form10k.htm
UNITED
STATES
SECURITIES
AND EXHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For the
fiscal year ended March 31,
2010
OR
oTRANSITION 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)
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Delaware
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54-1817218
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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13595 Dulles Technology
Drive, Herndon, VA 20171-3413
(Address,
including zip code, of principal offices)
Registrant’s
telephone number, including area code: (703)
984-8400
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, $.01 par value
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Nasdaq
Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act.
Yes o No x
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 229.405 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 o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
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
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o(do
not check if smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
aggregate market value of the common stock held by non-affiliates of ePlus, computed by reference
to the closing price at which the stock was sold as of September 30, 2009 was
$67,321,626. The outstanding number of shares of common stock of ePlus as of May 28, 2010, was
8,118,564 .
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents are incorporated by reference into the indicated parts of
this Form 10-K:
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Document
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Part
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Portions
of the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the Company's
fiscal year end.
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Part
III
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CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K 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:
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we offer
a comprehensive set of solutions—the bundling of our direct IT sales,
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:
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managing
a diverse product set of solutions in highly competitive
markets;
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increasing
the total number of customers utilizing bundled solutions by up-selling
within our customer base and gaining new
customers;
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adapting
to meet changes in markets and competitive
developments;
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maintaining
and increasing advanced professional services by retaining highly skilled
personnel and vendor
certifications;
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integrating
with external IT systems, including those of our customers and vendors;
and
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continuing
to enhance our proprietary software and update our technology
infrastructure to remain competitive in the
marketplace.
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our
ability to hire and retain sufficient qualified
personnel;
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a
decrease in the capital spending budgets of our customers or purchases
from us;
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our
ability to protect our intellectual
property;
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the
creditworthiness of our customers;
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the
possibility of goodwill impairment charges in the
future;
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our
ability to raise capital, maintain or increase as needed our line of
credit or floor planning facilities, or obtain non-recourse financing for
our transactions;
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our
ability to realize our investment in leased
equipment;
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our
ability to reserve adequately for credit losses;
and
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significant
adverse changes in, reductions in, or losses of relationships with major
customers or vendors.
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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 7, “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
SEC.
PART
I
GENERAL
Our
company was founded in 1990. ePlus inc. is sometimes
referred to in this Annual Report on Form 10-K as “we”, “our”, “us”,
“ourselves”, or “ePlus.”
Our
operations are conducted through two basic business segments. Our first segment
is our technology sales business unit that includes all the technology sales and
related services, including our proprietary software. Our second
segment is our financing business unit that consists of the leasing and
financing of equipment and related software and services to commercial,
government, and government-oriented entities. See Note 15, “Segment Reporting”
in the Consolidated Financial Statements included elsewhere in this
report.
ePlus
inc. does not engage in any other business other than serving as the parent
holding company for the following operating companies:
Technology
Sales Business
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ePlus Technology,
inc.;
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ePlus Content Services,
inc.; and
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ePlus Document Systems,
inc.
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Financing
Business
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ePlus Government,
inc.;
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ePlus Jamaica, inc.;
and
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We began
using the name ePlus
inc. in 1999 after changing our name from MLC Holdings, Inc. On March 31, 2003,
the former entities ePlus Technology of PA, inc.
and ePlus Technology of
NC, inc. were merged into ePlus Technology, inc. This
combination created one national entity to conduct our Technology sales and
services business. ePlus Systems, inc. and ePlus Content Services, inc.
were incorporated on May 15, 2001 and provide consulting services and
proprietary software for enterprise supply management. ePlus Capital, inc. owns 100
percent of ePlus Canada
Company, which was created on December 27, 2001 to transact business within
Canada. ePlus
Government, inc. was incorporated on September 17, 1997 to handle business
servicing the Federal government marketplace, which includes financing
transactions that are generated through government contractors. ePlus Document Systems, inc.
was incorporated on October 15, 2003 and provides proprietary software for
document management.
ePlus Jamaica, inc. was
incorporated on April 8, 2005 and ePlus Iceland, inc. was
incorporated on August 10, 2005. Both companies are subsidiaries of
ePlus Group, inc. and
were created to transact business in Jamaica and Iceland, respectively; however,
neither entity has conducted any significant business, or has any employees or
business locations outside the United States.
OUR
BUSINESS
Our
primary focus is to deliver technology solutions. We have evolved our product
set by expanding our technology credentials with our key vendors and developing
proprietary software and engineering services. Our current offerings
include:
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direct
marketing of information technology equipment and third-party
software;
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advanced
professional services;
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proprietary
software, including order-entry and order-management software
(OneSource®), procurement, asset management, document management and
distribution software, and electronic catalog content management software
and services; and
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leasing,
and business process services.
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We have
been in the business of selling, leasing, financing, and managing information
technology and other assets for more than 19 years and have been providing
software for more than 10 years. We currently derive the majority of our
revenues from Information Technology (“IT”) product sales, advanced professional
services, and leasing. Our sales are generated primarily by our internal sales
force and through vendor relationships to our customers, which include
commercial accounts; federal, state and local governments; K-12 schools; and
higher education institutions. We also lease and finance equipment, and supply
software and services directly and through relationships with vendors and
equipment manufacturers.
Our broad
product offerings provide customers with a highly-focused, end-to-end, turnkey
solution for purchasing, lifecycle management, and financing for IT products and
services. In addition, we offer asset-based financing and leasing of capital
assets and lifecycle management solutions for the assets during their useful
life, including disposal. We offer our customers a multi-disciplinary approach
for implementing, controlling, and maintaining cost savings throughout their
organizations, allowing our customers to simplify their administrative
processes, gain data transparency and visibility, and enhance internal controls
and reporting.
