form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[
X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the quarter ended September 30, 2006
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from____ to ____ .
Commission
file number: 0-28926
ePlus
inc.
(Exact
name of registrant as specified in its charter)
Delaware 54-1817218
(State
or
other jurisdiction
of (I.R.S.
Employer
incorporation
or
organization) Identification
No.)
13595
Dulles Technology Drive, Herndon, VA 20171-3413
(Address,
including zip code, of principal executive offices)
Registrant's
telephone number, including area code: (703)
984-8400
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 [ __ ] No [ X_ ]
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 [____] Accelerated filer
[____] Non-accelerated filer [ X ]
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2
of
the Exchange Act). Yes [ ___] No [ X ]
The
number of shares of common stock outstanding as of August 31, 2007, was
8,231,741.
ePlus
inc. and Subsidiaries
|
1
|
|
|
Part
I. Financial Information:
|
|
|
Item
1. Financial Statements—Unaudited:
|
|
|
|
2
|
|
|
3
|
|
|
5
|
|
|
7
|
|
|
29
|
|
|
41
|
|
|
41
|
|
|
Part
II. Other Information:
|
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
48
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|
|
48
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|
|
48
|
|
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|
49
|
This
Quarterly Report on Form 10-Q contains the restatement of our Condensed
Consolidated Statements of Operations and Cash Flows for the three and six
months ended September 30, 2005 for the effects of errors in accounting for
stock options and other items. See Note 2, “Restatement of
Consolidated Financial Statements” to our Unaudited Condensed Consolidated
Financial Statements contained elsewhere in this document. For
further discussion of the effects of the restatement, see the following sections
of our Annual Report on Form 10-K for the year ended March 31, 2006: Explanatory
Note; Item 2. Management’s Discussion and Analysis of Results of
Operations and Financial Condition; Item 9A. Controls and Procedures; and Note
2
to our Consolidated Financial Statements.
PART
I. FINANCIAL
INFORMATION
Item
1. Financial Statements
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
(UNAUDITED)
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
September
30, 2006
|
|
ASSETS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,697
|
|
|
$ |
23,681
|
|
Accounts
receivable—net
|
|
|
103,060
|
|
|
|
138,974
|
|
Notes
receivable
|
|
|
330
|
|
|
|
293
|
|
Inventories
|
|
|
2,292
|
|
|
|
10,303
|
|
Investment
in leases and leased equipment—net
|
|
|
205,774
|
|
|
|
223,178
|
|
Property
and equipment—net
|
|
|
5,629
|
|
|
|
4,957
|
|
Other
assets
|
|
|
10,038
|
|
|
|
16,577
|
|
Goodwill
|
|
|
26,125
|
|
|
|
26,125
|
|
TOTAL
ASSETS
|
|
$ |
373,945
|
|
|
$ |
444,088
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable—equipment
|
|
$ |
7,733
|
|
|
$ |
9,197
|
|
Accounts
payable—trade
|
|
|
19,235
|
|
|
|
25,227
|
|
Accounts
payable—floor
plan
|
|
|
46,689
|
|
|
|
57,155
|
|
Salaries
and commissions payable
|
|
|
4,124
|
|
|
|
4,511
|
|
Accrued
expenses and other liabilities
|
|
|
33,346
|
|
|
|
37,792
|
|
Income
taxes payable
|
|
|
104
|
|
|
|
1,321
|
|
Recourse
notes payable
|
|
|
6,000
|
|
|
|
16,700
|
|
Nonrecourse
notes payable
|
|
|
127,973
|
|
|
|
160,495
|
|
Deferred
tax liability
|
|
|
165
|
|
|
|
165
|
|
Total
Liabilities
|
|
|
245,369
|
|
|
|
312, 563
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 2,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
none
issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value; 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
11,037,213
issued and 8,267,223 outstanding at March 31, 2006
|
|
|
|
|
|
|
|
|
and
11,210,731 issued and 8,231,741 outstanding at September
30,2006
|
|
|
110
|
|
|
|
112
|
|
Additional
paid-in capital
|
|
|
72,811
|
|
|
|
75,505
|
|
Treasury
stock, at cost, 2,769,990 and 2,978,990 shares,
respectively
|
|
|
(29,984 |
) |
|
|
(32,884 |
) |
Deferred
compensation expense
|
|
|
(25 |
) |
|
|
-
|
|
Retained
earnings
|
|
|
85,377
|
|
|
|
88,420
|
|
Accumulated
other comprehensive income—
|
|
|
|
|
|
|
|
|
foreign
currency translation adjustment
|
|
|
287
|
|
|
|
372
|
|
Total
Stockholders' Equity
|
|
|
128,576
|
|
|
|
131,525
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
373,945
|
|
|
$ |
444,088
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
REVENUES
|
|
As
Restated (1)
|
|
|
|
|
|
|
(dollar
amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
159,409
|
|
|
$ |
180,313
|
|
Sales
of leased equipment
|
|
|
-
|
|
|
|
1,819
|
|
|
|
|
159,409
|
|
|
|
182,132
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
11,916
|
|
|
|
13,522
|
|
Fee
and other income
|
|
|
2,918
|
|
|
|
3,094
|
|
|
|
|
14,834
|
|
|
|
16,616
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
174,243
|
|
|
|
198,748
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
143,742
|
|
|
|
160,596
|
|
Cost
of sales, leased equipment
|
|
|
-
|
|
|
|
1,775
|
|
|
|
|
143,742
|
|
|
|
162,371
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
3,798
|
|
|
|
5,572
|
|
Professional
and other fees
|
|
|
1,776
|
|
|
|
4,764
|
|
Salaries
and benefits
|
|
|
15,288
|
|
|
|
17,723
|
|
General
and administrative expenses
|
|
|
4,975
|
|
|
|
4,385
|
|
Interest
and financing costs
|
|
|
1,717
|
|
|
|
2,665
|
|
|
|
|
27,554
|
|
|
|
35,109
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (2)
|
|
|
171,296
|
|
|
|
197,480
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
2,947
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,198
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
1,749
|
|
|
$ |
978
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
0.21
|
|
|
$ |
0.12
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
0.19
|
|
|
$ |
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,474,301
|
|
|
|
8,228,823
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
9,071,470
|
|
|
|
8,424,903
|
|
|
|
|
|
|
|
|
|
|
(1)
See Note 2, "Restatement of Consolidated Financial
Statements."
|
|
|
|
|
|
(2)
Includes amounts to related parties of $219 thousand and $238 thousand
for
the three months ended September 30, 2005 and September 30, 2006,
respectively.
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
REVENUES
|
|
(dollar
amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
294,278
|
|
|
$ |
355,646
|
|
Sales
of leased equipment
|
|
|
-
|
|
|
|
1,819
|
|
|
|
|
294,278
|
|
|
|
357,465
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
23,211
|
|
|
|
24,853
|
|
Fee
and other income
|
|
|
6,558
|
|
|
|
5,940
|
|
|
|
|
29,769
|
|
|
|
30,793
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
324,047
|
|
|
|
388,258
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
265,830
|
|
|
|
316,625
|
|
Cost
of sales, leased equipment
|
|
|
-
|
|
|
|
1,775
|
|
|
|
|
265,830
|
|
|
|
318,400
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
7,594
|
|
|
|
10,596
|
|
Professional
and other fees
|
|
|
2,724
|
|
|
|
6,050
|
|
Salaries
and benefits
|
|
|
30,077
|
|
|
|
34,965
|
|
General
and administrative expenses
|
|
|
9,437
|
|
|
|
8,871
|
|
Interest
and financing costs
|
|
|
3,254
|
|
|
|
4,653
|
|
|
|
|
53,086
|
|
|
|
65,135
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (2)
|
|
|
318,916
|
|
|
|
383,535
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
5,131
|
|
|
|
4,723
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,082
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
3,049
|
|
|
$ |
3,042
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
0.36
|
|
|
$ |
0.37
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
0.34
|
|
|
$ |
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,509,827
|
|
|
|
8,218,154
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
9,071,092
|
|
|
|
8,586,866
|
|
|
|
|
|
|
|
|
|
|
(1)
See Note 2, "Restatement of Consolidated Financial
Statements."
|
|
|
|
|
|
(2)
Includes amounts to related parties of $439 thousand and $472 thousand
for
the six months ended September 30, 2005 and September 30, 2006,
respectively.
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
(in
thousands)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
3,049
|
|
|
$ |
3,042
|
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,035
|
|
|
|
10,406
|
|
Write-off
of non-recourse debt
|
|
|
(209 |
) |
|
|
-
|
|
Reserve
for credit losses
|
|
|
80
|
|
|
|
638
|
|
Provision
for inventory losses
|
|
|
-
|
|
|
|
18
|
|
Impact
of stock-based compensation
|
|
|
167
|
|
|
|
510
|
|
Excess
tax benefit from exercise of stock options
|
|
|
-
|
|
|
|
(95 |
) |
Tax
benefit of stock options exercised
|
|
|
18
|
|
|
|
308
|
|
Deferred
taxes
|
|
|
(327 |
) |
|
|
-
|
|
Payments
from lessees directly to lenders—operating leases
|
|
|
(2,594 |
) |
|
|
(5,009 |
) |
Loss
on disposal of property and equipment
|
|
|
67
|
|
|
|
25
|
|
Gain
on disposal of operating lease equipment
|
|
|
(224 |
) |
|
|
(394 |
) |
Excess
increase in cash value of officers life insurance
|
|
|
-
|
|
|
|
(36 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable—net
|
|
|
(28,143 |
) |
|
|
(36,617 |
) |
Notes
receivable
|
|
|
28
|
|
|
|
37
|
|
Inventories
|
|
|
(1,788 |
) |
|
|
(8,028 |
) |
Investment
in leases and leased
equipment—net
|
|
|
(18,267 |
) |
|
|
(28,227 |
) |
Other
assets
|
|
|
(83 |
) |
|
|
(6,365 |
) |
Accounts
payable—equipment
|
|
|
1,814
|
|
|
|
1,081
|
|
Accounts
payable—trade
|
|
|
1,818
|
|
|
|
6,188
|
|
Salaries
and commissions
payable, accrued expenses
|
|
|
|
|
|
|
|
|
and
other
liabilities
|
|
|
(15,763 |
) |
|
|
6,050
|
|
Net
cash used in operating activities
|
|
|
(52,322 |
) |
|
|
(56,468 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of operating lease equipment
|
|
|
685
|
|
|
|
845
|
|
Purchases
of operating lease equipment
|
|
|
(17,846 |
) |
|
|
(15,104 |
) |
Proceeds
from sale of property and equipment
|
|
|
44
|
|
|
|
2
|
|
Purchases
of property and equipment
|
|
|
(1,178 |
) |
|
|
(942 |
) |
Premiums
paid on officers life insurance
|
|
|
-
|
|
|
|
(137 |
) |
Net
cash used in investing activities
|
|
|
(18,295 |
) |
|
|
(15,336 |
) |
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
(in
thousands)
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
Nonrecourse
|
|
$ |
40,305
|
|
|
$ |
67,782
|
|
Repayments:
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
|
(17,084 |
) |
|
|
(13,343 |
) |
Purchase
of treasury stock
|
|
|
(2,076 |
) |
|
|
(2,900 |
) |
Proceeds
from issuance of capital stock, net of expenses
|
|
|
109
|
|
|
|
1,903
|
|
Excess
tax benefit from exercise of stock options
|
|
|
-
|
|
|
|
95
|
|
Net
borrowings on floor-planning facility
|
|
|
5,241
|
|
|
|
10,466
|
|
Net
borrowings on lines of credit
|
|
|
21,044
|
|
|
|
10,700
|
|
Net
cash provided by financing activities
|
|
|
47,539
|
|
|
|
74,703
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
101
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(22,977 |
) |
|
|
2,984
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
38,852
|
|
|
|
20,697
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
15,875
|
|
|
$ |
23,681
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,305
|
|
|
$ |
1,222
|
|
Cash
paid for income taxes
|
|
$ |
1,588
|
|
|
$ |
294
|
|
|
|
|
|
|
|
|
|
|
Schedule
of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment included in accounts payable
|
|
$ |
207
|
|
|
$ |
123
|
|
Payments
from lessees directly to lenders
|
|
$ |
12,848
|
|
|
$ |
21,917
|
|
|
|
|
|
|
|
|
|
|
(1)
See Note 2, "Restatement of Consolidated Financial
Statements."
|
|
|
|
|
|
|
|
|
See
Notes To Unaudited Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
ePlus
inc. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
BASIS OF PRESENTATION
The
Condensed Consolidated Financial Statements of ePlus inc. and
subsidiaries and Notes thereto included herein are unaudited and have been
prepared by us, pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) and reflect all adjustments that are, in the opinion
of management, necessary for a fair statement of results for the interim
periods. All adjustments made were of a normal recurring nature.
Certain
information and note disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules
and regulations.
These
interim financial statements should be read in conjunction with our Consolidated
Financial Statements and Notes thereto contained in our Annual Report on Form
10-K for the fiscal year ended March 31, 2006. Operating results for the interim
periods are not necessarily indicative of results for an entire
year.
PRINCIPLES
OF CONSOLIDATION — The Condensed Consolidated Financial Statements include the
accounts of ePlus inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
REVENUE
RECOGNITION — We adhere to guidelines and principles of sales recognition
described in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition,” issued by the staff of the SEC. Under SAB No. 104, sales are
recognized when the title and risk of loss are passed to the customer, there
is
persuasive evidence of an arrangement for sale, delivery has occurred and/or
services have been rendered, the sales price is fixed or determinable and
collectibility is reasonably assured. Using these tests, the vast majority
of
our sales represent product sales recognized upon delivery.
From
time
to time, in the sales of product and services, we may enter into contracts
that
contain multiple elements. Sales of services currently represents less than
10% of our sales. For services that are performed in conjunction
with product sales and are completed in our facilities prior to shipment of
the
product, sales for both the product and services are recognized upon shipment.
Sales of services that are performed at customer locations are recorded as
sales
of product or services on the accompanying Statement of Operations when the
services are performed. If the service is performed at a customer location
in
conjunction with a product sale or other service sale, we recognize the sale
in
accordance with SAB No. 104 and Emerging Issues Task Force (“EITF”) 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables.”
Accordingly, in an arrangement with multiple deliverables, we recognize
sales
for delivered items only when all of the following criteria are
satisfied:
·
|
the
delivered item(s) has value to the client on a stand-alone
basis;
|
·
|
there
is objective and reliable evidence of the fair value of the undelivered
item(s); and
|
·
|
if
the arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item(s)
is
considered probable and substantially in our
control.
|
We
sell
certain third-party service contracts and software assurance or subscription
products for which we evaluate whether the subsequent sales of such services
should be recorded as gross sales or net sales in accordance with the sales
recognition criteria outlined in SAB No. 104, EITF 99-19, “Reporting Revenue
Gross as a Principal versus Net as an Agent” and Financial Accounting
Standards Board (“FASB”) Technical Bulletin 90-1, “Accounting for Separately
Priced Extended Warranty and Product Contracts.” We must
determine whether we act as a principal in the transaction and assume the risks
and rewards of ownership or if we are simply acting as an agent or broker.
Under
gross sales recognition, the entire selling price is recorded in sales of
product and services and our costs to the third-party service provider or vendor
is recorded in cost of sales, product and services on the accompanying Statement
of Operations. Under net sales recognition, the cost to the third-party service
provider or vendor is recorded as a reduction to sales resulting in net sales
equal to the gross profit on the transaction and there is no cost of
sales.
In
accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and
Costs,” we record freight billed to our customers as sales of product and
services and the related freight costs as a cost of sales, product and
services.
We
receive payments and credits from vendors, including consideration pursuant
to
volume sales incentive programs, volume purchase incentive programs and shared
marketing expense programs. Vendor consideration received pursuant to volume
sales incentive programs is recognized as a reduction to costs of sales, product
and services in accordance with EITF Issue No. 02-16, “Accounting for
Consideration Received from a Vendor by a Customer (Including a Reseller of
the
Vendor’s Products).” Vendor consideration received pursuant to volume
purchase incentive programs is allocated to inventories based on the applicable
incentives from each vendor and is recorded in cost of sales, product and
services, as the inventory is sold. Vendor consideration received pursuant
to
shared marketing expense programs is recorded as a reduction of the related
selling and administrative expenses in the period the program takes place only
if the consideration represents a reimbursement of specific, incremental,
identifiable costs. Consideration that exceeds the specific, incremental,
identifiable costs is classified as a reduction of cost of sales, product and
services.
We
are
the lessor in a number of transactions and these transactions are accounted
for
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13,
“Accounting for Leases.” Each lease is classified as either a direct
financing lease, sales-type lease, or operating lease, as appropriate. Under
the
direct financing and sales-type lease methods, we record the net investment
in
leases, which consists of the sum of the minimum lease payments, initial direct
costs (direct financing leases only), and unguaranteed residual value (gross
investment) less the unearned income. The difference between the gross
investment and the cost of the leased equipment for direct finance leases is
recorded as unearned income at the inception of the lease. The unearned income
is amortized over the life of the lease using the interest method. Under
sales-type leases, the difference between the fair value and cost of the leased
property plus initial direct costs (net margins) is recorded as revenue at
the
inception of the lease. For operating leases, rental amounts are accrued on
a
straight-line basis over the lease term and are recognized as lease revenue.
SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,” establishes criteria for determining
whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral
in
a secured borrowing. Certain assignments of direct finance leases we make on
a
non-recourse basis meet the criteria for surrender of control set forth by
SFAS
No. 140 and have therefore been treated as sales for financial statement
purposes.
Sales
of
leased equipment represent revenue from the sales of equipment subject to a
lease in which we are the lessor. If the rental stream on such
lease has non-recourse debt associated with it, sales revenue is recorded at
the
amount of consideration received, net of the amount of debt assumed by the
purchaser. If there is no non-recourse debt associated with the rental stream,
sales revenue is recorded at the amount of gross consideration received, and
costs of sales is recorded at the book value of the lease. Sales of equipment
represents revenue generated through the sale of equipment sold primarily
through our technology business unit.
Lease
revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to our estimate of residual value.
We
assign
all rights, title, and interests in a number of our leases to third-party
financial institutions without recourse. These assignments are accounted for
as
sales since we have completed our obligations as of the assignment date,
and we retain no ownership interest in the equipment under lease.
Revenue
from hosting arrangements is recognized in accordance with EITF 00-3,
“Application of AICPA Statement of Position 97-2 to Arrangements That
Include the Right to Use Software Stored on Another Entity’s Hardware.” Our
hosting arrangements do not contain a contractual right to take possession
of
the software. Therefore, our hosting arrangements are not in the scope of SOP
97-2, “Software Revenue Recognition,” and require that the portion of
the fee allocated to the hosting elements be recognized as the service is
provided. Currently, the majority of our software revenue is generated through
hosting agreements and is included in fee and other income on our Condensed
Consolidated Statements of Operations.
