiscal 2000 534 million 573 million fiscal 1999 decrease compensate 58 decline gross profits operating loss percent net sales increased 17 fiscal 2000 09 fiscal 1999 due mainly declining sales volume interest expense interest expense decreased 13 million 451 16 million fiscal 2000 29 million fiscal 1999 13 million decrease 06 million related interest income netted interest expense remaining 07 million decrease interest expense due decline borrowing lines due declining sales volumes comparison fiscal years ended september 30 1999 1998 net sales net sales increased 1006 million 177 6683 fiscal 1999 5677 million fiscal 1998 increase sales attributable sales new customers increased sales existing customers increased sales valueadded services firstsource internet focused business contributed 300 million first full fiscal year operations 45 total net sales increase 246 million four month initial start operations fiscal 1998 services revenues increased 98 million 744 230 million fiscal 1999 132 million fiscal 1998 34 total net sales versus 23 prior year net sales ibm contract accounted 188 total net sales 185 total accounts receivable 1999 fiscal year compared 214 208 respectively prior fiscal year however absolute dollars ibm net sales increased 42 million 1257 million fiscal 1999 1215 million fiscal 1998 trailing 177 overall growth company net sales expected future gross profit gross profit increased 01 million 02 537 million fiscal 1999 536 million 1998 decreased percentage net sales 80 1999 compared 94 1998 decrease gross margin attributable pricing pressures throughout industry information technology products company believes past years trend declining gross profits abate coming year selling marketing expenses selling marketing expenses increased 37 million 108 379 million fiscal 1999 343 million fiscal 1998 primarily result increased net sales volume percentage net sales selling marketing expense decreased 57 1999 60 1998 due increased volume net sales general administrative expenses general administrative expenses increased 171 million 1252 308 million fiscal 1999 137 million fiscal 1998 146 million increase related companys subsidiary firstsource increase general administrative expense firstsource primarily result noncash charge compensation related grant stock options firstsource total charge 100 million incurred fourth quarter fiscal 1999 due large part acceleration vesting schedule options granted remaining compensation 14 million september 30 1999 amortized next 16 quarters addition 43 million 146 million increase result hiring additional personnel necessary support growth firstsources internet business percentage net sales general administrative expenses increased 46 fiscal 1999 compared 24 fiscal 1998 excluding noncash stock option compensation charge general administrative expenses 31 net sales fiscal 1999 31 increase 24 prior year primarily due increased staffing firstsource nonrecurring charges nonrecurring charges consist 62 million impairment charge write ontario configuration facility market value 17 million charge reserve litigation expense operating income operating income decreased 286 million 5059 loss 229 million fiscal 1999 56 million operating profit fiscal 1998 primarily result increased general administrative expenses firstsource accompanied decreased gross profit margins operating loss percent net sales declined 34 fiscal 1999 10 fiscal 1998 interest expense interest expense increased 10 million 465 32 million fiscal 1999 22 million fiscal 1998 increase interest expense primarily due 06 million interest incurred borrowings incurred ontario facility fas 98 future rental payments related ontario saleleaseback fiscal 2000 estimated 5 million characterized interest expense gain sale investment gain sale investment resulted sale shares held company shoppingcom net proceeds received 50 million adjusted carrying value shares 06 million minority interest firstsource formerly whollyowned subsidiary july 28 1999 issued 2659886 shares common stock private placement grossed 93 million resulted companys ownership declining 714 minority interest reflects 286 allocable portion subsidiarys loss since july 28 1999 benefit income taxes benefit income taxes 12 million fiscal 1999 represents change 27 million 15 million provision fiscal 1998 benefit fiscal 1999 limited exclude loss taxes firstsource 137 million exclusion tax benefit firstsource loss necessitated companys ownership firstsource declining less mandatory 80 required consolidated filings net loss income net income decreased 188 million 8434 166 million net loss fiscal 1999 22 million net income fiscal 1998 decrease fiscal 1999 earnings resulted primarily declining profit margins coupled increased operating expenses companys internetfocused subsidiary 144 million net 39 million allocated minority interest nonrecurring charges 79 million percentage net sales net loss income declined 25 04 fiscal 1998 liquidity capital resources fiscal 2000 operating activities provided cash totaling 93 million compared 123 million prior fiscal year decline 146 million accounts receivable represented largest cash producing reconciling item net loss 194 million cash provided operating activities 93 million fiscal 2000 accounts receivable allowances returns doubtful accounts declined 214 largely due 278 decline sales volume companys accounts receivable balance september 30 2000 1999 790 million 1017 million respectively number days sales outstanding accounts receivable increased 58 days 56 days september 30 2000 1999 respectively investing activities used cash totaling 221 million fiscal 2000 providing 56 million cash prior year total cash used investing activities 221 million 322 million deconsolidation two subsidiaries partially offsetting 322 million deconsolidation proceeds received sale marketable securities 107 million marketable securities received noncash exchange issuance preferred stock one subsidiaries subsidiary deconsolidated sale securities produced gain 38 million eliminated arriving cash provided operating activities financing activities provided net cash totaling 86 million fiscal 2000 using cash 143 million fiscal 1999 financing cash provided came 227 million raised private placement sales stock two former subsidiaries subsequently deconsolidated stock sales resulted company losing majority voting control addition 227 million cash raised stock sales additional 90 million stock former subsidiaries exchanged marketable securities noncash transaction 90 million marketable securities received 68 million sold gain 38 million referenced investing activities net cash 166 million used reduction borrowings lines credit lines used primarily finance accounts receivable balances september 30 2000 company approximately 26 million cash working capital 223 million company two revolving credit facilities collateralized accounts receivable assets company including 440 million lines ibm credit corporation ibmcc september 30 2000 lines credit provided maximum aggregate borrowings approximately 830 million approximately 412 million outstanding borrowings ibmcc line credit bore interest prime less 25 fiscal 2000 increased prime plus 2 effective december 15 2000 line credit renewable annual basis unless notification election renew made either company creditor prior annual renewal date borrowings collateralized substantially companys assets addition line credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2000 company obtained waiver noncompliance two covenants relate minimum percentage net income sales debt equity company remains compliance covenants discussed note 3 consolidated financial statements december 11 2000 company advised one lenders finova capital corporation finova discontinuing financing segment business result company advised 39 million working capital line credit finova longer available 60 days february 9 2001 following expiration finova line credit agreement companys remaining working capital financing agreement ibm credit corporation ibmcc effective december 15 2000 company also advised ibmcc maximum available amount companys working capital financing agreement reduced 44 million 30 million subsequently ibmcc effective january 17 2001 agreed increase amount available working capital financing agreement 30 million 35 million extend date expiration renewed april 14 2001 september 30 2001 diversify companys working capital financing company currently seeking additional financing various lenders augment ibmcc line credit agreement believes successful finding financing although necessarily terms favorable current lenders address profitability issue june 2000 new executive management team taken steps improve profitability including implementation restructuring plan june 2000 included reduction work force 105 conversion five sales offices virtual sales locations additionally company focusing efforts increasing service revenues yield higher gross margin product sales approximately 141 million 137 million companys operating losses years ended september 30 2000 1999 respectively arose companys investments certain former subsidiaries june quarter due reduction voting interest certain former subsidiaries company began account investments former subsidiaries equity method accounting see note 1 investment affiliates accordance equity method accounting company suspended recognition equity method losses adjusted basis reduced zero anticipate increasing investment affiliates result foregoing changes fourth quarter fiscal year 2000 company able record profit 174000 consideration nonoperational gain 23 million reversal equity losses affiliates resulted 24 million net income reported quarter assurance managements plans continue successful improving profitability management able obtain additional financing facility augment ibmcc financing arrangement ibmcc renew financing agreement company september 30 2001 however management believes increase amount available working capital financing agreement ibmcc 35 million extension date expiration september 30 2001 provide sufficient working capital year ending september 30 2001 recently issued accounting pronouncements june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities statement requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation company currently hold derivative instruments engage hedging activities impact adoption sfas 133 currently expected material impact companys consolidated financial position results operations cash flows sfas 137 defers effective date sfas 133 fiscal years beginning june 30 2000 december 1999 sec issued staff accounting bulletin sab 101 revenue recognition financial statements provides guidance recognition presentation disclosure revenue financial statements filed sec sab 101 outlines basic criteria must met recognize revenue provides guidance disclosures related revenue recognition policies management currently assessing impact sab101 believes impact material impact companys consolidated financial position results operations cash flows march 2000 financial accounting standards board issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 effective july 1 2000 interpretation provides guidance applying apb opinion 25 accounting stock issued employees management believe adoption fin 44 material impact companys consolidated financial position results operations cash flows item 7a item 7 managements discussion analysis financial condition results operations significant factors performance understanding significant factors influenced companys performance past three fiscal years financial discussion read conjunction consolidated financial statements presented form 10k critical accounting policies management believes following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition product revenues recognized upon transfer title risk loss satisfaction significant vendor obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns allowance doubtful accounts companys estimate allowance doubtful accounts related trade receivables based two methods first company evaluates specific accounts 90 days outstanding applies various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts 90 days outstanding exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns general company follows strict policy duplicating terms vendor manufacturers product return policies however certain cases company must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations rma reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales vendor returns product returned vendors authenticated rmas company reviews outstanding receivables vendors establishes reserve product qualify refund based review specific vendor receivables rebates result principally satisfying various manufacturer sales quotas certain incentive programs rebate programs subject audit manufacturer whether sales requirements actually fulfilled company establishes reserves cover losses resulting subsequent audits return funds based historical patterns audit results inventory although company employs virtual inventory model generally limits exposure inventory losses certain large customers company contractually obligates product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included companys inventory product returned customers acceptable returnable vendor result company exposes losses inventory requires reserves losses established company records reserves returned product inventory six months old overview company initially began operations march 1993 reseller information technology products fiscal 1999 company began offering valueadded services customers gradually valueadded services represented larger percentage total net sales accounting 105 85 companys net sales fiscal years 2002 2001 respectively gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology product business require additional overhead expense supervision idle time expenses related service offerings part offset portion increased margin companys initial operating years net sales increased compound annual growth rate 351 increasing 1100 million fiscal 1994 6683 million fiscal 1999 seasonal trends prominent companys business although march quarter historically regarded one least promising quarters past growth net sales principally driven robust economy information technology market accommodated companys business model allowed expand geographically opening sales offices however fiscal 2000 company experienced first annual decline 1738 million sales due softer information technology market difficulties transitioning new erp business system fiscal years 2002 2001 continued negative trend declines 1083 1291 million respectively net sales since december quarter 1999 quarterly net sales consistently declined twelve consecutive quarters compared prior fiscal year quarters quarterly rate decline four quarters current 2002 fiscal year still negative appears lessening degree percentage decline narrowing singledigit 77 september quarter compared increasing larger percentage declines 293 364 371 earlier sequential quarters fiscal years 2001 2000 response declining sales company conducted two restructurings sales administrative force leased sales offices converted virtual offices employees work homebased offices additional technical administrative support supplied corporate headquarters assist field personnel customer support operating expenses exclusive nonrecurring charges 344 million continued reduction prior year core operating expenses 410 million nonrecurring charges declined 17 million combined 66 million decline operating expenses lessened impact 120 million gross profits decline resulting operating loss 60 million companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors shipped yet received accepted customers product revenues generally recognized upon shipment service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits june 1998 firstsource corp firstsource formerly firstsourcecom purchase pointe inc whollyowned subsidiary began operations internet based businesstobusiness provider products services series private placements equity capital companys voting interest may 2000 dropped 50 company otherwise effective control firstsource company began accounting investment former subsidiary equity method accounting april 10 2001 firstsource ceased operations entirely assets assigned sherwood partners inc unaffiliated company assignee benefit creditors november 1999 company formed new subsidiary supplyaccess inc supplyaccess designed internet portal charging transaction fees seller company transferred information technology department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed supplyaccess would provide company information technology services would allow company customers access fulfillment engine initial year flat quarterly fee 500000 series private placements equity capital began february 2000 undertaken raise additional capital companys voting interest eventually reduced 3869 companys interest dropping 50 otherwise control former subsidiary company began april 2000 accounting supplyaccess investment equity method accounting september 21 2001 company settlement dispute supplyaccess agreed pay supplyaccess 11 million assignment transfer en pointe sap application software certain listed assets effective october 1 2001 company cancelled balance note receivable supplyaccess 750000 agreed assume information technology responsibilities previously assigned supplyaccess january 2002 majority shareholders supplyaccess approved transfer assets supplyaccess liquidator benefit creditors time transfer en pointe owned approximately 39 voting securities supplyaccess connection liquidation supplyaccess february 2002 company acquired full rights accesspointetm well intellectual rights supplyaccess software copyrights trade secrets proprietary rights results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2002 2001 net sales net sales decreased 1083 million 296 2570 million fiscal 2002 3653 million fiscal 2001 decline represents continuation weak capital spending business noted quarterly reports decline net sales persistent past eight quarters severe decline 461 quarteroverprioryearquarter net sales occurred last quarter fiscal year 2001 following closely heels decline first quarter fiscal year 2002 registered negative 371 since first quarter fiscal 2002 quarter declines moderated march june september quarters fiscal 2002 percentage declines 364 293 77 respectively product net sales decreased 1045 million 313 2296 million fiscal 2002 3341 million fiscal 2001 1045 million decrease exclusive 04 million miscellaneous excess credits previously granted customers taken income part ongoing process improve customer transaction processing service revenues also declined 41 million 132 271 million fiscal 2002 312 million fiscal 2001 year ended september 30 2002 two companys major customers accounted 545 million 212 net sales revenues follows amounts stated millions gross profit decline net sales directly impacted gross profits reducing gross profits 120 million 303 275 million fiscal 2002 395 million 2001 gross profits expressed percentage net sales also slid fractionally tenth percent 107 2002 108 2001 120 million decline gross profits traced lower margins product sales product gross profits decreased 108 million 384 175 million 283 million prior fiscal year expressed percentage net sales product gross profit percentage declined 85 prior fiscal year 76 decline product gross profit attributable aggressive pricing policies employed capturing market share including large sales microsoft software licenses relatively low margins well lessening rebate income dependent volume sales manufacturervender availability service gross profits also fell result 132 decline service revenues registering total decline 10 million 95 101 million 111 million prior fiscal year however service gross profits expressed percentage service revenues increased 15 372 357 prior fiscal year selling marketing expenses selling marketing expenses decreased 64 million 211 236 million fiscal 2002 300 million fiscal 2001 64 million decrease 59 million relates reduction commissions salaries wage related benefits since sales commissions computed based gross margin dollars companys method commission payment declines gross profits experienced 2002 fiscal year directly reduce commission expense declining sales volume provides less base spreading certain fixed selling marketing expenses selling marketing expenses expressed percentage net sales increased 10 92 2002 82 2001 general administrative expenses general administrative expenses decreased slight 02 million 22 108 million fiscal 2002 110 million fiscal 2001 reduction facilities related expense including rent reduction renegotiation headquarters lease contributed reduction general administrative expense selling marketing expenses general administrative expenses expressed percentage net sales expenses show increase 12 30 42 fiscal 2002 attributable decline net sales volume nonrecurring income charges nonrecurring income 09 million fiscal 2002 primarily resulted settlement litigation claim 08 million settled litigation claim company liable total 16 million various court decisions including accrued interest settled 12 million addition recovery 08 million insurance reimbursement relating previously expensed legal fees offset legal costs 04 million operating loss operating loss increased 37 million 1545 loss 60 million fiscal 2002 23 million operating loss fiscal 2001 although total operating expenses decreased 83 million fiscal 2002 335 million 418 million fiscal 2001 decrease insufficient compensate 120 million decline gross profits declining sales volume providing less base spreading expenses operating loss expressed percentage net sales increased 17 23 2002 06 2001 interest expense interest expense net interest income 01 million interest expense incurred foothill financing agreement consisted principally 1 charges acting guarantor ibmcc order ibmcc provide 30day interestfree flooring company addition 1 guarantee charge foothill charged 6 634 per annum float 03 per annum unused credit line total interest related charges paid foothill amounted 02 million 01 million less prior fiscal year interest expense 06 million fiscal years 2002 2001 incurred company represents interest expense related ontario facility lease treated financing lease presently carried longterm liability income losses affiliates result deconsolidation two previously consolidated subsidiaries see note 1 consolidated financial statements june quarter 2001 company began using equity method accounting record interest losses related two affiliates company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded losses large part reversed fiscal 2001 taken income guarantees obligations removed discharged total income reversal losses year amounted 07 million includes 03 million profit past sales affiliates 02 million estimated costs transitioning information technology services related costs previously incurred reported operations first quarter current fiscal year 02 million lease guarantees one former affiliates much larger prior fiscal year income reversal losses 84 million included reversal 70 million lender guarantees provided company one affiliates along reduction information technology reserves resumption information technology responsibilities reversal note reserve related affiliate benefit provision income taxes company files consolidated federal income tax return many state tax returns files separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states march 9 2002 passage job creation worker assistance act 2002 tax law company recognized unanticipated net 15 million federal income tax benefit second quarter fiscal year 2002 tax bill allowed company carry back net operating losses nols arising current fiscal year well prior fiscal year recover taxes two fiscal years ended september 30 1997 1996 previously closed carry backs total tax benefits recognized company new tax law 28 million year 09 million prior year nol offsetting part 28 million federal tax benefits nols 06 million tax expense related prior year amended federal income tax return carrying tax losses back prior years company exhausted benefits recovery taxes paid prior years future losses carried forward apply future income years september 30 2002 company 87 million nols may carried forward 47 million nol considered adjustment additional paidin capital benefit future earnings since portion nol attributable exercise stock options employees recognized expense financial statement purposes net loss income net loss 34 million realized current fiscal year compared net income 54 million prior fiscal year net effect change net income net loss amounted 88 million decrease gross profits 120 million offset part reduction operating expenses 83 million resulted operating loss change 37 million however 37 million operating loss change adversely impacted 54 million consisting 77 million less benefits reversal losses affiliates reduced 23 million tax benefits 2002 tax law change percentage net sales net loss 13 compared net income 15 fiscal 2001 comparison fiscal years ended september 30 2001 2000 net sales net sales decreased 1291 million 261 3653 million fiscal 2001 4944 million fiscal 2000 approximately quarter 1291 million decrease results fiscal 2000 deconsolidation former subsidiaries contributed 342 million 4944 million prior year net sales remaining 948 million decrease sales 206 attributable softness marketplace erosion customer base services revenues increased 09 million 31 312 million fiscal 2001 302 million fiscal 2000 85 total net sales versus 61 prior year net sales ibm contract accounted 166 total net sales 147 total accounts receivable 2001 fiscal year compared 128 214 respectively prior fiscal year absolute dollars ibm net sales decreased 27 million 608 million fiscal 2001 634 million fiscal 2000 reflecting conditions noted fiscal 2001 quarterly net sales compared respective prior fiscal year quarters shown consistent negative trend throughout fiscal year percentage declines commencing first quarter fiscal year 135 224 233 460 respectively sequentially net sales declined every quarter fiscal 2001 except june quarter registered modest 08 increase gross profit result decline net sales gross profits decreased 91 million 187 395 million fiscal 2001 486 million 2000 however gross profits expressed percentage net sales actually increased one full percentage point 108 2001 98 2000 increase gross margin percentage attributable lessening pricing pressures industry information technology products well increased margins rising service revenues selling marketing expenses selling marketing expenses decreased 154 million 339 300 million fiscal 2001 453 million fiscal 2000 154 million decrease 67 million selling marketing expenses attributable former subsidiaries reported consolidated basis first nine months prior fiscal year subsequently deconsolidated another 54 million decrease wage related part due restructuring including 18 million lower wage cost 36 million decrease sales commissions paid result decline net sales volume percentage net sales selling marketing expenses decreased one full percentage point 82 2001 92 2000 one percent decrease represents former subsidiaries expenses included financial results first nine months prior fiscal year deconsolidation general administrative expenses general administrative expenses decreased 118 million 517 110 million fiscal 2001 228 million fiscal 2000 decrease 107 million due deconsolidation former subsidiaries noted percentage net sales general administrative expenses declined 46 30 fiscal 2001 attributable deconsolidation nonrecurring charges nonrecurring charges 08 million consist 19 million restructuring charges 02 million charge relating settlement law suit income 13 million related legal suit plaintiff attorney fees costs previously awarded court reversed restructuring charges occurred june quarter workforce reduced 64 nine rental locations identified closure reduced size sales personnel working location closures converted virtual sales environment carefully monitored program company see note 4 consolidated financial statements company believes restructuring result lower selling marketing costs future quarters nonrecurring charges declined 19 million 689 08 million 27 million reported fiscal 2000 15 million restructuring charge 12 million charge related plaintiff attorney fees costs awarded court subsequently appeal reversed 2001 recognized operating loss operating loss decreased 200 million 895 loss 23 million fiscal 2001 223 million operating loss fiscal 2000 although total operating expenses decreased 291 million fiscal 2001 418 million 709 million fiscal 2000 decrease insufficient compensate 91 million decline gross profits decrease 174 million accounted deconsolidation former subsidiaries noted operating loss percent net sales decreased 06 fiscal 2001 45 fiscal 2000 interest expense interest expense decreased 07 million 435 10 million fiscal 2001 17 million fiscal 2000 included interest expense portions lease payments related ontario configuration center treated financing lease payments amounted 06 million fiscal 2001 fiscal 2000 decrease interest expense due mainly decline borrowing credit lines due declining sales volumes interest charged companys lines credit increased april 2000 25 prime 2 prime 225 prime rate declined 3 fiscal year compensate large part increase rates result companys weighted average borrowing rate increased slightly 91 85 prior year gain sale assets gain sale assets decreased 38 million 01 39 million prior fiscal year prior year 39 million gain attributed sale marketable securities acquired connection private placement former subsidiary income losses affiliates result deconsolidation two previously consolidated subsidiaries see note 1 consolidated financial statements june quarter 2000 company began using equity method accounting record interest losses related two affiliates company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded losses large part reversed fiscal 2001 taken income guarantees obligations removed discharged provision income taxes loss reversal income affiliates 83 million subject tax adjustments differences book tax inconsequential company estimates 26 million tax nol 2001 fiscal year since longer open prior years taxable income nol may carried back benefit recognized current year tax loss current provision income taxes relates certain minimum state income franchise taxes net income loss net income 54 million compared net loss 194 million prior fiscal year improvement earnings due 84 million loss reversal income affiliates 291 million decrease operating expenses percentage net sales net income 15 compared net loss 39 fiscal 2000 liquidity capital resources fiscal 2002 operating activities provided cash totaling 09 million compared 318 million prior fiscal year major factor 309 million reduction cash provided operations greater 420 million reduction accounts receivable experienced fiscal 2001 achieved fiscal 2002 attributable large part sharp 460 decline fiscal 2001 fourth quarter net sales prior fiscal years quarter companys accounts receivable balance net allowances returns doubtful accounts september 30 2002 2001 317 million 368 million respectively number days sales outstanding accounts receivable increased 45 days 37 days september 30 2002 2001 respectively however computing number days sales outstanding accounts receivable fourth quarter fiscal 2002 net sales number decreased 47 days compared 51 days prior fiscal year investing activities used cash totaling 09 million fiscal 2002 relatively unchanged 09 million prior fiscal year cash used investing activities fiscal 2002 acquisition property equipment financing activities provided net cash totaling 31 million fiscal 2002 using cash 319 million fiscal 2001 cash provided fiscal 2002 chiefly net borrowings 30 million companys lines credit primary use cash financing activities fiscal 2001 pay 318 million companys lines credit resulted 420 million reduction accounts receivable september 30 2002 company approximately 46 million cash working capital 168 million company threeyear 300 million revolving credit facility foothill capital corporation foothill expires december 28 2004 credit facility collateralized accounts receivable assets company addition ibm credit corporation ibmcc continued provide company 30day interestfree inventory flooring financing 200 million separate oneyear agreement expiring december 28 2003 september 30 2002 companys borrowings credit lines concentrated 124 million borrowings outstanding ibmcc 30day interestfree flooring agreement company additional borrowing capacity approximately 76 million taking consideration available collateral borrowing limitations financing agreements borrowings lending agreements collateralized substantially companys assets addition lines credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2002 company compliance loan covenants borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 20 million consideration providing guarantee foothill agreement contains 1 annual charge provision average outstanding balances owing ibmcc foothill agreement initially provided maximum interest rate one half percent prime rate reduction interest rates dependent upon company meeting certain earnings targets july 30 2002 amendment foothill agreement discussed maximum rate interest based certain targets related earnings interest taxes depreciation amortization ebitda increased 05 prime rate plus 200 libor rate plus 425 june fiscal 2002 quarter company estimated possible loss trends noted quarter continued company would unable meet june 2002 quarter ebitda covenants existing lines credit foothill ibmcc respectively would default terms agreements avert default company renegotiated lines credit ease ebitda covenant requirements signed amendment loan agreement foothill july 30 2002 subsequently ibmcc august 6 2002 new covenants loan agreements ebitda nine months ended june 30 2002 could exceed negative 30 million thereafter ebitda measured cumulative rolling four quarter basis ending last day fiscal quarter september 30 2002 quarter set negative 38 million december 31 2002 quarter negative 23 million march 31 2003 quarter negative 15 million june 30 2003 quarter positive 12 million september 30 2003 quarter positive 25 million fiscal quarters thereafter remaining positive 25 million two financial covenants previously place tangible net worth 170 million annual limitation maximum asset acquisitions 12 million remained november 21 2002 ibmcc extended 200 million interestfree flooring financing agreement december 28 2003 terms amendment ibmcc added provision limits hand inventory flooring amounts 30 million company believes adequate anticipated onhand inventory needs reflected financial statements contained part iv item 15 company experienced declining sales losses operations last three fiscal years ended september 30 2002 sales declines approximately 342 million operating losses approximately 100 million fiscal 2000 attributable activities former subsidiaries since deconsolidatedsee note 2 investment affiliates management believes exception amounts related deconsolidated former subsidiaries remainder companys sales declines losses primarily attributable industrywide decline information technology spending order counter sales profitability declines company completed two restructurings fiscal years 2001 2000 certain fixed occupancy payroll costs reduced addition second quarter fiscal 2002 change certain key executives part change chairman ceo returned former position president company responsibility daytoday operations addition company rehired former senior vice president sales certain senior sales employees previously worked company new management team taken following actions intended increase sales improve profitability arefocused companys sales strategy back aggressive personal face selling model hiring 55 new account executives increase approximately 125 number account executives employed prior change management implementing robust processes managing account executives performance sales quotas breasserted companys focus selling managed services higher gross margins product sales cqualified company minorityowned business order provide enhanced sales opportunities certain public private sector customers whose procurement policies provide preferences minorityowned businesses dcommitted company strategy acquiring targeted smaller competitors company believes acquisition immediately accretive earnings company opportunity complete acquisition affordable price discussed note 16 october 11 2002 company acquired tabin corporation chicagobased valueadded reseller discussed company 30 million line credit agreement foothill capital corporation foothill expires december 2004 company also 20 million inventory flooring agreement ibm credit corporation ibmcc expires december 28 2003 borrowings inventory flooring agreement serve reduce availability financing available line credit agreement management believes financing available company credit agreements together working capital resources september 30 2002 company net working capital approximately 168 million provide company sufficient working capital finance operations least next fiscal year also discussed foothill ibmcc agreements contain certain restrictive covenants requiring among things maintenance specified levels tangible net worth attainment specified amounts profitability management believes operating plans implemented enable maintain compliance covenants least september 30 2003 however assurance managements plans successful improving companys sales profitability company unable maintain compliance loan covenants noncompliance waived lenders working capital line credit flooring line could revoked prior expiration dates eventuality management believes sufficient working capital enable continue operate least september 30 2003 however company would required significantly scale business plans unable obtain alternative sources financing recently issued accounting standards june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations recorded value exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company adopted sfas 141 142 effective october 1 2002 company anticipate impact future financial results result adopting standard june 2001 fasb issued sfas 143 accounting asset retirementobligations statement establishes standards accounting obligations associated retirement tangible longlived assets company must adopt standard january 1 2003 management currently assessing impact standard august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company required adopt sfas 144 effective october 1 2002 company anticipate impact resulting adoption sfas 144 june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity liability exit cost recognized date entitys commitment exit plan sfas 146 requires liability cost associated exit disposal activity recognized fair value liability incurred provisions statement effective exit disposal activities initiated december 31 2002 item 7a item 7 management’s discussion analysis financial condition results operations understanding significant factors influenced performance past three fiscal years financial discussion read conjunction consolidated financial statements presented form 10k executive overview initially began operations march 1993 reseller information technology products fiscal 1999 began offering valueadded services customers gradually valueadded services represented larger percentage total net sales accounting 149 152 net sales fiscal years 2005 2004 respectively gross profit margins valueadded services currently offer significantly higher gross profit margins information technology product business require additional overhead expense supervision idle time expenses related service offerings offset portion increased margin initial operating years fiscal 1994 fiscal 1999 aid robust economy information technology market accommodated business model net sales increased compound annual growth rate 351 seasonal trends never prominent business although march quarters historically regarded one least promising quarters fiscal 2000 experienced first annual net sales decline 26 1738 million net sales fiscal 1999 due softer information technology market difficulties transitioning new enterprise resource planning business system declining trend resumed fiscal years 2001 2002 declines 261 296 respectively trend temporarily reversed fiscal 2003 net sales increased 127 prior year fiscal year 2004 disappointed net sales marginally lower 36 fiscal year 2003 however fiscal 2005 brought rebound net sales 176 increase fiscal year 2004 results built initial turnaround fiscal 2003 increase net sales fiscal 2005 came cost noticeable decline gross profits service side business limited growth gross profits 06 increase operating expenses chiefly selling marketing 30 million inclusive 18 million attributable affiliate pbpo suffered 877000 operating loss year operating loss reversed presence greater sum nonoperating income including income allocation pbpo loss outside stockholders allowed us realize marginal net profit year business model involves resale information technology products held inventory certain distributors maintain significant amounts inventory hand resale typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially product net sales quarter result orders received quarter although maintain relatively small amount inventory stock resale record inventory merchandise configured products purchased distributors shipped yet received accepted customers product revenues generally recognized upon delivery customer service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted distributors manufacturers less incentive credits critical accounting policies preparation financial statements related disclosures conformity us generally accepted accounting principles discussion analysis financial condition results operations require us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes note 1 notes consolidated financial statements form 10k describes significant accounting policies methods used preparation consolidated financial statements base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities regularly discuss audit committee basis estimates actual results may differ estimates differences may material believe following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts apply provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general recognize revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured shipping terms title risk loss merchandise shipped pass customers delivered takes place generally two three days product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory majority sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales small portion hardware software products services offer primary obligor recognized net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” accordingly revenues recognized net sales either time sale contract period based nature contract net amount retained us cost sales service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract allowance doubtful accounts estimate allowance doubtful accounts related trade receivables two methods first evaluate specific accounts 90 days outstanding apply various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns provide allowance sales returns based historical experience general follow strict policy duplicating terms vendor manufacturers’ product return policies however certain cases must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations “rma” reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales generally customers return goods configuration facility ontario california processed return vendor returns product returned vendors authenticated rmas review outstanding receivables vendors establish reserve product qualify refund based review specific vendor receivables rebates cooperative marketing incentives receive incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require use cooperative marketing development funds exclusively advertising marketing programs marketing expenses recognized restricted cooperative marketing development funds recorded reduction related marketing expense excess funding identified specific vendor program reducing gross profits rebates earned record rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met establish reserves cover collectibility risks including subsequent supplier audits inventory although employ virtual inventory model generally limits exposure inventory losses certain large customers contractually obligate product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included inventory product returned customers acceptable returnable vendor result expose losses inventory requires reserves losses established record varying reserves based upon class inventory ie held resale returned customers age inventory results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2005 net sales net sales increased 491 million 176 3283 million fiscal year 2005 2792 million fiscal year 2004 viablelinks inc acquisition made beginning fiscal year 2005 contributed 157 million net sales increase quarterly basis fiscal year 2005 2004 respective quarters net sales improved quarter september 2005 quarter registering largest increase 223 comparable fiscal 2004 quarter fiscal years however june quarter recorded largest amount net sales due large flux governmental orders preceding quarter march least net sales respective fiscal years one customer accounted 10 total net sales fiscal 2005 compared single customer accounting 111 net sales year ended september 30 2004 however sales tend concentrated relatively accounts evidenced fiscal year 2005 top five customers made 319 total net sales top twentyfive customers contributed 634 total net sales product sales fiscal year 2005 increased 426 million 180 fiscal year 2004 service revenues also increased yearoveryear modest rate revenues increasing 65 million 152 reported prior fiscal year service revenues quarterly sequential basis strongest september 2005 quarter rising 132 million quarter high fiscal year gross profit gross profits increased 06 million 17 351 million fiscal year 2005 345 million fiscal year 2004 06 million increase gross profits attributed increased product sales improvement gross margins percentage margins realized product sales held steady 74 net sales fiscal years product gross profits increased 32 million service gross profits hand decreased 27 million 157 fiscal year 2005 142 million 169 million fiscal year 2004 expressed percentage net sales service percentage margins declined 106 291 fiscal year 2005 397 fiscal year 2004 decline service percentage margins responsible 16 decline combined margins 107 fiscal year 2005 123 fiscal year 2004 decline service gross margin 291 fiscal year 2005 results first comparisons fiscal year 2004 periods contained unusually robust profit margins gross margins decelerating 489 first fiscal quarter fiscal year 2004 314 fourth quarter record gross margin first two quarters fiscal year 2004 result unusually high shortterm project revenue contracts concluding secondly service business concluded replaced shorter term jobs producing lower margins targeted ranges order capture new business believe future service gross margins substantially less 35 40 past average 25 35 range selling marketing expenses selling marketing expenses increased 29 million 125 258 million fiscal year 2005 229 million fiscal year 2004 29 million increase inclusive increase pbpo’s selling marketing expenses 02 million excluding pbpo’s portion consolidated selling marketing expense increase core selling marketing expenses increased 27 million increases selling marketing expenses fiscal year 2005 resulted primarily 21 million expended increase sales force support provide sales growth another 03 million related increased work force benefits additional 08 million related improving outsourced backoffice capabilities reduction selling marketing expenses achieved part 02 million reduction connectivity expenses increase sales volume fiscal year 2005 selling marketing expenses expressed percentage net sales results favorable decline 03 79 fiscal year 2005 82 fiscal year 2004 general administrative expenses general administrative expenses “ga” increased marginally 01 million 09 101 million fiscal year 2005 100 fiscal year 2004 101 million ga expenses recorded fiscal year 2005 includes 08 million expense affiliate pbpo increase 05 million corresponding pbpo expense recognized fiscal year 2004 exclusive pbpo’s 05 million increase ga expenses core business ga expenses fell 04 million major components 04 million reduction include reduction salaries bonuses compensation 07 million offsetting wage reduction part increase 04 million related improving outsourced backoffice capabilities ga expenses expressed percentage net sales results decrease 05 31 fiscal year 2005 36 fiscal year 2004 operating loss income operating loss 09 million realized fiscal year 2005 compared 15 million operating income prior fiscal year decline 24 million operating income attributed disproportionally large increase selling marketing expenses 29 million fiscal year 2005 discussed exceeded 06 million increase gross profits period operating loss expressed percentage net sales 02 fiscal year 2005 compared operating income percentage 05 fiscal year 2004 interest income expense net interest income 6000 fiscal year 2005 net interest income 266000 interest expense 260000 interest expense fiscal year 2004 749000 decrease interest expense fiscal year 2005 resulted principally increased interestfree borrowings lending facility ge commercial distribution finance corporation established june 2004 well change lending terms allows us earn interest customer payments semimonthly financing payments due remainder decline resulted change accounting treatment second quarter fiscal year 2005 ontario facility changed capitalized lease interest previously recorded operating lease rental expense recorded income remained relatively constant 06 million fiscal years 2005 2004 income consisted chiefly insurance recovery prior year losses rental income early payment discounts state sales tax authorities provision income taxes provided 21000 tax provision fiscal year 2005 110000 less provided prior fiscal year due part reduced earnings subject regular 34 corporate federal income tax rates tax benefit derived past net operating losses nols carried forward nevertheless subject federal alternative minimum tax alternative minimum tax limits nol carryforwards applied one year 90 current year’s taxable income imposes 20 tax remaining 10 taxable income file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2005 81 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period total 81 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximately 38 pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 62 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” net income loss net income decreased 13 million 01 million fiscal year 2005 14 million fiscal year 2004 principal reason 13 million decline net income 24 million decline operating income offset part 10 million nonoperating income principally income recognizing minority interest affiliate’s loss percentage net sales net income 00 fiscal year 2005 compared 05 fiscal year 2004 comparison fiscal years ended september 30 2004 net sales net sales decreased 106 million 36 2792 million fiscal 2004 2898 million fiscal 2003 decrease net sales product related maintained margins shifting emphasis lowermargin product sales highermargin service sales decline net sales prevailed quarter fiscal 2004 except june quarter benefited large increase governmental sales year ended september 30 2004 one customer accounted 111 net sales 97 accounts receivable product sales fiscal 2004 declined 158 million 63 fiscal 2003 service sales hand increased 52 million 140 prior fiscal year growth service sales lagged fiscal year 2003 increase 102 million 378 fiscal year 2002 results attributed part several projects favorably impacted second half fiscal 2003 wound early fiscal 2004 loss major service customer end june 2004 quarter gross profit gross profits decreased 15 million 43 345 million fiscal 2004 360 million fiscal year 2003 15 million decrease gross profits attributed decreased product sales well decreased product margins product gross profit percentage sales margins slipped 77 fiscal year 2003 74 fiscal year 2004 expressed percentage net sales service gross profit percentage fiscal 2004 decreased 48 prior fiscal year 397 line anticipated 35 40 range services even 48 decline service margins service gross profits managed increased 03 million 17 due additional volume provided 52 million service revenue increase fiscal 2004 strength services allowed gross margins product service remain relatively constant fiscal years 2004 2003 123 124 respectively selling marketing expenses selling marketing expenses decreased 47 million 168 229 million fiscal 2004 276 million fiscal 2003 47 million decrease inclusive pbpo’s initial fiscal year selling marketing expenses 08 million excluding pbpo’s portion combined selling marketing expense core selling marketing expenses decreased 55 million 200 compared fiscal 2003 results decrease selling marketing expense traced reduction employee related expense 51 million accomplish employee related expense decrease 51 million part incurred 13 million expense program outsource backoffice sales support offshore effect contributed 38 million net expense reduction benefit also favorable 07 million reduction connectivity rent related expenses expressed percentage net sales selling marketing expense decreased 13 95 fiscal year 2003 82 fiscal year 2004 general administrative expenses general administrative expenses remained relatively constant 100 million fiscal 2004 2003 current year’s 100 million general administrative expenses includes 03 million expense affiliate pbpo whose operations present fiscal 2003 major increases general administrative expenses fiscal year 2004 included increase employee related expenses 04 million due increased information technology wages executive bonuses employee benefits 11 million less reduced accounting finance wages 07 million reduction accounting finance wages resulted principally efforts outsource offshore incurred additional 04 million outsourcing expense resulted savings 03 million addition 06 million reduced attorney fees 03 million reduced software maintenance support expenses related sap license general administrative expenses expressed percentage net sales small increase 01 36 fiscal year 2004 35 fiscal year 2003 operating loss income operating income improved 34 million 19 million loss fiscal year 2003 15 million income fiscal year 2004 improvement attributed reduction selling marketing expenses 47 million discussed made 15 million decline gross profits operating income expressed percentage net sales improved 05 fiscal year 2004 negative 07 fiscal year 2003 interest income expense net interest expense 07 million net interest income 01 million interest expense decreased 02 million 09 million fiscal year 2003 interest expense 05 million incurred us represents interest expense related ontario facility treated financing lease presently carried longterm liability interest expense incurred previous lender whose financing arrangement replaced ge june 2004 amounted 03 million provision benefit income taxes provided 01 million tax provision fiscal year 2004 approximately 71 provision state income tax california domiciled net operating losses “nol” temporarily suspended remainder 01 million provision federal income tax 108 million nol carryforward 19 million applied current year’s federal taxable income leaving 89 million nol carryforward available future periods subject regular 34 corporate federal income tax rates nol carryforwards exceed taxable income nevertheless subject alternative minimum tax “amt” bears 20 rate limits nol carryforwards 90 thereby mandating least 10 taxable income becomes subject amt tax file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2004 89 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period total 89 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 38 voting interest commons shares pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses shareholders pbpo collectively approximately 62 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” income reversal losses affiliates result deconsolidation two previously consolidated subsidiaries june quarter 2002 began using equity method accounting record interest losses related two affiliates guaranteed certain debts affiliates responsible certain obligations losses excess investment affiliates recorded majority income reversal losses reversed prior years remaining balance 01 million reversed first quarter fiscal year 2003 net income loss net income increased 38 million 14 million net loss 24 million prior fiscal year 2003 principal reason improvement net income due reduction selling marketing expenses 47 million discussed percentage net sales net income 05 fiscal 2004 compared 08 net loss fiscal 2003 liquidity capital resources fiscal 2005 operating activities used cash totaling 54 million 117 million 63 million provided prior fiscal year lead contributor 54 million net decrease cash operating activities 91 million increase accounts receivable 33 million increase inventory working asset accounts built partially response 491 million increase net sales accounts receivable balance net allowances returns doubtful accounts september 30 2005 2004 409 million 316 million respectively 93 million increase accounts receivable reflects part increase net sales fiscal year 2005 well certain governmental net sales past late number days’ sales outstanding accounts receivable increased 45 days 41 days september 30 2005 2004 respectively inventory increased 33 million fiscal year 2005 prior fiscal year increase 26 million product purchased configuration specific customers’ orders remainder inventory shipped customers transit trade accounts payable increased 45 million net borrowings credit line used primarily purchase product decreased 15 million net increase 30 million trade accounts payable borrowings line credit reflects part buildup inventory customer configuration well increased trade related expenses investing activities used cash totaling 27 million fiscal 2005 increase 20 million prior fiscal year purchased 12 million equipment chiefly computer related equipment fiscal year 2005 fiscal 2004 fiscal year 2005 also expended 09 million fiscal 2004 acquisition viablelinks inc financing activities used net cash totaling 10 million fiscal 2005 84 million 74 million net cash provided fiscal 2004 84 million increase cash used fiscal 2005 net repayments borrowings line credit contrast net borrowings prior fiscal year september 30 2005 approximately 69 million cash working capital 161 million improve financing flexibility reduce costs june 2004 closed 300 million replacement working capital financing facility ge commercial distribution finance corporation “ge” august 2005 obtained temporary overline october 31 2005 5000000 bringing total borrowing capacity 350 million term facility period three years except either party may terminate agreement upon 60 days prior written notice party additionally ge may terminate facility time upon occurrence subsequent failure cure certain instances “event default” term defined agreement financing facility may borrow 85 eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 addition may purchase finance information technology products geapproved vendors terms depend upon certain variable factors substantial portion purchases ge approved vendors terms allow interestfree flooring financing agreements contain various liquidity financial covenants including without limitation ebitda sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter compliance debt covenants september 30 2005 ge facility collateralized accounts receivable inventory substantially assets september 30 2005 approximately 168 million borrowings outstanding 350 million financing facility september 30 2005 additional borrowings available approximately 163 million taking consideration temporary increase 50 million granted ge october 31 2005 available collateral borrowing limitations agreements discussed overview section recorded modest earnings last two fiscal years begun reversal 198 million losses accumulated fiscal years 2000 2003 accomplish second quarter fiscal year 2002 chairman ceo replaced key executives resumed role president daytoday responsibilities refocused sales strategy aggressive facetoface style encouraged selling higher margin managed services enhanced sales opportunities qualifying us “minorityowned” business evaluated smaller competitors could accretive earnings potential acquisition candidates return us low cost operational overhead model previously succeeded contracted offshore firms provide backoffice operational accounting related services rates substantially discounted available us management believes turn around plans continue successful improving sales profitability however unable maintain compliance loan covenants noncompliance waived ge working capital line credit could revoked prior expiration date eventuality believe sufficient working capital enable us continue operate least september 30 2006 however would required significantly scale business plans unable obtain alternative sources financing recent accounting pronouncements may 2005 financial accounting standards board “fasb” issued sfas 154 “accounting changes error corrections replacement accounting principles board opinion “apb” opinion 20 fasb statement 3 statement applies voluntary changes accounting principle changes required accounting pronouncement specific transition provisions included sfas 154 requires retrospective application prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change retrospective application limited direct effects change indirect effects recognized period change statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate however sfas 154 redefines restatement revising previously issued financial statements reflect correction error provisions sfas 154 effective accounting changes corrections errors made fiscal periods begin december 15 2005 although early adoption permitted anticipate implementation standard material impact condensed consolidated results operations cash flows financial position december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” sfas 123r addresses accounting sharebased payment transactions company receives employee services exchange either equity instruments company liabilities based fair value company’s equity instruments may settled issuance equity instruments sfas 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used requires transactions accounted using fair valuebased method recognized expense consolidated statement operations effective date sfas 123r annual periods beginning june 15 2005 assessing potential negative impact provisions sfas 123r consolidated financial statements fiscal year 2006 decided minimize exposure accounting pronouncement accelerating vesting outstanding unvested options effective july 20 2005 accelerated outstanding unvested options fully vested date see note 10 consolidated financial statements december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” sfas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged apb opinion 29 “accounting nonmonetary transactions” provided exception basic measurement principle fair value exchanges similar productive assets apb opinion 29 exchange productive asset similar productive asset based recorded amount asset relinquished sfas 153 eliminates exception replaces exception exchanges nonmonetary assets commercial substance believe adoption sfas 153 material impact consolidated financial statements november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 requires abnormal amounts idle facility expense freight handling costs wasted materials spoilage recorded current period charges allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective us october 1 2006 believe adoption sfas 151 material impact consolidated financial statements obligations commitments september 30 2005 company following obligations commitments make future payments contracts contractual obligations commercial commitments item 7a item 7 management’s discussion analysis financial condition results operations understanding significant factors influenced performance past three fiscal years financial discussion read conjunction consolidated financial statements notes thereto presented form 10k executive overview began operations march 1993 reseller information technology products fiscal year 1999 valueadded services added customer offerings valueadded services represented 138 145 149 net sales fiscal years 2007 2006 2005 respectively gross profit margins valueadded services currently offer significantly higher gross profit margins information technology product business require additional overhead expense supervision idle time expenses related service offerings offset portion increased margin october 2003 made initial investment pbpo start company tennessee sells bpo services carry higher gross profit margins similar found valueadded services october 2006 broadened bpo capability acquiring 70 interest ovex private company pakistan significant experience success providing bpo services internal operations well pbpos customers initial operating years fiscal 1994 fiscal 1999 aid robust economy information technology market accommodated business model net sales increased compounded annual growth rate 351 seasonal trends never prominent business although march quarters historically regarded one least promising quarters fiscal 2000 experienced first annual net sales decline 26 1738 million net sales fiscal 1999 due softer information technology market difficulties transitioning new enterprise resource planning business system net sales continued decline subsequent fiscal years reaching low 2570 million fiscal year 2002 compounded annual decline rate 27 three years last five years seen compounded annual growth rate 37 net sales 2898 million fiscal year 2003 present 3471 million fiscal year 2007 net sales increased 234 million 72 gross profits increased 39 million 98 fiscal year 2007 fiscal year 2006 driven principally increased product sales operating expenses consisting mainly selling marketing expenses increased total 30 million fiscal year 2006 results leaving operating income 11 million fiscal year 2007 improvement 09 million 02 million reported fiscal year 2006 business model involves resale information technology products held inventory certain distributors maintain significant amounts inventory hand resale typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped configuration center rancho cucamonga california distributor typically ships products within 24 hours following receipt purchase order consequently substantially product net sales quarter result orders received quarter although maintain relatively small amount inventory stock resale inventory represents either merchandise configured customers’ orders products purchased distributors shipped yet received accepted customers product revenues generally recognized upon delivery customer service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted distributors manufacturers less incentive credits critical accounting policies preparation financial statements related disclosures conformity us generally accepted accounting principles discussion analysis financial condition results operations require us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes note 1 notes consolidated financial statements form 10k describes significant accounting policies methods used preparation consolidated financial statements base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities regularly discuss audit committee basis estimates actual results may differ estimates differences may material believe following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts apply provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general recognize revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured standard shipping terms title passes upon delivery common carrier revenue recognized delivery takes place generally two three days later product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory majority sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sell primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” net revenues recognized full time sale adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer revenue customer maintenance support agreements primary obligor reported net basis recognized time sale net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract allowance doubtful accounts estimate allowance doubtful accounts related trade receivables two methods first evaluate specific accounts 90 days outstanding apply various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns provide allowance sales returns based historical experience general follow strict policy duplicating terms vendor manufacturers’ product return policies however certain cases must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations rmas reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales generally customers return goods configuration facility rancho cucamonga california processed return vendor returns product returned vendors authenticated rmas review outstanding receivables vendors establish reserve product qualify refund based review specific vendor receivables rebates cooperative marketing incentives receive incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require use cooperative marketing development funds exclusively advertising marketing programs marketing expenses recognized restricted cooperative marketing development funds recorded reduction related marketing expense excess funding identified specific vendor program reducing cost goods sold rebates earned record rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met establish reserves cover collectibility risks including subsequent supplier audits inventory although employ virtual inventory model generally limits exposure inventory losses certain large customers contractually obligate product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included inventory product returned customers acceptable returnable vendor result expose losses inventory requires reserves losses established record varying reserves based upon class inventory ie held resale returned customers age inventory results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2007 2006 net sales net sales increased 234 million 72 3471 million fiscal year 2007 3237 million fiscal year 2006 affiliate pbpo subsidiary ovex contributed 32 million 09 million respectively total net sales increase remaining 193 million increase coming core operations sales service information technology products one customer accounted 10 total net sales fiscal years 2007 2006 core operation increase sales resulted fact large volume customers purchased increased amounts products services example net sales top five customers accounted 396 total net sales fiscal year 2007 net sales top five customers increased 531 million 156 fiscal year 2007 total net sales five customers prior fiscal year product net sales fiscal year 2007 increased 226 million 82 fiscal year 2006 responsible increase total net sales year top selling products software desktop computers laptops respectively fiscal years 2007 2006 software sales leading component sales mix software agency commissions part product sales increased third consecutive year fiscal year 2007 70 million increase 15 million 210 fiscal 2006 commissions service net sales fiscal year 2007 increased marginal 08 million 17 fiscal year 2006 service net sales affiliate pbpo subsidiary ovex promotes performs business process outsourcing services increased 41 million aggregate 67 million fiscal year 2007 responsible increase service net sales fiscal year 2007 core service net sales fiscal year 2007 relate service information technology products exclude contributions pbpo ovex decreased 33 million 411 million 444 million fiscal year 2006 decline core service net sales fiscal year 2007 large part conclusion substantial municipal services work project principally completed fiscal year 2006 well decrease services major customer adversely affected general slow mortgage industry gross profit gross profits increased 39 million 98 436 million fiscal year 2007 397 million fiscal year 2006 bulk increase gross profits 22 million product gross profits remainder 17 million attributable services affiliate pbpo subsidiary ovex contributed approximately onethird gross profits increase 13 million aggregate base sales 21 million fiscal year 2007 overall gross margins improved 125 fiscal year 2007 122 prior fiscal year product gross profits increased 22 million fiscal year 2007 252 million 230 million prior fiscal year principally increased sales volume product gross margin percentages improved marginally 84 fiscal year 2007 83 fiscal year 2006 slight improvement margins attributable increase agency commission fees bear associated costs excluding agency commissions product gross margins fell 61 fiscal year 2007 63 prior fiscal year service gross profits increased 17 million fiscal year 2007 183 million 166 million prior fiscal year increase 11 million attributable increase service gross profits affiliate pbpo operates approximate 35 service gross margin core service gross profits relates service information technology products excludes contributions pbpo ovex increased marginally 04 million fiscal year 2007 162 million 158 million prior fiscal year related core service gross margins increased 38 394 356 core service net sales core service gross profits