e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-28052

EN POINTE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		75-2467002
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization):

2381 Rosecrans Avenue, Suite 325
El Segundo, California		90245
(Address of principal executive offices)		(Zip Code)

(310) 725-5200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last year)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES þ NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 14, 2006, 7,027,472 shares of common stock of the Registrant were issued and outstanding.

En Pointe Technologies, Inc.

Condensed Consolidated Balance Sheets

Unaudited

(In Thousands Except Share and Per Share Amounts)


	June 30,			September 30,
	2006			2005
ASSETS:
Current assets:
Cash	$	7,577		$	6,903
Restricted cash		73			72
Accounts receivable, net		58,027			40,916
Inventories, net		7,990			10,367
Prepaid expenses and other current assets		532			764

Total current assets		74,199			59,022

Property and equipment, net of accumulated depreciation and amortization		2,829			3,070

Other assets		1,585			804

Total assets	$	78,613		$	62,896


LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable, trade	$	23,934		$	18,444
Borrowings under line of credit		23,893			16,824
Accrued liabilities		5,838			4,344
Accrued taxes and other liabilities		5,524			3,346

Total current liabilities		59,189			42,958
Long term liabilities		454			584

Total liabilities		59,643			43,542


Minority interest		1,493			903

Stockholders’ equity:
Preferred stock, $.001 par value:
Shares authorized—5,000,000 No shares issued or outstanding		—			—
Common stock, $.001 par value:
Shares authorized—15,000,000; with 7,027,472 and 6,973,472 shares issued		7			7
Additional paid-in capital		41,762			41,718
Treasury stock		(1	)		(1	)
Accumulated deficit		(24,291	)		(23,273	)

Total stockholders’ equity		17,477			18,451

Total liabilities and stockholders’ equity	$	78,613		$	62,896

See Notes to Condensed Consolidated Financial Statements.

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En Pointe Technologies, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)


	Three months ended						Nine months ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales:
Product	$	84,835		$	80,450		$	211,525		$	205,107
Service		10,789			12,142			33,800			35,815

Total net sales		95,624			92,592			245,325			240,922

Cost of sales:
Product		76,985			74,416			194,726			189,407
Service		7,147			9,098			22,349			25,568

Total cost of sales		84,132			83,514			217,075			214,975

Gross profit:
Product		7,850			6,034			16,799			15,700
Service		3,642			3,044			11,451			10,247

Total gross profit		11,492			9,078			28,250			25,947


Selling and marketing expenses		7,325			6,591			21,091			18,872
General and administrative expenses		3,237			2,661			8,446			7,367

Operating income (loss)		930			(174	)		(1,287	)		(292	)


Interest (income) expense, net		(60	)		(76	)		(120	)		23
Other income, net		(24	)		(46	)		(60	)		(530	)

Income (loss) before income taxes and minority interest		1,014			(52	)		(1,107	)		215
Provision for income taxes		26			1			26			25

Income (loss) before minority interest		988			(53	)		(1,133	)		190
Minority interest in affilate loss		28			155			115			304

Net income (loss)	$	1,016		$	102		$	(1,018	)	$	494


Net income (loss) per share:
Basic	$	0.14		$	0.01		$	(0.15	)	$	0.07

Diluted	$	0.14		$	0.01		$	(0.15	)	$	0.07


Weighted average shares outstanding:
Basic		7,027			6,867			7,000			6,841

Diluted		7,092			7,124			7,000			7,101

See Notes to Condensed Consolidated Financial Statements.

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En Pointe Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine months ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(1,018	)	$	494
Adjustments to reconcile net income to net cash used by operations:
Depreciation and amortization		1,101			742
Amortization of deferred gain on sale-leaseback		(303	)		(179	)
Allowances for doubtful accounts, returns, and inventory		586			237
Minority interest in loss of affiliate		(115	)		(304	)
Net change in operating assets and liabilities		(6,072	)		(14,948	)

Net cash used by operating activities		(5,821	)		(13,958	)


Cash flows from investing activities:
Acquisition of business		(550	)		(878	)
Purchase of property and equipment		(609	)		(1,541	)

Net cash used by investing activities		(1,159	)		(2,419	)


Cash flows from financing activities:
Net borrowings under line of credit		7,069			14,103
Proceeds from convertible bond issued by affiliate		50			—
Stock offering by affiliate		705			385
Proceeds from exercise of employee stock options		100			154
Payment on long term liabilities		(270	)		(97	)

Net cash provided by financing activities		7,654			14,545

Increase (decrease) in cash	$	674		$	(1,832	)


Supplemental disclosures of cash flow information:
Interest paid	$	62		$	218

Income taxes paid	$	31		$	215

Capitalized leases	$	—		$	586

See Notes to Condensed Consolidated Financial Statements.

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En Pointe Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation and General Information

In the opinion of management, the unaudited condensed consolidated balance sheet of En Pointe Technologies, Inc., including its wholly-owned subsidiaries En Pointe Technologies Sales, Inc., En Pointe Gov, Inc., En Pointe Technologies Canada, Inc. and The Xyphen Corporation (collectively, the “Company” or “En Pointe”), and Premier BPO, Inc. (a partially owned Variable Interest Entity, see Note 6), at June 30, 2006, and the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows for the interim periods ended June 30, 2006 and 2005, respectively, include all adjustments (consisting only of normal recurring adjustments) necessary to fairly state these financial statements in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC. The year-end balance sheet data were derived from audited financial statements, but do not include disclosures required by generally accepted accounting principles. Operating results for the three months and nine months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006. It is suggested that these condensed financial statements be read in conjunction with the Company’s most recent Form 10-K for the fiscal year ended September 30, 2005.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer bad debts, product returns, vendor returns, rebate reserves, inventories, other contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Note 2 – Accounting for Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement Financial Accounting Standard (“SFAS”) No. 123 (R), “Share-Based Payment”. SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. That expense is then recognized over the period during which an

Page 6

employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company adopted SFAS No. 123 (R) effective beginning October 1, 2005 using the Modified Prospective Application Method. Under this method, SFAS No. 123 (R) applies to new awards and to awards modified, repurchased or cancelled after the effective date. There have been no new share-based awards since the Company adopted SFAS No. 123 (R) and thus there has been no financial impact from its adoption.

Prior to adoption of SFAS No. 123 (R), the Company accounted for stock options granted to employees and directors under its 1996 stock incentive plan in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. On July 19, 2005, the Board of Directors and Compensation Committee approved accelerating the exercisability of all unvested stock options outstanding under the Company’s 1996 stock incentive plan effective as of July 20, 2005. The options are held by employees, including executive officers, and directors. In order to prevent unintended personal benefits, shares of the Company’s common stock received upon exercise of an accelerated option remain subject to the original vesting period with respect to transferability of such shares and, consequently, may not be sold or otherwise transferred prior to the earlier of termination of continuous service with the Company or expiration of such original vesting period.

The purpose of accelerating vesting was to minimize the Company’s recognition of compensation expense associated with these options upon adoption of SFAS No. 123(R) in the first quarter of fiscal 2006. To the extent that any accelerated options are exercised prior to the term of their respective original vesting periods and the estimated compensation expense established by the Company proves insufficient, the Company may incur additional compensation expense under SFAS No. 123(R). The Company’s full Board of Directors ratified the acceleration to the extent affected options were held by members of the Compensation Committee.