The key
elements of our business are:
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Direct IT Sales: We are
a direct marketer and authorized reseller of leading IT products via our
direct sales force and web-based ordering solution,
OneSource®.
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Advanced Professional Services:
We provide an array of Internet telephony and Internet
communications, collaboration, cloud computing, virtual desktop
infrastructure (“VDI”), network design and implementation, storage,
security, virtualization, business continuity, maintenance, and
implementation services to support our customer base as part of our
consolidated service offering.
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Leasing, Lease and Asset
Management, and Lifecycle Management: We offer a wide range of
leasing and financing options for IT and capital assets for both our
product set as well as our vendor partners. These offerings include
operating and direct finance leases, lease process automation and
tracking, asset tracking and management, risk management, disposal of
end-of-life assets, and lifecycle
management.
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Proprietary Software: We
offer proprietary software, for enterprise supply management, which can be
used as standalone solutions or be integrated as component of a bundled
solution. These include eProcurement, spend
management, asset management, document management, and product content
management software. These systems can be installed behind our customer's
firewall or operated as a service hosted by ePlus.
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Our
proprietary software and associated business process services allow us to better
support and retain our customers in our technology sales and finance
businesses. We have developed and acquired these products and
services to distinguish us from our competition by providing a comprehensive
offering to customers.
Our
primary target customers are middle-market and larger companies in the United
States of America with annual revenues between $25 million and $2.5 billion. We
believe there are more than 50,000 target customers in this
market.
INDUSTRY
BACKGROUND
In the
current marketplace, we believe demand for IT equipment, services, and financing
is being driven by the following industry trends:
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In
calendar year 2009, IT spending in most categories declined due to the
economy. In 2010, many industry analysts are forecasting an
increase in overall IT spending in the U.S., and the first quarter
produced solid results in many sectors of the industry. We believe that
customers are continuing to focus on cost savings initiatives by utilizing
technologies such as virtualization and cloud computing, and we continue
to provide these and other advanced technology solutions to meet these
needs.
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We
believe customers are focused on improving their data and physical
security, from their data centers to their end-user mobile devices, and
all points between. These comprehensive and complex solutions
may include consulting, hardware, software, and implementation, and
ongoing maintenance and monitoring. We have continued to focus
our resources in these areas to meet expected customer
demand.
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We
believe that customers are seeking to reduce the number of vendors they do
business with for the purpose of improving internal efficiencies,
enhancing accountability and improving supplier management practices, and
reducing costs. We have continued to enhance our relationships with
premier manufacturers and gained the engineering and sales certifications
required to provide the most desired technologies for our
customers. In addition, we have continued to enhance our
automated business processes, including eProcurement and
electronic business solutions, such as OneSource®, to make transacting
business with us more efficient and cost effective for our
customers. We introduced OneSource IT+ to improve internal
business process efficiencies for customers ordering from multiple
suppliers. OneSource IT+ is positioned to help our customers and prospects
reduce the number of suppliers they purchase from, eliminate multiple and
unique ordering processes, provide a consolidated view of IT purchases,
consolidate invoice and payable processing and reduce the complexities of
IT spend through multiple
suppliers.
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We
believe that customers prefer bundled offerings to include IT
products/services and leasing, due to decreased liquidity in the global
financial markets, as customers seek to preserve cash balances and working
capital availability under bank
lines.
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We have
continuously evolved our advanced professional service and software
capabilities. We believe that we are distinctively positioned to take advantage
of this shift in the purchasing process as evidenced by continued development of
our various integrated solutions, which we began developing in 1999 (earlier
than many other direct marketers) and we continue to believe that our bundled
solution set is a leader in the marketplace because of its breadth
and depth of offerings.
We
believe that we will continue to benefit from industry changes as a
cost-effective provider of a full range of IT products and services with the
added competitive advantage of in-house proprietary software. In addition, our
ability to provide financing for capital assets to our customers and our
lifecycle management solutions provides an additional benefit and differentiator
in the marketplace. While purchasing decisions will continue to be influenced by
product selection and availability, price, and convenience, we believe that our
comprehensive set of solutions is a differentiator that businesses will look for
to reduce the total cost of ownership.
COMPETITION
The
market for IT sales and professional services is intensely competitive, subject
to economic conditions and rapid change, and significantly affected by new
product introductions and other market activities of industry participants. We
expect to continue to compete in all areas of our business against local,
regional, national and international firms, including manufacturers; other
direct marketers; national and regional resellers; and regional, national, and
international services providers. In addition, many computer manufacturers may
sell or lease directly to our customers, and our continued ability to compete
effectively may be affected by the policies of such
manufacturers.
We
believe that we offer enhanced solution capability, broader product selection
and availability, competitive prices, and greater purchasing convenience than
traditional retail stores or value-added resellers. In addition, our dedicated
account executives offer the necessary support functions (e.g., software,
purchases on credit terms, leasing, and efficient return processes) that
Internet-only sellers do not usually provide. We believe that we are one of the
few companies in the United States that offers, as a principal, a comprehensive
solution which can include eProcurement, leasing, advanced technology solutions,
IT fulfillment, and end-to-end asset management services.
The
market for leasing is intensely competitive and subject to changing economic
conditions and market activities of industry participants. We expect to continue
to compete against local, regional, national and international firms, including
banks, specialty finance companies, vendors' captive finance companies, and
third-party leasing companies. Banks and other large financial services
companies sell directly to business customers, particularly larger enterprise
customers, and may provide other financial or ancillary services that we do not
provide. Vendor captive leasing companies may utilize internal transfer pricing
to effectively lower lease rates and/or bundle equipment sales and leasing to
provide highly competitive packages to customers. Third-party leasing companies
may have deep customer and contractual relationships that are difficult to
displace. However, these competitors typically do not offer the breadth of
product, service, and software offerings that we offer our
customers.
