10-Q 1 form10q.htm EPLUS INC 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from____ to ____ .
 
Commission file number: 1-34167
 
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 x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
 Yes o  No x
 
The number of shares of common stock outstanding as of October 31, 2012 was 8,080,322.
 
 
 

 
 
 
ePlus inc. AND SUBSIDIARIES
 
Part I. Financial Information:
 
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
 
9
 
 
 
 
 
 
10
 
 
 
 
Item 2.
 
22
 
 
 
 
Item 3.
 
35
 
 
 
 
Item 4.
 
36
 
 
 
 
Part II. Other Information:
 
 
 
 
 
Item 1.
 
36
 
 
 
 
Item 1A.
 
37
 
 
 
 
Item 2.
 
37
 
 
 
 
Item 3.
 
38
 
 
 
 
Item 4.
 
38
 
 
 
 
Item 5.
 
38
 
 
 
 
Item 6.
 
39
 
 
 
 
40
 
 
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,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. 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:
 
 
·
we offer a comprehensive set of solutions—the bundling of our direct information technology (IT) hardware sales, third party software assurance and maintenance, professional services and financing with our proprietary software, and may encounter some of the challenges, risks, difficulties and uncertainties frequently faced by similar companies, such as:
 
o
managing a diverse product set of solutions in highly competitive markets;
 
o
increasing the total number of customers utilizing bundled solutions by up-selling within our customer base and gaining new customers;
 
o
adapting to meet changes in markets and competitive developments;
 
o
maintaining and increasing advanced professional services by retaining highly skilled personnel and vendor certifications;
 
o
integrating with external IT systems, including those of our customers and vendors; and
 
o
continuing to enhance our proprietary software and update our technology infrastructure to remain competitive in the marketplace.
 
·
our ability to hire and retain sufficient qualified personnel;
 
·
a decrease in the capital spending budgets of our customers or purchases from us;
 
·
our ability to protect our intellectual property;
 
·
the creditworthiness of our customers and our ability to reserve adequately for credit losses;
 
·
the possibility of goodwill impairment charges in the future;
 
·
uncertainty and volatility in the global economy and financial markets;
 
·
changes in the IT industry;
 
·
our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain non-recourse financing for our transactions;
 
·
our ability to realize our investment in leased equipment;
 
·
significant adverse changes in, reductions in, or losses of relationships with major customers or vendors;
 
·
our ability to successfully integrate acquired businesses;
 
·
our ability to maintain effective disclosure controls and procedures and internal control over financial reporting;
 
·
changes in taxes and other regulatory legislation that could require us to change our policies or structure;
 
·
reduction of manufacturer incentive programs; and
 
·
significant changes in accounting guidance related to the financial reporting of leases; which could impact the demand for our leasing services.
 
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 Item 1A, “Risk Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as other reports that we file with the Securities and Exchange Commission (“SEC”).


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

ePlus inc. AND SUBSIDIARIES

   
As of
   
As of
 
   
September 30, 2012
   
March 31, 2012
 
ASSETS
 
(in thousands)
 
   
 
   
 
 
Cash and cash equivalents
  $ 43,935     $ 33,778  
Short-term Investments
    1,970       7,396  
Accounts receivable—net
    194,344       174,599  
Notes receivable—net
    18,148       24,337  
Inventories—net
    15,783       23,514  
Investment in leases and leased equipment—net
    112,380       115,974  
Property and equipment—net
    2,040       2,086  
Other assets
    23,407       23,560  
Goodwill
    28,787       28,444  
TOTAL ASSETS
  $ 440,794     $ 433,688  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES
               
                 
Accounts payable—equipment
  $ 8,066     $ 17,268  
Accounts payable—trade
    24,650       26,719  
Accounts payable—floor plan
    84,366       85,911  
Salaries and commissions payable
    9,673       9,500  
Accrued expenses and other liabilities
    34,833       40,822  
Recourse notes payable
    1,682       1,727  
Non-recourse notes payable
    33,020       26,328  
Deferred tax liability
    5,786       5,786  
Total Liabilities
    202,076       214,061  
                 
COMMITMENTS AND CONTINGENCIES  (Note 9)
               
                 
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; 12,820,478 issued and 8,079,919 outstanding at September 30, 2012 and 12,692,224 issued and 7,999,895 outstanding at March 31, 2012
    128       127  
Additional paid-in capital
    96,056       93,545  
Treasury stock, at cost, 4,740,559 and 4,692,329 shares, respectively
    (66,973 )     (65,416 )
Retained earnings
    209,001       190,906  
Accumulated other comprehensive income—foreign currency translation adjustment
    506       465  
Total Stockholders' Equity
    238,718       219,627  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 440,794     $ 433,688  

See Notes to Unaudited Condensed Consolidated Financial Statements.

 
ePlus inc. AND SUBSIDIARIES

   
 
   
 
   
 
   
 
 
   
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
 
   
2011
   
 
   
2011
 
   
2012
   
As Restated (1)
   
2012
   
As Restated (1)
 
   
(amounts in thousands, except shares and per share data)
 
         
 
   
 
   
 
 
         
 
   
 
   
 
 
Sales of product and services
  $ 250,178     $ 193,493     $ 484,460     $ 362,814  
Financing revenue
    7,413       7,305       15,313       14,739  
Fee and other income
    2,460       2,857       5,002       5,001  
                                 
TOTAL REVENUES
    260,051       203,655       504,775       382,554  
                                 
COSTS AND EXPENSES
                               
                                 
Cost of sales, product and services
    205,199       158,429       399,590       299,103  
Direct lease costs
    2,461       2,078       4,704       4,174  
      207,660       160,507       404,294       303,277  
                                 
