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 December 31, 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 incorporation or organization)
|
|
(I.R.S.
Employer 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 (Check one):
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 September 30, 2007, was
8,231,741.
ePlus
inc. AND SUBSIDIARIES
Part
I. Financial Information:
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Item
1.
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3
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3
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4
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5
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6
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8
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Item
2.
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29
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Item
3.
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40
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Item
4.
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41
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43
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Item
1.
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43
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Item
1A.
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45
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Item
2.
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45
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Item
3.
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46
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Item
4.
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46
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Item
5.
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46
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Item
6.
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46
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47
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Explanatory
Note
This
Quarterly Report on Form 10-Q contains the restatement of our Condensed
Consolidated Statements of Operations and Cash Flows for the three and nine
months ended December 31, 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
|
|
|
December
31, 2006
|
|
ASSETS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,697
|
|
|
$ |
20,946
|
|
Accounts
receivable—net
|
|
|
103,060
|
|
|
|
150,868
|
|
Notes
receivable
|
|
|
330
|
|
|
|
265
|
|
Inventories
|
|
|
2,292
|
|
|
|
11,360
|
|
Investment
in leases and leased equipment—net
|
|
|
205,774
|
|
|
|
216,975
|
|
Property
and equipment—net
|
|
|
5,629
|
|
|
|
5,427
|
|
Other
assets
|
|
|
10,038
|
|
|
|
10,531
|
|
Goodwill
|
|
|
26,125
|
|
|
|
26,125
|
|
TOTAL
ASSETS
|
|
$ |
373,945
|
|
|
$ |
442,497
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable—equipment
|
|
$ |
7,733
|
|
|
$ |
6,226
|
|
Accounts
payable—trade
|
|
|
19,235
|
|
|
|
22,692
|
|
Accounts
payable—floor
plan
|
|
|
46,689
|
|
|
|
53,815
|
|
Salaries
and commissions payable
|
|
|
4,124
|
|
|
|
5,188
|
|
Accrued
expenses and other liabilities
|
|
|
33,346
|
|
|
|
30,938
|
|
Income
taxes payable
|
|
|
104
|
|
|
|
10,211
|
|
Recourse
notes payable
|
|
|
6,000
|
|
|
|
10,000
|
|
Non-recourse
notes payable
|
|
|
127,973
|
|
|
|
159,200
|
|
Deferred
tax liability
|
|
|
165
|
|
|
|
165
|
|
Total
Liabilities
|
|
|
245,369
|
|
|
|
298,435
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2006
|
|
|
110
|
|
|
|
112
|
|
Additional
paid-in capital
|
|
|
72,811
|
|
|
|
75,722
|
|
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
|
|
|
|
100,823
|
|
Accumulated
other comprehensive income—foreign
currency
translation adjustment
|
|
|
287
|
|
|
|
289
|
|
Total
Stockholders' Equity
|
|
|
128,576
|
|
|
|
144,062
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
373,945
|
|
|
$ |
442,497
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
(dollar
amounts in thousands,
|
|
|
|
except
per share data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
146,385
|
|
|
$ |
183,277
|
|
Sales
of leased equipment
|
|
|
-
|
|
|
|
2,557
|
|
|
|
|
146,385
|
|
|
|
185,834
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
13,758
|
|
|
|
16,000
|
|
Fee
and other income
|
|
|
2,931
|
|
|
|
3,544
|
|
Patent
settlement income |
|
|
- |
|
|
|
17,500 |
|
|
|
|
16,689
|
|
|
|
37,044
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
163,074
|
|
|
|
222,878
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
131,734
|
|
|
|
161,254
|
|
Cost
of leased equipment
|
|
|
-
|
|
|
|
2,509
|
|
|
|
|
131,734
|
|
|
|
163,763
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
4,742
|
|
|
|
5,574
|
|
Professional
and other fees
|
|
|
2,464
|
|
|
|
7,245
|
|
Salaries
and benefits
|
|
|
15,893
|
|
|
|
17,947
|
|
General
and administrative expenses
|
|
|
4,469
|
|
|
|
4,050
|
|
Interest
and financing costs
|
|
|
1,956
|
|
|
|
2,839
|
|
|
|
|
29,524
|
|
|
|
37,655
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (2)
|
|
|
161,258
|
|
|
|
201,418
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
1,816
|
|
|
|
21,460
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
740
|
|
|
|
9,056
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
1,076
|
|
|
$ |
12,404
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
0.13
|
|
|
$ |
1.51
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
0.12
|
|
|
$ |
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,215,221
|
|
|
|
8,231,741
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
8,865,829
|
|
|
|
8,456,627
|
|
(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
December 31, 2005 and December 31, 2006,
respectively.
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
(dollar
amounts in thousands, except per share data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
440,663
|
|
|
$ |
538,923
|
|
Sales
of leased equipment
|
|
|
-
|
|
|
|
4,376
|
|
|
|
|
440,663
|
|
|
|
543,299
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
36,969
|
|
|
|
40,853
|
|
Fee
and other income
|
|
|
9,488
|
|
|
|
9,484
|
|
Patent
settlement income |
|
|
- |
|
|
|
17,500 |
|
|
|
|
46,457
|
|
|
|
67,837
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
487,120
|
|
|
|
611,136
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
397,564
|
|
|
|
477,879
|
|
Cost
of sales, leased equipment
|
|
|
-
|
|
|
|
4,284
|
|
|
|
|
397,564
|
|
|
|
482,163
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
12,336
|
|
|
|
16,170
|
|
Professional
and other fees
|
|
|
5,188
|
|
|
|
13,295
|
|
Salaries
and benefits
|
|
|
45,969
|
|
|
|
52,912
|
|
General
and administrative expenses
|
|
|
13,906
|
|
|
|
12,921
|
|
Interest
and financing costs
|
|
|
5,210
|
|
|
|
7,492
|
|
|
|
|
82,609
|
|
|
|
102,790
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (2)
|
|
|
480,173
|
|
|
|
584,953
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
6,947
|
|
|
|
26,183
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,823
|
|
|
|
10,737
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
4,124
|
|
|
$ |
15,446
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
0.49
|
|
|
$ |
1.88
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
0.46
|
|
|
$ |
1.80
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,411,268
|
|
|
|
8,222,700
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
8,998,659
|
|
|
|
8,577,999
|
|
(1)
|
See
Note 2, "Restatement of Consolidated Financial
Statements."
|
(2)
|
Includes
amounts to related parties of $658 thousand and $710 thousand for
the nine
months ended December 31, 2005 and December 31, 2006,
respectively.