As a result of the acceleration of vesting of unvested options, no compensation cost has been recognized for stock option awards. Had compensation cost been determined in accordance with SFAS No. 123 (R), the Company’s income and income per common share would have been as follows:


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
(In Thousands, Except Per Share Amounts)	2006		2005			2006			2005
Net income (loss), as reported	$	1,016	$	102		$	(1,018	)	$	494

Add: Total stock-based employee compensation included in reported net income, net of related tax effects		—		—			—			—

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		(102	)		—			(764	)


Pro-forma net income (loss)	$	1,016	$	0		$	(1,018	)	$	(270	)


Net income (loss) per share:
Basic-as reported	$	0.14	$	0.01		$	(0.15	)	$	0.07

Basic-pro forma	$	0.14	$	0.00		$	(0.15	)	$	(0.04	)


Diluted-as reported	$	0.14	$	0.01		$	(0.15	)	$	0.07

Diluted-pro forma	$	0.14	$	0.00		$	(0.15	)	$	(0.04	)

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The fair value of each stock option grant has been estimated pursuant to SFAS No. 123 (R) on the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions used:


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
Risk free interest rates		—		3.35	%		—		3.35	%
Expected dividend yield		—		0.00	%		—		0.00	%
Expected lives		—		5			—		5
Expected volatility		—		105.25	%		—		105.25	%

In the first quarter of fiscal year 2005, options to purchase 275,000 shares of common stock at a weighted average price of $2.09 per share were issued to employees. The Company has not issued any additional options to purchase common shares since then and all outstanding options were fully-vested as of July 20, 2005.

Note 3 – Computation of Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except for per share amounts):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006			2005
Net income (loss)	$	1,016	$	102	$	(1,018	)	$	494


Weighted average shares outstanding		7,027		6,867		7,000			6,841
Effect of dilutive securities:
Dilutive potential of options		65		257		—			260

Weighted average shares and share equivalents outstanding		7,092		7,124		7,000			7,101


Basic income (loss) per share	$	0.14	$	0.01	$	(0.15	)	$	0.07

Diluted income (loss) per share	$	0.14	$	0.01	$	(0.15	)	$	0.07

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Note 4 – Recent Accounting Pronouncements

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an Amendment of FASB Statement No. 140”. SFAS No. 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. The Company does not engage in activities to which this pronouncement pertains, such as mortgage securitization and other forms of financial asset servicing, and therefore does not anticipate that the implementation of SFAS No. 156 will have a material impact on its financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133 and 140”. SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company does not hold any hybrid financial instruments and therefore does not anticipate that the implementation of SFAS No. 155 will have a material impact on its financial statements.

In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning Of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The Company was required to and adopted FSP FAS 115-1 in the March 2006 quarter and the adoption has not had a material impact on its financial statements.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements of the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the period of the

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change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impractical to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, it does not change the transition provisions of any of the existing accounting pronouncements. The Company does not anticipate that the implementation of SFAS No. 154 will have a material impact on its financial statements.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” Asset retirement obligations (“AROs”) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. FIN No. 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional on future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN No. 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN No. 47 is intended to result in more consistent recognition of liabilities relating to AROs among companies, more information about expected future cash outflows associated with those obligations stemming from the retirement of the asset(s) and more information about investments in long-lived assets because additional asset retirement costs will be recognized by increasing the carrying amounts of the assets identified to be retired. FIN No. 47 is effective for fiscal years ending after December 15, 2005. The Company does not anticipate that the implementation of FIN No. 47 will have a material impact on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (R) (revised 2004), “Share-Based Payment.” SFAS No. 123 (R) addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123 (R) eliminates the ability to account for share-based compensation transactions using the intrinsic method that is currently used and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statement of operations. The effective date of SFAS No. 123 (R) is for annual periods beginning after June 15, 2005. The Company after assessing the potential negative impact of the provisions of SFAS No. 123 (R) on its consolidated financial statements in fiscal year 2006, decided to minimize its exposure to the accounting pronouncement by accelerating the vesting of all outstanding unvested options. Effective July 20, 2005, the Company accelerated all outstanding unvested options so as to be fully vested as of such date (see Note 2). The Company adopted SFAS No. 123(R) on October 1, 2005 and the adoption did not have a material impact on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. The Company adopted SFAS No. 153 effective October 1, 2005 and the adoption has not had a material impact on its financial statements.

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In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recorded as current period charges and that the allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. The Company adopted SFAS No. 151 effective October 1, 2005 and the adoption has not had a material impact on its financial statements.

Note 5 – Acquisition of Business

On January 18, 2006, pursuant to an Asset Purchase Agreement with Software Medium, Inc., a Texas corporation (“SMI”), and Veridyn, LLC, a Texas limited liability company and a wholly-owned subsidiary of SMI (“Veridyn,” and collectively with SMI, the “Sellers”), the Company acquired certain depreciable and intangible assets and assumed certain liabilities, including a short-term lease commitment for office facilities. On closing, $550,000 in cash was paid to the Sellers. Two of Sellers’ officers entered into employment agreements with the Company. One of the officers was guaranteed a $250,000 bonus that will be payable over two years, subject to continued employment and is considered part of the purchase price. The other Sellers’ officer’s employment agreement contains a performance-based bonus provision that is based on the percentage of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) on sales of security services. The bonus is payable over three years on a quarterly basis, subject to continued employment, and approximates 25% of such EBITDA per year, subject to a maximum annual aggregate bonus payment of $400,000. Additional fees payable and estimated to be payable for professional services directly related to the acquisition total $175,000.

The Company allocated the $975,000 purchase price to the tangible and intangible assets acquired, based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. The fair value assigned to the intangible assets acquired was based on valuations estimated by management with the assistance of an independent appraisal firm. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Of the purchase price, approximately $154,000 was allocated to amortizable (over five years using sum of the year’s digits method) customer relationships and approximately $460,000 was allocated to amortizable (over three years on a straight-line basis) non-competition agreements. The allocation of the purchase price (in thousands) was as follows:


Depreciable assets acquired	$	57
Excess purchase price over net assets acquired		918

Purchase price	$	975


Intangible assets:
Customer relationships		154
Goodwill		304
Covenant not to compete		460

Total intangibles	$	918

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The following unaudited pro forma consolidated financial information reflects the results of operations for the three and nine months ended June 30, 2006 and 2005 as if the acquisition of SMI’s operations had occurred on January 1, 2005 (in thousands, except per share amounts). The pro forma for the three months ended June 30, 2006 is not presented since SMI operations were fully integrated with the Company at that time.