Professional and other fees
    2,707       2,355       5,820       4,780  
Salaries and benefits
    26,919       24,090       53,273       47,096  
General and administrative expenses
    5,411       4,507       10,066       8,540  
Interest and financing costs
    446       348       851       730  
      35,483       31,300       70,010       61,146  
                                 
TOTAL COSTS AND EXPENSES
    243,143       191,807       474,304       364,423  
                                 
EARNINGS BEFORE PROVISION FOR INCOME TAXES
    16,908       11,848       30,471       18,131  
                                 
PROVISION FOR INCOME TAXES
    6,875       4,784       12,376       7,364  
                                 
NET EARNINGS
  $ 10,033     $ 7,064     $ 18,095     $ 10,767  
                                 
NET EARNINGS PER COMMON SHAREBASIC
  $ 1.29     $ 0.87     $ 2.34     $ 1.31  
NET EARNINGS PER COMMON SHAREDILUTED
  $ 1.27     $ 0.85     $ 2.29     $ 1.28  
                                 
                                 
WEIGHTED AVERAGE SHARES OUTSTANDINGBASIC
    7,770,206       8,153,495       7,745,506       8,230,022  
WEIGHTED AVERAGE SHARES OUTSTANDINGDILUTED
    7,920,927       8,327,748       7,912,818       8,422,099  

(1) 
See Note 2, "Restatement of Financial Statements."
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

 
ePlus inc. AND SUBSIDIARIES

   
Three months ended
 September 30,
   
Six months ended
 September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(amounts in thousands)
 
         
 
         
 
 
   
 
   
 
   
 
   
 
 
NET EARNINGS
  $ 10,033     $ 7,064     $ 18,095     $ 10,767  
                                 
OTHER COMPREHENSIVE INCOME, NET OF TAX:
                               
Foreign currency translation adjustments
    91       (197 )     41       (182 )
Other comprehensive (loss) income
    91       (197 )     41       (182 )
                                 
TOTAL COMPREHENSIVE INCOME
  $ 10,124     $ 6,867     $ 18,136     $ 10,585  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.


ePlus inc. AND SUBSIDIARIES

   
Six months ended September 30,
 
   
2012
   
2011
 
   
(in thousands)
 
Cash Flows From Operating Activities:
 
 
   
 
 
Net earnings
  $ 18,095     $ 10,767  
                 
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    5,615       4,868  
Reserves for credit losses and sales returns
    40       335  
Provision for inventory allowances and inventory returns
    97       (297 )
Share-based compensation expense
    1,578       1,080  
Excess tax benefit from exercise of stock options
    (756 )     (303 )
Payments from lessees directly to lendersoperating leases
    (2,391 )     (2,049 )
(Gain)/loss on disposal of property, equipment and operating lease equipment
    (560 )     340  
(Gain)/loss on sales of notes receivable
    (525 )     (439 )
Excess increase in cash value of life insurance
    (75 )     (78 )
Other
    (255 )     (125 )
Changes in:
               
Accounts receivablenet
    (19,551 )     (30,328 )
Notes receivable
    1,028       (1,400 )
Inventories—net
    7,635       (3,259 )
Investment in direct financing and sale-type leases—net
    (795 )     (447 )
Other assets
    (506 )     9,709  
Accounts payableequipment
    (9,081 )     241  
Accounts payabletrade
    (2,037 )     1,903  
Salaries and commissions payable, accrued expenses and other liabilities
    (4,949 )     (10,643 )
Net cash used in operating activities
  $ (7,393 )   $ (20,125 )
                 
Cash Flows From Investing Activities:
               
Purchases in short-term investments
  $ (1,232 )   $ -  
Maturities of short-term investments
    6,658       -  
Proceeds from sale of property, equipment and operating lease equipment
    877       1,116  
Purchases of property, equipment and operating lease equipment
    (6,223 )     (3,054 )
Issuance of notes receivable
    (17,237 )     (19,690 )
Repayments of notes receivable
    9,387       10,703  
Proceeds from transfer of notes receivable
    13,420       11,896  
Premiums paid on life insurance
    (43 )     (70 )
Cash used in acquisition, net of cash acquired
    -       (3,514 )
Net cash  provided by (used in) investing activities
  $ 5,607     $ (2,613 )

 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
 
   
Six months ended September 30,
 
   
2012
   
2011
 
   
(in thousands)
 
Cash Flows From Financing Activities:
 
 
   
 
 
Borrowings of non-recourse and recourse notes payable
  $ 14,605       2,300  
Repayments of non-recourse and recourse notes payable
    (500 )     (292 )
Repurchase of common stock
    (1,557 )     (10,034 )
Proceeds from issuance of capital stock through option exercise
    178       216  
Excess tax benefit from share based compensation
    756       303  
Net repayments on floor plan facility
    (1,545 )     (85 )
Net cash provided by (used in) financing activities
    11,937       (7,592 )
                 
Effect of exchange rate changes on cash
    6       (20 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    10,157       (30,350 )
                 
Cash and Cash Equivalents, Beginning of Period
    33,778       75,756  
                 
Cash and Cash Equivalents, End of Period
  $ 43,935     $ 45,406  
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 1     $ 2  
Cash paid for income taxes
  $ 6,738     $ 3,773  
                 
Schedule of Non-Cash Investing and Financing Activities:
               
Purchase of property and equipment included in accounts payable
  $ 62     $ 19  
Purchase of operating lease equipment included in accounts payable
  $ 175     $ 58  
Sales of operating lease equipment included in accounts receivable
  $ 143     $ -  
Principal payments from lessees directly to lenders
  $ 7,374     $ 8,627  
Vesting of share-based compensation
  $ 3,558     $ 1,419  
Contingent consideration
  $ -     $ 1,500  

See Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
ePlus inc. AND SUBSIDIARIES
(amounts in thousands, except shares data)

                                 
Accumulated
       
               
Additional
               
Other
       
   
Common Stock
   
Paid-In
   
Treasury
   
Retained
   
Comprehensive
       
   
Shares
   
Par Value
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
               
 
   
 
   
 
   
 
   
 
 
Balance, April 1, 2012
    7,999,895     $ 127     $ 93,545     $ (65,416 )   $ 190,906     $ 465     $ 219,627  
                                                         
Issuance of shares for option exercises
    25,000       -       178       -       -       -       178  
Excess tax benefit of share based compensation
    -       -       756       -       -       -       756  
Effect of share-based compensation
    103,254       1       1,577       -       -       -       1,578  
Purchase of treasury stock
    (48,230 )     -       -       (1,557 )     -       -       (1,557 )
Net earnings
    -       -       -       -       18,095       -       18,095  
Foreign currency translation adjustment (net of tax of $1)
    -       -       -       -       -       41       41  
                                                         
Balance, September 30, 2012
    8,079,919     $ 128     $ 96,056     $ (66,973 )   $ 209,001     $ 506     $ 238,718  

See Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
ePlus inc. AND SUBSIDIARIES
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION — Our company was founded in 1990 and is a Delaware corporation. ePlus inc. is sometimes referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” or “ePlus.” The unaudited condensed consolidated financial statements include the accounts of ePlus inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

INTERIM FINANCIAL STATEMENTS — The condensed consolidated financial statements for the three and six months ended September 30, 2012 and 2011 are unaudited, but include all adjustments consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations, changes in equity and cash flows for such periods. Operating results for the three and six months ended September 30, 2012 and 2011 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending March 31, 2013 or any other future period. These unaudited condensed consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements. Our audited consolidated financial statements are contained in our annual report on Form 10-K for the year ended March 31, 2012, which should be read in conjunction with these interim financial statements.

SUBSEQUENT EVENTS — Management has evaluated subsequent events after the balance sheet date through the date our financial statements are issued.
 
USE OF 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include estimates related to revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangibles, reserves for credit losses, and the recognition and measurement of income tax assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

REVENUE RECOGNITION–The majority of our revenues are derived from the following sources: sales of third party products, software, software assurance, maintenance and services; sales of our services and software; and financing revenues. For all these revenue sources, we determine whether we are the principal or agent in accordance with Codification Topic, Revenue Recognition, Subtopic Principal Agent Considerations. Our revenue recognition policies vary based on these revenue sources.

For the sale of third party software assurance, maintenance and services we concluded that we are acting as an agent and recognize revenue for these transactions on a net basis at the date of sale, which is presented within sales of products and services in our unaudited condensed consolidated statements of operations. Gross billings for all products and services for the three months ended September 30, 2012 and September 30, 2011 were $318.8 million and $252.7 million, respectively. Gross billings for all products and services for the six months ended September 30, 2012 and September 30, 2011 were $597.6 million and $454.7 million, respectively.

CONCENTRATIONS OF RISK—Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, short-term investments, accounts receivable, notes receivable and investments in direct financing and sales-type leases. Cash and cash equivalents and short-term investments are maintained principally with financial institutions in the United States, which have high credit ratings. Risk on accounts receivable, notes receivable and investments in direct financing and sales-type leases is reduced by the large number of diverse industries comprising our customer base and through the ongoing evaluation of collectability of our portfolio. Our credit risk is further mitigated through the underlying collateral and whether the asset is funded with recourse or non-recourse notes payable.

A substantial portion of our sales of product and services are from sales of Cisco and Hewlett Packard products, which represented approximately 49.8% and 10.0%, and 51.6% and 10.1%, respectively, of our sales of product and services for the three and six months ended September 30, 2012, as compared to 46.1% and 17.2%, and 44.0% and 16.4%, respectively, of our sales of product and services for the three and six months ended September 30, 2011. Any changes in our vendors’ ability to provide products could have a material adverse effect on our business, results of operations and financial condition.
 
 
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS — In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-12, Comprehensive Income (“ASU 2011-12”), which amended existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-12 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this amendment on April 1, 2012 and are presenting our components of net income and other comprehensive income in two separate but consecutive financial statements.

2. RESTATEMENT OF FINANCIAL STATEMENTS

During the preparation of our financial statements for the fiscal year ended March 31, 2012, we reassessed the presentation of sales of third party software assurance, maintenance and services and, after giving further consideration with respect to gross vs. net reporting, concluded that these transactions should be presented on a net basis in accordance with Codification Topic, Revenue Recognition, Subtopic Principal Agent Considerations. We determined that we should have been considered an agent in the transaction because a third party is responsible for the day to day provision of services under the contract. This change in the determination of that status results in different accounting treatment of the revenue resulting from the sale of such third party software assurance, maintenance and services, requiring the revenue to be reported net of the associated cost of the underlying contract with the third party service provider.

Under net sales recognition, the cost paid to the third party service provider is recorded as a reduction to sales of products and services, resulting in net sales being equal to the gross profit on the transaction. The change in accounting policy and restatement affects our revenues and offsetting costs and expenses for the identified periods but does not affect our previously reported earnings before provision for income tax, net earnings, net earnings per common share or unaudited condensed consolidated statement of cash flows.