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
(in
thousands)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
4,124
|
|
|
$ |
15,446
|
|
Adjustments
to reconcile net earnings to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,673
|
|
|
|
16,153
|
|
Write-off
of non-recourse debt
|
|
|
(22 |
) |
|
|
-
|
|
Reserves
for credit losses
|
|
|
(280 |
) |
|
|
788
|
|
Provision
for inventory losses
|
|
|
-
|
|
|
|
150
|
|
Impact
of stock-based compensation
|
|
|
303
|
|
|
|
719
|
|
Excess
tax benefit from exercise of stock options
|
|
|
-
|
|
|
|
(95 |
) |
Tax
benefit of stock options exercised
|
|
|
50
|
|
|
|
308
|
|
Deferred
taxes
|
|
|
(2,339 |
) |
|
|
-
|
|
Payments
from lessees directly to lenders—operating
leases
|
|
|
(4,650 |
) |
|
|
(8,244 |
) |
Loss
on disposal of property and equipment
|
|
|
142
|
|
|
|
90
|
|
Gain
on disposal of operating lease equipment
|
|
|
(932 |
) |
|
|
(600 |
) |
Excess
increase in cash value of officers life insurance
|
|
|
-
|
|
|
|
(19 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable—net
|
|
|
(26,354 |
) |
|
|
(48,784 |
) |
Notes
receivable
|
|
|
(37 |
) |
|
|
65
|
|
Inventories
|
|
|
(1,555 |
) |
|
|
(9,219 |
) |
Investment
in leases and leased equipment—net
|
|
|
(20,995 |
) |
|
|
(34,335 |
) |
Other
assets
|
|
|
152
|
|
|
|
(279 |
) |
Accounts
payable—equipment
|
|
|
(3,058 |
) |
|
|
(1,614 |
) |
Accounts
payable—trade
|
|
|
12,074
|
|
|
|
3,709
|
|
Salaries
and commissions payable, accrued expenses and other
liabilities
|
|
|
(12,503 |
) |
|
|
8,763
|
|
Net
cash used in operating activities
|
|
|
(43,207 |
) |
|
|
(56,998 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of operating lease equipment
|
|
|
1,647
|
|
|
|
1,270
|
|
Purchases
of operating lease equipment
|
|
|
(22,578 |
) |
|
|
(19,711 |
) |
Proceeds
from sale of property and equipment
|
|
|
2
|
|
|
|
2
|
|
Purchases
of property and equipment
|
|
|
(1,927 |
) |
|
|
(2,145 |
) |
Premiums
paid on officers life insurance
|
|
|
-
|
|
|
|
(219 |
) |
Net
cash used in investing activities
|
|
|
(22,856 |
) |
|
|
(20,803 |
) |
ePlus
inc. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
(in
thousands)
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
Non-recourse
|
|
$ |
68,682
|
|
|
$ |
87,029
|
|
Repayments:
|
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
(27,869 |
) |
|
|
(19,213 |
) |
Purchase
of treasury stock
|
|
|
(5,732 |
) |
|
|
(2,900 |
) |
Proceeds
from issuance of capital stock, net of expenses
|
|
|
187
|
|
|
|
1,911
|
|
Excess
tax benefit from exercise of stock options
|
|
|
-
|
|
|
|
95
|
|
Net
borrowings on floor-planning facility
|
|
|
8,532
|
|
|
|
7,126
|
|
Net
borrowings on lines of credit
|
|
|
735
|
|
|
|
4,000
|
|
Net
cash provided by financing activities
|
|
|
44,535
|
|
|
|
78,048
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
92
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(21,436 |
) |
|
|
249
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
38,852
|
|
|
|
20,697
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
17,416
|
|
|
$ |
20,946
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
2,094
|
|
|
$ |
1,981
|
|
Cash
paid for income taxes
|
|
$ |
3,695
|
|
|
$ |
457
|
|
Schedule
of Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment included in accounts payable
|
|
$ |
24
|
|
|
$ |
67
|
|
Payments
from lessees directly to lenders
|
|
$ |
21,218
|
|
|
$ |
36,589
|
|
(1)
See Note 2, "Restatement of Consolidated Financial
Statements".
|
|
|
|
|
|
|
|
|
See
Notes To Unaudited Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
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 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 represent 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 and services on the accompanying Condensed Consolidated Statements
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 Condensed
Consolidated Statements 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. 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.
Patent settlement income related to SAP America, Inc. and its German
parent, SAP AG, is included in patent settlement income on our Condensed
Consolidated Statements of Operations -- see also Note 12 to our Condensed
Consolidated Financial Statements.
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 $178 thousand and $685 thousand of
internal use software were capitalized for the nine months ended December
31,
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 such costs
are capitalized until the product is made available for release to customers.
For the nine months ended December 31, 2006 and 2005, costs of $59 thousand
and
$91 thousand, respectively, 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 March 31, 2006 and
December 31, 2006 was $134,412,611 and $168,737,035, compared to a carrying
amount of $133,973,456 and $169,199,885, 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 nine months ended December 31, 2006 and
2005,
accumulated other comprehensive income increased $1.7 thousand and $92.1
thousand, respectively, resulting in total comprehensive income of $15.4
million
and $4.2 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 8,411,268 for the nine months ended December 31, 2005 and 8,222,700 for
the
nine months ended December 31, 2006. Diluted EPS amounts were calculated
based
on weighted average shares outstanding and potentially dilutive common stock
equivalents of 8,998,659 for the nine months ended December 31, 2005, and
8,577,999 for the nine months ended December 31, 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 nine months ended December 31, 2005
have
been restated for changes in measurement dates resulting from the Audit
Committee Investigation (as defined below 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 Condensed 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 nine months ended
December 31, 2005 and our Condensed Consolidated Statement of Cash Flows
for the
nine months ended December 31, 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 nine months ended December 31,
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 Statement of Cash Flows for the nine months ended
December 31, 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 Statement of Cash Flows for the nine months ended December
31, 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.
Reclassifications
We
have
also reclassified certain items for our December 31, 2005 Condensed Consolidated
Statement of Cash Flows to conform to our presentation on our December 31,
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 nine months ended December 31, 2005 and the Condensed Consolidated
Statement of Cash Flows for the nine months ended December 31, 2005 (in
thousands, except per share data):
UNAUDITED
CONDENSED
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
Adjustments
|
|
|
|
|
Three
Months Ended December 31, 2005
|
|
As
Previously Reported
|
|
|
Stock-Based
Compensation and Tax Impact
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
146,385
|
|
|
|
-
|
|
|
$ |
146,385
|
|
Lease
revenues
|
|
|
13,758
|
|
|
|
-
|
|
|
|
13,758
|
|
Fee
and other income
|
|
|
2,931
|
|
|
|
-
|
|
|
|
2,931
|
|
Total
Revenue
|
|
|
163,074
|
|
|
|
-
|
|
|
|
163,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
131,734
|
|
|
|
-
|
|
|
|
131,734
|
|
Direct
lease costs
|
|
|
4,742
|
|
|
|
-
|
|
|
|
4,742
|
|
Professional
and other fees
|
|
|
2,464
|
|
|
|
-
|
|
|
|
2,464
|
|
Salaries
and benefits
|
|
|
15,678
|
|
|
|
215
|
|
|
|
15,893
|
|
General
and administrative expenses
|
|
|
4,469
|
|
|
|
-
|
|
|
|
4,469
|
|
Interest
and financing costs
|
|
|
1,950
|
|
|
|
6
|
|
|
|
1,956
|
|
Total
Costs and Expenses
|
|
|
161,037
|
|
|
|
221
|
|
|
|
161,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Before Provision for Income Taxes
|
|
|
2,037
|
|
|
|
(221 |
) |
|
|
1,816
|
|
Provision
for Income Taxes
|
|
|
825
|
|
|
|
(85 |
) |
|
|
740
|
|
Net
Earnings
|
|
$ |
1,212
|
|
|
$ |
(136 |
) |
|
$ |
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.15