margins service gross margin improvement traced major municipal service project largely completed fiscal year 2006 whose revenues 42 million service gross margins 11 adversely impacted fiscal 2006 results causing 3 drop overall gross margins year selling marketing expenses selling marketing expenses increased 22 million 79 305 million fiscal year 2007 283 million fiscal year 2006 22 million increase selling marketing expenses fiscal year 2007 attributable principally 19 million increase wages hiring additional 48 employees including 40 call center us 8 recently formed cabling division 02 million increased overtime pay remaining 01 increase selling marketing expenses relates increases expenses affiliate pbpo subsidiary ovex selling marketing expenses expressed percentage net sales flat 88 fiscal years 2007 2006 general administrative expenses general administrative expenses ga increased 08 million 70 119 million fiscal year 2007 111 fiscal year 2006 increase attributed affiliate pbpo subsidiary ovex ga expense pbpo ovex increasing 04 million 06 million respectively ovex increase due acquisition ovex stock ovex’s merger fiscal year 2007 comparable expense prior fiscal years majority increase pbpo relates increases salary well increases travel entertainment related costs selling marketing expenses ga expenses expressed percentage net sales results flat 34 fiscal years 2007 2006 operating income operating income increased 09 million fiscal year 2007 11 million compared 02 million prior fiscal year increase 09 million operating income attributed increase gross profit 39 million less 30 million increase operating expenses fiscal year 2007 discussed interest income net interest income net interest expense consisted following components last two fiscal years thousands net interest income increased 01 million fiscal year 2007 03 million 02 million fiscal year 2006 interest income fiscal years resulted short term cash investments interest expense increased 02 million fiscal year 2007 03 million 01 million fiscal year 2006 increase principally acquisition ovex fiscal year 2007 related interest expense present prior fiscal year ovex interest expense includes 01 million related shortterm borrowings export finance program addition consolidated interest expense includes approximately 01 million related capitalized leases interest expense fiscal years 2007 2006 lending facility ge commercial distribution finance corporation approximately 11000 14000 respectively customarily low due interestfree borrowing periods allowed financing income increased marginal 43000 fiscal year 2007 compared fiscal year 2006 significant factor either fiscal year income tax benefit provision 203000 tax benefit provided fiscal year 2007 arose principally 400000 decrease valuation allowance deferred tax benefits related net operating loss tax benefits decrease 400000 represented estimate federal state taxes combined rate 40 would incurred future periods tax benefit deferred net operating loss deduction would available 263000 400000 decrease available reduction deferred taxes since balance 137000 relates net operating losses arising stock options considered adjustment equity result use deferred net operating loss 263000 future provisions taxes financial statement purposes benefit net operating loss deduction computed full statutory rates file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo ovex case pbpo investment less required 80 consolidate federal tax law case ovex taxed foreign income distributed september 30 2007 53 million federal nol carryforwards 35 federal tax rates would reduce future federal taxes 19 million addition 01 million alternative minimum tax credits carryforwards bring total future benefit 20 million 04 million recognized fiscal year 2007 nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 30 voting interest pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 70 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” ovex hand acquired fiscal year 2007 majority 70 interest company thus allocate 30 net income ovex minority shareholders allocations minority interest thousands last two fiscal years follows net income net income increased 11 million 16 million fiscal year 2007 05 million fiscal year 2006 principal reasons 11 million increase net income 09 million increase operating income 02 million decrease income taxes comparison fiscal years ended september 30 2006 2005 net sales net sales decreased 46 million 14 3237 million fiscal year 2006 3283 million fiscal year 2005 moderating net sales decrease business software medium inc acquired january 2006 contributed 39 million net sales fiscal year 2006 pbpo variable interest entity affiliate whose sales increased 17 million one customer accounted 10 total net sales fiscal year 2006 2005 however sales tend concentrated relatively accounts evidenced fiscal years 2006 2005 top five customers made 271 319 respectively total net sales top twentyfive customers contributed 597 634 respectively total net sales quarterly seasonal basis june quarter helped software agency commissions 11 million strongest net sales quarter fiscal year third consecutive year june 2006 fiscal quarter coming 956 million compared 926 million prior fiscal year period hand march quarter fiscal 2006 continued weakest net sales quarter fiscal year third consecutive year product sales fiscal year 2006 decreased 26 million 09 2767 million 2793 million reported fiscal year 2005 reflecting decline overall net sales major customers service revenues fiscal year 2006 decreased yearoveryear 20 million lesser decline reported product sales higher rate 41 470 million 490 million reported prior fiscal year gross profit gross profits increased 46 million 131 397 million fiscal year 2006 351 million fiscal year 2005 services contributed 25 million gross profits increase products responsible remaining 21 million declining net sales increase gross profits came solely improvements gross margin percentages improved product services combined 122 107 fiscal year 2005 product gross margin percentages improved 09 83 fiscal year 2006 service improved 64 355 21 million increase product gross profits came agency commission fees 18 million turn originated primarily increased microsoft software commission fees service gross profits increase 25 million combination factors however pbpo consolidated affiliate contributed 08 million increase service gross profits fiscal year 2006 fiscal year 2005 two large logistic asset management customers contributed majority remaining 17 million increase service gross profits high volume projects processing costs successfully contained factors explaining increase include reaching certain contractual milestones municipal service contracts allowed us recognize higher service margins well acquisition january 2006 security services business traditionally earns average gross profit margins selling marketing expenses selling marketing expenses increased 25 million 99 283 million fiscal year 2006 258 million fiscal year 2005 25 million increase inclusive decrease pbpo’s selling marketing expenses 03 million excluding decrease pbpo’s selling marketing expense core selling marketing expenses increased 28 million increase selling marketing expenses fiscal year 2006 resulted primarily 27 million wage related expenses consisting 14 million commissions mainly increased software sales draws 09 million wages 04 million employee benefits reimbursements also experienced 08 million increase business process outsourcing expenses increased use employees offshore costs related software programming india however costs largely offset 09 million increased coop funds favorable settlement disputed balances creditors selling marketing expenses expressed percentage net sales increase 09 88 fiscal year 2006 79 fiscal year 2005 general administrative expenses general administrative expenses ga increased 10 million 94 111 million fiscal year 2006 101 fiscal year 2005 increase ga principally result higher legal expenses 07 million due three legal suits defended 03 million settlement first union securities matter dating back 2000 ga expenses expressed percentage net sales increase 03 34 fiscal year 2006 31 fiscal year 2005 operating income loss operating income 02 million realized fiscal year 2006 compared 09 million operating loss prior fiscal year increase 11 million operating income attributed increase gross profit 46 million less 35 million increase operating expenses fiscal year 2006 discussed interest income expense net interest income 02 million fiscal year 2006 net interest expense 01 million interest income resulted short term cash investments interest expense fiscal year 2006 related capitalized leases computer equipment acquired interest expense fiscal year 2006 lending facility ge commercial distribution finance corporation approximately 14000 customarily low nonexistent due interestfree borrowing periods allowed financing net interest income increased 02 million fiscal year 2006 compared prior fiscal year increase attributed inclusion fiscal year 2005 02 million interest expense related ontario configuration facility present fiscal year 2006 due ontario lease converting financing lease operating lease rentexpense replaces interest expense major expense item income decreased 06 million fiscal year 2006 fiscal year 2005 decrease income due inclusion fiscal year 2005 insurance recovery prior year losses rental income repeat fiscal year 2006 provision income taxes provided 42000 tax provision fiscal year 2006 increase 21000 provided prior fiscal year subject regular 34 corporate federal income tax rates tax benefit derived past net operating losses nols carried forward nevertheless subject federal alternative minimum tax alternative minimum tax limits nol carryforwards applied one year 90 current year’s taxable income imposes 20 tax remaining 10 taxable income file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2006 69 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period 69 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 31 voting interest pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 69 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” net income net income increased 04 million 05 million fiscal year 2006 01 million fiscal year 2005 principal reason 04 million increase net income 11 million increase operating income less 07 million reductions nonoperating income principally income recognizing minority interest affiliate’s loss liquidity capital resources sources liquidity include cash equivalents cash flow operations amounts available ge financing facility sources adequate daytoday operations capital expenditures although provide assurance believe remaining cash balances cash flows operations availability funds financing facility sufficient satisfy operating requirements next fiscal year cash flows operating activities fiscal 2007 operating activities used cash totaling 153 million compared 55 million provided operating activities prior fiscal year lead contributors 208 million net decrease cash operating activities increases inventory accounts receivable together increased 195 million fiscal year 2006 accounts receivable balance net allowances returns doubtful accounts september 30 2007 2006 614 million 464 million respectively increase 150 million fiscal year 2007 accounts receivable increase principally 150 million sale made us government days prior end fiscal year 2007 150 million sale also responsible increase number days’ sales outstanding accounts receivable 65 days 52 days september 30 2007 2006 respectively inventory net allowance increased 46 million fiscal year 2007 88 million 42 million reported end prior fiscal year majority increase resulted increases physical inventory purchased specific customer orders lesser extent increase inventory transit 2007 fiscal year end cash flows investing activities investing activities used cash totaling 52 million fiscal year 2007 increase 37 million prior fiscal year 37 million increase resulted increased acquisition costs 08 million increased purchases property equipment 19 million 10 million shortterm cash investment cash flows financing activities financing activities provided net cash totaling 162 million fiscal 2007 169 million 07 million net cash used fiscal 2006 162 million increase cash provided fiscal 2007 increase 158 million net borrowings line credit addition subsidiary ovex borrowed 19 million government sponsored export finance borrowing program carries annual interest rates 65 credit facility september 30 2007 approximately 60 million cash working capital 164 million two primary information technology sales subsidiaries en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation “ge” parties certain business financing agreement certain agreement wholesale financing dated june 25 2004 amended date collectively agreements” guarantor obligations agreements flooring arrangement two subsidiaries may purchase finance information technology products geapproved vendors terms depend upon certain variable factors two subsidiaries may borrow 85 collective eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 purchases geapproved vendors historically terms allow interestfree flooring original agreements provided 300 million accounts receivable flooring facility expired june 25 2007 extended june 13 2007 july 31 2007 via temporary overline letter agreement effective july 25 2007 facility increased 450 million certain financial covenants revised pursuant addendum executed among parties addendum also provided extension term facility period three years august 1 2007 successive oneyear renewal periods thereafter subject termination end period least sixty days prior written notice party parties effective september 25 2007 entered amendment delete prior financial covenants contained agreements restate effective last day calendar quarter follows terms defined agreements • tangible net worth subordinated debt combined amount less 12750000 • total funded indebtedness ebitda preceding four fiscal quarters ended shall 300100 compliance debt covenants september 30 2007 ge facility collateralized accounts receivable inventory substantially assets september 30 2007 approximately 303 million borrowings outstanding 450 million financing facility september 30 2007 additional borrowings available approximately 147 million taking consideration borrowing limitations agreements amended date recent accounting pronouncements accounting pronouncements adopted september 2006 sec released staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 adopted sab 108 fourth quarter fiscal year 2007 sab 108 requires registrants use balance sheet approach income statement approach quantifying evaluating materiality misstatement adjust financial statements either approach results quantifying misstatement material adopting requirements sab 108 determined previously accrued taxes overstated 02 million immaterial balance sheet could considered material income statement adjusted accrued tax overstatement resulted accrual income tax refund years prior 2002 evaluated immaterial reversing rollover method time reported cumulative effect initial application sab 108 adjusting accumulated deficit september 30 2006 credit 02 million march 2006 financial accounting standards board “fasb” issued fas 156 accounting servicing financial assets amendment fasb statement 140 standard clarifies separately account servicing rights requires servicing rights separately recognized initially fair value provides option subsequently accounting servicing rights either fair value amortization method standard effective fiscal years beginning september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 amends statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entitys first fiscal year begins september 15 2006 adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements accounting pronouncements pending adoption february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 effective company fiscal years beginning july 1 2008 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings currently evaluating potential impact adoption sfas 159 consolidated financial statements september 2006 fasb issued fas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 anticipate adoption accounting pronouncement material effect consolidated financial statements july 2006 fasb issued interpretation 48 accounting uncertainty income taxes fin 48 interpretation requires recognition measurement uncertain income tax positions using morelikelythannot approach provisions fin 48 effective fiscal years beginning december 15 2006 anticipate adoption accounting pronouncement material effect consolidated financial statements offbalance sheet arrangements currently offbalance sheet arrangements within meaning item 303a4 regulation sk obligations commitments september 30 2007 following obligations commitments make future payments contracts contractual obligations commercial commitments impact inflation believe inflation material effect net sales results operations item 7a item 7 management’s discussion analysis financial condition results operations understanding significant factors influenced performance past three fiscal years financial discussion read conjunction consolidated financial statements notes thereto presented form 10k executive overview began operations march 1993 reseller information technology products fiscal year 1999 valueadded services added customer offerings valueadded services represented 135 138 145 net sales fiscal years 2008 2007 2006 respectively july 2008 sold 805 interest services business approximately 240 million combination cash equity purchaser retained 195 interest service business set business referrals cost sharing arrangements october 2003 made initial investment pbpo start company tennessee sells bpo services carry higher gross profit margins similar found valueadded services october 2006 broadened bpo capability acquiring 70 interest ovex private company pakistan significant experience success providing bpo services internal operations well pbpos customers initial operating years fiscal 1994 fiscal 1999 aid robust economy information technology market accommodated business model net sales increased compounded annual growth rate 351 seasonal trends never prominent business although march quarters historically regarded one least promising quarters fiscal 2000 experienced first annual net sales decline 26 1738 million net sales fiscal 1999 due softer information technology market difficulties transitioning new enterprise resource planning business system net sales continued decline subsequent fiscal years reaching low 2570 million fiscal year 2002 compounded annual decline rate 27 three years last six years seen marginal compounded annual growth rate 1 net sales 2898 million fiscal year 2003 present 3005 million fiscal year 2008 result sale service business july 2008 slow product sales net sales decreased 467 million 134 fiscal year 2008 compared 2007 however despite decline net sales gross profit percentage widened sufficiently allow marginal increase gross profits 03 million fiscal 2008 prior fiscal year 102 million increase operating expenses fiscal 2008 eclipsed marginal 03 million increase gross profits resulting 99 million increase operating loss fiscal year 2008 fiscal year 2007 business model involves resale information technology products held inventory certain distributors maintain significant amounts inventory hand resale typically place order product purchases distributors received customer purchase order inventory configured necessary dropshipped distributor customer distributor typically ships products within 24 hours following receipt purchase order consequently substantially product net sales quarter result orders received quarter although may maintain relatively small amount inventory stock resale inventory represents either merchandise configured customers’ orders products purchased distributors shipped yet received accepted customers product revenues generally recognized upon delivery customer service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted distributors manufacturers less incentive credits critical accounting policies preparation financial statements related disclosures conformity us generally accepted accounting principles discussion analysis financial condition results operations require us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes note 1 notes consolidated financial statements form 10k describes significant accounting policies methods used preparation consolidated financial statements base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities regularly discuss audit committee basis estimates actual results may differ estimates differences may material believe following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition net sales consist primarily revenue sale hardware software peripherals prior july 2008 service support contracts apply provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general recognize revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured standard shipping terms title passes upon delivery common carrier revenue recognized delivery takes place generally two three days later product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory majority sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sell primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” net revenues recognized full time sale adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer revenue customer maintenance support agreements primary obligor reported net basis recognized time sale net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract allowance doubtful accounts estimate allowance doubtful accounts related trade receivables three methods first evaluate specific accounts 90 days outstanding apply various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns third review accounts 90 days known risks collection example bankruptcy proceedings establish reserves accordingly product returns provide allowance sales returns based historical experience general follow strict policy duplicating terms vendor manufacturers’ product return policies however certain cases must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations rmas reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales generally customers return goods configuration facility rancho cucamonga california processed return vendor returns product returned vendors authenticated rmas review outstanding receivables vendors establish reserve product qualify refund based review specific vendor receivables rebates cooperative marketing incentives receive incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require use cooperative marketing development funds exclusively advertising marketing programs marketing expenses recognized restricted cooperative marketing development funds recorded reduction related marketing expense excess funding identified specific vendor program reducing cost goods sold rebates earned record rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met establish reserves cover collectibility risks including subsequent supplier audits inventory although employ virtual inventory model generally limits exposure inventory losses certain large customers contractually obligate product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included inventory product returned customers acceptable returnable vendor result expose losses inventory requires reserves losses established record varying reserves based upon class inventory ie held resale returned customers age inventory results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2008 2007 net sales net sales decreased 467 million 134 3005 million fiscal year 2008 3471 million fiscal year 2007 net sales declines prevalent product service sales however product sales decline prominent declining 393 million 131 2600 million fiscal year 2008 2993 million fiscal year 2007 except first quarter fiscal year 2008 product sales declined quarter comparison like quarters prior fiscal year decline become severe passing quarter witnessed fourth quarter fiscal year 2008 reaching decline 251 million net sales compared fourth quarter prior fiscal year reasons decline product net sales include overall declines sales major customers loss major customer expected make future purchases directly manufactures loss customers victims instability banking industry impact loss sales major customers noted fact fiscal year 2007 net product sales top ten product customers amounted 1820 million 608 total product net sales fiscal year 2008 top ten product customers accounted 940 million 362 total product net sales trending less dependence major customers brought benefit presently less risk sales concentration one customer accounted 10 total net sales either fiscal year 2008 2007 software sales major component product sales shown steady rise contrast decline product sales laptops printers monitors net software sales including agency commissions fiscal year 2008 822 million 278 total net sales increase 178 million 277 fiscal year 2008 644 million net software sales fiscal year 2007 affiliates pbpo ovex significant impact total net sales fiscal year 2008 combined companies net sales 73 million increase 06 million fiscal year 2007 service net sales fiscal year 2008 decreased 73 million 153 fiscal year 2007 decrease attributed sale service business effective july 1 2008 service business excluded fourth quarter fiscal year 2008 service sales result sale amounted 100 million anticipate service net sales continue negative trend compared corresponding prior year quarters next three quarters core information technology services substantially sold july 2008 excluding income partiallyowned affiliates consolidate engaged business process outsourcing services represented 831 total 405 million service revenues reported services perform include installation fiber optic cable configuration services logistical services related life cycle computer maintenance gross profit gross profits increased 03 million 07 438 million fiscal year 2008 436 million fiscal year 2007 marginal increase gross profits ascribed product gross profits increased 15 million 60 fiscal year 2008 compared fiscal year 2007 services gross profits declined 12 million 66 171 million fiscal year 2008 183 million fiscal year 2007 decline gross profits attributed volume loss fourth quarter sale service business selling marketing expenses selling marketing expenses increased 70 million 230 376 million fiscal year 2008 306 million fiscal year 2007 70 million increase selling marketing expenses fiscal year 2008 attributable principally following increases 28 million increase bad debt provisions 11 million increase reserve sales tax business tax audit provisions 10 million increase wage related costs 09 million increase settlement costs 08 million increase bonuses related sale service business remaining 04 million increase selling marketing expenses relates increases expenses affiliates pbpo ovex selling marketing expenses expressed percentage net sales increased 125 fiscal year 2008 88 fiscal year 2007 general administrative expenses general administrative expenses ga increased 32 million 268 151 million fiscal year 2008 119 million fiscal year 2007 32 million increase ga fiscal year 2008 principally following increases 18 million increase bonuses related sale service business 11 million increase legal costs 03 million increase facilities costs selling marketing expenses ga expenses expressed percentage net sales also increased 50 fiscal year 2008 34 fiscal year 2007 operating loss income operating loss 88 million fiscal year 2008 compared 11 million operating income prior fiscal year increase 99 million operating loss attributed 102 million increase operating expenses fiscal year 2008 less 03 million increase gross profit discussed interest income net interest income net interest expense consisted following components last two fiscal years thousands interest income decreased 03 million fiscal year 2008 03 million 06 million fiscal year 2007 interest income fiscal years resulted short term cash investments interest expense decreased 01 million fiscal year 2008 02 million 03 million fiscal year 2007 decrease declines interest expense core information technology operations well affiliates pbpo ovex interest expense fiscal years 2008 2007 lending facility ge commercial distribution finance corporation approximately 17000 11000 respectively customarily low due interestfree borrowing periods allowed financing income increased 146 million fiscal year 2008 147 million major component increase income gain sale service business 154 million net 06 million related costs 60 million reduction related value consideration paid stock decline value discount fact restricted trading one year losses including impairment investment 05 million accounted remaining offsetting difference 08 million arriving net increase 146 million income additional 20 million gain sale service business deferred time collection reasonably assured income tax provision benefit income tax provision 21 million fiscal year 2008 compared tax benefit 02 million prior fiscal year 2007 prior fiscal year current tax liability offset full net operating loss carryforward nol amounted tax 60000 low alternative minimum tax rates deferred tax benefit 263000 reduction valuation allowance deferred tax benefits resulted net tax benefit 203000 fiscal year 2007 fiscal year 2008 however used last remaining 06 million portion federal nol carry forwards excluding 47 million nol arose fiscal year 2000 pertained stock option expense fas 123r precluded recognizing 47 million federal nol carry forwards result excess tax stock option expense book amounts tax benefit instead difference 14 million fiscal year 2008 tax expense federal tax liability added paidin capital federal tax rate applied fiscal year 2008 provision calculated 34 tax rate deferred taxes increased 06 million 03 million fiscal year 2008 credit 03 million fiscal year 2007 increase result reversal amount valuation allowance credit net deferred assets estimated prior year usable offset future taxable income september 30 2008 federal nol carryforwards available noncontrolling interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 30 voting interest pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 70 pbpo losses allocated noncontrolling interest based upon percentage ownership upon “at risk” capital owners noncontrolling interest risk capital absorbed losses remaining losses allocated us without regard amount capital “at risk” hand ovex acquired fiscal year 2007 owned 70 us thus allocate 30 net income ovex minority shareholders allocations noncontrolling interest thousands last two fiscal years follows loss equity investment july 2 2008 formed en pointe global services llc epgs whollyowned subsidiary express purposes transferring information technology service business entity july 9 2008 sold 805 interest epgs allied digital services limited retained noncontrolling interest 195 prior formation epgs service product operations reported en pointe technologies sales inc service product business closely integrated separate accounting management review evaluate financial results operation possible information technology service business previously considered separate segment prior period comparative financial information available however contributing significantly 08 million net loss allocatable partners present prior fiscal year quarter bankruptcy one larger service customers epgs bankruptcy contributed majority 04 million bad debts incurred quarter epgs results operations initial quarter operations ended september 30 2008 thousands except percentage ownership follows net income net income increased 20 million 36 million fiscal year 2008 16 million fiscal year 2007 increase attributed 146 million increase income arising principally sale services business comparison fiscal years ended september 30 2007 2006 net sales net sales increased 234 million 72 3471 million fiscal year 2007 3237 million fiscal year 2006 affiliate pbpo subsidiary ovex contributed 32 million 09 million respectively total net sales increase remaining 193 million increase coming core operations sales service information technology products one customer accounted 10 total net sales fiscal years 2007 2006 core operation increase sales resulted fact large volume customers purchased increased amounts products services example net sales top five customers accounted 396 total net sales fiscal year 2007 net sales top five customers increased 531 million 156 fiscal year 2007 total net sales five customers prior fiscal year product net sales fiscal year 2007 increased 226 million 82 fiscal year 2006 responsible increase total net sales year top selling products software desktop computers laptops respectively fiscal years 2007 2006 software sales leading component sales mix software agency commissions part product sales increased third consecutive year fiscal year 2007 70 million increase 15 million 210 fiscal 2006 commissions service net sales fiscal year 2007 increased marginal 08 million 17 fiscal year 2006 service net sales affiliate pbpo subsidiary ovex promotes performs business process outsourcing services increased 41 million aggregate 67 million fiscal year 2007 responsible increase service net sales fiscal year 2007 core service net sales fiscal year 2007 relate service information technology products exclude contributions pbpo ovex decreased 33 million 411 million 444 million fiscal year 2006 decline core service net sales fiscal year 2007 large part conclusion substantial municipal services work project principally completed fiscal year 2006 well decrease services major customer adversely affected general slow mortgage industry gross profit gross profits increased 39 million 98 436 million fiscal year 2007 397 million fiscal year 2006 bulk increase gross profits 22 million product gross profits remainder 17 million attributable services affiliate pbpo subsidiary ovex contributed approximately onethird gross profits increase 13 million aggregate base sales 21 million fiscal year 2007 overall gross margins improved 125 fiscal year 2007 122 prior fiscal year product gross profits increased 22 million fiscal year 2007 252 million 230 million prior fiscal year principally increased sales volume product gross margin percentages improved marginally 84 fiscal year 2007 83 fiscal year 2006 slight improvement margins attributable increase agency commission fees bear associated costs excluding agency commissions product gross margins fell 61 fiscal year 2007 63 prior fiscal year service gross profits increased 17 million fiscal year 2007 183 million 166 million prior fiscal year increase 11 million attributable increase service gross profits affiliate pbpo operates approximate 35 service gross margin core service gross profits relates service information technology products excludes contributions pbpo ovex increased marginally 04 million fiscal year 2007 162 million 158 million prior fiscal year related core service gross margins increased 38 394 356 core service net sales core service gross profits margins service gross margin improvement traced major municipal service project largely completed fiscal year 2006 whose revenues 42 million service gross margins 11 adversely impacted fiscal 2006 results causing 3 drop overall gross margins year selling marketing expenses selling marketing expenses increased 22 million 79 305 million fiscal year 2007 283 million fiscal year 2006 22 million increase selling marketing expenses fiscal year 2007 attributable principally 19 million increase wages hiring additional 48 employees including 40 call center us 8 recently formed cabling division 02 million increased overtime pay remaining 01 increase selling marketing expenses relates increases expenses affiliate pbpo subsidiary ovex selling marketing expenses expressed percentage net sales flat 88 fiscal years 2007 2006 general administrative expenses general administrative expenses ga increased 08 million 70 119 million fiscal year 2007 111 fiscal year 2006 increase attributed affiliate pbpo subsidiary ovex ga expense pbpo ovex increasing 04 million 06 million respectively ovex increase due acquisition ovex stock ovex’s merger fiscal year 2007 comparable expense prior fiscal years majority increase pbpo relates increases salary well increases travel entertainment related costs selling marketing expenses ga expenses expressed percentage net sales results flat 34 fiscal years 2007 2006 operating income operating income increased 09 million fiscal year 2007 11 million compared 02 million prior fiscal year increase 09 million operating income attributed increase gross profit 39 million less 30 million increase operating expenses fiscal year 2007 discussed interest income net interest income net interest expense consisted following components last two fiscal years thousands net interest income increased 01 million fiscal year 2007 03 million 02 million fiscal year 2006 interest income fiscal years resulted short term cash investments interest expense increased 02 million fiscal year 2007 03 million 01 million fiscal year 2006 increase principally acquisition ovex fiscal year 2007 related interest expense present prior fiscal year ovex interest expense includes 01 million related shortterm borrowings export finance program addition consolidated interest expense includes approximately 01 million related capitalized leases interest expense fiscal years 2007 2006 lending facility ge commercial distribution finance corporation approximately 11000 14000 respectively customarily low due interestfree borrowing periods allowed financing income increased marginal 43000 fiscal year 2007 compared fiscal year 2006 significant factor either fiscal year income tax benefit provision 203000 tax benefit provided fiscal year 2007 arose principally 400000 decrease valuation allowance deferred tax benefits related net operating loss tax benefits decrease 400000 represented estimate federal state taxes combined rate 40 would incurred future periods tax benefit deferred net operating loss deduction would available 263000 400000 decrease available reduction deferred taxes since balance 137000 relates net operating losses arising stock options considered adjustment equity result use deferred net operating loss 263000 future provisions taxes financial statement purposes benefit net operating loss deduction computed full statutory rates file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo ovex case pbpo investment less required 80 consolidate federal tax law case ovex taxed foreign income distributed september 30 2007 53 million federal nol carryforwards 35 federal tax rates would reduce future federal taxes 19 million addition 01 million alternative minimum tax credits carryforwards bring total future benefit 20 million 04 million recognized fiscal year 2007 nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period noncontrolling interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 30 voting interest pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 70 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” ovex hand acquired fiscal year 2007 majority 70 interest company thus allocate 30 net income ovex minority shareholders allocations minority interest thousands 2007 2006 fiscal years follows net income net income increased 11 million 16 million fiscal year 2007 05 million fiscal year 2006 principal reasons 11 million increase net income 09 million increase operating income 02 million decrease income taxes liquidity capital resources sources liquidity include cash equivalents cash flow operations amounts available ge financing facility sources adequate daytoday operations capital expenditures although provide assurance believe remaining cash balances cash flows operations availability funds financing facility sufficient satisfy operating requirements next fiscal year cash flows operating activities fiscal 2008 operating activities provided cash totaling 158 million compared 153 million used operating activities prior fiscal year lead contributor 311 million net increase cash operating activities fiscal year 2008 fiscal year 2007 decrease change accounts receivable 382 million accounts receivable balance net allowances returns doubtful accounts september 30 2008 2007 354 million 614 million respectively decrease 260 million fiscal year 2008 accounts receivable decrease principally decline net sales resulting overall decline sales decline net sales sale service business marked decline net accounts receivable caused accompanying large decrease number days’ sales outstanding accounts receivable shrank 65 days september 30 2007 43 days september 30 2008 inventory net allowance decreased 29 million fiscal year 2008 59 million 88 million reported end prior fiscal year majority decrease resulted decreases physical inventory held configuration purchased specific customer orders cash flows investing activities investing activities provided cash totaling 52 million fiscal year 2008 increase 103 million 52 million used investing activities prior fiscal year 103 million increase resulted principally 80 million cash proceeds paid closing sale 805 interest service business cash flows financing activities financing activities used net cash totaling 233 million fiscal 2008 395 million 162 million net cash provided fiscal 2007 395 million increase cash used fiscal 2008 increase 371 million net repayments line credit addition subsidiary ovex increase net repayments 33 million export loan program credit facility september 30 2008 approximately 37 million cash working capital 102 million two primary information technology sales subsidiaries en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation “ge” parties certain business financing agreement certain agreement wholesale financing dated june 25 2004 amended date collectively “agreements” en pointe technologies inc guarantor obligations agreements flooring arrangement two subsidiaries may purchase finance information technology products geapproved vendors terms depend upon certain variable factors two subsidiaries may borrow 85 collective eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 purchases geapproved vendors historically terms allow interestfree flooring original agreements provided 300 million accounts receivable flooring facility expired june 25 2007 extended june 13 2007 july 31 2007 via temporary overline letter agreement effective july 25 2007 facility increased 450 million certain financial covenants revised pursuant addendum executed among parties addendum also provided extension term facility period three years august 1 2007 successive oneyear renewal periods thereafter subject termination end period least sixty days prior written notice party parties effective september 25 2007 entered amendment delete prior financial covenants contained agreements restate effective last day calendar quarter follows terms defined agreements • tangible net worth subordinated debt combined amount less 12750000 • total funded indebtedness ebitda preceding four fiscal quarters ended shall 300100 compliance debt covenants september 30 2008 ge facility collateralized accounts receivable inventory substantially assets september 30 2008 approximately 78 million borrowings outstanding 450 million financing facility september 30 2008 additional borrowings available approximately 235 million taking consideration borrowing limitations agreements amended date recent accounting pronouncements accounting pronouncements adopted july 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxes fin 48 interpretation requires recognition measurement uncertain income tax positions using morelikelythannot approach provisions fin 48 effective fiscal years beginning december 15 2006 adopted accounting pronouncement effective october 1 2007 adoption material effect consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 amends statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entitys first fiscal year begins september 15 2006 adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements accounting pronouncements pending adoption march 2008 fasb issued statement financial accounting standards sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 requires enhanced disclosures companys derivative hedging activities enhanced disclosures discuss company uses derivative instruments b derivative instruments related hedged items accounted fasb statement 133 related interpretations c derivative instruments related hedged items affect companys financial position results operations cash flows sfas 161 effective fiscal years beginning november 15 2008 earlier adoption allowed anticipate adoption accounting pronouncement material effect consolidated financial statements february 2008 fasb issued fasb staff position 1572 effective date fasb statement 157 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities fiscal years beginning november 15 2008 therefore delay application sfas 157 nonfinancial assets nonfinancial liabilities anticipate delayed adoption accounting pronouncement material effect consolidated financial statements december 2007 fasb issued sfas 141r business combinations sfas 160 accounting reporting noncontrolling interests consolidated financial statements amendment arb 51 new standards significantly change financial accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements sfas 141r required adopted concurrently sfas 160 effective business combination transactions acquisition date beginning first annual reporting period beginning december 15 2008 early adoption prohibited anticipate adoption accounting pronouncement material effect consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 effective us fiscal years beginning july 1 2008 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings anticipate adoption accounting pronouncement material effect consolidated financial statements september 2006 fasb issued fas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 anticipate adoption accounting pronouncement material effect consolidated financial statements offbalance sheet arrangements currently offbalance sheet arrangements within meaning item 303a4 regulation sk obligations commitments applicable smaller reporting company impact inflation believe inflation material effect net sales results operations item 7a item 7 management’s discussion analysis financial condition results operations understanding significant factors influenced performance past three fiscal years financial discussion read conjunction consolidated financial statements presented form 10k executive overview began operations march 1993 reseller information technology products fiscal year 1999 valueadded services added customer offerings valueadded services represented 145 149 net sales fiscal years 2006 2005 respectively gross profit margins valueadded services currently offer significantly higher gross profit margins information technology product business require additional overhead expense supervision idle time expenses related service offerings offset portion increased margin initial operating years fiscal 1994 fiscal 1999 aid robust economy information technology market accommodated business model net sales increased compound annual growth rate 351 seasonal trends never prominent business although march quarters historically regarded one least promising quarters fiscal 2000 experienced first annual net sales decline 26 1738 million net sales fiscal 1999 due softer information technology market difficulties transitioning new enterprise resource planning business system declining trend continued fiscal year 2006 total contraction net sales 3446 million fiscal year 1999 52 net sales decreased 46 million 14 fiscal year 2006 fiscal year 2005 gross profits compensated loss net sales increasing 46 million 131 due principally increased service gross profits operating expenses chiefly selling marketing increased total 35 million leaving operating income 02 million fiscal year 2006 income principally interest income allocation losses pbpo outside shareholders 03 million provided majority net income 2006 fiscal year business model involves resale information technology products held inventory certain distributors maintain significant amounts inventory hand resale typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped configuration center rancho cucamonga california distributor typically ships products within 24 hours following receipt purchase order consequently substantially product net sales quarter result orders received quarter although maintain relatively small amount inventory stock resale inventory represents either merchandise configured customers’ orders products purchased distributors shipped yet received accepted customers product revenues generally recognized upon delivery customer service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted distributors manufacturers less incentive credits critical accounting policies preparation financial statements related disclosures conformity us generally accepted accounting principles discussion analysis financial condition results operations require us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes note 1 notes consolidated financial statements form 10k describes significant accounting policies methods used preparation consolidated financial statements base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities regularly discuss audit committee basis estimates actual results may differ estimates differences may material believe following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts apply provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general recognize revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured shipping terms title risk loss merchandise shipped pass customers delivery takes place generally two three days product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory majority sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sell primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” accordingly revenues recognized net sales adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined revenue customer maintenance support agreements reported net basis recognized time sale service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract allowance doubtful accounts estimate allowance doubtful accounts related trade receivables two methods first evaluate specific accounts 90 days outstanding apply various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns provide allowance sales returns based historical experience general follow strict policy duplicating terms vendor manufacturers’ product return policies however certain cases must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations rmas reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales generally customers return goods configuration facility rancho cucamonga california processed return vendor returns product returned vendors authenticated rmas review outstanding receivables vendors establish reserve product qualify refund based review specific vendor receivables rebates cooperative marketing incentives receive incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require use cooperative marketing development funds exclusively advertising marketing programs marketing expenses recognized restricted cooperative marketing development funds recorded reduction related marketing expense excess funding identified specific vendor program reducing cost goods sold rebates earned record rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met establish reserves cover collectibility risks including subsequent supplier audits inventory although employ virtual inventory model generally limits exposure inventory losses certain large customers contractually obligate product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included inventory product returned customers acceptable returnable vendor result expose losses inventory requires reserves losses established record varying reserves based upon class inventory ie held resale returned customers age inventory results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2006 2005 net sales net sales decreased 46 million 14 3237 million fiscal year 2006 3283 million fiscal year 2005 moderating net sales decrease business software medium inc acquired january 2006 contributed 39 million net sales fiscal year 2006 pbpo variable interest entity affiliate whose sales increased 17 million one customer accounted 10 total net sales fiscal year 2006 2005 however sales tend concentrated relatively accounts evidenced fiscal years 2006 2005 top five customers made 271 319 respectively total net sales top twentyfive customers contributed 597 634 respectively total net sales quarterly seasonal basis june quarter helped software agency commissions 11 million strongest net sales quarter fiscal year third consecutive year june 2006 fiscal quarter coming 956 million compared 926 million prior fiscal year period hand march quarter fiscal 2006 continued weakest net sales quarter fiscal year third consecutive year product sales fiscal year 2006 decreased 26 million 09 2767 million 2793 million reported fiscal year 2005 reflecting decline overall net sales major customers service revenues fiscal year 2006 decreased yearoveryear 20 million lesser decline reported product sales higher rate 41 470 million 490 million reported prior fiscal year gross profit gross profits increased 46 million 131 397 million fiscal year 2006 351 million fiscal year 2005 services contributed 25 million gross profits increase products responsible remaining 21 million declining net sales increase gross profits came solely improvements gross margin percentages improved product services combined 122 107 fiscal year 2005 product gross margin percentages improved 09 83 fiscal year 2006 service improved 64 355 21 million increase product gross profits came agency commission fees 18 million turn originated primarily increased microsoft software commission fees service gross profits increase 25 million combination factors however pbpo consolidated affiliate contributed 08 million increase service gross profits fiscal year 2006 fiscal year 2005 two large logistic asset management customers contributed majority remaining 17 million increase service gross profits high volume projects processing costs successfully contained factors explaining increase include reaching certain contractual milestones municipal service contracts allowed us recognize higher service margins well acquisition january 2006 security services business traditionally earns average gross profit margins selling marketing expenses selling marketing expenses increased 25 million 99 283 million fiscal year 2006 258 million fiscal year 2005 25 million increase inclusive decrease pbpo’s selling marketing expenses 03 million excluding decrease pbpo’s selling marketing expense core selling marketing expenses increased 28 million increase selling marketing expenses fiscal year 2006 resulted primarily 27 million wage related expenses consisting 14 million commissions mainly increased software sales draws 09 million wages 04 million employee benefits reimbursements also experienced 08 million increase business process outsourcing expenses increased use employees offshore costs related software programming india however costs largely offset 09 million increased coop funds favorable settlement disputed balances creditors selling marketing expenses expressed percentage net sales increase 09 88 fiscal year 2006 79 fiscal year 2005 general administrative expenses general administrative expenses ga increased 10 million 94 111 million fiscal year 2006 101 fiscal year 2005 increase ga principally result higher legal expenses 07 million due three legal suits defended 03 million settlement first union securities matter dating back 2000 ga expenses expressed percentage net sales increase 03 34 fiscal year 2006 31 fiscal year 2005 operating income loss operating income 02 million realized fiscal year 2006 compared 09 million operating loss prior fiscal year increase 11 million operating income attributed increase gross profit 46 million less 35 million increase operating expenses fiscal year 2006 discussed interest income expense net interest income 02 million fiscal year 2006 net interest expense 01 million interest income resulted short term cash investments interest expense fiscal year 2006 related capitalized leases computer equipment acquired interest expense fiscal year 2006 lending facility ge commercial distribution finance corporation approximately 14000 customarily low nonexistent due interestfree borrowing periods allowed financing net interest income increased 02 million fiscal year 2006 compared prior fiscal year increase attributed inclusion fiscal year 2005 02 million interest expense related ontario configuration facility present fiscal year 2006 due ontario lease converting financing lease operating lease rent expense replaces interest expense major expense item income decreased 06 million fiscal year 2006 fiscal year 2005 decrease income due inclusion fiscal year 2005 insurance recovery prior year losses rental income repeat fiscal year 2006 provision income taxes provided 42000 tax provision fiscal year 2006 increase 21000 provided prior fiscal year subject regular 34 corporate federal income tax rates tax benefit derived past net operating losses nols carried forward nevertheless subject federal alternative minimum tax alternative minimum tax limits nol carryforwards applied one year 90 current year’s taxable income imposes 20 tax remaining 10 taxable income file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2006 69 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period 69 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximate 31 voting interest pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 69 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” net income net income increased 04 million 05 million fiscal year 2006 01 million fiscal year 2005 principal reason 04 million increase net income 11 million increase operating income less 07 million reductions nonoperating income principally income recognizing minority interest affiliate’s loss comparison fiscal years ended september 30 2005 2004 net sales net sales increased 491 million 176 3283 million fiscal year 2005 2792 million fiscal year 2004 viablelinks inc acquisition made beginning fiscal year 2005 contributed 157 million net sales increase quarterly basis fiscal year 2005 2004 respective quarters net sales improved quarter september 2005 quarter registering largest increase 223 comparable fiscal 2004 quarter fiscal years however june quarter recorded largest amount net sales due large flux governmental orders preceding quarter march least net sales respective fiscal years one customer accounted 10 total net sales fiscal 2005 compared single customer accounting 111 net sales year ended september 30 2004 however sales tend concentrated relatively accounts evidenced fiscal year 2005 top five customers made 319 total net sales top twentyfive customers contributed 634 total net sales product sales fiscal year 2005 increased 426 million 180 fiscal year 2004 service revenues also increased yearoveryear modest rate revenues increasing 65 million 152 reported prior fiscal year service revenues quarterly sequential basis strongest september 2005 quarter rising 132 million quarter high fiscal year gross profit gross profits increased 06 million 17 351 million fiscal year 2005 345 million fiscal year 2004 06 million increase gross profits attributed increased product sales improvement gross margins percentage margins realized product sales held steady 74 net sales fiscal years product gross profits increased 32 million service gross profits hand decreased 27 million 157 fiscal year 2005 142 million 169 million fiscal year 2004 expressed percentage net sales service percentage margins declined 106 291 fiscal year 2005 397 fiscal year 2004 decline service percentage margins responsible 16 decline combined margins 107 fiscal year 2005 123 fiscal year 2004 decline service gross margin 291 fiscal year 2005 results first comparisons fiscal year 2004 periods contained unusually robust profit margins gross margins decelerating 489 first fiscal quarter fiscal year 2004 314 fourth quarter record gross margin first two quarters fiscal year 2004 result unusually high shortterm project revenue contracts concluding secondly service business concluded replaced shorter term jobs producing lower margins targeted ranges order capture new business believe future service gross margins substantially less 35 40 past average 25 35 range selling marketing expenses selling marketing expenses increased 29 million 125 258 million fiscal year 2005 229 million fiscal year 2004 29 million increase inclusive increase pbpo’s selling marketing expenses 02 million excluding pbpo’s portion consolidated selling marketing expense increase core selling marketing expenses increased 27 million increases selling marketing expenses fiscal year 2005 resulted primarily 21 million expended increase sales force support provide sales growth another 03 million related increased work force benefits additional 08 million related improving outsourced backoffice capabilities reduction selling marketing expenses achieved part 02 million reduction connectivity expenses increase sales volume fiscal year 2005 selling marketing expenses expressed percentage net sales results favorable decline 03 79 fiscal year 2005 82 fiscal year 2004 general administrative expenses general administrative expenses “ga” increased marginally 01 million 09 101 million fiscal year 2005 100 fiscal year 2004 101 million ga expenses recorded fiscal year 2005 includes 08 million expense affiliate pbpo increase 05 million corresponding pbpo expense recognized fiscal year 2004 exclusive pbpo’s 05 million increase ga expenses core business ga expenses fell 04 million major components 04 million reduction include reduction salaries bonuses compensation 07 million offsetting wage reduction part increase 04 million related improving outsourced backoffice capabilities ga expenses expressed percentage net sales results decrease 05 31 fiscal year 2005 36 fiscal year 2004 operating income loss operating loss 09 million realized fiscal year 2005 compared 15 million operating income prior fiscal year decline 24 million operating income attributed disproportionally large increase selling marketing expenses 29 million fiscal year 2005 discussed exceeded 06 million increase gross profits period operating loss expressed percentage net sales 02 fiscal year 2005 compared operating income percentage 05 fiscal year 2004 interest income expense net interest income 6000 fiscal year 2005 net interest income 266000 interest expense 260000 interest expense fiscal year 2004 749000 decrease interest expense fiscal year 2005 resulted principally increased interestfree borrowings lending facility ge commercial distribution finance corporation established june 2004 well change lending terms allows us earn interest customer payments semimonthly financing payments due remainder decline resulted change accounting treatment second quarter fiscal year 2005 ontario facility changed capitalized lease interest previously recorded operating lease rental expense recorded income remained relatively constant 06 million fiscal years 2005 2004 income consisted chiefly insurance recovery prior year losses rental income early payment discounts state sales tax authorities provision income taxes provided 21000 tax provision fiscal year 2005 110000 less provided prior fiscal year due part reduced earnings subject regular 34 corporate federal income tax rates tax benefit derived past net operating losses nols carried forward nevertheless subject federal alternative minimum tax alternative minimum tax limits nol carryforwards applied one year 90 current year’s taxable income imposes 20 tax remaining 10 taxable income file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2005 81 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period total 81 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximately 38 pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses stockholders pbpo collectively approximately 62 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” net income net income decreased 13 million 01 million fiscal year 2005 14 million fiscal year 2004 principal reason 13 million decline net income 24 million decline operating income offset part 10 million nonoperating income principally income recognizing minority interest affiliate’s loss percentage net sales net income 00 fiscal year 2005 compared 05 fiscal year 2004 liquidity capital resources fiscal 2006 operating activities provided cash totaling 55 million 109 million 54 million used prior fiscal year lead contributor 55 million net increase cash operating activities 60 million decrease inventory accounts receivable balance net allowances returns doubtful accounts september 30 2006 2005 464 million 409 million respectively 55 million increase accounts receivable two factors one increase sales financed leasing companies matter practice withhold payment partial shipments product merchandise ordered shipped factor increase accounts receivable due certain slow paying governmental accounts factors responsible increase number days’ sales outstanding accounts receivable 52 days 45 days september 30 2006 2005 respectively inventory net allowance decreased 62 million fiscal year 2006 prior fiscal year decrease resulted primarily two factors less inventory transit fiscal year end less inventory purchased configuration specific customers’ orders trade accounts payable increased 07 million net borrowings credit line used primarily purchase product decreased 12 million net decrease 19 million trade accounts payable borrowings line credit reflects part decline buildups inventory customer configuration well decreased trade related expenses investing activities used cash totaling 15 million fiscal 2006 decrease 13 million prior fiscal year decline resulted purchasing 11 million less equipment chiefly computer related equipment fiscal year 2006 fiscal 2005 well reduction acquisition costs fiscal year 2006 03 million acquisition costs recorded fiscal 2005 financing activities used net cash totaling 07 million fiscal 2006 03 million less 10 million net cash used fiscal 2005 decrease cash used fiscal 2006 reduced net repayments borrowings line credit contributions additional capital outside stockholders pbpo september 30 2006 approximately 102 million cash working capital 165 million improve financing flexibility reduce costs june 2004 closed 300 million replacement working capital financing facility ge commercial distribution finance corporation ge term facility period three years except either party may terminate agreement upon 60 days prior written notice party additionally ge may terminate facility time upon occurrence subsequent failure cure certain instances “event default” term defined agreement financing facility may borrow 85 eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 addition may purchase finance information technology products geapproved vendors terms depend upon certain variable factors substantial portion purchases ge approved vendors terms allow interestfree flooring financing agreements contain various liquidity financial covenants including without limitation ebitda sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter compliance debt covenants september 30 2006 ge facility collateralized accounts receivable inventory substantially assets september 30 2006 approximately 157 million borrowings outstanding 300 million financing facility september 30 2006 additional borrowings available approximately 143 million taking consideration borrowing limitations agreements recorded modest earnings last three fiscal years 21 million begun reversal 364 million losses accumulated fiscal years 1999 2003 accomplish second quarter fiscal year 2002 president ceo replaced key executives resumed role president daytoday responsibilities refocused sales strategy aggressive facetoface style encouraged selling higher margin managed services enhanced sales opportunities qualifying us “minorityowned” business evaluated smaller competitors could accretive earnings potential acquisition candidates return us low cost operational overhead model previously succeeded contracted offshore firms provide backoffice operational accounting related services rates substantially discounted available us management believes turn around plans continue successful improving sales profitability however unable maintain compliance loan covenants noncompliance waived ge working capital line credit could revoked prior expiration date eventuality believe sufficient working capital enable us continue operate least september 30 2007 however would required significantly scale business plans unable obtain alternative sources financing recent accounting pronouncements september 2006 sec released staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 sab 108 provides interpretive guidance sec’s views regarding process quantifying materiality financial statement misstatements sab 108 effective fiscal years ending november 15 2006 adoption accounting pronouncement expected material effect consolidated financial statements september 2006 fasb issued fas 157 sfas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged adoption accounting pronouncement expected material effect consolidated financial statements july 2006 fasb issued interpretation 48 fin 48 accounting uncertainty income taxes interpretation requires recognition measurement uncertain income tax positions using “morelikelythannot” approach provisions fin 48 effective fiscal years beginning december 15 2006 adoption accounting pronouncement expected material effect consolidated financial statements march 2006 fasb issued fas 156 sfas 156 accounting servicing financial assets amendment fasb statement 140 standard clarifies separately account servicing rights requires servicing rights separately recognized initially fair value provides option subsequently accounting servicing rights either fair value amortization method standard effective fiscal years beginning september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued adoption accounting pronouncement expected material effect consolidated financial statements february 2006 fasb issued fas 155 sfas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 amend statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entity’s first fiscal year begins september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued adoption accounting pronouncement expected material effect consolidated financial statements march 2005 fasb issued interpretation 47 fin 47 accounting conditional asset retirement obligations interpretation fasb statement 143 interpretation clarifies timing recording certain asset retirement obligations required fasb statement 143 accounting asset retirement obligations provisions fin 47 effective years ending december 15 2005 adoption accounting pronouncement material effect consolidated financial statements may 2005 fasb issued sfas 154 “accounting changes error corrections replacement accounting principles board opinion “apb” opinion 20 fasb statement 3 statement applies voluntary changes accounting principle changes required accounting pronouncement specific transition provisions included sfas 154 requires retrospective application prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change retrospective application limited direct effects change indirect effects recognized period change statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate however sfas 154 redefines restatement revising previously issued financial statements reflect correction error provisions sfas 154 effective accounting changes corrections errors made fiscal periods begin december 15 2005 although early adoption permitted adoption accounting pronouncement material effect consolidated financial statements december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” sfas 123r addresses accounting sharebased payment transactions company receives employee services exchange either equity instruments company liabilities based fair value company’s equity instruments may settled issuance equity instruments sfas 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used requires transactions accounted using fair valuebased method recognized expense consolidated statement operations effective date sfas 123r annual periods beginning june 15 2005 assessing potential negative impact provisions sfas 123r consolidated financial statements fiscal year 2006 decided minimize exposure accounting pronouncement accelerating vesting outstanding unvested options effective july 20 2005 outstanding unvested options accelerated fully vested date see note 9 consolidated financial statements december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” sfas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged apb opinion 29 “accounting nonmonetary transactions” provided exception basic measurement principle fair value exchanges similar productive assets apb opinion 29 exchange productive asset similar productive asset based recorded amount asset relinquished sfas 153 eliminates exception replaces exception exchanges nonmonetary assets commercial substance provisions statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption accounting pronouncement material effect consolidated financial statements november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 requires abnormal amounts idle facility expense freight handling costs wasted materials spoilage recorded current period charges allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective fiscal year beginning october 1 2005 adoption accounting pronouncement