Revenue
from sales of our software is recognized in accordance with SOP 97-2, as amended
by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP
97-2,” and SOP 98-9, “Modification of SOP 97-2 With Respect to Certain
Transactions.” We recognize revenue when all the following criteria exist:
(1) there is persuasive evidence that an arrangement exists; (2) delivery has
occurred; (3) no significant obligations by us related to services essential
to
the functionality of the software remain with regard to implementation; (4)
the
sales price is determinable; and (5) and it is probable that collection will
occur. Revenue from sales of our software is included in fee and other income
on
our Condensed Consolidated Statements of Operations.
At
the
time of each sale transaction, we make an assessment of the collectibility
of
the amount due from the customer. Revenue is only recognized at that time if
management deems that collection is probable. In making this assessment, we
consider customer creditworthiness and assess whether fees are fixed or
determinable and free of contingencies or significant uncertainties. If the
fee
is not fixed or determinable, revenue is recognized only as payments become
due
from the customer, provided that all other revenue recognition criteria are
met.
In assessing whether the fee is fixed or determinable, we consider the payment
terms of the transaction and our collection experience in similar transactions
without making concessions, among other factors. Our software license agreements
generally do not include customer acceptance provisions. However, if an
arrangement includes an acceptance provision, we record revenue only upon the
earlier of (1) receipt of written acceptance from the customer or (2) expiration
of the acceptance period.
Our
software agreements often include implementation and consulting services that
are sold separately under consulting engagement contracts or as part of the
software license arrangement. When we determine that such services are not
essential to the functionality of the licensed software and qualify as “service
transactions” under SOP 97-2, we record revenue separately for the license and
service elements of these agreements. Generally, we consider that a service
is
not essential to the functionality of the software based on various factors,
including if the services may be provided by independent third parties
experienced in providing such consulting and implementation in coordination
with
dedicated customer personnel. If an arrangement does not qualify for separate
accounting of the license and service elements, then license revenue is
recognized together with the consulting services using either the
percentage-of-completion or completed-contract method of contract accounting.
Contract accounting is also applied to any software agreements that include
customer-specific acceptance criteria or where the license payment is tied
to
the performance of consulting services. Under the percentage-of-completion
method, we may estimate the stage of completion of contracts with fixed or
“not
to exceed” fees based on hours or costs incurred to date as compared with
estimated total project hours or costs at completion. If we do not have a
sufficient basis to measure progress towards completion, revenue is recognized
upon completion of the contract. When total cost estimates exceed revenues,
we
accrue for the estimated losses immediately. The use of the
percentage-of-completion method of accounting requires significant judgment
relative to estimating total contract costs, including assumptions relative
to
the length of time to complete the project, the nature and complexity of the
work to be performed, and anticipated changes in salaries and other costs.
When
adjustments in estimated contract costs are determined, such revisions may
have
the effect of adjusting, in the current period, the earnings applicable to
performance in prior periods.
We
generally use the residual method to recognize revenues from agreements that
include one or more elements to be delivered at a future date when evidence
of
the fair value of all undelivered elements exists. Under the residual method,
the fair value of the undelivered elements (e.g., maintenance, consulting and
training services) based on vendor-specific objective evidence (“VSOE”) is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (i.e., software license). If evidence of the fair value
of
one or more of the undelivered services does not exist, all revenues are
deferred and recognized when delivery of all of those services has occurred
or
when fair values can be established. We determine VSOE of the fair value of
services revenue based upon our recent pricing for those services when sold
separately. VSOE of the fair value of maintenance services may also be
determined based on a substantive maintenance renewal clause, if any, within
a
customer contract. Our current pricing practices are influenced primarily by
product type, purchase volume, maintenance term and customer location. We review
services revenue sold separately and maintenance renewal rates on a periodic
basis and update our VSOE of fair value for such services to ensure that it
reflects our recent pricing experience, when appropriate.
Maintenance
services generally include rights to unspecified upgrades (when and if
available), telephone and Internet-based support, updates and bug fixes.
Maintenance revenue is recognized ratably over the term of the maintenance
contract (usually one year) on a straight-line basis and is included in fee
and
other income on our Condensed Consolidated Statements of Operations.
When
consulting qualifies for separate accounting, consulting revenues under time
and
materials billing arrangements are recognized as the services are performed.
Consulting revenues under fixed-price contracts are generally recognized using
the percentage-of-completion method. If there is a significant uncertainty
about
the project completion or receipt of payment for the consulting services,
revenue is deferred until the uncertainty is sufficiently resolved. Consulting
revenues are classified as fee and other income on our Condensed Consolidated
Statements of Operations.
Training
services include on-site training, classroom training and computer-based
training and assessment. Training revenue is recognized as the related training
services are provided and is included in fee and other income on our Condensed
Consolidated Statements of Operations.
Amounts
charged for our Procure+ service are recognized as services are
rendered. Amounts charged for the Manage+ service are recognized on a
straight-line basis over the contractual period for which the services are
provided. Fee and other income results from: (1) income from events that occur
after the initial sale of a financial asset; (2) remarketing fees; (3) brokerage
fees earned for the placement of financing transactions; and (4) interest and
other miscellaneous income. These revenues are included in fee and other income
in our Condensed Consolidated Statements of Operations.
RESIDUALS
— Residual values, representing the estimated value of equipment at the
termination of a lease, are recorded in our Condensed Consolidated Financial
Statements at the inception of each sales-type or direct financing lease as
amounts estimated by management based upon its experience and judgment.
Unguaranteed residual values for sales-type and direct financing leases are
recorded at their net present value and the unearned income is amortized over
the life of the lease using the interest method. The residual values for
operating leases are included in the leased equipment’s net book
value.
We
evaluate residual values on an ongoing basis and record any downward adjustment,
if required. No upward revision of residual values is made subsequent to lease
inception.
RESERVES
FOR CREDIT LOSSES — The reserve for credit losses (the “reserve”) is maintained
at a level believed by management to be adequate to absorb losses inherent
in
our lease and accounts receivable portfolio. Management’s determination of the
adequacy of the reserve is based on an evaluation of historical credit loss
experience, current economic conditions, volume, growth, the composition of
the
lease portfolio, and other relevant factors. The reserve is increased by
provisions for potential credit losses charged against income. Accounts are
either written off or written down when the loss is both probable and
determinable, after giving consideration to the customer’s financial condition,
the value of the underlying collateral and funding status (i.e., discounted
on a
non-recourse or recourse basis).
CASH
AND
CASH EQUIVALENTS — Cash and cash equivalents include funds in operating accounts
as well as money market funds.
INVENTORIES
— Inventories are stated at the lower of cost (weighted average basis) or
market.
PROPERTY
AND EQUIPMENT — Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the related assets,
which range from three to ten years.
CAPITALIZATION
OF COSTS OF SOFTWARE FOR INTERNAL USE — We have capitalized certain costs for
the development of internal use software under the guidelines of SOP 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.” Approximately $98 thousand and $399 thousand of
internal use software were capitalized for the six months ended September 30,
2006 and 2005, respectively, which is included in the accompanying
Condensed Consolidated Balance Sheets as a component of property and
equipment.
CAPITALIZATION
OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS — In accordance with SFAS
No. 86, “Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed,” software development costs are expensed as incurred
until technological feasibility has been established. At such time, costs are
capitalized until the product is made available for release to customers. For
the six months ended September 30, 2006 and 2005, costs of $59 thousand and
$26
thousand were capitalized for software to be made available to
customers.
INTANGIBLE
ASSETS — In June 2001, the FASB issued SFAS No. 141, “Business
Combinations.” SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations transacted after June 30,
2001.
SFAS No. 141 also specifies criteria that intangible assets acquired in a
business combination must be recognized and reported separately from
goodwill. In May 2004, we acquired certain assets and liabilities of
Manchester Technologies, Inc. The excess of the cost over the fair value of
net
tangible assets acquired was assigned to identifiable intangible assets and
goodwill utilizing the purchase method of accounting. The final determination
of
the purchase price allocation was based on the fair values of the assets and
liabilities assumed, including acquired intangible assets. This determination
was made by management through various means, including obtaining a third-party
valuation of identifiable intangible assets acquired and an evaluation of the
fair value of other assets and liabilities acquired.
Effective
January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible
Assets,” which eliminates amortization of goodwill and intangible assets
that have indefinite useful lives and requires annual tests of impairment of
those assets. SFAS No. 142 also provides specific guidance about how to
determine and measure goodwill and intangible asset impairments, and requires
additional disclosures of information about goodwill and other intangible
assets.
Further,
SFAS No. 142 requires us to perform an impairment test at least on an annual
basis at any time during the fiscal year, provided the test is performed at
the
same time every year. We perform the impairment test as of September 30th of
each year and follow the two-step process prescribed in SFAS No. 142 to test
our
goodwill for impairment under the goodwill impairment test. The first step
is to
screen for potential impairment, while the second step measures the amount
of
the impairment, if any.
IMPAIRMENT
OF LONG-LIVED ASSETS — We review long-lived assets, including property and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully recoverable. If the
total of the expected undiscounted future cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and the carrying value of the asset.
FAIR
VALUE OF FINANCIAL INSTRUMENTS — The carrying value of our financial
instruments, which include cash and cash equivalents, accounts receivable,
accounts payable and other accrued expenses, approximates fair value due to
their short maturities. The carrying amount of our non-recourse and recourse
notes payable approximates its fair value. We determined the fair value of
notes
payable by applying the average portfolio debt rate and applying such rate
to
future cash flows of the respective financial instruments. The estimated fair
value of our recourse and non-recourse notes payable at September 31, 2006
and
2005 was $177,638,963 and $152,161,962, compared to a carrying amount of
$177,194,735 and $152,311,053, respectively.
TREASURY
STOCK — We account for treasury stock under the cost method and include treasury
stock as a component of stockholders’ equity.
INCOME
TAXES — Deferred income taxes are accounted for in accordance with SFAS No. 109,
“Accounting for Income Taxes.” Under this method, deferred income tax
assets and liabilities are determined based on the temporary differences between
the financial statement reporting and tax bases of assets and liabilities,
using
tax rates currently in effect. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of these benefits
is considered to be more likely than not.
ESTIMATES
— The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
COMPREHENSIVE
INCOME — Comprehensive income consists of net income and foreign currency
translation adjustments. For the six months ended September 30, 2006 and 2005,
accumulated other comprehensive income increased $85.4 thousand and $100.9
thousand, respectively, resulting in total comprehensive income of $2.7 million
and $3.1 million, respectively.
EARNINGS
PER SHARE — Earnings per share (“EPS”) have been calculated in accordance with
SFAS No. 128, “Earnings per Share.” In accordance with SFAS No. 128,
basic EPS amounts were calculated based on weighted average shares outstanding
of 8,509,827 for the six months ended September 30, 2005 and 8,218,154 for
the
six months ended September 30, 2006. Diluted EPS amounts were calculated based
on weighted average shares outstanding and potentially dilutive common stock
equivalents of 9,071,092 for the six months ended September 30, 2005, and
8,586,866 for the six months ended September 30, 2006. Additional
shares included in the diluted EPS calculations are attributable to incremental
shares issuable upon the assumed exercise of stock options and other common
stock equivalents. Both basic and diluted EPS and weighted average
shares outstanding for the three and six months ended September 30, 2005 have
been restated for changes in measurement dates resulting from the Audit
Committee Investigation (as defined in Note 2, “Restatement of Consolidated
Financial Statements”).
STOCK-BASED
COMPENSATION — In December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS
No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB
25, “Accounting for Stock Issued to Employees,” and subsequently issued
stock option related guidance. This statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments. Entities are required
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award (usually
the
vesting period). The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award
is
modified after the grant date, incremental compensation expense will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification.
On
April
1, 2006, we adopted SFAS No. 123R and elected the modified-prospective
transition method. Under the modified-prospective method, we must recognize
compensation expense for all awards subsequent to adopting the standard and
for
the unvested portion of previously granted awards outstanding upon
adoption. We have recognized compensation expense equal to the fair
values for the unvested portion of share-based awards at April 1, 2006 over
the
remaining period of service, as well as compensation expense for those
share-based awards granted or modified on or after April 1, 2006 over the
vesting period based on the grant-date fair values using the straight-line
method. For those awards granted prior to the date of adoption, compensation
expense is recognized on an accelerated basis based on the grant-date fair
value
amount as calculated for pro forma purposes under SFAS No. 123.
RECENT
ACCOUNTING PRONOUNCEMENTS —In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections — A Replacement of APB Opinion No.
20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective
application, or the latest practical date, as the preferred method to report
a
change in accounting principle or correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. While the adoption of SFAS No. 154 did not
have a material impact on our Consolidated Financial Statements, the restatement
disclosures included herein comply with the provisions of the
standard.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”
(“FIN 48”). The interpretation clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” Specifically, the
pronouncement prescribes a recognition threshold and a measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. The interpretation also provides guidance
on the related derecognition, classification, interest and penalties, accounting
for interim periods, disclosure and transition of uncertain tax positions.
The
interpretation is effective for us on April 1, 2007. We are currently
evaluating the impact that FIN 48 will have on our financial condition and
results of operations.
During
September 2006, the SEC released SAB No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements.” SAB No. 108 requires a registrant to quantify all
misstatements that could be material to financial statement users under both
the
“rollover” and “iron curtain” approaches. If either approach results in
quantifying a misstatement that is material, the registrant must adjust its
financial statements. SAB No. 108 is applicable for our fiscal year 2007. We
are
currently evaluating the impact that SAB No. 108 will have on our financial
condition and results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with U.S. GAAP and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
does
not require any new fair value measurements. SFAS No. 157 is effective for
our
fiscal year 2009. We are currently evaluating the impact that SFAS No. 157
will
have on our financial condition and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115.” SFAS No. 159 gives companies an opportunity
to use fair value measurements in financial reporting and permits entities
to
measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact that SFAS
No. 159 will have on our financial condition and results of
operations.
2.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As
a
result of the errors discussed below, we have restated our Condensed
Consolidated Statements of Operations for the three and six months ended
September 30, 2005 and our Condensed Consolidated Statements of Cash Flows
for
the six months ended September 30, 2005 including related
disclosures.
Restatement
for Historical Stock Option Grants
Restated
Accounting for Historical Stock Option Grants
In
response to a letter received by our Chief Executive Officer (“CEO”), the Audit
Committee, with the assistance of outside legal counsel and forensic
accountants, commenced an investigation (“Audit Committee Investigation” or
“Investigation”) into our historical practices related to stock options,
including a review of option grant measurement dates. Prior to April
1, 2006, we accounted for all of our employee and director-based compensation
awards under APB 25 and provided the required disclosures in accordance with
SFAS No. 123.
In
connection with the Audit Committee Investigation, we performed a review of
stock option grants recorded for financial reporting purposes. Based
on the individual facts and circumstances, we concluded that the exercise price
for a number of option grants from our initial public offering (“IPO”) in 1996
through August 10, 2006 were below the fair market value of our common stock
on
the revised measurement date of the grant. This resulted from certain
option grant dates having been established prior to the completion of all the
final granting actions necessary for those grants. In some cases, the
exercise price and date of the grant was determined with hindsight to provide
a
more favorable exercise price for such grants at quarterly or monthly low stock
prices. The grants in question included grants made to newly hired
employees, annual director grants, grants made to employees in connection with
an acquisition, and discretionary grants made to officers, non-employee and
employee directors, and rank and file employees. Applying the revised
measurement dates to the impacted stock option grants resulted in a stock-based
compensation charge if the fair market value of our common stock as of the
revised measurement date exceeded the exercise price of the option grant, in
accordance with APB 25.
Based
on
the facts and circumstances, we concluded that we (1) used incorrect measurement
dates for the accounting of certain stock options, (2) had not properly
accounted for certain modifications of stock options, and (3) had incorrectly
accounted for certain stock options that required the application of the
variable accounting method.
We
determined revised measurement dates for those option grants with incorrect
measurement dates and recorded stock-based compensation expense to the extent
that the fair market value of our stock on the revised measurement date exceeded
the exercise price of the stock option, in accordance with APB 25 and related
FASB interpretations. Additionally, we restated both basic and diluted weighted
average shares outstanding for changes in measurement dates resulting from
the
Investigation which also resulted in a change in the assumptions utilized in
the
Black-Scholes option pricing model for the six months ended September 30, 2005.
The combination of recording stock-based compensation expense and restating
our
weighted average shares outstanding has resulted in restated basic and diluted
EPS.
We
also
determined that we should have recorded stock-based compensation expense
associated with the modification of certain stock option grants which resulted
in the application of variable accounting under FASB Interpretation No. 44,
“Accounting for Certain Transactions Involving Stock Compensation”
(“FIN 44”). The modified grants included certain grants made to newly
hired employees, annual director grants, grants made to employees in connection
with an acquisition, and discretionary grants made to officers, employee
directors, and rank and file employees. For these grants,
documentation exists that supports the completion of all the final granting
actions necessary for an original grant and measurement
date. However, certain of the terms of the awards were subsequently
modified.
Income
and Payroll Tax Related Matters
In
certain instances where a revised measurement date was applied to those stock
options classified as incentive stock options (“ISO”), in accordance with United
States tax rules it had the effect of disqualifying the ISO tax treatment
of
those stock options, causing those stock options to be recharacterized as
non-qualified options. For purposes of assessing the tax impact of
the accounting change, we concluded that the grant date for tax purposes
is the
same as the measurement date for financial reporting purposes. The
recharacterization of the ISOs to non-qualified status resulted in a failure
to
withhold certain employee payroll taxes and consequently we have recorded
an
adjustment to salaries and benefits, along with an adjustment to interest
and
financing costs for penalties and interest, based on the period of exercise.
In
subsequent periods in which the liabilities
were legally extinguished due to statutes of limitations, the payroll taxes,
interest and penalties were reversed, and recognized as a reduction in the
related functional expense category in our Condensed Consolidated Statements
of
Operations.
Summary
of the Restatement — Other Items
In
addition to the stock option errors described above, we have also restated
our
Condensed Consolidated Statements of Cash Flows for the six months ended
September 30, 2005 for the following reasons:
We
use floor planning agreements for dealer financing of products purchased
from distributors and resold to end-users. Historically, we classified the
cash flows from our floor plan financing agreements in operating activities
in our Condensed Consolidated Statements of Cash Flows. We previously
treated the floor plan facility as an outsourced accounts payable function,
and,
therefore, considered the payments made by our floor plan facility as cash
paid to suppliers under Financial Accounting Standards No. 95, “Statement of
Cash Flows.”
We have
now determined that when an unaffiliated finance company remits payments to
our
suppliers on our behalf, we should show this transaction as a financing
cash inflow and an operating cash outflow. In addition, when we repay
the financing company, we should present this transaction as a financing
cash outflow. As a result, we have restated the accompanying Condensed
Consolidated Statements of Cash Flows for the six months ended September 30,
2005 to correct this error.