	Three Months Ended
	June 30, 2005
	Pro Forma		As Reported
Net sales	$	96,313	$	92,592
Net income	$	353	$	102
Net income per share:
Basic	$	0.05	$	0.01

Diluted	$	0.05	$	0.01

Weighted average shares outstanding:
Basic		6,867		6,867

Diluted		7,124		7,124


	Nine Months Ended
	June 30, 2006						June 30, 2005
	Pro Forma			As Reported			Pro Forma		As Reported
Net sales	$	247,635		$	245,325		$	251,865	$	240,922
Net (loss) income	$	(797	)	$	(1,018	)	$	1,149	$	494
Net (loss) income per share:
Basic	$	(0.11	)	$	(0.15	)	$	0.17	$	0.07

Diluted	$	(0.11	)	$	(0.15	)	$	0.16	$	0.07

Weighted average shares outstanding:
Basic		7,000			7,000			6,841		6,841

Diluted		7,129			7,000			7,101		7,101

Effective October 1, 2004, the Company purchased certain assets of Viablelinks, Inc., a Portland, Oregon and Boise, Idaho-based regional reseller of technology products and services (“Viablelinks”). At the time of purchase, the total purchase price paid was approximately $878,000 (including $882,000 gross purchase price less $4,000 cash received back).

The Company had originally estimated that of the $564,000 of accounts receivable acquired in the Viablelinks purchase that approximately $113,000 would be uncollectible, allowing a net of $451,000 to be realized. Subsequently, in the quarter ended March 31, 2005, upon resolution of the $564,000 of trade accounts receivable acquired, it was determined that $82,000 more had been collected than had been previously estimated. Consequently, the preliminary purchase price allocation was adjusted to the following (in thousands):


Accounts receivable	$	533
Depreciable assets		57

Net assets acquired		590
Excess purchase price over net assets acquired		288

Purchase price	$	878


Intangible assets:
Customer relationships		200
Goodwill		88

Total intangibles	$	288

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The Company allocated the purchase price to the tangible and intangible assets acquired, based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. The fair value assigned to the intangible assets acquired was based on valuations estimated by management with the assistance of an independent appraisal firm. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Of the purchase price, approximately $200,000 was allocated to amortizable intangible assets related to customer relationships.

On October 11, 2002, the Company completed the purchase of certain assets of Tabin Corporation (“Tabin”), a Chicago-based value-added reseller, providing the Company with an established presence in one of the largest market places in the U.S. Based on an independent valuation, the total purchase price of approximately $921,000 was allocated as follows (in thousands):


Inventory	$	76
Depreciable assets		145
Customer relationships		470
Goodwill		230

	$	921

The Company allocated the purchase price to the tangible and intangible assets acquired, based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. The fair value assigned to the intangible assets acquired was based on valuations prepared by an independent third party appraisal firm using estimates and assumptions provided by management. In accordance with SFAS No. 142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Of the purchase price, approximately $470,000 was allocated to amortizable intangible assets related to customer relationships. Customer relationships are existing sales contacts that relate to underlying customer relationships pertaining to the products and services provided by the Company.

The Company is amortizing the fair value of customer relationships from the Viablelinks and Tabin acquisitions over an estimated useful life of 5 years using the straight-line method for the Tabin acquisition and the sum-of-the-years digits for Viablelinks. Management considers that sum-of-the-years digits best reflects the pattern in which the economic benefits of the Viablelinks customer relationships will be realized. At September 30, 2005, the Company increased its amortization of the Tabin customer relationships by $50,000 in recognition of the impairment of certain customer relationships

At June 30, 2006, amortization of customer relationships and covenant not to compete for current and future years is as follows (in thousands):


	Tabin		Viablelinks		Software Medium		Total
9/30/05 accumulated amortization	$	332	$	67	$	—	$	399
Amortization for nine months of fiscal 2006		53		40		101		194

06/30/06 accumulated amortization	$	385	$	107	$	101	$	593

Amortization for remaining three months of fiscal 2006	$	17	$	14	$	52	$	83
Amortization for fiscal 2007		68		40		197		305
Amortization for fiscal 2008		—		27		187		214
Amortization for fiscal 2009		—		12		61		73
Amortization for fiscal 2010		—		—		13		13
Amortization for fiscal 2011		—		—		3		3

Total future amortization	$	85	$	93	$	513	$	691


								0
Total amortization	$	470	$	200	$	614	$	1,284

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Note 6 – Investment in Variable Interest Entity

In March 2005, the Company invested an additional $250,000 in a third round of private placements of the common stock of Premier BPO, Inc. (formerly known as En Pointe Global Services, Inc., “PBPO”). The Company’s total investment in PBPO common stock through June 30, 2006 is $759,000 and represents an approximate 31% voting interest in the privately-held corporation. PBPO is a business process outsourcing company formed in October 2003 and headquartered in Clarksville, Tennessee.

In addition to the Company’s PBPO common stock investments described above, the Company invested an additional $600,000 in PBPO in the form of a five-year 6% interest-bearing note that subsequently was converted into Series A non-voting convertible preferred stock of PBPO in October 2004. The preferred stock may not be converted to common stock until the earlier of five years from the issuance date of the preferred stock or the effective date of an initial public offering. The conversion price is set as the greater of $100 per share or the fair market value, as determined under the preferred stock agreement. The Company’s approximate 31% voting interest in PBPO referenced above excludes the Series A non-voting convertible preferred stock that it holds.

PBPO is considered a related party because of the Company’s equity interest in PBPO as well as the interrelationship of several of the investors with the Company. One of the Company’s board members, Mark Briggs, owns approximately 17% of PBPO and also serves as its Chairman of the Board and Chief Executive Officer. Further, the Company’s Chairman of the Board, Bob Din, represents En Pointe’s interest as a member of the board of directors of PBPO. In addition, the owners of Ovex Technologies (Private) Limited (“Ovex”), the Pakistani company in Islamabad that performs the operational side of the Company’s outsourcing under a cost plus fixed fee agreement that may be cancelled upon written notice, owns collectively approximately 16% of PBPO. The owners of Ovex also hold shares of Series A non-voting convertible preferred stock of PBPO that they received in October 2004 in exchange for the conversion of their outstanding five-year notes that aggregated $603,000 in principal and interest. The preferred shares held by Ovex are a component of their minority interest but are excluded from their approximate 16% voting interest in PBPO referenced above and are not subject to the allocation of PBPO losses.

Because of the substantial investment that the Company made in PBPO, the related party nature of the investment, as well as other factors, when the Company’s acquired interest in PBPO was evaluated, it was determined that PBPO met the tests of a Variable Interest Entity under FIN 46 and PBPO’s financial results have thus been consolidated with the Company’s financial statements since PBPO’s inception.

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PBPO has contracted with Ovex in Pakistan and Colwell and Salmon in India to provide its workforces for back-office support. PBPO shares workspace with the Company in Islamabad for a nominal fee using contracted Ovex workers and contracts directly with Ovex for workspace and workers in Lahore. In October 2003, PBPO obtained a five year option agreement whereby PBPO could purchase all of the equity of Ovex for $2.0 million.

In September 2005, PBPO entered into a five year cost-plus fixed fee service agreement with Ovex to supply contracted employees and an operating facility in Lahore, Pakistan. In addition, PBPO agreed to provide certain marketing services for Ovex. The agreements can be terminated with thirty days written notice by PBPO. In September 2005, PBPO also agreed to cancel its option to purchase Ovex in consideration for the payment of $200,000 by Ovex. The $200,000 is being amortized over five years, to run concurrent with the five year service agreement entered into with Ovex. In addition, Ovex agreed to purchase certain office equipment with a net book value of $124,000 for $150,000.