material effect consolidated financial statements offbalance sheet arrangements currently offbalance sheet arrangements within meaning item 303a4 regulation sk obligations commitments september 30 2006 following obligations commitments make future payments contracts contractual obligations commercial commitments impact inflation believe inflation material effect net sales results operations item 7a item 7 managements discussion analysis financial condition results operation following discussion analysis companys financial condition results operations read conjunction consolidated financial statements notes thereto included elsewhere annual report form 10k overview company incorporated january 1993 commenced operations march 1993 reseller information technology products company began emphasizing valueadded services customers fiscal 1998 valueadded services accounted 34 companys net sales fiscal 1999 gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology products reselling business firstsourcecom internet call center based businesstobusiness provider products services information necessary operate small medium sized businesses began operations june 1998 whollyowned subsidiary july 1999 private placement firstsourcecoms common stock 93 million additional capital raised total shares issued connection private placement 2659886 reduced companys ownership interest 714 companys net sales increased 1100 million fiscal 1994 companys first full year operations 6683 million fiscal 1999 representing compound annual growth rate 434 growth net sales principally driven sales new customers increased sales existing customers well geographic expansion opening additional sales offices companys gross profit margins expanded earlier years 81 fiscal 1994 94 fiscal 1998 contracted 80 fiscal 1999 principally highly competitive market pressures tighter margins sufficient gross margins provide disproportionately larger operating expenses 193 million allocation minority interest related firstsourcecom nonrecurring charges 79 million major factor increase firstsourcecoms operating expenses 104 million noncash expense related issuance stock options see discussion general administrative comparison section nonrecurring charges related impairment charge 62 million ontario facility see following discussion thus company incurred first operating loss 229 million fiscal 1999 june 1998 company completed construction 126000 square foot ontario facility company believed facility would enable compete believed would emerging market final assembly certain computer products performed thirdparties including corporate resellers distributors rather done inhouse buildto forecast methodology traditionally employed computer manufacturers market developed became apparent certain manufacturers would require distributors colocate final assembly operations manufacturers facility instead outsourcing final assembly distributors separate site reaction change emerging market january 1999 company decided sell leaseback ontario facility continuing product configuration operation quarter ended march 31 1999 company recorded impairment charge 62 million operations writedown net book value ontario facility estimated fair value writedown determined using held use model contained sfas no121 time saleleaseback intent company sublease approximately 45 facility space unrelated party however sublease executed date company continues evaluate options regard use excess space companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors yet shipped customers product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits companys effective tax rate varied significantly statutory rate current fiscal year attributable principally net operating losses generated firstsourcecom could utilized company due reduction ownership precluded consolidation tax filing purposes see note 9 consolidated financial statements fuller explanation results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 1999 1998 net sales net sales increased 1006 million 177 6683 fiscal 1999 5677 million fiscal 1998 increase sales attributable sales new customers increased sales existing customers increased sales valueadded services firstsourcecom internet focused business contributed 300 million first full fiscal year operations 45 total net sales increase 246 million four months initial operations fiscal 1998 services revenues increased 98 million 744 230 million fiscal 1999 132 million fiscal 1998 34 total net sales versus 23 prior year net sales ibm contract accounted 188 total net sales 185 total accounts receivable 1999 fiscal year compared 214 208 respectively prior fiscal year however absolute dollars ibm net sales increased 42 million 1257 million fiscal 1999 1215 million fiscal 1998 trailing 177 overall growth company net sales expected future gross profit gross profit increased 01 million 02 537 million fiscal 1999 536 million 1998 decreased percentage net sales 80 1999 compared 94 1998 decrease gross margin attributable pricing pressures throughout industry information technology products company believes past years trend declining gross profits abate coming year selling marketing expenses selling marketing expenses increased 37 million 108 379 million fiscal 1999 343 million fiscal 1998 primarily result increased net sales volume percentage net sales selling marketing expense decreased 57 1999 60 1998 due increased volume net sales general administrative expenses general administrative expenses increased 171 million 1252 308 million fiscal 1999 137 million fiscal 1998 146 million increase related companys subsidiary firstsourcecom increase general administrative expense firstsourcecom primarily result noncash charge compensation related grant stock options firstsourcecom total charge 100 million incurred fourth quarter fiscal 1999 due large part acceleration quarter vesting schedule options granted remaining deferred compensation 14 million september 30 1999 amortized next 16 quarters addition 43 million 146 million increase result hiring additional personnel necessary support growth firstsourcecoms internet business percentage net sales general administrative expenses increased 46 fiscal 1999 compared 24 fiscal 1998 excluding noncash stock option compensation charge general administrative expenses 31 net sales fiscal 1999 31 increase 24 prior year primarily due increased staffing firstsourcecom nonrecurring charges nonrecurring charges consist 62 million impairment charge write ontario configuration facility market value 17 million charge reserve litigation expense operating income operating income decreased 286 million 5059 loss 229 million fiscal 1999 56 million operating profit fiscal 1998 primarily result increased general administrative expenses firstsourcecom accompanied decreased gross profit margins operating loss income percent net sales declined 34 fiscal 1999 10 fiscal 1998 interest expense interest expense increased 10 million 465 32 million fiscal 1999 22 million fiscal 1998 increase interest expense primarily due 06 million interest incurred borrowings incurred ontario facility sfas 98 future rental payments related ontario saleleaseback fiscal 2000 estimated 5 million characterized interest expense gain sale investment gain sale investment resulted sale shares held company shoppingcom net proceeds received 4990000 adjusted carrying value shares 562000 minority interest firstsourcecom formerly whollyowned subsidiary july 28 1999 issued 2659886 shares common stock private placement grossed 93 million resulted companys ownership declining 714 minority interest reflects 286 allocable portion subsidiarys loss since july 28 1999 net loss income net income decreased 188 million 8434 166 million net loss fiscal 1999 22 million net income fiscal 1998 decrease fiscal 1999 earnings resulted primarily declining profit margins coupled increase operating expenses firstsourcecom 183 million allocation minority interest nonrecurring charges 79 million percentage net sales net loss income declined 25 04 fiscal 1998 comparison fiscal years ended september 30 1998 1997 net sales net sales increased 763 million 155 5677 fiscal 1998 4914 million fiscal 1997 increase sales attributable sales new customers increased sales existing customers increased sales valueadded services four new sales territories opened fiscal 1998 contributed 103 million net sales preexisting territories net sales increased 607 million increase 124 firstsourcecom internet business venture contributed additional 53 million initial four months operations services revenues increased 72 million 218 132 million fiscal 1998 59 million fiscal 1997 23 total net sales versus 12 prior year sales ibm contract accounted 214 total sales 208 total accounts receivable 1998 fiscal year compared 296 242 respectively prior fiscal year gross profit gross profit increased 95 million 215 536 million fiscal 1998 441 million 1997 increased percentage net sales 94 1998 compared 90 1997 increase gross margin attributable part increased services revenue partially offset general decrease margins information technology products selling marketing expenses selling marketing expenses increased 120 million 533 343 million fiscal 1998 223 million fiscal 1997 primarily result increased net sales volume percentage net sales selling marketing increased 60 1998 46 1997 due additional staffing opening new branch offices costs related commencing operations internet business firstsourcecom general administrative expenses general administrative expenses increased 28 million 253 137 million fiscal 1998 109 million fiscal 1997 primarily result hiring additional personnel necessary support growth company administrative duties well administrative costs related firstsourcecom percentage net sales general administrative expenses increased 24 fiscal 1998 compared 22 fiscal 1997 operating income operating income decreased 52 million 479 56 million fiscal 1998 108 million fiscal 1997 primarily result increased selling marketing expenses accompanied flattening gross profit margins operating income percent net sales declined 10 fiscal 1998 22 fiscal 1997 interest expense interest expense increased 10 million 748 22 million fiscal 1998 12 million fiscal 1997 increase interest expense primarily due increased borrowing lines credit end fiscal 1998 increased 289 570 borrowing used primarily fund 251 million 326 growth accounts receivable well 23 million 503 increase inventories additionally july 1998 operations commenced ontario configuration repair rma returned merchandise authorization facility resulted 02 million interest expense net income net income decreased 36 million 617 22 million fiscal 1998 58 million fiscal 1997 decrease fiscal 1998 net income resulted primarily 119 million 533 increase selling marketing expense 28 million 253 increase general administrative expense 09 million 748 increase interest expense expenses totaled 156 million exceeding increase gross profits 95 million 61 million percentage net sales net income declined 04 12 fiscal 1997 liquidity capital resources fiscal 1999 operating activities provided cash totaling 123 million compared use cash 212 million prior fiscal year largest noncash reconciling items net loss cash provided operating activities 62 impairment loss related ontario facility 104 million compensation related subsidiary option grants total 193 million cash provided increase accounts payable accrued expenses current liabilities fiscal 1999 growth accounts receivable consumed modest 17 million cash compared 258 million prior fiscal year historically company satisfied accounts receivable cash requirements principally borrowings lines credit companys accounts receivable balance september 30 1999 1998 1017 million 1020 million respectively number days sales outstanding accounts receivable 56 days 66 days september 30 1999 1998 respectively investing activities provided cash totaling 56 million fiscal 1999 compared 111 million used prior year cash provided investing activities principally result proceeds received sale ontario facility 55 million proceeds sale shoppingcom stock 50 million offsetting proceeds received additional investment 49 million property plant equipment compared 106 million 1998 financing activities used net cash totaling 143 million fiscal 1999 compared providing cash 323 million fiscal 1998 net cash 173 million used reduction borrowings lines credit lines used primarily finance accounts receivable balances remained relatively constant requiring capital investment prior years companys subsidiary firstsourcecom july 28 1999 completed private placement 2659886 shares common stock 350 per share netted expenses 91 million represented 286 interest subsidiary june 24 1999 company closed escrow saleleaseback ontario facility conjunction saleleaseback retired debt related land building 34 million equipment financing 16 million september 30 1999 company approximately 69 million cash including 01 million restricted cash working capital 235 million company several revolving credit facilities collateralized accounts receivable assets company including 800 million lines ibm credit corporation ibmcc september 30 1999 1998 lines credit provided maximum aggregate borrowings approximately 1210 million 1050 million respectively approximately 623 million 796 million outstanding respectively outstanding borrowings ibmcc line credit bears interest prime less 25 line credit automatically renewable annual basis unless notification election renew made either company creditor prior annual renewal date borrowings collateralized substantially companys assets addition line credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 1999 company obtained waiver noncompliance covenant relating minimum percentage net income sales remains compliance remaining covenants risks associated potential year 2000 leapyear problems company aware issues associated programming code existing computer systems year 2000 approached result fact january 1 2000 come gone result companys analysis computer programs operations concluded business systems year 2000 compliant related potential problem stems fact 2000 rare leapyear expressed concern programmers component designers may forgotten properly take fact account may risk relating anomalous leapyear 2000 management believes remaining year 2000 problems seriously impact material adverse effect companys expenses business including data gathering interpretation operations recently issued accounting pronouncements april 1998 aicpa issued sop 985 reporting costs startup activities sop 985 requires startup costs related new operations must expensed incurred addition startup costs capitalized past must written sop 985 adopted company expect adoption sop 985 material impact companys financial position results operations cash flows company required implement sop 985 first quarter fiscal 2000 june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities statement requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation company currently hold derivative instruments engage hedging activities impact adoption sfas 133 currently expected material impact results operations financial position sfas 137 defers effective date sfas 133 fiscal years beginning june 30 2000 item 7a item 7 managements discussion analysis financial condition results operation following discussion analysis companys financial condition results operations read conjunction financial statements notes thereto included elsewhere annual report form 10k overview company incorporated january 1993 commenced operations march 1993 reseller information technology products company began emphasizing valueadded offerings customers fiscal 1997 valueadded services accounted 23 companys net sales fiscal 1998 gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology products reselling business companys net sales increased 1100 million fiscal 1994 companys first full year operations 5677 million fiscal 1998 representing compound annual growth rate 507 growth net sales principally driven sales new customers increased sales existing customers well geographic expansion opening additional sales offices companys gross profit margins expanded 81 fiscal 1994 94 fiscal 1998 principally due increased purchasing volume resulting better purchasing terms shift highermargin product sales highermargin valueadded services companys operating income increased 13 million fiscal 1994 56 million fiscal 1998 representing compound annual growth rate 440 growth operating income principally driven increased sales gross profit margins decline general administrative expenses excluding software development costs percentage net sales rebate manufacturer distributor incentive programs also constitute significant material component operating income product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors yet shipped customers companys effective tax rate varied significantly statutory rate past company anticipate effective tax rate vary significantly statutory rate future results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 1998 1997 net sales net sales increased 763 million 155 5677 fiscal 1998 4914 million fiscal 1997 increase sales attributable sales new customers increased sales existing customers increased sales valueadded services four new sales territories opened fiscal 1998 contributed 103 million net sales preexisting territories net sales increased 607 million increase 124 firstsourcecom internet business venture contributed additional 54 million initial four months operations see comments liquidity capital resources section services revenues increased 72 million 218 132 million fiscal 1998 59 million fiscal 1997 23 total net sales versus 12 prior year sales ibm contract accounted 214 total sales 208 total accounts receivable 1998 fiscal year compared 296 242 respectively prior fiscal year gross profit gross profit increased 95 million 215 536 million fiscal 1998 441 million 1997 increased percentage net sales 94 1998 compared 90 1997 increase gross margin attributable part increased services revenue partially offset general decrease margins information technology products selling marketing expenses selling marketing expenses increased 120 million 533 343 million fiscal 1998 223 million fiscal 1997 primarily result increased net sales volume percentage net sales selling marketing increased 60 1998 46 1997 due additional staffing opening new branch offices costs related commencing operations internet business firstsourcecom general administrative expenses general administrative expenses increased 28 million 253 137 million fiscal 1998 109 million fiscal 1997 primarily result hiring additional personnel necessary support growth company administrative duties well administrative costs related firstsourcecom percentage net sales general administrative expenses increased 24 fiscal 1998 compared 22 fiscal 1997 operating income operating income decreased 52 million 479 56 million fiscal 1998 108 million fiscal 1997 primarily result increased selling marketing expenses accompanied flattening gross profit margins operating income percent net sales declined 10 fiscal 1998 22 fiscal 1997 interest expense interest expense increased 10 million 748 22 million fiscal 1998 12 million fiscal 1997 increase interest expense primarily due increased borrowing lines credit end fiscal 1998 increased 289 570 borrowing used primarily fund 251 million 326 growth accounts receivable well 23 million 503 increase inventories additionally july 1998 operations commenced ontario integration repair rma returned merchandise authorization facility resulted 02 million interest expense net income net income decreased 36 million 617 22 million fiscal 1998 58 million fiscal 1997 decrease fiscal 1998 net income resulted primarily 119 million 533 increase selling marketing expense 28 million 253 increase general administrative expense 09 million 748 increase interest expense expenses totaled 156 million exceeding increase gross profits 95 million 61 million percentage net sales net income declined 04 12 fiscal 1997 comparison fiscal years ended september 30 1997 1996 net sales net sales increased 1463 million 424 4914 fiscal 1997 3451 million fiscal 1996 increase sales attributable sales new customers increased sales existing customers increased sales valueadded services company opened four sales offices fiscal 1997 contributed 106 million net sales net sales ibm contract increased 479 million fiscal 1997 1455 million accounted 296 net sales fiscal 1997 compared 283 net sales fiscal 1996 gross profit gross profits increased 152 million 524 441 million fiscal 1997 289 million 1996 increased percentage net sales 90 1997 compared 84 1996 improvement gross profit margin attributed better purchasing terms shift highermargin sales higher margin valueadded services selling marketing expenses selling marketing expenses increased 70 million 465 223 million fiscal 1997 153 million fiscal 1996 primarily result increased net sales volume percentage net sales selling marketing increased 46 1997 44 1996 due additional staffing opening four sales branch offices general administrative expenses general administrative expenses increased 50 million 833 109 million fiscal 1997 59 million fiscal 1996 significant factor contributing increase general administrative expenses increase software development costs increased 23 million fiscal 1997 03 million fiscal 1996 addition company hired additional personnel support increase sales volume administrative duties percentage net sales general administrative expenses increased 22 fiscal 1997 17 fiscal 1996 litigation settlement defense net april 1996 company entered settlement agreement former employee relating claims respect companys use certain proprietary software programs originally developed employee prior employment company settlement consideration entering settlement company agreed pay former employee installment payments totaling 1225000 remaining unpaid balance settlement september 30 1997 1996 287511 447512respectively august 1996 company entered separate settlement agreement insurance carrier whereby insurance carrier reimbursed company amounts paid company pursuant settlement well certain legal expenses incurred company connection settlement underlying claims fiscal 1996 company expensed 524913 litigation settlement defense costs net insurance recoveries operating income operating income increased 36 million 505 108 million fiscal 1997 72 million fiscal 1996 primarily result increased sales volume accompanied improved gross profit margins percent net sales operating income improved 22 fiscal 1997 21 fiscal 1996 interest expense interest expense decreased 434000 259 12 million fiscal 1997 17 million fiscal 1996 decrease interest expense primarily due improved borrowing rates following companys may 1996 initial public offering resulted weighted average interest rate declining 108 fiscal 1996 82 fiscal 1997 net income net income increased 25 million 751 58 million fiscal 1997 33 million fiscal 1996 increase net income resulted primarily 424 increase sales related 524 increase gross profit well reduction interest expense percentage net sales net income improved 12 10 fiscal 1996 quarterly financial results following table sets forth certain unaudited quarterly financial data information derived unaudited financial statements opinion management reflect adjustments consisting normal recurring adjustments necessary fair presentation quarterly information operating results quarter necessarily indicative results expected future period liquidity capital resources fiscal 1998 operating activities used cash totaling 212 million compared 138 million used prior fiscal year largest consumer cash growth accounts receivable related companys sales expansion extended collection period receivables fiscal 1998 258 million cash expended 215 million used prior fiscal year historically company satisfied accounts receivable cash requirements principally borrowings lines credit companys accounts receivable balance september 30 1998 1997 1020 million 769 million respectively number days sales outstanding accounts receivable 66 days 57 days september 30 1998 1997 respectively september 30 1998 restricted cash amounted 20 million related principally unexpended funds 34 million equipment financing targeted ontario integration repair rma facility see financing activities investing activities used cash totaling 111 million fiscal 1998 compared 17 million used prior year increase cash used investing activities principally build ontario integration repair rma facility 126000 square foot stateofthe art facility cash invested totaled 73 million 54 million related ontario building improvements another 12 million invested computer program costs software handle growing services business remaining 21 million property equipment purchases upgrades improvements existing systems equipment furnish new branch offices financing activities provided net cash totaling 323 million fiscal 1998 compared 157 million fiscal 1997 mostly borrowings lines credit used primarily finance accounts receivable balances grown result increased sales another 34 million provided equipment financing ontario facility 20 million remained restricted cash september 30 1998 company approximately 54 million cash including 20 million restricted cash working capital 198 million company several revolving credit facilities collateralized accounts receivable assets company including 730 million lines ibmcc september 30 1998 1997 lines credit provided maximum aggregate borrowings approximately 1050 million 810 million respectively approximately 796 million 507 million outstanding respectively outstanding borrowings ibmcc line credit bears interest prime less 25 line credit automatically renewable annual basis unless notification election renew made either company creditor prior annual renewal date borrowings collateralized substantially companys assets addition line credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line company obtained waiver noncompliance one ibmcc covenants relating minimum percentage net income sales remains compliance remaining covenants ontario facility cash demands facility costs present carrying costs full production achieved well costs attributable rampup technical services firstsourcecom asset management believes restructuring operations possibly additional cash infusion necessary actively pursuing exploration options result charge may material cannot quantified expected recognized period restructuring plan approved board directors company aware issues associated programming code existing computer systems year 2000 approaches year 2000 problem concerned whether computer systems properly recognize date sensitive information year changes 2000 systems properly recognize information could generate erroneous data cause system fail year 2000 problems pervasive complex virtually every companys computer operation may affected way result companys analysis computer programs operations reached conclusion business systems including computer systems fully prepared year 2000 although management believes corrections planned company seriously impact material adverse effect companys expenses business including data gathering interpretation operations possible however year 2000 problems incurred customers suppliers company could negative impact future operations financial performance company although company able specifically identify problems among suppliers company believes dependent upon single supplier customer equipment supplies sales year 2000 contacted primary suppliers determine developing plans address processing transactions may impact company furthermore year 2000 problem may impact entities company transacts business company cannot predict effect year 2000 problem entities resulting effect company yet developed contingency plan operate event noncompliant customer supplier systems materially impact company remedied timely manner yet determined time table developing plan result preventative andor corrective actions company entities company business made timely manner year 2000 issue could material adverse effect companys business financial condition results operations however based analysis date expenses companys efforts identify address problems expenses liabilities company may become subject result problems expected material adverse effect companys business financial position results operations cash flows well purchasing patterns existing potential customers may affected year 2000 problems could cause fluctuations companys sales volumes recently announced accounting standards june 1997 fasb issued sfas 130 reporting comprehensive income sfas 130 establishes guidelines reporting display comprehensive income components financial statements disclosure comprehensive income components required beginning companys fiscal year ending september 30 1999 also june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 requires companies disclose operating segments based way management disaggregates company making internal operating decisions new standard effective companys 1999 fiscal year end company yet evaluated impact new standard item 8 item 7 managements discussion analysis financial condition results operations following discussion analysis companys financial condition results operations read conjunction financial statements notes thereto included elsewhere annual report form 10k overview company began operations march 1993 reseller information technology products fiscal 1999 company started emphasizing valueadded services customers valueadded services accounted 85 61 companys net sales fiscal years 2001 2000 respectively gross profit margins valueadded services company currently offers four five times higher gross profit margins companys information technology products reselling business firstsource corp firstsource formerly firstsourcecom purchase pointe inc internet call center based businesstobusiness provider products services information necessary operate small medium sized businesses began operations june 1998 whollyowned subsidiary july 1999 private placement reduced companys ownership percentage 714 subsequent private placements fiscal 2000 reduced companys ownership may 16 2000 voting interest percentage decreased 435 companys voting interest dropped 50 effective may 16 2000 company otherwise control company began account investment firstsource equity method accounting effective april 10 2001 firstsource operations ceased assets firstsource assigned sherwood partners inc unaffiliated company assignee benefit creditors november 1999 company formed new subsidiary supplyaccess inc supplyaccess address larger corporate customers needs find product via internet favorable prices supplyaccess designed internet portal charging transaction fees seller company transferred department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed supplyaccess would provide company services would allow company customers access fulfillment engine initial year flat quarterly fee 500000 february 2000 supplyaccess completed initial private placement 12000000 shares convertible preferred stock 150 share reduced companys voting interest 54 april 4 2000 supplyaccess completed supplemental private placement stock 5088318 shares convertible preferred stock 150 share reduced companys voting interest 4510 subsequent private placements convertible preferred stock hare reduced companys voting interest 3869 companys voting interest dropped 50 effective april 4 2000 company otherwise control company began account investment supplyaccess equity method accounting september 21 2001 company settlement dispute supplyaccess agreed pay supplyaccess 11 million assignment transfer en pointe sap application software certain listed assets company cancelled balance note receivable supplyaccess 750000 agreed assume responsibilities previously assigned supplyaccess effective october 1 2001 result agreement assumption responsibilities company longer pay supplyaccess flat 500000 quarterly fee services however company agreed make monthly payments supplyaccess 15000 rights accesspointe™ web site content therein companys net sales increased 1100 million fiscal 1994 companys first full year operations 6683 million fiscal 1999 representing compound annual growth rate 351 past growth net sales principally driven sales new customers increased sales existing customers well geographic expansion opening additional sales offices however fiscal 2000 company experienced first annual decline 1738 million sales due softer pc market difficulties transitioning new business erp system fiscal year 2001 continued negative trend decline 1291 million net sales fiscal 2001 quarterly net sales compared respective prior fiscal year quarters shown consistent negative trend throughout fiscal year percentage declines commencing first quarter fiscal year 135 224 233 460 respectively sequentially net sales declined every quarter fiscal 2001 except june quarter registered modest 08 increase company anticipate reversal sales decline later fiscal 2002 counter sales decline company conducted two restructurings sales administrative force fiscal years 2001 2000 leased sales offices converted virtual offices employees work home based offices home offices equipped dsl lines latest information technology equipment full technical administrative support committed corporate headquarters assist field personnel improving customer support also moderating impact sales decline overall improvement gross profit margins rising 108 fiscal 2001 98 year ago principally lessening competitive pricing higher margins companys expanding service business nevertheless increase gross profit margins insufficient offset loss margins sales volume decline total gross profits declined 91 million operating expenses exclusive nonrecurring charges 410 million notable reduction prior year core operating expenses 507 million excludes 174 million operating expenses subsidiaries subsequently deconsolidated nonrecurring charges declined 19 million combined 97 decline core operating expenses helped compensate 91 million gross profits decline narrowed operating loss 23 million substantial improvement 223 million operating loss prior year burdened substantial operating losses former subsidiaries prior deconsolidation companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors yet shipped customers product revenues generally recognized upon shipment service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2001 2000 net sales net sales decreased 1291 million 261 3653 million fiscal 2001 4944 million fiscal 2000 approximately quarter 1291 million decrease results fiscal 2000 deconsolidation former subsidiaries contributed 342 million 4944 million prior year net sales remaining 948 million decrease sales 206 attributable softness marketplace erosion customer base services revenues increased 09 million 31 312 million fiscal 2001 302 million fiscal 2000 85 total net sales versus 61 prior year net sales ibm contract accounted 166 total net sales 147 total accounts receivable 2001 fiscal year compared 128 214 respectively prior fiscal year absolute dollars ibm net sales decreased 27 million 608 million fiscal 2001 634 million fiscal 2000 reflecting conditions noted fiscal 2001 quarterly net sales compared respective prior fiscal year quarters shown consistent negative trend throughout fiscal year percentage declines commencing first quarter fiscal year 135 224 233 460 respectively sequentially net sales declined every quarter fiscal 2001 except june quarter registered modest 08 increase company anticipate reversal sales decline later fiscal 2002 gross profit result decline net sales gross profits decreased 91 million 187 395 million fiscal 2001 486 million 2000 however gross profits expressed percentage net sales actually increased one full percentage point 108 2001 98 2000 increase gross margin percentage attributable lessening pricing pressures industry information technology products well increased margins rising service revenues selling marketing expenses selling marketing expenses decreased 154 million 339 300 million fiscal 2001 453 million fiscal 2000 154 million decrease 67 million selling marketing expenses attributable former subsidiaries reported consolidated basis first nine months prior fiscal year subsequently deconsolidated another 54 million decrease wage related part due restructuring including 18 million lower wage cost 36 million decrease sales commissions paid result decline net sales volume percentage net sales selling marketing expenses decreased one full percentage point 82 2001 92 2000 one percent decrease represents former subsidiaries expenses included financial results first nine months prior fiscal year deconsolidation general administrative expenses general administrative expenses decreased 118 million 517 110 million fiscal 2001 228 million fiscal 2000 decrease 107 million due deconsolidation former subsidiaries noted percentage net sales general administrative expenses declined 46 30 fiscal 2001 attributable deconsolidation nonrecurring charges nonrecurring charges 08 million consist 19 million restructuring charges 02 million charge relating settlement law suit income 13 million related legal suit plaintiff attorney fees costs previously awarded court reversed restructuring charges occurred june quarter workforce reduced 64 nine rental locations identified closure reduced size sales personnel working location closures converted virtual sales environment carefully monitored program company see note 4 consolidated financial statements company believes restructuring result lower selling marketing costs future quarters nonrecurring charges declined 19 million 689 08 million 27 million reported fiscal 2000 15 million restructuring charge 12 million charge related plaintiff attorney fees costs awarded court subsequently appeal reversed 2001 recognized operating loss operating loss decreased 200 million 895 loss 23 million fiscal 2001 223 million operating loss fiscal 2000 although total operating expenses decreased 291 million fiscal 2001 418 million 709 million fiscal 2000 decrease insufficient compensate 91 million decline gross profits decrease 174 million accounted deconsolidation former subsidiaries noted operating loss percent net sales decreased 06 fiscal 2001 45 fiscal 2000 interest expense interest expense decreased 07 million 435 10 million fiscal 2001 17 million fiscal 2000 included interest expense portions lease payments related ontario configuration center treated financing lease payments amounted 06 million fiscal 2001 fiscal 2000 decrease interest expense due mainly decline borrowing credit lines due declining sales volumes interest charged companys lines credit increased april 2000 25 prime 2 prime 225 prime rate declined 3 fiscal year compensate large part increase rates result companys weighted average borrowing rate increased slightly 91 85 prior year gain sale assets gain sale assets decreased 38 million 01 39 million prior fiscal year prior year 39 million gain attributed sale marketable securities acquired connection private placement former subsidiary income losses affiliates result deconsolidation two previously consolidated subsidiaries see note 1 consolidated financial statements june quarter 2000 company began using equity method accounting record interest losses related two affiliates company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded losses large part reversed fiscal 2001 taken income guarantees obligations removed discharged provision income taxes loss reversal income affiliates 83 million subject tax adjustments differences book tax inconsequential company anticipates 26 tax net operating loss nol 2001 fiscal year since longer open prior years taxable income nol may carried back benefit recognized current year tax loss current provision income taxes relates certain minimum state income franchise taxes net income loss net income 54 million compared net loss 194 million prior fiscal year improvement earnings due 84 million loss reversal income affiliates 291 million decrease operating expenses percentage net sales net income 15 compared net loss 39 fiscal 2000 comparison fiscal years ended september 30 2000 1999 net sales net sales decreased 1739 million 260 4944 million fiscal 2000 6683 million fiscal 1999 decrease sales attributable softness marketplace loss customer base implementation sap business system net sales ibm contract accounted 128 total net sales 214 total accounts receivable 2000 fiscal year compared 188 185 respectively prior fiscal year absolute dollars ibm net sales decreased 623 million 634 million fiscal 2000 1257 million fiscal 1999 reflecting conditions noted services revenues increased 72 million 313 302 million fiscal 2000 230 million fiscal 1999 66 total net sales versus 36 prior year firstsource internet call center based businesstobusiness provider products services information small medium sized businesses contributed 342 million net sales seven half month period former subsidiary consolidated company net sales firstsource seven onehalf month period prior deconsolidation consolidation period exceeded prior full fiscal year 1999 net sales 300 million supplyaccess startup internet portal businesstobusiness provider record net sales approximate six month period former subsidiary consolidated company gross profit gross profit decreased 52 million 96 486 million fiscal 2000 537 million 1999 increased percentage net sales 98 2000 compared 80 1999 increase gross profit percentage attributable lessening pricing pressures throughout industry information technology products well increased margins rising service revenues gross profits firstsource 31 million consolidation period compared 21 million twelve months fiscal year 1999 gross margins improved 90 69 fiscal 1999 selling marketing expenses selling marketing expenses increased 74 million 194 453 million fiscal 2000 379 million fiscal 1999 74 million increase 25 million increased marketing efforts firstsource consolidation period remainder primarily attributed hiring additional sales personnel percentage net sales selling marketing expenses increased 35 92 2000 57 1999 24 attributed decline volume net sales 09 increased firstsource expenses remainder cost additional sales personnel hired general administrative expenses general administrative expenses decreased 79 million 258 228 million fiscal 2000 307 million fiscal 1999 79 million decline due less general administrative expenses incurred firstsource 2000 partial fiscal year former subsidiary consolidated result abnormally high prior year expense acceleration vesting firstsource stock options fourth quarter fiscal 1999 declining sales volume general administrative expenses percentage net sales remained constant 46 fiscal 2000 nonrecurring charges nonrecurring charges consist 15 million restructuring charges 12 million related legal suit attorney fees costs awarded court restructuring charges occurred june quarter workforce reduced 105 five sales offices converted virtual sales locations see note 4 consolidated financial statements nonrecurring charges declined 52 million 27 million 79 million fiscal 1999 62 million impairment charge write ontario configuration facility comprised charge operating loss operating loss decreased 06 million 28 loss 223 million fiscal 2000 229 million operating loss fiscal 1999 although total operating expenses decreased 57 million fiscal 2000 709 million 766 million fiscal 1999 decrease compensate 52 million decline gross profits decline total operating expenses 52 million decrease nonrecurring charges explained operating loss percent net sales increased 45 fiscal 2000 34 fiscal 1999 due declining sales volume interest expense interest expense decreased 15 million 459 17 million fiscal 2000 32 million fiscal 1999 15 million decrease 06 million related interest income netted interest expense remaining 09 million decrease interest expense due decline borrowing lines credit gain sale investments conjunction supplyaccess private placement marketable securities acquired produced gain 39 million upon sale securities acquired february 23 2000 cost basis 68 million minority interest minority interest represents losses allocated minority shareholders december 31 1999 firstsource still majority owned subsidiary eligible consolidated company income losses affiliates result deconsolidation two previously consolidated subsidiaries see note 1 consolidated financial statements june quarter 2000 company began using equity method accounting record interest losses related two affiliates company anticipate recognizing losses affiliates since additional financial support would considered additional investment planned future benefit income taxes benefit income taxes decreased 07 million 559 benefit 05 million fiscal 2000 12 million benefit fiscal 1999 reduction benefit fiscal 2000 due limitation available loss carry back well nonrecognition deferred tax assets due uncertainty future realization net loss income net loss increased 28 million 168 194 million net loss fiscal 2000 166 million net loss fiscal 1999 percentage net sales net loss increased 39 29 fiscal 1999 pro forma comparison fiscal years ended september 30 2000 1999 order meaningfully assess underlying operating trends management believes results operations fiscal 2000 analyzed excluding effects subsidiaries deconsolidated june 2000 quarter following discussion analysis focuses amounts trends adjusted exclude impact deconsolidated subsidiaries normal operations net sales net sales decreased 1781 million 279 4602 million fiscal 2000 6383 million fiscal 1999 decrease sales attributable softness marketplace loss customer base implementation sap business system net sales ibm contract accounted 138 total net sales 2000 fiscal year compared 197 prior fiscal year absolute dollars ibm net sales decreased 623 million 634 million fiscal 2000 1257 million fiscal 1999 reflecting conditions noted services revenues increased 72 million 313 302 million fiscal 2000 230 million fiscal 1999 61 total net sales versus 36 prior year gross profit gross profit decreased 58 million 112 458 million fiscal 2000 516 million 1999 increased percentage net sales 100 2000 compared 81 1999 increase gross margin percentage attributable lessening pricing pressures throughout industry information technology products well increased margins rising service revenues selling marketing expenses selling marketing expenses increased 49 million 146 386 million fiscal 2000 337 million fiscal 1999 primarily result hiring additional sales personnel percentage net sales selling marketing expense increased 32 85 2000 53 1999 24 attributed decline volume net sales remainder cost additional sales personnel hired general administrative expenses general administrative expenses decreased 36 million 230 121 million fiscal 2000 157 million fiscal 1999 percentage net sales general administrative expenses increased 26 fiscal 2000 25 fiscal 1999 due decline sales volume operating loss operating loss increased 19 million 331 loss 76 million fiscal 2000 57 million operating loss fiscal 1999 although total operating expenses decreased 39 million fiscal 2000 534 million 573 million fiscal 1999 decrease compensate 58 decline gross profits operating loss percent net sales increased 17 fiscal 2000 09 fiscal 1999 due mainly declining sales volume interest expense interest expense decreased 13 million 451 16 million fiscal 2000 29 million fiscal 1999 13 million decrease 06 million related interest income netted interest expense remaining 07 million decrease interest expense due decline borrowing lines due declining sales volumes liquidity capital resources fiscal 2001 operating activities provided cash totaling 318 million compared 93 million prior fiscal year decline 420 million accounts receivable represented largest single cash producing reconciling item fiscal 2001 accounts receivable allowances returns doubtful accounts declined 523 mainly due 460 decline fourth quarter net sales prior fiscal years quarter well improved collection activity companys accounts receivable balance net allowances returns doubtful accounts september 30 2001 2000 368 million 790 million respectively number days sales outstanding accounts receivable decreased 37 days 58 days september 30 2001 2000 respectively however computing dso fourth quarter fiscal 2001 net sales number days sales outstanding accounts receivable decreases 51 days compared 58 days prior year investing activities used cash totaling 09 million fiscal 2001 compared using 221 million cash prior year cash used investing activities fiscal 2001 acquisition property equipment financing activities used net cash totaling 319 million fiscal 2001 providing cash 86 million fiscal 2000 financing cash used repayments lines credit consistent 523 decline accounts receivable upon financing based prior fiscal year financing activities provided cash 86 million cash provided came 227 million raised private placement sales stock two former subsidiaries september 30 2001 company approximately 16 million cash working capital 202 million company revolving credit facility ibm credit corporation ibmcc collateralized accounts receivable assets company september 30 2001 lines credit provided maximum aggregate borrowings approximately 350 million approximately 94 million outstanding interest outstanding borrowings ibmcc line credit increased prime plus 2 effective april 15 2001 prime less 25 effect prior borrowings collateralized substantially companys assets addition line credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2001 company compliance loan covenants ibmcc financing agreement expired september 30 2001 extended january 31 2002 december 28 2001 company entered 30 million line credit agreement three years foothill capital corporation foothill part separate one year agreement entered date ibmcc continues provide company 30 day interest free inventory flooring financing 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 20 million consideration providing guarantee foothill agreement contains 1 annual charge average outstanding balances owing ibmcc initially foothill agreement provide interest rate onehalf one percent prime rate future interest rate dependent upon company meeting certain earnings targets minimum variable interest rate floored 6 per annum option company could based prime libor rate maximum range interest based certain earnings targets prime plus 150 libor plus 375 company brought new management team june 2000 committed two restructuring plans see note 4 consolidated financial statements reduced workforce replaced brick mortar offices virtual offices company greatly reduced former operating losses restructuring actions taken company yet able return operating profitability assure successful future however management believes amount available borrowings new line credit facility foothill ibmcc provide sufficient working capital support companys operations year ending september 30 2002 recently issued accounting pronouncements june 1998 financial accounting standards board fasb issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities statement requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value accounting changes fair value derivative depends planned use derivative resulting designation sfas 133 effective fiscal quarters fiscal years beginning june 15 2000 company hold derivative instruments engage hedging activities impact adoption sfas 133 impact results operations financial position december 1999 securities exchange commission released staff accounting bulletin 101 revenue recognition financial statements sab 101 providing secs view respect application generally accepted accounting principles selected revenue recognition issues company adopted sab 101 required fourth quarter fiscal 2001 impact adoption sab 101 companys consolidated financial statements material companys operating results financial position july 2000 emerging issues task force eitf reached final consensus issue 0010 accounting shipping handling fees costs eitf 0010 adopted eitf 0010 requires amounts billed customers sale transactions related shipping handling classified revenue addition eitf 0010 requires shipping handling fees costs financial statements prior periods presented comparative purposes reclassified eitf 0010 must adopted prior concurrent adoption sab 101 adoption eitf 0010 material impact companys results operations financial position june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 142 sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations recorded value exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company expects adopt sfas 141 142 effective october 1 2002 company anticipate impact future financial results result adopting standard august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company required adopt sfas 144 effective october 1 2002 company anticipate impact resulting adoption sfas 144 item 7a item 7 management’s discussion analysis financial condition results operations significant factors performance understanding significant factors influenced performance past three fiscal years financial discussion read conjunction consolidated financial statements presented form 10k critical accounting policies management believes following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition apply provisions securities exchange commission sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general recognize revenue persuasive evidence arrangement exists ii shipment products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured provide allowance sales returns based historical experience product sales shipped directly suppliers customers take title products sold upon shipment bearing credit risk inventory risk returned customer products successfully returned suppliers although risks mitigated arrangements shippers suppliers service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid maintenance contracts performed future periods time income recognized contracts ratably period contract allowance doubtful accounts estimate allowance doubtful accounts related trade receivables two methods first evaluate specific accounts 90 days outstanding apply various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns general follow strict policy duplicating terms vendor manufacturers’ product return policies however certain cases must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations “rma” reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales vendor returns product returned vendors authenticated rmas review outstanding receivables vendors establish reserve product qualify refund based review specific vendor receivables rebates cooperative advertising allowances receive incentives suppliers related cooperative advertising allowances volume rebates incentive agreements incentives generally quarterly semiannual annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require use cooperative advertising allowances exclusively advertising marketing programs restricted cooperative advertising allowances recognized reduction operating expense gross profit related expenses recognized rebates earned record rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative advertising allowances deferred earned rebate programs subject audit whether requirements rebates actually met establish reserves cover collectibility risks including subsequent supplier audits inventory although employ virtual inventory model generally limits exposure inventory losses certain large customers contractually obligate product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included inventory product returned customers acceptable returnable vendor result expose losses inventory requires reserves losses established record varying reserves based upon class inventory ie held resale returned customers age inventory overview initially began operations march 1993 reseller information technology products fiscal 1999 began offering valueadded services customers gradually valueadded services represented larger percentage total net sales accounting 152 129 net sales fiscal years 2004 2003 respectively gross profit margins valueadded services currently offer significantly higher gross profit margins information technology product business require additional overhead expense supervision idle time expenses related service offerings offset portion increased margin initial operating years fiscal 1994 fiscal 1999 aid robust economy information technology market accommodated business model net sales increased compound annual growth rate 351 seasonal trends never prominent business although march quarters historically regarded one least promising quarters however fiscal 2000 experienced first annual net sales decline 26 1738 million net sales fiscal 1999 due softer information technology market difficulties transitioning new erp business system declining trend resumed fiscal years 2001 2002 declines 261 296 respectively trend temporarily reversed stalled fiscal 2003 net sales increased 127 prior year fiscal year 2004 net sales marginally lower 36 fiscal year 2003 even mentioned lower net sales related gross profits able increase net income current fiscal year 24 million loss fiscal 2003 14 million gain fiscal 2004 resulted 51 million reduction operating expenses fiscal year 2004 inclusive 11 million startup operating costs pbpo excluded brings core operating cost reduction 62 million total business model involves resale information technology products held inventory certain distributors maintain significant amounts inventory hand resale typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially net sales quarter result orders received quarter although maintain relatively small amount inventory stock resale record inventory merchandise configured products purchased distributors shipped yet received accepted customers product revenues generally recognized upon shipment service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted distributors manufacturers less incentive credits results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2004 2003 net sales net sales decreased 106 million 36 2792 million fiscal 2004 2898 million fiscal 2002 decrease net sales product related maintained margins shifting emphasis lowermargin product sales highermargin service sales decline net sales prevailed quarter fiscal 2004 except june quarter benefited large increase governmental sales year ended september 30 2004 one customer accounted 111 net sales 97 accounts receivable product sales fiscal 2004 declined 158 million 63 fiscal 2003 service sales hand increased 52 million 140 prior fiscal year growth service sales lagged fiscal year 2003 increase 102 million 378 fiscal year 2002 results attributed part several projects favorably impacted second half fiscal 2003 wound early fiscal 2004 loss major service customer end june 2004 quarter gross profit gross profits decreased 15 million 43 345 million fiscal 2004 360 million fiscal year 2003 15 million decrease gross profits attributed decreased product sales well decreased product margins product gross profit percentage sales margins slipped 77 fiscal year 2003 74 fiscal year 2004 expressed percentage net sales service gross profit percentage fiscal 2004 decreased 48 prior fiscal year 397 line anticipated 35 40 range services even 48 decline service margins service gross profits managed increased 03 million 17 due additional volume provided 52 million service revenue increase fiscal 2004 strength services allowed gross margins product service remain relatively constant fiscal years 2004 2003 123 124 respectively selling marketing expenses selling marketing expenses decreased 47 million 168 229 million fiscal 2004 276 million fiscal 2003 47 million decrease inclusive pbpo’s initial fiscal year selling marketing expenses 08 million excluding pbpo’s portion combined selling marketing expense core selling marketing expenses decreased 55 million 200 compared fiscal 2003 results decrease selling marketing expense traced reduction employee related expense 51 million accomplish employee related expense decrease 51 million part incurred 13 million expense program outsource backoffice sales support offshore effect contributed 38 million net expense reduction benefit also favorable 07 million reduction connectivity rent related expenses expressed percentage net sales selling marketing expense decreased 13 95 fiscal year 2003 82 fiscal year 2004 general administrative expenses general administrative expenses remained relatively constant 100 million fiscal 2004 2003 current year’s 100 million general administrative expenses includes 03 million expense affiliate pbpo whose operations present fiscal 2003 major increases general administrative expenses fiscal year 2004 included increase employee related expenses 04 million due increased information technology wages executive bonuses employee benefits 11 million less reduced accounting finance wages 07 million reduction accounting finance wages resulted principally efforts outsource offshore incurred additional 04 million outsourcing expense resulted savings 03 million addition 06 million reduced attorney fees 03 million reduced software maintenance support expenses related sap license general administrative expenses expressed percentage net sales small increase 01 36 fiscal year 2004 35 fiscal year 2003 operating income loss operating income improved 34 million 19 million loss fiscal year 2003 15 million income fiscal year 2004 improvement attributed reduction selling marketing expenses 47 million discussed made 15 million decline gross profits operating income expressed percentage net sales improved 05 fiscal year 2004 negative 07 fiscal year 2003 interest expense interest expense 07 million net interest income 01 million interest expense decreased 02 million 09 million fiscal year 2003 interest expense 05 million incurred us represents interest expense related ontario facility treated financing lease presently carried longterm liability interest expense incurred previous lender whose financing arrangement replaced ge june 2004 amounted 03 million minority interest fin 46 recent changes consolidation principles certain minority interests required consolidated approximately 38 pbpo fin 46 required consolidate pbpo’s financial results financial statements result allocate certain losses shareholders pbpo collectively approximately 62 pbpo losses allocated “minority interest” based upon percentage ownership upon “at risk” capital owners “minority interest risk” capital absorbed losses remaining losses allocated us without regard amount capital hold “at risk” provision benefit income taxes provided 01 million tax provision fiscal year 2004 approximately 71 provision state income tax california domiciled net operating losses “nol” temporarily suspended remainder 01 million provision federal income tax 108 million nol carryforward 19 million applied current year’s federal taxable income leaving 89 million nol carryforward available future periods subject regular 34 corporate federal income tax rates nol carryforwards exceed taxable income nevertheless subject alternative minimum tax “amt” bears 20 rate limits nol carryforwards 90 thereby mandating least 10 taxable income becomes subject amt tax file consolidated federal income tax return many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes september 30 2004 89 million nol carryforwards 100 valuation allowance provided nol carryforwards scheduled expire various dates fiscal year 2023 section 382 internal revenue code could limit future use nol carryforwards ownership common stock changes 50 percentage points certain circumstances three year testing period total 89 million nol carryforwards 47 million considered adjustment additional paidin capital benefit future earnings since losses attributable exercise employee stock options recognized expense tax purposes financial statement purposes net income loss net income increased 38 million 14 million net loss 24 million prior fiscal year 2003 principal reason improvement net income due reduction selling marketing expenses 47 million discussed percentage net sales net income 05 fiscal 2004 compared 08 net loss fiscal 2003 comparison fiscal years ended september 30 2003 2002 net sales net sales increased 328 million 127 2898 million fiscal 2003 2570 million fiscal 2002 increase net sales steady throughout fiscal year net sales increased quarter fiscal year 2003 reported respective quarters prior fiscal year tabin corporation acquisition made october 2002 provided approximately 164 million 328 million increase net sales 501 year ended september 30 2003 net sales less concentrated previous fiscal years customer accounting 10 total net sales product sales led service sales registering largest dollar increase service sales easily outpaced product sales terms percentage growth prior fiscal year product net sales increased 225 million 98 2525 million fiscal 2003 2300 million fiscal 2002 service revenues increased 102 million 378 373 million fiscal 2003 271 million fiscal 2002 portion strong growth service revenues attributed several projects favorably impacted second half fiscal 2003 wound early fiscal 2004 gross profit gross profits increased 85 million 309 360 million fiscal 2003 275 million fiscal year 2002 85 million increase gross profits 63 million attributed increased sales volume balance 22 million resulting improved margins chiefly services sales product contributed 20 million increase gross profits 113 service sales contributed gross profit increase 65 million 647 expressed percentage net sales gross profit percentage increased 17 124 107 recorded prior fiscal year growth gross profit margins attributable services whose gross profit margins increased 73 445 372 recorded prior fiscal year service profit margin increase attributable small number shortterm projects necessarily considered representative anticipated future service margins product gross profit margins held steady 77 marginal tenth percent prior fiscal year selling marketing expenses selling marketing expenses increased 40 million 166 276 million fiscal 2003 236 million fiscal 2002 expense increase related selling marketing expenses arising commitment commenced late fiscal 2002 reverse past sales declines selectively increasing size direct sales force therefore increase selling marketing expenses relates commissions salaries wage related benefits mitigate costs associated increasing direct sales force boost productivity late june 2003 fiscal quarter initiated offshore outsourcing program much backoffice sales support increase selling marketing expenses decidedly less expressed percentage net sales improvement net sales increased sales provided larger base spreading certain fixed elements selling marketing expense result selling marketing expenses increased 03 95 2003 92 2002 general administrative expenses general administrative expenses decreased 08 million 73 100 million fiscal 2003 108 million fiscal 2002 factors responsible reduction general administrative expenses included reduced wage related expenses 10 million reduced facilities related expense 07 million offshore outsourcing program began june 2003 fiscal quarter contributed reduction wages reduction wages decline number personnel employed rent reduction resulted finalization closure certain branch offices longer operational well prior year’s renegotiation headquarters lease may 2002 benefits reduction expense related wages facilities reduced 09 million increase legal expense general administrative expenses expressed percentage net sales decrease 07 42 35 fiscal 2003 charges income charges 04 million fiscal 2003 primarily resulted february 2003 settlement litigation claim court approved dismissal settlement stockholder derivative litigation fredrick v din et al part stipulation parties agreed defendants would pay plaintiff’s attorney fees approximately 04 million review selected members board directors defendants litigation based board’s review recommendation paid settlement charged full amount expense operating loss operating loss decreased 41 million 680 loss 19 million fiscal 2003 60 million operating loss fiscal 2002 decrease attributed 85 million increase gross profits reduced increase 44 million operating expenses operating loss expressed percentage net sales decreased 16 07 2003 23 2002 interest expense interest expense net interest income 01 million interest expense incurred foothill capital corporation “foothill” financing agreement consisted principally 1125 charges acting guarantor ibm credit corporation “ibmcc” order ibmcc provide us 30day interestfree flooring addition guarantee charge foothill charged 6 65 per annum use line float 03 per annum unused credit line total interest related charges paid foothill amounted 04 million interest expense 05 million incurred us represents interest expense related ontario facility lease treated financing lease presently carried longterm liability income reversal losses affiliates result deconsolidation two previously consolidated subsidiaries june quarter 2002 began using equity method accounting record interest losses related two affiliates guaranteed certain debts affiliates responsible certain obligations losses excess investment affiliates recorded majority income reversal losses 84 million reversed fiscal 2001 07 million reversed fiscal 2002 remaining balance 01 million reversed first quarter fiscal year 2003 benefit provision income taxes recorded tax benefit current year likely tax benefits realized near future second quarter fiscal 2002 recognized unanticipated net 15 million federal income tax benefit “job creation worker assistance act 2002” tax bill allowed us carry back net operating losses “nols” arising current fiscal year well prior fiscal year recover taxes two fiscal years ended september 30 1997 1996 previously closed carry backs file consolidated federal income tax returns many state tax returns file separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states carrying tax losses back prior years exhausted benefits recovery taxes paid prior years future losses carried forward apply future income years september 30 2003 108 million net operating losses “nols” may carried forward 47 million nol considered adjustment additional paidin capital benefit future earnings since portion nol attributable exercise stock options employees recognized expense financial statement purposes net loss income net loss decreased 10 million 300 24 million 34 million prior fiscal year decrease net loss due increase gross profits 85 million offset part increase operating expenses 44 million combined reduced operating loss 41 million however 41 million reduced operating loss offset increased interest expense decreased income 04 million 27 million less tax benefit less income reversal losses affiliates recognized fiscal year 2002 percentage net sales net loss 08 compared 13 fiscal 2002 liquidity capital resources fiscal 2004 operating activities provided cash totaling 65 million 55 million 10 million provided prior fiscal year lead contributor 55 million net increase cash operating activities 70 million decrease accounts receivable accounts receivable decline sales decreased 34 million fiscal 2004 rising 36 million fiscal 2003 another factor contributing improvement cash operations net income rose 14 million 38 million net loss 24 million fiscal year 2003 accounts receivable balance net allowances returns doubtful accounts september 30 2004 2003 316 million 351 million respectively number days’ sales outstanding accounts receivable decreased slightly 41 days 44 days september 30 2004 2003 respectively investing activities used cash totaling 10 million fiscal 2004 decrease 01 million prior fiscal year purchased 08 million equipment fiscal year 2004 2003 fiscal year 2003 expended 09 million fiscal 2004 acquisition tabin corporation financing activities provided net cash totaling 74 million fiscal 2004 86 million 12 million net cash used fiscal 2003 86 million increase cash financing activities came 81 million additional net borrowings made line credit september 30 2004 approximately 161 million cash working capital 179 million improve financing flexibility reduce costs june 2004 closed 300 million replacement working capital financing facility ge commercial distribution finance corporation “ge” term facility period three years except either party may terminate agreement upon 60 days written notice party additionally ge may terminate facility time upon occurrence subsequent failure cure certain instances “event default” term defined agreement financing facility may borrow 85 eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 addition may purchase finance information technology products geapproved vendors terms depend upon certain variable factors anticipate substantial portion purchases ge approved vendors terms allow interestfree flooring financing agreements contain various liquidity financial covenants including without limitation ebitda sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter compliance debt covenants september 30 2004 ge facility collateralized accounts receivable inventory assets september 30 2004 approximately 183 million borrowings outstanding 300 million financing facility september 30 2004 additional borrowings available approximately 70 million taking consideration available collateral borrowing limitations agreements discussed overview section recent five marginally profitable quarters seen beginning reversal loss trend prevalent four past five years operations accomplish second quarter fiscal year 2002 chairman ceo changed key executives resumed role president daytoday responsibilities refocused sales strategy aggressive facetoface style encouraged selling higher margin managed services enhanced sales opportunities qualifying us “minorityowned” business evaluated smaller competitors could accretive earnings potential acquisition candidates return us low cost operational overhead model previously succeeded contracted offshore