|
|
|
$ |
(0.02 |
) |
|
$ |
0.13
|
|
Diluted
|
|
$ |
0.14
|
|
|
$ |
(0.02 |
) |
|
$ |
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Used in Computing Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,215,221
|
|
|
|
-
|
|
|
|
8,215,221
|
|
Diluted
|
|
|
8,890,948
|
|
|
|
(25,119 |
) |
|
|
8,865,829
|
|
UNAUDITED
CONDENSED
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
Nine
Months Ended December 31, 2005
|
|
As
Previously Reported
|
|
|
Stock-Based
Compensation and Tax Impact
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
440,663
|
|
|
$ |
-
|
|
|
$ |
440,663
|
|
Lease
revenues
|
|
|
36,969
|
|
|
|
-
|
|
|
|
36,969
|
|
Fee
and other income
|
|
|
9,488
|
|
|
|
-
|
|
|
|
9,488
|
|
Total
Revenue
|
|
|
487,120
|
|
|
|
-
|
|
|
|
487,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
397,564
|
|
|
|
-
|
|
|
|
397,564
|
|
Direct
lease costs
|
|
|
12,336
|
|
|
|
-
|
|
|
|
12,336
|
|
Professional
and other fees
|
|
|
5,188
|
|
|
|
-
|
|
|
|
5,188
|
|
Salaries
and benefits
|
|
|
45,482
|
|
|
|
487
|
|
|
|
45,969
|
|
General
and administrative expenses
|
|
|
13,906
|
|
|
|
-
|
|
|
|
13,906
|
|
Interest
and financing costs
|
|
|
5,203
|
|
|
|
7
|
|
|
|
5,210
|
|
Total
Costs and Expenses
|
|
|
479,679
|
|
|
|
494
|
|
|
|
480,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Before Provision for Income Taxes
|
|
|
7,441
|
|
|
|
(494 |
) |
|
|
6,947
|
|
Provision
for Income Taxes
|
|
|
3,014
|
|
|
|
(191 |
) |
|
|
2,823
|
|
Net
Earnings
|
|
$ |
4,227
|
|
|
$ |
(303 |
) |
|
$ |
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.53
|
|
|
$ |
(0.04 |
) |
|
$ |
0.49
|
|
Diluted
|
|
$ |
0.49
|
|
|
$ |
(0.03 |
) |
|
$ |
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Used in Computing Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,411,268
|
|
|
|
-
|
|
|
|
8,411,268
|
|
Diluted
|
|
|
8,992,035
|
|
|
|
6,624 |
|
|
|
8,998,659
|
|
Unaudited
Condensed Consolidated Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
Nine
Months Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Lessee
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Stock-Based
|
|
|
Floor
|
|
|
to
|
|
|
|
|
|
As
|
|
|
Reported
|
|
|
Compensation
|
|
|
Plan
|
|
|
Lenders
|
|
|
Other
|
|
|
Restated
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$ |
4,427
|
|
|
$ |
(303 |
) |
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
4,124
|
|
Adjustments
to reconcile net earnings to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
12,673
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,673
|
|
Write-off
of non-recourse debt
|
|
(22 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22 |
) |
Reserve
for credit losses
|
|
(280 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(280 |
) |
Impact
of stock-based compensation
|
|
-
|
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
303
|
|
Tax
benefit of stock options exercised
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
Deferred
taxes
|
|
(2,339 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,339 |
) |
Payments
from lessees directly to lenders
|
|
(5,645 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
995
|
|
|
|
|
|
|
|
(4,650 |
) |
Loss
on disposal of property and equipment
|
|
142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142
|
|
Gain
on disposal of operating lease equipment
|
|
(932 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(932 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(26,354 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,354 |
) |
Notes
receivable
|
|
(37 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37 |
) |
Inventories
|
|
(1,555 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,555 |
) |
Investment
in leases and leased equipment—net
|
|
(4,525 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(16,569 |
) |
|
|
99
|
|
|
|
(20,995 |
) |
Other
assets
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
Accounts
payable—equipment
|
|
(2,959 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(99 |
) |
|
|
(3,058 |
) |
Accounts
payable—trade
|
|
18,247
|
|
|
|
-
|
|
|
|
(8,532 |
) |
|
|
-
|
|
|
|
2,359
|
|
|
|
12,074
|
|
Salaries
and commissions payable, accrued expenses and other
liabilities
|
|
(10,144 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,359 |
) |
|
|
(12,503 |
) |
Net
cash used in operating activities
|
|
(19,101 |
) |
|
|
-
|
|
|
|
(8,532 |
) |
|
|
(15,574 |
) |
|
|
-
|
|
|
|
(43,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of operating equipment
|
|
1,647
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,647
|
|
Purchases
of operating lease equipment
|
|
(22,578 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,578 |
) |
Proceeds
from sale of property and equipment
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Purchases
of property and equipment
|
|
(1,927 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,927 |
) |
Net
cash used in investing activities
|
|
(22,856 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
68,682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,682
|
|
Repayments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
(43,443 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
15,574
|
|
|
|
-
|
|
|
|
(27,869 |
) |
Purchase
of treasury stock
|
|
(5,732 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,732 |
) |
Proceeds
from issuance of capital stock, net of expenses
|
|
187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187
|
|
Net
borrowings on floor-planning facility
|
|
-
|
|
|
|
-
|
|
|
|
8,532
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,532
|
|
Net
borrowings on lines of credit
|
|
735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
735
|
|
Net
cash provided by financing activities
|
|
20,429
|
|
|
|
-
|
|
|
|
8,532
|
|
|
|
15,574
|
|
|
|
-
|
|
|
|
44,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
(21,436 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
38,852
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
$ |
17,416
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
17,416
|
|
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
|
|
|
December
31, 2006
|
|
Investment
in direct financing and sales-type leases-net
|
|
$ |
155,910
|
|
|
$ |
161,209
|
|
Investment
in operating lease equipment-net
|
|
|
49,864
|
|
|
|
55,766
|
|
|
|
$ |
205,774
|
|
|
$ |
216,975
|
|
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
|
|
|
December
31, 2006
|
|
Minimum
lease payments
|
|
$ |
149,200
|
|
|
$ |
158,368
|
|
Estimated
unguaranteed residual value (1)
|
|
|
23,804
|
|
|
|
22,973
|
|
Initial
direct costs, net of amortization (2)
|
|
|
1,763
|
|
|
|
1,684
|
|
Less: Unearned
lease income
|
|
|
(15,944 |
) |
|
|
(19,240 |
) |
Reserve
for credit losses
|
|
|
(2,913 |
) |
|
|
(2,576 |
) |
Investment
in direct finance and sales-type leases-net
|
|
$ |
155,910
|
|
|
$ |
161,209
|
|
(1)
|
Includes
estimated unguaranteed residual values of $1,451 and $1,213 as
of March
31, 2006 and December 31, 2006, respectively, for direct financing
SFAS
140 leases.
|
(2)
|
Initial
direct costs are shown net of amortization of $1,786 and $1,385
as of
March 31, 2006 and December 31, 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 are as follows (in thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
December
31, 2006
|
|
Cost
of equipment under operating leases
|
|
$ |
71,786
|
|
|
$ |
87,738
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(21,922 |
) |
|
|
(31,972 |
) |
Investment
in operating lease equipment-net
|
|
$ |
49,864
|
|
|
$ |
55,766
|
|
4.
RESERVES FOR CREDIT LOSSES
As
of
March 31 and December 31, 2006, our activity in our reserves for credit
losses
is as follows (in thousands):
|
|
Accounts
Receivable
|
|
|
Lease-Related
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
|
|
|
1,417
|
|
|
|
(100 |
) |
|
|
1,317
|
|
Recoveries
|
|
|
(522 |
) |
|
|
-
|
|
|
|
(522 |
) |
Write-offs
and other
|
|
|
(148 |
) |
|
|
(237 |
) |
|
|
(385 |
) |
Balance
December 31, 2006
|
|
$ |
2,807
|
|
|
$ |
2,576
|
|
|
$ |
5,383
|
|
5.
RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse
and non-recourse obligations consist of the following (in
thousands):
|
|
As
of
|
|
|
|
March
31, 2006
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance Corporation – Recourse accounts receivable
component of our credit facility bearing interest at prime less
0.5%
(7.75% at December 31, 2006) with a maximum balance of $30,000,000.
Either party may terminate with 90 days’ advance notice.
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
National
City Bank – Recourse credit facility of $35,000,000 expiring on July 21,
2009. At our option, the 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 December 31, 2006 was
6.875%.
|
|
|
6,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total
recourse obligations
|
|
$ |
6,000
|
|
|
$ |
10,000
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
equipment notes secured by related investments in leases with interest
rates ranging from 3.05% to 9.05% for year ended March 31, 2006 and
3.05%
to 9.25% for the nine months ended December 31, 2006. |
|
$ |
127,973
|
|
|
$ |
159,200
|
|
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 December 31, 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
and
then extended again on October 1, 2007 through October 31, 2007. Other than
during the temporary increase periods described above, the total credit facility
limit is $85.0 million. Effective October 29, 2007, the aggregate limit of
the
facility was increased to $125.0 million with an accounts receivable sub-limit
of $30.0 million, and the temporary overline period was eliminated. 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 December 31, 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 December 31, 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 ending March
31, 2008; and (c) quarterly Unaudited Financial Statements for the quarters
ended 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 the delivery date of the documents above 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 nine months ended December 31,
2006,
we paid rent in the amount of $238 thousand and $710 thousand,
respectively. During the three and nine months ended December 31,
2005, we paid rent in the amount of $219 thousand and $658 thousand, respectively.
During
the nine months ended December 31, 2005, we reimbursed the landlord for certain
construction costs in the amount of $280 thousand, which are being amortized
over the lease term. There was no such reimbursement during the nine months
ended December 31, 2006. The capitalized reimbursement is included in
property and equipment—net on the Condensed Consolidated Balance
Sheets.
7.
COMMITMENTS AND CONTINGENCIES
Pending
Litigation
We
have
been involved in several matters described below, arising from four separate
installment sales to a customer 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.
In
the
first lawsuit, which was filed May 10, 2005, an underlying lender, Banc of
America Leasing and Capital, LLC (“BoA”) sought repayment from us 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 have recorded $4,081,697, representing $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 an additional
$36,429 in interest in the quarter ended December 31, 2006 and $108,891 for
the
nine months ended December 31, 2006.
The
second 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 suit against ePlus Group 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 in March 2008. ePlus is vigorously defending the
suit. We cannot predict the outcome of this suit. 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 was filed on April 20, 2005. Under the terms of the
Agreement, we licensed to SAP our existing patents as well as patents 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 on January 16, 2007. No royalties
or
additional payments of any kind are required to keep this Agreement in
full
force. We are not engaged in licensing patents in the normal course
of our business and do not perform research and development activities
to obtain
patentable processes or products; however, we may patent our existing business
processes or products. We do not anticipate incurring any additional costs
arising as a result of this Agreement and there are no further actions
that are
required to be taken by us. 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 provided for general release, indemnification for its violation,
and dismissed the litigation with prejudice. We accrued for the
Agreement in the quarter ended December 31, 2006
in patent settlement income on the accompanying Condensed
Consolidated Statements of Operations.
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 amended complaint names ePlus inc. as nominal
defendant, and personally names eight individual defendants who are directors
and/or executive officers of ePlus. The amended 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
have filed a Motion to Dismiss the plaintiff’s amended complaint. The
amended complaint seeks monetary damages from individual defendants and that
we
take certain corrective actions relating to option grants and corporate
governance, and attorneys’ fees. We cannot predict the outcome of
this suit. 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,” in June 2006, the Audit Committee commenced an investigation of our
stock option grants since our initial public offering in 1996. In August
2006,
the Audit Committee voluntarily contacted and advised the staff of SEC of
its
investigation and the Audit Committee’s preliminary conclusion that a
restatement will be required. The SEC opened an informal inquiry and 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 its financial condition and results of operations,
resolution of this dispute is ongoing.
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 Statements of Operations for the three and nine
months ended December 31, 2005 and 2006 (in thousands, except per share
data).
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders-- basic and
diluted
|
|
$ |
1,076
|
|
|
$ |
12,404
|
|
|
$ |
4,124
|
|
|
$ |
15,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding—basic
|
|
|
8,215
|
|
|
|
8,232
|
|
|
|
8,411
|
|
|
|
8,223
|
|
In-the-money
options exercisable under stock compensation plans
|
|
|
651
|
|
|
|
225
|
|
|
|
588
|
|
|
|
355
|
|
Weighted
average common shares outstanding—diluted
|
|
|
8,866
|
|
|
|
8,457
|
|
|
|
8,999
|
|
|
|
8,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.13
|
|
|
$ |
1.51
|
|
|
$ |
0.49
|
|
|
$ |
1.88
|
|
Diluted
|
|
$ |
0.12
|
|
|
$ |
1.47
|
|
|
$ |
0.46
|
|
|
$ |
1.80
|
|
_________________
(1) See
Note 2,
“Restatement of Consolidated Financial Statements.”
Unexercised
employee stock options to purchase 890,907 and 844,707 shares of our common
stock were not included in the computations of diluted EPS for the three
and
nine months ended December 31, 2006, respectively, because the options’ exercise
prices were greater than the average market price of our common stock during
the
applicable periods.
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 nine months ended December 31, 2006, we repurchased 209,000 shares of
our
outstanding common stock for $2.9 million, whereas during the nine months
ended
December 31, 2005, we repurchased 447,056 shares for $5.7 million. Since
the inception of our initial repurchase program on September 20, 2001, and
as of
December 31, 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. When the stock repurchase program expired on
November 17, 2006, a maximum purchase amount of $7,856,187 and up to
763,107 shares were available. As of December 31, 2006, there was no
approved stock repurchase plan.
10.
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 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
December 31, 2006, a total of 2,817,594 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 the 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 $209 thousand and $719 thousand
of
stock-based compensation expense ($121 thousand and $416 thousand net of
tax) for the three and nine months ended December 31, 2006,
respectively. As of December 31, 2006 there was $1.8 million of
unrecognized compensation expense related to nonvested options. This expense
is
expected to be fully recognized over the next 2.5 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 nine months ended December 31, 2005 (in thousands, except per share
data).
|
|
Three
Months Ended December 31, 2005
|
|
|
Nine
Months Ended December 31, 2005
|
|
|
|
As
Restated (1)
|
|
|
|
|
|
|
|
|
Net
earnings, as reported
|
|
$ |
1,076
|
|
|
$ |
4,124
|
|
Add:
APB intrinsic value of stock-based compensation, net of
tax
|
|
|
136
|
|
|
|
303
|
|
Less:
FAS 123 stock-based employee compensation expense, net of
tax
|
|
|
(150 |
) |
|
|
(465 |
) |
Net
earnings, pro forma
|
|
$ |
1,062
|
|
|
$ |
3,962
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share, as reported
|
|
$ |
0.13
|
|
|
$ |
0.49
|
|
Basic
earnings per share, pro forma
|
|
$ |
0.13
|
|
|
$ |
0.47
|
|
Diluted
earnings per share, as reported
|
|
$ |
0.12
|
|
|
$ |
0.46
|
|
Diluted
earnings per share, pro forma
|
|
$ |
0.12
|
|
|
$ |
0.44
|
|
___________________
(1) See
Note 2, “Restatement of Consolidated Financial Statements.”