Also,
payments made by our lessees directly to third-party, non-recourse lenders
were
previously reported on our Condensed Consolidated Statements of Cash Flows
as
repayments of non-recourse debt in the financing section and a decrease in
our
investment in leases and leased equipment—net in the operating section. As these
payments were not received or disbursed by us, management determined that these
amounts should not be shown as cash used in financing activities and cash
provided by operating activities on our Condensed Consolidated Statements of
Cash Flows. Rather, these payments are now disclosed as a non-cash
financing activity on our Condensed Consolidated Statements of Cash
Flows.
In
addition, certain corrections were made for errors noted on our Condensed
Consolidated Statements of Cash Flows between the line items reserve for credit
losses and changes in accounts receivable, both of which are in the operating
section.
Reclassifications
We
have
also reclassified certain items for our September 30, 2005 Condensed
Consolidated Statement of Cash Flows to conform to our presentation on our
September 30, 2006 Condensed Consolidated Statement of Cash
Flows. These reclassifications include: (1) certain liabilities that
had been included in accounts payable—trade have been reclassified to accrued
expenses and other liabilities; and (2) certain personal property taxes have
been reclassified to eliminate from investment in leases and leased
equipment—net and accounts payable—equipment.
Impact
of the Restatement
The
following tables present the effects of the restatement and reclassifications
on
our previously issued Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 2005 and the Condensed Consolidated
Statements of Cash Flows for the six months ended September 30, 2005 (in
thousands, except per share data):
UNAUDITED
CONDENSED
|
|
|
|
|
Adjustments
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
Stock-Based
|
|
|
|
|
|
|
As
Previously
|
|
|
Compensation
and
|
|
|
|
|
Three
Months Ended September 30, 2005
|
|
Reported
|
|
|
Tax
Impact
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
159,409
|
|
|
|
-
|
|
|
$ |
159,409
|
|
Lease
revenues
|
|
|
11,916
|
|
|
|
-
|
|
|
|
11,916
|
|
Fee
and other income
|
|
|
2,918
|
|
|
|
-
|
|
|
|
2,918
|
|
Total
Revenue
|
|
|
174,243
|
|
|
|
-
|
|
|
|
174,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
143,742
|
|
|
|
-
|
|
|
|
143,742
|
|
Direct
lease costs
|
|
|
3,798
|
|
|
|
-
|
|
|
|
3,798
|
|
Professional
and other fees
|
|
|
1,776
|
|
|
|
-
|
|
|
|
1,776
|
|
Salaries
and benefits
|
|
|
15,012
|
|
|
|
276
|
|
|
|
15,288
|
|
General
and administrative expenses
|
|
|
4,975
|
|
|
|
-
|
|
|
|
4,975
|
|
Interest
and financing costs
|
|
|
1,715
|
|
|
|
2
|
|
|
|
1,717
|
|
Total
Costs and Expenses
|
|
|
171,018
|
|
|
|
278
|
|
|
|
171,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Before Provision for Income Taxes
|
|
|
3,225
|
|
|
|
(278 |
) |
|
|
2,947
|
|
Provision
for Income Taxes
|
|
|
1,306
|
|
|
|
(108 |
) |
|
|
1,198
|
|
Net
Earnings
|
|
$ |
1,919
|
|
|
$ |
(170 |
) |
|
$ |
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.23
|
|
|
$ |
(0.02 |
) |
|
$ |
0.21
|
|
Diluted
|
|
$ |
0.21
|
|
|
$ |
(0.02 |
) |
|
$ |
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Used in Computing Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,474,301
|
|
|
|
-
|
|
|
|
8,474,301
|
|
Diluted
|
|
|
9,070,969
|
|
|
|
501
|
|
|
|
9,071,470
|
|
UNAUDITED
CONDENSED
|
|
|
|
|
Adjustments
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
Stock-Based
|
|
|
|
|
|
|
As
Previously
|
|
|
Compensation
and
|
|
|
|
|
Six
Months Ended September 30, 2005
|
|
Reported
|
|
|
Tax
Impact
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
294,278
|
|
|
$ |
-
|
|
|
$ |
294,278
|
|
Lease
revenues
|
|
|
23,211
|
|
|
|
-
|
|
|
|
23,211
|
|
Fee
and other income
|
|
|
6,558
|
|
|
|
-
|
|
|
|
6,558
|
|
Total
Revenue
|
|
|
324,047
|
|
|
|
-
|
|
|
|
324,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
265,830
|
|
|
|
-
|
|
|
|
265,830
|
|
Direct
lease costs
|
|
|
7,594
|
|
|
|
-
|
|
|
|
7,594
|
|
Professional
and other fees
|
|
|
2,724
|
|
|
|
-
|
|
|
|
2,724
|
|
Salaries
and benefits
|
|
|
29,805
|
|
|
|
272
|
|
|
|
30,077
|
|
General
and administrative expenses
|
|
|
9,437
|
|
|
|
-
|
|
|
|
9,437
|
|
Interest
and financing costs
|
|
|
3,252
|
|
|
|
2
|
|
|
|
3,254
|
|
Total
Costs and Expenses
|
|
|
318,642
|
|
|
|
274
|
|
|
|
318,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Before Provision for Income Taxes
|
|
|
5,405
|
|
|
|
(274 |
) |
|
|
5,131
|
|
Provision
for Income Taxes
|
|
|
2,189
|
|
|
|
(107 |
) |
|
|
2,082
|
|
Net
Earnings
|
|
$ |
3,216
|
|
|
$ |
(167 |
) |
|
$ |
3,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.38
|
|
|
$ |
(0.02 |
) |
|
$ |
0.36
|
|
Diluted
|
|
|
0.36
|
|
|
$ |
(0.02 |
) |
|
$ |
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Used in Computing Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,509,827
|
|
|
|
-
|
|
|
|
8,509,827
|
|
Diluted
|
|
|
9,057,606
|
|
|
|
13,486
|
|
|
|
9,071,092
|
|
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
Six
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
Lessee
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
Previously
|
|
Stock-Based
|
|
Floor
|
|
to
|
|
|
|
As
|
|
|
|
Reported
|
|
Compensation
|
|
Plan
|
|
Lenders
|
|
Other
|
|
Restated
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
3,216
|
|
$ |
(167 |
) |
$ |
-
|
|
$ |
-
|
|
$ |
-
|
|
$ |
3,049
|
|
Adjustments
to reconcile net earnings to net cash used |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,035
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,035
|
|
Write-off
of non-recourse debt
|
|
|
(209 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(209 |
) |
Reserve
for credit losses
|
|
|
80
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80
|
|
Impact
of stock-based compensation
|
|
|
-
|
|
|
167
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
167
|
|
Tax
benefit of stock options exercised
|
|
|
18
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18
|
|
Deferred
taxes
|
|
|
(327 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(327 |
) |
Payments
from lessees directly to lenders
|
|
|
(3,139 |
) |
|
-
|
|
|
-
|
|
|
545
|
|
|
-
|
|
|
(2,594 |
) |
Loss
on disposal of property and equipment
|
|
|
67
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67
|
|
Gain
on disposal of operating lease equipment
|
|
|
(224 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(224 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(28,143 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(28,143 |
) |
Notes
receivable
|
|
|
28
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28
|
|
Inventories
|
|
|
(1,788 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,788 |
) |
Investment
in leases and leased equipment - net
|
|
|
(8,161 |
) |
|
-
|
|
|
-
|
|
|
(10,254 |
) |
|
148
|
|
|
(18,267 |
) |
Other
assets
|
|
|
(83 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(83 |
) |
Accounts
payable - equipment
|
|
|
1,962
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(148 |
) |
|
1,814
|
|
Accounts
payable - trade
|
|
|
3,289
|
|
|
-
|
|
|
(5,241 |
) |
|
-
|
|
|
3,770
|
|
|
1,818
|
|
Salaries
and commissions payable, accrued expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and other liabilities
|
|
|
(11,993 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,770 |
) |
|
(15,763 |
) |
Net
cash used in operating activities
|
|
|
(37,372 |
) |
|
-
|
|
|
(5,241 |
) |
|
(9,709 |
) |
|
-
|
|
|
(52,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of operating equipment
|
|
|
685
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
685
|
|
Purchases
of operating lease equipment
|
|
|
(17,846 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,846 |
) |
Proceeds
from sale of property and equipment
|
|
|
44
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
44
|
|
Purchases
of property and equipment
|
|
|
(1,178 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,178 |
) |
Net
cash used in investing activities
|
|
|
(18,295 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
|
40,305
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,305
|
|
Repayments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
|
(26,793 |
) |
|
-
|
|
|
-
|
|
|
9,709
|
|
|
-
|
|
|
(17,084 |
) |
Purchase
of treasury stock
|
|
|
(2,076 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,076 |
) |
Proceeds
from issuance of capital stock, net of expenses
|
|
|
109
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
109
|
|
Net
borrowings on floor-planning facility
|
|
|
-
|
|
|
-
|
|
|
5,241
|
|
|
-
|
|
|
-
|
|
|
5,241
|
|
Net
borrowings on lines of credit
|
|
|
21,044
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,044
|
|
Net
cash provided by financing activities
|
|
|
32,589
|
|
|
-
|
|
|
5,241
|
|
|
9,709
|
|
|
-
|
|
|
47,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
101
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(22,977 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(22,977 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
38,852
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
38,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
15,875
|
|
$ |
-
|
|
$ |
-
|
|
$ |
-
|
|
$ |
-
|
|
$ |
15,875
|
|
3.
INVESTMENT IN LEASES AND LEASED EQUIPMENT—NET
Investment
in leases and leased equipment—net consists of the following (in
thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
September
30, 2006
|
|
Investment
in direct financing and sales-type leases-net
|
|
$ |
155,910
|
|
|
$ |
166,765
|
|
Investment
in operating lease equipment-net
|
|
|
49,864
|
|
|
|
56,413
|
|
|
|
$ |
205,774
|
|
|
$ |
223,178
|
|
INVESTMENT
IN DIRECT FINANCING AND SALES-TYPE LEASES—NET
Our
investment in direct financing and sales-type leases—net consists of the
following (in thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
September
30, 2006
|
|
Minimum
lease payments
|
|
$ |
149,200
|
|
|
$ |
160,874
|
|
Estimated
unguaranteed residual value (1)
|
|
|
23,804
|
|
|
|
23,977
|
|
Initial
direct costs, net of amortization (2)
|
|
|
1,763
|
|
|
|
1,757
|
|
Less: Unearned
lease income
|
|
|
(15,944 |
) |
|
|
(17,266 |
) |
Reserve
for credit losses
|
|
|
(2,913 |
) |
|
|
(2,577 |
) |
Investment
in direct finance and sales-type leases-net
|
|
$ |
155,910
|
|
|
$ |
166,765
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
estimated unguaranteed residual values of $1,451 and $1,394 as of
March
31, 2006 and
September 30, 2006, respectively, for direct financing SFAS 140 leases
which have been sold.
|
|
|
|
(2) Initial
direct costs are shown net of amortization of $1,786 and $1,418 as
of
March 31, 2006 and September 30, 2006, respectively.
|
|
Our
net
investment in direct financing and sales-type leases is collateral for
non-recourse and recourse equipment notes, if any.
INVESTMENT
IN OPERATING LEASE EQUIPMENT—NET
Investment
in operating lease equipment—net primarily represents leases that do not qualify
as direct financing leases or are leases that are short-term renewals on a
month-to-month basis. The components of the net investment in operating lease
equipment—net are as follows (in thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
September
30, 2006
|
|
Cost
of equipment under operating leases
|
|
$ |
71,786
|
|
|
$ |
84,314
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(21,922 |
) |
|
|
(27,901 |
) |
Investment
in operating lease equipment-net
|
|
$ |
49,864
|
|
|
$ |
56,413
|
|
4.
RESERVES FOR CREDIT LOSSES
As
of
March 31, 2006 and September 30, 2006, our activity in our reserves for credit
losses is as follows (in thousands):
|
|
Accounts
|
|
|
Lease-Related
|
|
|
|
|
|
|
Receivable
|
|
|
Assets
|
|
|
Total
|
|
Balance
April 1, 2005
|
|
$ |
1,959
|
|
|
$ |
3,056
|
|
|
$ |
5,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
debts expense
|
|
|
1,033
|
|
|
|
-
|
|
|
|
1,033
|
|
Recoveries
|
|
|
(308 |
) |
|
|
-
|
|
|
|
(308 |
) |
Write-offs
and other
|
|
|
(624 |
) |
|
|
(143 |
) |
|
|
(767 |
) |
Balance
March 31, 2006
|
|
$ |
2,060
|
|
|
$ |
2,913
|
|
|
$ |
4,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
debts expense
|
|
|
976
|
|
|
|
(100 |
) |
|
|
876
|
|
Recoveries
|
|
|
(333 |
) |
|
|
-
|
|
|
|
(333 |
) |
Write-offs
and other
|
|
|
(131 |
) |
|
|
(236 |
) |
|
|
(367 |
) |
Balance
September 30, 2006
|
|
$ |
2,572
|
|
|
$ |
2,577
|
|
|
$ |
5,149
|
|
5.
RECOURSE AND NON-RECOURSE NOTES
PAYABLE
Recourse
and non-recourse obligations consist of the following (in
thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance Corporation – Recourse accounts receivable
component of our credit facility bearing interest at prime less 0.5%
(7.75% at September 30, 2006) with a maximum balance of $30,000,000.
Either party may terminate with 90 days’ advance notice.
|
|
$ |
-
|
|
|
$ |
1,700
|
|
|
|
|
|
|
|
|
|
|
National
City Bank – Recourse credit facility of $35,000,000 expiring on July 21,
2009. At our option, carrying interest rate is either LIBOR rate
plus
175–250 basis points, or the Alternate Base Rate of the higher of prime,
or federal funds rate plus 50 basis points, plus 0–25 basis points of
margin. The interest rate at September 30, 2006 was 8.25%.
|
|
|
6,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total
recourse obligations
|
|
$ |
6,000
|
|
|
$ |
16,700
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
equipment notes secured by related investment in leases with interest
rates ranging from 3.05% to 9.25% in fiscal year 2006 and the six
months
ended September 30, 2006.
|
|
$ |
127,973
|
|
|
$ |
160,495
|
|
There
are
two components of the GE Commercial Distribution Finance Corporation (“GECDF”)
credit facility: (1) a floor plan component and (2) an accounts receivable
component. As of September 30, 2006 and as a result of the June 29, 2006
amendment, the facility agreement had an aggregate limit of the two components
of $85.0 million, and the accounts receivable component had a sub-limit of
$30
million other than during the overline period from June 26, 2006 through
September 21, 2006 in which the aggregate limit of the two components was $100.0
million. Effective June 20, 2007, the facility with GECDF was again
amended to temporarily increase the total credit facility limit to $100.0
million during the period from June 19, 2007 through August 15, 2007. On August
2, 2007, the period was extended from August 15, 2007 to September 30, 2007.
Other than during the temporary increase periods described above, the total
credit facility limit is $85.0 million. Availability under the GECDF facility
may be limited by the asset value of equipment we purchase and may be further
limited by certain covenants and terms and conditions of the facility. We were
in compliance with these covenants as of September 30, 2006.
The
facility provided by GECDF requires a guaranty of up to $10.5 million by
ePlus inc. The guaranty requires ePlus inc. to deliver its
annual audited financial statements by a certain date. We have not delivered
the
annual audited financial statements for the year ended March 31, 2007; however,
GECDF has extended the delivery date to provide the financial statements through
November 30, 2007. The loss of the GECDF credit facility could have a material
adverse effect on our future results as we currently rely on this facility
and
its components for daily working capital and liquidity for our technology sales
business and as an operational function of our accounts payable
process.
Borrowings
under our $35 million line of credit from National City Bank are subject to
and
in compliance with certain covenants regarding minimum consolidated tangible
net
worth, maximum recourse debt to net worth ratio, cash flow coverage, and minimum
interest expense coverage ratio. We were in compliance with or had
received amendments extending these covenants as of September 30, 2006. The
borrowings are secured by our assets such as leases, receivables, inventory,
and
equipment. Borrowings are limited to our collateral base, consisting of
equipment, lease receivables and other current assets, up to a maximum of $35
million. In addition, the credit agreement restricts, and under some
circumstances prohibits, the payment of dividends.
The
National City Bank facility requires the delivery of our Audited and Unaudited
Financial Statements, and pro forma financial projections, by certain
dates. We have not delivered the following documents as required by
Section 5.1 of the facility: (a) annual Audited Financial Statements for the
year ended March 31, 2007; (b) “Projections” for our fiscal year ended March 31,
2008; and (c) quarterly Unaudited Financial Statements for the quarters ended
September 30, 2006, December 31, 2006 and June 30, 2007. We entered
into the following amendments which have extended the delivery date requirements
for these documents: a First Amendment dated July 11, 2006, a Second Amendment
dated July 28, 2006, a third Amendment dated August 30, 2006, a Fourth Amendment
dated September 27, 2006, a Fifth Amendment dated November 15, 2006, a Sixth
Amendment dated January 11, 2007, a Seventh Amendment dated March 12, 2007,
an
Eighth Amendment dated June 27, 2007 and a Ninth Amendment dated August 22,
2007. As a result of the amendments, the agents agreed, inter
alia, to extend through November 30, 2007.
We
believe we will receive additional extensions from our lenders, if needed,
regarding our requirement to provide financial statements as described above
through the date of delivery of the documents. However, we cannot guarantee
that
we will receive any such additional extensions.
6.
RELATED PARTIES
We
lease
50,322 square feet for use as our principal headquarters from Norton Building
1,
LLC. The annual rent is $19.50 per square foot for the first year, with a rent
escalation of three percent per year for each year thereafter. Phillip G. Norton
is the manager of Norton Building 1, LLC and is Chairman of the Board,
President, and CEO of ePlus inc. The lease is at or below
market taking into consideration the rental charges and the ability to terminate
the lease. During the three and six months ended September 30, 2006, we
paid rent in the amount of $238 thousand and $472 thousand,
respectively. During the three and six months ended September 30,
2005, we paid rent in the amount of $219 thousand and $439 thousand,
respectively.
During
the six months ended September 30, 2005, we reimbursed the landlord for certain
construction costs in the amount of $280 thousand, which will be amortized
over
the lease term. There was no such reimbursement during the six months
ended September 30, 2006. The capitalized reimbursement is included
in property and equipment—net on our Condensed Consolidated Balance
Sheets.
7.
COMMITMENTS AND CONTINGENCIES
Litigation
We
have
been named a defendant in three lawsuits and one bankruptcy adversary proceeding
concerning a lessee named Cyberco Holdings, Inc. (“Cyberco”), which was
perpetrating a fraud related to installment sales that were assigned to various
lenders and were non-recourse to us. Two of the suits have been
resolved, and two are pending.
In
one of
the lawsuits, filed on January 4, 2005, an underlying lender, GMAC Commercial
Finance, L.L.C. (“GMAC”), sought approximately $10,646,230. On July
24, 2006, we settled the case for a $6,000,000 payment by us to GMAC, which
we
have recorded in the period ended March 31, 2006.