firms provide backoffice operational accounting related services rates substantially discounted available us management believes turn around plans continue successful improving sales profitability however unable maintain compliance loan covenants noncompliance waived ge working capital line credit could revoked prior expiration date eventuality believe sufficient working capital enable us continue operate least september 30 2005 however would required significantly scale business plans unable obtain alternative sources financing recently issued accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities” “fin 46” clarifies application accounting research bulletin 51 consolidated financial statements fin 46 requires variable interest entities “vie” consolidated company subject majority risk loss vie activities entitled receive majority entity’s residual returns company consolidates vie called primary beneficiary entity fin 46 also requires disclosures vie company required consolidate significant variable interest provisions interpretation apply immediately vie created january 31 2003 apply existing vie first fiscal year interim period ending december 15 2003 adopted fin 46 quarter ended december 31 2003 adversely affected operating results due substantial losses vie investment pbpo consolidated december 2003 fasb issued interpretation 46 revised 2003 “consolidation variable interest entities” “fin 46r” partially deferred effective date fin 46 certain entities makes changes fin 46 including complete definition variable interest exemption many entities defined businesses march 2004 fasb’s emerging issues task force “eitf” finalized new guidance otherthantemporary impairment debt equity securities impairment evaluation guidance issue 031 “the meaning otherthantemporary impairment application certain investments” effective reporting periods beginning june 15 2004 previously evaluating impairments debt equity securities using much guidance incorporated new eitf issue implementation guidance significantly change procedures evaluating impairments obligations commitments september 30 2004 company following obligations commitments make future payments contracts contractual obligations commercial commitments pbpo note payable subsequently october 2004 fully satisfied conversion series nonvoting convertible preferred stock item 7a item 7 managements discussion analysis financial condition results operations significant factors performance understanding significant factors influenced companys performance past three fiscal years financial discussion read conjunction consolidated financial statements presented form 10k critical accounting policies management believes following critical accounting policies among others affect significant judgments estimates used preparation consolidated financial statements revenue recognition product revenues recognized upon transfer title risk loss satisfaction significant obligations company generally considers occur upon receipt products customer although customers accept title upon shipment company provides allowance sales returns based historical experience product sales shipped directly suppliers customers company takes title products sold upon shipment bears credit risk bears inventory risk returned products successfully returned suppliers although risks mitigated arrangements companys shippers suppliers service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less rebates allowance doubtful accounts companys estimate allowance doubtful accounts related trade receivables based two methods first company evaluates specific accounts 90 days outstanding applies various levels risk analysis accounts determine satisfactory risk category given percentages applied establish reserve second general reserve established accounts exclusive accounts identified specific reserve percentage applied supportable historic collection patterns product returns general company follows strict policy duplicating terms vendor manufacturers product return policies however certain cases company must deviate policy order satisfy requirements certain sales contracts andor satisfy maintain customer relations establish reserve returns outstanding return merchandise authorizations rma reviewed rmas issued related product returned customer considered future sale reversals fully reserved addition estimate based historical return patterns provided probable future rmas relate past sales vendor returns product returned vendors authenticated rmas company reviews outstanding receivables vendors establishes reserve product qualify refund based review specific vendor receivables rebates cooperative advertising allowances company receives incentives suppliers related cooperative advertising allowances volume rebates incentive agreements incentives generally quarterly semiannual annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company use cooperative advertising allowances exclusively advertising marketing programs restricted cooperative advertising allowances recognized reduction operating expense related marketing expenses recognized however company evaluating impact emerging issues task force eitf issue 0216 accounting customer including reseller certain consideration received vendor fiscal 2004 require reclassification portion certain funds received vendors operating expense gross profit effect net income rebates earned company records rebate receivables corresponding reduction cost goods sold amounts received suppliers related cooperative advertising allowances deferred earned rebate programs subject audit whether requirements rebates actually met company establishes reserves cover collectibility risks including subsequent supplier audits inventory although company employs virtual inventory model generally limits exposure inventory losses certain large customers company contractually obligates product availability terms require maintaining physical inventory well configured product inventory generally confined limited range product applies specific customers contracts included companys inventory product returned customers acceptable returnable vendor result company exposes losses inventory requires reserves losses established company records varying reserves based upon class inventory ie held resale returned customers age inventory overview company initially began operations march 1993 reseller information technology products fiscal 1999 company began offering valueadded services customers gradually valueadded services represented larger percentage total net sales accounting 129 105 companys net sales fiscal years 2003 2002 respectively gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology product business require additional overhead expense supervision idle time expenses related service offerings part offset portion increased margin companys initial operating years net sales increased compound annual growth rate 351 increasing 1100 million fiscal 1994 6683 million fiscal 1999 seasonal trends prominent companys business although march quarter historically regarded one least promising quarters past growth net sales principally driven robust economy information technology market accommodated companys business model allowed expand geographically opening sales offices however fiscal 2000 company experienced first annual decline resulted 1738 million sales due softer information technology market difficulties transitioning new erp business system declining trend continued following fiscal years 2002 2001 registered declines 1083 1291 million respectively reversal negative net sales trend began first quarter fiscal 2003 set tone improvement continued throughout fiscal year resulted 328 million increase net sales fiscal year prior year operating expenses fiscal year 2003 exclusive special charges 376 million 32 million increase prior year operating expenses 344 million increase operating expenses attributed 40 million increase selling marketing expenses principally incurred increase directsales force boost sales productivity special charges also increased 13 million due payment legal settlement fiscal year 2003 prior fiscal year recognized income favorable legal settlement recovery expenses companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer shipped companys configuration center ontario california distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains relatively small amount inventory stock resale records inventory merchandise configured products purchased distributors shipped yet received accepted customers product revenues generally recognized upon shipment service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales includes product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits june 1998 firstsource corp firstsource formerly firstsourcecom purchase pointe inc whollyowned subsidiary began operations internet based businesstobusiness provider products services series private placements equity capital companys voting interest may 2000 dropped 50 company otherwise effective control firstsource company began accounting investment former subsidiary equity method accounting april 10 2001 firstsource ceased operations entirely assets assigned sherwood partners inc unaffiliated company assignee benefit creditors november 1999 company formed new subsidiary supplyaccess inc supplyaccess designed internet portal charging transaction fees seller company transferred information technology department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed supplyaccess would provide company information technology services would allow company customers access fulfillment engine initial year flat quarterly fee 500000 series private placements equity capital began february 2000 undertaken raise additional capital companys voting interest supplyaccess eventually reduced 3869 companys interest dropping 50 otherwise control former subsidiary april 2000 company began accounting supplyaccess investment equity method accounting september 21 2001 company settlement dispute supplyaccess agreed pay supplyaccess 11 million assignment transfer en pointe sap application software certain listed assets effective october 1 2001 company cancelled balance note receivable supplyaccess 750000 agreed assume information technology responsibilities previously assigned supplyaccess january 2002 majority shareholders supplyaccess approved transfer assets supplyaccess liquidator benefit creditors time transfer en pointe owned approximately 39 voting securities supplyaccess connection liquidation supplyaccess february 2002 company acquired full rights accesspointetm well rights supplyaccess software copyrights trade secrets proprietary rights results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 2003 2002 net sales net sales increased 328 million 127 2898 million fiscal 2003 2570 million fiscal 2002 increase net sales steady throughout fiscal year net sales increased current years fiscal quarters reported respective quarters prior fiscal year tabin corporation acquisition made october 2002 provided approximately 164 million 328 million increase net sales 501 year ended september 30 2003 net sales less concentrated previous fiscal years customer accounting 10 total net sales product sales led service sales registering largest dollar increase service sales easily outpaced product sales terms percentage growth prior fiscal year product net sales increased 225 million 98 2525 million fiscal 2003 2300 million fiscal 2002 service revenues increased 102 million 378 373 million fiscal 2003 271 million fiscal 2002 portion strong growth service revenues attributed several projects favorably impacted second half fiscal 2003 expected wind early fiscal 2004 gross profit gross profits increased 85 million 309 360 million fiscal 2003 275 million fiscal year 2002 85 million increase gross profits 63 million attributed increased sales volume balance 22 million resulting improved margins chiefly services sales product contributed 20 million increase gross profits 113 service sales contributed gross profit increase 65 million 647 expressed percentage net sales gross profit percentage increased 17 124 107 recorded prior fiscal year growth gross profit margins attributable services whose gross profit margins increased 73 445 372 recorded prior fiscal year service profit margin increase attributable small number shortterm projects necessarily considered representative anticipated future service margins product gross profit margins held steady 77 marginal tenth percent prior fiscal year selling marketing expenses selling marketing expenses increased 40 million 166 276 million fiscal 2003 236 million fiscal 2002 expense increase related selling marketing expenses arising companys commitment commenced late fiscal 2002 reverse past sales declines selectively increasing size direct sales force therefore increase selling marketing expenses relates commissions salaries wage related benefits mitigate costs associated increasing direct sales force boost productivity company late june 2003 fiscal quarter initiated offshore outsourcing program much backoffice sales support increase selling marketing expenses decidedly less expressed percentage net sales improvement net sales increased sales provided larger base spreading certain fixed elements selling marketing expense result selling marketing expenses increased 03 95 2003 92 2002 general administrative expenses general administrative expenses decreased 08 million 73 100 million fiscal 2003 108 million fiscal 2002 factors responsible reduction general administrative expenses included reduced wage related expenses 10 million reduced facilities related expense 07 million offshore outsourcing program began june 2003 fiscal quarter contributed reduction wages reduction wages decline number personnel employed rent reduction resulted finalization closure certain branch offices longer operational well prior years renegotiation headquarters lease may 2002 benefits reduction expense related wages facilities reduced 09 million increase legal expense general administrative expenses expressed percentage net sales decrease 07 42 35 fiscal 2003 special charges income charges 04 million fiscal 2003 primarily resulted february 2003 settlement litigation claim court approved dismissal settlement stockholder derivative litigation fredrick v din et al part stipulation parties agreed defendants would pay plaintiffs attorney fees approximately 04 million review selected members companys board directors defendants litigation based boards review recommendation company paid settlement charged full amount expense operating loss operating loss decreased 41 million 680 loss 19 million fiscal 2003 60 million operating loss fiscal 2002 decrease attributed 85 million increase gross profits reduced increase 44 million operating expenses operating loss expressed percentage net sales decreased 16 07 2003 23 2002 interest expense interest expense net interest income 01 million interest expense incurred foothill financing agreement consisted principally 1125 charges acting guarantor ibmcc order ibmcc provide 30day interestfree flooring company addition guarantee charge foothill charged 6 65 per annum use line float 03 per annum unused credit line total interest related charges paid foothill amounted 04 million interest expense 05 million incurred company represents interest expense related ontario facility lease treated financing lease presently carried longterm liability income reversal losses affiliates result deconsolidation two previously consolidated subsidiaries june quarter 2002 company began using equity method accounting record interest losses related two affiliates company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded majority income reversal losses 84 million reversed fiscal 2001 07 million reversed fiscal 2002 remaining balance 01 million reversed first quarter fiscal year 2003 benefit provision income taxes company recorded tax benefit current year likely tax benefits realized near future second quarter fiscal 2002 company recognized unanticipated net 15 million federal income tax benefit job creation worker assistance act 2002 tax bill allowed company carry back net operating losses nols arising current fiscal year well prior fiscal year recover taxes two fiscal years ended september 30 1997 1996 previously closed carry backs company files consolidated federal income tax return many state tax returns files separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states carrying tax losses back prior years company exhausted benefits recovery taxes paid prior years future losses carried forward apply future income years september 30 2003 company 108 million net operating losses nols may carried forward 47 million nol considered adjustment additional paidin capital benefit future earnings since portion nol attributable exercise stock options employees recognized expense financial statement purposes net loss income net loss decreased 10 million 300 24 million 34 million prior fiscal year decrease net loss due increase gross profits 85 million offset part increase operating expenses 44 million combined reduced operating loss 41 million however 41 million reduced operating loss offset increased interest expense decreased income 04 million 27 million less tax benefit less income reversal losses affiliates recognized fiscal year 2002 percentage net sales net loss 08 compared 13 fiscal 2002 comparison fiscal years ended september 30 2002 2001 net sales net sales decreased 1083 million 296 2570 million fiscal 2002 3653 million fiscal 2001 decline represents continuation weak capital spending business noted quarterly reports decline net sales persistent past eight quarters severe decline 461 quarteroverprioryearquarter net sales occurred last quarter fiscal year 2001 following closely heels decline first quarter fiscal year 2002 registered negative 371 since first quarter fiscal 2002 quarter declines moderated march june september quarters fiscal 2002 percentage declines 364 293 77 respectively product net sales decreased 1045 million 313 2296 million fiscal 2002 3341 million fiscal 2001 1045 million decrease exclusive 04 million miscellaneous excess credits previously granted customers taken income part ongoing process improve customer transaction processing service revenues also declined 41 million 132 271 million fiscal 2002 312 million fiscal 2001 year ended september 30 2002 two companys major customers accounted 545 million 212 net sales follows amounts stated millions gross profit decline net sales directly impacted gross profits reducing gross profits 120 million 303 275 million fiscal 2002 395 million 2001 gross profits expressed percentage net sales also slid fractionally tenth percent 107 2002 108 2001 120 million decline gross profits traced lower margins product sales product gross profits decreased 108 million 384 175 million 283 million prior fiscal year expressed percentage net sales product gross profit percentage declined 85 prior fiscal year 76 decline product gross profit attributable aggressive pricing policies employed capturing market share including large sales microsoft software licenses relatively low margins well lessening rebate income dependent volume sales manufacturervender availability service gross profits also fell result 132 decline service revenues registering total decline 10 million 95 101 million 111 million prior fiscal year however service gross profits expressed percentage service revenues increased 15 372 357 prior fiscal year selling marketing expenses selling marketing expenses decreased 64 million 211 236 million fiscal 2002 300 million fiscal 2001 64 million decrease 59 million relates reduction commissions salaries wage related benefits since sales commissions computed based gross margin dollars companys method commission payment declines gross profits experienced 2002 fiscal year directly reduce commission expense declining sales volume provides less base spreading certain fixed selling marketing expenses selling marketing expenses expressed percentage net sales increased 10 92 2002 82 2001 general administrative expenses general administrative expenses decreased slight 02 million 22 108 million fiscal 2002 110 million fiscal 2001 reduction facilities related expense including rent reduction renegotiation headquarters lease contributed reduction general administrative expense selling marketing expenses general administrative expenses expressed percentage net sales expenses show increase 12 30 42 fiscal 2002 attributable decline net sales volume special charges income 09 million fiscal 2002 primarily resulted settlement litigation claim 08 million settled litigation claim company liable total 16 million various court decisions including accrued interest settled 12 million addition recovery 08 million insurance reimbursement relating previously expensed legal fees offset legal costs 04 million operating loss operating loss increased 37 million 1545 loss 60 million fiscal 2002 23 million operating loss fiscal 2001 although total operating expenses decreased 83 million fiscal 2002 335 million 418 million fiscal 2001 decrease insufficient compensate 120 million decline gross profits declining sales volume providing less base spreading expenses operating loss expressed percentage net sales increased 17 23 2002 06 2001 interest expense interest expense net interest income 01 million interest expense incurred foothill financing agreement consisted principally 1 charges acting guarantor ibmcc order ibmcc provide 30day interestfree flooring company addition 1 guarantee charge foothill charged 6 634 per annum float 03 per annum unused credit line total interest related charges paid foothill amounted 02 million 01 million less prior fiscal year interest expense 06 million fiscal years 2002 2001 incurred company represents interest expense related ontario facility lease treated financing lease presently carried longterm liability income reversal losses affiliates result deconsolidation two previously consolidated subsidiaries june quarter 2001 company began using equity method accounting record interest losses related two affiliates company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded losses large part reversed fiscal 2001 taken income guarantees obligations removed discharged total income reversal losses year amounted 07 million includes 03 million profit past sales affiliates 02 million estimated costs transitioning information technology services related costs previously incurred reported operations first quarter current fiscal year 02 million lease guarantees one former affiliates much larger prior fiscal year income reversal losses 84 million included reversal 70 million lender guarantees provided company one affiliates along reduction information technology reserves resumption information technology responsibilities reversal note reserve related affiliate benefit provision income taxes company files consolidated federal income tax return many state tax returns files separately name whollyowned sales subsidiary en pointe technologies sales inc qualified business fifty states march 9 2002 passage job creation worker assistance act 2002 tax law company recognized unanticipated net 15 million federal income tax benefit second quarter fiscal year 2002 tax bill allowed company carry back net operating losses nols arising current fiscal year well prior fiscal year recover taxes two fiscal years ended september 30 1997 1996 previously closed carry backs total tax benefits recognized company new tax law 28 million year 09 million prior year nol offsetting part 28 million federal tax benefits nols 06 million tax expense related prior year amended federal income tax return carrying tax losses back prior years company exhausted benefits recovery taxes paid prior years future losses carried forward apply future income years september 30 2002 company 87 million nols may carried forward 47 million nol considered adjustment additional paidin capital benefit future earnings since portion nol attributable exercise stock options employees recognized expense financial statement purposes net loss income net loss 34 million realized fiscal year 2002 compared net income 54 million prior fiscal year net effect change net income net loss amounted 88 million decrease gross profits 120 million offset part reduction operating expenses 83 million resulted operating loss change 37 million however 37 million operating loss change adversely impacted 54 million consisting 77 million less benefits reversal losses affiliates reduced 23 million tax benefits 2002 tax law change percentage net sales net loss 13 compared net income 15 fiscal 2001 liquidity capital resources fiscal 2003 operating activities provided cash totaling 10 million compared 09 million prior fiscal year contributing increase operating cash decline net loss 10 million increase accounts payable accrued expenses 59 million collection 18 million recoverable taxes major expenditure operating cash build accounts receivable 84 million directly relating growth net sales 328 million prior fiscal year companys accounts receivable balance net allowances returns doubtful accounts september 30 2003 2002 351 million 317 million respectively number days sales outstanding accounts receivable decreased slightly 44 days 45 days september 30 2003 2002 respectively investing activities used cash totaling 11 million fiscal 2003 increase 02 million increase 09 million related october 2002 acquisition tabin corporation financing activities used net cash totaling 12 million fiscal 2003 providing cash 31 million fiscal 2002 cash used fiscal 2003 chiefly repayment net borrowings 11 million companys lines credit 30 million cash provided net borrowings activities fiscal 2002 september 30 2003 company approximately 32 million cash working capital 147 million company threeyear 300 million revolving credit facility foothill capital corporation foothill expires december 28 2004 addition ibm credit corporation ibmcc provided company 30day interestfree inventory flooring financing 160 million separate oneyear agreement expiring december 28 2004 september 30 2003 companys borrowings credit lines concentrated 113 million borrowings outstanding ibmcc 30day interestfree flooring agreement september 30 2003 company additional borrowing capacity approximately 21 million taking consideration available collateral borrowing limitations financing agreements borrowings lending agreements collateralized substantially companys assets addition lines credit contains certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2003 company compliance amended ebitda covenants various debt covenants contained loan agreements company foresaw would unable meet covenants related liquidity profitability quarter ended march 31 2003 would default terms agreements avert default company renegotiated lines credit ibmcc foothill ease respective covenant requirements signed amendments financing agreements may 2003 amendments loan agreements earnings interest taxes depreciation amortization ebitda tangible net worth covenants reset loan agreements ebitda measured cumulative rolling twelvemonth basis ending last day fiscal quarter september 30 2003 quarter set negative 08 million december 31 2003 quarter set positive 03 million fiscal quarters thereafter set positive 25 million tangible net worth measured last day fiscal quarter ended september 30 2003 immediate quarter thereafter tangible net worth may less 143 million 145 million respectively beginning quarter ending march 31 2004 quarter thereafter tangible net worth may less 146 million addition ibmcc added new covenant limits product backlog 40 million given time consideration amendments loan covenants lenders increased borrowing rates ibmcc reduced available ibmcc credit line ibmcc amended credit line provides company 30day free inventory flooring financing 160 million 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 220 million consideration providing guarantee amended foothill agreement contains 125 annual charge 100 average outstanding balances owing ibmcc foothill financing agreement also contains 03 annual charge unused portion credit line variable interest rate option company based either prime rate libor rate amended foothill agreement maximum rate interest based certain targets related ebitda increased 05 prime rate plus 250 libor option similarly increased 05 libor rate plus 475 reflected part financial statements contained part iv item 15 company experienced losses operations last three fiscal years declining sales fiscal years ended september 30 2002 2001 company made progress improving net sales loss operations fiscal year ended september 30 2003 assurance company continue progress obtain goal profitability order counter prior years sales profitability declines second quarter fiscal 2002 change certain key executives part change chairman ceo returned former position president company responsibility daytoday operations addition company rehired former senior vice president sales certain senior sales employees previously worked company new management team took following actions intended increase sales improve profitability arefocused companys sales strategy back aggressive personal face selling model hiring 55 new account executives increase approximately 125 number account executives employed prior change management implementing robust processes managing account executives performance sales quotas breasserted companys focus selling managed services higher gross margins product sales cqualified company minorityowned business order provide enhanced sales opportunities certain public private sector customers whose procurement policies provide preferences minorityowned businesses dcommitted company strategy acquiring targeted smaller competitors company believes acquisition immediately accretive earnings company opportunity complete acquisition affordable price october 2002 company completed acquisition tabin corporation ebeginning june 2003 contracted offshore firms provide backoffice operations accounting services reduced rates discussed company 300 million line credit agreement foothill expires december 2004 company also 16 million inventory flooring agreement ibm credit corporation ibmcc expires december 28 2004 borrowings inventory flooring agreement serve reduce availability financing available line credit agreement management believes financing available company credit agreements together working capital resources september 30 2003 company net working capital approximately 147 million provide company sufficient working capital finance operations least next fiscal year also discussed foothill ibmcc agreements contain certain restrictive covenants requiring among things maintenance specified levels tangible net worth attainment specified amounts profitability assurance managements plans successful improving companys sales profitability company able maintain compliance loan covenants company unable maintain compliance loan covenants noncompliance waived lenders working capital line credit flooring line could revoked prior expiration dates eventuality management believes sufficient working capital enable continue operate least september 30 2004 however company would required significantly scale business plans unable obtain alternative sources financing october 15 2003 company advanced 300000 en pointe global services inc see note 14 result transaction company violation certain debt covenants company received verbal commitment foothill provide waiver companys noncompliance however negotiations completed assurance waiver noncompliance granted recently issued accounting standards june 2001 fasb issued sfas 143 accounting asset retirementobligations statement establishes standards accounting obligations associated retirement tangible longlived assets company adopted standard january 1 2003 adoption standard impact financial results august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company adopted sfas 144 effective october 1 2002 adoption standard impact financial results june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity liability exit cost recognized date entitys commitment exit plan sfas 146 requires liability cost associated exit disposal activity recognized fair value liability incurred company adopted standard january 1 2003 adoption standard impact financial results december 2002 fasb issued sfas 148 accounting stockbased compensationtransition disclosure provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also amends disclosure requirements sfas 123 accounting stockbased compensation require prominent additional disclosure annual interim financial statements method accounting stockbased compensation interim disclosure provisions effective financial reports interim periods beginning december 15 2002 company adopted disclosure provisions sfas 148 january 1 2003 company transition use fair value method accounting stockbased compensation permitted sfas 148 adoption standard impact financial results may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity effective beginning first interim period beginning june 15 2003 however certain aspects sfas 150 deferred sfas 150 establishes standards companys classification liabilities financial statements characteristics liabilities equity company adopted sfas 150 quarter ended september 30 2003 adoption standard impact financial results january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 clarifies application accounting research bulletin 51 consolidated financial statements fin 46 requires variable interest entities vie consolidated company subject majority risk loss vie activities entitled receive majority entitys residual returns company consolidates vie called primary beneficiary entity fin 46 also requires disclosures vie company required consolidate significant variable interest provisions interpretation apply immediately vie created january 31 2003 apply existing vie first fiscal year interim period ending december 15 2003 company currently assessing application fin 46 may relate variable interests acquired september 30 2003 obligations commitments september 30 2003 company following obligations commitments make future payments contracts contractual obligations commercial commitments item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis companys financial condition results operations read conjunction companys financial statements related notes thereto appearing elsewhere herein overview revenues recognized upon product shipment satisfaction significant vendor obligations net sales consist product sales less discounts cost sales includes current estimated allowances losses returns accepted companys distributors addition cost sales includes credits rebates incentives passed allied distributors companys return policy previously placed major emphasis customer accommodation expense losses arising product could returned distributors result policy company experienced high losses product returns fiscal year 1995 25 sales 1995 company recognized need tighter controls product returns centralized processing returns october 1995 company amended return policy closely align policies distributors addition new database could closely monitor returned product authorization initiated additional personnel hired assist return processing result controls attention returns loss estimates product returns considered significant year ended 1996 company experience significant differences tax financial reporting purposes companys effective tax rate varied significantly statutory rate past company anticipate effective tax rate vary significantly statutory rate future company place order product purchases distributors received customer sales order inventory dropshipped distributor either customer companys configuration center memphis tennessee distributor typically ships products within one two days receipt purchase order consequently substantially companys revenues quarter result orders received quarter thus although company maintain inventory stock resale records inventory merchandise configured merchandise purchased distributors yet shipped customers result company generally reflects one two days cost sales inventory following table sets forth certain financial data percentage net sales periods indicated comparison years ended september 30 1996 1995 net sales net sales 1996 3451 million increase 1443 million 719 compared 2008 million 1995 increase sales attributable sales new customers increased sales existing customers sales ibm accounted 27 total sales 28 total accounts receivable 1996 fiscal year compared 11 15 respectively prior fiscal year company anticipates continued sales growth fiscal 1997 moderate rate increase experienced fiscal 1996 gross profit gross profit 1996 289 million increase 129 million 804 compared 160 million 1995 remained relatively consistent percentage sales approximately 84 1996 compared 80 1995 though company seeking expand higher gross profit valueadded services company expect pressures gross profit margins core business continue company anticipates incentive rebates manufacturers may decline would result reduction gross margins selling marketing expenses selling marketing expenses 1996 153 million increase 59 million 639 compared 93 million 1995 primarily result increased sales volume percentage sales however expense decreased 44 1996 46 1995 due fixed costs spread higher volume sales lower commission rate paid sales highvolume customers general administrative expenses general administrative expenses 1996 59 million increase 22 million 584 compared 38 million 1995 primarily result increased staff necessary support increase sales volume administrative activities software development upgrades maintenance 9 million except 6 million cumulative capitalized software development costs amortized three years commencing june 1996 software related costs expensed incurred percentage sales general administrative expenses decreased slightly 17 1996 compared 19 1995 litigation settlement defense recovery april 1996 company entered settlement agreement former employee see item 3 legal proceedings interest expense interest expense 1996 17 million decrease 2 million 92 compared 18 million 1995 decrease interest expense primarily due reduction debt 147 million applying proceeds public offering debt reduction well reduction interest rate gradually declined year 20 reflected slight prime reduction improved borrowing rate lender offsetting reductions debt increased borrowings support accounts receivable growth 241 million net income net income 1996 33 million increase 26 million 3735 compared 70 million 1995 increase 1996 net income resulted primarily 719 increase sales related 804 increase gross profit 1996 discussed additionally although gross profit remained relatively stable percentage sales selling marketing expenses general administrative expenses decreased percentage sales 65 1995 61 1996 comparison years ended september 30 1995 1994 net sales net sales 1995 2008 million increase 908 million 826 compared 1100 million 1994 increase sales attributable sales new customers increased sales existing customers addition ibm customer early fiscal 1995 gross profit gross profit 1995 160 million increase 71 million 796 compared 89 million 1994 remained consistent percentage sales approximately 80 1995 compared 81 1994 selling marketing expenses selling marketing expenses 1995 93 million increase 38 million 694 compared 55 million 1994 primarily result increased sales volume percentage sales however expense decreased 46 1995 50 1994 due fixed costs spread higher volume sales lower commission rate paid sales highvolume customers general administrative expenses general administrative expenses 1995 38 million increase 16 million 739 compared 22 million 1994 primarily result increased staff necessary support increase sales volume administrative activities percentage sales general administrative expenses decreased slightly 19 1995 compared 20 1994 interest expense interest expense 1995 18 million increase 7 million 644 compared 11 million 1994 increase interest expense primarily due increased borrowings support increase companys accounts receivable balances resulting growth net sales lesser extent slight increase interest rates net income net income 1995 7 million increase 5 million 2765 compared 19 million 1994 increase 1995 net income resulted primarily 826 increase sales related 796 increase gross profit 1995 discussed additionally although gross profit remained relatively stable percentage sales selling marketing expenses general administrative expenses decreased percentage sales 70 1994 65 1995 liquidity capital resources fiscal 1996 operating activities used cash totaling 160 million compared 93 million used prior fiscal year primary cause increased use cash accommodate increase accounts receivable 241 million resulting sales growth restricted cash representing amounts deposit financial institutions pursuant certain credit arrangements decreased 5 million fiscal year 1996 due payoff allied distributor indebtedness proceeds public offering september 30 1996 restricted cash represented primarily cash held escrow security purchase agreement allied distributor agreement requires 55 million products purchased 18 month period beginning october 1 1996 pro rata portion escrowed funds released incremental 5 million dollar purchase levels obtained company meet purchase commitment full unreleased funds would forfeited allied distributor investing activities used cash totaling 22 million fiscal 1996 compared 8 million used prior year half 13 million increase software development remainder computer equipment office equipment furnishings financing activities provided net cash totaling 211 million mostly net proceeds companys ipo another source cash borrowings lines credit used primarily finance accounts receivable balances grown result increased sales companys accounts receivable balance september 30 1996 1995 557 million 319 million respectively number days sales outstanding accounts receivable 59 days 58 days september 30 1996 1995 respectively september 30 1996 company approximately 38 million cash including 6 million restricted cash working capital 183 million company several revolving credit facilities collateralized accounts receivable assets company including 40 million line ibm credit corporation ibm credit september 30 1996 1995 lines credit provided maximum aggregate borrowings approximately 486 million 335 million respectively approximately 365 million 275 million outstanding respectively outstanding borrowings lines credit bear interest prime plus 1 lines credit automatically renewable annual basis unless notification election renew made either company creditor prior annual renewal date borrowings collateralized substantially companys assets addition lines credit contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends september 30 1996 company compliance covenants companys line credit agreements company believes net proceeds recent sale common stock together current working capital available lines credit cash flows operations sufficient meet working capital expenditure requirements least next 12 months impact inflation impact inflation company significant recent years relatively low rates inflation experienced united states recent pronouncements october 1995 financial accounting standards board issued statement financial accounting standards 123 sfas 123 accounting stockbased compensation established fair value based method accounting stockbased compensation plans requires additional disclosures companies elect adopt new method accounting disclosure requirements statement effective companys fiscal year 1997 company yet determined whether adopt accounting requirements standard whether elect disclosure requirements continue measure compensation costs using accounting principles board opinion 25 1995 statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 issued adopted company year ended september 30 1996 statement requires longlived assets certain identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable adoption sfas 121 material impact financial position results operations cash flows company item 8 item 7 managements discussion analysis financial condition results operation following discussion analysis companys financial condition results operations read conjunction financial statements notes thereto included elsewhere annual report form 10k overview company incorporated january 1993 commenced operations march 1993 reseller information technology products company began emphasizing valueadded offerings customers fiscal 1997 valueadded services accounted 16 companys net sales fiscal 1997 gross profit margins valueadded services company currently offers significantly higher gross profit margins companys information technology products reselling business companys net sales increased 1100 million fiscal 1994 companys first full year operations 4914 million fiscal 1997 representing compound annual growth rate 647 growth net sales principally driven sales new customers increased sales existing customers well geographic expansion opening additional sales offices companys gross profit margins expanded 81 fiscal 1994 90 fiscal 1997 principally due increased purchasing volume resulting better purchasing terms shift highermargin product sales highermargin valueadded services companys operating income increased 13 million fiscal 1994 108 million fiscal 1997 representing compound annual growth rate 1039 growth operating income principally driven increased sales gross profit margins decline general administrative expenses excluding software development costs percentage net sales product revenues recognized upon shipment satisfaction significant vendor obligations service revenues recognized based contractual hourly rates services rendered upon completion specified contract services net sales consist product service revenues less discounts cost sales include product service costs current estimated allowances returns products accepted companys distributors manufacturers less incentive credits companys business model involves resale information technology products held inventory certain distributors company maintain significant amounts inventory hand resale company typically place order product purchases distributors received customer purchase order inventory dropshipped distributor either customer companys configuration center memphis tennessee distributor typically ships products within 24 hours following receipt purchase order consequently substantially companys net sales quarter result orders received quarter although company maintains little inventory stock resale records inventory merchandise configured products purchased distributors yet shipped customers company experience significant differences tax financial reporting purposes companys effective tax rate varied significantly statutory rate past company anticipate effective tax rate vary significantly statutory rate future results operations following table sets forth certain financial data percentage net sales periods indicated comparison fiscal years ended september 30 1997 1996 net sales net sales increased 1463 million 424 4914 million fiscal 1997 3451 million fiscal 1996 increase net sales attributable sales new customers increased sales existing customers increased sales valueadded services company opened four sales offices fiscal 1997 contributed 106 million net sales net sales ibm contract increased 479 million fiscal 1997 1455 million accounted 296 net sales fiscal 1997 compared 283 net sales fiscal 1996 gross profit gross profit increased 152 million 524 441 million fiscal 1997 289 million fiscal 1996 increased percentage net sales 90 fiscal 1997 84 fiscal 1996 improvement gross profit margin primarily attributable increased purchasing volume resulting better purchasing terms shift highermargin product sales highermargin valueadded services selling marketing expenses selling marketing expenses increased 71 million 465 223 million fiscal 1997 153 million fiscal 1996 primarily result increased sales volume percentage net sales selling marketing expenses increased 46 fiscal 1997 44 fiscal 1996 primarily due hiring additional personnel opening four sales branch offices general administrative expenses general administrative expenses increased 50 million 833 109 million fiscal 1997 59 million fiscal 1996 significant factor contributing increase general administrative expenses increase software development costs increased 23 million fiscal 1997 03 million fiscal 1996 addition company hired additional personnel support increase sales volume administrative duties percentage net sales general administrative expenses increased 22 fiscal 1997 17 fiscal 1996 litigation settlement defense net april 1996 company entered settlement agreement former employee relating claims respect companys use certain proprietary software programs originally developed employee prior employment company settlement consideration entering settlement company agreed pay former employee installment payments totaling 1225000 remaining unpaid balance settlement september 30 1997 1996 287511 447512 respectively august 1996 company entered separate settlement agreement insurance carrier whereby insurance carrier reimbursed company amounts paid company pursuant settlement well certain legal expenses incurred company connection settlement underlying claims fiscal 1996 company expensed 524913 litigation settlement defense costs net insurance recoveries operating income operating income increased 36 million 505 108 million fiscal 1997 72 million fiscal 1996 primarily result increased sales volume accompanied improved gross profit margins percentage net sales operating income improved 22 fiscal 1997 21 fiscal 1996 interest expense interest expense decreased 434000 259 12 million fiscal 1997 17 million fiscal 1996 decrease interest expense primarily due improved borrowing rates following companys may 1996 initial public offering resulted weighted average interest rate declining 108 fiscal 1996 82 fiscal 1997 net income net income increased 25 million 751 58 million fiscal 1997 33 million fiscal 1996 increase net income resulted primarily 424 increase net sales related 524 increase gross profit well reduction interest expense percentage net sales net income improved 12 fiscal 1997 10 fiscal 1996 comparison fiscal years ended september 30 1996 1995 net sales net sales increased 1443 million 719 3451 million fiscal 1996 2008 million fiscal 1995 increase net sales attributable sales new customers increased sales existing customers company opened two sales offices fiscal 1996 contributed 32 million net sales net sales ibm contract increased 736 million fiscal 1996 976 million accounted 283 net sales fiscal 1996 compared 121 fiscal 1995 gross profit gross profit increased 129 million 804 289 million fiscal 1996 compared 160 million fiscal 1995 increased percentage net sales 84 fiscal 1996 80 fiscal 1995 improvement gross profit margin primarily due increased purchasing volume resulting better purchasing terms selling marketing expenses selling marketing expenses increased 59 million 639 153 million fiscal 1996 93 million fiscal 1995 primarily result increased sales volume percentage net sales however selling marketing expenses decreased slightly 44 fiscal 1996 46 fiscal 1995 primarily due fixed costs spread higher sales volume lower commission rate paid sales highvolume customers general administrative expenses general administrative expenses increased 22 million 584 59 million fiscal 1996 38 million fiscal 1995 primarily result hiring additional personnel support increase sales volume administrative activities percentage net sales general administrative expenses decreased slightly 17 fiscal 1996 19 fiscal 1995 operating income operating income increased 42 million 1422 72 million fiscal 1996 30 million fiscal 1995 primarily result increased sales volume improved gross profit margins reduction operating expenses percentage net sales percentage net sales operating income increased 21 fiscal 1996 15 fiscal 1995 excluding net litigation settlement defense charge operating income would 77 million fiscal 1996 22 net sales interest expense interest expense decreased 170000 92 17 million fiscal 1996 18 million fiscal 1995 decrease interest expense primarily due applying 147 million net proceeds companys initial public offering pay line credit offsetting reduction debt increased borrowings support accounts receivable growth 241 million net income net income increased 26 million 3735 33 million fiscal 1996 703000 fiscal 1995 increase net income resulted primarily 719 increase net sales related 804 increase gross profit reduction operating expenses percentage net sales percentage net sales net income improved 10 fiscal 1996 04 fiscal 1995 excluding litigation settlement charge net income would 36 million fiscal 1996 11 net sales quarterly financial results following tables sets forth certain unaudited quarterly financial data expressed percentage net sales information derived companys unaudited financial statements opinion management reflect adjustments consisting normal recurring adjustments necessary fair presentation quarterly information operating results quarter necessarily indicative results expected future period liquidity capital resources operating activities used cash totaling 138 million fiscal 1997 compared 160 million used fiscal 1996 primary factor decline use cash fiscal 1997 increase net income net cash used operating activities significant due working capital requirements resulting rapid growth company specifically financing increasing accounts receivable balances direct result increased sales companys accounts receivable balance september 30 1997 1996 769 million 557 million respectively number days sales outstanding accounts receivable 57 days 59 days september 30 1997 1996 respectively september 30 1997 restricted cash 412000 represented cash placed company escrow account collateral obligations purchase agreement allied distributor agreement requires company purchase 550 million products allied distributor 18month period beginning october 1 1996 every 50 million aggregate purchases company reached pro rata portion funds released company escrow account company fail meet purchase commitment full funds remaining escrow account would forfeited allied distributor investing activities used cash totaling 17 million fiscal 1997 compared 22 million used fiscal 1996 investing activities related purchase computer equipment office furniture equipment reduction cash used investing activities fiscal 1997 principally due software development costs longer capitalized fiscal 1998 company purchased facility ontario california initially used configuration boardlevel repair maintenance company expects ontario facility operational end june 1998 ultimately company plans equip staff plant build toorder manufacturing capabilities become iso 9002 certified company estimates cost plant fully equipped approximately 87 million company obtained mortgage 40 million facility costs bears interest 85 per annum amortized 15 years company expects finance balance facility costs borrowings companys lines credit company anticipates incurring startup expenses relating ontario facility approximately 300000 first two quarters fiscal 1998 financing activities provided net cash totaling 157 million fiscal 1997 compared 211 million fiscal 1996 mostly borrowings lines credit used primarily finance accounts receivable balances grown result increased sales september 30 1997 company approximately 37 million cash including 04 million restricted cash working capital 248 million company several revolving credit facilities collateralized accounts receivable assets company including 700 million line credit ibmcc september 30 1997 1996 lines credit provided maximum aggregate borrowings approximately 810 million 486 million respectively approximately 507 million 365 million outstanding respectively borrowings ibmcc financing agreement collateralized certain assets company including accounts receivable inventory equipment addition lines credit contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained lines credit september 30 1997 company compliance covenants companys line credit agreements ibmcc financing agreement expires april 13 1998 ibmcc may terminate ibmcc financing agreement time upon occurrence subsequent failure cure event default term defined ibmcc financing agreement event termination outstanding borrowings ibmcc financing agreement become immediately due payable entirety outstanding borrowings ibmcc financing agreement bear interest prime less 025 825 november 30 1997 recently announced accounting standards february 1997 financial accounting standards board fasb issued statement financial accounting standards sfas 128 earnings per share sfas 128 sfas 128 requires dual presentation newly defined basic diluted earnings per share face income statement entities complex capital structures method considered compatible international accounting standards sfas 128 effective fiscal years ending december 15 1997 company currently evaluating impact sfas 128 june 1997 fasb issued sfas 130 reporting comprehensive income sfas 130 establishes guidelines reporting display comprehensive income components financial statements disclosure comprehensive income components required beginning companys fiscal year ending september 30 1999 also june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 requires companies disclose operating segments based way management disaggregates company making internal operating decisions new standard effective companys 1999 fiscal year end company yet evaluated impact new standard item 8 item 7a quantative qualitive disclosures market risk company exposed market risk changes interest rates primarily result borrowings lines credit companys line credit ibmcc bore interest prime rate less 025 fiscal 2000 increased prime plus 2 effective december 15 2000 assuming increase onehalf percentage point lenders prime rate october 1 2000 change outstanding borrowings lines credit september 30 2000 interest expense would increase approximately 50000 fiscal year 2001 compared fiscal year 2000 item 8 item 7a quantitative qualitative disclosure market risk company presently limited exposure market risk changes interest rates borrowings lines credit companys primary working capital financing agreement foothill foothills lending agreement provides interest maximum rate 2 prime ibmcc separate lending agreement provides 30day free flooring stipulation foothill guarantees company borrowings guarantee ibmcc foothill charges company 1 outstanding balances judicious use ibmcc interestfree flooring company able largely limit interest charges 1 borrowings fiscal year 2002 companys ability available interestfree flooring assuming interest rates increase assumed percentage next fiscal year would financial impact upon company incremental increase long company successful limiting borrowing 20 million 30day interestfree flooring borrowings excess 20 million would course subject foothills borrowing rate 2 prime rate 475 september 30 2002 subsequently lowered 425 effective november 7 2002 company also committed offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes company commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 7a quantitative qualitative disclosure market risk presently limited exposure market risk changes interest rates borrowings line credit ge’s lending agreement provides interest 1 prime per annum minimum rate 50 effectively interestfree flooring made available incur little interest expense also committed certain offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 7a quantitative qualitative disclosure market risk primary objective investment activities preserve principal time maximizing income receive investments without significantly increasing risk securities invest may market risk means change prevailing interest rates may cause principal amount investment fluctuate example hold security issued fixed interest rate thenprevailing rate prevailing interest rate later rises principal amount investment probably decline seeking minimize risk maintain portfolio cash equivalents shortterm investments variety securities including commercial paper money market funds government nongovernment debt securities average duration investments fiscal year 2007 less one year due shortterm nature investments believe material exposure interest rate risk arising investments hypothetical 10 adverse move interest rates along entire interest rate yield curve would materially affect fair market value interest sensitive financial investments declines interest rates time however reduce investment income increases interest rates time increase interest expense historically september 30 2007 used derivative instruments engaged hedging activities presently limited exposure market risk changes interest rates borrowings line credit ge’s lending agreements provide interest 1 prime per annum minimum rate 50 effectively interestfree flooring made available incur little interest expense therefore hypothetical 10 increase interest rate levels september 30 2007 would material impact financial position consolidated results operations cash flows exposed foreign currency risk exchange rate differences extent investment ovex pakistan since operations incur local operating costs generate third party revenues currencies us dollar date entered hedging transactions market sensitive instruments attempt reduce exposure foreign currency exchange risks however may decide future implement active hedging program utilizing derivative instruments assist managing foreign currency exchange risk based overall foreign exchange rate exposure september 30 2007 10 change rupee would material effect financial position consolidated results operations cash flows also committed certain offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 7a quantitative qualitative disclosure market risk applicable smaller reporting company item 8 item 7a quantitative qualitative disclosure market risk presently limited exposure market risk changes interest rates borrowings line credit ge’s lending agreement provides interest 1 prime per annum minimum rate 50 effectively interestfree flooring made available incur little interest expense also committed certain offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 7a quantative qualitive disclosures market risk company exposed market risk changes interest rates primarily result borrowings lines credit companys lines credit bear interest prime rate less 025 assuming increase onehalf percentage point lenders prime rate october 1 1999 change outstanding borrowings lines credit september 30 1999 interest expense would increase approximately 105000 fiscal year 2000 compared fiscal year 1999 item 8 item 7a quantative qualitive disclosures market risk company exposed market risk changes interest rates primarily result borrowings lines credit companys line credit ibmcc bore interest prime rate less 025 increased prime plus 2 effective april 15 2001 assuming increase onehalf percentage point lenders prime rate october 1 2001 average borrowings lines credit fiscal 2001 interest expense would increase approximately 15000 fiscal year 2002 compared fiscal year 2001 item 8 item 7a quantitative qualitative disclosure market risk presently limited exposure market risk changes interest rates borrowings line credit ge’s lending agreement provides interest 1 prime per annum minimum rate 50 effectively interestfree flooring made available incur little interest expense also committed certain offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 7a quantitative qualitative disclosure market risk company presently limited exposure market risk changes interest rates borrowings lines credit companys primary working capital financing agreement foothill foothills lending agreement provides interest maximum rate 25 prime ibmcc separate lending agreement provides 30day free flooring stipulation foothill guarantees company borrowings guarantee ibmcc foothill charges company 125 per annum average outstanding balances owed ibmcc judicious use ibmcc interestfree flooring company able largely limit interest charges 04 million borrowings fiscal year 2003 02 million represents cost guarantee ibmcc companys ability available interestfree flooring assuming interest rates increase assumed percentage next fiscal year would little financial impact upon company incremental increase long company successful limiting borrowing foothill continuing use 16 million 30day interestfree flooring borrowings excess 16 million would course subject foothills borrowing rate maximum 25 prime rate 400 september 30 2003 company also committed offbalance sheet obligations represented operating leases office facilities various types office equipment fully disclosed financial statement footnotes company commercial paper derivatives swaps hedges joint ventures andor partnerships currency fluctuation disclose evaluate market risks item 8 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data reference made financial statements included report pages item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data financial statements listed index financial statements page item 9 item 8 financial statements supplementary data en pointe technologies inc report independent accountants board directors stockholders en pointe technologies inc audited accompanying balance sheets en pointe technologies inc september 30 1996 1995 related statement operations stockholders equity cash flows three years period ended september 30 1996 also audited financial statement schedule listed index page 18 form 10k financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position en pointe technologies inc september 30 1996 1995 results operations cash flows three years period ended september 30 1996 conformity generally accepted accounting principles addition opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp los angeles california november 15 1996 en pointe technologies inc balance sheets see notes financial statements en pointe technologies inc statements operations see notes financial statements en pointe technologies inc statements stockholders equity see notes financial statements en pointe technologies inc statements cash flows see notes financial statements en pointe technologies inc notes financial statements 1 organization summary significant accounting policies organization company incorporated laws state texas january 25 1993 name infosystemsinc name later changed infotech systems commenced operations march 1993 september 21 1995 company changed name en pointe technologies inc february 1996 companys board directors board authorized reincorporation company state delaware total authorized shares classes stock 20000000 shares consisting 15000000 shares common stock 001 par value per share 5000000 shares preferred stock 001 par value per share effected effective date registration statement initial public offering ipo common stock connection reincorporation company authorized forward stock split 2077 shares share issued outstanding common stock company share pershare amounts adjusted retroactively reflect stock split may 8 1996 company successfully completed initial public offering ipo 2250000 shares 8 per share company reseller computers computerrelated products services currently sales offices twelve locations revenue recognition revenues recognized upon product shipment satisfaction significant vendor obligations net sales consist product sales less discounts estimated allowance returns provided extent returns accepted companys vendors september 30 1996 1995 allowance returns approximately 386600 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes statement cash flows company considers time deposits highly liquid investments acquired maturities three months less cash equivalents inventories consist principally merchandise configured customer orders merchandise purchased resale company yet shipped companys vendors customers stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lessor remaining lease term estimated useful lives upon sale gain en pointe technologies inc notes financial statements continued 1 organization summary significant accounting policies continued loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value short maturity carrying amount longterm debt also assumed approximate fair value advertising company reports costs advertising periods costs incurred income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized concentration credit risk major customers financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions years ended september 30 1996 1995 one companys customers accounted approximately 27 11 net sales respectively company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements generally within managements expectations net income per share net income per share based weighted average number common equivalent shares outstanding period using treasury stock method common equivalent shares related stock options excluded computation effect antidilutive recently issued accounting standards october 1995 financial accounting standards board issued statement financial accounting standard 123 accounting stockbased compensation accounting disclosure requirements statement effective companys fiscal year 1997 company yet determined whether adopt accounting requirements standard whether elect disclosure requirements continue measure compensation cost using accounting principles board opinion no25 en pointe technologies inc notes financial statements continued 1 organization summary significant accounting policies continued 1995 statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 issued adopted company year ended september 30 1996 statement requires longlived assets certain identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable adoption sfas 121 material impact financial position results operations cash flows company reclassifications certain reclassification made 1995 financial statements conform 1996 presentation 2 property equipment property equipment consist following 3 lines credit september 30 1996 1995 company outstanding borrowings 36503838 27472952 respectively lines credit various financial institutions line credit agreements provide total financing 48550000 33500000 september 30 1996 1995 respectively annual interest rates prime plus 1 250 respectively total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets including certificates deposit 10000 1116000 classified restricted cash september 30 1996 1995 respectively borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain various covenants provide among things restriction dividend payments requirement maintenance certain financial ratios september 30 1996 company compliance covenants line credit agreements prime rate interest 825 875 775 september 30 1996 1995 1994 respectively weighted average interest rates years ended september 30 1996 1995 1994 1078 1076 874 respectively lines credit automatically renewable annual basis unless notification election renew made either company creditor prior annual renewal date en pointe technologies inc notes financial statements continued 4 notes payable notes payable consist following vendor notes collateralized substantially assets company certain notes also required company maintain specified financial ratios september 30 1995 notes one vendors entered directly vendor certain stockholders however notes guaranteed company collateralized substantially assets company principal interest payments notes made company interest expense notes payable stockholders years ended september 30 1996 1995 1994 5630 94200 88600 respectively maturities longterm debt september 30 1996 follows 5 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest 7 years service contributions made company 401k plan fiscal years 1996 1995 en pointe technologies inc notes financial statements continued 6 income taxes components income tax benefit provision follows provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes based level taxable income generated company prior periods management believes likely company realize benefit recorded net deferred tax asset significant components deferred taxes follows en pointe technologies inc notes financial statements continued 7 commitments contingencies company leases office facilities various office equipment leases extend period six years accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year september 30 1996 follows rent expense years ended september 30 1996 1995 1994 operating leases approximately 1104000 966000 578000 respectively company entered employment contracts certain officers agreements provide annual base salary annual increases provide annual bonuses determined board directors agreements fiveyear terms ending various times fiscal 2001 provide guaranteed severance payments upon termination employment august 22 1996 company entered agreement distributor requires 55 million products purchased distributor 18 month period competitive market prices minimum quarterly purchases beginning october 1 1996 range 36 million 15 million guarantee performance agreement company placed 600000 escrow account interest bearing pro rata portion escrowed funds released 5 million dollar purchase levels achieved 8 stock options warrants company qualified incentive stock option plan nonqualified stock option plan provides options maximum 360000 shares common stock may granted directors officers key employees period exceed ten years qualified stock options exercisable fair market value date grant nonqualified stock options 80 fair market value date grant september 30 1996 warrants purchase 217500 shares companys common stock outstanding warrants issued company underwriter initial public offering five year life exercise price 960 per share en pointe technologies inc notes financial statements continued 9 employee stock plan company also employee stock