We
believe that we offer an enhanced leasing solution to our customers which
provides a business process services approach that can automate the leasing
process and reduce our customers’ cost of doing business with us. The solution
incorporates value-added services at every step in the leasing process,
including:
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front
end processing, such as eProcurement, order
aggregation, order automation, vendor performance measurement, ordering,
reconciliation, and payment;
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lifecycle
and asset ownership services, including asset management, change
management, and property tax filing;
and
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end-of-life
services such as equipment audit, removal, and
disposal.
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In
addition, we are able to bundle equipment sales and professional services to
provide a turnkey leasing solution. This allows us to differentiate ourselves
with a customer service strategy that spans the continuum from fast delivery of
competitively priced products to end-of-life disposal services, and a selling
approach that permits us to grow with customers and solidify those
relationships. 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.
In the
software market, there are a number of companies developing and marketing
business-to-business electronic commerce solutions similar to ours, and
competitors are migrating their offerings to a Software-As-A-Service (“SAAS”)
platform. Some of these competitors and potential competitors include enterprise
resource planning (“ERP”) system vendors and other major software vendors that
are expected to sell their procurement and asset management products along with
their application suites. These ERP vendors have a significant installed
customer base and have the opportunity to offer additional products to those
customers as additional components of their respective application suites. We
also face indirect competition from potential customers’ internal development
efforts and have to overcome potential customers’ reluctance to move away from
existing legacy systems and processes.
We
believe that the principal competitive factors for the solution are scalability,
functionality, ease-of-use, ease-of-implementation, ability to integrate with
existing legacy systems, experience in business-to-business supply chain
management, and knowledge of a business’ asset management needs. We believe we
can compete favorably with our competitors in these areas within our framework
that consists of OneSource®, OneSource® IT+ , Procure+®, Spend+®, Manage+®, Content+®, ePlus Leasing, strategic
sourcing, document management software, and business process
outsourcing.
In all of
our markets, some of our competitors have longer operating histories and greater
financial, technical, marketing, and other resources than we do. In addition,
some of these competitors may be able to respond more quickly to new or changing
opportunities, technologies, and customer requirements. Many current and
potential competitors also have greater name recognition and engage in more
extensive promotional marketing and advertising activities, offer more
attractive terms to customers, and adopt more aggressive pricing policies than
we do.
For a
discussion of risks associated with the actions of our competitors, see Item 1A,
“Risk Factors” included elsewhere in this report.
STRATEGY
Our goal
is to become a leading provider of bundled solution offerings in the IT supply
chain. The key elements of our strategy include the following:
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selling
additional products and services to our existing customer
base;
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expanding
our customer base;
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making
strategic acquisitions;
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expanding
our advanced professional services
offerings;
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strengthening
vendor relationships; and
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enhancing
the effectiveness of our software offerings, especially
OneSource®.
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Selling
Additional Products and Services to Our Existing Customer Base
We seek
to become the primary provider of IT solutions for our customers by delivering
the best customer service, pricing, availability, and professional services in
the most efficient manner. We continue to focus on improving our sales
efficiency by providing on-going training, targeted incentive compensation, and
by implementing better automation processes to reduce costs and improve
productivity. Our account executives are being trained on our broad solutions
capabilities and to sell in a consultative manner that increases the likelihood
of cross-selling our solutions. We believe that our bundled offerings are an
important differentiating factor from our competitors.
In 2006,
we announced a new software portal called OneSource®, which is an integrated
order entry platform to enhance product sales, increase incremental sales, and
reduce costs by eliminating touch-points for order automation. In
2008, we extended the OneSource® brand by creating two differentiated solutions:
OneSourceIT, for purchasing from ePlus’ technology catalog,
and OneSourceIT+, for purchasing from ePlus and other technology
vendors. We continue to offer Procure+, Content+, and Spend+, a full
suite of eProcurement, catalog content management, and spend analysis
applications on an SAAS or enterprise basis.
In 2008,
we started a telesales group of experienced telesales sales professionals and
engineers. This group is focused on marketing to existing and new
customers primarily within the geographic reach of our existing service
areas.
Expanding
Our Customer Base
We intend
to increase our direct sales and targeted marketing efforts in each of our
geographic and vertical industry areas. We actively seek to acquire new account
relationships through a new outbound telesales effort, face-to-face field sales,
electronic commerce (especially OneSource®), and targeted direct marketing to
increase awareness of our solutions.
Making
Strategic Acquisitions
Based on
our prior experience, capital structure, and business systems and processes, we
believe we are well positioned to take advantage of strategic acquisitions that
broaden our customer base, expand our geographic reach, scale our existing
operating structure, and/or enhance our product and service offerings. It is
part of our growth strategy to evaluate and consider strategic acquisition
opportunities if and when they become available.
Expanding
Advanced Professional Service Offerings
We have
focused on gaining engineering certifications and advanced professional services
expertise in advanced technologies of strategic vendors, such as Cisco Systems,
IBM, HP, NetApp, VMWare and Sun Microsystems. We are especially focused on VDI,
data center virtualization, unified communications, collaboration, cloud
computing, networking, security, and storage technologies that are currently in
high demand. We believe our ability to deliver advanced professional services
provides benefits in two ways. First, we gain recognition and mindshare of our
strategic vendor partners and become the “go-to” partner in selected regional
and national markets. This significantly increases direct and referral sales
opportunities to provide our products and services, and allows us to achieve
optimal pricing levels. Second, within our own existing and potential customer
base, our advanced professional services are a key differentiator against
competitors who cannot provide services or advanced services for these key
technologies.