The effects of this restatement are summarized in the table below (in thousands):

   
Three Months Ended
 September 30, 2011
   
Six Months Ended
 September 30, 2011
 
   
As reported
   
Adjustments
   
As restated
   
As reported
   
Adjustments
   
As restated
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Sales of product and services
  $ 252,688     $ (59,195 )   $ 193,493     $ 454,654     $ (91,840 )   $ 362,814  
Total revenues
  $ 262,850     $ (59,195 )   $ 203,655     $ 474,394     $ (91,840 )   $ 382,554  
Cost of sales, product and services
  $ 217,624     $ (59,195 )   $ 158,429     $ 390,943     $ (91,840 )   $ 299,103  
Total costs and expenses
  $ 251,002     $ (59,195 )   $ 191,807     $ 456,263     $ (91,840 )   $ 364,423  
Net earnings
  $ 7,064     $ -     $ 7,064     $ 10,767     $ -     $ 10,767  
Net earnings per common share - basic
  $ 0.87     $ -     $ 0.87     $ 1.31     $ -     $ 1.31  
Net earnings per common share - diluted
  $ 0.85     $ -     $ 0.85     $ 1.28     $ -     $ 1.28  

3. INVESTMENT IN LEASES AND LEASED EQUIPMENT—NET

Investment in leases and leased equipment—net consists of the following (in thousands):
 
   
September 30,
   
March 31,
 
   
2012
 
Investment in direct financing and sales-type leases—net
  $ 90,711     $ 95,460  
Investment in operating lease equipment—net
    21,669       20,514  
    $ 112,380     $ 115,974  
 
 
 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):
 
   
September 30,
   
March 31,
 
   
2012
 
Minimum lease payments
  $ 93,646     $ 99,747  
Estimated unguaranteed residual value (1)
    7,319       6,917  
Initial direct costs, net of amortization (2)
    746       797  
Less:  Unearned lease income
    (9,648 )     (10,665 )
Less:  Reserve for credit losses (3)
    (1,352 )     (1,336 )
Investment in direct financing and sales-type leases—net
  $ 90,711     $ 95,460  
 
(1)
Includes estimated unguaranteed residual values of $2,222 thousand and $1,700 thousand as of September 30, 2012 and March 31, 2012, respectively, for direct financing leases which have been sold and accounted for as sales under Codification Topic, Transfers and Servicing.
(2)
Initial direct costs are shown net of amortization of $618 thousand and $512 thousand as of September 30, 2012 and March 31, 2012, respectively.
(3)
For details on reserve for credit losses, refer to Note 5, “Reserves for Credit Losses.”

Our net investment in direct financing and sales-type leases for certain lease agreements serves as collateral for non-recourse equipment notes. See Note 7, “Notes Payable and Credit Facility.”

We enter into agreements to sell the financing receivable associated with certain notes receivables and investments in direct financing leases, which are accounted for as a sale under Codification Topic, Transfer and Servicing. We recognized a net gain for these sales of $0.5 million and $0.9 million in financing revenues in the unaudited condensed consolidated statement of operations for the three months ended September 30, 2012 and 2011, respectively, and $1.7 million and $1.0 million for the six months ended September 30, 2012 and 2011, respectively. Total proceeds from these sales were $12.6 million and $23.0 million for the three months ended September 30, 2012 and 2011, respectively. Total proceeds from these sales were $42.0 million and $24.6 million for the six months ended September 30, 2012 and 2011, respectively.

INVESTMENT IN OPERATING LEASE EQUIPMENT—NET

Investment in operating lease equipment—net primarily represents leases that do not qualify as direct financing leases. The components of the investment in operating lease equipment—net are as follows (in thousands):
 
   
 
   
 
 
   
September 30,
   
March 31,
 
   
2012
 
Cost of equipment under operating leases
  $ 46,775     $ 44,487  
Less:  Accumulated depreciation and amortization
    (25,106 )     (23,973 )
Investment in operating lease equipment—net (1)
  $ 21,669     $ 20,514  
 
 
(1)
Includes estimated unguaranteed residual values of $7,918 thousand and $7,802 thousand as of September 30, 2012 and March 31, 2012, respectively, for operating leases.

 
4. GOODWILL
 
Goodwill represents the premium paid over the fair value of net tangible and intangible assets we have acquired in business combinations. The following table summarizes the amount of goodwill allocated to our reporting units (in thousands):
 
   
Financing
   
Technology
   
Software
 Procurement
   
Software
 Document
 Management
   
Total
 
Balance April 1, 2012
 
 
   
 
   
 
   
 
   
 
 
Goodwill
  $ 4,029     $ 27,355     $ 4,644     $ 1,089     $ 37,117  
Accumulated impairment losses
    (4,029 )     -       (4,644 )     -       (8,673 )
      -       27,355       -       1,089       28,444  
                                         
Purchase accounting adjustments
    -       343       -       -       343  
                                         
Balance September 30, 2012
                                       
Goodwill
    4,029       27,698       4,644       1,089       37,460  
Accumulated impairment losses
    (4,029 )     -       (4,644 )     -       (8,673 )
Goodwill - net balance September 30, 2012
  $ -     $ 27,698     $ -     $ 1,089     $ 28,787  

5. RESERVES FOR CREDIT LOSSES

Activity in our reserves for credit losses for the six months ended September 30, 2012 and 2011 were as follows (in thousands):
 
   
Accounts
 Receivable
   
Notes
 Receivable
   
Lease-Related
 Receivables
   
Total
 
Balance April 1, 2012
  $ 1,307     $ 2,963     $ 1,336     $ 5,606  
Provision for bad debts
    (206 )     117       19       (70 )
Write-offs and other
    (48 )     -       (3 )     (51 )
Balance September 30, 2012
  $ 1,053     $ 3,080     $ 1,352     $ 5,485  
 