purchase plan remains authorized available sale employees aggregate 250000 shares companys common stock plan intended qualify section 423 code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period 10 litigation settlement april 1996 company bob din naureen din entered settlement agreement former employee company pursuant former employee released company claims respect companys use certain computerized information system software originally developed former employee prior employment company settlement agreement consideration entering settlement agreement company agreed pay former employee installment payments equivalent present value 11 million legal fees incurred connection settlement agreement related litigation expensed incurred company filed suit insurance carrier order recoup legal costs incurred company connection defense foregoing litigation well amounts paid former employee pursuant settlement august insurance company settled company paying total 1562500 11 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended 1996 1995 presented thousands except per share amounts third quarter 1996 company settled lawsuit former employee 13 million less partial recovery 7 million insurance carrier 6 million net expense fourth quarter 1996 remaining insurance recovery 7 million received less related expenses 1 million 6 million net recovery income schedule ii en pointe technologies inc valuation qualifying accounts item 9 item 8 financial statements supplementary data reference made financial statements included report pages item 9 item 15 exhibits financial statements schedules reports form 8k athe following documents filed part report 1financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3exhibits list exhibits accompanying exhibit index herein incorporated reference breports form 8k company filed current report form 8k dated october 11 2002 report en pointe technologies completed purchase certain assets tabin corporation chicagobased regional valueadded reseller assets purchased consisted 220000 inventory fixed assets 700000 intangible assets primarily customer relationships additional 300000 may paid certain operating targets achieved fourmonth period ending february 28 2003 shareholders tabin corporation may also receive additional earnout payments based upon achieving certain profitability targets twoyear period beginning november 1 2002 purchase price 920000 paid cash along acquisition assets en pointe hired approximately 40 former tabin sales service operations personnel en pointe technologies inc report independent accountants board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index page present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2002 2001 results operations cash flows three years period ended september 30 2002 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp los angeles california november 25 2002 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders equity thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 22 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity management plans reflected accompanying financial statements company experienced declining sales losses operations last three fiscal years ended september 30 2002 sales declines approximately 342 million operating losses approximately 100 million fiscal 2000 attributable activities former subsidiaries since deconsolidatedsee note 2 investment affiliates management believes exception amounts related deconsolidated former subsidiaries remainder companys sales declines losses primarily attributable industrywide decline information technology spending order counter sales profitability declines company completed two restructurings fiscal years 2001 2000 certain fixed occupancy payroll costs reduced addition second quarter fiscal 2002 change certain key executives part change chairman ceo returned former position president company responsibility daytoday operations addition company rehired former senior vice president sales certain senior sales employees previously worked company new management team taken following actions intended increase sales improve profitability arefocused companys sales strategy back aggressive personal face selling model hiring 55 new account executives increase approximately 125 number account executives employed prior change management implementing robust processes managing account executives performance sales quotas breasserted companys focus selling managed services higher gross margins product sales cqualified company minorityowned business order provide enhanced sales opportunities certain public private sector customers whose procurement policies provide preferences minorityowned businesses dcommitted company strategy acquiring targeted smaller competitors company believes acquisition immediately accretive earnings company opportunity complete acquisition affordable price discussed note 16 october 11 2002 company acquired tabin corporation chicagobased valueadded reseller september 30 2002 company approximately 46 million cash working capital 168 million discussed note 3 company threeyear 300 million revolving credit facility foothill capital corporation foothill expires december 28 2004 credit facility collateralized accounts receivable assets company addition ibm credit corporation ibmcc continued provide company 30day interestfree inventory flooring financing 200 million separate oneyear agreement expiring december 28 2003 borrowings inventory flooring agreement serve reduce availability financing available line credit agreement september 30 2002 companys borrowings credit lines concentrated 124 million borrowings outstanding ibmcc 30day interestfree flooring agreement company additional borrowing capacity approximately 76 million taking consideration available collateral borrowing limitations financing agreements borrowings lending agreements collateralized substantially companys assets addition lines credit contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line june fiscal 2002 quarter company estimated possible loss trends noted quarter continued company would unable meet june 2002 quarter ebitda covenants existing lines credit foothill ibmcc respectively would default terms agreements avert default company renegotiated lines credit ease ebitda covenant requirements signed amendment loan agreement foothill july 30 2002 subsequently ibmcc august 6 2002 new covenants loan agreements ebitda nine months ended june 30 2002 could exceed negative 30 million thereafter ebitda measured cumulative rolling four quarter basis ending last day fiscal quarter september 30 2002 quarter set negative 38 million december 31 2002 quarter negative 23 million march 31 2003 quarter negative 15 million june 30 2003 quarter positive 12 million september 30 2003 quarter positive 25 million fiscal quarters thereafter remaining positive 25 million two financial covenants previously place tangible net worth 170 million annual limitation maximum asset acquisitions 12 million remained september 30 2002 company compliance loan covenants management believes operating plans implemented enable maintain compliance covenants least september 30 2003 management believes financing available company credit agreements together working capital resources september 30 2002 company net working capital approximately 168 million provide company sufficient working capital finance operations least next fiscal year however assurance managements plans successful improving companys sales profitability company unable maintain compliance loan covenants noncompliance waived lenders working capital line credit flooring line could revoked prior expiration dates eventuality management believes sufficient working capital enable continue operate least september 30 2003 however company would required significantly scale business plans unable obtain alternative sources financing principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany accounts transactions eliminated consolidated financial statements deconsolidation fiscal year 2000 firstsource previously wholly owned subsidiary completed series private placements aggregated 8630197 shares convertible preferred stock ranging prices 350 per share 419 per share increase shares outstanding may 16 2000 companys 6645000 shares common stock firstsource represented 435 voting interest effective may 16 2000 company otherwise control firstsource company began account investment firstsource equity method accounting november 1999 company formed new subsidiary supplyaccess inc supplyaccess address larger corporate customers needs find product internet favorable prices supplyaccess designed internet portal charging transaction fees seller company transferred information technology department related computer equipment software supplyaccess exchange 55 million note receivable gain loss recognized transaction concurrently agreed flat quarterly fee 500000 supplyaccess would provide company information technology services would allow company customers access fulfillment engine years ended september 30 2001 2000 company paid supplyaccess 1977341 2000000 respectively information technology services february 2000 supplyaccess completed initial private placement 12000000 shares convertible preferred stock 150 per share reduced companys voting interest 54 addition april 2000 supplyaccess completed supplemental private placement 5088318 shares convertible preferred stock 150 per share reduced companys voting interest 4510 two subsequent private placements 5196000 shares convertible preferred stock 150 per share reduced companys voting interest even 3865 effective april 4 2000 companys voting interest supplyaccess dropped 50 company otherwise control supplyaccess company began account investment supplyaccess equity method accounting periods prior reduction companys voting interest 50 company consolidated operating results assets liabilities firstsource supplyaccess dates deconsolidation company recognize gain approximately 100 million resulting accumulated losses recognized excess companys ownership interest former subsidiaries gain deferred due primarily companys continued guarantee certain debt obligations commitments considered increase companys investment basis adjusted basis equity method accounting investment unconsolidated affiliates company recognized accumulated losses excess companys ownership interest former subsidiaries periods former subsidiaries consolidated september 30 2002 2001 companys adjusted basis equity method accounting reduced zero accordance equity method accounting company suspended recognition equity method losses adjusted basis reduced zero future losses generated monitored reported equity method income recognized future periods companys share equity method income equals previously unreported equity method losses accumulated periods recognition equity method losses suspended years ended september 30 2002 2001 2000 company recognized income reversal excess losses previously recognized equity losses affiliates 674000 8392000 702000 respectively affiliates discontinued operations april 10 2001 firstsource ceased operations entirely assets assigned sherwood partners inc unaffiliated company assignee benefit creditors january 2002 majority shareholders supplyaccess approved transfer assets supplyaccess liquidator benefit creditors use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition product revenues recognized upon transfer title risk loss satisfaction significant obligations service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less estimated volume purchase incentives purchase rebates generally applicable specific customers received company vendors cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 2002 2001 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased company drop shipped yet received accepted customer stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lesser remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount longterm liabilities debt also approximates fair value longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value impairment losses years ended september 30 2002 2001 2000 advertising company reports costs advertising periods costs incurred fiscal years ended september 30 2002 2001 2000 advertising expense approximately 349000 299000 3343000 respectively income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits customers accounted 10 net sales follows respective percentage outstanding accounts receivable fiscal year end single customer accounted 10 net sales company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations year ended september 30 2002 2001 purchases three vendors accounted 63 48 total purchases respectively treasury stock company uses specific identification method accounting treasury stock 2001 fiscal year company purchased 120000 shares 253000 subsequently issued 64000 shares employee stock benefit plans 163000 2002 fiscal year company issued 100000 additional shares employee stock benefit plans 135000 september 30 2002 2001 remained approximately 2000 102000 treasury shares respectively cost 4000 214000 respectively stock based compensation company accounts stockbased employee compensation arrangements accordance provisions accounting principles board opinion apb 25 accounting stock issued employees complies disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation apb 25 compensation expense recognized vesting period based difference date grant deemed fair value companys stock accounting purposes exercise price company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force issue 9618 vendor programs company receives volume incentives purchase rebates certain manufacturers related sales certain products recorded reduction cost goods sold earned company also receives manufacturer reimbursement certain training promotional marketing activities offset expenses incurred company earnings per share basic net loss income per share computed dividing net loss income period weighted average number common shares outstanding period diluted net loss income per share computed dividing net loss income period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 reporting comprehensive income establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2002 2001 2000 segment reporting company discloses segment information accordance sfas 131 disclosures segments enterprise related information sfas 131 emphasizes management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers see note 14 segment information recently issued accounting standards june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations recorded value exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company adopted sfas 141 142 effective october 1 2002 company anticipate impact future financial results result adopting standard june 2001 fasb issued sfas 143 accounting asset retirementobligations statement establishes standards accounting obligations associated retirement tangible longlived assets company must adopt standard january 1 2003 management currently assessing impact standard august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company required adopt sfas 144 effective october 1 2002 company anticipate impact resulting adoption sfas 144 june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity liability exit cost recognized date entitys commitment exit plan sfas 146 requires liability cost associated exit disposal activity recognized fair value liability incurred provisions statement effective exit disposal activities initiated december 31 2002 2 property equipment property equipment consist following thousands depreciation amortization expense 1818000 1414000 2278000 years ended september 30 2002 2001 2000 respectively 3 lines credit september 30 2002 2001 company outstanding borrowings 12421000 9440000 respectively lines credit various financial institutions september 30 2002 2001 line credit agreements provide financing cash advances flooring 30 million 35 million respectively included separate lending agreement within companys 30 million line 20 million flooring agreement provides interestfree period approximately 30 days depending product sold total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2002 company compliance various debt covenants contained financing agreement prior fiscal year companys 35 million dollar line credit ibmcc expired september 30 2001 extended january 31 2002 december 28 2001 company entered 30 million line credit agreement three years foothill part separate oneyear agreement entered date ibmcc continued provide company 30day interest free inventory flooring financing 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 20 million consideration providing guarantee foothill agreement contains 1 annual charge average outstanding balances owing ibmcc minimum variable interest rate originally floored 600 per annum option company could based prime rate libor rate foothill agreement originally provided maximum interest rate 15 prime rate lesser interest rates dependent upon companys quarterly ebitda earnings exceeding certain targets july 30 2002 company renegotiated lines credit ease ebitda covenant requirements signed amendment loan agreement foothill signed like amendment subsequently ibmcc august 6 2002 november 25 2002 ibmcc extended 200 million interestfree flooring december 28 2003 terms amendment ibmcc added provision limits onhand inventory flooring amounts 30 million company believes adequate anticipated onhand inventory needs prime rate interest 475 650 september 30 2002 2001 respectively weighted average interest rates incurred line credit borrowings years ended september 30 2002 2001 2000 100 911 849 respectively 100 weighted average interest rate 2002 fiscal year resulted borrowings financed ibmcc interestfree flooring agreement whereby foothill paid 1 guarantee ibmcc companys borrowings interest expense majority ontario facility lease see note 6 years ended september 30 2002 2001 2000 823000 1002000 2308000 respectively 4 nonrecurring income charges nonrecurring income 09 million primarily resulted settlement litigation claim 08 million settled litigation claim company liable total 16 million various court decisions including accrued interest settled 12 million addition recovery 08 million insurance reimbursement relating previously expensed legal fees offset legal costs 04 million nonrecurring charges 08 million fiscal year ended september 30 2001 include restructuring charges 18 million legal settlement 02 million less reversal plaintiff legal fees recorded prior year result adverse judgment 12 million see note 13 nonrecurring charges fiscal year ended september 30 2000 include provision litigation 11 million related adverse judgment received legal matter see note 13 restructuring charges 15 million june 2001 company underwent second restructuring part plan convert fixed sales offices virtual sales offices executing restructure workforce reduced sixtyfour employees nine rental locations either closed converted virtual sales locations reduced size june 2000 company underwent initial restructuring charge result reorganizing certain aspects business elements restructuring plan included streamlining organization reducing costs expenses aligning resources accelerate growth potential companys core business executing restructure workforce reduced one hundred five employees independent contractors various levels five offices also closed converted virtual sales locations following table summarizes restructuring charges remaining reserves associated restructuring 5 gain sale assets fiscal 2000 conjunction former subsidiarys private placement marketable securities acquired produced gain 3938000 upon sale securities acquired february 23 2000 cost basis 6800000 6 saleleaseback ontario facility june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit company terminate lease cost penalty end seventh tenth year company currently occupies approximately 55 facility originally planned sublease remaining space however sfas 98 accounting leases subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property equipment estimated fair value related liability lease qualifies normal leaseback sfas 98 aggregate noncancellable annual future minimum lease payments income sublease term company may terminate lease ontario facility follows thousands year ended september 30 2002 2001 2000 ontario facility rent expense characterized financing lease sfas 98 approximately 558000 568000 551000 respectively 7 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 8 income taxes components income tax provision benefit follows thousands benefit provision income taxes differs amount computed applying federal statutory rate loss income benefit provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 58 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating losses nol available since fiscal 2000 nol attributable exercise stock options employees realization income tax benefits 47 million nol considered adjustment additional paidin capital benefit future earnings 9 commitments contingencies company leases office facilities various types office equipment leases extend period five years many contain renewal options andor escalation clauses accounted operating leases estimated future minimum lease payments operating leases initial remaining noncancelable lease terms excess one year september 30 2002 approximately follows thousands rent expense years ended september 30 2002 2001 2000 operating leases approximately 2072000 1794000 2273000 respectively 10 earnings per share preferred stock following table sets forth computation basic diluted net income loss per share thousands except per share amounts dilutive potential stock options include 5819 shares 324004 shares respectively years ended september 30 2002 2000 excluded calculation diluted loss per share effect inclusion would antidilutive company antitakeover provision grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority outstanding voting stock company section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change control company without action stockholders therefore could adversely affect market price common stock 11 stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years september 30 2002 2001 shares available grant plan 892606 512985 respectively following summary stock option activity company adopted disclosureonly provisions sfas 123 accounting stock based compensation expense stock options determined using fair value grant date awards 2002 2001 2000 consistent provisions sfas 123 companys net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2002 2001 2000 12 employee stock plan company employee stock purchase plan remains authorized available sale employees aggregate 350007 shares companys common stock september 30 2002 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period april 2002 company announced employees suspending plan notice 13 litigation february 6 2002 settlement agreement release entered company novaquest infosystems known webvision inc settling parties agreed stipulate reverse vacate november 7 2001 superior court judgment relating certain litigation company owed accrued books 1375000 along accrued interest 293000 terms settlement agreement company made various payments representative parties plaintiff totaling 1200000 discharge litigation claim company recorded settlement litigation nonrecurring charge income less certain litigation related income insurance reimbursement resulted total recovery 848000 september 18 2000 claim arbitration submitted first union securities new york stock exchange among others company president chief executive officer attiazaz din en pointe defendants first union alleges company din violated federal state securities laws connection promotion sale en pointe stock last half 1999 first half 2000 en pointe defendants dispute jurisdiction intend vigorously defend allegations en pointe defendants filed declaratory relief claim challenging arbitarbility first unions claims din company en pointe technologies inc et al v first union united states district court san diego case 02 cv 1246 k rbb court ruled claims must arbitrated january 2001 five companys directors one current officer certain former officers along four unrelated parties named shareholders derivative complaint alleging persons improperly benefited form sales shares companys common stock seeking recovery company damages sustained result activities fredrick v din et superior court california county los angeles case yc 039456 defendants intend vigorously defend allegations believe case without merit february 2001 company five companys directors one current officer certain former officers along seven unrelated parties named shareholder class action complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys shareholders damages sustained result activities en pointe technologies securities litigation united states district court southern district california case 01 cv0205l cga february 19 2002 en pointe defendants filed motion dismiss grounds allegations failed state actionable claims en pointe defendants motion dismiss granted leave amend plaintiffs filed amended complaint response due january 2003 en pointe defendants intend continue vigorously defend allegations december 2000 company certain current former directors officers along several unrelated parties named complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys shareholders damages sustained result activities crosby v en pointe technologies al superior court california county san diego gic 759905 parties stipulated stay case pending class action en pointe defendants intend vigorously defend allegations october 5 2001 action brought company qamar zaidi san bernardino county superior court case rcv 058254 plaintiff former employee alleges breach contract anticipatory breach repudiation breach implied covenant good faith fair dealing conversion claim asks 710000 damages 500000 punitive damages penalties labor code 150000 management consulting legal counsel determined potential adverse outcome litigation cannot estimated case set trial may 2003 march 2000 action brought company orange county superior court case 00cc03948 contending fraud breach contract arising purchase former subsidiary company certain assets company formerly known first source international fsi lawsuit filed rlc inc assignee benefit creditors defunct corporation paragon solutions inc formerly known fsi contended fsi unable obtain contingent earnout agreement faulty software provided company damages sought range 08 35 million plaintiff seeking punitive damages 10 million company successful compelling action moved arbitration since november 17 2000 court appeals rejected request plaintiff prohibit arbitration proceedings commenced company vigorously denies charges contends full disclosure made problems software former subsidiary date produced net income case remained dormant past two years legal counsel currently unable predict outcome litigation various claims litigation proceedings company involved ordinary course business outcome claims proceedings cannot predicted certainty consulting legal counsel management believe outcome matters material adverse affect companys business financial position results operations cash flows 14 segment information deconsolidation company consisted primarily three business units companies en pointe technologies firstsource supplyaccess companies separate management teams infrastructures facilities en pointe technologies focuses efforts sales technology products services fortune 1000 government customers en pointe technologies utilizes traditional national sales force sales representatives major metropolitan areas well available electronic interfaces en pointe customers vendors firstsource focused efforts sale technology products services primarily via internet consumers small medium sized businesses supplyaccess offered hosted businesstobusiness web application integrated customized sapbased enterprise fulfillment engine quarter ended june 30 2000 company began account investments firstsource supplyaccess equity method accounting see note 1 tables present information reported segments year ended september 30 2000 years ended september 30 2002 2001 company operated one segment company operates one geographic segment 15 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2002 2001 presented thousands except per share amounts 16 subsequent events october 11 2002 company purchased certain assets tabin corporation chicagobased regional valueadded reseller assets purchased consisted 220000 inventory fixed assets 700000 intangible assets primarily customer relationships additional 300000 may paid certain operating targets achieved fourmonth period ending february 28 2003 shareholders tabin corporation may also receive additional earnout payments based upon achieving certain profitability targets twoyear period beginning november 1 2002 purchase price 920000 paid cash along acquisition assets company hired approximately 40 former tabin sales service operations personnel en pointe technologies inc schedule ii valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized en pointe technologies inc attiazaz bob din attiazaz bob din chairman board chief executive officer principal executive officer dated december 23 2002 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din kevin ayers either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated signature title date attiazaz bob din attiazaz bob din chairman board chief executive officer president principal executive officer december 23 2002 kevin ayers kevin ayers chief financial officer principal financial principal accounting officer december 23 2002 naureen din naureen din director december 23 2002 barry abelson barry abelson director december 23 2002 s1 zubair ahmed zubair ahmed director december 23 2002 mark briggs mark briggs director december 23 2002 verdell garroutte verdell garroutte director december 23 2002 walter w larkins iii walter w larkins iii director december 23 2002 s2 certifications pursuant section 302 sarbanesoxley act 2002 attiazaz din certify 1i reviewed annual report form 10k en pointe technologies inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses december 23 attiazaz din attiazaz din chairman president chief executive officer s3 kevin ayers certify 1i reviewed annual report form 10k en pointe technologies inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions dall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls eany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses december 23 kevin ayers kevin ayers vice president chief financial officer s4 index exhibits exhibit number description 21 agreement plan merger registrant en pointe technologies inc texas corporation effective february 29 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 31 certificate incorporation registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 32 bylaws registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 33 certificate amendment certificate incorporation registrant filed may 16 2000 incorporated reference numbered exhibit registrants registration statement form 10k filed january 18 2001 43 form common stock certificate incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 101 en pointe technologies inc 1996 stock incentive plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 102 en pointe technologies inc employee stock purchase plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 103 form directors officers indemnity agreement incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 105 employment agreement registrant attiazaz bob din dated 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 1018 lease dated may 1999 us real estate consortium registrant property located 1040 vintage avenue ontario california incorporated reference numbered exhibit registrants form 10k filed january 13 2000 1019 lease dated april 2001 pacific corporate towers llc registrant property located 100 n sepulveda blvd 19th floor el segundo california incorporated reference numbered exhibit registrants form 10q filed august 14 2001 1020 employment agreement registrant michael r shabazian dated july 1 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1021 separation agreement registrant michael r shabazian dated december 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1022 employment agreement registrant thomas scott dated august 1 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1024 assignment license agreement registrant supplyaccess inc dated september 21 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1025 loan security agreement among en pointe technologies sales inc lenders named therein foothill capital corporation dated december 28 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1026 inventory financing agreement en pointe technologies sales inc ibm credit corporation dated december 28 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1027 employment agreement registrant kevin schatzle dated march 28 2002 1028 first amendment loan security agreement among en pointe technologies sales inc lenders named therein foothill capital corporation dated july 30 2002 1029 acknowledgment amendment financing agreement en pointe technologies sales inc ibm credit corporation dated august 6 2002 1030 second amendment loan security agreement consent among en pointe technologies sales inc lenders named therein foothill capital corporation dated october 9 2002 1031 asset purchase agreement entered october 10 2002 tabin corporation en pointe technologies sales inc 1032 amendment agreement inventory financing en pointe technologies sales inc ibm credit corporation dated november 21 2002 1033 amendment lease pacific towers registrant dated april 30 2001 211 subsidiaries company 231 consent pricewaterhousecoopers llp 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 chief executive officer 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 chief financial officer part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosure market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statements schedules reports form 8k en pointe technologies inc index financial statements report independent accountants en pointe technologies inc consolidated balance sheets thousands except share per share amounts en pointe technologies inc consolidated statements operations thousands except per share amounts en pointe technologies inc consolidated statements stockholders equity thousands en pointe technologies inc consolidated statements cash flows thousands en pointe technologies inc notes consolidated financial statements en pointe technologies inc schedule ii signatures index exhibits item 15 exhibits financial statement schedules following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto b exhibits list exhibits accompanying exhibit index herein incorporated reference en pointe technologies independent registered public accounting firm board directors stockholders en pointe technologies inc el segundo california audited accompanying consolidated balance sheet en pointe technologies inc september 30 2005 related consolidated statements operations stockholders’ equity cash flows year ended september 30 2005 also audited schedule listed accompanying index consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position en pointe technologies inc september 30 2005 results operations cash flows year ended september 30 2005 conformity accounting principles generally accepted united states america also opinion schedule ii valuation qualifying accounts year ended september 30 2005 presents fairly material respects information set forth therein bdo seidman llp los angeles california december 23 2005 independent registered public accounting firm board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2004 results operations cash flows two years period ended september 30 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provide reasonable basis opinion pricewaterhousecoopers llp los angeles california december 27 2004 en pointe technologies inc consolidated balance sheets see notes consolidated financial statements en pointe technologies inc consolidated statements operations see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders’ equity see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows see notes consolidated financial statements organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 17 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity capital resources last two fiscal years produced net income 15 million marginal comparison 364 million losses incurred previous five years fiscal years 1999 2003 represents positive change direction operations company change began second quarter fiscal year 2002 chairman ceo changed key executives resumed role president daytoday responsibilities company made two acquisitions accretive earnings return company low cost operational overhead model previously succeeded contracted offshore firms provide backoffice operational accounting related services rates substantially discounted available united states management believes turnaround plans continue successful improving company’s sales profitability sales gross profits fiscal year ended september 30 2005 improved results prior fiscal year increase selling marketing expenses contributed part sales improvement brought operating loss ultimately reversed increases income allocation affiliate losses minority interest increase net sales company’s accounts receivable increased accordingly principal contributor 92 million negative cash flow year september 30 2005 company approximately 69 million cash working capital 161 million discussed note 3 june 2004 company closed 300 million replacement working capital financing facility ge commercial distribution finance corporation “ge” term facility period three years except either party may terminate agreement upon 60 days’ prior written notice party september 30 2005 credit line borrowings amounted 168 million additional borrowings available approximately 163 million taking consideration temporary increase 50 million ge made available october 31 2005 available collateral borrowing limitations agreements borrowings line credit agreement collateralized substantially company’s assets financing agreements contain various liquidity financial covenants including without limitation ebitda sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter company compliance debt covenants september 30 2005 principles consolidation consolidated financial statements include company’s accounts whollyowned subsidiaries well affiliate pbpo approximate 38 owned variable interest entity intercompany accounts transactions eliminated consolidated financial statements since stockholders pbpo collectively represent approximately 62 voting interest majority ownership interest entitlement share losses reflected company’s consolidated balance sheet statement operations “minority interest” losses allocated 62 owners pbpo based upon percentage ownership upon “at risk” capital owners losses excess “at risk” capital allocated company without regard company’s capital risk date losses absorbed amount 21 million exceed invested capital 14 million 07 million investment premier pbo inc march 2005 company invested additional 250000 third round private placements common stock premier bpo inc formerly known en pointe global services inc “pbpo” company’s total investment pbpo common stock september 30 2005 759000 represents approximate 38 voting interest privatelyheld corporation pbpo business process outsourcing company formed october 2003 headquartered clarksville tennessee addition company’s pbpo common stock investments described company invested additional 600000 pbpo form fiveyear 6 interestbearing note subsequently converted series nonvoting convertible preferred stock pbpo october 2004 preferred stock may converted common stock earlier five years issuance date preferred stock effective date initial public offering conversion price set greater 100 per share fair market value determined preferred stock agreement en pointe’s approximate 38 voting interest pbpo referenced excludes series nonvoting convertible preferred stock holds pbpo considered related party company’s equity interest pbpo well interrelationship several investors company one company’s board members mark briggs owns approximately 21 pbpo also serves chairman board chief executive officer company’s chairman board bob din represents en pointe’s interest member board directors pbpo addition owners ovex technologies private limited “ovex” pakistani company islamabad performs operational side company’s outsourcing cost plus fixed fee agreement may cancelled upon written notice owns collectively approximately 19 pbpo owners ovex also hold shares series nonvoting convertible preferred stock pbpo received october 2004 exchange conversion fiveyear notes aggregated 603000 principal interest preferred shares held ovex component minority interest subject allocation pbpo losses substantial investment company made pbpo related party nature investment well factors company’s acquired interest pbpo evaluated determined pbpo met tests variable interest entity fin 46 pbpo’s financial results thus consolidated company’s financial statements since pbpo’s inception pbpo contracted ovex pakistan colwell salmon india provide workforces backoffice support pbpo shares workspace company islamabad nominal fee using contracted ovex workers contracts directly ovex workspace workers lahore september 2005 pbpo entered five year costplus fixed fee service agreement ovex supply contracted employees operating facility lahore pakistan addition pbpo agreed provide certain marketing services ovex agreements terminated thirty days written notice pbpo september 2005 pbpo also agreed cancel option purchase ovex consideration payment 200000 ovex 200000 amortized five years run concurrent five year service agreement entered ovex addition ovex agreed purchase certain office equipment net book value 124000 150000 business transactions related company’s outsourcing activities ovex including services billed operating cost charges balances due ovex follows changes minority interest thousands since october 1 2003 follows former investments unconsolidated affiliates september 30 2003 result recognizing accumulated losses excess company’s ownership interest two former subsidiaries periods former subsidiaries consolidated company’s adjusted basis equity method accounting reduced zero accordance equity method accounting company’s former subsidiaries deconsolidated became affiliates company suspended recognition losses however company guaranteed certain debt affiliates responsible certain obligations losses excess company’s investment affiliates recorded year ended september 30 2003 affiliates ceased operations liquidated became apparent company would responsible remaining accrued obligations affiliates company reversed accrued excess losses recognized income 143000 affiliates discontinued operations use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition company applies provisions securities exchange commission sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general company recognizes revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured company’s shipping terms title risk loss merchandise shipped pass delivered customer generally two three days product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included company’s inventory product revenues recognized upon transfer title risk loss satisfaction significant obligations company generally considers occur upon acceptance delivery products customer although customers accept title upon shipment company provides allowance sales returns based historical experience product sales shipped directly suppliers customers company takes title products sold upon shipment bears credit risk bears inventory risk returned products successfully returned suppliers although risks mitigated arrangements shippers suppliers service revenues recognized based contracted hourly rates services rendered accepted upon completion specified contracted services acceptance customer net sales consist product service revenues less cash discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted company’s suppliers less rebates cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits company experienced losses accounts believes exposed significant risk cash equivalents restricted cash restricted cash september 30 2005 2004 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased us drop shipped yet received accepted customer stated lower cost specific identification method market ongoing basis inventories reviewed written estimated obsolescence unmarketable inventories equal difference cost inventories estimated net realizable value changes increase inventory reserves recorded increase cost goods sold property equipment property equipment stated cost depreciated using straightline method estimated useful lives three seven years assets acquired capital lease arrangements recorded present value minimum lease payments amortized using straightline method life asset term lease whichever shorter amortization expense included depreciation expense leasehold improvements amortized using straightline method shorter lease terms useful lives improvements expenses repairs maintenance charged expense incurred renewals betterments capitalized gains losses sale disposal property equipment reflected operating income company accounts computer software costs developed internal use accordance statement position 981 sop 981 “accounting costs computer software developed obtained internal use” requires companies capitalize certain qualifying costs application development stage related software development project exclude initial planning phase determines performance requirements data conversion general administrate costs related payroll training costs incurred whenever software program considered operational company considers project completed places service commences amortization development cost succeeding month fiscal year 2005 company concluded development three internaluse software programs amortized straightline basis economic lives software products estimated four years costs capitalized include internal payroll direct fringe benefits external direct project costs including labor travel company began amortizing first internaluse programs may two october 2005 company’s machinery equipment see note 2 includes 781000 capitalized software development costs september 30 2005 203000 prior year fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount company’s longterm liabilities also approximates fair value based interest rates currently available us debt similar terms remaining maturities impairment longlived assets company assesses potential impairments longlived assets accordance provisions sfas 144 “accounting impairment disposal longlived assets” impairment review performed whenever events changes circumstances indicate carrying value assets may recoverable factors company considers include limited significant underperformance relative expected historical projected future operating results significant changes manner use acquired assets strategy overall business significant negative industry economic trends carrying value longlived asset may recoverable based upon existence one indicators impairment company estimates future undiscounted cash flows expected result use asset eventual disposition sum expected future undiscounted cash flows eventual disposition less carrying amount asset company recognizes impairment loss impairment loss reflected amount carrying amount asset exceeds fair value asset based fair market value available discounted cash flows date company recognized impairment charge related writedown longlived assets goodwill intangible assets company accounts goodwill intangible assets accordance provisions statement financial accounting standard sfas 142 “goodwill intangible assets” requires among things purchased goodwill certain intangibles amortized nonamortization approach goodwill intangibles indefinite life amortized instead reviewed impairment least annually event occurs circumstances indicate carrying amount may impaired events circumstances could indicate impairment include significant change business climate economic industry trends legal factors negative operating performance indicators significant competition changes strategy disposition reporting unit portion thereof goodwill impairment testing performed reporting unit level sfas 142 requires goodwill tested annually impairment using twostep process event occurs would likely reduce fair value reporting unit carrying amount goodwill shall tested time first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test must performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting unit goodwill carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units assignment goodwill reporting units determination fair value reporting unit fair value reporting unit estimated using discounted cash flow methodology requires significant judgments including estimation future cash flows dependent internal forecasts estimation longterm rate growth company’s business useful life cash flows occur determination weighted average cost capital changes estimates assumptions could materially affect determination fair value andor goodwill impairment reporting unit accordance sfas 142 company selected september 30 date company perform annual goodwill impairment test based valuation goodwill impairment charges related writedown goodwill recognized years ended september 30 2005 2004 connection company’s acquisitions company applied provisions sfas 141 “business combinations” using purchase method accounting assets liabilities assumed recorded estimated fair values determined management based information currently available current assumptions future operations excess purchase price fair values recorded goodwill company’s goodwill balance years ended september 30 2005 2004 318000 230000 respectively included assets accompanying consolidated balance sheet separable intangible assets finite useful lives amortized useful lives impaired asset written fair value intangible assets finite useful lives consist primarily customer relationships amortized expected period benefit five years using straightline sumoftheyearsdigits methods september 30 2005 2004 intangible assets amounted 271000 net 399000 accumulated amortization 282000 net 188000 accumulated amortization respectively included assets accompanying consolidated balance sheets advertising shipping handling costs company reports costs advertising periods costs incurred fiscal years ended september 30 2005 2004 2003 advertising expense approximately 224000 265000 549000 respectively shipping handling costs incurred company included cost sales income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts likely realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable company’s cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits customers accounted 10 net sales follows respective percentage outstanding accounts receivable fiscal year end company performs periodic credit evaluations financial condition customers monitors collections payments customers generally require collateral receivables generally due within 45 days company provides possible inability collect accounts receivable recording allowance doubtful accounts company writes account considered uncollectible company estimates allowance doubtful accounts based historical experience aging accounts receivable information regarding creditworthiness customers date losses within range management’s expectations company contracts various suppliers although limited number suppliers capable supplying inventory needs company believes shortfalls existing suppliers would absorbed suppliers comparable terms however change suppliers could cause delay sales adversely effect results purchases company’s three largest vendors years ended september 30 2005 2004 2003 comprised 54 56 53 respectively total purchases inventory supplies treasury stock company uses specific identification method accounting treasury stock 2004 fiscal year company issued 1000 additional shares employee stock benefit plans cost basis 2000 september 30 2005 2004 remained approximately 1000 treasury shares cost 1000 stock based compensation permitted statement financial accounting standards sfas 148 sfas 123 company applies accounting provisions accounting principle board “apb” opinion 25 “accounting stock issues employees” related interpretations regard measurement compensation cost options granted company’s equity compensation plan december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure” effective fiscal years ending december 15 2002 sfas 148 amends sfas 123 provide alternative methods transition fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 require disclosure summary significant accounting policies effects entity’s accounting policy respect stockbased employee compensation reported net income earnings per share annual interim financial statements sfas 148 amend sfas 123 require companies account employee stockbased awards using fair value method disclosure provisions required however companies stockbased employee compensation regardless whether utilize fair value method accounting described sfas 123 intrinsic value method described apb opinion 25 company adopted disclosure requirements sfas 148 effective january 1 2003 adoption standard significant impact financial condition operating results company accounts grants options employees purchase common stock using intrinsic value method accordance apb opinion 25 fin 44 “accounting certain transactions involving stock compensation” permitted sfas 123 amended sfas 148 company chosen continue account option grants apb opinion 25 provide expanded disclosures specified sfas 123 amended sfas 148 july 19 2005 board directors compensation committee approved accelerating exercisability 316106 unvested stock options outstanding company’s 1996 stock incentive plan effective july 20 2005 options held employees including executive officers directors range exercise prices 125 338 per share weighted average exercise price 203 per share closing price per share company’s common stock july 19 2005 last trading day effectiveness acceleration 321 total number options accelerated executive officers directors company hold options purchase aggregate 202906 shares common stock order prevent unintended personal benefits shares company’s common stock received upon exercise accelerated option remain subject original vesting period respect transferability shares consequently may sold otherwise transferred prior earlier termination continuous service company expiration original vesting period purpose accelerating vesting minimize company’s recognition compensation expense associated options upon adoption sfas 123r first quarter fiscal 2006 maximum aggregate pretax expense associated accelerated options would reflected company’s consolidated financial statements future fiscal years estimated approximately 581000 accelerated exercisability options created additional compensation expense provide estimate benefit would received future terminating employees exercise options prior term respective original vesting periods compensation expense based estimate future turnover percentage times intrinsic value accelerated stock options july 20 2005 amounted additional compensation expense approximately 68000 recognized fourth quarter fiscal 2005 however extent accelerated options exercised prior term respective original vesting periods estimated compensation expense proves insufficient company may incur additional compensation expense sfas 123r company’s full board directors ratified acceleration extent affected options held members compensation committee option grants acceleration option grants determined based fair value grant date awards consistent provisions sfas 123 effect compensation cost company’s net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts vendor programs company receives incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company uses cooperative marketing development funds exclusively advertising marketing programs restricted cooperative marketing development funds generally recognized reduction operating expense cases funds excess targeted marketing program reduction cost goods sold accordance emerging issues task force issue 0216 “accounting customer including reseller certain consideration received vendor” related marketing expenses recognized rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share company accounts earnings per common share accordance sfas 128 “earnings per share” basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 “reporting comprehensive income” establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2005 2004 2003 segment reporting provisions sfas 131 “disclosures segments enterprise related information” require public companies report financial descriptive information reportable operating segments company identifies reportable segments based management internally evaluates separate financial information business activities management responsibility years ended september 30 2005 2004 2003 company operated one segment company recognizes revenues geographic areas based location product shipped services rendered operations outside united states america immaterial date recent accounting pronouncements may 2005 fasb issued sfas 154 “accounting changes error corrections replacement apb opinion 20 fasb statement 3” statement applies voluntary changes accounting principle changes required accounting pronouncement specific transition provisions included sfas 154 requires retrospective application prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change retrospective application limited direct effects change indirect effects recognized period change statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate however sfas 154 redefines restatement revising previously issued financial statements reflect correction error provisions sfas 154 effective accounting changes corrections errors made fiscal periods begin december 15 2005 although early adoption permitted company anticipate implementation standard material impact condensed consolidated results operations cash flows financial position december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” sfas 123r addresses accounting sharebased payment transactions company receives employee services exchange either equity instruments company liabilities based fair value company’s equity instruments may settled issuance equity instruments sfas 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used requires transactions accounted using fair valuebased method recognized expense consolidated statement operations effective date sfas 123r annual periods beginning june 15 2005 company assessing potential negative impact provisions sfas 123r consolidated financial statements fiscal year 2006 decided minimize exposure accounting pronouncement accelerating vesting outstanding unvested options effective july 20 2005 company accelerated outstanding unvested options 1996 stock incentive plan fullyvested date see note 10 december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” sfas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged apb opinion 29 “accounting nonmonetary transactions” provided exception basic measurement principle fair value exchanges similar productive assets apb opinion 29 exchange productive asset similar productive asset based recorded amount asset relinquished sfas 153 eliminates exception replaces exception exchanges nonmonetary assets commercial substance company believe adoption sfas 153 material impact consolidated financial statements november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 requires abnormal amounts idle facility expense freight handling costs wasted materials spoilage recorded current period charges allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective company october 1 2006 company believe adoption sfas 151 material impact consolidated financial statements property equipment property equipment consist following thousands depreciation amortization expense 1110 1574 1788 years ended september 30 2005 2004 2003 respectively assets fully depreciated 8474 7937 years ended september 30 2005 2004 respectively accumulated amortization capitalized leases 221 777 september 30 2005 2004 respectively lines credit june 2004 company closed 300 million replacement working capital financing facility ge term facility period three years except either party may terminate agreement upon 60 days’ prior written notice party borrowings line credit agreement collateralized accounts receivable inventory substantially company’s assets september 30 2005 2004 company outstanding borrowings 168 million 183 million respectively line credit ge commercial distribution finance corporation “ge” september 30 2005 2004 line credit agreement provided financing cash advances flooring 300 million august 2005 company obtained temporary overline october 31 2005 5000000 bringing total borrowing capacity 350 million addition company closed concurrent flooring facility ge permits company purchase finance information technology products geapproved vendors terms depend upon certain variable factors september 2005 quarter purchases geapproved vendors historically terms allow interestfree flooring working capital flooring agreements contain following liquidity financial covenants 1 ebitda must sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter 2 tangible net worth subordinated debt must equal exceed 140 million 3 ratio debt minus subordinated debt tangible net worth subordinated debt must exceed 35 one 4 ratio current tangible assets current liabilities must less 12 one prime rate interest 650 475 september 30 2005 2004 respectively weighted average interest rates incurred line credit borrowings years ended september 30 2005 2004 2003 600 100 300 respectively 100 weighted average interest rate 2004 fiscal year resulted borrowings financed company’s former interestfree flooring agreement required 1 guarantee fee paid primary lender since company replaced working capital financing facility june 2004 minimal interest expense incurred borrowings line credit extended interestfree period flooring plan fiscal year 2005 interest expense amounted 3000 total interest expense majority ontario facility lease 260000 fiscal year 2005 see note 8 years ended september 30 2005 2004 2003 233000 805000 937000 respectively special charges 04 million incurred fiscal year ended september 30 2003 charges relate february 2003 court derivative litigation fredrick v din et al part stipulation parties agreed defendants would pay plaintiff’s attorney fees approximately 04 million review selected members company’s board directors defendants litigation based board’s review recommendation company paid 04 million settlement charged full amount expense income consisted chiefly insurance recovery prior year losses rental income early payment discounts state sales tax authorities employee benefit plan company employee savings plan “401k plan” covers substantially fulltime employees twentyone years age older company’s contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan income taxes components income tax provision follows thousands provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows company’s consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 66 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating losses “nol” available portion 81 million nol carry forward benefit earnings 47 million attributable exercise stock options considered adjustment additional paidin capital benefit future earnings longterm liabilities commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2005 approximately follows thousands june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net operating lease term 15 years time company occupied approximately 55 facility planned accomplished subleasing remaining space february 2002 subleased space excess 10 facility sfas 98 “accounting leases” company considered retained financial interest property despite fact property revert back landlord end lease period result company required continue carry leased property financial statements account saleleaseback financing transaction march 2005 lessee sublet space discontinued rental property company took possession 100 facility needed internal operations sfas 98 lease qualifies “normal leaseback” company thus removed consolidated balance sheet carrying value leased property including land building depreciable property approximate net book value 43 million along 50 million related liability future lease payments accounted rental expense company accounted lease financing transaction company recorded lease payments reduction obligation lessor interest expense obligation well depreciation expense property result approximately six years depreciate leased assets rapidly liability lessor amortized resulting liability lessor exceeding net book value lease property 07 million date immediately preceding termination sublease upon concluding company longer continuing interest ontario facility march 2005 company accordance sfas 98 removed leased assets liability accounts balance sheet remaining 07 million gain deferred amortized straightline basis approximately sixteen months represents conclusion seventh year fifteen year lease first date company may terminate lease without cost penalty year ended september 30 2005 company amortized earnings 330000 deferred gain unamortized gain recorded total liabilities accompanying condensed consolidated balance sheet august 26 2006 company gave notification lessor intention terminate lease notification acknowledged september 14 2005 company currently seeking alternative real estate opportunities respect ontario facility believes adequate space facility available buildings company less space requirements believes lower comparable rentals available proximity present facility company believes relocation economically advantageous company leases approximately 24000 square feet office space headquarters el segundo california lease expiring june 30 2006 company currently evaluating whether renew current lease pursue real estate opportunities respect headquarters company believes adequate space headquarters available buildings necessary rent expense years ended september 30 2005 2004 2003 operating leases approximately 1820000 1294000 1731000 respectively years ended september 30 2005 2004 2003 ontario facility rent expense characterized financing lease sfas 98 march 2005 reported interest expense approximately 218000 534000 547000 respectively amendment employment agreement company’s ceo entered october 12004 effective october 15 2004 provision event termination employment certain circumstances following unapproved change control company severance payout equal four times annual base salary single lumpsum payment made earnings per share preferred stock following table sets forth computation basic diluted net income loss per share thousands except per share amounts company antitakeover provision certificate incorporation amended date grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority company’s outstanding voting stock section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change company’s control without action stockholders therefore could adversely affect market price common stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years however anticipation adverse effects adoption sfas 123r would compensation committee board directors approved made effective july 20 2005 acceleration unvested stock options september 30 2005 2004 shares available grant plan 335954 545475 respectively year ended september 30 2005 company granted options purchase 275000 shares common stock directors employees exercise prices ranging 200 210 per share options granted accelerated fully vested july 20 2005 expire ten years date grant unless earlier exercised terminated compensation charge recorded connection issuance options exercise price stock options granted less fair market value company’s stock price date grant following summary stock option activity fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2005 2004 2003 employee stock plan company employee stock purchase plan “plan” remains authorized available sale employees aggregate 350007 shares common stock september 30 2005 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period april 2002 company announced employees company suspending plan notice acquisition businesses effective october 1 2004 company purchased certain assets viablelinks inc “viablelinks” portland oregon boise idahobased regional reseller technology products services time purchase total purchase price paid approximately 878000 including 882000 gross purchase price less 4000 cash received back company entered initial asset purchase agreement viablelinks october 6 2004 acquire certain assets viablelinks approximately 1050000 october 11 2004 first correcting amendment asset purchase agreement viablelinks company signed amendment effective october 1 2004 sets forth adjustment original purchase price necessary correctly reflect accounting certain assets balances previously estimated closing date result postclosing accounting original purchase price 1050000 reduced 882495 assets included purchase remained originally contemplated included cash trade accounts receivables depreciable assets intangible assets company originally estimated 564000 accounts receivable acquired viablelinks purchase approximately 113000 would uncollectible allowing net 451000 realized subsequently quarter ended march 31 2005 upon resolution 564000 trade accounts receivable acquired determined 82000 collected previously estimated consequently preliminary purchase price allocation adjusted following thousands company allocated purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 200000 allocated amortizable intangible assets related customer relationships october 11 2002 company completed purchase certain assets tabin corporation “tabin” chicagobased valueadded reseller providing company established presence one largest market places us based independent valuation total purchase price approximately 921000 allocated follows thousands company allocated purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management accordance sfas 142 goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 470000 allocated amortizable intangible assets related customer relationships customer relationships existing sales contacts relate underlying customer relationships pertaining products services provided company amortizing fair value customer relationships two acquisitions estimated useful life 5 years using straightline method tabin acquisition sumoftheyears digits viablelinks management considers sumoftheyears digits best reflects pattern economic benefits viablelinks customer relationships realized september 30 2005 company increased amortization tabin customer relationships 50000 recognition impairment certain customer relationships september 30 2005 amortization customer relationships current future years follows thousands terms agreement stockholders tabin corporation eligible receive additional earnout payments based upon achieving certain profitability targets twoyear period beginning november 1 2002 july 8 2003 stockholders tabin corporation agreed modification agreement accepted onetime payment 5000 payment full sums owed earnout provisions acquisition agreement following unaudited pro forma consolidated financial information reflects results operations two years ended september 30 2004 acquisitions occurred october 1 2002 thousands except per share data pro forma results prepared comparative purposes purport indicative operating results would acquisitions actually taken place earlier years addition results intended projection future results reflect synergies might achieved combined operations litigation september 18 2000 claim arbitration submitted first union securities new york stock exchange among others company president chief executive officer attiazaz din “en pointe defendants” first union alleges company din violated federal state securities laws connection promotion sale en pointe stock last half 1999 first half 2000 en pointe defendants dispute jurisdiction intend vigorously defend allegations december 2000 company certain current former directors officers along several unrelated parties named complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares company’s common stock seeking recovery company’s shareholders damages sustained result activities crosby v en pointe technologies al superior court california county san diego gic 759905 parties previously stipulated stay case pending class action however plaintiffs recently elected proceed case court recently set trial date june 2006 en pointe defendants intend vigorously defend allegations february 2001 company five directors one current officer certain former officers along seven unrelated parties named stockholder class action complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares company’s common stock seeking recovery company’s stockholders damages sustained result activities en pointe technologies securities litigation united states district court southern district california case 01cv0205l cga amended complaint plaintiffs limited claims company chief executive officer response motion dismiss court limited plaintiffs’ claims allegations market manipulation insider trading en pointe defendants answered amended complaint court recently certified case class action en pointe defendants intend vigorously defend allegations various claims litigation proceedings company involved ordinary course business outcome claims proceedings cannot predicted certainty consulting legal counsel