Strengthening
Vendor Relationships
We
believe it is important to maintain relationships with key manufacturers such as
VMWare, HP, IBM, Cisco, and NetApp on both a national level, for strategic
purposes, and at the local level, for tactical objectives. Strategically,
national relationships with key manufacturers give us increased visibility and
legitimacy, and authenticate our services. In addition, by maintaining a number
of high level engineering certifications, we are promoted as a high level
solutions provider by certain manufacturers. On a tactical level, by having more
than 20 locations, we are able to maintain direct relationships with key sales
and marketing personnel from the manufacturer, who provide referral sales
opportunities that are unavailable to Internet-only and catalog-based direct
marketers.
Enhancing
the Effectiveness of our Internet-based Solutions, especially
OneSource®
We will
continue to improve and expand the functionality of our integrated,
Internet-based solutions to better serve our customers’ needs. We intend to use
the flexibility of our platform to offer additional products and services when
economically feasible. As part of this strategy, we may also acquire technology
companies to expand and enhance the platform of solutions to provide additional
functionality and value-added services.
RESEARCH
AND DEVELOPMENT
In the
1990s, we utilized licensed software and outsourced development to provide
software and hosted software-related services to our customers, but with the
acquisition of software products and the hiring of employees from acquisitions
in the early 2000s, our products are comprised of our own proprietary software.
We expense software development costs as they are incurred until technological
feasibility has been established. At such time, development costs are
capitalized until the product is made available for release to customers. For
the year ended March 31, 2010, no such costs were capitalized and $162 thousand
was amortized. For the year ended March 31, 2009, no such costs were capitalized
and $167 thousand was amortized. We have also outsourced certain programming
tasks to an offshore software-development company to supplement our internal
development, support, and quality assurance.
To
successfully implement our business strategy and service the disparate
requirements of our customers and potential customers, we have a flexible
delivery model, which includes:
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traditional
enterprise licenses;
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hosted
or subscription; and
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software-as-a-service
(“SAAS”), or a services model, where our personnel may utilize our
software to provide one or more solutions to our
customers.
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We expect
that competitive factors will create a continuing need for us to improve and add
to our technology platform. The addition of new products and services will also
require that we continue to improve the technology underlying our applications.
We expect to continue to make significant investments in systems, personnel, and
offshore development to maintain a competitive advantage in this
market.
SALES
AND MARKETING
We focus
our marketing efforts on lead generation activities and converting our existing
customer base to our bundled solution set. The target market for our customer
base is primarily middle and large market companies with annual revenues between
$25 million and $2.5 billion. We believe there are over 50,000 potential
customers in our target market. We undertake many of our direct marketing
campaigns to target certain markets in conjunction with our primary vendor
partners, who may provide financial reimbursement, outsourced services, and
personnel to assist us in these efforts.
Our sales
representatives are compensated by a combination of salary and commission, with
commission becoming the primary component of compensation as the sales
representatives gain experience. To date, the majority of our customers have
been generated from direct sales. We market to different areas within a
customer’s organization depending on the products or services we are
selling. In 2008, we started a telesales group consisting of
experienced telesales sales professionals and engineers. This group
is focused on marketing to existing and new customers primarily within the
geographic reach of our existing service areas.
As of
March 31, 2010, our sales force was organized regionally in 25 office locations
throughout the United States. See Item 2, “Properties” of this Form
10-K for additional office location information. As of March 31, 2010, our sales
organization included 268 sales, marketing, and sales support
personnel.
INTELLECTUAL
PROPERTY RIGHTS
Our
success depends in part upon proprietary business methodologies and technologies
that we have licensed and modified. We own certain software programs or have
entered into software licensing agreements to provide services to our customers.
We rely on a combination of copyright, trademark, service mark, trade secret
protection, confidentiality and nondisclosure agreements and licensing
arrangements to establish and protect intellectual property rights. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection.
For
example, we have in the United States three electronic sourcing system patents,
two of which are currently under re-examination by the United States Patent and
Trademark Office (“USPTO”), six catalog management patents, three image
transmission management patents, a patent for collaborative editing of
electronic documents over a network, and a hosted asset information management
patent, among others. We have a counterpart of the electronic sourcing system
patents in nine European forums, and a counterpart of the image transmission
management patents in five additional forums. In 2005, the three U.S. patents
for electronic sourcing systems were determined to be valid and enforceable by a
jury at trial. However, in 2006, a trial to enforce the same patents ended in a
mistrial. We cannot provide assurance that any patents, as issued, will prevent
the development of competitive products or that our patents will not be
successfully challenged by others or invalidated through the administrative
process or litigation. Otherwise, the earliest of the three electronic sourcing
system patents is scheduled to expire in 2017; the three image transmission
patents are scheduled to expire in 2018; the earliest of the catalog management
patents is scheduled to expire in 2024; and the patent for collaborative editing
of electronic documents over a network is scheduled to expire in 2025, provided
that all maintenance fees are paid in accordance with USPTO
regulations. We also have the following registered
service/trademarks: ePlus, DirectSight, Procure+, Manage+, Finance+, ePlus
Leasing, Docpak, Viewmark, Digital Paper, OneSource, Content+, eECM, and ePlus
Enterprise Cost Management. In addition, we have over twenty
registered copyrights and additional common-law trademarks and
copyrights.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. Policing unauthorized use of our products is difficult, and
while we are unable to determine the extent to which piracy of our software
products exists, software piracy could be expected to be a persistent problem.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around our proprietary intellectual property.
SALES
AND FINANCING ACTIVITIES
We have
been in the business of selling, and providing advanced technology services for
a wide array of information technology assets and software, leasing, and
financing of IT and other capital assets and services, and a software publisher
for procurement, content management, document management and asset management
software. We currently derive the majority of our revenues from such
activities.
IT Sales and Professional
Services. We are an authorized reseller of, or have the right to resell
products and services from, over 400 manufacturers. Our most important
manufacturer relationships include Cisco, HP, Sun Microsystem, NetApp, and IBM.