In
the
second lawsuit, which was filed on May 10, 2005, another underlying lender,
Banc
of America Leasing and Capital, LLC (“BoA”) sought repayment from ePlus
Group, inc. of approximately $3,062,792 plus interest and attorneys’
fees. The case went to trial, and a final judgment in favor of BoA
was entered on February 6, 2007. We recorded $4,081,697, representing
the $3,025,000 verdict, $871,232 in attorneys’ fees and $185,465 in interest and
other costs in the fiscal year ended March 31, 2006. We have recorded
additional interest of $36,033 in the quarter ended June 30, 2006 and $36,429
in
the quarter ended September 30, 2006. We paid the total judgment in two
payments, the last of which was made on June 15, 2007.
The
third
non-bankruptcy lawsuit was filed on November 3, 2006 by BoA against
ePlus inc., seeking to enforce a guaranty in which ePlus inc.
guaranteed ePlus Group, inc.’s obligations to BoA relating to the
Cyberco transaction. ePlus Group has already paid to BoA the judgment
in the second lawsuit referenced above. The suit against ePlus seeks attorneys'
fees BoA incurred in ePlus' appeal of BoA's suit against ePlus Group referenced
above, expenses that may be incurred in a bankruptcy adversary proceeding
relating to Cyberco, attorneys' fees incurred by BoA in defending a pending
suit
by ePlus Group against BoA, and any other costs or fees relating to any of
the
described matters. The trial is scheduled to begin November 20, 2007. We are
vigorously defending the suit. We cannot predict the outcome of the suit against
ePlus inc. We believe a loss is not probable, and we have not accrued
for this matter.
In
the
bankruptcy adversary proceeding, which was filed on December 7, 2006, Cyberco’s
bankruptcy trustee is seeking approximately $775,000 as alleged preferential
transfers. Discovery has commenced. We cannot predict the
outcome of this litigation. We dispute that we are liable, believe we
have strong defenses to the claims and intend to vigorously defend against
them. We believe a loss is not probable, and we have not accrued for
this matter.
On
December 11, 2006, ePlus inc. and SAP America, Inc. and its German
parent, SAP AG (collectively, “SAP”) entered into a Patent License and
Settlement Agreement (the “Agreement”) to settle a patent lawsuit between the
companies which we filed on April 20, 2005. Under the terms of the
Agreement, we will license to SAP our existing patents, together with those
developed and/or acquired by us within the next five years, in exchange for
a
one-time cash payment to us of $17,500,000, which was paid by SAP on January
16,
2007. In addition, SAP has agreed not to pursue legal action against
us for patent infringement as to any of our current lines of business on any
of
SAP’s patents for a period of five years. The Agreement also provides
for general release, indemnification for its violation, and dismisses the
existing litigation with prejudice.
On January 18, 2007, a stockholder
derivative action related to stock option practices was filed in the United
States District Court for the District of Columbia. The complaint names
ePlus inc. as nominal defendant, and personally names eight individual
defendants who are directors and/or executive officers of ePlus. The
complaint alleges violations of federal securities law and various state law
claims such as breach of fiduciary duty, waste of corporate assets and unjust
enrichment. We are currently preparing a response to the plaintiff’s amended
complaint. The amended complaint seeks monetary damages from the individual
defendants and that we take certain corrective actions relating to option grants
and corporate governance, and attorneys' fees. No amount has been accrued for
this matter.
We
are
also engaged in other ordinary and routine litigation incidental to our
business. While we cannot predict the outcome of these various legal
proceedings, management believes that a loss is not probable and no amount
has
been accrued for these matters.
Regulatory
and Other Legal Matters
As
discussed in more detail in Note 2, “Restatement of Consolidated Financial
Statements,” to our Unaudited Condensed Consolidated Financial Statements, the
Audit Committee commenced an investigation of stock option grants by us since
our IPO in 1996. In August 2006, the Audit Committee voluntarily contacted
and
advised the staff of the SEC of its Investigation and the Audit Committee’s
preliminary conclusion that a restatement will be required. The SEC opened
an
informal inquiry. We have and will continue to cooperate with the
staff. No amount has been accrued for this matter.
We
are
currently engaged in a dispute with the government of the District of Columbia
(“DC”) regarding personal property taxes on property we financed for our
customers. DC is seeking approximately $508,000 plus interest and
penalties, relating to property we financed for our customers. We
believe the tax is owed by our customers, and are seeking resolution in DC’s
Office of Administrative Hearings. We cannot predict the outcome of
this matter. While management does not believe this matter will have
a material effect on our financial condition and results of operations,
resolution of this dispute is ongoing. No amount has been accrued for this
matter.
8.
EARNINGS PER SHARE
Basic
and
diluted income per share amounts are determined in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Basic income
per share is computed using the weighted average number of shares of common
stock outstanding for the period. Diluted income per share is
computed using the weighted average number of shares of common stock, adjusted
for the dilutive effect of potential common stock. Potential common
stock, computed using the treasury stock method or the if-converted method,
includes options.
The
following table provides a reconciliation of the numerators and denominators
used to calculate basic and diluted net income per common share as disclosed
in
our Condensed Consolidated Statement of Operations for the three and six months
ended September 30, 2005 and 2006.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders—basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
$ |
1,749
|
|
|
$ |
978
|
|
|
$ |
3,049
|
|
|
$ |
3,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding—basic
|
|
|
8,474
|
|
|
|
8,229
|
|
|
|
8,510
|
|
|
|
8,218
|
|
In-the-money
options exercisable under stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation plans
|
|
|
597
|
|
|
|
196
|
|
|
|
561
|
|
|
|
369
|
|
Weighted
average common shares outstanding—diluted
|
|
|
9,071
|
|
|
|
8,425
|
|
|
|
9,071
|
|
|
|
8,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.21
|
|
|
$ |
0.12
|
|
|
$ |
0.36
|
|
|
$ |
0.37
|
|
Diluted
|
|
$ |
0.19
|
|
|
$ |
0.12
|
|
|
$ |
0.34
|
|
|
$ |
0.35
|
|
________________
(1)
See Note 2, “Restatement of Consolidated Financial Statements.”
9.
STOCK REPURCHASE
On
November 17, 2004, a purchase program was authorized by our Board. This program
authorized the repurchase of up to 3,000,000 shares of our outstanding common
stock over a period of time ending no later than November 17, 2005 and was
limited to a cumulative purchase amount of $7,500,000. On March 2, 2005, our
Board approved an increase, from $7,500,000 to $12,500,000, for the maximum
total cost of shares that could be purchased, which expired November 17, 2005.
On November 18, 2005, the Board authorized a new stock repurchase program of
up
to 3,000,000 shares with a cumulative purchase limit of
$12,500,000.
During
the six months ended September 30, 2006, we repurchased 209,000 shares of our
outstanding common stock for $2.9 million, whereas during the six months ended
September 30, 2005, we repurchased 170,300 shares for $2.1 million. Since
the inception of our initial repurchase program on September 20, 2001, and
as of
September 30, 2006, we had repurchased 2,978,990 shares of our outstanding
common stock at an average cost of $11.04 per share for a total of
$32.9 million. As of September 30, 2006, a maximum purchase
amount of $7,856,187 and up to 808,416 shares were available under the stock
repurchase program which expired November 17, 2006.
10.
STOCK-BASED COMPENSATION
Adoption
of SFAS No. 123R
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS No. 123
“Accounting for Stock-Based Compensation,” and supersedes APB 25,
“Accounting for Stock Issued to Employees,” and subsequently issued
stock option related guidance. This statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments. Entities are required
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award (usually
the
vesting period). The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award
is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the
modification.
On
April 1, 2006, we adopted SFAS No. 123R using the modified prospective
transition method. We have recognized compensation cost equal to the fair values
for the unvested portion of share-based awards at April 1, 2006 over the
remaining period of service, as well as compensation cost for those share-based
awards granted or modified on or after April 1, 2006 over the vesting period
based on the grant-date fair values using the straight-line method. The fair
values were estimated using the Black-Scholes option pricing
model. For those awards granted prior to the date of adoption,
compensation expense is recognized on an accelerated basis based on the
grant-date fair value amount as calculated for pro forma purposes under SFAS
No.
123.
Stock
Option Plans
We
issued
only incentive and non-qualified stock option awards, and, except as noted
below, each grant was issued under one of the following five plans; (1) the
1996
Stock Incentive Plan (the “1996 SIP”), (2) Amendment and Restatement of the 1996
Stock Incentive Plan (“the Amended SIP”) (collectively the “1996 Plans”), (3)
the 1998 Long-Term Incentive Plan (the “1998 LTIP”), (4) Amendment and
Restatement of the 1998 Long-Term Incentive Plan (2001) (the “Amended LTIP
(2001)“) or (5) Amendment and Restatement of the 1998 Long-Term Incentive Plan
(2003) (the “Amended LTIP (2003)”). A summary of the plans are detailed below.
All the stock option plans require the use of the previous trading day’s closing
price when the grant date falls on a date the stock was not traded.
In
addition, at the IPO, there were 245,000 options issued that were not part
of
any plan, but issued under various employment agreements.
1996
Stock Incentive Plan
The
allowable number of outstanding shares under this plan was 155,000. On September
1, 1996, the Board adopted this plan, and it was effective on November 8, 1996
when the SEC declared our Registration Statement on Form S-1 effective in
connection with our IPO on November 20, 1996. The 1996 SIP is comprised of
an
Incentive Stock Option Plan, a Nonqualified Stock Option Plan, and an Outside
Director Stock Option Plan. Each of the components of the 1996 Plans provided
that options would only be granted after execution of an Option Agreement.
Except for the number of options awarded to directors, the salient provisions
of
the 1996 SIP are identical to the Amended SIP, which is more fully described
below.
With
regard to director options, the 1996 Outside Director Stock Option Plan provided
for 10,000 options to be granted to each non-employee director upon completion
of the IPO, and 5,000 options to be granted to each non-employee director on
the
anniversary of each full year of his or her services as a director of
ePlus As with the other components of the 1996 Plans, the director
options would be granted only after execution of an Option
Agreement.
Amendment
and Restatement of 1996 Stock Incentive Plan
The
1996
SIP was amended via an Amendment and Restatement of 1996 Stock Incentive Plan.
The primary purpose of the amendment was to increase the aggregate number of
shares allocated to the plan by making the shares available a percentage (20%)
of total shares outstanding rather than a fixed number.
The
Amended SIP also provided for an employee stock purchase plan and permitted
the
Board to establish other restricted stock and performance-based stock awards
and
programs. The Amended SIP was adopted by the Board and became effective on
May
14, 1997, subject to approval at the annual shareholders’ meeting that fall. The
Amended SIP was adopted by shareholders at the annual meeting on September
30,
1997.
1998
Long-Term Incentive Plan
The
1998
LTIP was adopted by the Board on July 28, 1998, which is its effective date,
and
approved by the shareholders on September 16, 1998. The allowable number of
shares under the 1998 LTIP is 20% of the outstanding shares, less shares
previously granted and shares purchased through our employee stock purchase
program. The 1998 LTIP shares many characteristics of the earlier plans. It
also
specified that options be priced at not less than fair market value. The 1998
LTIP consolidated the preexisting plans and made the Compensation Committee
of
the Board responsible for its administration. In addition, the 1998 LTIP
eliminated the language of the 1996 Plans that “options shall be granted only
after execution of an Option Agreement”. Thus, while the 1998 LTIP does require
that grants be evidenced in writing, the writing is not a condition precedent
to
the grant of the award.
Another
change to note is the modification of the LTIP as it relates to options awarded
to directors. Under the 1998 LTIP, instead of being awarded on the anniversary
of the director’s service, the options were to be automatically awarded the day
after the annual shareholders meeting to all directors in service as of that
day. It also permits for discretionary option awards to directors.
Amended
and Restated 1998 Long-Term Incentive Plan
Minor
amendments were made to the 1998 LTIP on April 1, April 17 and April 30, 2001.
The amendments change the name of the plan from the 1998 Long-Term Incentive
Plan to the Amended and Restated 1998 Long-Term Incentive Plan referred to
herein as Amended LTIP (2001). In addition, provisions were added “to allow the
Compensation Committee to delegate to a single board member the authority to
make awards to non-Section 16 insiders, as a matter of convenience,” and to
provide that “no option granted under the Plan may be exercisable for more than
ten years from the date of its grant.”
The
Amended LTIP (2001) was amended on July 15, 2003 by the Board and approved
by
the stockholders on September 18, 2003 referred to herein as Amended LTIP
(2003). Primarily the amendment modified the aggregate number of shares
available under the plan to 3,000,000. Although the language varies somewhat
from earlier plans, it permits the Board or Compensation Committee to delegate
authority to a committee of one or more directors who are also officers of
the
corporation to award options under certain conditions. The Amended LTIP (2003)
replaced all the prior plans, is our current plan and covers option grants
for
employees, executives and outside directors.
As
of
September 30, 2006, a total of 2,839,114 shares of common stock have been
reserved for issuance upon exercise of options granted under the Amended LTIP
(2003).
Stock-Based
Compensation Expense
Prior
to
the adoption of SFAS No. 123R, we accounted for stock-based compensation expense
under APB 25 and related interpretations and disclosed certain pro forma net
income and EPS information as if we had applied the fair value recognition
provisions of SFAS No. 123 as amended by SFAS No. 148 “Accounting for
Stock-Based Compensation — Transition and
Disclosure.” Accordingly, we measured compensation expense based
upon intrinsic value on the measurement date, calculated as the difference
between the fair value of the common stock and the relevant exercise
price.
In
accordance with SFAS No. 123R, we recognized $256 thousand and $510 thousand
of
stock-based compensation expense ($148 thousand and $296 thousand net of tax)
for the three and six months ended September 30, 2006,
respectively. As of September 30, 2006, there was $2.0 million of
unrecognized compensation expense related to nonvested options. This expense
is
expected to be fully recognized over the next 2.75 years. In
addition, we previously presented deferred compensation as a separate component
of stockholders’ equity. In accordance with SFAS No. 123R, upon
adoption, we also reclassified the balance in deferred compensation to
additional paid-in-capital on our Condensed Consolidated Balance
Sheet.
The
following pro forma table illustrates the impact on net earnings and EPS had
we
applied the fair value expense recognition provisions of SFAS No. 123 for the
three and six months ended September 30, 2005 (in thousands, except per share
data).
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
September
|
|
|
Ended
September
|
|
|
|
|
30,
2005
|
|
|
|
30,
2005
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
|
|
|
|
Net
earnings, as reported
|
|
$ |
1,749
|
|
|
$ |
3,049
|
|
Add:
APB intrinsic value of stock-based compensation, net of
tax
|
|
|
169
|
|
|
|
167
|
|
Less:
FAS 123 stock-based employee compensation expense,
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
(147 |
) |
|
|
(316 |
) |
Net
earnings, pro forma
|
|
$ |
1,771
|
|
|
$ |
2,
900
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share, as reported
|
|
$ |
0.21
|
|
|
$ |
0.36
|
|
Basic
earnings per share, pro forma
|
|
$ |
0.21
|
|
|
$ |
0.34
|
|
Diluted
earnings per share, as reported
|
|
$ |
0.19
|
|
|
$ |
0.34
|
|
Diluted
earnings per share, pro forma
|
|
$ |
0.20
|
|
|
$ |
0.32
|
|
(1)
See Note 2, “Restatement of Consolidated Financial Statements.”
Stock
Option Activity
During
both the three months ended September 30, 2005 and 2006, there were 40,000
options granted. We use the Black-Scholes option-pricing model to
estimate the fair value of stock-based option awards. The following
assumptions were utilized for the six months ended September 30, 2005 and
2006.
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
Options
granted under the Incentive Stock
|
|
|
|
|
|
|
Option
Plan:
|
|
|
|
|
|
|
Expected
life of option
|
|
5
years
|
|
|
5
years
|
|
Expected
stock price volatility
|
|
|
48.11 |
% |
|
|
38.22 |
% |
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
Risk-free
interest rate
|
|
|
4.07 |
% |
|
|
5.04 |
% |
Expected
life of the option is the period of time that we expect the options granted
to
be outstanding. Expected stock price volatility is based on
historical volatility of our stock. Expected dividend yield is zero
as we do no expect to pay any dividends, nor have we historically paid any
dividends. Risk-free interest rate is the five-year nominal constant
maturity Treasury rate on the date of the award.
A
summary of stock option activity during the three and six months ended September
30, 2006 is as follows:
|
Number
of Shares
|
|
|
Exercise
Price Range
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Contractual Life Remaining
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2006
|
|
1,999,911
|
|
|
$ |
6.23
- $17.38
|
|
|
$ |
9.93
|
|
|
|
|
|
|
|
Options
granted
|
|
40,000
|
|
|
$ |
10.25
|
|
|
$ |
10.25
|
|
|
|
|
|
|
|
Options
exercised
|
|
(173,518 |
) |
|
$ |
6.23
- $10.75
|
|
|
$ |
7.14
|
|
|
|
|
|
|
|
Options
forfeited
|
|
(10,060 |
) |
|
$ |
8.75
- $17.38
|
|
|
$ |
8.89
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2006
|
|
1,856,333
|
|
|
$ |
6.24
- $17.38
|
|
|
$ |
10.56
|
|
|
|
4.0
|
|
|
$ |
1,811,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest at September
30, 2006
|
|
1,856,333
|
|
|
|
|
|
|
$ |
10.56
|
|
|
|
4.0
|
|
|
$ |
1,811,057
|
|
Exercisable,
September 30, 2006
|
|
1,424,333
|
|
|
|
|
|
|
$ |
10.02
|
|
|
|
4.3
|
|
|
$ |
1,811,057
|
|
The
total
intrinsic value of options exercised during the six months ended September
30,
2006 was $991 thousand.
Additional
information regarding options outstanding as of September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Avg.
|
|
|
Weighted
Avg.
|
|
|
|
|
|
Weighted
Avg.
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
|
Exercise
|
|
Range
of
|
|
|
Options
|
|
|
Price
per
|
|
|
Life
|
|
|
Options
|
|
|
Price
per
|
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Share
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.24
- $9.00
|
|
|
|
885,426
|
|
|
$ |
7.73
|
|
|
|
3.6
|
|
|
|
885,426
|
|
|
$ |
7.73
|
|
$ |
9.01
- $13.50
|
|
|
|
760,400
|
|
|
|
12.10
|
|
|
|
3.4
|
|
|
|
328,400
|
|
|
|
11.78
|
|
$ |
13.51
- $17.38
|
|
|
|
210,507
|
|
|
|
16.91
|
|
|
|
4.5
|
|
|
|
210,507
|
|
|
|
16.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.24
- $17.38
|
|
|
|
1,856,333
|
|
|
|
10.56
|
|
|
|
4.0
|
|
|
|
1,424,333
|
|
|
|
10.02
|
|
We
issue
shares from our authorized but unissued common stock to satisfy stock option
exercises.
A
summary
of nonvested option activity is presented below:
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
440,500
|
|
|
$ |
7.45
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
$ |
4.27
|
|
Vested
|
|
|
(48,500 |
) |
|
$ |
6.03
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
432,000
|
|
|
$ |
7.32
|
|
We
manage our business segments on the basis of the products and services offered.