The changes in minority interest since September 30, 2005 are as follows:


	Minority Interest
	(in thousands)
Beginning balance at October 1, 2005	$	903
Contributed capital from stock offering		800
Fees related to stock offering		(95	)
Loss allocated to minority interest		(115	)

Ending balance at June 30, 2006	$	1,493

Note 7 – Financing Facility

In June 2004, the Company closed a $30.0 million replacement working capital financing facility with GE Commercial Distribution Finance Corporation (“GE”). The term of the facility is for a period of three years, except that either party may terminate the agreement upon 60 days’ prior written notice to the other party. Additionally, GE may terminate the facility at any time upon the occurrence of, and subsequent failure to cure in certain instances, an “Event of Default” as such term is defined in such agreement. Borrowings under the line of credit agreement are collateralized by accounts receivable, inventory and substantially all of the Company’s assets.

In addition, the Company closed a concurrent flooring facility with GE that permits the Company to purchase and finance information technology products from GE-approved vendors on terms that depend upon certain variable factors. Through the June 2006 quarter, such purchases from GE-approved vendors have historically been on terms that allow interest-free flooring.

In August 2005, the Company obtained a temporary overline through October 31, 2005 of $5.0 million, bringing the total borrowing capacity to $35.0 million. Further, in January 2006, the working capital and flooring agreements were amended to increase the maximum ratio amount for one of the liquidity financial covenants that measures the ratio of debt minus subordinated debt to tangible net worth and subordinated debt.

In May 2006, GE further amended the covenants contained in the working capital and flooring agreements effective for the March 2006 quarter and going forward as follows:

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	1.		There will be no EBITDA requirement until the June 2007 quarter. Commencing with the June 2007 quarter, the ratio of EBITDA to interest expense for the twelve month trailing period ending on the last day of each fiscal quarter will not be less than 1.25:1.0

	2.		The requirement that tangible net worth and subordinated debt must equal or exceed $14.0 million was reduced to lesser amounts commencing with the March 2006 quarter-end. The revised ratios in million for March 2006, June 2006, September 2006 and December 2006 are $12.9, $11.9, $12.3, and $12.8, respectively. For each quarter-end after December 2006 the ratio shall be $12.8 million.

	3.		The requirement that the ratio of debt minus subordinated debt to tangible net worth and subordinated debt not exceed 4.5:1.0 for each December and June quarter-end and 4.0:1.0 for each March and September quarter-end was increased to greater ratio amounts commencing with the June 2006 quarter-end. The revised ratios are 5.50:1.0 for the June 2006 quarter-end and 4.75:1.0 for each quarter-end thereafter.

	4.		The requirement that the ratio of current tangible assets to current liabilities must not be less than 1.2:1.0 was unchanged.

As of June 30, 2006, approximately $23.9 million in borrowings was outstanding under the Company’s GE financing facility and the Company had additional borrowings available of approximately $6.1 million after taking into consideration the available collateral and borrowing limitations under the agreements. As of June 30, 2006, the Company was in compliance with its debt covenants under the foregoing agreements.

Note 8 – Sale-Leaseback Related to Ontario Facility

On June 24, 1999, the Company entered into a sale-leaseback arrangement. Under the arrangement, the Company sold its Ontario facility for $5.5 million and leased it back under a triple net operating lease term of 15 years. At that time the Company occupied approximately 55% of the facility and planned and accomplished the subleasing of the remaining space in February of 2002. Because the subleased space was in excess of 10% of the facility, under SFAS No. 98 “Accounting for Leases”, the Company was considered to have retained a financial interest in the property despite the fact that the property was to revert back to the landlord at the end of the lease period. As a result the Company was required to continue to carry the leased property on its financial statements and account for the sale-leaseback as a financing transaction.

In March 2005, the lessee of the sublet space discontinued rental of the property and the Company took possession of 100% of the facility, which was needed for its own internal operations. Under SFAS No. 98, the lease now qualifies as a “normal leaseback” and the Company has thus removed from its consolidated balance sheet the carrying value of the leased property including the land, building, and other depreciable property with an approximate net book value of $4.3 million along with $5.0 million of related liability. Future lease payments will now be accounted for as rental expense.

When the Company accounted for its lease as a financing transaction, the Company recorded lease payments as a reduction of its obligation to the lessor and as interest expense on such obligation, as well as depreciation expense on the property. The result over approximately six years was to depreciate the leased assets more rapidly than the liability to the lessor was being amortized, resulting in the liability to the lessor exceeding the net book

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value of the lease property by $0.7 million at the date immediately preceding the termination of the sublease.

Upon concluding the Company no longer had a continuing interest in its Ontario facility in March 2005, the Company, in accordance with SFAS No. 98, removed the leased assets and liability accounts from its balance sheet. The remaining $0.7 million gain was deferred and is being amortized on a straight line basis over the remaining non-cancelable term of the lease. During the three and nine month periods ended June 30, 2006, the Company amortized into earnings $0.1 million and $0.3 million respectively of the deferred gain. The unamortized gain was recorded in total liabilities in the accompanying condensed consolidated balance sheet.

On August 26, 2005 the Company gave notification to the lessor of its intention to terminate the lease effective May 31, 2006. On March 30, 2006, the Company executed an amendment to the Ontario lease agreement that allows a five month extension until October 31, 2006 for occupancy of the facility. The Company is currently seeking alternative real estate opportunities with respect to its Ontario facility and believes that adequate space for such facility is available in other buildings.

Note 9 – Litigation

On or about September 18, 2000, a claim for arbitration was submitted by First Union Securities to the New York Stock Exchange against, among others, the Company and its President and Chief Executive Officer, Attiazaz Din (the “En Pointe defendants”). First Union alleges that the Company and Din violated federal and state securities laws in connection with the promotion and sale of En Pointe stock in the last half of 1999 and the first half of 2000. In August 2006, a settlement was reached with the Company agreeing to pay $325,000 and the Company’s insurance carrier to pay the balance. The full amount of the Company’s obligation under the settlement was accrued in the June 2006 quarter.

In December 2000, the Company and certain current and former directors and officers along with several unrelated parties were named in a complaint alleging that the defendants made misrepresentations regarding the Company and that the individual defendants improperly benefited from the sales of shares of the Company’s common stock and seeking a recovery by the Company’s shareholders of the damages sustained as a result of such activities (Crosby v. En Pointe Technologies, et al., Superior Court of California, County of San Diego, No. GIC 759905). The plaintiffs agreed to a settlement in the amount of $200,000, which amount was paid by the Company’s insurance carrier.

In February 2001, the Company and five of the Company’s directors, one current officer, and certain former officers along with seven unrelated parties were named in a stockholder class action complaint alleging that the defendants made misrepresentations regarding the Company and that the individual defendants improperly benefited from the sales of shares of the Company’s common stock and seeking a recovery by the Company’s stockholders of the damages sustained as a result of such activities (In Re En Pointe Technologies Securities Litigation, United States District Court, Southern District of California Case No. 01 CV0205L (CGA)). In an amended complaint, the plaintiffs limited their claims to the Company and its Chief Executive Officer. In response to a motion to dismiss, the Court further limited plaintiffs’ claims to allegations of market manipulation and insider trading. The En Pointe defendants have answered the amended complaint. The Court recently certified the case as a class action. Counsel for the parties have agreed to resolve the case for $1.8 million. The payment will be made by the Company’s insurance carrier.