Tech Data and Ingram Micro, Inc. are the largest distributors we utilize. We
have multiple vendor engineering certifications that authorize us to market
their products and enable us to provide advanced professional services. Our
flexible platform and customizable catalogs facilitate the addition of new
vendors with minimal incremental effort. Using the distribution systems
available, we usually sell products that are shipped from the distributors or
suppliers directly to our customer's location, which allows us to keep our
inventory of any product and shipping expenses to a minimum. The products we
sell typically have payment account terms ranging from payment in advance, by
credit card, due upon delivery, or 30 days to pay, depending on the customer’s
credit and payment structure.
Leasing and Financing. Our
leasing and financing transactions generally fall into two categories: direct
financing and operating leases. Direct financing transfers substantially all of
the benefits and risks of equipment ownership to the customer. Operating leases
consist of all other leases that do not meet the criteria to be direct financing
or sales-type leases. Our lease transactions include true leases and installment
sales or conditional sales contracts with corporations, non-profit entities and
municipal and federal government contractors. Substantially all of our lease
transactions are net leases with a specified non-cancelable lease term and a
fixed amount of rent. These non-cancelable leases have a provision which
requires the lessee to make all lease payments without offset or counterclaim. A
net lease requires the lessee to make the full lease payment and pay any other
expenses associated with the use of equipment, such as maintenance, casualty and
liability insurance, sales or use taxes and personal property taxes. We
primarily lease computers, associated accessories and software,
communication-related equipment, and medical equipment, and we may also lease
industrial machinery and equipment, office furniture and general office
equipment, transportation equipment, and other general business equipment. In
anticipation of the expiration of the term of a lease, we initiate the
remarketing process for the related equipment. Our goal is to maximize revenues
from the remarketing effort by either (1) releasing or selling the equipment to
the initial lessee, (2) renting the equipment to the initial lessee on a
month-to-month basis, or (3) selling the equipment to an equipment broker or
leasing the equipment to a different customer. The remarketing process is
intended to enable us to recover or exceed the original estimated residual value
of the leased equipment. Any amounts received over the estimated residual value
less any commission expenses become profit margin to us and can significantly
impact the degree of profitability of a lease transaction.
We
aggressively manage the remarketing process of our leases to maximize the
residual values of our leased equipment portfolio. To date, we have realized a
premium over our original recorded residual assumption or the net book
value.
Financing and Bank
Relationships. We have a number of bank and finance company relationships
that we use to provide working capital for our businesses and long-term
financing for our lease financing businesses. Our finance department is
responsible for maintaining and developing relationships with a diversified pool
of commercial banks and finance companies with varying terms and conditions. See
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Liquidity and Capital Resources.”
Risk Management and Process
Controls. It is our goal to minimize the financial risks of our balance
sheet assets. To accomplish this goal, we use and maintain conservative
underwriting policies and disciplined credit approval processes. We also have
internal control processes, including credit management, contract origination
and management, cash management, servicing, collections, remarketing and
accounting. We may utilize non-recourse financing (which is secured by a lease’s
underlying equipment and the specific lease and not our general assets) for our
leasing transactions and we try to obtain lender commitments before acquiring
the related assets.
When
desirable, we manage our risk in assets by selling leased assets, including the
residual portion of leases, to third parties rather than owning them. For
certain transactions, we may act as an intermediary and obtain commitments for
these asset sales before we consummate the lease. We also use agency purchase
orders to procure equipment for lease to our customers as an agent, not a
principal, and otherwise take measures to minimize our inventory. Additionally,
we use fixed-rate funding and issue proposals that adjust for material adverse
interest rate movements as well as material adverse changes to the financial
condition of the customer.
We have
an executive management review process and other internal controls in place to
evaluate the transactions’ potential risk. Our lease and sale contracts are
reviewed by senior management for pricing, structure, documentation, and credit
quality. Due in part to our strategy of focusing on a few types of equipment
categories, we have product knowledge, historical re-marketing information and
experience with many of the items that we lease, sell, and service. We rely
on our experience or outside opinions to set and adjust our sale prices,
lease rate factors, and residual values.
Default and Loss
Experience. During the fiscal year ended March 31, 2010, we
increased reserves for credit losses by $728 thousand, incurred actual credit
losses of $353 thousand and had recoveries of $118 thousand. During the fiscal
year ended March 31, 2009, we increased reserves for credit losses by $364
thousand, incurred actual credit losses of $420 thousand and had recoveries of
$91 thousand.
EMPLOYEES
As of
March 31, 2010, we employed 642 full-time and 19 part-time
employees. These 661 employees operated through 25 office locations,
including our principal executive offices and regional sales offices. No
employees are represented by a labor union and we believe that we have good
relations with our employees. The functional areas of our employees are as
follows:
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Number
of Employees
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Software
and Implementations
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U.S.
SECURITIES AND EXCHANGE COMMISSION REPORTS
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports, filed with or furnished to the
U.S. Securities and Exchange Commission (“SEC”), are available free of charge
through our Internet website, www.eplus.com, as
soon as reasonably practical after we have electronically filed such material
with, or furnished it to, the SEC. The public may read and copy any
materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov. The
contents on, or accessible through, these websites are not incorporated into
this filing. Further, our references to the URLs for these websites
are intended to be inactive textual references only.
The
following table sets forth the name, age and position of each person who was an
executive officer of ePlus on March 31,
2010. There are no family relationships between any director or
executive officer and any other director or executive officer of ePlus.
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NAME
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AGE
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POSITION
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Director,
Chairman of the Board, President and Chief Executive
Officer
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Director
and Executive Vice President
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Senior
Vice President of Business
Operations
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The
business experience during the past five years of each executive officer of
ePlus is described
below.