Stock
Option Activity
During
the nine months ended December 31, 2006 and 2005, there were 40,000 and 80,000
stock options granted to employees, respectively. 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 nine
months ended December 31, 2005 and 2006.
|
|
Nine
Months Ended
|
|
|
December
31,
|
|
|
2005
|
|
2006
|
Options
granted under the Incentive Stock
|
|
|
|
|
Option
Plan:
|
|
|
|
|
Expected
life of option
|
|
5
years
|
|
5
years
|
Expected
stock price volatility
|
|
48.08%
|
|
38.22%
|
Expected
dividend yield
|
|
0%
|
|
0%
|
Risk-free
interest rate
|
|
4.15%
|
|
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 nine months ended December 31, 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
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
expired
|
|
|
(31,580 |
) |
|
$ |
8.75
- $17.38
|
|
|
|
8.78
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
|
1,834,813
|
|
|
$ |
6.24
- $17.38
|
|
|
$ |
10.20
|
|
|
|
3.7
|
|
|
$ |
2,757,679
|
|
Vested
or expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
1,834,813
|
|
|
|
|
|
|
$ |
10.20
|
|
|
|
3.7
|
|
|
$ |
2,757,679
|
|
Exercisable,
December 31, 2006
|
|
|
1,492,813
|
|
|
|
|
|
|
$ |
10.00
|
|
|
|
3.9
|
|
|
$ |
2,749,679
|
|
The
total
intrinsic value of stock options exercised during the nine months ended December
31, 2006 was $991 thousand.
Additional
information regarding stock options outstanding as of December 31, 2006 is
as
follows:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
|
Options
Outstanding
|
|
|
Weighted
Avg. Exercise Price per Share
|
|
|
Weighted
Avg. Contractual Life Remaining
|
|
|
Options
Exercisable
|
|
|
Weighted
Avg. Exercise Price per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.24
- $9.00
|
|
|
|
863,906
|
|
|
$ |
7.70
|
|
|
|
3.4
|
|
|
|
863,906
|
|
|
$ |
7.70
|
|
$ |
9.01
- $13.50
|
|
|
|
760,400
|
|
|
|
12.10
|
|
|
|
3.2
|
|
|
|
418,400
|
|
|
|
11.93
|
|
$ |
13.51
- $17.38
|
|
|
|
210,507
|
|
|
|
16.90
|
|
|
|
4.2
|
|
|
|
210,507
|
|
|
|
16.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.24
- $17.38
|
|
|
|
1,834,813
|
|
|
$ |
10.20
|
|
|
|
3.7
|
|
|
|
1,492,813
|
|
|
$ |
10.00
|
|
We
issue
shares from our authorized but unissued common stock to satisfy stock option
exercises.
A
summary
of nonvested option activity is presented below:
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
440,500
|
|
|
$ |
7.45
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
|
4.27
|
|
Vested
|
|
|
(138,500 |
) |
|
|
7.12
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
342,000
|
|
|
$ |
7.20
|
|
11.
SEGMENT REPORTING
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
our
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 are also included
in
the technology sales business unit.
The
accounting policies of the segments are the same as those described in Note
1,
"Organization and Summary of Significant Accounting Policies," to our
Consolidated Financial Statements contained in our 2006 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 nine months ended December 31, 2005 to conform to the three and nine
months
ended December 31, 2006 presentation.
|
|
Financing
Business Unit
|
|
|
Technology
Sales Business Unit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2005 (as restated)
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
1,069
|
|
|
$ |
145,316
|
|
|
$ |
146,385
|
|
Lease
revenues
|
|
|
13,758
|
|
|
|
-
|
|
|
|
13,758
|
|
Fee
and other income
|
|
|
154
|
|
|
|
2,777
|
|
|
|
2,931
|
|
Total
revenues
|
|
|
14,981
|
|
|
|
148,093
|
|
|
|
163,074
|
|
Cost
of sales
|
|
|
779
|
|
|
|
130,955
|
|
|
|
131,734
|
|
Direct
lease costs
|
|
|
4,742
|
|
|
|
-
|
|
|
|
4,742
|
|
Selling,
general and administrative expenses
|
|
|
5,542
|
|
|
|
17,284
|
|
|
|
22,826
|
|
Segment
earnings
|
|
|
3,918
|
|
|
|
(146 |
) |
|
|
3,772
|
|
Interest
and financing costs
|
|
|
1,809
|
|
|
|
147
|
|
|
|
1,956
|
|
Earnings
before income taxes
|
|
$ |
2,109
|
|
|
$ |
(293 |
) |
|
$ |
1,816
|
|
Assets
|
|
$ |
273,465
|
|
|
$ |
108,878
|
|
|
$ |
382,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
1,012
|
|
|
$ |
182,265
|
|
|
$ |
183,277
|
|
Sales
of leased equipment
|
|
|
2,557
|
|
|
|
-
|
|
|
|
2,557
|
|
Lease
revenues
|
|
|
16,000
|
|
|
|
-
|
|
|
|
16,000
|
|
Fee
and other income
|
|
|
341
|
|
|
|
3,203
|
|
|
|
3,544
|
|
Patent settlement
income |
|
|
- |
|
|
|
17,500 |
|
|
|
17,500 |
|
Total
revenues
|
|
|
19,910
|
|
|
|
202,968
|
|
|
|
222,878
|
|
Cost
of sales
|
|
|
3,172
|
|
|
|
160,591
|
|
|
|
163,763
|
|
Direct
lease costs
|
|
|
5,574
|
|
|
|
-
|
|
|
|
5,574
|
|
Selling,
general and administrative expenses
|
|
|
4,540
|
|
|
|
24,702
|
|
|
|
29,242
|
|
Segment
earnings
|
|
|
6,624
|
|
|
|
17,675
|
|
|
|
24,299
|
|
Interest
and financing costs
|
|
|
2,768
|
|
|
|
71
|
|
|
|
2,839
|
|
Earnings
before income taxes
|
|
$ |
3,856
|
|
|
$ |
17,604
|
|
|
$ |
21,460
|
|
Assets
|
|
$ |
294,419
|
|
|
$ |
148,078
|
|
|
$ |
442,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended December 31, 2005 (as restated)
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
3,151
|
|
|
$ |
437,512
|
|
|
$ |
440,663
|
|
Lease
revenues
|
|
|
36,969
|
|
|
|
-
|
|
|
|
36,969
|
|
Fee
and other income
|
|
|
953
|
|
|
|
8,535
|
|
|
|
9,488
|
|
Total
revenues
|
|
|
41,073
|
|
|
|
446,047
|
|
|
|
487,120
|
|
Cost
of sales
|
|
|
3,034
|
|
|
|
394,530
|
|
|
|
397,564
|
|
Direct
lease costs
|
|
|
12,336
|
|
|
|
-
|
|
|
|
12,336
|
|
Selling,
general and administrative expenses
|
|
|
16,511
|
|
|
|
48,552
|
|
|
|
65,063
|
|
Segment
earnings
|
|
|
9,192
|
|
|
|
2,965
|
|
|
|
12,157
|
|
Interest
and financing costs
|
|
|
4,863
|
|
|
|
347
|
|
|
|
5,210
|
|
Earnings
before income taxes
|
|
$ |
4,329
|
|
|
$ |
2,618
|
|
|
$ |
6,947
|
|
Assets
|
|
$ |
273,465
|
|
|
$ |
108,878
|
|
|
$ |
382,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
2,864
|
|
|
$ |
536,059
|
|
|
$ |
538,923
|
|
Sales
of leased equipment
|
|
|
4,376
|
|
|
|
-
|
|
|
|
4,376
|
|
Lease
revenues
|
|
|
40,853
|
|
|
|
-
|
|
|
|
40,853
|
|
Fee
and other income
|
|
|
903
|
|
|
|
8,581
|
|
|
|
9,484
|
|
Patent settlement
income |
|
|
- |
|
|
|
17,500 |
|
|
|
17,500 |
|
Total
revenues
|
|
|
48,996
|
|
|
|
562,140
|
|
|
|
611,136
|
|
Cost
of sales
|
|
|
6,343
|
|
|
|
475,820
|
|
|
|
482,163
|
|
Direct
lease costs
|
|
|
16,170
|
|
|
|
-
|
|
|
|
16,170
|
|
Selling,
general and administrative expenses
|
|
|
14,473
|
|
|
|
64,655
|
|
|
|
79,128
|
|
Segment
earnings
|
|
|
12,010
|
|
|
|
21,665
|
|
|
|
33,675
|
|
Interest
and financing costs
|
|
|
7,301
|
|
|
|
191
|
|
|
|
7,492
|
|
Earnings
before income taxes
|
|
$ |
4,709
|
|
|
$ |
21,474
|
|
|
$ |
26,183
|
|
Assets
|
|
$ |
294,419
|
|
|
$ |
148,078
|
|
|
$ |
442,497
|
|
Included
in the Financing Business Unit above are inter-segment accounts receivable
of
$4.3 million and $4.8 million for the nine months ended December 31, 2005
and
2006, respectively. Included in the Technology Sales Business Unit
above are inter-segment accounts payable of $4.3 million and $4.8 million
for
the nine months ended December 31, 2005 and 2006, respectively.