management believe outcome matters material adverse affect company’s business financial position results operations cash flows quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2004 2003 presented thousands except per share amounts en pointe technologies inc schedule ii valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized en pointe technologies inc attiazaz “bob” din attiazaz “bob” din chairman board chief executive officer president principal executive officer dated december 23 2005 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments including posteffective amendments hereto hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated index exhibits item 15 exhibits financial statement schedules following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits see b exhibits list exhibits accompanying exhibit index herein incorporated reference en pointe technologies inc page reports independent registered public accounting firms consolidated balance sheets september 30 2007 2006 consolidated statements operations three years period ended september 30 consolidated statements stockholders’ equity three years period ended september 30 consolidated statements cash flows three years period ended september 30 2007 notes consolidated financial statements schedule iivaluation qualifying accounts f report independent registered public accounting firm board directors stockholders en pointe technologies inc el segundo california audited accompanying consolidated balance sheets en pointe technologies inc subsidiaries company september 30 2007 2006 related consolidated statements operations stockholders’ equity cash flows years ended connection audits consolidated financial statements also audited schedule ii valuation qualifying accounts consolidated financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards established public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position en pointe technologies inc subsidiaries september 30 2007 2006 results operations cash flows years ended conformity accounting principles generally accepted united states america also opinion related schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein rose snyder jacobs corporation certified public accountants encino california december 4 2007 f independent registered public accounting firm board directors stockholders en pointe technologies inc el segundo california audited accompanying consolidated statements operations stockholders’ equity cash flows en pointe technologies inc year ended september 30 2005 also audited schedule listed accompanying index consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provide reasonable basis opinion consolidated financial statements referred present fairly material respects results operations cash flows en pointe technologies inc year ended september 30 2005 conformity accounting principles generally accepted united states america also opinion schedule ii valuation qualifying accounts year ended september 30 2005 presents fairly material respects information set forth therein bdo seidman llp los angeles california december 23 2005 f en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements f en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements f en pointe technologies inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements f 6 en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements f notes consolidated financial statements organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 17 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 parent company en pointe technologies inc holding company provides administrative services subsidiaries sales conducted subsidiaries liquidity capital resources september 30 2007 company approximately 60 million cash working capital 164 million discussed note 3 july 2007 company entered addendum original replacement working capital financing facility ge commercial distribution finance corporation “ge” terms addendum company’s two whollyowned subsidiaries engaged information technology hardware software selling may borrow 450 million term facility period three years except either party may terminate agreement upon 60 days’ prior written notice party september 30 2007 credit line borrowings amounted 303 million additional borrowings available approximately 147 million taking consideration available collateral borrowing limitations agreements borrowings line credit agreement collateralized substantially company’s assets financing agreements contain various liquidity financial debt covenants explained note 3 company compliance debt covenants september 30 2007 principles consolidation consolidated financial statements include company’s accounts whollyowned majorityowned subsidiaries well affiliate premier bpo inc formerly known en pointe global services inc “pbpo” approximate 30 voting interest owned variable interest entity intercompany accounts transactions eliminated consolidated financial statements since stockholders pbpo collectively represent approximately 69 voting interest majority ownership interest entitlement share losses reflected company’s consolidated balance sheet statement operations “minority interest” losses allocated 69 owners pbpo based upon percentage ownership upon “at risk” capital owners losses excess “at risk” capital allocated company without regard company’s capital risk date losses absorbed amounted 24 million exceed company’s invested capital 14 million 10 million investment variable interest entity “vie” premier pbo inc “pbpo” company series investments invested september 30 2007 cumulative amount 759000 representing approximate 30 voting interest common stock pbpo privatelyheld corporation pbpo business process outsourcing company formed october 2003 headquartered clarksville tennessee addition company’s common stock investment pbpo company invested 600000 pbpo form fiveyear 6 interestbearing note subsequently converted series nonvoting convertible preferred stock pbpo october 2004 preferred stock may converted common stock earlier five years issuance date preferred stock effective date initial public offering conversion price set greater 100 per share fair market value determined preferred stock agreement en pointe’s approximate 30 voting interest pbpo referenced excludes series nonvoting convertible preferred stock holds pbpo considered related party company’s equity interest pbpo well interrelationship several investors company one company’s board members mark briggs owns approximately 17 pbpo also serves chairman board chief executive officer company’s ceo bob din represents en pointe’s interest member board directors pbpo addition owners ovex technologies private limited “ovex” pakistani company performs operational accounting side company’s outsourcing cost plus fixed agreement may cancelled upon written notice owns collectively approximately 16 pbpo omar arif saeed october 1 2006 collectively approximate 30 owners ovex also hold shares series nonvoting convertible preferred stock pbpo received october 2004 exchange conversion fiveyear notes aggregated 603000 principal interest preferred shares held saeeds component pbpo minority interest subject allocation pbpo losses f 8 substantial investment company made pbpo related party nature investment well factors company’s acquired interest pbpo evaluated determined pbpo met tests variable interest entity financial accounting standards board “fasb” interpretation 46 “fin 46” pbpo’s financial results thus consolidated company’s financial statements since pbpo’s inception pbpo contracted ovex pakistan employees china provide workforces backoffice support pbpo shares workspace company islamabad nominal fee using contracted ovex workers contracts directly ovex workspace workers lahore use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts company applies provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general company recognizes revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured standard shipping terms title passes upon delivery common carrier revenue recognized delivery takes place generally two three days later product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory majority company’s sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sold company primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” net revenues recognized full time sale company adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer revenue customer maintenance support agreements company primary obligor reported net basis recognized time sale net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed company’s maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents typically exceed federally insured limits f restricted cash restricted cash september 30 2007 2006 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased company drop shipped yet received accepted customer stated lower cost specific identification method market ongoing basis inventories reviewed written estimated obsolescence unmarketable inventories equal difference cost inventories estimated net realizable value changes increase inventory reserves recorded increase cost goods sold property equipment property equipment stated cost depreciated using straightline method estimated useful lives three seven years assets acquired capital lease arrangements recorded present value minimum lease payments amortized using straightline method life asset term lease whichever shorter amortization expense included depreciation expense leasehold improvements amortized using straightline method shorter lease terms useful lives improvements expenses repairs maintenance charged expense incurred renewals betterments capitalized gains losses sale disposal property equipment reflected operating income company accounts computer software costs developed internal use accordance statement position 981 sop 981 “accounting costs computer software developed obtained internal use” requires companies capitalize certain qualifying costs application development stage related software development project exclude initial planning phase determines performance requirements data conversion general administrative costs related payroll training costs incurred whenever software program considered operational company considers project completed places service commences amortization development cost succeeding month fiscal year 2005 company concluded development three internaluse software programs amortized straightline basis economic lives software products estimated four years costs capitalized include internal payroll direct fringe benefits external direct project costs including labor travel company began amortizing first internaluse programs may remaining two october 2005 company’s property equipment see note 2 september 30 2007 2006 2005 included 948000 781000 respectively capitalized software development costs included computer equipment software addition software underdevelopment fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount company’s longterm liabilities also approximates fair value based interest rates currently available us debt similar terms remaining maturities impairment longlived assets company assesses potential impairments longlived assets accordance provisions sfas 144 “accounting impairment disposal longlived assets” impairment review performed whenever events changes circumstances indicate carrying value assets may recoverable factors company considers include limited significant underperformance relative expected historical projected future operating results significant changes manner use acquired assets strategy overall business significant negative industry economic trends carrying value longlived asset may recoverable based upon existence one indicators impairment company estimates future undiscounted cash flows expected result use asset eventual disposition sum expected future undiscounted cash flows eventual disposition less carrying amount asset company recognizes impairment loss impairment loss reflected amount carrying amount asset exceeds fair value asset based fair market value available discounted cash flows date company recognized impairment charge related writedown longlived assets f goodwill intangible assets company accounts goodwill intangible assets accordance provisions statement financial accounting standard sfas 142 “goodwill intangible assets” requires among things purchased goodwill certain intangibles amortized nonamortization approach goodwill intangibles indefinite life amortized instead reviewed impairment least annually event occurs circumstances indicate carrying amount may impaired events circumstances could indicate impairment include significant change business climate economic industry trends legal factors negative operating performance indicators significant competition changes strategy disposition reporting unit portion thereof goodwill impairment testing performed reporting unit level sfas requires goodwill tested annually impairment using twostep process event occurs would likely reduce fair value reporting unit carrying amount goodwill shall tested time first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test must performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting unit goodwill carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units assignment goodwill reporting units determination fair value reporting unit fair value reporting unit estimated using discounted cash flow methodology requires significant judgments including estimation future cash flows dependent internal forecasts estimation longterm rate growth company’s business useful life cash flows occur determination weighted average cost capital changes estimates assumptions could materially affect determination fair value andor goodwill impairment reporting unit accordance sfas 142 company selected september 30 date perform annual goodwill impairment test based valuation goodwill impairment charges related writedown goodwill recognized years ended september 30 2007 2006 2005 connection company’s acquisitions company applied provisions sfas 141 “business combinations” using purchase method accounting assets liabilities assumed recorded estimated fair values determined management based information currently available current assumptions future operations excess purchase price fair values recorded goodwill company’s goodwill balance years ended september 30 2007 2006 1080000 623000 respectively included assets accompanying consolidated balance sheets separable intangible assets finite useful lives amortized useful lives impaired asset written fair value intangible assets finite useful lives consist customer relationships noncompete agreements amortized expected benefit period using straightline sumoftheyearsdigits methods september 30 2007 2006 intangible assets amounted 705000 net 1096000 accumulated amortization 609000 net 674000 accumulated amortization respectively included assets accompanying consolidated balance sheets advertising shipping handling costs company reports costs advertising periods costs incurred fiscal years ended september 30 2007 2006 2005 advertising expense approximately 403000 346000 224000 respectively shipping handling costs incurred company included cost sales f income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts likely realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consists principally cash deposits trade accounts receivable company’s cash deposits placed financial institutions combined account balances one institutions typically exceed 100000 federal depository insurance corporation fdic insurance coverage result concentration credit risk related amounts deposit excess fdic insurance coverage company believes risk significant company anticipate financial institutions nonperformance company one large customer accounted 24 total accounts receivable end fiscal year 2007 customer subsequently timely paid balance owed company full one customer one customer accounted 10 net sales outstanding accounts receivable fiscal year end past three fiscal years company performs periodic credit evaluations financial condition customers monitors collections payments customers generally require collateral receivables generally due within 45 days company provides possible inability collect accounts receivable recording allowance doubtful accounts company writes account considered uncollectible company estimates allowance doubtful accounts based historical experience aging accounts receivable information regarding creditworthiness customers date losses within range management’s expectations company contracts various suppliers although limited number suppliers capable supplying inventory needs company believes shortfalls existing suppliers would absorbed suppliers comparable terms however change suppliers could cause delay sales adversely effect results purchases company’s three largest vendors years ended september 30 2007 2006 2005 comprised 49 51 54 respectively total purchases product treasury stock company uses specific identification method accounting treasury stock 2004 fiscal year company issued 1000 additional shares employee stock benefit plans cost basis 2000 september 30 2007 2006 remained approximately 1000 treasury shares cost 1000 stock based compensation prior october 1 2005 company accounted grants options employees purchase common stock using intrinsic value method accordance accounting principle board “apb” opinion 25 fasb interpretation 44 “fin 44” “accounting certain transactions involving stock compensation” permitted sfas 123 amended sfas 148 company chosen continue account option grants apb opinion 25 provide expanded disclosures specified sfas 123 amended sfas 148 beginning october 1 2005 company adopted provisions sfas 123r using prospective method f july 19 2005 board directors compensation committee approved accelerating exercisability 316106 unvested stock options outstanding company’s 1996 stock incentive plan effective july 20 2005 options held employees including executive officers directors range exercise prices 125 338 per share weighted average exercise price 203 per share closing price per share company’s common stock july 19 2005 last trading day effectiveness acceleration 321 total number options accelerated executive officers directors company hold options purchase aggregate 202906 shares common stock order prevent unintended personal benefits shares company’s common stock received upon exercise accelerated option remain subject original vesting period respect transferability shares consequently may sold otherwise transferred prior earlier termination continuous service company expiration original vesting period purpose accelerating vesting minimize company’s recognition compensation expense associated options upon adoption sfas 123r first quarter fiscal 2006 maximum aggregate pretax expense associated accelerated options would reflected company’s consolidated financial statements future fiscal years estimated approximately 581000 accelerated exercisability options created additional compensation expense provide estimate benefit would received future terminating employees exercise options prior term respective original vesting periods compensation expense based estimate future turnover percentage times intrinsic value accelerated stock options july 20 2005 amounted additional compensation expense approximately 68000 recognized fourth quarter fiscal 2005 however extent accelerated options exercised prior term respective original vesting periods estimated compensation expense proves insufficient company may incur additional compensation expense sfas 123r company’s full board directors ratified acceleration extent affected options held members compensation committee option grants acceleration option grants determined based fair value grant date awards consistent provisions sfas 123 effect compensation cost company’s net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts f vendor programs company receives incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company uses cooperative marketing development funds exclusively advertising marketing programs restricted cooperative marketing development funds generally recognized reduction operating expense cases funds excess targeted marketing program reduction cost goods sold accordance emerging issues task force issue 0216 “accounting customer including reseller certain consideration received vendor” related marketing expenses recognized rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share company accounts earnings per common share accordance sfas 128 “earnings per share” basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 ‘‘reporting comprehensive income’’ establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company reported comprehensive income fiscal year ended september 30 2007 components comprehensive income fiscal years ended september 30 2006 2005 segment reporting provisions sfas 131 “disclosures segments enterprise related information” require public companies report financial descriptive information reportable operating segments company identifies reportable segments based management internally evaluates separate financial information business activities management responsibility years ended september 30 2006 2005 company operated one segment fiscal year ended september 30 2007 company began operating three segments follows company recognizes revenues geographic areas based location product shipped services rendered f minority interest minority interest consists capital contributed minority interests well earnings losses allocated company minority interest resulting equity investments pbpo ovex changes minority interest thousands since october 1 2005 follows recent accounting pronouncements accounting pronouncements adopted september 2006 sec released staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 company adopted sab 108 fourth quarter fiscal 2007 sab 108 requires registrants use balance sheet approach income statement approach quantifying evaluating materiality misstatement adjust financial statements either approach results quantifying misstatement material adopting requirements sab 108 company determined previously accrued taxes overstated 02 million immaterial balance sheet could considered material income statement adjusted accrued tax overstatement resulted accrual income tax refund years prior 2002 evaluated immaterial reversing rollover method time company reported cumulative effect initial application sab 108 adjusting accumulated deficit september 30 2006 credit 02 million march 2006 financial accounting standards board “fasb” issued fas 156 accounting servicing financial assets amendment fasb statement 140 standard clarifies separately account servicing rights requires servicing rights separately recognized initially fair value provides option subsequently accounting servicing rights either fair value amortization method standard effective fiscal years beginning september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued company adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 amends statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entitys first fiscal year begins september 15 2006 company adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements accounting pronouncements pending adoption february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 effective company fiscal years beginning july 1 2008 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings company anticipate adoption accounting pronouncement material effect consolidated financial statements f september 2006 fasb issued fas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 company anticipate adoption accounting pronouncement material effect consolidated financial statements july 2006 fasb issued interpretation 48 accounting uncertainty income taxes fin 48 interpretation requires recognition measurement uncertain income tax positions using morelikelythannot approach provisions fin 48 effective fiscal years beginning december 15 2006 company anticipate adoption accounting pronouncement material effect consolidated financial statements prior year balance sheet reclassification september 30 2006 financial statements current maturities longterm debt 346000 included accrued taxes liabilities balance sheet presentation fiscal year 2007 current maturities longterm debt reclassified 2007 2006 fiscal years included shortterm borrowings current maturities longterm debt property equipment property equipment consist following thousands depreciation amortization expense 2320000 1491000 1110000 years ended september 30 2007 2006 2005 respectively assets fully depreciated 8380000 8328000 years ended september 30 2007 2006 respectively accumulated amortization capitalized leases 849000 433000 september 30 2007 2006 respectively lines credit company’s two primary information technology sales subsidiaries en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation “ge” parties certain business financing agreement certain agreement wholesale financing dated june 25 2004 amended date collectively “agreements” company guarantor obligations agreements flooring arrangement two subsidiaries may purchase finance information technology products geapproved vendors terms depend upon certain variable factors two subsidiaries may borrow 85 company’s collective eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 purchases geapproved vendors historically terms allow interestfree flooring original agreements provided 300 million accounts receivable flooring facility expired june 25 2007 extended june 13 2007 july 31 2007 via temporary overline letter agreement f effective july 25 2007 facility increased 450 million certain financial covenants revised pursuant addendum executed among parties addendum also provided extension term facility period three years august 1 2007 successive oneyear renewal periods thereafter subject termination end period least sixty days prior written notice party parties effective september 25 2007 parties entered amendment delete prior financial covenants contained agreements restate effective last day calendar quarter follows terms defined agreements • tangible net worth subordinated debt combined amount less 12750000 • total funded indebtedness ebitda preceding four fiscal quarters ended shall 300100 ge facility collateralized accounts receivable inventory substantially assets september 30 2007 approximately 303 million borrowings outstanding 450 million financing facility september 30 2007 additional borrowings available approximately 147 million taking consideration borrowing limitations agreements amended date since company replaced working capital financing facility june 2004 minimal interest expense incurred borrowings line credit extended interestfree period flooring plan fiscal years 2007 2006 2005 interest expense amounted 11000 14000 3000 respectively total interest expense majority fiscal years 2007 2006 applied capitalized leases 2005 fiscal year related principally ontario facility lease years ended september 30 2007 2006 2005 318000 82000 233000 respectively income consisted chiefly insurance recovery prior year losses rental income early payment discounts state sales tax authorities employee benefit plan company employee savings plan ‘‘401k plan’’ covers substantially fulltime employees twentyone years age older company’s contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan income taxes components income tax benefit provision follows thousands f provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows company’s consolidated return excludes two affiliates see “affilate earnings losses taxable” table pbpo ovex pbpo excluded company’s investment less required 80 ownership required consolidate federal tax law ovex excluded foreign income subject us tax distributed deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization portion net deferred tax asset 49 million management provided valuation allowance significant components deferred taxes follows thousands company following federal net operating losses ‘‘nol’’ available 53 million nol carry forward benefit earnings attributable exercise stock options considered adjustment additional paidin capital f longterm liabilities commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2007 approximately follows thousands june 1999 company entered saleleaseback arrangement 126000 square foot configuration facility ontario california sfas 98 sublease 10 total leased premises company required account lease would otherwise considered operating lease financing transaction company recorded lease payments reduction obligation lessor interest expense obligation well depreciation expense capitalized property upon termination sublease conclusion company longer continuing interest ontario facility march 2005 company accordance sfas 98 removed leased assets liability accounts balance sheet however approximately six years capitalized leased assets depreciated rapidly liability lessor amortized resulting liability lessor exceeding net book value capitalized lease property 07 million date immediately preceding termination sublease 07 million gain deferred amortized straightline basis approximately sixteen months represented conclusion seventh year fifteen year lease first date company could terminate lease without cost penalty years ended september 30 2007 2006 2005 company amortized earnings 30000 387000 330000 respectively deferred gain years ended september 30 2005 2004 ontario facility rent expense characterized financing lease sfas 98 march 2005 reported interest expense approximately 218000 534000 respectively august 26 2005 company gave notification lessor ontario facility intention terminate lease notification acknowledged september 14 2005 march 30 2006 company amended lease agreement extend lease due terminate may 31 2006 october 31 2006 august 2006 company found alternative location configuration center seeking entered sublease agreement approximately 95090 square feet rancho cucamonga california sublease approximately two half years ending february 15 2009 june 2006 company moved headquarters el segundo california leased approximately 24000 square feet office space alternative el segundo location approximately 13000 square feet office space subleased sublease approximately two half years ending january 31 2009 rent expense years ended september 30 2007 2006 2005 operating leases approximately 1292000 1812000 1820000 respectively f 19 amendment employment agreement company’s ceo entered october 1 2004 effective october 15 2004 provision event termination employment certain circumstances following unapproved change control company severance payout equal four times annual base salary single lumpsum payment made earnings per share preferred stock following table sets forth computation basic diluted net income per share thousands except per share amounts company antitakeover provision certificate incorporation amended date grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority company’s outstanding voting stock section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change company’s control without action stockholders therefore could adversely affect market price common stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years however anticipation adverse effects adoption sfas 123r would compensation committee board directors approved made effective july 20 2005 acceleration unvested stock options march 2006 terms stock option plan terminated shares available grant plan options granted since fiscal year ended september 30 2005 company granted options purchase 275000 shares common stock director employee exercise prices ranging 200 210 per share options granted accelerated fully vested july 20 2005 expire ten years date grant unless earlier exercised terminated compensation charge recorded connection issuance options exercise price stock options granted less fair market value company’s stock price date grant f following summary stock option activity fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2005 grants 2006 2007 acquisition businesses september 19 2006 company entered share purchase agreement omar saeed arif saeed saeeds effective october 1 2006 acquire 70 capital stock two privately owned pakistani companies ovex technologies private limited ovex pakistan private limited subsequently july 7 2007 two companies approved merger pakistan court effective october 1 2006 surviving company merger ovex technologies private limited “ovex” companies engaged providing business process outsourcing bpo services whollyowned saeeds terms agreement company paid saeeds total 1680000 exchange 70 capital stock two companies form consideration paid consisted 240000 cash 240000 unregistered shares company common stock promissory note principal amount 1200000 promissory note repaid full november 2006 additionally board directors ovex consists five members one designated company edward hunter director company serves company’s designee one saeeds three designated mutually two designees f company allocated 1680000 purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives amortized reviewed periodically impairment purchase price approximately 98000 allocated amortizable five years using sum year’s digits method customer relationships approximately 420000 allocated amortizable five years straightline basis noncompetition agreements allocation purchase price thousands follows january 18 2006 pursuant asset purchase agreement software medium inc texas corporation “smi” veridyn llc texas limited liability company whollyowned subsidiary smi “veridyn” collectively smi “sellers” company acquired certain depreciable intangible assets assumed certain liabilities including shortterm lease commitment office facilities closing 550000 cash paid sellers two sellers’ officers entered employment agreements company one officers guaranteed 250000 bonus payable two years subject continued employment considered part purchase price sellers’ officer’s employment agreement contains performancebased bonus provision based percentage earnings interest taxes depreciation amortization “ebitda” sales security services bonus payable three years quarterly basis subject continued employment approximates 25 ebitda per year subject maximum annual aggregate bonus payment 400000 additional fees payable estimated payable professional services directly related acquisition total 175000 company allocated 975000 purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 154000 allocated amortizable five years using sum year’s digits method customer relationships approximately 460000 allocated amortizable three years straightline basis noncompetition agreements allocation purchase price thousands follows management considers sumoftheyears digits best reflects pattern economic benefits smi viablelinks defined customer relationships realized september 30 2005 company increased amortization tabin defined customer relationships 50000 recognition impairment certain customer relationships f prior fiscal years addition transactions described company made following acquisitions october 11 2002 tabin corporation tabin october 01 2004 viablelinks inc viablelinks september 30 2007 amortization customer relationships current future years follows thousands following unaudited pro forma consolidated financial information reflects results operations two years ended september 30 2006 acquisitions ovex smi occurred october 1 2004 pro form results year ended september 30 2007 presented companies fully integrated company’s operations period thousands except per share data pro forma results prepared comparative purposes purport indicative operating results would acquisitions actually taken place earlier years addition results intended projection future results reflect synergies might achieved combined operations litigation january 2007 order avoid cost ongoing litigation company reached settlement agreement softchoice corporation “softchoice” relating action brought company january 2006 los angeles county superior court case sc088295 seeking general special damages unspecified amount well punitive damages economic harm caused hiring five former employees softchoice terms settlement agreement stipulate payment softchoice 212500 made full amount settlement payment recognized march 2007 quarterly financial statements settlement business decision entering settlement company made admission liability f january 2007 order avoid cost ongoing litigation company negotiated settlement agreement websense inc former supplier software medium inc “smi” relating action brought company february 2006 san diego county superior court case gic859375 websense inc websense holder smi secured promissory note alleged company’s acquisition assets smi subsidiary veridyn llc via asset purchase agreement company liable debts smi successor settlement agreement company pay websense inc sum one dollar 1 addition agreed purchase one hundred thousand dollars 100000 software published websense inc become authorized vendor products settlement business decision entering settlement company made admission liability july 2006 church gardens llc current owner companys formerly leased configuration facility ontario california filed suit company san bernardino county superior court case rcv096518 complaint centers certain furniture fixtures equipment leasehold improvements sold leased back company plaintiff’s predecessor 1999 company still occupied former leased configuration facility ontario california plaintiff alleges among things portion leasedback property sold destroyed altered removed premises demands inspection accounting property remaining court provide damages extent company may breached contract company disputes allegations believes property loss liability lease provisions would limited 75000 already accrued financial statements february 2007 company filed crosscomplaint church gardens llc crosscomplaint asks companys 90720 security deposit returned interest addition company claims church gardens llc engaged unfair business practices retaining security deposit allowing removal certain personal property company owned church gardens llc engaged unlawful conversion certain property belonging company also asks court grant declaratory relief companys actions attempts preserve disputed property pending judicial determination rights company also seeks recovery possession personal property injunctive relief preventing plaintiff liquidating property january 2007 us real estate consortium predecessor owner companys former leased configuration facility ontario california filed suit current owner church gardens llc san bernardino county superior court case rcv100476 march 2007 current owner church gardens llc filed crosscomplaint company former owner us real estate consortium among others may 31 2007 company answered crossclaimed current owner church gardens llc july 25 2007 church gardens llc filed answer first amended crosscomplaint filed us cases rcv096518 rcv100476 consolidated purposes although first case rcv096518 originally filed july 2006 trial date consolidated case set substantial discovery substantial law motion practice date company contesting consolidated case vigorously intends continue various claims litigation proceedings company involved ordinary course business company accrues costs related contingencies loss probable amount reasonably determinable outcome foregoing claims proceedings cannot predicted certainty consulting legal counsel management believe reasonably possible ongoing pending litigation result unfavorable outcome company material adverse affect company’s business financial position results operations cash flows f quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2007 2006 presented thousands except per share amounts subsequent event october 29 2007 company entered lease agreement corporate headquarters property leased two story office building 29032 square feet office space carson california lease period seven years commencing november 1 2007 lease requires monthly payments 4848344 first year contains annual base rent increase 3 effective november 1 succeeding six years option company’s election extend lease two additional five year periods two option periods extend lease contain base rent increases 3 found original lease scheduled monthly payments lease extension options original base monthly rate 4848344 plus sum accumulated annual 3 base rent increases date lessee responsible payment real property taxes leased premises well utilities services lessor leased corporate headquarters dominguez channel llc 85 owned chief executive officer company four members immediate family two employees another director company f en pointe technologies inc schedule ii valuation qualifying accounts f signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized en pointe technologies inc dated december 17 2007 attiazaz “bob” din attiazaz ‘‘bob’’ din chief executive officer president principal executive officer power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments including posteffective amendments hereto hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date mansoor shah chairman board director december 17 2007 mansoor shah attiazaz “bob” din chief executive officer president director principal executive officer december 17 2007 attiazaz “bob” din javed latif chief financial officer senior vice president principal financial principal accounting officer december 17 2007 javed latif naureen din director december 17 2007 naureen din zubair ahmed director december 17 2007 zubair ahmed mark briggs director december 17 2007 mark briggs edward hunter director december 17 2007 edward hunter timothy j lilligren director december 17 2007 timothy j lilligren index exhibits exhibit number description 21 agreement plan merger registrant en pointe technologies inc texas corporation effective february 29 1996 incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 31 certificate incorporation registrant incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 32 bylaws registrant incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 33 certificate amendment certificate incorporation registrant filed may 16 2000 incorporated reference numbered exhibit registrant’s registration statement form 10k filed january 18 2001 34 certificate amendment certificate incorporation registrant filed may 16 2005 incorporated reference numbered exhibit registrant’s form 10q filed may 16 2005 43 form common stock certificate incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 103 form directors’ officers’ indemnity agreement incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 105 employment agreement registrant attiazaz ‘‘bob’’ din dated march 1 1996 incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 106 amended employment agreement registrant attiazaz ‘‘bob’’ din dated april 2 1997 incorporated reference numbered exhibit registrant’s registration statement form 10k filed december 29 1997 1024 assignment license agreement registrant supplyaccess inc dated september 21 2001 incorporated reference numbered exhibit registrant’s form 10k filed december 31 2001 1027 employment agreement registrant kevin schatzle dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10k filed december 27 2002 1031 asset purchase agreement entered october 9 2002 tabin corporation en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10k filed december 27 2002 1036 employment agreement registrant javed latif dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2003 1039 employee leasing licensing agreement registrant en pointe global services inc dated october 17 2003 incorporated reference numbered exhibit registrant’s form 10q filed may 17 2004 1041 business financing agreement en pointe technologies sales inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 exhibit number description 1042 agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1043 addendum business financing agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1044 addendum business financing agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated july 27 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1045 asset purchase agreement entered october 1 2004 viablelinks inc en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10q filed february 14 2005 1046 subscription agreement dated march 18 2005 premier bpo inc registrant incorporated reference numbered exhibit registrant’s form 10q filed may 16 2005 1047 amendment employment agreement registrant attiazaz ‘‘bob’’ din dated november 15 2004 incorporated reference exhibit 991 registrant’s form 8k filed november 18 2004 1048 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation effective january 23 2006 incorporated reference numbered exhibit registrant’s form 8k filed january 30 2006 1049 asset purchase agreement entered january 18 2006 software medium inc veridyn llc en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1050 employment agreement registrant robert mercer dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1051 employment agreement registrant robert mercer dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1052 employment agreement registrant david l mochalski dated may 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1053 sublease dated march 30 2006 jetabout north america inc registrant property located 2381 rosecrans avenue el segundo california 90245 incorporated reference numbered exhibit registrant’s form 10q filed may 15 2006 1055 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated may 12 2006 incorporated reference numbered exhibit registrant’s form 8k filed may 17 2006 1056 sublease dated july 12 2006 north pacific group inc registrant certain industrial warehouse properties located 11081 tacoma drive rancho cucamonga california 91730 incorporated reference numbered exhibit registrant’s form 8k filed september 1 2006 1057 share purchase agreement dated september 19 2006 among registrant omar saeed arif saeed incorporated reference numbered exhibit registrant’s form 8k filed september 25 2006 exhibit number description 1058 employment agreement registrant richard r emil dated september 27 2006 incorporated reference numbered exhibit registrant’s form 8k filed september 27 2006 1059 promissory note registrant omar arif saeed dated october 5 2006 incorporated reference numbered exhibit registrant’s form 10k filed december 18 2006 1060 amendment share purchase agreement effective october 1 2006 among registrant omar saeed arif saeed incorporated reference numbered exhibit registrant’s form 10k filed december 18 2006 1061 temporary overline agreement ge commercial distribution finance corporation en pointe technologies sales inc en pointe gov inc dated june 13 2007 incorporated reference exhibit 1060 registrant’s form 8k filed june 14 2007 1062 amendment business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated july 30 2007 incorporated reference exhibit 1061 registrant’s form 8k filed july 31 2007 1063 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated september 25 2007 incorporated reference numbered exhibit registrant’s form 8k filed september 26 2007 1064 lease dated october 29 2007 dominguez channel llc en pointe technologies sales inc certain office properties located 18701 figueroa street carson california incorporated reference numbered exhibit registrant’s form 8ka filed october 31 2007 211 subsidiaries company 231 consent rose snyder jacobs cpa corp 232 consent bdo seidman llp 311 certification chief executive officer required rule 13a14a 15d14a securities exchange act 1934 amended 312 certification chief financial officer required rule 13a14a 15d14a securities exchange act 1934 amended 321 certifications chief executive officer chief financial officer required rule 13a14b 15d14b securities exchange act 1934 amended 18 usc section 1350 exhibits constitutes management contract compensatory plan arrangement item 15 exhibits financial statement schedules following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3 exhibits see b exhibits list exhibits accompanying exhibit index herein incorporated reference en pointe technologies inc page reports independent registered public accounting firms consolidated balance sheets september 30 2008 2007 consolidated statements operations three years period ended september 30 consolidated statements stockholders’ equity three years period ended september 30 consolidated statements cash flows three years period ended september 30 2008 notes consolidated financial statements schedule iivaluation qualifying accounts f report independent registered public accounting firm board directors stockholders en pointe technologies inc gardena california audited accompanying consolidated balance sheets en pointe technologies inc subsidiaries company september 30 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years ended september 30 2008 connection audits consolidated financial statements also audited schedule ii valuation qualifying accounts consolidated financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards established public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position en pointe technologies inc subsidiaries september 30 2008 2007 results operations cash flows three years ended september 30 2008 conformity accounting principles generally accepted united states america also opinion related schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein rose snyder jacobs corporation certified public accountants encino california december 24 2008 f en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements f en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements f en pointe technologies inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements f 5 en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements f notes consolidated financial statements organization summary significant accounting policies organization company reseller information technology products prior july 1 2008 provider valueadded services large medium sized companies government entities sales personnel 19 markets located united states company headquartered gardena california originally incorporated texas 1993 reincorporated delaware 1996 parent company en pointe technologies inc holding company provides administrative services subsidiaries sales conducted subsidiaries liquidity capital resources september 30 2008 company approximately 37 million cash working capital 102 million discussed note 3 july 2007 company entered addendum original replacement working capital financing facility ge commercial distribution finance corporation “ge” terms addendum company’s two whollyowned subsidiaries engaged information technology hardware software selling may borrow 450 million term facility period three years august 1 2007 except either party may terminate agreement upon 60 days’ prior written notice party september 30 2008 credit line borrowings amounted 78 million additional borrowings available approximately 235 million taking consideration available collateral borrowing limitations agreements borrowings line credit agreement collateralized substantially company’s assets financing agreements contain various liquidity financial debt covenants explained note 3 company compliance debt covenants september 30 2008 principles consolidation consolidated financial statements include company’s accounts whollyowned majorityowned subsidiaries well affiliate premier bpo inc formerly known en pointe global services inc “pbpo” approximate 30 voting interest owned variable interest entity intercompany accounts transactions eliminated consolidated financial statements since stockholders pbpo collectively represent approximately 69 voting interest majority ownership interest entitlement share losses reflected company’s consolidated balance sheet statement operations “noncontrolling interest” losses allocated 69 owners pbpo based upon percentage ownership upon “at risk” capital owners losses excess “at risk” capital allocated company without regard company’s capital risk date losses absorbed amounted 16 million exceed company’s invested capital 14 million 02 million investment limited liability company july 2 2008 company formed en pointe global services llc epgs whollyowned subsidiary express purpose transferring companys information technology service business entity july 9 2008 company sold 805 interest epgs allied digital services limited retained noncontrolling interest 195 prior formation epgs service product operations reported en pointe technologies sales inc service product business closely integrated separate accounting management review evaluate financial results operation possible information technology service business previously considered separate segment prior period comparative financial information available epgs results operations initial quarter operations ended september 30 2008 financial position thousands follows f investment variable interest entity “vie” premier pbo inc “pbpo” company series investments invested september 30 2008 cumulative amount 759000 representing approximate 30 voting interest common stock pbpo privatelyheld corporation pbpo business process outsourcing company formed october 2003 headquartered clarksville tennessee addition company’s common stock investment pbpo company invested 600000 pbpo form fiveyear 6 interestbearing note subsequently converted series nonvoting convertible preferred stock pbpo october 2004 preferred stock may converted common stock earlier five years issuance date preferred stock effective date initial public offering conversion price set greater 100 per share fair market value determined preferred stock agreement en pointe’s approximate 30 voting interest pbpo referenced excludes series nonvoting convertible preferred stock holds pbpo considered related party company’s equity interest pbpo well interrelationship several investors company one company’s board members mark briggs owns approximately 17 pbpo also serves chairman board chief executive officer company’s ceo bob din represents en pointe’s interest member board directors pbpo addition owners ovex technologies private limited “ovex” pakistani company performs operational accounting side company’s outsourcing cost plus fixed agreement may cancelled upon written notice owns collectively approximately 16 pbpo omar arif saeed october 1 2006 collectively approximate 30 owners ovex also hold shares series nonvoting convertible preferred stock pbpo received october 2004 exchange conversion fiveyear notes aggregated 603000 principal interest preferred shares held saeeds component pbpo minority interest subject allocation pbpo losses substantial investment company made pbpo related party nature investment well factors company’s acquired interest pbpo evaluated determined pbpo met tests variable interest entity financial accounting standards board “fasb” interpretation 46 “fin 46” pbpo’s financial results thus consolidated company’s financial statements since pbpo’s inception pbpo contracted ovex pakistan employees china provide workforces backoffice support pbpo shares workspace company islamabad nominal fee using contracted ovex workers contracts directly ovex workspace workers lahore use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates f revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts company applies provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general company recognizes revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured product considered received accepted customer upon customer’s receipt product carrier acceptance thereof undelivered product included inventory majority company’s sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sold company primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” net revenues recognized full time sale company adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer revenue customer maintenance support agreements company primary obligor reported net basis recognized time sale net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed company’s maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents typically exceed federally insured limits restricted cash restricted cash september 30 2008 2007 represents deposits maintained certain government tax agencies investments securities companys securities carried fair market value based quoted market prices company holds two equity securities approximate 875000 value receivable escrow company escrow receivable 745000 restricted shares common stock allied digital services limited connection july 9 2008 sale services business 80 million value escrow receivable based underlying stock adjusted 60 million restricted nature stock decline value july 9 2008 september 30 2008 closed 1428 share unrestricted trading basis december 10 2008 allied digital services ltd stock closed 494 share unrestricted trading basis f inventories consist principally merchandise configured customer orders merchandise purchased company drop shipped yet received accepted customer stated lower cost specific identification method market ongoing basis inventories reviewed written estimated obsolescence unmarketable inventories equal difference cost inventories estimated net realizable value changes increase inventory reserves recorded increase cost goods sold property equipment property equipment stated cost depreciated using straightline method estimated useful lives three seven years assets acquired capital lease arrangements recorded present value minimum lease payments amortized using straightline method life asset term lease whichever shorter amortization expense included depreciation expense leasehold improvements amortized using straightline method shorter lease terms useful lives improvements expenses repairs maintenance charged expense incurred renewals betterments capitalized gains losses sale disposal property equipment reflected operating income company accounts computer software costs developed internal use accordance statement position 981 sop 981 “accounting costs computer software developed obtained internal use” requires companies capitalize certain qualifying costs application development stage related software development project exclude initial planning phase determines performance requirements data conversion general administrative costs related payroll training costs incurred whenever software program considered operational company considers project completed places service commences amortization development cost succeeding month fiscal year 2005 company concluded development three internaluse software programs amortized straightline basis economic lives software products estimated four years costs capitalized include internal payroll direct fringe benefits external direct project costs including labor travel company began amortizing first internaluse programs may remaining two october 2005 company’s property equipment see note 2 september 30 2008 2007 2006 included 948000 781000 respectively capitalized software development costs included computer equipment software addition 325000 costs related software development fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount company’s longterm liabilities also approximates fair value based interest rates currently available debt similar terms remaining maturities impairment longlived assets company assesses potential impairments longlived assets accordance provisions sfas 144 “accounting impairment disposal longlived assets” impairment review performed whenever events changes circumstances indicate carrying value assets may recoverable factors company considers include limited significant underperformance relative expected historical projected future operating results significant changes manner use acquired assets strategy overall business significant negative industry economic trends carrying value longlived asset may recoverable based upon existence one indicators impairment company estimates future undiscounted cash flows expected result use asset eventual disposition sum expected future undiscounted cash flows eventual disposition less carrying amount asset company recognizes impairment loss impairment loss reflected amount carrying amount asset exceeds fair value asset based fair market value available discounted cash flows date company recognized impairment charge related writedown longlived assets goodwill intangible assets company accounts goodwill intangible assets accordance provisions statement financial accounting standard sfas 142 “goodwill intangible assets” requires among things purchased goodwill certain intangibles amortized nonamortization approach goodwill intangibles indefinite life amortized instead reviewed impairment least annually event occurs circumstances indicate carrying amount may f impaired events circumstances could indicate impairment include significant change business climate economic industry trends legal factors negative operating performance indicators significant competition changes strategy disposition reporting unit portion thereof goodwill impairment testing performed reporting unit level sfas 142 requires goodwill tested annually impairment using twostep process event occurs would likely reduce fair value reporting unit carrying amount goodwill shall tested time first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test must performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting unit goodwill carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units assignment goodwill reporting units determination fair value reporting unit fair value reporting unit estimated using discounted cash flow methodology requires significant judgments including estimation future cash flows dependent internal forecasts estimation longterm rate growth company’s business useful life cash flows occur determination weighted average cost capital changes estimates assumptions could materially affect determination fair value andor goodwill impairment reporting unit accordance sfas 142 company selected september 30 date perform annual goodwill impairment test based valuation goodwill impairment charges related writedown goodwill recognized years ended september 30 2008 2007 2006 however conjunction sale service business july 9 2008 company reduced goodwill related service acquisition sold 265000 connection company’s acquisitions company applied provisions sfas 141 “business combinations” using purchase method accounting assets liabilities assumed recorded estimated fair values determined management based information currently available current assumptions future operations excess purchase price fair values recorded goodwill company’s goodwill balance years ended september 30 2008 2007 815000 1080000 respectively included assets accompanying consolidated balance sheets separable intangible assets finite useful lives amortized useful lives impaired asset written fair value intangible assets finite useful lives consist customer relationships noncompete agreements amortized expected benefit period using straightline sumoftheyearsdigits methods september 30 2008 2007 intangible assets amounted 374000 net 1427000 accumulated amortization 705000 net 1096000 accumulated amortization respectively included assets accompanying consolidated balance sheets advertising shipping handling costs company reports costs advertising periods costs incurred fiscal years ended september 30 2008 2007 2006 advertising expense approximately 498000 403000 346000 respectively shipping handling costs incurred company included cost sales income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts likely realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consists principally cash deposits trade accounts receivable company’s cash deposits placed financial institutions combined account balances one institutions typically exceed 100000 federal depository insurance corporation fdic insurance coverage result concentration credit risk related amounts deposit excess fdic insurance coverage f one customer accounted 10 net sales fiscal year 2008 prior two fiscal years one customer accounted 10 accounts receivable end fiscal year 2008 company performs periodic credit evaluations financial condition customers monitors collections payments customers generally require collateral receivables generally due within 45 days company provides possible inability collect accounts receivable recording allowance doubtful accounts company writes account considered uncollectible company estimates allowance doubtful accounts based historical experience aging accounts receivable information regarding creditworthiness customers date losses within range management’s expectations company contracts various suppliers although limited number suppliers capable supplying inventory needs company believes shortfalls existing suppliers would absorbed suppliers comparable terms however change suppliers could cause delay sales adversely effect results purchases company’s three largest vendors years ended september 30 2008 2007 2006 comprised 57 49 51 respectively total purchases product treasury stock company uses specific identification method accounting treasury stock 2004 fiscal year company issued 1000 additional shares employee stock benefit plans cost basis 2000 september 30 2008 2007 remained approximately 1000 treasury shares cost 1000 vendor programs company receives incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company uses cooperative marketing development funds exclusively advertising marketing programs restricted cooperative marketing development funds generally recognized reduction operating expense cases funds excess targeted marketing program reduction cost goods sold accordance emerging issues task force issue 0216 “accounting customer including reseller certain consideration received vendor” related marketing expenses recognized rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share company accounts earnings per common share accordance sfas 128 “earnings per share” basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 ‘‘reporting comprehensive income’’ establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company reported comprehensive income fiscal year ended september 30 2008 2007 respectively components comprehensive income fiscal year ended september 30 2006 segment reporting provisions sfas 131 “disclosures segments enterprise related information” require public companies report financial descriptive information reportable operating segments company identifies reportable segments based management internally evaluates separate financial information business activities management responsibility year ended september 30 2006 company operated one segment fiscal years ended september 30 2008 2007 company operated four three segments respectively follows f company recognizes revenues geographic areas based location product shipped services rendered noncontrolling interest noncontrolling interest consists capital contributed noncontrolling interests well earnings losses allocated company noncontrolling interests resulting equity investments pbpo ovex changes noncontrolling interest thousands since october 1 2006 follows recent accounting pronouncements accounting pronouncements adopted july 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxes fin 48 interpretation requires recognition measurement uncertain income tax positions using morelikelythannot approach provisions fin 48 effective fiscal years beginning december 15 2006 company adopted accounting pronouncement effective october 1 2007 adoption material effect consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 amends statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entitys first fiscal year begins september 15 2006 company adopted accounting pronouncement effective october 1 2006 adoption material effect consolidated financial statements f accounting pronouncements pending adoption march 2008 fasb issued statement financial accounting standards sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 requires enhanced disclosures companys derivative hedging activities enhanced disclosures discuss company uses derivative instruments b derivative instruments related hedged items accounted fasb statement 133 related interpretations c derivative instruments related hedged items affect companys financial position results operations cash flows sfas 161 effective fiscal years beginning november 15 2008 earlier adoption allowed company anticipate adoption accounting pronouncement material effect consolidated financial statements february 2008 fasb issued fasb staff position 1572 effective date fasb statement 157 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities fiscal years beginning november 15 2008 therefore company delay application sfas 157 nonfinancial assets nonfinancial liabilities company anticipate delayed adoption accounting pronouncement material effect consolidated financial statements december 2007 fasb issued sfas 141r business combinations sfas 160 accounting reporting noncontrolling interests consolidated financial statements amendment arb 51 new standards significantly change financial accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements sfas 141r required adopted concurrently sfas 160 effective business combination transactions acquisition date beginning first annual reporting period beginning december 15 2008 early adoption prohibited company anticipate adoption accounting pronouncement material effect consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 effective company fiscal years beginning july 1 2008 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings company anticipate adoption accounting pronouncement material effect consolidated financial statements september 2006 fasb issued fas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 company anticipate adoption accounting pronouncement material effect consolidated financial statements 2 property equipment property equipment consist following thousands depreciation amortization expense 2609000 2320000 1491000 years ended september 30 2008 2007 2006 respectively assets fully depreciated 10424000 8380000 september 30 2008 2007 respectively accumulated amortization capitalized leases 1329000 849000 september 30 2008 2007 respectively f 3 lines credit company’s two primary information technology sales subsidiaries en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation “ge” parties certain business financing agreement certain agreement wholesale financing dated june 25 2004 amended date collectively “agreements” company guarantor obligations agreements flooring arrangement two subsidiaries may purchase finance information technology products geapproved vendors terms depend upon certain variable factors two subsidiaries may borrow 85 company’s collective eligible accounts receivable interest rate prime plus 10 per annum subject minimum rate 50 purchases geapproved vendors historically terms allow interestfree flooring original agreements provided 300 million accounts receivable flooring facility expired june 25 2007 extended june 13 2007 july 31 2007 via temporary overline letter agreement effective july 25 2007 facility increased 450 million certain financial covenants revised pursuant addendum executed among parties addendum also provided extension term facility period three years august 1 2007 successive oneyear renewal periods thereafter subject termination end period least sixty days prior written notice party parties effective september 25 2007 parties entered amendment delete prior financial covenants contained agreements restate effective last day calendar quarter follows terms defined agreements • tangible net worth subordinated debt combined amount less 12750000 • total funded indebtedness ebitda preceding four fiscal quarters ended shall 300100 ge facility collateralized accounts receivable inventory substantially companys assets september 30 2008 approximately 78 million borrowings outstanding 450 million financing facility september 30 2008 additional borrowings available approximately 234 million taking consideration borrowing limitations agreements amended date since company replaced working capital financing facility june 2004 minimal interest expense incurred borrowings line credit extended interestfree period flooring plan fiscal years 2008 2007 2006 interest expense amounted 17000 11000 14000 respectively total interest expense majority fiscal years 2008 2007 applied capitalized leases years ended september 30 2008 2007 2006 241000 318000 82000 respectively 4 income gain sale service business july 9 2008 company sold 805 interest service business en pointe global services llc epgs allied digital services limited adsl connection transaction company transferred majority service business including related employees contracts epgs adsl publicly traded corporation bombay stock exchange india consideration purchase 10 million cash 8 million received 745000 shares restricted adsl stock face value 14 million july 9 2008 date signing contract securities portion consideration adjusted 60 million restricted nature stock decline value july september 2008 resulted reported gain sale 154 million related costs 06 million considered gain sale reflect remaining 20 million cash consideration due consideration resulting gain recorded received sale business considered discontinued operations service business never separate segment fas 144 based fact operations cash flows could clearly distinguished operationally rest company september 30 2008 escrow receivable 745000 shares adsl stock reevaluated reduced decline market value restriction stock see marketable securities note continuity management former service employees company initially continue capacities operate autonomously three year master service agreement signed conjunction sale company provides certain services including without limitation administrative corporate information f technology engineering services epgs signed separate subleasing agreement sublease one half