Phillip G. Norton joined us
in March 1993 and has served since then as our Chairman of the Board and CEO.
Since September 1996, Mr. Norton has also served as our President. Mr. Norton is
a 1966 graduate of the U.S. Naval Academy.
Bruce M. Bowen founded our
company in 1990 and served as our President until September 1996. Since
September 1996, Mr. Bowen has served as our Executive Vice President, and from
September 1996 to June 1997 also served as our CFO. Mr. Bowen has served on our
Board since our founding. He is a 1973 graduate of the University of Maryland
and in 1978 received a Masters of Business Administration from the University of
Maryland.
Elaine D. Marion joined us in
1998. Ms. Marion became our Chief Financial Officer on September 1,
2008. Since 2004, Ms. Marion served as our Vice President of
Accounting. Prior to that, she was the Controller of ePlus Technology, inc., a
subsidiary of ePlus, from 1998 to 2004. Ms. Marion is a 1995 graduate of George
Mason University, where she earned a Bachelor’s of Science degree with a
concentration in Accounting.
Mark P. Marron joined our
subsidiary ePlus Technology, inc. in 2005 as Senior Vice President of
Sales. On April 22, 2010 he was appointed as Chief Operating Officer
of ePlus inc. and President of ePlus Technology, inc. Prior to joining us, from
2001 - 2005 Mr. Marron was with NetIQ, where he held the position of senior vice
president of worldwide sales. Prior to joining NetIQ, Mr. Marron served as
general manager of worldwide channel sales for Computer Associates International
Inc. Mr. Marron has a Bachelor’s of Science degree in Computer Science from
Montclair State University.
Steven J. Mencarini joined us
in June 1997. On September 1, 2008, he became our Senior Vice
President of Business Operations. Prior to that, he served as our
Chief Financial Officer. Prior to joining us, Mr. Mencarini was
Controller of the Technology Management Group of CSC. Mr. Mencarini joined CSC
in 1991 as Director of Finance and was promoted to Controller in 1996. Mr.
Mencarini is a 1976 graduate of the University of Maryland and received a
Masters of Taxation from American University in 1985.
Each of
our executive officers is chosen by the Board and holds his or her office until
his or her successor shall have been duly chosen and qualified or until his or
her death or until he or she resigns or is removed by the Board.
General Economic Weakness
May Harm Our Operating Results and Financial Condition
Our
results of operations are dependent, to a large extent, upon the state of the
economy. Global economies and financial markets continue to experience
significant uncertainty and volatility. Continued adverse economic conditions
may decrease our customers’ demand for our products and services or impair the
ability of our customers to pay for products and services they have purchased.
In addition, many state and local governments who are our customers are
experiencing financial difficulties which are causing budget shortfalls and
resulting in decreased demand for our products and services. As a result, our
revenues could decrease and reserves for our credit losses and write-offs of
accounts receivable may increase. During the fiscal year ended March 31, 2010,
sales of product and services decreased 1.3% to $627.8 million compared to the
last fiscal year.
The Soundness of Financial
Institutions Could Adversely Affect Us
We have
relationships with many financial institutions, including the lender under our
credit facility, and, from time to time, we execute transactions with
counterparties in the financial services industry. As a result, defaults by, or
even rumors or questions about, financial institutions or the financial services
industry generally, could result in losses or defaults by these institutions. In
the event that the volatility of the financial markets adversely affects these
financial institutions or counterparties, we or other parties to the
transactions with us may be unable to access credit facilities or complete
transactions as intended, which could adversely affect our business and results
of operations.
We May Be Required to Take
Additional Impairment Charges For Goodwill or Intangible Assets Related to
Acquisitions
We have
acquired certain portions of our business and certain assets through
acquisitions. Further, as part of our long-term business strategy, we may
continue to pursue acquisitions of other companies or assets. In connection with
prior acquisitions, we have accounted for the portion of the purchase price paid
in excess of the book value of the assets acquired as goodwill or intangible
assets, and we may be required to account for similar premiums paid on future
acquisitions in the same manner.
Under the
applicable accounting rules, goodwill is not amortized and is carried on our
books at its original value, subject to periodic review and evaluation for
impairment, whereas intangible assets are amortized over the life of the asset.
Changes in the business itself, the economic environment (including business
valuation levels and trends), or the legislative or regulatory environment may
trigger a periodic review and evaluation of our goodwill and intangible assets
for potential impairment. These changes may adversely affect either the fair
value of the business or the fair value of our individual reporting units and we
may be required to take an impairment charge to the extent that the carrying
values of our goodwill or intangible assets exceeds the fair value of the
business in the reporting unit with goodwill and intangible assets. Also, if we
sell a business for less than the book value of the assets sold, plus any
goodwill or intangible assets attributable to that business, we may be required
to take an impairment charge on all or part of the goodwill and intangible
assets attributable to that business.
We
determined that our goodwill related to the Leasing business unit was impaired,
resulting in a non-cash impairment charge of $4.0 million during the third
quarter of fiscal 2010.
If market
and economic conditions deteriorate further, this could increase the likelihood
that we will need to record additional impairment charges to the extent the
carrying value of our goodwill exceeds the fair value of our overall business.
Such impairment charges could materially adversely affect our net earnings
during the period in which the charge is taken.
We May Not Be Able to
Realize Our Entire Investment in the Equipment We Lease
The
realization of equipment values (residual values) during the life and at the end
of the term of a lease is an important element in our leasing business. At the
inception of each lease, we record a residual value for the leased equipment
based on our estimate of the future value of the equipment at the expected
disposition date.