12.
LEGAL SETTLEMENT
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 was filed on April 20, 2005. Under the terms of the
Agreement, we licensed to SAP our existing patents as well as patents 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 on January 16, 2007. No royalties
or
additional payments of any kind are required to keep this Agreement in
full
force. We are not engaged in licensing patents in the normal course
of our business and do not perform research and development activities
to obtain
patentable processes or products; however, we may patent our existing business
processes or products. We do not anticipate incurring any additional costs
arising as a result of this Agreement and there are no further actions
that are
required to be taken by us. 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 provided for general release, indemnification for its violation,
and dismissed the litigation with prejudice. We accrued for the
Agreement in the quarter ended December 31, 2006 in patent settlement
income on the accompanying Condensed Consolidated Statements of
Operations.
Patent settlement
income
|
|
$ |
17,500,000
|
|
Professional
and other fees
|
|
|
5,511,437
|
|
Salaries
and benefits
|
|
|
266,020
|
|
Net
amount realized before income taxes
|
|
$ |
11,722,543
|
|
13.
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 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 Results of
Operations and Financial Condition
The
following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes 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 December 31, 2006, we
have
restated our Condensed Consolidated Statements of Operations for the three
and
nine months ended December 31, 2005 and our Condensed Consolidated Statement
of Cash Flows for the nine months ended December 31, 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 collectibility 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. Patent settlement income related to
SAP America, Inc. and its German parent, SAP AG, is included in
patent settlement income on our Condensed Consolidated Statements of
Operations -- see also Note 12 to our Condensed Consolidated Financial
Statements.
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 our Condensed
Consolidated Balance Sheets as a component of property and
equipment—net. Capitalized costs, net of amortization, totaled,
$622 thousand and $560 thousand as of March 31, 2006 and December 31, 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 our Condensed Consolidated
Balance Sheets as a component of other assets. We had $1.0 million
and $808 thousand of capitalized costs, net of amortization, as of March
31, 2006 and December 31, 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
Opinion No. 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 Nine Months Ended December 31, 2006 Compared to Three
and Nine Months Ended December 31, 2005
Revenues.
We generated total revenues during the three months ended December 31, 2006
of
$222.9 million compared to revenues of $163.1 million during the three months
ended December 31, 2005, an increase of 36.7%. The increase is primarily
the
result of increased sales of product and services. Total revenues generated
by
us during the nine months ended December 31, 2006 were $611.1
million compared to revenues of $487.1 million during the nine months ended
December 31 2005, an increase of 25.5%. 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 25.2% to $183.3 million during the three months
ended December 31, 2006 compared to $146.4 million generated during the three
months ended December 31, 2005 and represented 82.2% and 89.8% 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 nine months ended December 31, 2006, sales
of
product and services increased 22.3% to $538.9 million from $440.7 million
generated during the nine months ended December 31, 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 approximately 26% and
30%
of sales, respectively, for the three months ended December 31, 2006 as compared
to 29% and 24% of sales, respectively, for the three month period ended December
31, 2005.
Included
in the sales of product and service 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 12.0% and 11.3% for the three and nine months
ended December 31, 2006, respectively, and 10.0% and 9.8% for the three and
nine
months ended December 31, 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.
We
also
recognize revenue from the sale of leased equipment. During the three and
nine
months ended December 31, 2006, sales of leased equipment were $2.6 million
and
$4.4 million, respectively, and we recognized a gross margin of 1.9% and
2.1%,
respectively, on these sales. During the three and nine months ended December
31, 2005, there were no sales of leased equipment. The revenue and
gross margin recognized on sales of leased equipment can vary significantly
depending on the nature and timing of the sale, as well as the timing of
any
debt funding recognized in accordance with SFAS No. 125, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” as amended by SFAS No. 140 “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.”
Lease
revenues increased 16.3% to $16.0 million for the three months ended December
31, 2006 over the three months ended December 31, 2005. For the nine
months ended December 31, 2006, lease revenues increased 10.5% to $40.9 million
compared to $37.0 million during the nine months ended December 31, 2005.
The
increase in lease revenue is predominately due to an increase in our operating
lease portfolio. Our net investment in leased assets was $217.0
million as of December 31, 2006, a 5.4% increase from $205.8 million as of
December 31, 2005.
For
the
three months ended December 31, 2006, fee and other income was $3.5 million,
an
increase of 21.0% over the three months ended December 31, 2005. For the
nine
months ended December 31, 2006 and 2005, fee and other income remained the
same at $9.5 million. Fee and other income also 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 contains earnings from certain
transactions that 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.
Patent settlement income was $17.5 million for the
three and nine months ended December 31, 2006. The increase
in patent settlement income is primarily attributable to the
settlement of a lawsuit filed against SAP America, Inc. and SAP AG on December
14, 2006. Under the terms of the settlement agreement, we licensed to
SAP our existing patents as well as patents developed and/or acquired by us
within the next five years in exchange for a one-time cash payment of $17.5
million which was paid by SAP on January 16, 2007. No royalties or
additional payments of any kind are required to keep this settlement agreement
in full force. We are not engaged in licensing patents in the normal course
of
business and do not perform research and development activities to obtain
patentable processes or products; however, we may patent our existing processes
or products. We do not anticipate incurring any additional costs arising as
a result of this settlement agreement, and there are no further actions that
are
required to be taken by us. There was no patent settlement income for the
three and nine months ended December 31, 2005.