   
Accounts
 Receivable
   
Notes
 Receivable
   
Lease-Related
 Assets
   
Total
 
Balance April 1, 2011
  $ 944     $ 94     $ 1,733     $ 2,771  
Provision for bad debts
    129       162       (184 )     107  
Write-offs and other
    (224 )     -       (2 )     (226 )
Balance September 30, 2011
  $ 849     $ 256     $ 1,547     $ 2,652  

Our reserves for credit losses and minimum payments associated with our notes receivables and lease related receivables disaggregated on the basis of our impairment method were as follows (in thousands):
 
   
September 30, 2012
   
March 31, 2012
 
   
Notes
 Receivable
   
Lease-Related
 Receivables
   
Notes
 Receivable
   
Lease-Related
 Receivables
 
Reserves for credit losses:
 
 
   
 
   
 
   
 
 
Ending balance: collectively evaluated for impairment
  $ 133     $ 1,258     $ 298     $ 1,314  
Ending balance: individually evaluated for impairment
    2,947       94       2,665       22  
Ending balance
  $ 3,080     $ 1,352     $ 2,963     $ 1,336  
                                 
Minimum payments:
                               
Ending balance: collectively evaluated for impairment
  $ 17,728     $ 93,335     $ 22,944     $ 99,545  
Ending balance: individually evaluated for impairment
    3,500       311       4,356       202  
Ending balance
  $ 21,228     $ 93,646     $ 27,300     $ 99,747  


During fiscal year 2012, we began selling and financing various products and services to a large law firm, which filed for bankruptcy in May 2012. As of September 30, 2012, we had $3.6 million of notes and lease-related receivables from this customer and total reserves for credit losses of $2.9 million, which represented our estimated probable loss.

As of March 31, 2012, we had $4.2 million of notes receivables from this customer and total reserves for credit losses of $2.6 million. In addition to the notes receivable, there were accounts receivable for this customer of $0.9 million and a reserve for credit losses of $0.3 million as of March 31, 2012. Accordingly, the total receivables associated with this customer as of March 31, 2012 were $5.1 million and our estimated probable loss was $2.9 million. As of March 31, 2012, the notes and lease receivables associated with this customer were placed on non-accrual status.

As of September 30, 2012, the age of the recorded minimum lease payments and net credit exposure associated with our investment in direct financing and sales-type leases that are past due, disaggregated based on our internally assigned credit quality ratings (“CQR”), were as follows (in thousands):
 
 
 
31-60
 Days
 Past Due
   
61-90
 Days
 Past Due
   
Greater
 than 90
 Days
 Past Due
   
Total
 Past Due
   
Current
   
Unbilled
 Minimum
 Lease
 Payments
   
Total
 Minimum
 Lease
 Payments
   
Unearned
 Income
   
Non-
Recourse
 Notes
 Payable
   
Net Credit
 Exposure
 
September 30, 2012
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
High CQR
  $ 35     $ 15     $ 255     $ 305     $ 534     $ 51,490     $ 52,329     $ (3,889 )   $ (4,003 )   $ 44,437  
Average CQR
    27       -       25       52       76       40,848       40,976       (3,913 )     (15,413 )     21,650  
Low CQR
    6       12       29       47       -       294       341       (30 )     -       311  
Total
    68       27       309       404       610       92,632       93,646       (7,832 )     (19,416 )     66,398  
 
                                                                               
March 31, 2012
                                                                               
 
                                                                               
High CQR
  $ 1,767     $ 5     $ 72     $ 1,844     $ 977     $ 58,214     $ 61,035     $ (4,541 )   $ (3,480 )   $ 53,014  
Average CQR
    85       7       12       104       53       38,337       38,494       (4,445 )     (15,109 )     18,940  
Low CQR
    -       -       -       -       -       218       218       (16 )     -       202  
Total
  $ 1,852     $ 12     $ 84     $ 1,948     $ 1,030     $ 96,769     $ 99,747     $ (9,002 )   $ (18,589 )   $ 72,156  

As of September 30, 2012, the age of the recorded notes receivable balance disaggregated based on our internally assigned CQR were as follows (in thousands):

   
31-60Days
 Past Due
   
61-90 Days
 Past Due
   
Greater than
 90 Days
 Past Due
   
Total Past
 Due
   
Current
   
Unbilled
 Notes
 Receivable
   
Total
 
September 30, 2012
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
High CQR
  $ 500     $ 578     $ -     $ 1,078     $ 211     $ 12,796     $ 14,085  
Average CQR
    -       -       -       -       15       3,628       3,643  
Low CQR
    51       -       678       729       -       2,771       3,500  
Total
  $ 551     $ 578     $ 678     $ 1,807     $ 226     $ 19,195     $ 21,228  
                                                         
March 31, 2012
                                                       
                                                         
High CQR
  $ -     $ -     $ -     $ -     $ 2,661     $ 18,140     $ 20,801  
Average CQR
    -       -       -       -       29       2,113       2,142  
Low CQR
    -       -       86       86       387       3,884       4,357  
Total
  $ -     $ -     $ 86     $ 86     $ 3,077     $ 24,137     $ 27,300  

We estimate losses on our net credit exposure to be between 0% - 5% for customers with highest CQR, as these customers are investment grade or the equivalent of investment grade. We estimate losses on our net credit exposure to be between 2% - 25% for customers with average CQR, and between 50% - 100% for customers with low CQR, which includes customers in bankruptcy.


6. OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES

Our other assets and accrued expenses and other liabilities consist of the following (in thousands):

   
September 30,
   
March 31,
 
   
2012
 
   
 
   
 
 
Deferred costs
  $ 10,588     $ 9,391  
Capitalized software and other intangible assets
    4,568       5,075  
Prepaid assets
    2,266       2,215  
Other
    5,985       6,879  
Other assets
  $ 23,407     $ 23,560  
 
   
September 30,
   
March 31,
 
   
2012
 
   
 
   
 
 
Deferred revenue
  $ 17,285     $ 15,935  
Accrued expenses
    9,280       15,386  
Other
    8,268       9,501  
Accrued expenses and other liabilities
  $ 34,833     $ 40,822  
 
Deferred costs and revenues primarily relate to the sales of products and services in our technology sales business segment. Other assets include unbilled accounts receivable, cash surrender value of life insurance policies, escrow deposits and off-lease equipment. Other liabilities include accrued taxes, deferred compensation, lease rental payments due to third parties, and contingent consideration related to an acquisition.

7. NOTES PAYABLE AND CREDIT FACILITY
 
Non-recourse and recourse obligations consist of the following (in thousands):
 
   
September 30,
   
March 31,
 
   
2012
 
   
 
   
 
 
   
 
   
 
 
Recourse note payable at 4.84% expires on March 2, 2017
  $ 1,682     $ 1,727  
                 
Non-recourse equipment notes secured by related investments in leases with interest rates ranging from 2.58% to 10.0% at September 30, 2012 and March 31, 2012
  $ 33,020     $ 26,328  
 
Principal and interest payments on the non-recourse notes payable are generally due monthly in amounts that are approximately equal to the total payments due from the lessee under the leases that collateralize the notes payable.  The weighted average interest rate for our non-recourse notes payable was 5.22% and 5.15%, as of September 30, 2012 and March 31, 2012, respectively. Under recourse financing, in the event of a default by a lessee, the lender has recourse against the lessee, the equipment serving as collateral, and us. Under non-recourse financing, in the event of a default by a lessee, the lender generally only has recourse against the lessee, and the equipment serving as collateral, but not against us.
 
Our technology sales business segment, through our subsidiary ePlus Technology, inc., finances its operations with funds generated from operations, and with a credit facility with GE Commercial Distribution Finance Corporation (“GECDF”). This facility provides short-term capital for our technology sales business segment. There are two components of the GECDF credit facility: (1) a floor plan component and (2) an accounts receivable component. Under the floor plan component, we had outstanding balances of $84.4 million and $85.9 million as of September 30, 2012 and March 31, 2012, respectively. Under the accounts receivable component, we had no outstanding balances as of September 30, 2012 and March 31, 2012. As of September 30, 2012, the facility agreement had an aggregate limit of the two components of $175 million, and the accounts receivable component had a sub-limit of $30 million, which bears interest assessed at a rate of the One Month Libor plus two and one half percent. The credit facility with GECDF was amended and restated in July 2012 which increased the credit limit from $125 million to $175 million and modified the covenants, interest rate and other requirements within the facility.

 
The credit facility has full recourse to ePlus Technology, inc. and is secured by a blanket lien against all its assets, such as receivables and inventory. Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable, and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) of ePlus Technology, inc. Management believes we were in compliance with these covenants as of September 30, 2012. In addition, the facility restricts the ability of ePlus Technology, inc. to transfer funds to its affiliates in the form of dividends, loans or advances with certain exceptions for dividends to ePlus inc. The facility also requires that financial statements of the Company be provided within 45 days of each quarter and 90 days of each fiscal year end and also includes that other operational reports be provided on a regular basis. Either party may terminate with 90 days’ advance notice. We are not, and do not believe that we are reasonably likely to be, in breach of the GECDF credit facility. In addition, we do not believe that the covenants of the GECDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. This credit facility is secured by the assets of only ePlus Technology, inc. and the guaranty as described below.

The facility provided by GECDF requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by certain dates. We have delivered the annual audited financial statements for the year ended March 31, 2012, as required. 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 segment and as an operational function of our accounts payable process.

We have an agreement with 1st Commonwealth Bank of Virginia to provide us with a $0.5 million credit facility, which matured October 26, 2012. This credit facility was renewed for two years effective October 27, 2012. The credit facility is available for use by us and our affiliates and the lender has full recourse to us. Borrowings under this facility bear interest at the Wall Street Journal U.S. Prime rate plus 1%. The primary purpose of the facility is to provide letters of credit for landlords, taxing authorities and bids.  As of September 30, 2012 and as of March 31, 2012, we had no outstanding balance on this credit facility.

8. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On May 19, 2009, we filed a complaint in the United States District Court for the Eastern District of Virginia (the “trial court”) against four defendants, alleging that they used or sold products, methods, processes, services and/or systems that infringe on certain of our patents. During July and August 2009, we entered into settlement and license agreements with three of the defendants. We obtained a jury verdict against the remaining defendant, Lawson Software, Inc. (“Lawson”) on January 27, 2011. The jury unanimously found that Lawson infringed certain ePlus patents relating to electronic procurement systems, and additionally found that all ePlus patent claims tried in court were not invalid.
 
On May 23, 2011, the trial court issued a permanent injunction, ordering Lawson and its successors to: immediately stop selling and servicing products relating to its electronic procurement systems that infringe our patents; cease providing any ongoing or future maintenance, training or installation of its infringing products; and refrain from publishing any literature or information that encourages the use or sale of its infringing products.  We have filed a motion seeking a finding that Lawson is in contempt of the injunction. We currently do not have a hearing date for our motion. Lawson has appealed the trial court’s ruling. We also have appealed the trial court’s evidentiary ruling which precluded us from seeking monetary damages. Oral argument on the appeal was held on June 6, 2012. Court calendars are inherently unpredictable and we cannot predict when the court will issue a ruling.