Our reportable segments consist of our traditional financing business unit
and
technology sales business unit. The financing business unit offers
lease-financing solutions to corporations and governmental entities nationwide.
The technology sales business unit sells information technology (“IT”) equipment
and software and related services primarily to corporate customers on a
nationwide basis. The technology sales business unit also provides
Internet-based business-to-business supply-chain-management solutions for
information technology and other operating resources. We evaluate segment
performance on the basis of segment net earnings.
Both
segments utilize our proprietary software and services throughout the
organization. Sales and services and related costs of e-procurement software
are
included in the technology sales business unit. Income related to services
generated by our proprietary software and services is included in the financing
business unit.
The
accounting policies of the segments are the same as those described in Note
1,
"Organization and Summary of Significant Accounting Policies," of the Notes
to
Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2006. Corporate overhead expenses are
allocated on the basis of employee headcount. Certain items have been
reclassified for the three and six months ended September 30, 2005 to conform
to
the three and six months ended September 30, 2006 presentation. Amounts are
presented in thousands.
|
|
Financing
|
|
|
Technology
Sales
|
|
|
|
|
|
|
Business
Unit
|
|
|
Business
Unit
|
|
|
Total
|
|
Three
months ended September 30, 2005 (as restated)
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
1,379
|
|
|
$ |
158,030
|
|
|
$ |
159,409
|
|
Lease
revenues
|
|
|
11,916
|
|
|
|
-
|
|
|
|
11,916
|
|
Fee
and other income
|
|
|
315
|
|
|
|
2,603
|
|
|
|
2,918
|
|
Total
revenues
|
|
|
13,610
|
|
|
|
160,633
|
|
|
|
174,243
|
|
Cost
of sales
|
|
|
1,520
|
|
|
|
142,222
|
|
|
|
143,742
|
|
Direct
lease costs
|
|
|
3,798
|
|
|
|
-
|
|
|
|
3,798
|
|
Selling,
general and administrative expenses
|
|
|
5,864
|
|
|
|
16,175
|
|
|
|
22,039
|
|
Segment
earnings
|
|
|
2,428
|
|
|
|
2,236
|
|
|
|
4,664
|
|
Interest
and financing costs
|
|
|
1,558
|
|
|
|
159
|
|
|
|
1,717
|
|
Earnings
before income taxes
|
|
$ |
870
|
|
|
$ |
2,077
|
|
|
$ |
2,947
|
|
Assets
|
|
$ |
265,983
|
|
|
$ |
119,799
|
|
|
$ |
385,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
932
|
|
|
$ |
179,381
|
|
|
$ |
180,313
|
|
Sales
of leased equipment
|
|
|
1,819
|
|
|
|
-
|
|
|
|
1,819
|
|
Lease
revenues
|
|
|
13,522
|
|
|
|
-
|
|
|
|
13,522
|
|
Fee
and other income
|
|
|
354
|
|
|
|
2,740
|
|
|
|
3,094
|
|
Total
revenues
|
|
|
16,627
|
|
|
|
182,121
|
|
|
|
198,748
|
|
Cost
of sales
|
|
|
2,513
|
|
|
|
159,858
|
|
|
|
162,371
|
|
Direct
lease costs
|
|
|
5,572
|
|
|
|
-
|
|
|
|
5,572
|
|
Selling,
general and administrative expenses
|
|
|
5,411
|
|
|
|
21,461
|
|
|
|
26,872
|
|
Segment
earnings
|
|
|
3,131
|
|
|
|
802
|
|
|
|
3,933
|
|
Interest
and financing costs
|
|
|
2,573
|
|
|
|
92
|
|
|
|
2,665
|
|
Earnings
before income taxes
|
|
$ |
558
|
|
|
$ |
710
|
|
|
$ |
1,268
|
|
Assets
|
|
$ |
303,160
|
|
|
$ |
140,928
|
|
|
$ |
444,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended September 30, 2005 (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
2,081
|
|
|
$ |
292,197
|
|
|
$ |
294,278
|
|
Lease
revenues
|
|
|
23,211
|
|
|
|
-
|
|
|
|
23,211
|
|
Fee
and other income
|
|
|
801
|
|
|
|
5,757
|
|
|
|
6,558
|
|
Total
revenues
|
|
|
26,093
|
|
|
|
297,954
|
|
|
|
324,047
|
|
Cost
of sales
|
|
|
2,255
|
|
|
|
263,575
|
|
|
|
265,830
|
|
Direct
lease costs
|
|
|
7,594
|
|
|
|
-
|
|
|
|
7,594
|
|
Selling,
general and administrative expenses
|
|
|
10,971
|
|
|
|
31,267
|
|
|
|
42,238
|
|
Segment
earnings
|
|
|
5,273
|
|
|
|
3,112
|
|
|
|
8,385
|
|
Interest
and financing costs
|
|
|
3,053
|
|
|
|
201
|
|
|
|
3,254
|
|
Earnings
before income taxes
|
|
$ |
2,220
|
|
|
$ |
2,911
|
|
|
$ |
5,131
|
|
Assets
|
|
$ |
265,983
|
|
|
$ |
119,799
|
|
|
$ |
385,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
1,852
|
|
|
$ |
353,794
|
|
|
$ |
355,646
|
|
Sales
of leased equipment
|
|
|
1,819
|
|
|
|
-
|
|
|
|
1,819
|
|
Lease
revenues
|
|
|
24,853
|
|
|
|
-
|
|
|
|
24,853
|
|
Fee
and other income
|
|
|
563
|
|
|
|
5,377
|
|
|
|
5,940
|
|
Total
revenues
|
|
|
29,087
|
|
|
|
359,
171
|
|
|
|
388,258
|
|
Cost
of sales
|
|
|
3,171
|
|
|
|
315,229
|
|
|
|
318,400
|
|
Direct
lease costs
|
|
|
10,596
|
|
|
|
-
|
|
|
|
10,596
|
|
Selling,
general and administrative expenses
|
|
|
9,986
|
|
|
|
39,900
|
|
|
|
49,886
|
|
Segment
earnings
|
|
|
5,334
|
|
|
|
4,042
|
|
|
|
9,376
|
|
Interest
and financing costs
|
|
|
4,534
|
|
|
|
119
|
|
|
|
4,653
|
|
Earnings
before income taxes
|
|
$ |
800
|
|
|
$ |
3,923
|
|
|
$ |
4,723
|
|
Assets
|
|
$ |
303,160
|
|
|
$ |
140,928
|
|
|
$ |
444,088
|
|
Included
in the Financing Business Unit above are inter-segment accounts receivable
of
$2.2 million and $968 thousand for the six months ended September 30, 2005
and
2006, respectively. Included in the Technology Sales Business Unit
above are inter-segment accounts payable of $2.2 million and $968 thousand
for
the six months ended September 30, 2005 and 2006, respectively.
12.
SUBSEQUENT EVENT
Effective
at the opening of business on July 20, 2007, our common stock was delisted
from
The Nasdaq Global Market due to non-compliance with financial statement
reporting requirements. Specifically, in determining to delist our common stock,
Nasdaq cited the delay of more than one year from the final due date for the
filing of our fiscal year 2006 Annual Report on Form 10-K with the
SEC. Although we filed our fiscal year 2006 Form 10-K with the SEC on
August 16, 2007, the following requisite periodic reports must also be filed
with the SEC in order for us to be eligible to be relisted on Nasdaq; this
Form
10-Q; the Form 10-Q for the quarter ended December 31, 2006; the fiscal year
2007 Form 10-K; and the Form 10-Q for the quarter ended June 30,
2007.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis of our results of operations and financial
condition should be read in conjunction with the Condensed Consolidated
Financial Statements and the related Notes to Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report, and
our Annual Report on Form 10-K for the year ended March 31,
2006. Operating results for interim periods are not necessarily
indicative of results for an entire year.
Results
of Audit Committee Review; Restatement of Financial
Statements
In
this
Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, we
have
restated our Condensed Consolidated Statements of Operations for the three
and
six months ended September 30, 2005 and our Condensed Consolidated Statements
Cash Flows for the six months ended September 30, 2005 for the effects of errors
discussed in Note 2, “Restatement of Consolidated Financial Statements” to our
Unaudited Condensed Consolidated Financial Statements.
Our
decision to restate the previously issued Condensed Consolidated Financial
Statements for the effects of errors in accounting for stock options was based
on the findings of the Audit Committee Investigation of our historical stock
option granting practices and related accounting. See our Annual
Report on Form 10-K for the year ended March 31, 2006 for further
discussion.
Cautionary
Language About Forward-Looking Statements
This
Quarterly Report on Form 10-Q, contains certain statements that are, or may
be
deemed to be, “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are made in reliance upon the protections
provided by such acts for forward-looking statements. Such statements are not
based on historical fact, but are based upon numerous assumptions about future
conditions that may not occur. Forward-looking statements are generally
identifiable by use of forward-looking words such as “may,” “will,” “should,”
“intend,” “estimate,” “believe,” “expect,” “anticipate,” “project” and similar
expressions. Readers are cautioned not to place undue reliance on any
forward-looking statements made by or on our behalf. Any such statement speaks
only as of the date the statement was made. We do not undertake any obligation
to publicly update or correct any forward-looking statements to reflect events
or circumstances that subsequently occur, or of which we hereafter become
aware. Actual events, transactions and results may materially differ
from the anticipated events, transactions or results described in such
statements. Our ability to consummate such transactions and achieve such events
or results is subject to certain risks and uncertainties. Such risks and
uncertainties include, but are not limited to, the matters set forth
below.
Although
we have been offering IT financing since 1990 and direct marketing of IT
products since 1997, our comprehensive set of solutions—the bundling of our
direct IT sales, professional services and financing with our proprietary
software—has been available since 2002. Consequently, we may encounter some of
the challenges, risks, difficulties and uncertainties frequently faced by
companies providing new and/or bundled solutions in an evolving market. Some
of
these challenges relate to our ability to:
·
|
manage
the diverse product set of rapidly-evolving solutions in
highly-competitive markets;
|
·
|
increase
the total number of users of bundled services by cross-selling within
our
customer base and gain new
customers;
|
·
|
adapt
to meet changes in markets and competitive
developments;
|
·
|
maintain
and increase advanced professional services by retaining highly-skilled
personnel and vendor
certifications;
|
·
|
integrate
with external IT systems including those of our customers and vendors;
and
|
·
|
continue
to update our software and technology to enhance the features and
functionality of our products.
|
We
cannot
be certain that our business strategy will be successful or that we will
successfully address these and other challenges, risks and
uncertainties. For a further list and description of various risks,
relevant factors and uncertainties that could cause future results or events
to
differ materially from those expressed or implied in our forward-looking
statements, see the “Risk Factors” and ”—Results of Operations” sections
contained elsewhere in this document, as well as our Annual Report on Form
10-K
for the fiscal year ended March 31, 2006, any subsequent Reports on Form 10-Q
and Form 8-K and other filings with the SEC.
Discussion
and Analysis Overview
The
following discussion and analysis of our results of operations and financial
condition gives effect to the restatement discussed in Note 2, “Restatement of
Consolidated Financial Statements” to our Unaudited Condensed Consolidated
Financial Statements and should be read in conjunction with our Unaudited
Condensed Consolidated Financial Statements and the related Notes included
elsewhere in this report.
Our
results of operations are susceptible to fluctuations for a number of reasons,
including, without limitation, customer demand for our products and services,
supplier costs, interest rate fluctuations and differences between estimated
residual values and actual amounts realized related to the equipment we lease.
Operating results could also fluctuate as a result of the sale of equipment
in
our lease portfolio prior to the expiration of the lease term to the lessee
or
to a third party. Such sales of leased equipment prior to the expiration of
the
lease term may have the effect of increasing revenues and net earnings during
the period in which the sale occurs, and reducing revenues and net earnings
otherwise expected in subsequent periods.
We
currently derive the majority of our revenue from sales and financing of
information technology and other assets. We have expanded our product and
service offerings under our comprehensive set of solutions which represents
the
continued evolution of our original implementation of our e-commerce products
entitled ePlusSuite. The expansion to our bundled solution is a
framework that combines our IT sales and professional services, leasing and
financing services, asset management software and services, procurement
software, and electronic catalog content management software and
services.
We
expect
to expand or open new sales locations and hire additional staff for specific
targeted market areas in the near future whenever we can find both experienced
personnel and qualified geographic areas.
As
a
result of our acquisitions and expansion of sales locations, our historical
results of operations and financial position may not be indicative of our future
performance over time.
Critical
Accounting Policies
SALES
OF PRODUCT AND SERVICES. We adhere to guidelines and principles of
sales recognition described in SAB No. 104, “Revenue Recognition,”
issued by the staff of the SEC. Under SAB No. 104, sales are recognized
when the
title and risk of loss are passed to the customer, there is persuasive evidence
of an arrangement for sale, delivery has occurred and/or services have been
rendered, the sales price is fixed and determinable and collectibility is
reasonably assured. Using these tests, the vast majority of our sales represent
product sales recognized upon delivery; however, we make an adjustment for
our
sales that have FOB Shipping Point terms.
From
time
to time, in the sales of product and services, we may enter into contracts
that
contain multiple elements. Sales of services currently represent a small
percentage of our sales. For services that are performed in
conjunction with product sales and are completed in our facilities prior to
shipment of the product, sales for both the product and services are recognized
upon shipment. Sales of services that are performed at customer locations are
recorded as sales of product or services when the services are performed. If
the
service is performed at a customer location in conjunction with a product sale
or other service sale, we recognize the sale in accordance with SAB No. 104
and
EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” Accordingly, in an arrangement with multiple deliverables,
we recognize sales for delivered items only when all of the following criteria
are satisfied:
|
·
|
the
delivered item(s) has value to the client on a stand-alone
basis;
|
|
·
|
there
is objective and reliable evidence of the fair value of the undelivered
item(s); and
|
|
·
|
if
the arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item(s)
is
considered probable and substantially in our
control.
|
We
sell
certain third-party service contracts and software assurance or subscription
products for which we evaluate whether the subsequent sales of such services
should be recorded as gross sales or net sales in accordance with the sales
recognition criteria outlined in SAB No. 104, EITF 99-19, “Reporting Revenue
Gross as a Principal versus Net as an Agent,” and FASB Technical Bulletin
90.1, “Accounting for Separately Priced Extended Warranty and Product
Contracts.” We must determine whether we act as a principal in
the transaction and assume the risks and rewards of ownership or if we are
simply acting as an agent or broker. Under gross sales recognition, the entire
selling price is recorded in sales of product and services and our costs to
the
third-party service provider or vendor is recorded in cost of sales, product
and
services. Under net sales recognition, the cost to the third-party service
provider or vendor is recorded as a reduction to sales resulting in net sales
equal to the gross profit on the transaction and there are no cost of
sales.
In
accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and
Costs,” we record freight billed to our customers as sales of product and
services and the related freight costs as a cost of sales, product and
services.
VENDOR
CONSIDERATION. We receive payments and credits from vendors, including
consideration pursuant to volume sales incentive programs, volume purchase
incentive programs and shared marketing expense programs. Vendor consideration
received pursuant to volume sales incentive programs is recognized as a
reduction to costs of sales, product and services in accordance with EITF Issue
No. 02-16, “Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor’s Products).” Vendor
consideration received pursuant to volume purchase incentive programs is
allocated to inventories based on the applicable incentives from each vendor
and
is recorded in cost of sales, product and services, as the inventory is sold.
Vendor consideration received pursuant to shared marketing expense programs
is
recorded as a reduction of the related selling and administrative expenses
in
the period the program takes place only if the consideration represents a
reimbursement of specific, incremental, identifiable costs. Consideration that
exceeds the specific, incremental, identifiable costs is classified as a
reduction of cost of sales, product and services.
SOFTWARE
SALES AND RELATED COSTS. Revenue from hosting arrangements
is recognized in accordance with EITF 00-3, “Application of AICPA Statement
of Position 97-2 to Arrangements That Include the Right to Use Software Stored
on Another Entity’s Hardware.” Our hosting arrangements do not
contain a contractual right to take possession of the software. Therefore,
our
hosting arrangements are not in the scope of SOP 97-2, “Software Revenue
Recognition,” and require that allocation of the portion of the fee
allocated to the hosting elements be recognized as the service is provided.
Currently, the majority of our software revenue is generated through hosting
agreements and is included in fee and other income on our Condensed Consolidated
Statements of Operations.
Revenue
from sales of our software is recognized in accordance with SOP 97-2, as amended
by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP
97-2,” and SOP 98-9, “Modification of SOP 97-2 With Respect to
Certain Transactions.” We recognize revenue when all the following criteria
exist: (1) there is persuasive evidence that an arrangement exists; (2) delivery
has occurred; (3) no significant obligations by us related to services essential
to the functionality of the software remain with regard to implementation;
(4)
the sales price is determinable; and (5) and it is probable that collection
will
occur. Revenue from sales of our software is included in fee and
other income on our Condensed Consolidated Statements of
Operations.
At
the
time of each sale transaction, we make an assessment of the collectibility
of
the amount due from the customer. Revenue is only recognized at that time if
management deems that collection is probable. In making this assessment, we
consider customer credit-worthiness and assess whether fees are fixed or
determinable and free of contingencies or significant uncertainties. If the
fee
is not fixed or determinable, revenue is recognized only as payments become
due
from the customer, provided that all other revenue recognition criteria are
met.
In assessing whether the fee is fixed or determinable, we consider the payment
terms of the transaction and our collection experience in similar transactions
without making concessions, among other factors. Our software license agreements
generally do not include customer acceptance provisions. However, if an
arrangement includes an acceptance provision, we record revenue only upon the
earlier of: (1) receipt of written acceptance from the customer; or (2)
expiration of the acceptance period.
Our
software agreements often include implementation and consulting services that
are sold separately under consulting engagement contracts or as part of the
software license arrangement. When we determine that such services are not
essential to the functionality of the licensed software and qualify as “service
transactions” under SOP 97-2, we record revenue separately for the license and
service elements of these agreements. Generally, we consider that a service
is
not essential to the functionality of the software based on various factors,
including if the services may be provided by independent third parties
experienced in providing such consulting and implementation in coordination
with
dedicated customer personnel. If an arrangement does not qualify for separate
accounting of the license and service elements, then license revenue is
recognized together with the consulting services using either the
percentage-of-completion or completed-contract method of contract accounting.
Contract accounting is also applied to any software agreements that include
customer-specific acceptance criteria or where the license payment is tied
to
the performance of consulting services. Under the percentage-of-completion
method, we may estimate the stage of completion of contracts with fixed or
“not
to exceed” fees based on hours or costs incurred to date as compared with
estimated total project hours or costs at completion. If we do not have a
sufficient basis to measure progress towards completion, revenue is recognized
upon completion of the contract. When total cost estimates exceed revenues,
we
accrue for the estimated losses immediately. The use of the
percentage-of-completion method of accounting requires significant judgment
relative to estimating total contract costs, including assumptions relative
to
the length of time to complete the project, the nature and complexity of the
work to be performed, and anticipated changes in salaries and other costs.