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In January 2006, an action was brought against the Company in the Los Angeles County Superior Court, Case No. SC088295, seeking general and special damages of an unspecified amount as well as punitive damages from the economic harm caused by the hiring of five former employees of Softchoice Corporation. The suit alleges among other things that the Company engaged in misappropriation of trade secrets, conversion of misappropriated confidential information, and statutory unfair competition from misappropriated confidential information. The Company denies any wrongdoing and intends to vigorously defend the allegations.

In February 2006, an action was brought against the Company, Software Medium, Inc. (“SMI”), Veridyn, LLC (“Veridyn”), Consesusone, LLC, and certain individual officers, directors and shareholders of SMI and Veridyn in the San Diego County Superior Court, Case No. GIC859375, by Websense, Inc. The plaintiff, a former supplier to SMI and holder of a secured promissory note with an unpaid balance of $0.5 million, alleges that the Company’s acquisition of the assets of SMI and Veridyn via an asset purchase agreement constitutes a fraudulent transfer of assets and that the Company is liable for the debts of SMI and Veridyn as a successor. The Company disputes the allegations and believes that it complied with all applicable laws relating to the asset purchase transaction.

In July 2006, an action was brought against the Company in the San Bernardino County Superior Court, Case No. RVC096518, by Church Gardens LLC. The complaint by the current owner of the Company’s leased configuration facility in Ontario, California, centers on certain furniture, fixtures, equipment and leasehold improvements that was sold to, and leased back from, plaintiff’s predecessor by the Company in 1999. The plaintiff alleges, among other things, that a portion of the leased-back property was sold, destroyed, altered, or removed from the premises, and demands both an inspection and an accounting of the property remaining and for the court to provide damages to the extent that the Company may have breached its contract. The Company disputes the allegations and believes that any property loss liability under the lease provisions would be limited to the $75,000 that it has accrued.

There are various other claims and litigation proceedings in which the Company is involved in the ordinary course of business. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. While the outcome of the foregoing and other claims and proceedings cannot be predicted with certainty, after consulting with legal counsel, management does not believe that it is reasonably possible that any ongoing or pending litigation will result in an unfavorable outcome to the Company or have a material adverse affect on the Company’s business, financial position and results of operations or cash flows.

Note 10 – Decrease in Authorized Common Stock

On March 17, 2005, the stockholders of the Company voted on and approved an amendment to the Company’s certificate of incorporation to decrease the number of authorized shares of common stock from 40,000,000 to 15,000,000.

Note 11 – Lease Commitment

On March 30, 2006, the Company entered into a sublease with Jetabout North America, Inc. for its new corporate headquarters located at 2381 Rosecrans Avenue, Suite 325, El Segundo, California 90245. The term of the sublease is thirty-one months, commencing on

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July 1, 2006 and ending on January 31, 2009. Under terms of the sublease, the Company will pay monthly rent of $15,799, including utilities, for its occupancy of approximately 13,166 square feet of office space. The rental charge under its rental agreement for its prior corporate headquarters was $67,446 a month for approximately 36,090 square feet of office space.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

En Pointe Technologies, Inc., including its wholly-owned subsidiaries En Pointe Technologies Sales, Inc., En Pointe Gov, Inc., En Pointe Technologies Canada, Inc. and The Xyphen Corporation are collectively referred to as the “Company” or “En Pointe.” Premier BPO, Inc., a partially owned Variable Interest Entity (see Note 6 to the Financial Statements), is referred to as ”PBPO.”

The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995:

(i) any statements contained or incorporated herein regarding possible or assumed future results of operations of En Pointe’s business, anticipated cost savings or other synergies, the markets for En Pointe’s services and products, anticipated capital expenditures, regulatory developments or competition;

(ii) any statements preceded by, followed by or that include the words “intends,” “estimates,” “believes,” “expects,” “anticipates,” “should,” “could,” “projects,” “potential,” or similar expressions; and

(iii) other statements contained or incorporated by reference herein regarding matters that are not historical facts.

Such forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q, which reflect management’s best judgment based on factors currently known, involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements and their inclusion should not be regarded as a representation by the Company or any other person that the objectives or plans will be achieved. Factors that might cause such a difference include, but are not limited to: (i) a significant portion of the Company’s sales continuing to be to certain large customers, (ii) continued dependence by the Company on certain allied distributors, (iii) continued downward pricing pressures in the information technology market, (iv) the ability of the Company to maintain inventory and accounts receivable financing on acceptable terms, (v) quarterly fluctuations in results, (vi) seasonal patterns of sales and client buying behaviors, (vii) changing economic influences in the industry, (viii) the development by competitors of new or superior delivery technologies or entry in the market by new competitors, (ix) dependence on intellectual property rights, (x) delays in product development, (xi) the Company’s dependence on key personnel, (xii) potential influence by executive officers and principal stockholders, (xiii) volatility of the Company’s stock price, (xiv) delays in the receipt of orders or in the shipment of products, (xv) any delay in execution and implementation of the Company’s system development plans, (xvi) loss of minority ownership status, (xvii) planned or unplanned changes in the quantity and/or quality of the suppliers available for the Company’s products, (xviii) changes in the costs or availability of products, (xix) interruptions in transport or distribution, (xx) general business conditions in the economy, and (xxi) the ability of the Company to prevail in litigation.

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Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company’s business, financial position, results of operations and cash flows. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein and to consider other risks detailed more fully in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2005. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

The following critical accounting policies, among others, affect the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue recognition. Net sales consist primarily of revenue from the sale of hardware, software, peripherals, and service and support contracts. The Company applies the provisions of the SEC Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements,” which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of products has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured.

Under the Company’s shipping terms, title and risk of loss to merchandise shipped does not pass to customers until delivered takes place which is generally two to three days. Product is therefore considered received and accepted by the customer only upon the customer’s receipt of the product from the carrier. Any undelivered product is included in inventory.

The majority of the Company’s sales relate to physical products and are recognized on a gross basis with the selling price to the customer recorded as net sales and the acquisition cost of the product recorded as cost of sales. However, software maintenance contracts, software agency fees, and extended warranties that the Company sells in which it is not the primary obligor, are recorded on a net basis in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition” and Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Accordingly, such revenues are recognized as net sales.

The Company has adopted the provisions of Statement of Position No. 97-2, “Software Revenue Recognition” (SOP 97-2) as amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions” (SOP 98-9) in recognizing revenue from software transactions. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectibility has been determined. Revenue from customer maintenance support agreements is reported on a net basis and recognized at the time of the sale.

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Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer. Net sales consist of product and service revenues, less discounts and estimated allowances for sales returns. Cost of sales include the cost of product and services sold and current and estimated allowances for product returns that will not be accepted by our suppliers, less rebates.

Deferred revenues result from prepaid management services and maintenance contracts. Many of the Company’s management services are pre-billed quarterly and income is recognized as services are performed. The Company’s maintenance contracts are generally for services that may be performed over a one year period of time. Income is recognized on such contracts ratably over the period of the contract.

Allowance for doubtful accounts. The Company’s estimates its allowance for doubtful accounts related to trade receivables by two methods. First, the Company evaluates specific accounts over 90 days outstanding and applies various levels of risk analysis to these accounts to determine a satisfactory risk category to which given percentages are applied to establish a reserve. Second, a general reserve is established for all other accounts, exclusive of the accounts identified for the specific reserve, in which a percentage is applied that is supportable by historic collection patterns.