A
decrease in the market value of leased equipment at a rate greater than the rate
we projected, whether due to rapid technological or economic obsolescence,
unusual wear and tear on the equipment, excessive use of the equipment, or other
factors, would adversely affect the current or residual values of such
equipment. Further, certain equipment residual values are dependent on the
manufacturer’s or vendor’s warranties, reputation and other factors, including
market liquidity. In addition, we may not realize the full market value of
equipment if we are required to sell it to meet liquidity needs or for other
reasons outside of the ordinary course of business. Consequently, there can be
no assurance that we will realize our estimated residual values for
equipment.
The
degree of residual realization risk varies by transaction type. Direct financing
leases bear the least risk because contractual payments cover approximately 90%
or more of the equipment’s inception of lease cost. Operating leases have a
higher degree of risk because a smaller percentage of the equipment’s value is
covered by contractual cash flows at lease inception.
We Depend on Having
Creditworthy Customers
Our
leasing and technology sales business requires sufficient amounts of debt and
equity capital to fund our equipment purchases. If the credit quality of our
customer base materially decreases, or if we experience a material increase in
our credit losses, we may find it difficult to continue to obtain the capital we
require and our business, operating results and financial condition may be
harmed. In addition to the impact on our ability to attract capital, a material
increase in our delinquency and default experience would itself have a material
adverse effect on our business, operating results and financial condition. Our
lenders have reduced their demand for non-investment grade leases which has made
financing lower credit customers more difficult or impossible in some
cases.
Changes in the IT Industry
and/or Rapid Changes in Product Standards May Result in Substantial Inventory
Obsolescence and May Reduce Demand for the IT Hardware, Software and Services We
Sell
Our
results of operations are influenced by a variety of factors, including the
condition of the IT industry, shifts in demand for, or availability of, IT
hardware, software, peripherals and services, and industry introductions of new
products, upgrades or methods of distribution. The IT industry is characterized
by rapid technological change and the frequent introduction of new products,
product enhancements and new distribution methods or channels, each of which can
decrease demand for current products or render them obsolete. Sales of products
and services can be dependent on demand for specific product categories, and any
change in demand for or supply of such products could have a material adverse
effect on our net sales and/or cause us to record write-downs of obsolete
inventory, if we fail to react in a timely manner to such changes.
We May Not Reserve
Adequately for Our Credit Losses
Our
reserve for credit losses reflects management’s judgment of the loss potential
of our lease portfolio and accounts receivable. Our management bases its
judgment on the nature and financial characteristics of our obligors, general
economic conditions and our bad debt experience. We also consider delinquency
rates and the value of the collateral underlying the finance receivables. We
cannot be certain that our consolidated reserve for credit losses will be
adequate over time to cover credit losses in our portfolio because of
unanticipated adverse changes in the economy or events adversely affecting
specific customers, industries or markets. If our reserves for credit losses are
not adequate, our business, operating results and financial condition may
suffer.
We Rely on Inventory and
Accounts Receivable Financing Arrangements
The loss
of the technology sales business segment’s 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 the operational function of our
accounts payable process. Our credit agreement contains various net worth and
debt covenants that must be met each quarter. There can be no assurance that we
will continue to meet those debt covenants and failure to do so may limit
availability of, or cause us to lose, such financing. There can be no
assurance that such financing will continue to be available to us in the future
on acceptable terms.
We May Not Adequately
Protect Ourselves Through Our Contract Vehicles or Insurance
Policies
We may
not properly create contracts to protect ourselves against the risks inherent in
our business including, but not limited to, warranties, limitations of
liability, human resources and subcontractors, patent and product liability, and
financing activities. Despite the non-recourse nature of the loans financing our
activities, non-recourse lenders have, in the past, brought suit when the
underlying transaction turns out poorly for the lenders. We have vigorously
defended such cases in the past and will do so in the future, however, investors
should be aware that we are subject to such suits and the cost of defending such
suits due to the nature of our business.
Costs to Protect Our
Intellectual Property May Affect Our Earnings
The legal
and associated costs to protect our intellectual property may significantly
increase our expenses and have a material adverse effect on our operating
results. We may deem it necessary to protect our intellectual property rights
and significant expenses could be incurred with no certainty of the results of
these potential actions. Costs relative to lawsuits are usually expensed in the
periods incurred and there is no certainty in recouping any of the amounts
expended regardless of the outcome of any action.
We Face Risks of Claims From
Third Parties for Intellectual Property Infringement That Could Harm Our
Business
We cannot
provide assurance that our products and services do not infringe on the
intellectual property rights of third parties. In addition, because
patent applications in the United States are not publicly disclosed until the
patent is issued, we may not be aware of applications that have been filed which
relate to our products or processes. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the event
of a claim of infringement, we and our customers may be required to obtain one
or more licenses from third parties. We may not be able to obtain such licenses
from third parties at a reasonable cost or at all. Defense of any lawsuit or
failure to obtain any such required license could significantly increase our
expenses and/or adversely affect our ability to offer one or more of our
services. In addition, in certain instances, third parties licensing software to
us have refused to indemnify us for possible infringement
claims.
Capital Spending by Our
Customers May Decrease
We rely
on our customers to purchase capital equipment from us to maintain or increase
our earnings. If there is a further decline in the economy, or an increase in
competition, sales of capital equipment may decrease, thus adversely affecting
our earnings. As a result of the recent economic turbulence and
overall softening in the economy, our customers have generally delayed their
investment in capital equipment and we have experienced a decrease in total
sales. Continued weakness in the economy could continue to adversely
affect our results of operations and cash flows.