When
adjustments in estimated contract costs are determined, such revisions may
have
the effect of adjusting, in the current period, the earnings applicable to
performance in prior periods.
We
generally use the residual method to recognize revenues from agreements that
include one or more elements to be delivered at a future date when evidence
of
the fair value of all undelivered elements exists. Under the residual method,
the fair value of the undelivered elements (e.g., maintenance, consulting and
training services) based on vendor-specific objective evidence (“VSOE”) is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (i.e., software license). If evidence of the fair value
of
one or more of the undelivered services does not exist, all revenues are
deferred and recognized when delivery of all of those services has occurred
or
when fair values can be established. We determine VSOE of the fair value of
services revenue based upon our recent pricing for those services when sold
separately. VSOE of the fair value of maintenance services may also be
determined based on a substantive maintenance renewal clause, if any, within
a
customer contract. Our current pricing practices are influenced primarily by
product type, purchase volume, maintenance term and customer location. We review
services revenue sold separately and maintenance renewal rates on a periodic
basis and update our VSOE of fair value for such services to ensure that it
reflects our recent pricing experience, when appropriate.
Maintenance
services generally include rights to unspecified upgrades (when and if
available), telephone and Internet-based support, updates and bug
fixes. Maintenance revenue is recognized ratably over the term of the
maintenance contract (usually one year) on a straight-line basis and is included
in fee and other income on our Condensed Consolidated Statements of
Operations.
When
consulting qualifies for separate accounting, consulting revenues under time
and
materials billing arrangements are recognized as the services are
performed. Consulting revenues under fixed-price contracts are
generally recognized using the percentage-of-completion method. If
there is a significant uncertainty about the project completion or receipt
of
payment for the consulting services, revenue is deferred until the uncertainty
is sufficiently resolved. Consulting revenues are classified as fee and other
income on our Condensed Consolidated Statements of Operations.
Training
services include on-site training, classroom training and computer-based
training and assessment. Training revenue is recognized as the
related training services are provided and is included in fee and other income
on our Condensed Consolidated Statements of Operations.
SALES
OF LEASED EQUIPMENT. Sales of leased equipment consist of sales of
equipment subject to an existing lease, under which we are a lessor, including
any underlying financing related to the lease. Sales of equipment subject to
an
existing lease are recognized when constructive title passes to the
purchaser.
LEASE
CLASSIFICATION. The manner in which lease finance
transactions are characterized and reported for accounting purposes has a major
impact upon reported revenue and net earnings. Lease accounting methods critical
to our business are discussed below.
We
classify our lease transactions in accordance with SFAS No. 13, "Accounting
for Leases," as: (1) direct financing; (2) sales-type; or (3) operating
leases. Revenues and expenses between accounting periods for each lease term
will vary depending upon the lease classification.
As
a
result of these three classifications of leases for accounting purposes, the
revenues resulting from the "mix" of lease classifications during an accounting
period will affect the profit margin percentage for such period and such profit
margin percentage generally increases as revenues from direct financing and
sales-type leases increase. Should a lease be financed, the interest
expense declines over the term of the financing as the principal is
reduced.
For
financial statement purposes, we present revenue from all three classifications
in lease revenues, and costs related to these leases in direct lease
costs.
DIRECT
FINANCING AND SALES-TYPE LEASES. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility of lease payments are
reasonably certain, no important uncertainties surround the amount of
unreimbursable costs yet to be incurred, and it meets one of the following
criteria: (1) the lease transfers ownership of the equipment to the customer
by
the end of the lease term; (2) the lease contains a bargain purchase option;
(3)
the lease term at inception is at least 75% of the estimated economic life
of
the leased equipment; or (4) the present value of the minimum lease payments
is
at least 90% of the fair market value of the leased equipment at the inception
of the lease.
Direct
financing leases are recorded as investment in leases and leased equipment—net
upon acceptance of the equipment by the customer. At the commencement of the
lease, unearned lease income is recorded that represents the amount by which
the
gross lease payments receivable plus the estimated unguaranteed residual value
of the equipment exceeds the equipment cost. Unearned lease income is
recognized, using the interest method, as lease revenue over the lease
term.
Sales-type
leases include a dealer profit or loss that is recorded by the lessor upon
acceptance of the equipment by the lessee. The dealer's profit or loss
represents the difference, at the inception of the lease, between the present
value of minimum lease payments computed at the interest rate implicit in the
lease and the cost or carrying amount of the equipment (less the present value
of the unguaranteed residual value) plus any initial direct costs. Interest
earned on the present value of the lease payments and residual value is
recognized over the lease term using the interest method.
OPERATING
LEASES. All leases that do not meet the criteria to be classified as
direct financing or sales-type leases are accounted for as operating leases.
Rental amounts are accrued on a straight-line basis over the lease term and
are
recognized as lease revenue. Our cost of the leased equipment is recorded on
the
balance sheet as investment in leases and leased equipment—net and is
depreciated on a straight-line basis over the lease term to our estimate of
residual value. Revenue, depreciation expense and the resulting profit for
operating leases are recorded on a straight-line basis over the life of the
lease.
Lease
revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost on the balance sheet as investment in
leases and leased equipment—net and depreciated on a straight-line basis over
the lease term to our estimate of residual value. For the periods subsequent
to
the lease term, where collectibility is certain, revenue is recognized on an
accrual basis. Where collectability is not reasonably assured,
revenue is recognized upon receipt of payment from the lessee.
RESIDUAL
VALUES. Residual values represent our estimated value of the equipment
at the end of the initial lease term. The residual values for direct financing
and sales-type leases are included as part of the investment in direct financing
and sales-type leases. The residual values for operating leases are included
in
the leased equipment's net book value and are reported in the investment in
leases and leased equipment—net. The estimated residual values will vary, both
in amount and as a percentage of the original equipment cost, and depend upon
several factors, including the equipment type, manufacturer's discount, market
conditions and the term of the lease.
We
evaluate residual values on a quarterly basis and record any required changes
in
accordance with SFAS No. 13, paragraph 17.d., in which impairments of residual
value, other than temporary, are recorded in the period in which the impairment
is determined. Residual values are affected by equipment supply and demand
and
by new product announcements by manufacturers.
We
seek
to realize the estimated residual value at lease termination mainly through:
(1)
renewal or extension of the original lease; (2) the sale of the equipment either
to the lessee or on the secondary market; or (3) lease of the equipment to
a new
customer. The difference between the proceeds of a sale and the remaining
estimated residual value is recorded as a gain or loss in lease revenues when
title is transferred to the lessee, or if the equipment is sold on the secondary
market, in sales of product and services and cost of sales, product and services
when title is transferred to the buyer.
INITIAL
DIRECT COSTS. Initial direct costs related to the origination of direct
financing or operating leases are capitalized and recorded as part of the net
investment in direct financing leases, or net operating lease equipment, and
are
amortized over the lease term.
OTHER
SOURCES OF REVENUE. Amounts charged for hosting arrangements
in which the customer accesses the programs from an ePlus-hosted site
and does not have possession of the software, and for Procure+, our procurement
software package, are recognized as services are rendered. Amounts charged
for
Manage+, our asset management software service, are recognized on a
straight-line basis over the period the services are provided. In addition,
other sources of revenue are derived from: (1) income from events that occur
after the initial sale of a financial asset; (2) remarketing fees; (3) brokerage
fees earned for the placement of financing transactions; (4) agent fees received
from various manufacturers in the IT reseller business unit; (5) settlement
fees
related to disputes or litigation; and (6) interest and other miscellaneous
income. These revenues are included in fee and other income on our Condensed
Consolidated Statements of Operations.
RESERVES
FOR CREDIT LOSSES. The reserves for credit losses are maintained at a
level believed by management to be adequate to absorb potential losses inherent
in our lease and accounts receivable portfolio. Management's determination
of
the adequacy of the reserve is based on an evaluation of historical credit
loss
experience, current economic conditions, volume, growth, the composition of
the
lease portfolio and other relevant factors. The reserve is increased by
provisions for potential credit losses charged against income. Accounts are
either written off or written down when the loss is both probable and
determinable, after giving consideration to the customer's financial condition,
the value of the underlying collateral and funding status (i.e., discounted
on a
non-recourse or recourse basis). Our allowance also includes consideration
of
uncollectible vendor receivables which arise from vendor rebate programs and
other promotions.
CAPITALIZATION
OF COSTS OF SOFTWARE FOR INTERNAL USE. We have capitalized certain
costs for the development of internal-use software under the guidelines of
SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." These capitalized costs are included in the accompanying
Condensed Consolidated Balance Sheets as a component of property and
equipment—net. Capitalized costs, net of amortization, totaled $0.6 million and
$0.5 million of as of March 31, 2006 and September 30, 2006,
respectively.
CAPITALIZATION
OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS. In accordance
with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," software development costs are expensed as
incurred until technological feasibility has been established, at such time
such
costs are capitalized until the product is made available for release to
customers. These capitalized costs are included in the accompanying Condensed
Consolidated Balance Sheets as a component of other assets. We had
$1.0 million and $0.9 million of capitalized costs, net of amortization, as
of
March 31, 2006 and September 30, 2006, respectively.
SHARE-BASED
PAYMENT. In December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS
No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB
25, “Accounting for Stock Issued to Employees,” and subsequently issued
stock option related guidance. This statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those equity instruments.
We are required to apply SFAS No. 123R to all awards granted, modified or
settled as of the beginning of the annual fiscal reporting period that begins
after June 15, 2005. We have analyzed the impact of SFAS No. 123R and have
adopted SFAS No. 123R as of April 1, 2006. We are using the modified-prospective
and the straight-line method. As described in Note 2, “Restatement of
Consolidated Financial Statements” to the Unaudited Condensed Consolidated
Financial Statements, we are restating prior fiscal periods within this Form
10-Q principally to reflect additional non-cash stock-based compensation expense
relating to adjustments arising from the determinations of our Audit Committee
in its review relating to our historical statements.
Results
of Operations — Three and Six Months Ended September 30, 2006 Compared to Three
and Six Months Ended September 30, 2005
Revenues.
We generated total revenues during the three months ended September 30, 2006
of
$198.7 million compared to revenues of $174.2 million during the three
months ended September 30, 2005, an increase of 14.1%. The increase is primarily
the result of increased sales of product and services. Total revenues generated
by us during the six months ended September 30, 2006 were $388.3 million
compared to revenues of $324.0 million during the six months ended September
30,
2005, an increase of 19.8%. Our revenues are composed of sales of product
and services, sales of leased equipment, lease revenues, and fee and other
income, and may vary considerably from period to period.
Sales
of
product and services increased 13.1% to $180.3 million during the three months
ended September 30, 2006 compared to $159.4 million generated during the three
months ended September 30, 2005 and represented 90.7% and 91.5% of total
revenue, respectively. The increase was a result of higher sales within our
technology sales business unit subsidiaries primarily due to organic growth
within our existing customer base. For the six months ended September 30, 2006,
sales of product and services increased 20.9% to $355.6 million from $294.3
million generated during the six months ended September 30, 2005. The increase
was a result of higher sales within our technology sales business unit
subsidiaries.
Sales
of
product and services are generated primarily through our technology sales
business unit subsidiaries. Sales of product and services consist primarily
of
sales of new equipment and service engagements. Many customers
purchase from us using a contract vehicle known as a Master Purchase Agreement
(“MPA”) in which the terms and conditions of our relationship are
stipulated. Some MPAs contain pricing arrangements. However, the MPAs
do not contain purchase volume commitments and most have 30 day termination
for
convenience clauses. In addition, many of our customers place orders
using purchase orders without an MPA in place. There is no guarantee
that our sales of product and services volume can be maintained or
increased.
A
substantial portion of our sales of product and services is from sales of
Hewlett Packard and CISCO products, which represented, in the aggregate,
approximately 24.1% and 35.0% of sales, respectively, for the three months
ended
September 30, 2006 and September 30, 2005.
Included
in the sales of product and services in our technology sales business unit
are
certain service revenues that are bundled with sales of equipment and are
integral to the successful delivery of such equipment. Our service
engagements are generally governed by Statements of Work and/or Master Service
Agreements. They are primarily fixed fee, however, some agreements
are time and materials or estimates. We realized a gross margin on
sales of product and services of 10.9% and 11.0% during the three and six months
ended September 30, 2006, respectively, and 9.8% and 9.7% for the
three and six months ended September 30, 2005, respectively. Our gross margin
on
sales of product and services is affected by the mix and volume of products
sold
and competitive pressure in the marketplace.
Sales
of
leased equipment was $1.8 million for the three and six months ended September
30, 2006. There were no sales of leased equipment during the three
and six months ended September 30, 2005.
Lease
revenues increased 13.5% to $13.5 million for the three months ended September
30, 2006, over the three months ended September 30, 2005. For the six months
ended September 30, 2006, lease revenues increased 7.1% to $24.9 million
compared with $23.2 million during the six months ended September 30, 2005.
Our
investment in leases and leased equipment—net was $223.2 million as of September
30, 2006, a 7.0% increase from $208.6 million as of September 30,
2005.
For
the
three months ended September 30, 2006, fee and other income was $3.1 million,
an
increase of 6.0 % over the three months ended September 30, 2005. For the six
months ended September 30, 2006, fee and other income decreased 9.4% to $5.9
million as compared to $6.6 million for the six months ended September 30,
2005.
The decrease in fee and other income is partly attributable to the completion
of
certain professional service contracts predominately consulting, programming,
hosting and procurement services provided by our technology business unit.
Fee
and other income includes revenues from adjunct services and fees, including
broker and agent fees, support fees, warranty reimbursements, monetary
settlements arising from disputes and litigation and interest income. Our fee
and other income contain earnings from certain transactions which are in our
normal course of business, but there is no guarantee that future transactions
of
the same nature, size or profitability will occur. Our ability to consummate
such transactions, and the timing thereof, may depend largely upon factors
outside the direct control of management. The earnings from these types of
transactions in a particular period may not be indicative of the earnings that
can be expected in future periods.
Costs
and Expenses. For the three months ended September 30, 2006,
cost of sales, product and services increased 11.7% to $160.6 million as
compared to $143.7 million for the three months ended September 30, 2005. For
the six months ended September 30, 2006, cost of sales, product and services
increased 19.1% to $316.6 million from $265.8 million for the six months ended
September 30, 2005. The increase corresponds to the increase in sales of product
and services of 20.9% for the six months ended September 30, 2006 as compared
to
the six months ended September 30, 2005, primarily due to an increase in sales
from our technology sales business unit.
A
significant reduction in cost of sales is generated through vendor consideration
programs provided by manufacturers. The programs are generally
governed by our reseller authorization level with the
manufacturer. The authorization level we achieve and maintain governs
what types of product we can resell as well as such items as pricing received,
funds provided for the marketing of these products and other special
promotions. These authorization levels are achieved by us through
sales volume, certifications held by sales executives or engineers and/or
contractual commitments by us. The authorizations are costly to
maintain and these programs continually change and there is no guarantee of
future reductions of costs provided by these vendor consideration
programs. We currently maintain the following authorization levels
with our major manufacturers:
Manufacturer
|
Manufacturer
Authorization Level
|
Hewlett
Packard
|
HP
Platinum/VPA (National)
|
Cisco
Systems
|
Cisco
Gold DVAR (National)
|
Microsoft
|
Microsoft
Gold (National)
|
Sun
Microsystems
|
Executive
SPA Partner (National)
|
IBM
|
IBM
Premium Business Partner
|
Lenovo
|
Lenovo
Platinum Partner
|
Network
Appliance, Inc.
|
NetApp
Platinum Elite
|
Citrix
Systems, Inc.
|
Citrix
Gold (National)
|
Cost
of
sales, leased equipment was $1.8 million for the three and six months ended
September 30, 2006. There were no cost of sales, leased equipment
during the comparable period of the prior year.
Direct
lease costs increased 46.7% to $5.6 million during the three months ended
September 30, 2006, and 39.5% to $10.6 million during the six months ended
September 30, 2006 as compared to the same periods in the prior fiscal year.
The
largest component of direct lease costs is depreciation expense for operating
leased equipment. Our investment in operating leases increased 30.7% as of
September 30, 2006 as compared to the same period in the prior fiscal
year.
Professional
and other fees increased 168.2% to $4.8 million during the three months
ended September 30, 2006 and 122.1% to $6.1 million during the six months ended
September 30, 2006, as compared to the same periods in the prior fiscal
year. The increase is primarily due to increased expenses for
litigation related to the bankruptcy of Cyberco Holdings, Inc. and the related
non-bankruptcy lawsuit filed with BoA as discussed in Part II, Item 1, “Legal
Proceedings”. We incurred additional expenses related to our review of
accounting guidance regarding stock option grants since our IPO in 1996 and
the
resulting impact.
Salaries
and benefits expense increased 15.9% to $17.7 million during the three months
ended September 30, 2006, and 16.3% to $35.0 million during the six months
ended
September 30, 2006 as compared to the same periods in the prior fiscal year.
These increases are due in part to an increase in benefit costs and an increase
in the average number of employees. We employed approximately 671 people as
of
September 30, 2006, as compared to 649 people as of September 30,
2005.
General
and administrative expense decreased 11.9% to $4.4 million during the three
months ended September 30, 2006, and decreased 6.0% to $8.9 million during
the
six months ended September 30, 2006 as compared to the same periods in the
prior
fiscal year. The decrease is due to a slight reduction in
depreciation and amortization expense relating to property and equipment and
increased efficiency in spending controls to enhance productivity and
profits.
Interest
and financing costs increased 55.3% to $2.7 million during the three months
ended September 30, 2006 and 43.0% to $4.7 million during the six months ended
September 30, 2006, as compared to the same periods in the prior fiscal year.
This is primarily due to an increasing non-recourse debt portfolio and
increasing debt rates on new financings. Non-recourse notes payable increased
25.4% to $160.5 million as of September 30, 2006 as compared to March 31,
2006.
Provision
for Income Taxes. Our provision for income taxes decreased to
$0.3 million for the three months ended September 30, 2006 from $1.2 million
for
the three months ended September 30, 2005 primarily due to reduced earnings.
Our
provision for income taxes decreased to $1.7 million for the six months ended
September 30, 2006 from $2.1 million for the six months ended September 30,
2005. Our effective income tax rates for the three and six months ended
September 30, 2006 were 47.5% and 42.2%, respectively, and for the three
and six months ended September 30, 2005 were 40.7% and 40.6%, respectively.
The
decrease for the three months ended September 30, 2006 in the provision for
income taxes is due to a $0.3 million entry to true-up various accounts that
had
an impact on the tax provision.
Net
Earnings. The foregoing resulted in a 44.1% decrease and a 0.2% decrease in
net earnings for the three and six months ended September 30, 2006,
respectively, as compared to the same periods in the prior fiscal year.