Product returns. The Company provides an allowance for sales returns, which is based on historical experience. In general, the Company follows a strict policy of duplicating the terms of its vendor or manufacturers’ product return policies. However, in certain cases the Company must deviate from this policy in order to satisfy the requirements of certain sales contracts and/or to satisfy or maintain customer relations. To establish a reserve for returns, outstanding Return Merchandise Authorizations (“RMA”) are reviewed. Those RMAs issued for which the related product has not been returned by the customer are considered future sale reversals and are fully reserved. In addition, an estimate, based on historical return patterns, is provided for probable future RMAs that relate to past sales. Generally, customers return goods to the Company’s configuration facility in Ontario, California, where they are processed to return to the vendor.

Vendor returns. After product has been returned to vendors under authenticated RMAs, the Company reviews such outstanding receivables from its vendors and establishes a reserve on product that will not qualify for refund based on a review of specific vendor receivables.

Rebates and Cooperative Marketing Incentives. The Company receives incentives from suppliers related to product and volume rebates and cooperative marketing development funds. These incentives are generally under monthly, quarterly, or annual agreements with the suppliers; however, some of these incentives are product driven or are provided to support specific programs established by the supplier. Suppliers generally require that the Company use its cooperative marketing development funds exclusively for advertising or other marketing programs. As marketing expenses are recognized, these restricted cooperative marketing development funds are recorded as a reduction of the related marketing expense with any excess funding that can not be identified with a specific vendor program reducing gross profits.

As rebates are earned, the Company records the rebate receivable with a corresponding reduction of cost of goods sold. Any amounts received from suppliers related to cooperative marketing development funds are deferred until earned. Incentive programs are subject to audit as to whether the requirements of the incentives were actually met. The Company

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establishes reserves to cover any collectibility risks including subsequent supplier audits.

Inventory. Although the Company employs a virtual inventory model that generally limits its exposure to inventory losses, with certain large customers the Company contractually obligates itself to product availability terms that require maintaining physical inventory, as well as configured product. Such inventory is generally confined to a very limited range of product that applies to specific customers or contracts. Included in the Company’s inventory is product that has been returned by customers but is not acceptable as returnable by the vendor. As a result, the Company exposes itself to losses from such inventory that requires reserves for losses to be established. The Company records varying reserves based upon the class of inventory (i.e. held for resale or returned from customers) and age of inventory.

Comparisons of Financial Results

The following table sets forth certain financial data as a percentage of net sales for the periods indicated:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales:
Product		88.7	%		86.9	%		86.2	%		85.1	%
Services		11.3			13.1			13.8			14.9

Total net sales		100.0			100.0			100.0			100.0
Gross profit:
Product		8.2			6.5			6.8			6.5
Services		3.8			3.3			4.7			4.3

Total gross profit		12.0			9.8			11.5			10.8
Selling and marketing expenses		7.6			7.1			8.6			7.8
General and administrative expenses		3.4			2.9			3.4			3.1

Operating income (loss)		1.0			(0.2	)		(0.5	)		(0.1	)
Interest (income) expense, net		(0.1	)		(0.1	)		(0.0	)		0.0
Other income, net		(0.0	)		0.0			(0.0	)		(0.2	)

Income (loss) before taxes and minority interest		1.1			(0.1	)		(0.5	)		0.1
Provision for income taxes		0.0			0.0			0.0			0.0

Income (loss) before minority interest		1.1			(0.1	)		(0.5	)		0.1
Minority interest		0.0			(0.2	)		(0.1	)		(0.1	)

Net income (loss)		1.1	%		0.1	%		(0.4	)%		0.2	%

Comparison of the Results of Operations for the Three Months and Nine Months ended June 30, 2006 and 2005

NET SALES. Net sales increased $3.0 million, or 3.3%, to $95.6 million in the June 2006 quarter from $92.6 million in the June 2005 quarter. Approximately one third of the sales increase, or $1.1 million, was attributed to software agency commissions that totaled $2.0 million in the June 2006 quarter, with the balance, or $1.9 million, coming from an increase in other product sales. Sequentially, total net sales in the June 2006 quarter increased $24.6 million, or 34.7%, from the results recorded for the March 2006 quarter.

Product net sales increased $4.4 million, or 5.5%, to $84.8 million in the June 2006 quarter from $80.4 million in the June 2005 quarter. Within product net sales, software agency commissions mentioned above contributed an additional $1.1 million in the June 2006 quarter as compared to the June 2005 quarter.

Service net sales declined $1.3 million, or 11.1%, to $10.8 million in the June 2006 quarter from $12.1 in the June 2005 quarter primarily due to lower sales of third party maintenance warranty contracts.

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One customer accounted for 10.7% of total net sales in the June 2006 quarter, and 17.1% in the June 2005 quarter. The top twenty-five customers accounted for 61.3% and 68.7%, respectively, of total net sales for the June 2006 and 2005 quarters.

For the nine months ended June 30, 2006, net sales increased $4.4 million, or 1.8%, to $245.3 million from $240.9 million in the comparable period of the prior year. All of the net sales increase during such nine-month period was attributable to increased product sales. No customers accounted for more than 10% of net sales for the nine months ended June 30, 2006, while one customer accounted for 10.5% of net sales in the prior year’s comparable period.

GROSS PROFIT. Total gross profit increased $2.4 million, or 26.6%, to $11.5 million in the June 2006 quarter from $9.1 million in the June 2005 quarter. Almost half of the gross profit increase, or $1.1 million, was attributed to software agency commissions that totaled $2.0 million in the June 2006 quarter and are included with product sales. Agency commissions result from revenues received from software publishers for which there are no related direct costs and therefore have a very large impact on gross profits. The remaining $1.3 million increase in gross profits during the June 2006 quarter was approximately equally divided between product and service gross profits. Expressed as a percentage of net sales, gross margin percentages were 12.0% in the June 2006 quarter up from the 9.8% in the June 2005 quarter but less than the 13.0% recorded in the March 2006 quarter.

Product gross profit increased $1.8 million, or 30.1%, to $7.8 million in the June 2006 quarter from $6.0 million in the June 2005 quarter. Most of the increase was from the $1.1 million increase in software agency commissions mentioned above. On a sequential basis, product gross profit increased $2.9 million in the June 2006 quarter from the $4.9 million recorded in the March 2006 quarter. Product gross profit as a percentage of net sales increased 1.8% in the June 2006 quarter to 9.3% from the 7.5% recorded in the June 2005 quarter.

Service gross profit increased $0.6 million, or 19.6%, to $3.6 million in the June 2006 quarter from $3.0 million in the June 2005 quarter. Contributing to the increase in service gross profit was the Company’s Variable Interest Entity, Premier BPO, Inc., that is included in the Company’s consolidated financial statements and had a $0.2 million increase in gross profits for the June 2006 quarter. In addition, the increase in service gross margin percentage from 25.1% in the June 2005 quarter to 33.8% in the June 2006 quarter contributed to the overall increase in service gross profit in the most recent quarter as did the introduction of security services from the Company’s acquisitions in January 2006 (see Note 5 to the Financial Statements) that added a segment of business that has an increased gross margin percentage. On a sequential basis, service gross profit declined $0.7 million in the June 2006 quarter from the $4.3 million recorded in the March 2006 quarter.