company’s corporate headquarters company ceo en pointe technologies inc bob din also serve board epgs representative company going service contracts could readily transferred epgs billed company behalf epgs company continues liable contracts future renegotiation companys continuing interest 195 epgs reported equity method accounting promulgated apb 18 5 employee benefit plan company employee savings plan ‘‘401k plan’’ covers substantially fulltime employees twentyone years age older company’s contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 6 income taxes components income tax benefit provision follows thousands provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows company’s consolidated return excludes two affiliates see “affiliate earnings losses taxable” table pbpo ovex pbpo excluded company’s investment less required 80 ownership required consolidate federal tax law ovex excluded foreign income subject us tax distributed deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization portion net deferred tax asset 49 million management provided valuation allowance significant components deferred taxes follows thousands f company federal net operating losses ‘‘nol’’ available company files income tax returns us federal jurisdiction various foreign jurisdictions states united states company subject income tax examination us federal tax authorities years ending september 30 2005 company subject income tax examinations state california tax authorities years ending september 30 2004 neither internal revenue service taxing authorities jurisdictions commenced examination company’s income tax returns tax year october 1 2007 company adopted provisions fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 prescribes threshold financial statement recognition measurement tax position taken income tax return fin 48 requires company determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company must recognize largest amount benefit likely sustained financial statements tax positions likely sustained upon audit company may recognize portion benefit financial statements company investigated identified significant certain uncertain tax positions investigation included review federal tax returns open years company also reviewed book tax adjustments recorded federal tax returns open tax years company also reviewed transactional level detail identify tax exposure areas items part company’s identification process company completed fin 48 checklist inventory uncertain tax positions checklist covered areas accounting methods mergers acquisitions state local taxes international tax research development compensation benefits federal tax issues based investigation review company concluded uncertain tax positions exist tax returns open years except issues discussed whereby likelihood realization upon audit considered initially highly certain following item specifically addressed domestic transfer pricing en pointe technologies inc whollyowned subsidiaries file consolidated combined separate returns various states jurisdictions en pointe technologies whollyowned subsidiaries file separate state returns exposure respect domestic transfer pricing way management fees overhead allocations charged company performed transfer pricing study respect management fees overhead allocation addition documentation supporting allocation may satisfactory state taxing authorities management determined tax position likely highly certain accordingly liability tax position respect item recorded amount 10000 f 7 longterm liabilities commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2008 approximately follows thousands june 1999 company entered saleleaseback arrangement 126000 square foot configuration facility ontario california sfas 98 sublease 10 total leased premises company required account lease would otherwise considered operating lease financing transaction company recorded lease payments reduction obligation lessor interest expense obligation well depreciation expense capitalized property upon termination sublease conclusion company longer continuing interest ontario facility march 2005 company accordance sfas 98 removed leased assets liability accounts balance sheet however approximately six years capitalized leased assets depreciated rapidly liability lessor amortized resulting liability lessor exceeding net book value capitalized lease property 07 million date immediately preceding termination sublease 07 million gain deferred amortized straightline basis approximately sixteen months represented conclusion seventh year fifteen year lease first date company could terminate lease without cost penalty years ended september 30 2007 2006 company amortized earnings 30000 387000 respectively deferred gain august 26 2005 company gave notification lessor ontario facility intention terminate lease notification acknowledged september 14 2005 march 30 2006 company amended lease agreement extend lease due terminate may 31 2006 october 31 2006 august 2006 company found alternative location configuration center seeking entered sublease agreement approximately 95090 square feet rancho cucamonga california sublease approximately two half years ending february 15 2009 october 29 2007 company entered lease agreement new corporate headquarters property leased two story office building 29032 square feet office space carson california lease period seven years commencing november 1 2007 lease requires monthly payments 4848344 first year contains annual base rent increase 3 effective november 1 succeeding six years option extend lease two additional five year periods two option periods extend lease contain base rent increases 3 found original lease scheduled monthly payments lease extension options original base monthly rate 4848344 plus sum accumulated annual 3 base rent increases date security deposit 9696688 due upon execution lease lessee responsible payment real property taxes leased premises well utilities services july 11 2008 company entered sublease agreement ground floor new corporate headquarters en pointe global services llc 195 ownership interest lease commences july 1 2008 terminates october 31 2014 lease requires monthly payments 2424172 onehalf amount master lease agreement substantially mirrors terms master lease agreement payment amounts reduced onehalf master agreement f lessor leased corporate headquarters dominguez channel llc 85 owned chief executive officer company four members immediate family two employees another director company terms provisions lease agreement reviewed unanimously approved august 8 2007 companys audit committee comprised disinterested directors february 15 2008 company capital development authority organization commissioned government pakistan oversee planning maintenance islamabad entered leasing agreement lease company approximately 4125 acres land lease three incremental renewable periods thirtythree years land leased construction technology campus multiple educational training conferences may include limited technical labs including research data development labs centers types information technology services including data recovery centers knowledge business processing outsourcing training across various market segments managed services help desk support technology campus include accommodations faculty students staff well visiting foreign domestic guests business professional people contain auditoriums conference centers recreational facilities special dedicated commerce teaching training blocks advanced courses multinational companies microsoft corporation cisco systems inc numerous manufacturers software publishers resellers agents terms lease agreement company pay total lease rental 100 million ten year period time lease payments totaling 53 million due installments 05 million annually ten year period time total interest estimated 29 million based given monthly average kibor karachi interbank offered rate estimated rate 10 apr payment 10 07 million paid letter intent originally signed lessor another 15 11 million paid agreement signed addition 100 million lease rental annual ground rental charge approximately 13000 year company responsible applicable property related taxes 100 million cost lease amortized thirtythree years 03 million per year presently considered nonoperating investment expense 15 million advance lease payments substantially noncurrent included assets balance sheet rent expense years ended september 30 2008 2007 2006 operating leases approximately 1826000 1292000 1812000 respectively amendment employment agreement company’s ceo entered october 1 2004 effective october 15 2004 provision event termination employment certain circumstances following unapproved change control company severance payout equal four times annual base salary single lumpsum payment made company subject sales tax examinations sales tax jurisdictions throughout united states sales tax regulations set state local taxing authority involve difficultly interpretation application variations sales tax transactions company incurs accordingly company provides best estimates sales tax deficiency soon becomes aware deficiency currently company undergoing examinations two major states receive majority companys sales tax proceeds company accrued 14 million findings may result sales tax examinations believes amount accrued differ materially final audit examination results 8 earnings per share preferred stock following table sets forth computation basic diluted net income per share thousands except per share amounts f company antitakeover provision certificate incorporation amended date grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority company’s outstanding voting stock section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change company’s control without action stockholders therefore could adversely affect market price common stock 9 stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years however anticipation adverse effects adoption sfas 123r would compensation committee board directors approved made effective july 20 2005 acceleration unvested stock options march 2006 terms stock option plan terminated shares available grant plan options granted since fiscal year ended september 30 2005 company granted options purchase 275000 shares common stock director employee exercise prices ranging 200 210 per share options granted accelerated fully vested july 20 2005 expire ten years date grant unless earlier exercised terminated compensation charge recorded connection issuance options exercise price stock options granted less fair market value company’s stock price date grant following summary stock option activity 10 acquisition businesses september 19 2006 company entered share purchase agreement omar saeed arif saeed saeeds effective october 1 2006 acquire 70 capital stock two privately owned pakistani companies ovex technologies private limited ovex pakistan private limited subsequently july 7 2007 two companies approved merger pakistan court effective october 1 2006 surviving company merger ovex technologies private limited “ovex” f companies engaged providing business process outsourcing bpo services whollyowned saeeds terms agreement company paid saeeds total 1680000 exchange 70 capital stock two companies form consideration paid consisted 240000 cash 240000 unregistered shares company common stock promissory note principal amount 1200000 promissory note repaid full november 2006 additionally board directors ovex consists five members one designated company edward hunter director company serves company’s designee one saeeds three designated mutually two designees company allocated 1680000 purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives amortized reviewed periodically impairment purchase price approximately 98000 allocated amortizable five years using sum year’s digits method customer relationships approximately 420000 allocated amortizable five years straightline basis noncompetition agreements allocation purchase price thousands follows january 18 2006 pursuant asset purchase agreement software medium inc texas corporation “smi” veridyn llc texas limited liability company whollyowned subsidiary smi “veridyn” collectively smi “sellers” company acquired certain depreciable intangible assets assumed certain liabilities including shortterm lease commitment office facilities closing 550000 cash paid sellers two sellers’ officers entered employment agreements company one officers guaranteed 250000 bonus payable two years subject continued employment considered part purchase price sellers’ officer’s employment agreement contains performancebased bonus provision based percentage earnings interest taxes depreciation amortization “ebitda” sales security services bonus payable three years quarterly basis subject continued employment approximates 25 ebitda per year subject maximum annual aggregate bonus payment 400000 additional fees payable estimated payable professional services directly related acquisition total 175000 company allocated 975000 purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 154000 allocated amortizable five years using sum year’s digits method customer relationships approximately 460000 allocated amortizable three years straightline basis noncompetition agreements allocation purchase price thousands follows f management considers sumoftheyears digits best reflects pattern economic benefits smi viablelinks defined customer relationships realized september 30 2005 company increased amortization tabin defined customer relationships 50000 recognition impairment certain customer relationships prior fiscal years addition transactions described company made following acquisitions october 11 2002 tabin corporation tabin october 01 2004 viablelinks inc viablelinks september 30 2008 amortization customer relationships current future years follows thousands following unaudited pro forma consolidated financial information reflects results operations year ended september 30 2006 acquisitions ovex smi occurred october 1 2005 pro form results years ended september 30 2008 2007 presented companies fully integrated company’s operations periods thousands except per share data pro forma results prepared comparative purposes purport indicative operating results would acquisitions actually taken place earlier years addition results intended projection future results reflect synergies might achieved combined operations 11 litigation july 2006 church gardens llc current owner formerly leased configuration facility ontario california filed suit company san bernardino county superior court case rcv096518 complaint centers certain furniture fixtures equipment leasehold improvements sold leased back company plaintiff’s predecessor 1999 company still occupied former leased configuration facility ontario california plaintiff alleges among things portion leasedback property sold destroyed altered removed premises demands inspection accounting property remaining court provide damages extent company may breached contract company disputes allegations believes property loss liability lease provisions would limited 75000 already accrued financial statements f february 2007 company filed crosscomplaint church gardens llc crosscomplaint asks companys 90720 security deposit returned interest addition company claims church gardens llc engaged unfair business practices retaining security deposit allowing removal certain personal property company owned church gardens llc engaged unlawful conversion certain property belonging company also asked court grant declaratory relief actions companys attempt preserve disputed property pending judicial determination rights company also seeks recovery possession personal property injunctive relief preventing plaintiff liquidating companys property january 2007 us real estate consortium predecessor owner companys former leased configuration facility ontario california filed suit current owner church gardens llc san bernardino county superior court case rcv100476 march 2007 current owner church gardens llc filed crosscomplaint company former owner us real estate consortium among others may 31 2007 company answered crossclaimed current owner church gardens llc july 25 2007 church gardens llc filed answer first amended crosscomplaint filed company cases rcv096518 rcv100476 consolidated purposes substantial discovery substantial law motion practice date company contesting consolidated case vigorously intend continue july 25 2008 circuit court city norfolk virginia granted leave softchoice corporation amend complaint case number cl075777 certain companys employees former softchoice corporation employees add company subsidiary en pointe technologies sales inc defendants therein company yet filed responsive pleading vigorously disputes liability various claims litigation proceedings company involved ordinary course business company provides costs related contingencies loss probable amount reasonably determinable outcome foregoing claims proceedings cannot predicted certainty consulting legal counsel management believe reasonably possible ongoing pending litigation result unfavorable outcome material adverse affect business financial position results operations cash flows 12 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2008 2007 presented thousands except per share amounts f en pointe technologies inc schedule ii valuation qualifying accounts f signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized en pointe technologies inc attiazaz “bob” din dated december 26 2008 attiazaz ‘‘bob’’ din chief executive officer president principal executive officer power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments including posteffective amendments hereto hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date mansoor shah chairman board director december 26 2008 mansoor shah attiazaz “bob” din chief executive officer president director principal executive officer december 26 2008 attiazaz “bob” din javed latif chief financial officer senior vice president principal financial principal accounting officer december 26 2008 javed latif naureen din director december 26 2008 naureen din zubair ahmed director december 26 2008 zubair ahmed mark briggs director december 26 2008 mark briggs edward hunter director december 26 2008 edward hunter timothy j lilligren director december 26 2008 timothy j lilligren index exhibits exhibit number description 21 agreement plan merger registrant en pointe technologies inc texas corporation effective february 29 1996 incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 31 certificate incorporation registrant incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 32 bylaws registrant incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 33 certificate amendment certificate incorporation registrant filed may 16 2000 incorporated reference numbered exhibit registrant’s registration statement form 10k filed january 18 2001 34 certificate amendment certificate incorporation registrant filed may 16 2005 incorporated reference numbered exhibit registrant’s form 10q filed may 16 2005 43 form common stock certificate incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 103 form directors’ officers’ indemnity agreement incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 105 employment agreement registrant attiazaz ‘‘bob’’ din dated march 1 1996 incorporated reference numbered exhibit registrant’s registration statement form s1 filed may 8 1996 106 amended employment agreement registrant attiazaz ‘‘bob’’ din dated april 2 1997 incorporated reference numbered exhibit registrant’s registration statement form 10k filed december 29 1997 1024 assignment license agreement registrant supplyaccess inc dated september 21 2001 incorporated reference numbered exhibit registrant’s form 10k filed december 31 2001 1027 employment agreement registrant kevin schatzle dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10k filed december 27 2002 1031 asset purchase agreement entered october 9 2002 tabin corporation en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10k filed december 27 2002 1036 employment agreement registrant javed latif dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2003 1039 employee leasing licensing agreement registrant en pointe global services inc dated october 17 2003 incorporated reference numbered exhibit registrant’s form 10q filed may 17 2004 1041 business financing agreement en pointe technologies sales inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 exhibit number description 1042 agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1043 addendum business financing agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated june 25 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1044 addendum business financing agreement wholesale financing en pointe technologies inc ge commercial distribution finance corporation dated july 27 2004 incorporated reference numbered exhibit registrant’s form 10q filed august 16 2004 1045 asset purchase agreement entered october 1 2004 viablelinks inc en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10q filed february 14 2005 1046 subscription agreement dated march 18 2005 premier bpo inc registrant incorporated reference numbered exhibit registrant’s form 10q filed may 16 2005 1047 amendment employment agreement registrant attiazaz ‘‘bob’’ din dated november 15 2004 incorporated reference exhibit 991 registrant’s form 8k filed november 18 2004 1048 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation effective january 23 2006 incorporated reference numbered exhibit registrant’s form 8k filed january 30 2006 1049 asset purchase agreement entered january 18 2006 software medium inc veridyn llc en pointe technologies sales inc incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1050 employment agreement registrant robert mercer dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1051 employment agreement registrant robert mercer dated march 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1052 employment agreement registrant david l mochalski dated may 28 2002 incorporated reference numbered exhibit registrant’s form 10q filed february 14 2006 1053 sublease dated march 30 2006 jetabout north america inc registrant property located 2381 rosecrans avenue el segundo california 90245 incorporated reference numbered exhibit registrant’s form 10q filed may 15 2006 1055 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated may 12 2006 incorporated reference numbered exhibit registrant’s form 8k filed may 17 2006 1056 sublease dated july 12 2006 north pacific group inc registrant certain industrial warehouse properties located 11081 tacoma drive rancho cucamonga california 91730 incorporated reference numbered exhibit registrant’s form 8k filed september 1 2006 1057 share purchase agreement dated september 19 2006 among registrant omar saeed arif saeed incorporated reference numbered exhibit registrant’s form 8k filed september 25 2006 exhibit number description 1058 employment agreement registrant richard r emil dated september 27 2006 incorporated reference numbered exhibit registrant’s form 8k filed september 27 2006 1059 promissory note registrant omar arif saeed dated october 5 2006 incorporated reference numbered exhibit registrant’s form 10k filed december 18 2006 1060 amendment share purchase agreement effective october 1 2006 among registrant omar saeed arif saeed incorporated reference numbered exhibit registrant’s form 10k filed december 18 2006 1061 temporary overline agreement ge commercial distribution finance corporation en pointe technologies sales inc en pointe gov inc dated june 13 2007 incorporated reference exhibit 1060 registrant’s form 8k filed june 14 2007 1062 amendment business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated july 30 2007 incorporated reference exhibit 1061 registrant’s form 8k filed july 31 2007 1063 addendum business financing agreement wholesale financing among en pointe technologies sales inc en pointe gov inc ge commercial distribution finance corporation dated september 25 2007 incorporated reference numbered exhibit registrant’s form 8k filed september 26 2007 1064 lease dated october 29 2007 dominguez channel llc en pointe technologies sales inc certain office properties located 18701 figueroa street carson california incorporated reference numbered exhibit registrant’s form 8ka filed october 31 2007 1065 lease dated february 15 2008 capital development authority registrant 4125 acres land islamabad pakistan incorporated reference numbered exhibit registrant’s form 8k filed february 22 2008 1066 agreement inventory financing en pointe technologies sales inc ibm credit llc dated march 20 2008 incorporated reference numbered exhibit registrant’s form 8k filed march 21 2008 1067 collateralized guarantee en pointe technologies inc ibm credit llc dated march 20 2008 incorporated reference numbered exhibit registrant’s form 8k filed march 21 2008 1068 deposit account control agreement en pointe technologies sales inc ibm credit llc dated march 20 2008 incorporated reference numbered exhibit registrant’s form 8k filed march 21 2008 1069 intercreditor agreement ge commercial distribution finance corporation ibm credit llc dated march 2008 incorporated reference numbered exhibit registrant’s form 8k filed march 21 2008 1070 limited liability company purchase agreement en pointe technologies sales inc allied digital services ltd dated july 9 2008 incorporated reference numbered exhibit registrant’s form 8k filed july 15 2008 1071 escrow agreement among en pointe technologies sales inc allied digital services ltd us bank national association dated july 9 2008 incorporated reference numbered exhibit registrant’s form 8k filed july 15 2008 1072 master services agreement en pointe technologies inc en pointe technologies sales inc en pointe global services llc dated september 2 2008 incorporated reference numbered exhibit registrant’s form 8k filed september 2 2008 1073 first amendment july 9 2008 limited liability company interest purchase agreement en pointe technologies sales inc allied digital services ltd dated december 2 2008 incorporated reference numbered exhibit registrant’s form 8k filed december 2 2008 211 subsidiaries company 231 consent rose snyder jacobs cpa corp 311 certification chief executive officer required rule 13a14a 15d14a securities exchange act 1934 amended 312 certification chief financial officer required rule 13a14a 15d14a securities exchange act 1934 amended 321 certifications chief executive officer chief financial officer required rule 13a14b 15d14b securities exchange act 1934 amended 18 usc section 1350 exhibits constitutes management contract compensatory plan arrangement item 15 exhibits financial statement schedules following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto b exhibits list exhibits accompanying exhibit index herein incorporated reference en pointe technologies inc report independent registered public accounting firm board directors stockholders en pointe technologies inc el segundo california audited accompanying consolidated balance sheet en pointe technologies inc september 30 2006 related consolidated statements operations stockholders’ equity cash flows year ended september 30 2006 connection audit consolidated financial statements also audited schedule ii valuation qualifying accounts consolidated financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audit conducted audit accordance standards established public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position en pointe technologies inc september 30 2006 results operations cash flows year ended september 30 2006 conformity accounting principles generally accepted united states america also opinion related schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein rose snyder jacobs corporation certified public accountants encino california november 28 2006 f 2 independent registered public accounting firm board directors stockholders en pointe technologies inc el segundo california audited accompanying consolidated balance sheet en pointe technologies inc september 30 2005 related consolidated statements operations stockholders’ equity cash flows year ended september 30 2005 also audited schedule listed accompanying index consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position en pointe technologies inc september 30 2005 results operations cash flows year ended september 30 2005 conformity accounting principles generally accepted united states america also opinion schedule ii valuation qualifying accounts year ended september 30 2005 presents fairly material respects information set forth therein bdo seidman llp los angeles california december 23 2005 f 3 independent registered public accounting firm board directors stockholders en pointe technologies inc opinion consolidated statements operations stockholders’ equity cash flows year ended september 30 2004 present fairly material respects consolidated results operations cash flows en pointe technologies inc subsidiaries year ended september 30 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provide reasonable basis opinion pricewaterhousecoopers llp los angeles california december 27 2004 f 4 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements f 5 en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements f 6 en pointe technologies inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements f 7 en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements f 8 en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements f 9 1 organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 17 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity capital resources september 30 2006 company approximately 102 million cash working capital 165 million discussed note 3 june 2004 company closed 300 million replacement working capital financing facility ge commercial distribution finance corporation “ge” term facility period three years except either party may terminate agreement upon 60 days’ prior written notice party september 30 2006 credit line borrowings amounted 157 million additional borrowings available approximately 143 million taking consideration available collateral borrowing limitations agreements borrowings line credit agreement collateralized substantially company’s assets financing agreements contain various liquidity financial debt covenants explained note 3 company compliance debt covenants september 30 2006 principles consolidation consolidated financial statements include company’s accounts whollyowned subsidiaries well affiliate premier bpo inc formerly known en pointe global services inc “pbpo” approximate 31 voting interest owned variable interest entity intercompany accounts transactions eliminated consolidated financial statements since stockholders pbpo collectively represent approximately 69 voting interest majority ownership interest entitlement share losses reflected company’s consolidated balance sheet statement operations “minority interest” losses allocated 69 owners pbpo based upon percentage ownership upon “at risk” capital owners losses excess “at risk” capital allocated company without regard company’s capital risk date losses absorbed amounted 26 million exceed company’s invested capital 14 million 12 million investment premier pbo inc march 2005 company invested additional 250000 third round private placements common stock pbpo company’s total investment pbpo common stock september 30 2006 759000 represents approximate 31 voting interest privatelyheld corporation pbpo business process outsourcing company formed october 2003 headquartered clarksville tennessee f 10 addition company’s pbpo common stock investments described company invested additional 600000 pbpo form fiveyear 6 interestbearing note subsequently converted series nonvoting convertible preferred stock pbpo october 2004 preferred stock may converted common stock earlier five years issuance date preferred stock effective date initial public offering conversion price set greater 100 per share fair market value determined preferred stock agreement en pointe’s approximate 31 voting interest pbpo referenced excludes series nonvoting convertible preferred stock holds pbpo considered related party company’s equity interest pbpo well interrelationship several investors company one company’s board members mark briggs owns approximately 17 pbpo also serves chairman board chief executive officer company’s ceo bob din represents en pointe’s interest member board directors pbpo addition owners ovex technologies private limited “ovex” pakistani company islamabad performs operational accounting side company’s outsourcing cost plus fixed agreement may cancelled upon written notice owns collectively approximately 16 pbpo omar arif saeed october 1 2006 collectively 30 owners ovex also hold shares series nonvoting convertible preferred stock pbpo received october 2004 exchange conversion fiveyear notes aggregated 603000 principal interest preferred shares held saeeds component pbpo minority interest subject allocation pbpo losses substantial investment company made pbpo related party nature investment well factors company’s acquired interest pbpo evaluated determined pbpo met tests variable interest entity fin 46 pbpo’s financial results thus consolidated company’s financial statements since pbpo’s inception pbpo contracted ovex pakistan colwell salmon india provide workforces backoffice support pbpo shares workspace company islamabad nominal fee using contracted ovex workers contracts directly ovex workspace workers lahore september 2005 pbpo entered five year costplus fixed fee service agreement ovex supply contracted employees operating facility lahore pakistan addition pbpo agreed provide certain marketing services ovex agreements terminated thirty days written notice pbpo september 2005 pbpo also agreed cancel option purchase ovex consideration payment 200000 ovex 200000 amortized five years run concurrent five year service agreement entered ovex addition ovex agreed purchase certain office equipment net book value 124000 150000 f 11 business transactions related company’s outsourcing activities ovex including services billed operating cost charges balances due ovex follows thousands changes minority interest thousands since october 1 2004 follows use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition net sales consist primarily revenue sale hardware software peripherals service support contracts company applies provisions sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general company recognizes revenue persuasive evidence arrangement exists ii delivery products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured company’s shipping terms title risk loss merchandise shipped pass customers delivery takes place generally two three days product therefore considered received accepted customer upon customer’s receipt product carrier undelivered product included inventory f 12 majority company’s sales relate physical products recognized gross basis selling price customer recorded net sales acquisition cost product recorded cost sales however software maintenance contracts software agency fees extended warranties sold company primary obligor recorded net basis accordance sec staff accounting bulletin 104 “revenue recognition” emerging issues task force 9919 “reporting revenue gross principal versus net agent” accordingly revenues recognized net sales company adopted provisions statement position 972 “software revenue recognition” sop 972 amended sop 989 “modification sop 972 software revenue recognition respect certain transactions” sop 989 recognizing revenue software transactions revenue software license sales recognized persuasive evidence arrangement exists delivery product made fixed fee collectibility determined revenue customer maintenance support agreements reported net basis recognized time sale service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services acceptance customer net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted suppliers less rebates deferred revenues result prepaid management services maintenance contracts many management services prebilled quarterly income recognized services performed company’s maintenance contracts generally services may performed one year period time income recognized contracts ratably period contract cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 2006 2005 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased us drop shipped yet received accepted customer stated lower cost specific identification method market f 13 ongoing basis inventories reviewed written estimated obsolescence unmarketable inventories equal difference cost inventories estimated net realizable value changes increase inventory reserves recorded increase cost goods sold property equipment property equipment stated cost depreciated using straightline method estimated useful lives three seven years assets acquired capital lease arrangements recorded present value minimum lease payments amortized using straightline method life asset term lease whichever shorter amortization expense included depreciation expense leasehold improvements amortized using straightline method shorter lease terms useful lives improvements expenses repairs maintenance charged expense incurred renewals betterments capitalized gains losses sale disposal property equipment reflected operating income company accounts computer software costs developed internal use accordance statement position 981 sop 981 “accounting costs computer software developed obtained internal use” requires companies capitalize certain qualifying costs application development stage related software development project exclude initial planning phase determines performance requirements data conversion general administrative costs related payroll training costs incurred whenever software program considered operational company considers project completed places service commences amortization development cost succeeding month fiscal year 2005 company concluded development three internaluse software programs amortized straightline basis economic lives software products estimated four years costs capitalized include internal payroll direct fringe benefits external direct project costs including labor travel company began amortizing first internaluse programs may remaining two october 2005 company’s property equipment see note 2 september 30 2006 2005 2004 included 1000 781000 203000 respectively capitalized software development costs fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount company’s longterm liabilities also approximates fair value based interest rates currently available us debt similar terms remaining maturities f 14 impairment longlived assets company assesses potential impairments longlived assets accordance provisions sfas 144 “accounting impairment disposal longlived assets” impairment review performed whenever events changes circumstances indicate carrying value assets may recoverable factors company considers include limited significant underperformance relative expected historical projected future operating results significant changes manner use acquired assets strategy overall business significant negative industry economic trends carrying value longlived asset may recoverable based upon existence one indicators impairment company estimates future undiscounted cash flows expected result use asset eventual disposition sum expected future undiscounted cash flows eventual disposition less carrying amount asset company recognizes impairment loss impairment loss reflected amount carrying amount asset exceeds fair value asset based fair market value available discounted cash flows date company recognized impairment charge related writedown longlived assets goodwill intangible assets company accounts goodwill intangible assets accordance provisions statement financial accounting standard sfas 142 “goodwill intangible assets” requires among things purchased goodwill certain intangibles amortized nonamortization approach goodwill intangibles indefinite life amortized instead reviewed impairment least annually event occurs circumstances indicate carrying amount may impaired events circumstances could indicate impairment include significant change business climate economic industry trends legal factors negative operating performance indicators significant competition changes strategy disposition reporting unit portion thereof goodwill impairment testing performed reporting unit level sfas 142 requires goodwill tested annually impairment using twostep process event occurs would likely reduce fair value reporting unit carrying amount goodwill shall tested time first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test must performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting unit goodwill carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess f 15 application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units assignment goodwill reporting units determination fair value reporting unit fair value reporting unit estimated using discounted cash flow methodology requires significant judgments including estimation future cash flows dependent internal forecasts estimation longterm rate growth company’s business useful life cash flows occur determination weighted average cost capital changes estimates assumptions could materially affect determination fair value andor goodwill impairment reporting unit accordance sfas 142 company selected september 30 date perform annual goodwill impairment test based valuation goodwill impairment charges related writedown goodwill recognized years ended september 30 2006 2005 2004 connection company’s acquisitions company applied provisions sfas 141 “business combinations” using purchase method accounting assets liabilities assumed recorded estimated fair values determined management based information currently available current assumptions future operations excess purchase price fair values recorded goodwill company’s goodwill balance years ended september 30 2006 2005 623000 318000 respectively included assets accompanying consolidated balance sheets separable intangible assets finite useful lives amortized useful lives impaired asset written fair value intangible assets finite useful lives consist customer relationships noncompete agreements amortized expected benefit period using straightline sumoftheyearsdigits methods september 30 2006 2005 intangible assets amounted 609000 net 674000 accumulated amortization 271000 net 399000 accumulated amortization respectively included assets accompanying consolidated balance sheets advertising shipping handling costs company reports costs advertising periods costs incurred fiscal years ended september 30 2006 2005 2004 advertising expense approximately 346000 224000 265000 respectively shipping handling costs incurred company included cost sales income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances f 16 established necessary reduce deferred tax assets amounts likely realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable company’s cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits customers accounted 10 net sales follows respective percentage outstanding accounts receivable fiscal year end company performs periodic credit evaluations financial condition customers monitors collections payments customers generally require collateral receivables generally due within 45 days company provides possible inability collect accounts receivable recording allowance doubtful accounts company writes account considered uncollectible company estimates allowance doubtful accounts based historical experience aging accounts receivable information regarding creditworthiness customers date losses within range management’s expectations company contracts various suppliers although limited number suppliers capable supplying inventory needs company believes shortfalls existing suppliers would absorbed suppliers comparable terms however change suppliers could cause delay sales adversely effect results purchases company’s three largest vendors years ended september 30 2006 2005 2004 comprised 51 54 56 respectively total purchases product treasury stock company uses specific identification method accounting treasury stock 2004 fiscal year company issued 1000 additional shares employee stock benefit plans cost basis 2000 september 30 2006 2005 remained approximately 1000 treasury shares cost 1000 f 17 stock based compensation permitted statement financial accounting standards sfas 148 sfas 123 company applies accounting provisions accounting principle board “apb” opinion 25 “accounting stock issues employees” related interpretations regard measurement compensation cost options granted company’s equity compensation plan december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure” effective fiscal years ending december 15 2002 sfas 148 amends sfas 123 provide alternative methods transition fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 require disclosure summary significant accounting policies effects entity’s accounting policy respect stockbased employee compensation reported net income earnings per share annual interim financial statements sfas 148 amend sfas 123 require companies account employee stockbased awards using fair value method disclosure provisions required however companies stockbased employee compensation regardless whether utilize fair value method accounting described sfas 123 intrinsic value method described apb opinion 25 company adopted disclosure requirements sfas 148 effective january 1 2003 adoption standard significant impact financial condition operating results prior october 1 2005 company accounted grants options employees purchase common stock using intrinsic value method accordance apb opinion 25 fin 44 “accounting certain transactions involving stock compensation” permitted sfas 123 amended sfas 148 company chosen continue account option grants apb opinion 25 provide expanded disclosures specified sfas 123 amended sfas 148 beginning october 1 2005 company adopted provisions sfas 123r using prospective method july 19 2005 board directors compensation committee approved accelerating exercisability 316106 unvested stock options outstanding company’s 1996 stock incentive plan effective july 20 2005 options held employees including executive officers directors range exercise prices 125 338 per share weighted average exercise price 203 per share closing price per share company’s common stock july 19 2005 last trading day effectiveness acceleration 321 total number options accelerated executive officers directors company hold options purchase aggregate 202906 shares common stock order prevent unintended personal benefits shares company’s common stock received upon exercise accelerated option remain subject original vesting period respect transferability shares consequently may sold otherwise transferred prior earlier termination continuous service company expiration original vesting period f 18 purpose accelerating vesting minimize company’s recognition compensation expense associated options upon adoption sfas 123r first quarter fiscal 2006 maximum aggregate pretax expense associated accelerated options would reflected company’s consolidated financial statements future fiscal years estimated approximately 581000 accelerated exercisability options created additional compensation expense provide estimate benefit would received future terminating employees exercise options prior term respective original vesting periods compensation expense based estimate future turnover percentage times intrinsic value accelerated stock options july 20 2005 amounted additional compensation expense approximately 68000 recognized fourth quarter fiscal 2005 however extent accelerated options exercised prior term respective original vesting periods estimated compensation expense proves insufficient company may incur additional compensation expense sfas 123r company’s full board directors ratified acceleration extent affected options held members compensation committee option grants acceleration option grants determined based fair value grant date awards consistent provisions sfas 123 effect compensation cost company’s net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts vendor programs f 19 company receives incentives suppliers related product volume rebates cooperative marketing development funds incentives generally monthly quarterly annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company uses cooperative marketing development funds exclusively advertising marketing programs restricted cooperative marketing development funds generally recognized reduction operating expense cases funds excess targeted marketing program reduction cost goods sold accordance emerging issues task force issue 0216 “accounting customer including reseller certain consideration received vendor” related marketing expenses recognized rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative marketing development funds deferred earned incentive programs subject audit whether requirements incentives actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share company accounts earnings per common share accordance sfas 128 “earnings per share” basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 ‘‘reporting comprehensive income’’ establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2006 2005 2004 segment reporting provisions sfas 131 “disclosures segments enterprise related information” require public companies report financial descriptive information reportable operating segments company identifies reportable segments based management internally evaluates separate financial information business activities management responsibility years ended september 30 2006 2005 2004 company operated one segment f 20 company recognizes revenues geographic areas based location product shipped services rendered operations outside united states america immaterial date recent accounting pronouncements september 2006 sec released staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 sab 108 provides interpretive guidance sec’s views regarding process quantifying materiality financial statement misstatements sab 108 effective fiscal years ending november 15 2006 adoption accounting pronouncement expected material effect consolidated financial statements september 2006 fasb issued fas 157 fair value measurements standard defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged adoption accounting pronouncement expected material effect consolidated financial statements july 2006 fasb issued interpretation 48 fin 48 accounting uncertainty income taxes interpretation requires recognition measurement uncertain income tax positions using “morelikelythannot” approach provisions fin 48 effective fiscal years beginning december 15 2006 adoption accounting pronouncement expected material effect consolidated financial statements march 2006 fasb issued fas 156 sfas 156 accounting servicing financial assets amendment fasb statement 140 standard clarifies separately account servicing rights requires servicing rights separately recognized initially fair value provides option subsequently accounting servicing rights either fair value amortization method standard effective fiscal years beginning september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued adoption accounting pronouncement expected material effect consolidated financial statements february 2006 fasb issued fas 155 sfas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise accounted separately new statement also requires companies identify interests securitized financial assets freestanding derivatives contain embedded derivatives would accounted separately clarifies interestand principalonly strips subject statement 133 f 21 amends statement 140 revise conditions qualifying special purpose entity due new requirement identify whether interests securitized financial assets freestanding derivatives contain embedded derivates statement effective financial instruments acquired issued beginning entity’s first fiscal year begins september 15 2006 adopted early long financial statements fiscal year early adoption elected including interim statements yet issued adoption accounting pronouncement expected material effect consolidated financial statements may 2005 fasb issued sfas 154 “accounting changes error corrections replacement accounting principles board opinion “apb” opinion 20 fasb statement 3 statement applies voluntary changes accounting principle changes required accounting pronouncement specific transition provisions included sfas 154 requires retrospective application prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change retrospective application limited direct effects change indirect effects recognized period change statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate however sfas 154 redefines restatement revising previously issued financial statements reflect correction error provisions sfas 154 effective accounting changes corrections errors made fiscal periods begin december 15 2005 although early adoption permitted adoption accounting pronouncement material effect consolidated financial statements march 2005 fasb issued interpretation 47 fin 47 accounting conditional asset retirement obligations interpretation fasb statement 143 interpretation clarifies timing recording certain asset retirement obligations required fasb statement 143 accounting asset retirement obligations provisions fin 47 effective years ending december 15 2005 adoption accounting pronouncement material effect consolidated financial statements december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” sfas 123r addresses accounting sharebased payment transactions company receives employee services exchange either equity instruments company liabilities based fair value company’s equity instruments may settled issuance equity instruments sfas 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used requires transactions accounted using fair valuebased method recognized expense consolidated statement operations effective date sfas 123r annual periods beginning june 15 2005 assessing potential negative impact provisions sfas 123r consolidated financial statements fiscal year 2006 decided minimize exposure accounting pronouncement accelerating vesting outstanding unvested options effective july 20 2005 outstanding unvested options accelerated fully vested date see note 9 consolidated financial statements f 22 december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” sfas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged apb opinion 29 “accounting nonmonetary transactions” provided exception basic measurement principle fair value exchanges similar productive assets apb opinion 29 exchange productive asset similar productive asset based recorded amount asset relinquished sfas 153 eliminates exception replaces exception exchanges nonmonetary assets commercial substance provisions statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption accounting pronouncement material effect consolidated financial statements november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 requires abnormal amounts idle facility expense freight handling costs wasted materials spoilage recorded current period charges allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective fiscal year beginning october 1 2005 adoption accounting pronouncement material effect consolidated financial statements 2 property equipment property equipment consist following thousands depreciation amortization expense 1491000 1110000 1574000 years ended september 30 2006 2005 2004 respectively assets fully depreciated 8328000 8474000 years ended september 30 2006 2005 respectively accumulated amortization capitalized leases 433000 221000 september 30 2006 2005 respectively f 23 3 lines credit june 2004 company closed 300 million replacement working capital financing facility ge term facility period three years except either party may terminate agreement upon 60 days’ prior written notice party borrowings line credit agreement collateralized substantially company’s assets september 30 2006 2005 company outstanding borrowings 157 million 168 million respectively line credit ge addition subject 300 million limit line credit company closed concurrent flooring facility ge permits company purchase finance information technology products geapproved vendors terms depend upon certain variable factors september 2006 quarter purchases geapproved vendors historically terms allow interestfree flooring working capital flooring agreements amended may 2006 contain following liquidity financial covenants since company replaced working capital financing facility june 2004 minimal interest expense incurred borrowings line credit extended interestfree period flooring plan fiscal years 2006 2005 interest expense amounted 14000 3000 respectively fiscal year 2004 however lines credit interest expense amounted 258000 weighted average interest rate 1 total interest expense majority fiscal year 2006 applied capitalized leases previous fiscal years related principally ontario facility lease years ended september 30 2006 2005 2004 82000 233000 805000 respectively f 24 4 income consisted chiefly insurance recovery prior year losses rental income early payment discounts state sales tax authorities 5 employee benefit plan company employee savings plan ‘‘401k plan’’ covers substantially fulltime employees twentyone years age older company’s contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 6 income taxes components income tax provision follows thousands provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows company’s consolidated return excludes pbpo investment less required 80 consolidate federal tax law thus none losses generated pbpo available reduction income taxes f 25 deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 60 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating losses ‘‘nol’’ available portion 69 million nol carry forward benefit earnings 47 million attributable exercise stock options considered adjustment additional paidin capital benefit future earnings f 26 7 longterm liabilities commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2006 approximately follows thousands june 1999 company entered saleleaseback arrangement 126000 square foot configuration facility ontario california sfas 98 sublease 10 total leased premises company required account lease would otherwise considered operating lease financing transaction company recorded lease payments reduction obligation lessor interest expense obligation well depreciation expense capitalized property upon termination sublease conclusion company longer continuing interest ontario facility march 2005 company accordance sfas 98 removed leased assets liability accounts balance sheet however approximately six years capitalized leased assets depreciated rapidly liability lessor amortized resulting liability lessor exceeding net book value capitalized lease property 07 million date immediately preceding termination sublease 07 million gain deferred amortized straightline basis approximately sixteen months represented conclusion seventh year fifteen year lease first date company could terminate lease without cost penalty years ended september 30 2006 2005 company amortized earnings 387000 330000 respectively deferred gain years ended september 30 2005 2004 ontario facility rent expense characterized financing lease sfas 98 march 2005 reported interest expense approximately 218000 534000 respectively august 26 2005 company gave notification lessor intention terminate lease notification acknowledged september 14 2005 march 30 2006 company amended lease agreement extend lease due terminate may 31 2006 october 31 2006 august 2006 company found alternative location configuration center seeking entered sublease agreement approximately 95090 square feet rancho cucamonga california sublease approximately two half years ending february 15 2009 f 27 june 2006 company moved headquarters el segundo california leased approximately 24000 square feet office space alternative el segundo location approximately 13000 square feet office space subleased sublease approximately two half years ending january 31 2009 rent expense years ended september 30 2006 2005 2004 operating leases approximately 1812000 1820000 1294000 respectively amendment employment agreement company’s ceo entered october 1 2004 effective october 15 2004 provision event termination employment certain circumstances following unapproved change control company severance payout equal four times annual base salary single lumpsum payment made 8 earnings per share preferred stock following table sets forth computation basic diluted net income per share thousands except per share amounts company antitakeover provision certificate incorporation amended date grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority company’s outstanding voting stock section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change company’s control without action stockholders therefore could adversely affect market price common stock f 28 9 stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years however anticipation adverse effects adoption sfas 123r would compensation committee board directors approved made effective july 20 2005 acceleration unvested stock options september 30 2006 2005 shares available grant plan 424245 335954 respectively options granted since fiscal year ended september 30 2005 company granted options purchase 275000 shares common stock director employee exercise prices ranging 200 210 per share options granted accelerated fully vested july 20 2005 expire ten years date grant unless earlier exercised terminated compensation charge recorded connection issuance options exercise price stock options granted less fair market value company’s stock price date grant following summary stock option activity f 29 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2006 2005 2004 10 employee stock plan company employee stock purchase plan ‘‘plan’’ remains authorized available sale employees aggregate 350007 shares common stock september 30 2006 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period april 2002 company announced employees company suspending plan notice 11 acquisition businesses january 18 2006 pursuant asset purchase agreement software medium inc texas corporation “smi” veridyn llc texas limited liability company whollyowned subsidiary smi “veridyn” collectively smi “sellers” company acquired certain depreciable intangible assets assumed certain liabilities including shortterm lease commitment office facilities closing 550000 cash paid sellers two sellers’ officers entered employment agreements company one officers guaranteed 250000 bonus payable two years subject continued employment considered part purchase price sellers’ officer’s employment agreement contains performancebased bonus provision based percentage earnings interest taxes depreciation amortization “ebitda” sales security services bonus payable three years quarterly basis subject continued employment approximates 25 ebitda per year subject maximum annual aggregate bonus payment 400000 additional fees payable estimated payable professional services directly related acquisition total 175000 f 30 company allocated 975000 purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 154000 allocated amortizable five years using sum year’s digits method customer relationships approximately 460000 allocated amortizable three years straightline basis noncompetition agreements allocation purchase price thousands follows effective october 1 2004 company purchased certain assets viablelinks inc “viablelinks” portland oregon boise idahobased regional reseller technology products services time purchase total purchase price paid approximately 878000 including 882000 gross purchase price less 4000 cash received back company entered initial asset purchase agreement viablelinks october 6 2004 acquire certain assets viablelinks approximately 1050000 october 11 2004 first correcting amendment asset purchase agreement viablelinks company signed amendment effective october 1 2004 sets forth adjustment original purchase price necessary correctly reflect accounting certain assets balances previously estimated closing date result postclosing accounting original purchase price 1050000 reduced 882495 assets included purchase remained originally contemplated included cash trade accounts receivables depreciable assets intangible assets f 31 company originally estimated 564000 accounts receivable acquired viablelinks purchase approximately 113000 would uncollectible allowing net 451000 realized subsequently quarter ended march 31 2005 upon resolution 564000 trade accounts receivable acquired determined 82000 collected previously estimated consequently preliminary purchase price allocation adjusted following thousands company allocated purchase price tangible intangible assets acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations estimated management assistance independent appraisal firm accordance sfas 142 “goodwill intangible assets” goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 200000 allocated amortizable intangible assets related customer relationships october 11 2002 company purchased certain assets tabin corporation “tabin” chicagobased valueadded reseller based independent valuation total purchase price approximately 921000 allocated follows thousands company amortizing fair value customer relationships three acquisitions estimated useful life five years using sumoftheyears digits recent acquisitions smi viablelinks straightline method tabin f 32 management considers sumoftheyears digits best reflects pattern economic benefits smi viablelinks customer relationships realized september 30 2005 company increased amortization tabin customer relationships 50000 recognition impairment certain customer relationships september 30 2006 amortization customer relationships current future years follows thousands following unaudited pro forma consolidated financial information reflects results operations three years ended september 30 2006 acquisitions occurred october 1 2003 thousands except per share data pro forma results prepared comparative purposes purport indicative operating results would acquisitions actually taken place earlier years addition results intended projection future results reflect synergies might achieved combined operations 12 litigation january 2006 action brought company los angeles county superior court case sc088295 seeking general special damages unspecified amount well punitive damages economic harm caused hiring five former employees softchoice corporation suit alleges among things company engaged misappropriation trade secrets conversion misappropriated confidential information statutory unfair competition misappropriated confidential f 33 information action initial stage possible reliably predict outcome relief could awarded litigation process inherently uncertain therefore company unable currently estimate loss associated litigation company denied wrongdoing intends vigorously defend allegations february 2006 action brought company software medium inc “smi” veridyn llc “veridyn” consesusone llc certain individual officers directors shareholders smi veridyn san diego county superior court case gic859375 websense inc plaintiff former supplier smi holder secured promissory note unpaid balance 05 million alleges company’s acquisition assets smi veridyn via asset purchase agreement constitutes fraudulent transfer assets company liable debts smi veridyn successor company disputes allegations believes complied applicable laws relating asset purchase transaction although action set trial applicable assignedjudge rules action preliminary stage possible reliably predict outcome relief could awarded litigation process inherently uncertain therefore company unable currently estimate loss associated litigation july 2006 action brought company san bernardino county superior court case rvc096518 church gardens llc complaint current owner company’s leased configuration facility ontario california centers certain furniture fixtures equipment leasehold improvements sold leased back plaintiff’s predecessor company 1999 plaintiff alleges among things portion leasedback property sold destroyed altered removed premises demands inspection accounting property remaining court provide damages extent company may breached contract company disputes allegations believes property loss liability lease provisions would limited 75000 accrued action initial stage possible reliably predict outcome relief could awarded litigation process inherently uncertain therefore company unable currently estimate loss beyond accrued various claims litigation proceedings company involved ordinary course business company accrues costs related contingencies loss probable amount reasonably determinable outcome foregoing claims proceedings cannot predicted certainty consulting legal counsel management believe reasonably possible ongoing pending litigation result unfavorable outcome company material adverse affect company’s business financial position results operations cash flows f 34 13 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2006 2005 presented thousands except per share amounts 14 subsequent event september 19 2006 company entered share purchase agreement omar saeed arif saeed “saeeds” effective october 1 2006 acquire 70 capital stock two privately owned pakistani companies ovex technologies private limited “ovex” ovex pakistan private limited “ovexdomestic companies engaged providing business process outsourcing “bpo” services whollyowned saeeds terms agreement company paid saeeds total 1680000 exchange 70 capital stock two companies form consideration paid consisted 240000 cash 240000 unregistered shares company common stock promissory note principal amount 1200000 promissory note due october 1 2007 interest payable advance quarterly commencing october 1 2006 six month karachi interbank offering rate plus 3 extent promissory note fully paid october 10 2007 portion purchased shares capital stock ovex ovexdomestic shall returned saeeds pro rata based balance promissory note overall purchase price additionally pursuant terms agreement boards directors ovex ovexdomestic reconfigured consist three members one designated company one designated saeeds one designated mutually two designees ovex saeeds continue certain ongoing relationships company since 2003 ovex provided company bpo services company’s selling marketing operations quarter ended june 30 2006 ovex also assumed responsibilities company’s accounting finance outsourcing previously done kpmg taseer hadi co pakistani member firm kpmg six months ended september 30 2006 company’s costs ovex services costplus fixed fee service agreement approximated 1462000 included management fee approximately 288000 f 35 ovexus also ongoing relationship premier bpo inc “pbpo” promotes sells bpo services us businesses virtue principal provider bpo services us customers company owns 31 outstanding shares pbpo’s common stock 50 outstanding shares pbpo’s series nonvoting convertible preferred stock representative pbpo’s board directors consolidates pbpo financial reports variable interest entity addition business relationship ovex pbpo saeeds collectively 16 outstanding shares common stock pbpo well 50 outstanding shares series nonvoting convertible preferred stock pbpo representative board directors f 36 en pointe technologies inc schedule ii valuation qualifying accounts f 37 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized en pointe technologies inc power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments including posteffective amendments hereto hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated index exhibits item 15 exhibits financial statement schedules following documents filed part report 1 financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2 financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto b exhibits list exhibits accompanying exhibit index herein incorporated reference en pointe technologies inc independent registered public accounting firm board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2004 2003 results operations cash flows three years period ended september 30 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp los angeles california december 27 2004 en pointe technologies inc consolidated balance sheets see notes consolidated financial statements en pointe technologies inc consolidated statements operations see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders’ equity see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows see notes consolidated financial statements organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 17 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity management plans recent five marginally profitable quarters seen beginning reversal loss trend prevalent four past five years operations accomplish second quarter fiscal year 2002 chairman ceo changed key executives resumed role president daytoday responsibilities refocused sales strategy aggressive facetoface style encouraged selling higher margin managed services enhanced sales opportunities qualifying us “minorityowned” business company evaluated smaller competitors could accretive earnings potential acquisition candidates return company low cost operational overhead model previously succeeded contracted offshore firms provide backoffice operational accounting related services rates substantially discounted available us sales gross profits fiscal year ended september 30 2004 lagged results prior fiscal year marked reduction operating costs aided part shifting backoffice operations offshore provided 48 million cost reduction turnaround earnings 48 million reduction operating costs includes 11 