Basic
and
fully diluted earnings per common share were $0.12 and $0.12 for the three
months ended September 30, 2006, respectively, as compared to $0.21 and $0.19
for the three months ended September 30, 2005, respectively. Basic and diluted
weighted average common shares outstanding for the three months ended September
30, 2006 were 8,228,823 and 8,424,903, respectively. For the three months ended
September 30, 2005, the basic and diluted weighted average common shares
outstanding were 8,474,301 and 9,071,470, respectively.
Basic
and fully diluted earnings per common share were $0.37 and $0.35 for the six
months ended September 30, 2006, as compared to $0.36 and $0.34 for the six
months ended September 30, 2005. Basic and diluted weighted average common
shares outstanding for the six months ended September 30, 2006 were 8,218,154
and 8,586,866, respectively. For the six months ended September 30, 2005, the
basic and diluted weighted average common shares outstanding were 8,509,827
and
9,071,092, respectively. The number of common shares outstanding
decreased due to our repurchase of our common stock.
Liquidity
and Capital Resources
During
the six months ended September 30, 2006, we used cash flows from operations
of
$56.5 million and used cash flows from investing activities of $15.3 million.
Cash flows provided by financing activities amounted to $74.7 million during
the
same period. The effect of exchange rate changes during the six months ended
September 30, 2006 provided cash flows of $85.0 thousand. The net effect of
these cash flows was a net increase in cash and cash equivalents of $3.0 million
during the six months ended September 30, 2006. During the same period, our
total assets increased $70.1 million, or 18.8%, primarily as the result of
increases in our accounts receivable and investment in leases. The increase
in
inventory is due to orders from clients that required staging and rollout
schedules that delayed shipment and an increase in inventory in transit that
have FOB shipping point terms. The increase in accounts receivable of $35.9
million as of September 30, 2006 as compared to March 31, 2006 is due to a
21.5%
increase in total sales during the same period. Our cash and cash
equivalents balance as of September 30, 2006 is $23.7 million as compared to
$20.7 million as of March 31, 2006.
Debt
financing activities provide approximately 80% to 100% of the purchase price
of
the equipment we purchase for lease to our customers. Any balance of the
purchase price (our equity investment in the equipment) must generally be
financed by cash flows from our operations, the sale of the equipment leased
to
third parties or other internal means. Although we expect that the credit
quality of our leases and our residual return history will continue to allow
us
to obtain such financing, no assurances can be given that such financing will
be
available, at acceptable terms, or at all. The financing necessary to support
our leasing activities has principally been provided by non-recourse and
recourse borrowings. Historically, we have obtained recourse and non-recourse
borrowings from banks and finance companies. Non-recourse financings are loans
whose repayment is the responsibility of a specific customer, although we may
make representations to the lender regarding the specific contract or have
ongoing loan servicing obligations. Under a non-recourse loan, we borrow from
a
lender an amount based on the present value of the contractually committed
lease
payments under the lease at a fixed rate of interest, and the lender secures
a
lien on the financed assets. When the lender is fully repaid from the lease
payment, the lien is released and all further rental or sale proceeds are ours.
We are not liable for the repayment of non-recourse loans unless we breach
our
representations in the loan agreements. The lender assumes the credit risk
of
each lease, and their only recourse, upon default by the lessee, is against
the
lessee and the specific equipment under lease. Each transaction is specifically
approved and done solely at the lender’s discretion. During the six months ended
September 30, 2006, our lease-related non-recourse debt portfolio increased
25.4% to $160.5 million as compared to March 31, 2006.
Whenever
possible and desirable, we arrange for equity investment financing which
includes selling assets, including the residual portions, to third parties
and
financing the equity investment on a non-recourse basis. We generally retain
customer control and operational services, and have minimal residual risk.
We
usually preserve the right to share in remarketing proceeds of the equipment
on
a subordinated basis after the investor has received an agreed to return on
their investment.
Accounts
payable—equipment represents equipment costs that have been placed on a lease
schedule, but for which we have not yet paid. The balance of unpaid equipment
cost can vary depending on vendor terms and the timing of lease originations.
As
of September 30, 2006, we had $9.2 million of unpaid equipment cost, as compared
to $7.7 million as of March 31, 2006.
Accounts
payable—trade increased 31.2% to $25.2 million as of September 30, 2006 from
$19.2 million as of March 31, 2006. The increase is primarily related to an
increase in sales of product and services and, consequently, an increase in
cost
of goods sold, product and services from our technology business
unit.
Accounts
payable—floor plan increased 22.4% to $57.2 million as of September 30, 2006
from $46.7 million as of March 31, 2006. This increase is primarily due to
a
rise in sales of product and services from our technology business unit that
we
transacted through our floor plan facility with GE Commercial Distribution
Finance Corporation (“GECDF”).
Accrued
expenses and other liabilities includes deferred income and amounts collected
and payable, such as sales taxes and lease rental payments due to third parties.
We had $37.8 million and $33.3 million of accrued expenses and other liabilities
as of September 30, 2006 and March 31, 2006 respectively, an increase of 13.3
%.
Based
on
past performance and current expectations, we believe that our cash and cash
equivalents, available borrowings based on continued compliance and/or waivers
under our credit facilities, and cash generated from operations will satisfy
our
working capital needs, capital expenditures, stock repurchases, commitments,
acquisitions and other liquidity requirements associated with our existing
operations through at least the next 12 months.
Credit
Facility — Technology Business
Our
subsidiary, ePlus Technology, inc., has a financing facility from GECDF
to finance its working capital requirements for inventories and accounts
receivable. There are two components of this facility: (1) a floor plan
component; and (2) an accounts receivable component. As of September
30, 2006 and as a result of the June 29, 2006 amendment, the facility had an
aggregate limit of the two components of $85.0 million other than during the
overline period from June 26, 2006 through September 21, 2006 in which the
aggregate limit of the two components was $100.0 million. Effective
June 20, 2007, the facility with GECDF was again amended to temporarily increase
the total credit facility limit to $100.0 million during the period from June
19, 2007 through August 15, 2007. On August 2, 2007, the period was
extended from August 15, 2007 to September 30, 2007. Other than
during the temporary increase periods described above, the total credit facility
limit is $85.0 million. The accounts receivable component has a
sub-limit of $30.0 million. Availability under the GECDF facility may
be limited by the asset value of equipment we purchase and may be further
limited by certain covenants and terms and conditions of the facility. We were
in compliance with these covenants as of September 30, 2006.
The
facility provided by GECDF requires a guaranty of up to $10.5 million by
ePlus inc. The guaranty requires ePlus inc. deliver
its audited and unaudited financial statements by certain dates. We
have not delivered the annual audited financial statements for the year ended
March 31, 2007; however, GECDF has extended the delivery date to provide the
financial statements through November 30, 2007. We believe we will receive
additional extensions from our lender, if needed, regarding our requirement
to
provide financial statements as described above through the date of delivery
of
the documents. However, we cannot guarantee that we will receive additional
extensions. The loss of the GECDF credit facility could have a material adverse
effect on our future results as we currently rely on this facility and its
components for daily working capital and liquidity for our technology sales
business and as an operational function of our accounts payable
process.
Floor
Plan Component
The
traditional business of ePlus Technology, inc. as a seller of computer
technology, related peripherals and software products is financed through a
floor plan component in which interest expense for the first thirty- to
forty-five days, in general, is not charged. The floor plan liabilities are
recorded as accounts payable—floor plan on our Condensed Consolidated Balance
Sheets, as they are normally repaid within the thirty- to forty-five day time
frame and represent an assigned accounts payable originally generated with
the
manufacturer/distributor. If the thirty- to forty-five day obligation is not
paid timely, interest is then assessed at stated contractual rates.
The
respective floor plan component credit limits and actual outstanding balances
were as follows (in thousands):
Maximum
Credit
Limit at
March
31, 2006
|
|
|
Balance
as of March 31, 2006
|
|
|
Maximum
Credit
Limit at
September
30, 2006
|
|
|
Balance
as of
September
30, 2006
|
|
$ |
75,000 |
|
|
$ |
46,689 |
|
|
$ |
85,000 |
|
|
$ |
57,155 |
|
Accounts
Receivable Component
Included
within the floor plan component, ePlus Technology, inc. has an accounts
receivable component from GECDF, which has a revolving line of credit. On the
due date of the invoices financed by the floor plan component, the invoices
are
paid by the accounts receivable component of the credit facility. The
balance of the accounts receivable component is then reduced by payments from
our customers into a lockbox and our available cash. The outstanding
balance under the accounts receivable component is recorded as recourse notes
payable on our Condensed Consolidated Balance Sheets.
The
respective accounts receivable component credit limits and actual outstanding
balances were as follows (in thousands):
Maximum
Credit
Limit at
March
31, 2006
|
|
|
Balance
as of March 31, 2006
|
|
|
Maximum
Credit
Limit at
September
30, 2006
|
|
|
Balance
as of
September
30, 2006
|
|
$ |
20,000 |
|
|
$ |
0 |
|
|
$ |
30,000 |
|
|
$ |
1,700 |
|
Credit
Facility — Leasing Business
Working
capital for our leasing business is provided through a credit facility which
is
currently contractually scheduled to expire on July 10, 2009. On September
26,
2005, we terminated our $45 million credit facility and simultaneously entered
into a new $35 million credit facility. Participating in this
facility are Branch Banking and Trust Company ($15 million) and National City
Bank ($20 million) as agents. The ability to borrow under this facility is
limited to the amount of eligible collateral at any given time. The credit
facility has full recourse to us and is secured by a blanket lien against all
of
our assets such as chattel paper (including leases), receivables, inventory
and
equipment and the common stock of all wholly-owned subsidiaries.
The
credit facility contains certain financial covenants and certain restrictions
on, among other things, our ability to make certain investments, and sell assets
or merge with another company. Borrowings under the credit facility bear
interest at London Interbank Offered Rates (“LIBOR”) plus an applicable margin
or, at our option, the Alternate Base Rate (“ABR”) plus an applicable
margin. The ABR is the higher of the agent bank’s prime rate or
Federal Funds rate plus 0.5%. The applicable margin is determined
based on our recourse funded debt ratio and can range from 1.75% to 2.50% for
LIBOR loans and from 0.0% to 0.25% for ABR loans. As of September 30, 2006,
we
had an outstanding balance of $15.0 million on the facility, as recorded in
recourse notes payable on our Condensed Consolidated Balance
Sheets.
In
general, we use the National City Bank facility to pay the cost of equipment
to
be put on lease, and we repay borrowings from the proceeds of: (1) long-term,
non-recourse, fixed rate financing which we obtain from lenders after the
underlying lease transaction is finalized; or (2) sales of leases to third
parties. The loss of this credit facility could have a material adverse effect
on our future results as we may have to use this facility for daily working
capital and liquidity for our leasing business. The availability of
the credit facility is subject to a borrowing base formula that consists of
inventory, receivables, purchased assets and lease
assets. Availability under the credit facility may be limited by the
asset value of the equipment purchased by us or by terms and conditions in
the
credit facility agreement. If we are unable to sell the equipment or unable
to
finance the equipment on a permanent basis within a certain time period, the
availability of credit under the facility could be diminished or
eliminated. The credit facility contains covenants relating to
minimum tangible net worth, cash flow coverage ratios, maximum debt to equity
ratio, maximum guarantees of subsidiary obligations, mergers and acquisitions
and asset sales. Other than as detailed below, we were in compliance
with these covenants as of September 30, 2006.
The
National City Bank facility requires the delivery of our Audited and Unaudited
Financial Statements, and pro-forma financial projections, by certain
dates. We have not delivered the following documents as required by
Section 5.1 of the facility: (a) annual Audited Financial Statements for the
year ended March 31, 2007; (b) “Projections” for our fiscal year ended March 31,
2008; and (c) quarterly Unaudited Financial Statements for the quarters ended
September 30, 2006, December 31, 2006 and June 30, 2007. We entered
into the following amendments which have extended the delivery date requirements
for these documents: a First Amendment dated July 11, 2006, a Second Amendment
dated July 28, 2006, a Third Amendment dated August 30, 2006, a Fourth Amendment
dated September 27, 2006, a Fifth Amendment dated November 15, 2006, a Sixth
Amendment dated January 11, 2007, a Seventh Amendment dated March 12, 2007,
and
an Eighth Amendment dated June 27, 2007. As a result of the
amendments, the agents agreed, inter alia, to extend the delivery date
requirements of the documents above through November 30, 2007.
We
believe we will receive additional extensions from our lender, if needed,
regarding our requirement to provide financial statements as described above
through the date of delivery of the documents. However, we cannot guarantee
that
we will receive additional extensions.
Performance
Guarantees
In
the
normal course of business, we may provide certain customers with performance
guarantees, which are generally backed by surety bonds. In general,
we would only be liable for the amount of these guarantees in the event of
default in the performance of our obligations. We are in compliance
with the performance obligations under all service contracts for which there
is
a performance guarantee, and we believe that any liability incurred in
connection with these guarantees would not have a material adverse effect on
our
Condensed Consolidated Statements of Operations.
Potential
Fluctuations in Quarterly Operating Results
Our
future quarterly operating results and the market price of our common stock
may
fluctuate. In the event our revenues or earnings for any quarter are less than
the level expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of our common stock. Any such adverse impact could be greater if any
such
shortfall occurs near the time of any material decrease in any widely followed
stock index or in the market price of the stock of one or more public equipment
leasing and financing companies, IT reseller, software competitor, major
customers or vendors of ours.
Our
quarterly results of operations are susceptible to fluctuations for a number
of
reasons, including, but not limited to, reduction in IT spending, our entry
into
the e-commerce market, any reduction of expected residual values related to
the
equipment under our leases, timing and mix of specific transactions and other
factors. See Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2006. Quarterly operating results could
also
fluctuate as a result of our sale of equipment in our lease portfolio at the
expiration of a lease term or prior to such expiration, to a lessee or to a
third party. Such sales of equipment may have the effect of increasing revenues
and net income during the quarter in which the sale occurs, and reducing
revenues and net income otherwise expected in subsequent quarters.
We
believe that comparisons of quarterly results of our operations are not
necessarily meaningful and that results for one quarter should not be relied
upon as an indication of future performance.
Item
3. Quantitative and Qualitative Disclosures
About Market Risk
Although
a substantial portion of our liabilities are non-recourse, fixed interest rate
instruments, we are reliant upon lines of credit and other financing facilities,
which are subject to fluctuations in interest rates. These
instruments, which are denominated in U.S. Dollars, were entered into for other
than trading purposes, and, with the exception of amounts drawn under the
National City Bank and GECDF facilities, bear interest at a fixed rate. Because
the interest rate on these instruments is fixed, changes in interest rates
will
not directly impact our cash flows. Borrowings under the National City facility
bear interest at a market-based variable rate, based on a rate selected by
us
and determined at the time of borrowing. Borrowings under the GECDF facility
bear interest at a market-based variable rate. Due to the relatively
short nature of the interest rate periods, we do not expect our operating
results or cash flow to be materially affected by changes in market interest
rates. As of September 30, 2006, the aggregate fair value of our recourse
borrowings approximated their carrying value.
During
the year ended March 31, 2003, we began transacting business in
Canada. As a result, we have entered into lease contracts and
non-recourse, fixed interest rate financing denominated in Canadian Dollars.
To
date, Canadian operations have been insignificant and we believe that potential
fluctuations in currency exchange rates will not have a material effect on
our
financial position.
Item
4. Controls
and
Procedures
Background
of Restatement
As
previously disclosed, our CEO received a letter, dated June 20, 2006, from
a
stockholder raising concerns about 450,000 options awarded in 2004 to our
four
senior officers (“2004 Options”). On June 21, 2006, our CEO forwarded
the letter to the Chairman of the Audit Committee. On June 23, 2006,
the Audit Committee commenced a voluntary investigation of the issues raised
concerning the 2004 Options. Subsequently, the Audit Committee
Investigation was expanded to cover all our stock option grants since our
IPO in
1996 and the historical practices related to stock option grants. The
Audit Committee retained independent legal counsel, who in turn retained
forensic accountants, to assist in the Investigation.
With
the
assistance of independent counsel, the Audit Committee obtained and reviewed
corporate books and records relating to option grants since our IPO, including
relevant stock option plans, option agreements, minutes and written consents
of
our Board and Compensation Committee, relevant public filings and other
available documentation. In addition, independent counsel for the
Audit Committee reviewed a large volume of potentially relevant emails and
electronic documents and interviewed 28 individuals, many on multiple
occasions. The Audit Committee’s independent counsel developed an
exhaustive search term list, which was applied to electronic data
retrieved. Approximately 79 gigabytes of electronic data was located
and reviewed. The Audit Committee met frequently throughout the
course of its Investigation.
On
August
11, 2006, we filed a Form 8-K which disclosed that based on its review and
assessment, the Audit Committee preliminarily concluded that the appropriate
measurement dates for determining the accounting treatment for certain stock
options we granted differ from the recorded measurement dates used in preparing
our Consolidated Financial Statements. The Audit Committee further
determined that certain stock option grants or modifications of stock option
grants that were not in accordance with our stock-based compensation plans
should have been accounted for using variable plan accounting for the duration
of the options. As a result, non-cash stock-based compensation expense should
have been recorded with respect to these stock option
grants. Accordingly, it was further disclosed that we would restate
our previously issued financial statements for the fiscal years ended March
31,
2004 and 2005, as well as previously reported interim financial information,
to
reflect additional non-cash charges for stock-based compensation expense
and the
related tax effects in certain reported periods. We further disclosed that
for
the above-stated reasons, certain of our prior financial statements and the
related reports from our independent registered public accountants, earnings
statements and press releases, and similar communications issued by us should
no
longer be relied upon.
The
Audit
Committee Investigation, and our internal review, identified certain errors
in
the ways in which we accounted for certain option grants. We
concluded that we (1) used incorrect measurement dates for the accounting
of
certain stock options, (2) had not properly accounted for certain modifications
of stock options, and (3) had incorrectly accounted for certain stock options
that required the application of the variable accounting method. We determined
revised measurement dates for those option grants with incorrect measurement
dates and recorded stock-based compensation expense to the extent that the
fair
market value of our stock on the revised measurement date exceeded the exercise
price of the stock option, in accordance with APB 25 and related FASB
interpretations. Additionally, we restated both basic and diluted
weighted average shares outstanding for changes in measurement dates resulting
from the Investigation. The combination of recording stock-based
compensation expense and restating our weighted average shares outstanding
have
resulted in restated basic and diluted EPS.
We
adopted a methodology for determining the most likely appropriate accounting
measurement dates for all stock option grants. We reviewed all
available documentation and considered all facts and circumstances for each
award and attempted to identify the date at which the award was most likely
authorized and approved and the recipient, number of shares and price were
determined with finality. A detailed discussion of the correction of
these errors and the impact of the adjustment to our Condensed Consolidated
Financial Statements for the periods ended September 30, 2005 is included
in
Note 2, “Restatement of Consolidated Financial Statements” to our Unaudited
Condensed Consolidated Financial Statements.