Costs
and Expenses. During the three months ended December 31, 2006, cost of
sales, product and services increased 22.4% to $161.3 million as compared
to
$131.7 million during the three months ended December 31, 2005. For the nine
months ended December 31, 2006, cost of sales, product and services increased
20.2% from $397.6 million to $477.9 million. The increase corresponds
to the increase in sales of product and services in our technology sales
business unit which increased 22.5% for the nine months ended December 31,
2006
as compared to the nine months ended December 31, 2005.
Cost
of
sales, product and services as a percentage of sales decreased from 90.0%
to
88.0% for the three months ended December 31, 2005 and 2006, respectively.
For
the nine months ended December 31, 2005 and 2006, cost of sales, product
and
services as a percentage of sales decreased from 90.2% to 88.7%,
respectively.
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 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 (National)
|
Lenovo
|
Lenovo
Platinum Partner
|
Network
Appliance, Inc.
|
NetApp
Platinum Elite
|
Citrix
Systems, Inc.
|
Citrix
Gold (National)
|
Cost
of
sales, leased equipment was $2.5 million for the three months ended December
31,
2006 and $4.3 million for the nine months ended December 31,
2006. There were no cost of sales, leased equipment during the
comparable period of the prior year.
Direct
lease costs increased 17.5% to $5.6 million during the three months ended
December 31, 2006, and 31.1% to $16.2 million during the nine months ended
December 31, 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 26.0% as of
December 31, 2006 as compared to the same periods in the prior fiscal
year.
Professional
and other fees increased 194.0%, to $7.2 million for the three months ended
December 31, 2006, and 156.3% to $13.3 million during the nine months ended
December 31, 2006 as compared to the same periods in the prior fiscal year.
The
increase is primarily due to increased expenses related to patent litigation
against SAP America, Inc. and its German parent, SAP AG as well as our review
of
accounting guidance regarding stock option grants since our IPO in 1996 and
the
resulting tax and accounting impact in connection with the Audit Committee
Investigation.
Salaries
and benefits expenses increased 12.9% to $17.9 million during the three
months ended December 31, 2006, and 15.1% to $52.9 million during the nine
months ended December 31, 2006 as compared to the same periods in the previous
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 682 people as
of
December 31, 2006, as compared to 670 people as of December 31,
2005.
General
and administrative expenses decreased 9.4% to $4.1 million during the three
months ended December 31, 2006, and decreased 7.1% to $12.9 million during
the
nine months ended December 31, 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 45.2% to $2.8 million during the three months
ended December 31, 2006, and 43.8% to $7.5 million during the nine months
ended
December 31, 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 18.4% to $159.2 million as of December 31, 2006 as compared
to
December 31, 2005.
Provision
for Income Taxes. Our provision for income taxes increased to
$9.1 million and $10.7 million for the three and nine months ended December
31,
2006, respectively, from $0.7 million and $2.8 million for the three and
nine
months ended December 31, 2005, respectively, primarily due to an increase
in
net earnings. Our effective income tax rates for both the three and
nine months ended December 31, 2006 were 42.2% and for the three and nine
months
ended December 31, 2005 were 40.8% and 40.6%, respectively.
Net
Earnings. The foregoing resulted in a 1053.3% and a 274.5% increase in
net earnings for the three and nine months ended December 31, 2006,
respectively, as compared to the same periods in the prior fiscal
year.
Basic
and
fully diluted earnings per common share were $1.51 and $1.47 for the three
months ended December 31, 2006, respectively, as compared to $0.13 and $0.12
for
the three months ended December 31, 2005, respectively. Basic and diluted
weighted average common shares outstanding for the three months ended December
31, 2006 were 8,231,741 and 8,456,627, respectively. For the three
months ended December 31, 2005, the basic and diluted weighted average common
shares outstanding were 8,215,221 and 8,865,829, respectively.
Basic
and
fully diluted earnings per common share were $1.88 and $1.80 for the nine
months
ended December 31, 2006, as compared to $0.49 and $0.46 for the nine months
ended December 31, 2005. Basic and diluted weighted average common shares
outstanding for the nine months ended December 31, 2006 were 8,222,700 and
8,577,999, respectively. For the nine months ended December 31, 2005, the
basic
and diluted weighted average common shares outstanding were 8,411,268 and
8,998,659, respectively. The number of common shares outstanding
decreased due to our repurchases of our common stock.
Liquidity
and Capital Resources
During
the nine months ended December 31, 2006, we used cash flows from operations
of
$57.0 million and used cash flows from investing activities of $20.8 million.
Cash flows provided by financing activities amounted to $78.0 million during
the
same period. The effect of exchange rate changes during the period generated
cash flows of $2.0 thousand. The net effect of these cash flows was a
net increase in cash and cash equivalents of $0.2 million during the nine
months
ended December 31, 2006. During the same period, our total assets increased
$68.6 million, or 18.3%, primarily as the result of increases in our accounts
receivable, investment in leases, and inventory. Our cash balance as of December
31, 2006 was $20.9 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
it
to obtain such financing, no assurances can be given that such financing
will be
available on 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 and warranties 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 and warranties 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. During the nine months ended December 31, 2006, our lease-related
non-recourse debt portfolio increased 24.4% to $159.2 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 reserve 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 December 31, 2006, we had $6.2 million of unpaid equipment cost, as compared
to $7.7 million as of March 31, 2006.
Accounts
payable—trade increased 18.0% to $22.7 million as of December 31, 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 15.3% to $53.8 million as of December 31, 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 $30.9 million and $33.3 million of accrued expenses and other liabilities
as of December 31, 2006 and March 31, 2006, respectively, a decrease of
7.2%.
Non-recourse
notes payable increased 24.4% or $31.2 million from March 31, 2006 to December
31, 2006. This increase is due to a strategic effort to fund existing
leases in our portfolio with non-recourse debt.
Based
on
past performance and current expectations, we believe that our cash and cash
equivalents, available borrowings based on continued compliance and/or waivers
or extensions 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 December
31, 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 and then extended again
on
October 1, 2007 through October 31, 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. Effective October 29, 2007, the aggregate limit of the
facility was increased to $125.0 million with an accounts receivable sub-limit
of $30.0 million, and the temporary overline period was eliminated. 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
December 31, 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 audited 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
(in thousands) were as follows:
Maximum
Credit Limit at March 31, 2006
|
|
|
Balance
as of March 31, 2006
|
|
|
Maximum
Credit Limit at December 31, 2006
|
|
|
Balance
as of December 31, 2006
|
|
$ |
75,000
|
|
|
$ |
46,689
|
|
|
$ |
85,000
|
|
|
$ |
53,815
|
|
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 (in thousands) were as follows:
Maximum
Credit Limit at March 31, 2006
|
|
|
Balance
as of March 31, 2006
|
|
|
Maximum
Credit Limit at December 31, 2006
|
|
|
Balance
as of December 31, 2006
|
|
$ |
20,000
|
|
|
$ |
0
|
|
|
$ |
30,000
|
|
|
$ |
0
|
|
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 December 31, 2006,
we
had an outstanding balance of $10.0 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 December 31, 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 ending March
31, 2008; and (c) quarterly Unaudited Financial Statements for the quarters
ended 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 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 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 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 and GECDF facilities
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 December 31, 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 December 31, 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
Statement of Cash Flows for the nine months ended December 31, 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 Statement of Cash Flows for the nine months ended December 31,
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
As
of
the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"),
of
the effectiveness of the design and operation of our disclosure controls
and
procedures, as such term is defined in Exchange Act Rules 13a-15(e) and
15d-15(e). Based upon that evaluation, our CEO and CFO concluded
that, as of December 31, 2006, our disclosure controls and procedures
were not
effective due to an existing material weakness in our internal control
over
financial reporting as discussed below.