. For the nine months ended June 30, 2006, gross profit increased $2.3 million, or 8.9%, to $28.2 million from $25.9 million recorded in the comparable prior year period. During the first nine months of fiscal 2006, product gross profits increased $1.1 million, or 7.0%, to $16.8 million, while service gross profits increased $1.3 million, or 11.7%, to $11.5 million as compared to the prior year period. The foregoing increase in product gross profits resulted primarily from software agency commissions whereas the increase in service gross profits was primarily from improved operating margins.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased $0.7 million, or 11.1%, to $7.3 million in the June 2006 quarter, from $6.6 million in the June

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2005 quarter. Most of the increase, $0.5 million, resulted from draws of $0.4 million granted newly hired software personnel and personal acquired from recent acquisitions and from the $0.1 increase in commission expense. On a sequential basis, selling and marketing expenses decreased $0.4 million in the June 2006 quarter from the March 2006 quarter. Selling and marketing expenses as a percentage of net sales increased 0.5% to 7.6% in the June 2006 quarter from the 7.1% recorded in the June 2005 quarter.

For the nine months ended June 30, 2006, selling and marketing expenses increased $2.2 million, or 11.8%, to $21.1 million from $18.9 million in the prior fiscal year period. The increased expenses were due primarily from draws of $0.9 million granted newly hired software personnel and personnel acquired from recent acquisitions and from a $0.4 increase in commission expense as well as other wage related expense. In addition, the Company incurred approximately $0.2 million in establishing a programming service in India that for the SAP enhancement market.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $0.5 million in the June 2006 quarter, or 21.6%, to $3.2 million from $2.7 million in the June 2005 quarter. The increase in general and administrative expenses can be attributed to an increase in legal expense of $0.4 million, expense of $0.3 million incurred in connection with the Company’s portion of the settlement of the First Union Securities matter (see Note 9 to the Financial Statements) less a reduction in consulting expense of $0.2 million that was incurred in the June 2005 quarter for compliance with the Sarbanes Oxley Act and was not repeated in the June 2006 quarter. When expressed as a percentage of net sales, general and administrative expenses increased 0.5% to 3.4% in the June 2006 quarter from the 2.9% reported in the June 2005 quarter.

For the nine months ended June 30, 2006, general and administrative expenses increased $1.0 million, or 14.6%, to $8.4 million from $7.4 million in the prior fiscal year period. The net increase, after taking into account the increased legal and settlement expense and decreased consulting expense during the June 2006 quarter mentioned above, amounted to $0.5 million for the nine month period ended June 30, 2006. Of the remaining $0.5 million increase, $0.4 million of such amount resulted from increased depreciation charges from the $1.1 million purchase of computer equipment during the last twelve months. When expressed as a percentage of net sales, general and administrative expenses increased 0.3% to 3.4% in the nine months ended June 30, 2006 from the 3.1% reported in the prior fiscal year period.

OPERATING INCOME (LOSS). The Company’s operating income was $0.9 million in the June 2006 quarter compared with an operating loss of $0.2 million in the June 2005 quarter. The $1.1 million increase in operating income during the June 2006 quarter was due to an increase in gross profits of $2.4 million less a $1.3 million increase in operating expenses.

For the nine months ended June 30, 2006, the Company’s operating loss increased $1.0 million to $1.3 million from $0.3 million in the prior fiscal year period. The increase in the operating loss during the foregoing period was due to the increase in operating expenses of $3.3 million partially offset by a $2.3 million increase in gross profits.

INTEREST (INCOME) EXPENSE, NET. At June 30, 2006, net interest (income) expense was comprised of the following:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	(In Thousands)
	2006			2005			2006			2005
Interest (income)	$	(83	)	$	(60	)	$	(182	)	$	(167	)
Interest expense (credit)		23			(16	)		62			190

	$	(60	)	$	(76	)	$	(120	)	$	23

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Interest income results principally from short-term money market investments earned from excess cash holdings. The decline in interest expense for the nine month period ended June 30, 2006 from that of the prior fiscal year period can be attributed to the March 2005 conversion of the Ontario configuration facility from a capital lease to an operating lease which is now accounted for as rental expense in cost of sales (see Note 8 to the Financial Statements).

PROVISION FOR INCOME TAXES. For the June 2006 quarter and nine months fiscal year-to-date, the Company estimated an income tax expense of $26,000. Taxable income for the nine months ended June 30, 2006 results from certain estimates of loss and other expenses that are not allowable for tax purposes. The Company is not subject to regular income tax rates because of its net operating loss carry forwards but is obligated to pay tax under the alternative minimum tax that limits the application of net operating loss carry forwards to 90% of taxable income.

As of June 30, 2006, the Company had an available federal net operating loss carry forward of approximately $7.2 million, of which $4.7 million would be considered an increase to capital and would not benefit earnings.

MINORITY INTEREST. Under FIN 46 and other recent changes in consolidation principles, certain minority interests are required to be consolidated. The Company owns an approximate 31% voting interest in PBPO as of June 30, 2006 and under FIN 46 is required to consolidate PBPO’s financial results in the Company’s financial statements. As a result, certain losses are allocated to the other stockholders of PBPO who collectively own approximately 69% of the voting interests in PBPO. Losses so allocated to the “minority interest” are not based upon the percentage of ownership, but rather upon the “at risk” capital of those owners. For the June 2006 quarter, approximately 21.5% of the total PBPO loss of $0.1 million was allocated to the 69% “minority stockholders”. For the June 2005 quarter, approximately 41.7% of the total PBPO loss of $0.4 million was allocated to the 62% “minority shareholders”. Once the “minority interest” “at risk” capital has been absorbed by losses, all remaining losses are allocated to the Company, without regard for the amount of the Company’s capital that is “at risk”.

For the nine months ended June 30, 2006, approximately 20.7% of the total PBPO loss of $0.6 million was allocated to the 69% “minority shareholders”.

NET INCOME (LOSS). Net income for the June 2006 quarter increased $0.9 million to $1.0 million from $0.1 million in the June 2005 quarter. The increase in net income for the June 2006 quarter was due to a $1.1 million increase in operating income less reductions in other income and allocation of losses to minority interests of $0.2 million. Expressed as a percentage of net sales, net income increased 1.0% to 1.1% in the June 2006 quarter from 0.1% in the June 2005 quarter.

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For the nine months ended June 30, 2006, the Company had a net loss of $1.0 million compared with net income of $0.5 million in the prior fiscal year period. The $1.5 million decrease in income that resulted in a net loss for the nine months ended June 30, 2006 was due to an increase in operating loss of $1.0 million and a decline in other income and the allocation of losses to minority interests of $0.5 million.

Liquidity and Capital Resources

During the nine months ended June 30, 2006, operating activities used cash of $5.8 million compared with $14.0 million used in the comparable prior fiscal year period. The $8.2 million improvement from the reduction in the use of cash from operations can be attributed principally to the $3.0 million decrease in accounts receivable and the $3.3 million decrease in inventory balances for the nine months ended June 30, 2006 as compared with the nine months ended June 30, 2005.