As
a
result of the Audit Committee Investigation, the Board adopted Stock Option
Grant Policies and Procedures (the “Option Grant Policy”) on September 28,
2006. The new policies and procedures include the
following:
·
|
|
All
option grants shall be effective and priced as of the date approved
or at
a predetermined date certain in the future, in accordance with
the
applicable plan and the terms of the
grant.
|
· |
|
All
decisions regarding stock options shall be made by the Compensation
Committee or the full Board. The Stock Incentive Committee ("SIC")
was discontinued. |
·
|
|
Each
option grant shall be approved at an in-person or telephonic meeting
of
the Compensation Committee or full Board. Option grants shall
not be approved by unanimous written
consent.
|
·
|
|
Systematic
authorization for option grants shall ensure that all option transactions
adhere to our plans and stated policies. All such transactions
must be accurately reflected in our books and records and have
appropriate
supporting documentation. Determinations of the Compensation
Committee and/or the Board regarding options must be implemented
in an
accurate and timely manner.
|
·
|
|
Options
shall be issued only during a specified window each year, immediately
after release of the Form 10-K for the prior year or after quarterly
earnings reports, with narrow exceptions for new employees and
other
special circumstances as determined by the Compensation Committee
or the
Board.
|
·
|
|
Each
option granted must specify all material terms of any options granted,
including date of grant, exercise price, vesting schedule, duration,
breakdown of ISOs versus non-qualified stock options, and any other
terms
the Compensation Committee or the Board deems
appropriate.
|
·
|
|
All
Forms 4 must be filed within two business days of any
grant.
|
·
|
|
Option
agreements for executive officers must be in the form on file with
the
SEC.
|
·
|
|
All
option agreements must be signed contemporaneously with each
grant.
|
· |
|
The
Compensation Committee may in its discretion engage
independent outside counsel to obtain legal advice on issues
that are significant and not ministerial rather than relying
on company
counsel for advice on such
matters. |
· |
|
The
Compensation Committee must be advised of the accounting and
reporting
impact of each grant. |
· |
|
Our
general counsel must review all proposed grants to ensure that all
legal requirements have been met. |
In
addition, we will strengthen our Internal Audit function by: (i) having
the
Internal Audit function report directly to the Audit Committee; (ii)
implementing appropriate enhancements to our independent monitoring
of financial
controls, including specifically the monitoring of stock options and
compensation issues; and (iii) implementing appropriate additional
compliance
training for our employees and management and we will adopt a new long-term
incentive plan to effectuate the new Option Grant Policy. We will ensure
that
the new plan is accurately described in public filings.
In addition to
the stock option errors described above, we have also restated our
Condensed
Consolidated Statements of Cash Flows for the six months ended September
30,
2005 for the following reasons:
We
use floor planning agreements for dealer financing of products purchased
from distributors and resold to end-users. Historically, we classified the
cash flows from our floor plan financing agreements in operating activities
in our Condensed Consolidated Statements of Cash Flows. We previously
treated the floor plan facility as an outsourced accounts payable function,
and,
therefore, considered the payments made by our floor plan facility as cash
paid to suppliers under Financial Accounting Standards No. 95, “Statement of
Cash Flows.”
We have
now determined that when an
unaffiliated finance company remits payments to our suppliers on our
behalf, we should show this transaction as a financing cash inflow and an
operating cash outflow. In addition, when we repay the financing
company, we should present this transaction as a financing cash outflow. As
a result, we have restated the accompanying Condensed Consolidated
Statements of Cash Flows for the six months ended September 30, 2005 to correct
this error.
Also,
payments made by our lessees directly to third-party, non-recourse
lenders were
previously reported on our Condensed Consolidated Statements of Cash
Flows as
repayments of non-recourse debt in the financing section and a decrease
in our
investment in leases and leased equipment—net in the operating section. As these
payments were not received or disbursed by us, management determined
that these
amounts should not be shown as cash used in financing activities and
cash
provided by operating activities on our Condensed Consolidated Statements
of
Cash Flows. Rather, these payments are now disclosed as a non-cash
financing activity on our Condensed Consolidated Statements of Cash
Flows.
Disclosure
Controls and Procedures
Management,
under the supervision and with the participation of our CEO and Chief
Financial
Officer (“CFO”), evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under
the Exchange Act), as of the end of the period covered by this report.
Based on
that evaluation, which included the findings of our Audit Committee
as part of
its review of our historical stock option granting practices and the
adjustments
to our Condensed Consolidated Financial Statements resulting from that
review
and classification errors in our Condensed Consolidated Statements
of Cash
Flows, our CEO and CFO have concluded that our disclosure controls
and
procedures as of September 30, 2006 were not effective at the reasonable
assurance level due to the existence of material weaknesses in our
internal
control over financial reporting, as described
below.
Discussion
of Material Weaknesses
A
material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely
basis.
In
connection with the restatements described above and as described under
“Summary
of the Restatement – Other Items” in Note 2, “Restatement of Consolidated
Financial Statements” to our Unaudited Condensed Consolidated Financial
Statements contained elsewhere in this document, the Company’s management
identified the existence of material weaknesses over the determination
of the
accounting measurement dates for our granting of stock option awards,
modifications of stock options awards and the classification of certain
cash
flows.
Stock
Option Grants
We
concluded that our controls over the application of accounting policies
related
to the determination of the measurement date of stock options were ineffective
to ensure that these policies complied with U.S. GAAP. Specifically, the
deficiency in our controls over the application of our stock option accounting
policies failed to identify errors in our financial statements, which resulted
in adjustments to our Condensed Consolidated Financial Statements.
Cash
Flow Statements
We
concluded that our controls over the application of accounting policies
related
to preparing our Condensed Consolidated Statements of Cash Flows were
ineffective to ensure that these policies complied with U.S. GAAP. Specifically,
the deficiency in our controls over the preparation of our Condensed
Consolidated Statements of Cash Flows failed to identify errors in our
financial
statements, which resulted in adjustments to our Condensed Consolidated
Financial Statements.
To
address these control weaknesses, we performed additional analysis and
other
procedures in order to prepare our Consolidated Financial Statements in
accordance with U.S. GAAP.
Change
in Internal Control over Financial Reporting
We
are
committed to remediation of the control deficiencies that constitute the
material weaknesses described above by implementing changes to our internal
control over financial reporting. Our CEO and CFO have taken the
responsibility to implement changes and improvements in our internal control
over financial reporting and remediate the control deficiencies that gave
rise
to the material weaknesses. The following changes have occurred
during the quarter ended September 30, 2006, that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting:
·
|
On
September 28, 2006, the Board adopted the Option Grant Policy
described
above.
|
·
|
We
have created a separate general ledger account for floor planning
liabilities to detect and report on cash flows related to the
transactions, and have created reports to detect payments from
lessees
that we did not receive or disburse. In addition, we have made
changes to our cash flow template and quarterly checklists to
ensure that
these activities are detected and reported upon
properly.
|
Other
than the changes noted above, there have not been any other changes in
our
internal control over financial reporting during the quarter ended September
30,
2006, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Cyberco
Related Matters
We
have
been involved in several matters described below, arising from four separate
installment sales to a customer named Cyberco Holdings, Inc.
(“Cyberco”). Two of the lawsuits arising from this matter have been
resolved. The Cyberco principals were perpetrating a scam, which
victimized several dozen leasing and lending institutions. Five Cyberco
principals have pled guilty to criminal conspiracy and/or related charges
including bank fraud, mail fraud and money laundering.
Cyberco, related affiliates, and at least one principal are in Chapter 7
bankruptcy. No future payments are expected from Cyberco, and at this time,
the
bankruptcy estate is anticipated to have insignificant funds.
In
a
bankruptcy adversarial complaint filed on December 7, 2006 in the United States
Bankruptcy Court for the Western District of Michigan, the bankruptcy trustee
filed a claim against ePlus Group, inc. seeking payments of
approximately $775,000 as alleged preferential transfers. We retained
none of those payments, and instead forwarded them to the appropriate assignees
of the underlying sales. Of the $775,000 in payments, approximately $200,000
was
forwarded to Banc of America Leasing and Capital, LLC (“BoA”) and the remainder
was forwarded to GMAC Commercial Finance, LLC (“GMAC”). Subsequent to
its filing suit against us, the trustee added BoA and GMAC as
defendants. We intend to vigorously defend these claims.
On
January 4, 2005 we filed suit in the United States District Court for the
Southern District of New York against our insurance carrier, Travelers Property
Casualty Company of America (“Travelers”), seeking a declaratory judgment that
any potential liability for claims made against us by GMAC or BoA, which are
described below, is covered by our insurance policy with Travelers. On February
9, 2006, the court granted summary judgment for Travelers, determining that
our
claim was not covered by our insurance policies. A final judgment was
entered on or about October 25, 2006, and we timely appealed to the United
States Court of Appeals for the Second Circuit. The ultimate decision
on insurance coverage will apply to the claims filed against us by both
underlying lenders, GMAC and BoA. We believe that our position
asserting insurance coverage is correct, but we cannot predict the outcome
of
our appeal.
On
January 4, 2005, GMAC filed suit, which we removed to the United States District
Court for the Southern District of New York, against ePlus Group, inc.
seeking repayment of three promissory notes underlying our non-recourse
assignment of Cyberco’s loan payments. GMAC’s suit sought approximately
$10,646,000, plus interest. The suit was settled on July 24, 2006 for $6,000,000
in cash, which we paid on July 25, 2006.
On
May
10, 2005, BoA filed a lawsuit against ePlus Group, inc. in the Circuit
Court for Fairfax County, Virginia. BoA funded one of the Cyberco
sales in exchange for assignment of the payment stream. After Cyberco
went into bankruptcy, BoA sought to recover its loss of approximately $3,062,792
plus interest. On September 14, 2006, a jury awarded BoA $3,025,000
plus interest. On or about February 6, 2007, a final judgment was
entered, which also awarded BoA $871,232 in attorneys’ fees. We paid
the total judgment, including interest and fees, of $4,258,237 in two payments,
the last of which was made on June 15, 2007.
In
addition, BoA filed a lawsuit against ePlus inc. on November 3, 2006 in
the Circuit Court for Fairfax County, Virginia, seeking to enforce a guaranty
in
which ePlus inc. guaranteed ePlus Group, inc.’s obligations to
BoA relating to the Cyberco transaction. ePlus Group has already paid to BoA
the
judgment in the Fairfax County lawsuit referenced above. The suit seeks
attorneys' fees BoA incurred in ePlus' appeal of BoA's suit against ePlus Group
referenced above, expenses that may be incurred in a bankruptcy adversary
proceeding relating to Cyberco, attorneys' fees incurred by BoA in defending
a
pending suit by ePlus Group against BoA, and any other costs or fees relating
to
any of the described matters. The trial is scheduled to begin November 20,
2007.
We are vigorously defending the suit. We cannot predict the outcome of this
suit.
On
January 12, 2007, ePlus Group, inc. filed a complaint against BoA in
the Superior Court of California, County of San Diego, seeking relief on matters
not adjudicated in the Virginia state court action described
above. While we believe that we have a basis for our claims to
recover certain of our losses related to the Cyberco matter, we cannot predict
whether we will be successful in our claim for damages, whether any award
ultimately received will exceed the costs incurred to pursue this matter or
how
long it will take to bring this matter to resolution.
On
June
22, 2007, ePlus Group, inc. and two other entities victimized by
Cyberco filed suit in the United States District Court for the Western District
of Michigan against The Huntington National Bank. The complaint
alleges counts of aiding and abetting fraud, aiding and abetting conversion,
and
statutory conversion. While we believe that we have a basis for our
claims to recover certain of our losses related to the Cyberco matter, we cannot
predict whether we will be successful in our claim for damages, whether any
award ultimately received will exceed the costs incurred to pursue this matter
or how long it will take to bring this matter to resolution.
Other
Matters
On
January 18, 2007 a stockholder derivative action related to stock option
practices was filed in the United States District Court for the District of
Columbia. The complaint names ePlus inc. as nominal defendant, and
personally names eight individual defendants who are directors and/or executive
officers of ePlus. The complaint alleges violations of federal
securities law and various state law claims such as breach of fiduciary duty,
waste of corporate assets and unjust enrichment. The Amended Complaint seeks
monetary damages from the individual defendants and that we take certain
corrective actions relating to option grants and corporate governance, and
attorneys' fees. We are currently preparing a response to the plaintiff’s
amended complaint.
On
December 11, 2006, ePlus inc. and SAP America, Inc. and its German
parent, SAP AG (collectively, “SAP”) entered into a Patent License and
Settlement Agreement (the “Agreement”) to settle a patent lawsuit between the
companies which we filed on April 20, 2005. Under the terms of the
Agreement, we will license to SAP our existing patents, together with those
developed and/or acquired by us within the next five years, in exchange for
a
one-time cash payment of $17,500,000, which was paid by SAP on January 16,
2007. In addition, SAP has agreed not to pursue legal action against
us for patent infringement as to any of our current lines of business on any
of
SAP’s patents for a period of five years. The Agreement also provides
for general release, indemnification for its violation, and dismisses the
existing litigation with prejudice.
We
are
currently engaged in a dispute with the government of the District of Columbia
(“DC”) regarding personal property taxes on property we financed for our
customers. DC is seeking approximately $508,000, plus interest and
penalties, relating to property we financed for our customers. We
believe the tax is owed by our customers, and are seeking resolution in DC’s
Office of Administrative Hearings. We cannot predict the outcome of
this matter. While management does not believe this matter will have
a material effect on our financial condition and results of operations,
resolution of this dispute is ongoing.
There
can
be no assurance that these or any existing or future litigation arising in
the
ordinary course of business or otherwise will not have a material adverse effect
on our business, consolidated financial position, results of operations or
cash
flows.
There
have not been any material changes in the risk factors previously disclosed
in
Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
March 31, 2006.
Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds
The
following table provides information regarding our purchases of ePlus
inc. common stock during the six months ended September 30, 2006.
Period
|
|
|
Total
number
of
shares
purchased
(1)
|
|
|
Average
price
paid
per
share
|
|
|
Total
number of
shares
purchased
as
part of publicly
announced
plans
or
programs
|
|
|
Maximum
number
of
shares that may
yet
be purchased under the plans
or
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1, 2006 through April 30, 2006
|
|
|
62,400
|
|
|
$ |
14.32
|
|
|
|
62,400
|
|
|
|
688,704
|
|
(2 |
) |
May
1, 2006 through May 31, 2006
|
|
|
122,900
|
|
|
$ |
13.69
|
|
|
|
122,900
|
|
|
|
599,104
|
|
(3 |
) |
June
1, 2006 through June 30, 2006
|
|
|
23,700
|
|
|
$ |
13.64
|
|
|
|
23,700
|
|
|
|
603,904
|
|
(4 |
) |
July
1, 2006 through July 31, 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
777,148
|
|
(5 |
) |
August
1, 2006 through August 31, 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
814,197
|
|
(6 |
) |
September
1, 2006 through September 30, 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
808,416
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All
shares acquired were in open-market purchases.
|
(2) |
|
The
share purchase authorization in place for the month ended April 30,
2006 had purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap
($12,500,000). As of April 30, 2006, the
remaining authorized dollar amount to purchase shares was $9,862,236
and,
based on April's average price per
share of $14.320, the maximum number of shares that may yet be purchased
is 688,704.
|
(3) |
|
The
share purchase authorization in place for the month ended May 31,
2006 had
purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap
($12,500,000). As of May 31, 2006, the
remaining authorized dollar amount to purchase shares was $8,179,568
and,
based on May's average price per
share of $13.653, the maximum number of shares that may yet be purchased
is 599,104.
|
(4) |
|
The
share purchase authorization in place for the month ended June 30,
2006
had purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap
($12,500,000). As of June 30, 2006, the
remaining authorized dollar amount to purchase shares was $7,856,187
and,
based on June's average price per share of $13.009, the maximum number
of
shares that may yet be purchased is 603,904.
|
(5) |
|
The
share purchase authorization in place for the month ended July 31,
2006
had purchase limitations on both the number of shares (3,000,000)
as well
as a total dollar cap ($12,500,000). As of July 31, 2006, the remaining
authorized dollar amount to purchase shares was $7,856,187 and, based
on
July's average price per share of $10.109, the maximum number of
shares
that may yet be purchased is 777,148.
|
(6) |
|
The
share purchase authorization in place for the month ended August
31, 2006
had purchase limitations on both the number of shares (3,000,000)
as well
as a total dollar cap ($12,500,000). As of August 31, 2006, the remaining
authorized dollar mount to purchase shares was $7,856,187 and, based
on
August's average price per share of $9.649, the maximum number of
shares
that may yet be purchased is 814, 197.
|
(7) |
|
The
share purchase authorization in place for the month ended September
30,
2006 had purchase limitations on both the number of shares (3,000,000)
as
well as a total dollar cap ($12,500,000). As of September 30, 2006,
the
remaining authorized dollar amount to purchase shares was $7,856,187
and,
based on September's average price per share of $9.718, the maximum
number
of shares that may yet be purchased is 808,416.
|
On
November 17, 2004, a stock purchase program was authorized by our
Board. This program authorized the repurchase of up to 3,000,000
shares of our outstanding common stock over a period of time ending no later
than November 17, 2005 and was limited to a cumulative purchase amount of $7.5
million. On March 2, 2005, our Board approved an increase, from $7.5
million to $12.5 million, for the maximum total cost of shares that could be
purchased. On November 18, 2005 our Board authorized a new stock repurchase
program for the repurchase of up to 3,000,000 shares of our outstanding common
stock, over a twelve-month period ending November 17, 2006, with a cumulative
purchase limit of $12.5 million.
During
the three months ended September 30, 2006, we repurchased no shares of our
outstanding common stock, whereas during the three months ended September 30,
2005, we repurchased 115,300 shares for $1.5 million. During the six months
ended September 30, 2006 and 2005, we repurchased 209,000 and 170,300 shares
of
our outstanding common stock for $2.9 million and $2.1 million,
respectively. Since the inception of our initial repurchase program
on September 20, 2001, and as of September 30, 2006, we had repurchased
2,978,990 shares of our outstanding common stock at an average cost of $11.04
per share for a total of $32.9 million.
Item
3. Defaults Upon
Senior Securities
Not
Applicable
Item
4. Submission
of Matters to a Vote of
Security Holders
Not
Applicable
Item
5. Other Information
Not
Applicable
Item
6. Exhibits
Exhibit
No. |
Exhibit
Description |
31.1 |
Certification
of the Chief Executive Officer of ePlus inc. pursuant to the
Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
31.2 |
Certification
of the Chief Financial Officer of ePlus inc. pursuant to the
Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
32 |
Certification
of the Chief Executive Officer and Chief Financial Officer of
ePlus inc. pursuant to 18 U.S.C. § 1350. |
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ePlus
inc. |
|
|
Date:
October 5, 2007 |
/s/
PHILLIP G. NORTON |
|
By:
Phillip G. Norton, Chairman of the Board, |
|
President
and Chief Executive Officer |
|
|
|
|
|
|
Date:
October 5, 2007 |
/s/
STEVEN J. MENCARINI |
|
By:
Steven J. Mencarini |
|
Chief
Financial Officer |