While we believe that we have a basis for our claims, these types of cases are complex in nature, are likely to have significant expenses associated with them, and we cannot predict whether we will be successful in our claim for a contempt finding or 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

We may become party to various legal proceedings arising in the normal course of business, including preference payment claims asserted in customer bankruptcy proceedings, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions, employment related claims, claims by competitors, vendors or customers, and claims related to alleged violations of laws and regulations. We accrue for costs associated with these contingencies when a loss is probable and the amount is reasonably estimable.  Refer to Note 5, "Reserves for Credit Losses," for additional information regarding loss contingencies associated with our accounts, notes and lease-related receivables.

9. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated by dividing net earnings available to common shareholders by the basic weighted average number of shares of common stock outstanding plus incremental shares issuable upon the assumed exercise of “in-the-money” stock options and other common stock equivalents during each period.

The following table provides a reconciliation of the numerators and denominators used to calculate basic and diluted net earnings per common share as disclosed on our unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2012 and September 30, 2011 (in thousands, except per share data).
 
   
Three months ended 
September 30,
   
Six months ended 
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net earnings available to common shareholders—basic and diluted
  $ 10,033     $ 7,064     $ 18,095     $ 10,767  
                                 
Weighted average shares outstanding — basic
    7,770       8,153       7,746       8,230  
Effect of dilutive shares
    151       174       167       192  
Weighted average shares outstanding — diluted
    7,921       8,327       7,913       8,422  
                                 
Earnings per common share:
                               
Basic
  $ 1.29     $ 0.87     $ 2.34     $ 1.31  
Diluted
  $ 1.27     $ 0.85     $ 2.29     $ 1.28  

All unexercised stock options were included in the computations of diluted earnings per share for the three and six months ended September 30, 2012 and 2011.

10. SHARE REPURCHASE

On August 15, 2011, our Board approved a share repurchase plan which authorized share repurchases up to 500,000 shares over a 12-month period commencing on September 16, 2011. Since the commencement of this plan through November 14, 2011, we purchased 403,458 shares. On November 15, 2011, our Board amended the share repurchase plan to authorize share repurchases up to 500,000 shares commencing on November 15, 2011. We purchased 72,978 shares under the amended plan before it expired on September 15, 2012. On August 13, 2012, our Board authorized a new share repurchase plan which authorized share repurchases up to 500,000 shares commencing on September 16, 2012, through September 15, 2013. The purchases may be made from time to time in the open market, or in privately negotiated transactions, subject to availability. Any repurchased shares will have the status of treasury shares and may be used, when needed, for general corporate purposes.

During the six months ended September 30, 2012, we repurchased 19,423 shares of our outstanding common stock at an average cost of $29.46 per share for a total purchase price of $572 thousand. Since the inception of our initial repurchase program on September 20, 2001 to September 30, 2012, we have repurchased 4.7 million shares of our outstanding common stock at an average cost of $13.94 per share for a total purchase price of $65.3 million.


11. SHARE-BASED COMPENSATION

Share-Based Plans

We have share-based awards outstanding under the following plans: (1) Amendment and Restatement of the 1998 Stock Incentive Plan (2003) (the “Amended LTIP (2003)”), (2) the 2008 Non-Employee Director Long-Term Incentive Plan (“2008 Director LTIP”), and (3) the 2008 Employee Long-Term Incentive Plan (“2008 Employee LTIP”). On September 13, 2012, our shareholders approved the 2012 Employee Long-Term Incentive Plan (“2012 Employee LTIP”), which has no awards outstanding as of September 30, 2012. Currently, awards are only issued under the 2008 Director LTIP and the 2008 Employee LTIP. All the share-based 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.

For a summary of descriptions and vesting periods of the 1998 LTIP, the Amended LTIP (2001), the Amended LTIP (2003), the 2008 Director LTIP and the 2008 Employee LTIP discussed below, please refer to our Annual Report on Form 10-K for the year ended March 31, 2012.

Stock Option Activity

During the three and six months ended September 30, 2012 and 2011, there were no stock options granted to employees.

A summary of stock option activity during the six months ended September 30, 2012 is as follows:
 
   
Number of
 Shares
   
Exercise Price
 Range
   
Weighted
 Average
 Exercise
 Price
   
Weighted
 Average
 Contractual
 Life Remaining
 (in years)
   
Aggregate
 Intrinsic
 Value
 
   
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
 
Outstanding, April 1, 2012
    145,000     $ 7.14 - $15.25     $ 11.91    
 
   
 
 
Options exercised (1)
    (25,000 )   $ 7.14     $ 7.14    
 
   
 
 
Outstanding, September 30, 2012
    120,000     $ 10.75 - $15.25     $ 12.90       2.0     $ 3,158,100  
                                         
Vested at September 30, 2012
    120,000             $ 12.90       2.0     $ 3,158,100  
Exercisable at September 30, 2012
    120,000             $ 12.90       2.0     $ 3,158,100  

(1)
The total intrinsic value of stock options exercised during the six months ended September 30, 2012 was $683 thousand.

Additional information regarding stock options outstanding as of September 30, 2012 is as follows:

     
Options Outstanding and Exercisable
 
Range of
 Exercise Prices
   
Options
 Outstanding
   
Weighted
 Average
 Exercise
 Price per
 Share
   
Weighted
Average
 Contractual
 Life Remaining
 (in years)
 
 
   
 
   
 
   
 
 
$ 10.75 - $13.50       80,000     $ 11.74       2.5  
$ 13.51 - $15.25       40,000     $ 15.23       1.0  
                             
$ 10.75 - $15.25       120,000     $ 12.90       2.0  
 
We issue shares from our authorized but unissued common stock to satisfy stock option exercises.  At September 30, 2012, all of our options are vested.
 