The Company’s net accounts receivable balance at June 30, 2006 and September 30, 2005, was $58.0 million and $40.9 million, respectively. The number of days’ sales outstanding in accounts receivable was 65 days as of June 30, 2006, which was an increase from the 60 days reported in the June 2005 quarter, and from the 45 days as of September 30, 2005. The increase in days’ sales outstanding in accounts receivable resulted from the increase in net sales, as is indicative of the seasonal trend for the June quarters and did not represent deterioration in the ageing of the receivables

Inventories decreased $2.4 million, from $10.4 million at September 30, 2005 to $8.0 million at June 30, 2006. Most of the Company’s reported inventory balances consist of in-transit inventory, representing sales orders that are in the process of being filled. Of the remaining balance of physical inventory on hand, much of that is product ordered by customers and in the process of configuration before shipment and billing.

Investing activities during the nine months ended June 30, 2006 used cash of $1.2 million, a decrease of $1.2 million from the $2.4 million used in the comparable prior fiscal year period. Most of the decrease was from reduced expenditures for the purchases of property and equipment.

Financing activities provided cash of $7.7 million during the nine month period ended June 30, 2006, $6.8 million less than the $14.5 million provided in the comparable prior fiscal year period. The principal reason for the reduction of cash by financing activities was from $7.0 million less in net borrowings under the Company’s line of credit during the 2006 period.

As of June 30, 2006, the Company had approximately $7.6 million in cash and working capital of $15.0 million. The Company has a $30.0 million replacement working capital financing facility with GE. The term of the facility is for a period of three years, except that either party may terminate the agreement upon 60 days written notice to the other party. Additionally, GE may terminate the facility at any time upon the occurrence of, and subsequent failure to cure in certain instances, an “Event of Default” as such term in defined in such agreement. Under the financing facility, the Company may borrow up to 85% of the eligible accounts receivable at an interest rate of prime plus 1.0% per annum, subject to a minimum rate of 5.0% per annum. In addition, pursuant to a separate financing agreement with GE, the Company may purchase and finance information technology products from GE-approved vendors on terms that depend upon certain variable factors. Such purchases from

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GE-approved vendors have been on terms that allow interest-free flooring. The financing agreements contain various liquidity financial covenants (see Note 7 to the Financial Statements). The Company was in compliance with all of its debt covenants under the foregoing agreements as of June 30, 2006.

The GE facility is collateralized by accounts receivable, inventory and all of the Company’s other assets. As of June 30, 2006, approximately $23.9 million in borrowings were outstanding under its GE financing facility and En Pointe had additional borrowings available of approximately $6.1 million after taking into consideration the available collateral and borrowing limitations under the agreements.

The Company’s future needs for financial resources include increases in working capital to support anticipated sales growth and repayments of indebtedness. The Company has evaluated, and will continue to evaluate, possible business acquisitions within the parameters of the restrictions set forth in the financing agreements with GE. These possible business acquisitions could require substantial cash payments.

Based on the Company meeting its internal sales growth targets, management believes that the Company’s current cash balances, combined with net cash that it expects to generate from operations, and access to the $30.0 million financing facility with GE and with the availability of any temporary increases to its credit facility, will sustain its ongoing operations for at least the next twelve months. In the event that the Company requires additional cash to support its operations during the next twelve months or thereafter, it may attempt to raise the required capital through either debt or equity arrangements. The Company cannot provide any assurance that the required capital will be available on acceptable terms, if at all, or that any financing activity will not be dilutive to its current stockholders. If the Company is not able to raise additional funds, it may be required to significantly curtail its operations and this would have an adverse effect on its financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

The Company does not currently have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.

Obligations and Commitments

As of June 30, 2006, the Company had the following obligations and commitments to make future payments, contracts, contractual obligations, and commercial commitments:


	Payments Due by Period (In Thousands)
			Less Than
Contractual Cash Obligations	Total		1 Year		1-3 Years		4-5 Years		After 5 Years
Capital lease obligations	$	719	$	384	$	328	$	7	$	—
Operating lease obligations	$	1,775	$	1,171	$	413	$	191	$	—
Line of credit	$	23,893	$	23,893	$	—	$	—	$	—

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has limited exposure to market risk from changes in interest rates from borrowings under its line of credit. While the Company’s working capital financing facility with GE provides for interest at a rate of 1.0% per annum over prime, subject to a minimum of 5.0% per annum, it is anticipated that a substantial portion of the Company’s borrowings will

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be interest-free flooring that mitigates market risk from interest fluctuations.

The Company is also committed to obligations represented by operating leases for office facilities and various types of office equipment which were fully disclosed in the Company’s Form 10-K filed for the fiscal year ended September 30, 2005. The Company has no commercial paper, derivatives, swaps, hedges, or foreign currency transactions to disclose and evaluate for market risks.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

An evaluation as of the end of the period covered by this quarterly report, was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures”, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

(b) Changes in internal controls

There were no changes to internal controls over financial reporting during the quarter ended June 30, 2006 that materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to legal proceedings and claims that arise in the normal course of business. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. While the outcome of proceedings and claims cannot be predicted with certainty, after consulting with counsel, management does not believe that it is reasonably possible that any ongoing or pending litigation will result in an unfavorable outcome to the Company or have a material adverse effect on the Company’s business, financial position, and results of operations or cash flows. Except as set forth below, there have been no material changes in the legal proceedings reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005, as updated by the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

On or about September 18, 2000, a claim for arbitration was submitted by First Union

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Securities to the New York Stock Exchange against, among others, the Company and its President and Chief Executive Officer, Attiazaz Din (the “En Pointe defendants”). First Union alleges that the Company and Din violated federal and state securities laws in connection with the promotion and sale of En Pointe stock in the last half of 1999 and the first half of 2000. In August 2006, a settlement was reached with the Company agreeing to pay $325,000 and the Company’s insurance carrier to pay the balance. The full amount of the Company’s obligation under the settlement was accrued in the June 2006 quarter.

In July 2006, an action was brought against the Company, in the San Bernardino County Superior Court, Case No. RVC096518, by Church Gardens LLC. The complaint by the current owner of the Company’s leased configuration facility in Ontario, California, centers on certain furniture, fixtures, equipment and leasehold improvements that was sold to, and leased back from, plaintiff’s predecessor by the Company in 1999. The plaintiff alleges, among other things, that a portion of the leased-back property was sold, destroyed, altered, or removed from the premises, and demands both an inspection and an accounting of the property remaining and for the court to provide damages to the extent that the Company may have breached its contract. The Company disputes the allegations and believes that any property loss liability under the lease provisions would be limited to the $75,000 that it has accrued.

Item 6. Exhibits


31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive and Chief Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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		En Pointe Technologies, Inc.

		By:		/s/ Javed Latif
				Senior Vice President and
				Chief Financial Officer
				(Duly Authorized Officer and Principal Financial Officer)

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PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – June 30, 2006 and September 30, 2005	3

	Condensed Consolidated Statements of Operations - Three months and nine months ended June 30, 2006 and 2005	4

	Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 2006 and 2005	5

	Notes to Condensed Consolidated Financial Statements - June 30, 2006	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 6.	Exhibits	29

	Signatures	30

	Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1