Change
in Internal Control over Financial Reporting
Our
CEO
and CFO have implemented changes and improvements in our internal control
over
financial reporting to remediate the control deficiencies that gave rise
to the
material weaknesses in previous periods, relating to our historical stock
option
granting process. During the quarter ended December 31, 2006, we
implemented the Option Grant Policy as described above that was adopted
by the
Board on September 28, 2006, except for the adoption of a new long-term
incentive plan which we intend to submit to the shareholders at our next
annual
meeting.
During
the course of preparing our Condensed Consolidated Financial Statements
for the
period ended December 31, 2006, we identified a material weakness related
to the
cut-off and recognition of service sales and accrued liabilities. We
have begun remediation of this material weakness as described
below.
A
material weakness is a deficiency, or a 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.
Other
than the changes noted above, there have not been any other changes in
our
internal control over financial reporting during the quarter ended December
31,
2006, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Plan
for Remediation
In
connection with the preparation of our Condensed Consolidated Financial
Statements for the period ended December 31, 2006, we performed additional
procedures related to the cut-off and recognition matters noted
above. In addition, we are developing a plan to enhance our controls
surrounding these cut-off issues including, but not limited to, improvements
to
existing software applications to track service engagements, standardization
of
sales contract terms, and additional staff training. The actions that
we plan to
take are subject to continued management review supported by confirmation
and
testing as well as audit committee oversight.
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”). 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. ePlus retained none of those payments, and
instead forwarded them to the appropriate assignees of the underlying leases.
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 suit against
ePlus 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 ePlus by GMAC or BoA,
is covered by our insurance policy with Travelers. The BoA claims are
described below, and in July 2006 we settled a similar claim by GMAC for
$6,000,000. 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 ePlus 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 on this appeal.
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 an
assignment of the payment stream, and after Cyberco went into bankruptcy,
BoA
sought to recover its loss of approximately $3,062,792 plus
interest. On September 14, 2006 a jury verdict found in favor of BoA,
and awarded BoA $3,025,000 plus interest of $396 per day beginning December
22,
2004. On or about February 6, 2007, a final judgment was entered,
which also awarded BoA $871,232 in attorneys’ fees. The judgment,
fees and applicable interest was accrued in the period ended March 31,
2006. 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 against ePlus inc. seeks attorneys’ fees BoA incurred
in ePlus Group’s 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. We cannot predict the outcome of this suit.
On
January 12, 2007, ePlus Group, inc. filed a complaint against Banc of
America Leasing & Capital, LLC in the Superior Court of California, County
of San Diego, seeking relief on matters not adjudicated in the Virginia state
court action referenced 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 Cyberco victims filed suit in
the United States District Court for the Western District of Michigan against
The Huntington National Banks. 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 shareholder derivative action related to stock option
practices was filed in the United States District Court for the District
of
Columbia. The amended complaint names ePlus inc. as nominal
defendant, and personally names eight individual defendants who are directors
and/or executive officers of ePlus, inc. The amended 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 have filed a motion to dismiss
the amended complaint. We cannot predict the outcome of this
suit.
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 was filed on April 20, 2005. Under the terms of the
Agreement, we licensed to SAP our existing patents as well as patents 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 on January 16, 2007. No royalties
or
additional payments of any kind are required to keep this Agreement in
full
force. We are not engaged in licensing patents in the normal course
of our business and do not perform research and development activities
to obtain
patentable processes or products; however, we may patent our existing business
processes or products. We do not anticipate incurring any additional costs
arising as a result of this Agreement and there are no further actions
that are
required to be taken by us. 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 provided for general release, indemnification for its violation,
and dismissed the litigation with prejudice. We accrued for the
Agreement in the quarter ended December 31, 2006
in patent settlement income on the accompanying Condensed
Consolidated Statements of Operations.
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 its 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, or 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 nine months ended December 31, 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
|
|
|
$ |
13.65
|
|
|
122,900
|
|
|
599,104
|
|
(3 |
) |
June
1, 2006 through June 30, 2006
|
|
23,700
|
|
|
$ |
13.01
|
|
|
23,700
|
|
|
603,904
|
|
(4 |
) |
July
1, 2006 through July 31, 2006
|
|
-
|
|
|
$ |
10.11
|
|
|
-
|
|
|
777,148
|
|
(5 |
) |
August
1, 2006 through August 31, 2006
|
|
-
|
|
|
$ |
9.65
|
|
|
-
|
|
|
814,197
|
|
(6 |
) |
September
1, 2006 through September 30, 2006
|
|
-
|
|
|
$ |
9.72
|
|
|
-
|
|
|
808,416
|
|
(7 |
) |
October
1, 2006 through October 31, 2006
|
|
-
|
|
|
$ |
10.69
|
|
|
-
|
|
|
734,979
|
|
(8 |
) |
November
1, 2006 through November 30, 2006
|
|
-
|
|
|
$ |
10.06
|
|
|
-
|
|
|
781,166
|
|
(9 |
) |
December
1, 2006 through December 31, 2006
|
|
-
|
|
|
$ |
10.30
|
|
|
-
|
|
|
763,107
|
|
(10 |
) |
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
The
share purchase authorization in place for the month ended October
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 October 31, 2006,
the remaining
authorized dollar amount to purchase shares was $7,856,187 and,
based on
October's average price per share of $10.689, the maximum number
of shares
that may yet be purchased is
734,979.
|
|
|
The
share purchase authorization in place for the month ended November
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 November 30,
2006, the
remaining authorized dollar amount to purchase shares was $7,856,187
and,
based on November's average price per share of $10.057, the maximum
number
of shares that may yet be purchased is
781,166.
|
|
|
The
share purchase authorization in place for the month ended December
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 December 31,
2006, the
remaining authorized dollar amount to purchase shares was $7,856,187
and,
based on December's average price per share of $10.295, the maximum
number
of shares that may yet be purchased is
763,107.
|
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 December 31, 2006, we repurchased no shares of our
outstanding common stock, whereas during the three months ended December
31,
2005, we repurchased 276,756 shares for $3.7 million. During the nine
months ended December 31, 2006 and 2005 we repurchased 209,000 and 447,056
shares of our outstanding common stock for $2.9 million and $5.7 million,
respectively. Since the inception of the Company’s initial repurchase
program on September 20, 2001, and as of December 31, 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 December 31, 2006, there was
no
approved stock repurchase plan.
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
Exhibit
No.
|
|
Exhibit
Description
|
|
|
Certification
of the Chief Executive Officer of ePlus inc. pursuant to the
Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
|
|
|
Certification
of the Chief Financial Officer of ePlus inc. pursuant to the
Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
|
|
|
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:
November 6, 2007
|
/s/
PHILLIP G. NORTON
|
|
|
By:
Phillip G. Norton, Chairman of the Board,
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
Date:
November 6, 2007
|
/s/
STEVEN J. MENCARINI
|
|
|
By:
Steven J. Mencarini
|
|
Chief
Financial Officer
|
47