 
Restricted Stock Activity
 
For the six months ended September 30, 2012, we granted 7,831 restricted shares under the 2008 Director LTIP, and 96,590 restricted shares under the 2008 Employee LTIP. A summary of the non-vested restricted shares is as follows:
 
 
 
Number of
 Shares
   
Weighted
 Average Grant-
date Fair Value
 
 
 
 
   
 
 
Nonvested April 1, 2012
    276,130     $ 20.75  
Granted
    104,421     $ 32.64  
Vested
    (102,523 )   $ 11.68  
Forfeited
    (1,167 )   $ 20.17  
Nonvested September 30, 2012
    276,861     $ 25.19  

Upon each vesting period of the restricted stock awards, employees are subject to minimum tax withholding obligations. The 2008 Director LTIP and 2008 Employee LTIP allows us, at the participant’s election, to withhold a sufficient number of shares due to the participant to satisfy their minimum tax withholding obligations. During the six months ended September 30, 2012, we withheld 28,807 shares of common stock at a value of $985 thousand, which was included in treasury stock.

Compensation Expense

We recognize compensation cost for awards of restricted stock with graded vesting on a straight line basis over the requisite service period and estimate the forfeiture rate to be zero, based on historical experience. There are no additional conditions for vesting other than service conditions. During the three months ended September 30, 2012 and 2011, we recognized $915 thousand and $650 thousand, respectively, of total share-based compensation expense. During the six months ended September 30, 2012 and 2011, we recognized $1.6 million and $1.1 million, respectively, of total share-based compensation expense. Unrecognized compensation expense related to non-vested restricted stock was $5.8 million, which will be fully recognized over the next 33 months.

We also provide our employees with a contributory 401(k) profit sharing plan. Employer contribution percentages are determined by us and are discretionary each year. The employer contributions vest pro-ratably over a four-year service period by the employees, after which, all employer contributions will be fully vested. For the three months ended September 30, 2012 and 2011, our contribution expense for the plan was approximately $236 thousand and $214 thousand, respectively. For the six months ended September 30, 2012 and 2011, our contribution expense for the plan was approximately $465 thousand and $417 thousand, respectively.

12. INCOME TAXES

We recognize interest and penalties for uncertain tax positions. As of September 30, 2012, our gross liability related to uncertain tax positions was $316 thousand. At September 30, 2012 if the unrecognized tax benefits of $316 thousand were to be recognized, including the effect of interest, penalties and federal tax benefit, the impact would be $429 thousand. We also recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We recorded interest expense of $4 and $9 thousand for the three and six months ended September 30, 2012, and $11 thousand and $22 thousand for the same periods last year. We did not recognize any additional penalties. We had $189 thousand and $167 thousand accrued for the payment of interest at September 30, 2012 and 2011, respectively.


13. FAIR VALUE OF FINANCIAL INSTRUMENTS

We account for the fair values of our assets and liabilities in accordance with Codification Topic Fair Value Measurement and Disclosure. Accordingly, we established a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. The fair value of our non-recourse notes payable is calculated using the discounted cash flow approach based on the contractual terms of the notes payable discounted at current market rates.

The following table summarizes the fair value hierarchy of our financial instruments and contingent liability (in thousands):
 
 
 
 
   
Fair Value Measurement Using
 
 
 
September 30,
 2012
   
Quoted Prices in
 Active Markets
 for Identical
 Assets (Level 1)
   
Significant
 Other
 Observable
 Inputs (Level 2)
   
Significant
 Unobservable
 Inputs (Level 3)
   
Total Gains
 (Losses)
 
Liabilities:
 
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
 
Contingent consideration
  $ 1,122     $ -     $ -     $ 1,122     $ -  
 
              Fair Value Measurement Using  
     
March 31, 2012
     
Quoted Prices in
 Active Markets
 for Identical
 Assets (Level 1)
      Significant
 Other
 Observable
 Inputs (Level 2)
     
 Significant
 Unobservable
 Inputs (Level 3)
     
Total Gains
 (Losses)
 
Liabilities:
                                       
                                         
Contingent consideration
  $ 1,292     $ -     $ -     $ 1,292     $ -  

For the six months ended September 30, 2012, the adjustment to the fair value of the contingent consideration was $170 thousand, which was presented within general and administrative expenses in our unaudited condensed consolidated statements of operations.

14. SEGMENT REPORTING

We manage our business segments on the basis of the products and services offered. Our reportable segments consist of our technology sales business segment and our financing business segment. The technology sales business segment sells information technology equipment and software and related services primarily to corporate customers on a nationwide basis. The technology sales business segment also provides Internet-based business-to-business supply chain management solutions for information technology and other operating resources. The financing business segment offers lease-financing solutions to corporations and governmental entities nationwide. We evaluate segment performance on the basis of total revenue, segment earnings and earnings before provision for income taxes.

Both segments utilize our proprietary software and services within the organization. Sales and services and related costs of our software are included in the technology sales business segment. Our reportable segment information is as follows (in thousands):

 
   
Three months ended September 30, 2012
   
Three months ended September 30, 2011
 
   
Technology
 Sales
 Business
 Segment
   
Financing
 Business
 Segment
   
Total
   
Technology
 Sales
 Business
 Segment
   
Financing
 Business
 Segment
   
Total
 
                     
 
   
 
   
 
 
Sales of product and services
  $ 250,178     $ -     $ 250,178     $ 193,493     $ -     $ 193,493  
Financing revenues
    -       7,413       7,413       -       7,305       7,305  
Fee and other income
    1,591       869