million startup operating costs premier bpo inc “pbpo” excluded brings core operating cost reduction 59 million total september 30 2004 company approximately 161 million cash working capital 179 million discussed note 3 june 2004 company closed 300 million replacement working capital financing facility ge commercial distribution finance corporation “ge” term facility period three years except either party may terminate agreement upon 60 days written notice party september 30 2004 credit line borrowings amounted 183 million subject interestfree flooring agreement company additional borrowings available approximately 70 million taking consideration available collateral borrowing limitations agreements borrowings financing agreement collateralized substantially company’s assets financing agreements contain various liquidity financial covenants including without limitation ebitda sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter company compliance debt covenants september 30 2004 management believes financing available company’s financing facility together company’s working capital resources september 30 2004 company net working capital approximately 179 million provide sufficient working capital finance operations least fiscal year ended september 30 2005 management believes turn around plans continue successful improving company’s sales profitability however company unable maintain compliance loan covenants noncompliance waived lender working capital line credit could revoked prior expiration date eventuality management believes sufficient working capital enable continue operate least september 30 2005 however company would required significantly scale business plans unable obtain alternative sources financing principles consolidation consolidated financial statements include company’s accounts whollyowned subsidiaries well pbpo approximate 38 owned variable interest entity intercompany accounts transactions eliminated consolidated financial statements since stockholders pbpo collectively represent approximately 62 ownership majority ownership interest entitlement share losses reflected company’s consolidated balance sheet statement operations “minority interest” losses allocated 62 owners pbpo based upon percentage ownership upon “at risk” capital owners losses excess “at risk” capital allocated company without regard capital risk investment premier pbo inc fiscal year 2004 series two private stock offerings company invested 509000 approximate 38 ownership interest privatelyheld corporation formed october 2003 pbpo formerly en pointe global services inc pbpo business process outsourcing company headquartered clarksville tennessee addition company provided pbpo 600000 fiveyear 6 interestbearing note working capital subsequently converted series nonvoting convertible preferred stock october 2004 pbpo considered related party company’s equity interest pbpo well interrelationship several pbpo investors company one company’s board members owns approximately 22 pbpo also serves chairman board chief executive officer addition owners ovex technologies private limited “ovex” pakistani company islamabad performs operational side company’s outsourcing owns collectively approximately 22 pbpo substantial investment company made pbpo related party nature investment well factors company evaluated acquired interest pbpo company determined met tests variable interest entity fin 46 thus consolidated interest pbpo since inception pbpo contracted services workers islamabad pakistan perform data entry accounts receivable functions customers ovex provided contract workers pbpo well use facility also shared concurrently en pointe contracted workers owners ovex collectively approximate 22 ownership interest pbpo 600000 fiveyear 6 interestbearing note working capital pbpo subsequently converted series nonvoting convertible preferred stock october 2004 october 2003 pbpo obtained five year option agreement whereby pbpo may purchase equity ovex 20 million investment unconsolidated affiliates company recognized accumulated losses excess ownership interest two former subsidiaries periods former subsidiaries consolidated september 30 2003 2002 company’s adjusted basis equity method accounting reduced zero accordance equity method accounting company’s former subsidiaries deconsolidated became affiliates company suspended recognition equity method losses adjusted basis reduced zero company guaranteed certain debt affiliates responsible certain obligations losses excess company’s investment affiliates recorded years ended september 30 2003 2002 company recognized income reversal excess losses previously recognized affiliates 143000 674000 respectively result recognition income reversal excess losses former affiliates additional excess losses affiliates remains company’s balance sheet affiliates discontinued operations april 10 2001 firstsource ceased operations entirely assets assigned sherwood partners inc unaffiliated company assignee benefit creditors january 2002 majority shareholders supplyaccess approved transfer assets supplyaccess liquidator benefit creditors use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition company applies provisions securities exchange commission sec staff accounting bulletin sab 104 “revenue recognition financial statements” provides guidance recognition presentation disclosure revenue financial statements filed sec sab 104 outlines basic criteria must met recognize revenue provides guidance disclosure related revenue recognition policies general company recognizes revenue persuasive evidence arrangement exists ii shipment products occurred services rendered iii sales price charged fixed determinable iv collection reasonably assured product revenues recognized upon transfer title risk loss satisfaction significant obligations company generally considers occur upon receipt products customer although customers accept title upon shipment company provides allowance sales returns based historical experience product sales shipped directly suppliers customers company takes title products sold upon shipment bears credit risk bears inventory risk returned products successfully returned suppliers although risks mitigated arrangements shippers suppliers service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted company’s suppliers less rebates cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits company experienced losses accounts believes exposed significant risk cash equivalents restricted cash restricted cash september 30 2004 2003 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased us drop shipped yet received accepted customer stated lower cost specific identification method market ongoing basis inventories reviewed written estimated obsolescence unmarketable inventories equal difference cost inventories estimated net realizable value changes increase inventory reserves recorded increase cost goods sold property equipment property equipment stated cost depreciated using straightline method estimated useful lives three seven years assets acquired capital lease arrangements recorded present value minimum lease payments amortized using straightline method life asset term lease whichever shorter amortization expense included depreciation expense leasehold improvements amortized using straightline method shorter lease terms useful lives improvements expenses repairs maintenance charged expense incurred renewals betterments capitalized gains losses sale disposal property equipment reflected operating income company accounts computer software costs developed internal use accordance statement position 981 sop 981 “accounting costs computer software developed obtained internal use” requires companies capitalize certain qualifying costs incurred application development stage related software development project software used primarily internally accordingly capitalized software development costs amortized straightline basis economic lives related products exceed three years company’s machinery equipment see note 2 includes 203000 capitalized software development costs september 30 2004 none prior years company begun amortizing capitalized development costs development software reached completion fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount company’s longterm liabilities also approximates fair value based interest rates currently available us debt similar terms remaining maturities impairment longlived assets company periodically assesses potential impairments longlived assets accordance provisions sfas 144 “accounting impairment disposal longlived assets” impairment review performed whenever events changes circumstances indicate carrying value assets may recoverable factors company considers include limited significant underperformance relative expected historical projected future operating results significant changes manner use acquired assets strategy overall business significant negative industry economic trends carrying value longlived asset may recoverable based upon existence one indicators impairment company estimates future undiscounted cash flows expected result use asset eventual disposition sum expected future undiscounted cash flows eventual disposition less carrying amount asset company recognizes impairment loss impairment loss reflected amount carrying amount asset exceeds fair value asset based fair market value available discounted cash flows date company recognized impairment charge related writedown longlived assets goodwill intangible assets effective january 1 2002 company adopted statement financial accounting standard sfas 142 “goodwill intangible assets” requires among things use nonamortization approach purchased goodwill certain intangibles nonamortization approach goodwill intangibles indefinite life amortized instead reviewed impairment least annually event occurs circumstances indicate carrying amount may impaired events circumstances could indicate impairment include significant change business climate economic industry trends legal factors negative operating performance indicators significant competition changes strategy disposition reporting unit portion thereof goodwill impairment testing performed reporting unit level sfas 142 requires goodwill tested impairment using twostep process first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test must performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting unit goodwill carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units assignment goodwill reporting units determination fair value reporting unit fair value reporting unit estimated using discounted cash flow methodology requires significant judgments including estimation future cash flows dependent internal forecasts estimation longterm rate growth company’s business useful life cash flows occur determination weighted average cost capital changes estimates assumptions could materially affect determination fair value andor goodwill impairment reporting unit accordance sfas 142 company selected september 30 date company perform annual goodwill impairment test based valuation goodwill impairment charges related writedown goodwill recognized years ended september 30 2004 2003 connection company’s acquisition subsequent july 1 2001 company applied provisions sfas 141 “business combinations” using purchase method accounting assets liabilities assumed recorded estimated fair values determined management based information currently available current assumptions future operations excess purchase price fair values recorded goodwill company’s goodwill balance years ended september 30 2004 2003 230000 included assets accompanying consolidated balance sheet separable intangible assets finite useful lives amortized useful lives impaired asset written fair value intangible assets finite useful lives consist primarily customer relationships amortized expected period benefit five years using straightline method intangible assets amount 470000 less accumulated amortization 188000 94000 september 30 2004 2003 respectively included assets accompanying consolidated balance sheets advertising shipping handling costs company reports costs advertising periods costs incurred fiscal years ended september 30 2004 2003 2002 advertising expense approximately 265000 549000 349000 respectively shipping handling costs incurred us included cost sales income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject us significant concentrations credit risk consist principally cash deposits trade accounts receivable company’s cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits customers accounted 10 net sales follows respective percentage outstanding accounts receivable fiscal year end company performs periodic credit evaluations financial condition customers monitor collections payments customers generally require collateral receivables generally due within 45 days company provides possible inability collect accounts receivable recording allowance doubtful accounts company writes account considered uncollectible company estimates allowance doubtful accounts based historical experience aging accounts receivable information regarding creditworthiness customers date losses within range management’s expectations company contract various suppliers although limited number suppliers capable supplying inventory needs company believes shortfalls existing suppliers would absorbed suppliers comparable terms however change suppliers could cause delay sales adversely effect results purchases company’s three largest vendors years ended september 30 2004 2003 2002 comprised 56 53 63 respectively total purchases inventory supplies purchases treasury stock company uses specific identification method accounting treasury stock 2001 fiscal year company purchased 120000 shares 253000 subsequently issued 64000 shares employee stock benefit plans 163000 2004 2002 fiscal years company issued 1000 100000 additional shares respectively employee stock benefit plans amounting 2000 135000 respectively september 30 2004 2003 remained approximately 1000 2000 respectively treasury shares cost 1000 4000 respectively stock based compensation company accounts grants options purchase common stock key personnel accordance sfas 123 “accounting stockbased compensation” december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure” effective fiscal years ending december 15 2002 sfas 148 amends sfas 123 provide alternative methods transition fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 require disclosure summary significant accounting policies effects entity’s accounting policy respect stockbased employee compensation reported net income earnings per share annual interim financial statements sfas 148 amend sfas 123 require companies account employee stockbased awards using fair value method disclosure provisions required however companies stockbased employee compensation regardless whether utilize fair value method accounting described sfas 123 intrinsic value method described accounting principles board “apb” opinion 25 “accounting stock issued employees” company adopted disclosure requirements sfas 148 effective january 1 2003 adoption standard significant impact financial condition operating results company accounts grants options employees purchase common stock using intrinsic value method accordance apb opinion 25 fin 44 “accounting certain transactions involving stock compensation” permitted sfas 123 amended sfas 148 company chosen continue account option grants apb opinion 25 provide expanded disclosures specified sfas 123 amended sfas 148 compensation cost company’s option grants determined based fair value grant date awards consistent provisions sfas 123 net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts vendor programs company receives incentives suppliers related cooperative advertising allowances volume rebates incentive agreements incentives generally quarterly semiannual annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company uses cooperative advertising allowances exclusively advertising marketing programs restricted cooperative advertising allowances recognized reduction operating expense cost goods sold accordance emerging issues task force issue 0216 related marketing expenses recognized rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative advertising allowances deferred earned rebate programs subject audit whether requirements rebates actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share company accounts earnings per common share accordance sfas 128 “earnings per share” basic net income loss per share computed dividing net income loss period weighted average number common shares outstanding period diluted net income loss per share computed dividing net income loss period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 “reporting comprehensive income” establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2004 2003 2002 segment reporting provisions sfas 131 “disclosures segments enterprise related information” require public companies report financial descriptive information reportable operating segments company identifies reportable segments based management internally evaluates separate financial information business activities management responsibility years ended september 30 2004 2003 2002 company operated one segment company recognizes revenues geographic areas based location product shipped services rendered operations outside united states america immaterial date recently issued accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities” “fin 46” clarifies application accounting research bulletin 51 consolidated financial statements fin 46 requires variable interest entities “vie” consolidated company subject majority risk loss vie activities entitled receive majority entity’s residual returns company consolidates vie called primary beneficiary entity fin 46 also requires disclosures vie company required consolidate significant variable interest provisions interpretation apply immediately vie created january 31 2003 apply existing vie first fiscal year interim period ending december 15 2003 adopted fin 46 quarter ended december 31 2003 adversely affected operating results due substantial losses vie investment pbpo consolidated december 2003 fasb issued interpretation 46 revised 2003 “consolidation variable interest entities” “fin 46r” partially deferred effective date fin 46 certain entities makes changes fin 46 including complete definition variable interest exemption many entities defined businesses march 2004 fasb’s emerging issues task force “eitf” finalized new guidance otherthantemporary impairment debt equity securities impairment evaluation guidance issue 031 “the meaning otherthantemporary impairment application certain investments” effective reporting periods beginning june 15 2004 previously evaluating impairments debt equity securities using much guidance incorporated new eitf issue implementation guidance significantly change procedures evaluating impairments property equipment property equipment consist following thousands depreciation amortization expense 1574 1788 1818 years ended september 30 2004 2003 2002 respectively accumulated amortization capitalized leases 777 604 september 30 2004 2003 respectively lines credit september 30 2004 2003 company outstanding borrowings 18309000 11326000 respectively lines credit various financial institutions september 30 2004 2003 line credit agreements provide financing cash advances flooring 300 million june 2004 company closed 300 million replacement working capital financing facility ge term facility period three years except either party may terminate agreement upon 60 days written notice party borrowings line credit agreement collateralized 85 eligible accounts receivable defined agreement substantially company’s assets september 30 2004 company additional borrowings available approximately 70 million taking consideration available collateral borrowing limitations agreement borrowings limited specific percentages company’s accounts receivable inventory balances financing agreement contains following liquidity financial covenants 1 ebitda must sufficient cover multiple 125 times interest expense rolling twelve month period ending last day fiscal quarter 2 tangible net worth subordinated debt must equal exceed 140 million 3 ratio debt minus subordinated debt tangible net worth subordinated debt must exceed 35 one 4 ratio current tangible assets current liabilities must less 12 one prime rate interest 475 400 september 30 2004 2003 respectively weighted average interest rates incurred line credit borrowings years ended september 30 2004 2003 2002 100 300 100 respectively 100 weighted average interest rate 2004 fiscal year resulted borrowings financed company’s former interestfree flooring agreement required 1 guarantee fee paid primary lender since company replaced working capital financing facility june 2004 interest expense incurred borrowings interest expense majority ontario facility lease see note 7 years ended september 30 2004 2003 2002 805 937 823 respectively charges income charges 04 million incurred fiscal year ended september 30 2003 charges relate february 2003 court derivative litigation fredrick v din et al part stipulation parties agreed defendants would pay plaintiff’s attorney fees approximately 04 million review selected members company’s board directors defendants litigation based board’s review recommendation company paid settlement charged full amount expense income 09 million primarily resulted settlement litigation claim 08 million settled litigation claim company liable total 16 million various court decisions including accrued interest settled 12 million addition recovery 08 million insurance reimbursement relating previously expensed legal fees offset legal costs 04 million june 2001 company underwent second restructuring part plan convert fixed sales offices virtual sales offices executing restructure workforce reduced 64 employees 9 rental locations either closed converted virtual sales locations reduced size connection restructuring recorded restructuring charges 1263000 following table summarizes restructuring charges remaining reserves associated restructuring thousands employee benefit plan company employee savings plan “401k plan” covers substantially fulltime employees twentyone years age older company’s contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan income taxes components income tax provision benefit follows thousands provision benefit income taxes differs amount computed applying federal statutory rate income loss provision benefit income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 56 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating losses “nol” available portion 89 million nol carry forward benefit earnings 47 million attributable exercise stock options considered adjustment additional paidin capital benefit future earnings commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses sublease income results principally subletting company’s ontario facility former branch sales offices closed remaining lease obligations estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2004 approximately follows thousands june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit termination lease cost penalty end seventh tenth years may 30 2006 2009 respectively company currently occupies approximately 55 facility planned accomplished subleasing remaining space february 2002 however sfas 98 “accounting leases” subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property equipment estimated fair value related liability lease qualifies “normal leaseback” sfas 98 rent expense years ended september 30 2004 2003 2002 operating leases approximately 1294000 1731000 2072000 respectively year ended september 30 2004 2003 2002 ontario facility rent expense characterized financing lease sfas 98 reported interest expense approximately 534000 547000 558000 respectively earnings per share preferred stock following table sets forth computation basic diluted net income loss per share thousands except per share amounts dilutive potential stock options include 5819000 shares years ended september 30 2002 excluded calculation diluted loss per share effect inclusion would antidilutive company antitakeover provision grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority company’s outstanding voting stock section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change company’s control without action stockholders therefore could adversely affect market price common stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years september 30 2004 2003 shares available grant plan 545475 801689 respectively year ended september 30 2004 company granted options purchase 450000 shares common stock directors employees exercise price ranging 174 338 per share options vest four years expire ten years date grant compensation charge recorded connection issuance options exercise price stock options granted less fair market value company’s stock price date grant following summary stock option activity fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2004 2003 2002 employee stock plan company employee stock purchase plan “plan” remains authorized available sale employees aggregate 350007 shares common stock september 30 2004 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period april 2002 company announced employees company suspending plan notice acquisition business october 11 2002 company completed purchase certain assets tabin corporation chicagobased valueadded reseller providing us established presence one largest market places us based independent valuation total purchase price approximately 921000 allocated follows thousands company allocated purchase price tangible intangible acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management accordance sfas 142 goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 470000 allocated amortizable intangible assets related customer relationships customer relationships existing sales contacts relate underlying customer relationships pertaining products services provided company amortizing fair value customer relationships straightline basis estimated useful life 5 years september 30 2004 remained balance 282000 unamortized customer relationships next three years amortized rate 94000 per year terms agreement stockholders tabin corporation eligible receive additional earnout payments based upon achieving certain profitability targets twoyear period beginning november 1 2002 july 8 2003 stockholders tabin corporation agreed modification agreement accepted onetime payment 5000 payment full sums owed earnout provisions acquisition agreement following unaudited pro forma consolidated financial information reflects results operations year ended september 30 2003 2002 acquisition tabin corporation’s operations occurred october 1 2002 2001 respectively thousands except per share data litigation march 2000 action brought us orange county superior court case 00cc03948 contending fraud breach contract arising purchase former subsidiary company certain assets company formerly known first source international “fsi” lawsuit filed rlc inc assignee benefit creditors defunct corporation paragon solutions inc formerly known fsi contended fsi unable obtain contingent earnout agreement faulty software provided company damages sought range 08 35 million plaintiff seeking punitive damages 10 million company successful compelling action moved arbitration since november 17 2000 court appeals rejected request plaintiff prohibit arbitration proceedings commenced company vigorously denies charges contends full disclosure made problems software former subsidiary date produced net income case remained dormant past four years legal counsel currently unable predict outcome litigation september 18 2000 claim arbitration submitted first union securities new york stock exchange among others company president chief executive officer attiazaz din “en pointe defendants” first union alleges company din violated federal state securities laws connection promotion sale en pointe stock last half 1999 first half 2000 en pointe defendants dispute jurisdiction intend vigorously defend allegations december 2000 company certain current former directors officers along several unrelated parties named complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares company’s common stock seeking recovery shareholders damages sustained result activities crosby v en pointe technologies al superior court california county san diego gic 759905 parties stipulated stay case pending class action en pointe defendants intend vigorously defend allegations february 2001 company five directors one current officer certain former officers along seven unrelated parties named stockholder class action complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares company’s common stock seeking recovery company’s stockholders damages sustained result activities en pointe technologies securities litigation united states district court southern district california case 01cv0205l cga amended complaint plaintiffs limited claims company chief executive officer response motion dismiss court limited plaintiffs’ claims allegations market manipulation insider trading en pointe defendants answered amended limited complaint intend vigorously defend litigation february 2002 company entered settlement agreement release novaquest infosystems known webvision inc settling parties agreed stipulate reverse vacate november 7 2001 superior court judgment relating certain litigation company owed accrued books 1375000 along accrued interest 293000 terms settlement agreement company made various payments representative parties plaintiff totaling 1200000 discharge litigation claim company recorded settlement litigation charge income less certain litigation related income insurance reimbursement resulted total recovery 848000 various claims litigation proceedings company involved ordinary course business outcome claims proceedings cannot predicted certainty consulting legal counsel management believe outcome matters material adverse affect company’s business financial position results operations cash flows quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2004 2003 presented thousands except per share amounts subsequent event effective october 1 2004 company purchased certain assets viablelinks inc portland oregon boise idahobased regional reseller technology products services based independent preliminary valuation total purchase price approximately 882000 allocated follows thousands company allocated purchase price tangible intangible acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management accordance sfas 142 goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price 370000 allocated intangible assets majority relates amortizable customer relationships customer relationships existing sales contacts relate underlying customer relationships pertaining products services provided company amortizing fair value assets straightline basis estimated useful life approximately 5 years october 1 2004 company’s president ceo awarded 250000 nonqualified options purchase common stock exercise price 210 per share represented 5 premium closing sales price reported nasdaq smallcap market date options vest entirety january 1 2005 however terms option agreement shares common stock acquired option agreement may sold transferred october 1 2006 addition option grant october 1 2004 president ceo employment contract amended terms amendment base salary increased 500000 650000 per year amendment also provides event termination employment certain circumstances following unapproved change control company severance payout equal four times annual base salary single lumpsum payment made subsequent september 30 2004 company saeed brothers owners ovex converted 600000 notes receivable pbpo 1200000 series nonvoting convertible preferred stock en pointe technologies inc schedule ii valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized en pointe technologies inc attiazaz “bob” din attiazaz “bob” din chairman board chief executive officer principal executive officer dated december 23 2004 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din javed latif either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated index exhibits item 15 exhibits financial statements schedules reports form 8k athe following documents filed part report 1financial statements list financial statements contained accompanying index financial statements covered report independent accountants herein incorporated reference 2financial statement schedules list financial statements schedules contained accompanying index financial statements covered report independent accountants herein incorporated reference schedules omitted applicable required information shown financial statements notes thereto 3exhibits list exhibits accompanying exhibit index herein incorporated reference breports form 8k 1on august 28 2003 company filed current report form 8k items 5 7 events financial statements exhibits reporting appointment mr edward hunter companys board directors audit committee compensation committee 2on august 8 2003 company filed current report form 8k items 7 12 financial statements exhibits results operations financial condition report financial results quarter ended june 30 2003 3on july 30 2003 company filed current report form 8k items 5 7 events financial statements exhibits reporting receipt offer mr bob din purchase balance outstanding equity interests company negotiated merger 4on july 24 2003 company filed current report form 8k items 5 7 events financial statements exhibits report resignation mr barry abelson companys board directors audit committee en pointe technologies inc report independent auditors board directors stockholders en pointe technologies inc opinion consolidated financial statements listed accompanying index page present fairly material respects consolidated financial position en pointe technologies inc subsidiaries september 30 2003 2002 results operations cash flows three years period ended september 30 2003 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp los angeles california december 4 2003 en pointe technologies inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements en pointe technologies inc consolidated statements stockholders equity thousands see notes consolidated financial statements en pointe technologies inc consolidated statements cash flows thousands see notes consolidated financial statements en pointe technologies inc notes consolidated financial statements 1 organization summary significant accounting policies organization company reseller information technology products provider valueadded services large medium sized companies government entities sales service personnel 17 markets located throughout united states company headquartered el segundo california originally incorporated texas 1993 reincorporated delaware 1996 liquidity management plans company continued experience operating losses fiscal year ended september 30 2003 declining sales losses operations prior last three fiscal years ended september 30 2002 company believes much prior year sales declines losses attributed industrywide decline information technology spending order counter prior years sales profitability declines second quarter fiscal 2002 change certain key executives part change chairman ceo returned former position president company responsibility daytoday operations addition company rehired former senior vice president sales certain senior sales employees previously worked company new management team took following actions intended increase sales improve profitability arefocused companys sales strategy back aggressive personal face selling model hiring 55 new account executives increase approximately 125 number account executives employed prior change management implementing robust processes managing account executives performance sales quotas breasserted companys focus selling managed services higher gross margins product sales cqualified company minorityowned business order provide enhanced sales opportunities certain public private sector customers whose procurement policies provide preferences minorityowned businesses dcommitted company strategy acquiring targeted smaller competitors company believes acquisition immediately accretive earnings company opportunity complete acquisition affordable price october 2002 company completed acquisition tabin corporation ebeginning june 2003 contracted offshore firms provide backoffice operations accounting services reduced rates september 30 2003 company approximately 32 million cash working capital 147 million discussed note 3 company threeyear 300 million revolving credit facility foothill capital corporation foothill expires december 28 2004 credit facility collateralized accounts receivable assets company addition ibm credit corporation ibmcc provided company 30day interestfree inventory flooring financing 160 million separate oneyear agreement expiring december 28 2004 borrowings inventory flooring agreement serve reduce availability financing available line credit agreement september 30 2003 companys borrowings credit lines concentrated 113 million borrowings outstanding ibmcc 30day interestfree flooring agreement addition september 30 2003 company additional borrowing capacity approximately 21 million taking consideration available collateral borrowing limitations financing agreements borrowings lending agreements collateralized substantially companys assets addition lines credit contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line company foresaw would unable meet covenants related liquidity profitability quarter ended march 31 2003 would default terms agreements avert default company renegotiated lines credit ibmcc ease covenant requirements signed amendments financing agreement foothill capital corporation foothill ibmcc may 2003 amendments loan agreements earnings interest taxes depreciation amortization ebitda tangible net worth covenants reset loan agreements ebitda measured cumulative rolling twelvemonth basis ending last day fiscal quarter september 30 2003 quarter set negative 08 million december 31 2003 quarter set positive 03 million fiscal quarters thereafter set positive 25 million tangible net worth measured last day fiscal quarter ended september 30 2003 immediate quarter thereafter tangible net worth may less 143 million 145 million respectively beginning quarter ending march 31 2004 quarter thereafter tangible net worth may less 146 million addition ibmcc added new covenant limits product backlog 4 million given time september 30 2003 company compliance amended ebitda covenants various debt covenants contained loan agreements management believes financing available company credit agreements together working capital resources september 30 2003 company net working capital approximately 147 million provide company sufficient working capital finance operations least next fiscal year however assurance managements plans successful improving companys sales profitability company unable maintain compliance loan covenants noncompliance waived lenders working capital line credit flooring line could revoked prior expiration dates eventuality management believes sufficient working capital enable continue operate least september 30 2004 however company would required significantly scale business plans unable obtain alternative sources financing october 15 2003 company advanced 300000 en pointe global services inc see note 14 result transaction company violation certain debt covenants company received verbal commitment foothill provide waiver companys noncompliance however negotiations completed assurance waiver noncompliance granted principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany accounts transactions eliminated consolidated financial statements investment unconsolidated affiliates company recognized accumulated losses excess companys ownership interest two former subsidiaries periods former subsidiaries consolidated september 30 2003 2002 companys adjusted basis equity method accounting reduced zero accordance equity method accounting former subsidiaries deconsolidated became affiliates company suspended recognition equity method losses adjusted basis reduced zero company guaranteed certain debt affiliates responsible certain obligations losses excess companys investment affiliates recorded years ended september 30 2003 2002 2001 company recognized income reversal excess losses previously recognized affiliates 143000 674000 8392000 respectively affiliates discontinued operations april 10 2001 firstsource ceased operations entirely assets assigned sherwood partners inc unaffiliated company assignee benefit creditors january 2002 majority shareholders supplyaccess approved transfer assets supplyaccess liquidator benefit creditors use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition product revenues recognized upon transfer title risk loss satisfaction significant obligations company generally considers occur upon receipt products customer although customers accept title upon shipment company provides allowance sales returns based historical experience product sales shipped directly suppliers customers company takes title products sold upon shipment bears credit risk bears inventory risk returned products successfully returned suppliers although risks mitigated arrangements companys shippers suppliers service revenues recognized based contracted hourly rates services rendered upon completion specified contracted services net sales consist product service revenues less discounts estimated allowances sales returns cost sales include cost product services sold current estimated allowances product returns accepted companys suppliers less rebates cash equivalents purposes statement cash flows company considers time deposits highly liquid investments original maturities three months less cash equivalents company bank balances including cash equivalents times may exceed federally insured limits restricted cash restricted cash september 30 2003 2002 represents deposits maintained certain government tax agencies inventories consist principally merchandise configured customer orders merchandise purchased company drop shipped yet received accepted customer stated lower cost specific identification method market property equipment property equipment stated cost depreciation amortization computed using straightline method estimated useful lives three seven years leasehold improvements amortized lesser remaining lease term estimated useful lives upon sale gain loss included statement operations maintenance minor replacements charged operations incurred fair value financial instruments carrying amounts financial instruments including cash equivalents restricted cash accounts receivable payable accrued current liabilities current maturities longterm debt approximate fair value due short maturity carrying amount companys longterm liabilities also approximates fair value based interest rates currently available company debt similar terms remaining maturities longlived assets carrying value longterm assets periodically reviewed management impairment losses recognized expected nondiscounted future operating cash flows derived assets less carrying value impairment losses years ended september 30 2003 2002 2001 advertising company reports costs advertising periods costs incurred fiscal years ended september 30 2003 2002 2001 advertising expense approximately 549000 349000 299000 respectively income taxes company accounts income taxes liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse valuation allowances established necessary reduce deferred tax assets amounts expected realized income tax expense represents tax payable period change period deferred tax assets liabilities concentration credit risk major customers vendors financial instruments potentially subject company significant concentrations credit risk consist principally cash deposits trade accounts receivable companys cash deposits placed various financial institutions times balances one financial institution may excess fdic insurance limits customers accounted 10 net sales follows respective percentage outstanding accounts receivable fiscal year end single customer accounted 10 net sales fiscal 2003 company performs ongoing credit evaluations customers financial condition generally require collateral estimated credit losses returns provided financial statements date generally within managements expectations year ended september 30 2003 2002 2001 purchases three vendors accounted 53 63 48 total purchases respectively treasury stock company uses specific identification method accounting treasury stock 2001 fiscal year company purchased 120000 shares 253000 subsequently issued 64000 shares employee stock benefit plans 163000 2002 fiscal year company issued 100000 additional shares employee stock benefit plans 135000 september 30 2003 2002 remained approximately 2000 treasury shares cost 4000 stock based compensation company accounts stockbased employee compensation arrangements accordance provisions accounting principles board opinion apb 25 accounting stock issued employees complies disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation apb 25 compensation expense recognized vesting period based difference date grant deemed fair value companys stock accounting purposes exercise price company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force issue 9618 december 31 2002 fasb issued sfas 148 accounting stock based compensation transition disclosure amends sfas 123 sfas 148 requires prominent frequent disclosures effects stockbased compensation adopted year ended september 30 2003 continue account stock based compensation according provisions apb opinion 25 compensation expense stock options determined using fair value grant date awards 2003 2002 2001 consistent provisions sfas 123 companys net income loss net income loss per share would reduced pro forma amounts indicated thousands except per share amounts vendor programs company receives incentives suppliers related cooperative advertising allowances volume rebates incentive agreements incentives generally quarterly semiannual annual agreements suppliers however incentives product driven provided support specific programs established supplier suppliers generally require company use cooperative advertising allowances exclusively advertising marketing programs restricted cooperative advertising allowances recognized reduction operating expense related marketing expenses recognized however company evaluating impact emerging issues task force eitf issue 0216 accounting customer including reseller certain consideration received vendor fiscal 2004 require reclassification portion certain funds received vendors operating expense gross profit effect net income rebates earned company records income reduction cost goods sold amounts received suppliers related cooperative advertising allowances deferred earned rebate programs subject audit whether requirements rebates actually met company establishes reserves cover collectibility risks including subsequent supplier audits earnings per share basic net loss income per share computed dividing net loss income period weighted average number common shares outstanding period diluted net loss income per share computed dividing net loss income period weighted average number common shares common share equivalents outstanding period common share equivalents consisting stock options included calculation extent antidilutive comprehensive income sfas 130 reporting comprehensive income establishes standards reporting displaying comprehensive income components financial statements sfas 130 requires items required reported accounting standards components comprehensive income reported financial statement displayed prominence financial statements company components comprehensive income fiscal years ended september 30 2003 2002 2001 segment reporting company discloses segment information accordance sfas 131 disclosures segments enterprise related information sfas 131 emphasizes management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers years ended september 30 2003 2002 2001 company operated one segment recently issued accounting standards june 2001 fasb issued sfas 143 accounting asset retirementobligations statement establishes standards accounting obligations associated retirement tangible longlived assets company adopted standard january 1 2003 adoption standard impact financial results august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting principles board opinion 30 reporting results operationsreporting effect disposal segment business extraordinary unusual infrequently occurring events transactions company adopted sfas 144 effective october 1 2002 adoption standard impact financial results june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 nullifies emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity liability exit cost recognized date entitys commitment exit plan sfas 146 requires liability cost associated exit disposal activity recognized fair value liability incurred company adopted standard january 1 2003 adoption standard impact financial results december 2002 fasb issued sfas 148 accounting stockbased compensationtransition disclosure provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also amends disclosure requirements sfas 123 accounting stockbased compensation require prominent additional disclosure annual interim financial statements method accounting stockbased compensation interim disclosure provisions effective financial reports interim periods beginning december 15 2002 company adopted disclosure provisions sfas 148 january 1 2003 company transition use fair value method accounting stockbased compensation permitted sfas 148 adoption standard impact financial results may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity effective beginning first interim period beginning june 15 2003 however certain aspects sfas 150 deferred sfas 150 establishes standards companys classification liabilities financial statements characteristics liabilities equity company adopted sfas 150 quarter ended september 30 2003 adoption standard impact financial results january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 clarifies application accounting research bulletin 51 consolidated financial statements fin 46 requires variable interest entities vie consolidated company subject majority risk loss vie activities entitled receive majority entitys residual returns company consolidates vie called primary beneficiary entity fin 46 also requires disclosures vie company required consolidate significant variable interest provisions interpretation apply immediately vie created january 31 2003 apply existing vie first fiscal year interim period ending december 15 2003 company currently assessing application fin 46 may relate variable interests acquired september 30 2003 2 property equipment property equipment consist following thousands depreciation amortization expense 1788000 1818000 1414000 years ended september 30 2003 2002 2001 respectively accumulated amortization capitalized leases 945000 740000 september 30 2003 2002 respectively 3 lines credit september 30 2003 2002 company outstanding borrowings 11326000 12421000 respectively lines credit various financial institutions september 30 2003 2002 line credit agreements provide financing cash advances flooring 30 million included separate lending agreement within companys 30 million line 16 million flooring agreement provides interestfree period approximately 30 days depending product sold total borrowings line credit agreements collateralized eligible accounts receivable defined agreements substantially companys assets borrowings limited specific percentages companys accounts receivable inventory balances line credit agreements contain certain financing operating covenants relating net worth liquidity profitability repurchase indebtedness prohibition payment dividends well restrictions use proceeds obtained line september 30 2003 company compliance amended ebitda covenants various debt covenants contained loan agreements may 2003 company renegotiated lines credit ibmcc ease covenant requirements signed amendments financing agreement foothill ibmcc amended credit line provides company 30day free inventory flooring financing 160 million 200 million borrowing availability foothill credit facility directly reduced outstanding flooring financings financing agreement foothill includes guarantee ibmcc amount outstanding flooring line maximum 160 million consideration providing guarantee amended foothill agreement contains 125 annual charge 100 average outstanding balances owing ibmcc foothill financing agreement also contains 03 charge unused portion credit line variable interest rate option company based either prime rate libor rate amended foothill agreement maximum rate interest based certain targets related ebitda increased 05 prime rate plus 250 libor option similarly increased 05 libor rate plus 475 october 15 2003 company advanced 300000 en pointe global services inc see note 14 result transaction company violation certain debt covenants company received verbal commitment foothill provide waiver companys noncompliance however negotiations completed assurance waiver noncompliance granted prime rate interest 400 475 september 30 2003 2002 respectively weighted average interest rates incurred line credit borrowings years ended september 30 2003 2002 2001 300 100 911 respectively 300 weighted average interest rate 2003 fiscal year resulted borrowings financed ibmcc interestfree flooring agreement whereby foothill paid 1 guarantee ibmcc companys borrowings interest expense majority ontario facility lease see note 7 years ended september 30 2003 2002 2001 937000 823000 1002000 respectively 4 special charges income charges 04 million incurred fiscal year ended september 30 2003 charges relate february 2003 court derivative litigation fredrick v din et al part stipulation parties agreed defendants would pay plaintiffs attorney fees approximately 04 million review selected members companys board directors defendants litigation based boards review recommendation company paid settlement charged full amount expense income 09 million primarily resulted settlement litigation claim 08 million settled litigation claim company liable total 16 million various court decisions including accrued interest settled 12 million addition recovery 08 million insurance reimbursement relating previously expensed legal fees offset legal costs 04 million charges 08 million fiscal year ended september 30 2001 include restructuring charges 18 million legal settlement 02 million less reversal plaintiff legal fees recorded prior year result adverse judgment 12 million see note 12 charges fiscal year ended september 30 2000 include provision litigation 11 million related adverse judgment received legal matter see note 13 restructuring charges 15 million june 2001 company underwent second restructuring part plan convert fixed sales offices virtual sales offices executing restructure workforce reduced sixtyfour employees nine rental locations either closed converted virtual sales locations reduced size following table summarizes restructuring charges remaining reserves associated restructuring 5 employee benefit plan company employee savings plan 401k plan covers substantially fulltime employees twentyone years age older company contributions 401k plan discretion board directors vest seven years service date company made contributions 401k plan 6 income taxes components income tax provision benefit follows thousands benefit provision income taxes differs amount computed applying federal statutory rate loss income benefit provision income taxes follows deferred income taxes reflect tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes due uncertainty surrounding realization net deferred tax asset 68 million management provided full valuation allowance significant components deferred taxes follows thousands company following federal net operating losses nol available since fiscal 2000 nol attributable exercise stock options employees realization income tax benefits 47 million nol considered adjustment additional paidin capital benefit future earnings 7 commitments contingencies company leases office facilities various types office equipment leases vary duration many contain renewal options andor escalation clauses sublease income results principally subletting former branch sales offices closed remaining lease obligations estimated future minimum lease payments leases initial remaining noncancelable lease terms excess one year september 30 2003 approximately follows thousands june 24 1999 company entered saleleaseback arrangement company sold ontario facility 55 million leased back triple net lease term 15 years base rent 544000 first year 3 increases following 15 years terms lease permit company terminate lease cost penalty end seventh tenth year may 30 2006 2007 respectively company currently occupies approximately 55 facility planned accomplished subleasing remaining space february 2002 however sfas 98 accounting leases subleasing space excess 10 considered retaining financial interest property requires property remain financial statements balance sheet therefore reflects property equipment estimated fair value related liability lease qualifies normal leaseback sfas 98 rent expense years ended september 30 2003 2002 2001 operating leases approximately 1731000 2072000 1794000 respectively year ended september 30 2003 2002 2001 ontario facility rent expense characterized financing lease sfas 98 reported interest expense approximately 547000 558000 568000 respectively addition company entered another capitalized lease may 2003 interest approximated 5000 8 earnings per share preferred stock following table sets forth computation basic diluted net income loss per share thousands except per share amounts dilutive potential stock options include 5819 shares years ended september 30 2002 excluded calculation diluted loss per share effect inclusion would antidilutive company antitakeover provision grants board directors authority issue 5000000 shares preferred stock determine price rights preferences qualifications limitations restrictions including voting rights shares without vote action stockholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect delaying preventing third party acquiring majority outstanding voting stock company section 203 general corporation law delaware prohibits company engaging certain business combinations interested stockholders provisions may effect delaying preventing change control company without action stockholders therefore could adversely affect market price common stock 9 stock options march 1996 company instituted qualified nonqualified stock option plan provides currently options maximum 2760000 shares common stock may granted directors officers key employees exercise period exceed ten years stock options generally exercisable fair market value date grant generally vest prorata basis ending third ninth twentyseventh months following grant date 25 six months remaining 75 vesting quarterly three one half years september 30 2003 2002 shares available grant plan 801689 892606 respectively following summary stock option activity fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2003 2002 2001 10 employee stock plan company employee stock purchase plan remains authorized available sale employees aggregate 350007 shares companys common stock september 30 2003 plan intended qualify section 423 internal revenue code permits eligible employees purchase common stock subject certain limitations 20 compensation purchases stock plan made twice annually amounts withheld payroll 85 lower fair market value common stock beginning end six month offering period april 2002 company announced employees suspending plan notice 11 acquisition business october 11 2002 company completed purchase certain assets tabin corporation chicagobased valueadded reseller providing company established presence one largest market places us based independent preliminary valuation total purchase price approximately 921000 allocated follows thousands company allocated purchase price tangible intangible acquired based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management accordance sfas 142 goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchase price approximately 470000 allocated amortizable intangible assets related customer relationships customer relationships existing sales contacts relate underlying customer relationships pertaining products services provided company amortizing fair value assets straightline basis estimated useful life approximately 5 years terms agreement stockholders tabin corporation eligible receive additional earnout payments based upon achieving certain profitability targets twoyear period beginning november 1 2002 july 8 2003 stockholders tabin corporation agreed modification agreement accepted onetime payment 5000 payment full sums owed earnout provisions acquisition agreement following unaudited pro forma consolidated financial information reflects results operations year ended september 30 2003 2002 acquisition tabin corporations operations occurred october 1 2002 2001 respectively thousands except per share data 12 litigation february 6 2002 settlement agreement release entered company novaquest infosystems known webvision inc settling parties agreed stipulate reverse vacate november 7 2001 superior court judgment relating certain litigation company owed accrued books 1375000 along accrued interest 293000 terms settlement agreement company made various payments representative parties plaintiff totaling 1200000 discharge litigation claim company recorded settlement litigation special charge income less certain litigation related income insurance reimbursement resulted total recovery 848000 september 18 2000 claim arbitration submitted first union securities new york stock exchange among others company president chief executive officer attiazaz din en pointe defendants first union alleges company din violated federal state securities laws connection promotion sale en pointe stock last half 1999 first half 2000 en pointe defendants dispute jurisdiction intend vigorously defend allegations february 2001 company five companys directors one current officer certain former officers along seven unrelated parties named stockholder class action complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys stockholders damages sustained result activities en pointe technologies securities litigation united states district court southern district california case 01 cv0205l cga amended complaint plaintiffs limited claims company chief executive officer response motion dismiss court limited plaintiffs claims allegations market manipulation insider trading en pointe defendants answered amended limited complaint intend vigorously defend litigation december 2000 company certain current former directors officers along several unrelated parties named complaint alleging defendants made misrepresentations regarding company individual defendants improperly benefited sales shares companys common stock seeking recovery companys shareholders damages sustained result activities crosby v en pointe technologies al superior court california county san diego gic 759905 parties stipulated stay case pending class action en pointe defendants intend vigorously defend allegations october 5 2001 action brought company qamar zaidi san bernardino county superior court case rcv 058254 plaintiff former employee initially alleged breach contract anticipatory breach repudiation breach implied covenant good faith fair dealing conversion en pointe initially filed petition compel arbitration early 2002 based plaintiffs employment agreement petition denied based plaintiffs representation would amending complaint remove allegations regarding employment agreement 2003 plaintiff amended complaint second time reintroduce claims arising employment agreement currently alleging breach contract anticipatory breach contract conversion declaratory relief plaintiffs second amended complaint claims least 100000 damages 500000 punitive damages response en pointe filed second petition compel arbitration july 22 2003 court granted en pointes petition compel arbitration stayed judicial proceedings late november 2003 parties selected robert w thomas arbitrator matter parties process creating schedule arbitration held counsel planning seek permission arbitrator file motion summary adjudication plaintiffs claims completes plaintiffs deposition permission granted counsel cautiously optimistic motion would granted march 2000 action brought company orange county superior court case 00cc03948 contending fraud breach contract arising purchase former subsidiary company certain assets company formerly known first source international fsi lawsuit filed rlc inc assignee benefit creditors defunct corporation paragon solutions inc formerly known fsi contended fsi unable obtain contingent earnout agreement faulty software provided company damages sought range 08 35 million plaintiff seeking punitive damages 10 million company successful compelling action moved arbitration since november 17 2000 court appeals rejected request plaintiff prohibit arbitration proceedings commenced company vigorously denies charges contends full disclosure made problems software former subsidiary date produced net income case remained dormant past three years legal counsel currently unable predict outcome litigation 13 quarterly financial data unaudited selected financial information quarterly periods fiscal years ended september 30 2003 2002 presented thousands except per share amounts 14 subsequent event october 15 2003 company advanced 300000 en pointe global services inc egs newlyformed privatelyheld corporation related party egs related party en pointe board member officer holds equity interest egs en pointe anticipates ultimately owning approximate onethird interest egs addition company expects provide approximately 309000 egs combination investment interestbearing note january 2004 companys chairman board bob din represent en pointes interest board egs intends offer business process outsourcing assist companies reducing backoffice overhead expenses providing offshore outsourcing alternatives company also anticipates entering employee leasing agreement egs whereby company employees leased egs costplus basis result transaction company violation certain debt covenants company received verbal commitment lenders provide waiver companys noncompliance however negotiations completed assurance waiver noncompliance granted lenders en pointe technologies inc schedule ii valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized en pointe technologies inc attiazaz bob din attiazaz bob din chairman board chief executive officer principal executive officer dated december 23 2003 power attorney undersigned directors officers en pointe technologies inc hereby constitute appoint attiazaz din kevin ayers either full power substitution resubstitution true lawful attorneys agents acts things name behalf capacities directors officers execute instruments us names capacities indicated said attorneys agents either substitutes may deem necessary advisable enable said corporation comply securities exchange act 1934 amended rules regulations requirements securities exchange commission connection annual report form 10k including specifically without limitation power authority sign us names capacities indicated amendments hereby ratify confirm said attorneys agents either shall cause done virtue hereof pursuant requirements securities exchange act 1934 annual report form 10k signed following persons capacities dates indicated signature title date attiazaz bob din attiazaz bob din chairman board chief executive officer president principal executive officer december 23 2003 kevin ayers kevin ayers chief financial officer principal financial principal accounting officer december 23 2003 naureen din naureen din director december 23 2003 zubair ahmed zubair ahmed director december 23 2003 s1 mark briggs mark briggs director december 23 2003 verdell garroutte verdell garroutte director december 23 2003 edward hunter edward hunter director december 23 2003 walter w larkins iii walter w larkins iii director december 23 2003 mansoor shah mansoor shah director december 23 2003 timothy j lilligren timothy j lilligren director december 23 2003 s2 index exhibits exhibit number description 21 agreement plan merger registrant en pointe technologies inc texas corporation effective february 29 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 31 certificate incorporation registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 32 bylaws registrant incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 33 certificate amendment certificate incorporation registrant filed may 16 2000 incorporated reference numbered exhibit registrants registration statement form 10k filed january 18 2001 43 form common stock certificate incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 101 en pointe technologies inc 1996 stock incentive plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 102 en pointe technologies inc employee stock purchase plan incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 103 form directors officers indemnity agreement incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 105 employment agreement registrant attiazaz bob din dated march 1 1996 incorporated reference numbered exhibit registrants registration statement form s1 filed may 8 1996 1018 lease dated may 1999 us real estate consortium registrant property located 1040 vintage avenue ontario california incorporated reference numbered exhibit registrants form 10k filed january 13 2000 1019 lease dated april 2001 pacific corporate towers llc registrant property located 100 n sepulveda blvd 19th floor el segundo california incorporated reference numbered exhibit registrants form 10q filed august 14 2001 1024 assignment license agreement registrant supplyaccess inc dated september 21 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1025 loan security agreement among en pointe technologies sales inc lenders named therein foothill capital corporation dated december 28 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1026 inventory financing agreement en pointe technologies sales inc ibm credit corporation dated december 28 2001 incorporated reference numbered exhibit registrants form 10k filed december 31 2001 1027 employment agreement registrant kevin schatzle dated march 28 2002 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1028 first amendment loan security agreement among en pointe technologies sales inc lenders named therein foothill capital corporation dated july 30 2002 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1029 acknowledgment amendment financing agreement en pointe technologies sales inc ibm credit corporation dated august 6 2002 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1030 second amendment loan security agreement consent among en pointe technologies sales inc lenders named therein foothill capital corporation dated october 9 2002 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1031 asset purchase agreement entered october 9 2002 tabin corporation en pointe technologies sales inc incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1032 amendment agreement inventory financing en pointe technologies sales inc ibm credit corporation dated november 21 2002 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1033 amendment lease pacific towers registrant dated april 30 2001 incorporated reference numbered exhibit registrants form 10k filed december 27 2002 1034 employment agreement registrant kevin ayers dated march 28 2002 incorporated reference numbered exhibit registrants form 10q filed february 14 2003 1035 employment agreement registrant kathy perez dated april 20 2002 incorporated reference numbered exhibit registrants form 10q filed february 14 2003 1036 employment agreement registrant javed latif dated march 28 2002 incorporated reference numbered exhibit registrants form 10q filed february 14 2003 1037 third amendment loan security agreement en pointe technologies sales inc foothill capital corporation agent lenders dated may 12 2003 incorporated reference exhibit 1034 registrants form 10q filed may 15 2003 1038 amendment agreement inventory financing en pointe technologies sales inc ibm credit llc formerly ibm credit corporation dated may 7 2003 incorporated reference exhibit 1035 registrants form 10q filed may 15 2003 211 subsidiaries company 231 consent pricewaterhousecoopers llp 311 certification chief executive officer required section 302 sarbanesoxley act 2002 312 certification chief financial officer required section 302 sarbanesoxley act 2002 321 certification chief executive officer required section 906 sarbanesoxley act 2002 322 certification chief financial officer required section 906 sarbanesoxley act 2002 part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosure market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 principal accounting fees services part iv item 15 exhibits financial statements schedules reports form 8k en pointe technologies inc index financial statements report independent auditors en pointe technologies inc consolidated balance sheets thousands except share per share amounts en pointe technologies inc consolidated statements operations thousands except per share amounts en pointe technologies inc consolidated statements stockholders equity thousands en pointe technologies inc consolidated statements cash flows thousands en pointe technologies inc notes consolidated financial statements en pointe technologies inc schedule ii signatures index exhibits