We Face Substantial
Competition From Larger Companies As Well As Our Vendors and Financial
Partners
In our
reseller business, manufacturers may choose to market their products directly to
end-users, rather than through resellers such as our company, and this could
adversely affect our future sales. In addition, a reduction in the
amount of credit granted to us by our vendors and financial partners could
increase our need for and cost of working capital and have a material adverse
effect on our business, results of operations and financial condition. Many
competitors compete principally on the basis of price and may have lower costs
or accept lower selling prices than us and, therefore, current gross margins may
not be maintainable. In addition, we do not have guaranteed
commitments from our customers and, therefore, our sales volume may be
volatile.
In our
leasing business, we face competition from many sources including much larger
companies with greater financial resources. Our competition may even
come from some of our vendors or financial partners who choose to market
directly to customers. Our competition may lower lease rates in order
to increase market share.
We May Experience A
Reduction in the Incentive Programs Offered to Us by Our
Vendors
We
receive payments and credits from vendors, including consideration pursuant to
volume sales incentive programs, volume purchase incentive programs and shared
marketing expense programs. These programs are usually of finite terms and may
not be renewed or may be changed in a way that has an adverse effect on
us. Vendor funding is used to offset, among other things,
inventory costs, costs of goods sold, marketing costs and other operating
expenses. Certain of these funds are based on our volume of net sales or
purchases, growth rate of net sales or purchases and marketing programs. If we
do not grow our net sales over prior periods or if we are not in compliance with
the terms of these programs, there could be a material negative effect on the
amount of incentives offered or paid to us by vendors. No assurance can be given
that we will continue to receive such incentives or that we will be able to
collect outstanding amounts relating to these incentives in a timely manner, or
at all. Any sizeable reduction in, the discontinuance of, a significant delay in
receiving or the inability to collect such incentives, particularly related to
incentive programs with our largest partners, HP and Cisco, could have a
material adverse effect on our business, results of operations and financial
condition. If we are unable to react timely to any fundamental changes in the
programs of vendors, including the elimination of funding for some of the
activities for which we have been compensated in the past, such changes would
have a material adverse effect on our business, results of operations and
financial condition.
There is a Risk that We
Could Lose a Large Customer Without Being Able to Find a Ready
Replacement
For the
fiscal year 2010, no one customer accounted for 10% or more of our total
revenues. Our top twenty-five customers in fiscal year 2010 represented an
aggregate of approximately 35.7% of total revenue.
Our
contracts for the provision of products are generally non-exclusive agreements
that are terminable by either party upon 30 days’ notice. Either the
loss of any large customer, or the failure of any large customer to pay its
accounts receivable on a timely basis, or a material reduction in the amount of
purchases made by any large customer could have a material adverse effect on our
business, financial position, results of operations and cash
flows.
We May Not Be Able to Hire
and Retain Personnel That We Need to Succeed
To
increase market awareness and sales of our offerings, we may need to expand our
sales operations and marketing efforts in the future. Our products and services
require a sophisticated sales effort and significant technical support. For
example, our sales and engineering candidates must have highly technical
hardware and software knowledge in order to suggest a customized solution for
our customers’ business processes. Competition for qualified sales, marketing
and technical personnel fluctuates depending on market conditions and we might
not be able to hire or retain sufficient numbers of such personnel to maintain
and grow our business. Increasingly, our competitors are requiring their
employees to agree to non-compete and non-solicitation agreements as part of the
employment, and this could make it more difficult for us to hire those
persons.
We Do Not Have Long-term
Supply or Guaranteed Price Agreements with Our Vendors
The loss
of a key vendor or manufacturer or changes in their policies could adversely
impact our ability to sell. In addition, violation of a contract that results in
either the termination of our ability to sell the product or a decrease in our
certification with the manufacturer could adversely impact our
earnings.
We May Not Have Designed Our
Information Technology Systems to Support Our Business without
Failure
We are
dependent upon the reliability of our information, telecommunication and other
systems, which are used for sales, distribution, marketing, purchasing,
inventory management, order processing, customer service and general accounting
functions. Interruption of our information systems, Internet or
telecommunications systems could have a material adverse effect on our business,
financial condition, cash flows or results of operations.
Our Earnings May Fluctuate,
Which Could Adversely Affect the Price of Our Common Stock
Our
earnings are susceptible to fluctuations for a number of reasons, including the
impact of the economic environment on our customers’ procurement levels, the
outcome of litigation, interest rates, decrease in funds received from incentive
programs from manufacturers, impairment or other charges, and increases in our
costs of goods sold and overhead expenses. In the event our revenues or net
income are less than the level expected by the market in general, such shortfall
could have an immediate and significant adverse impact on the market price of
our common stock.
If We Are Unable to Protect
Our Intellectual Property, Our Business Will Suffer
The
success of our business strategy depends, in part, upon proprietary technology
and other intellectual property rights. To date, we have relied primarily on a
combination of copyright, trademark, patent and trade secret laws and
contractual provisions with our subcontractors to protect our proprietary
technology. It may be possible for unauthorized third parties to copy certain
portions of our products or reverse engineer or obtain and use information that
we regard as proprietary. Some of our agreements with our customers and
technology licensors contain residual clauses regarding confidentiality and the
rights of third parties to obtain the source code for our products. These
provisions may limit our ability to protect our intellectual property rights in
the future that could seriously harm our business and operating results. Our
means of protecting our intellectual property rights may not be
adequate.
Our Ability to Consummate
and Integrate Acquisitions May Materially and Adversely Affect Our Profitability
if We Fail to Achieve Anticipated Revenue Improvements and Cost
Reductions
Our
ability to successfully integrate the operations we acquire to reduce costs, or
leverage these operations to generate revenue and earnings growth, could
significantly impact future revenue and earnings. Integrating acquired
operations is a significant challenge and there is no assurance that we will be
able to manage the integrations successfully. Failure to successfully
integrate acquired operations may adversely affect our cost structure thereby
reducing our margins and return on investment. In addition, we may
acquire entities with unknown liabilities, fraud, cultural or business
environment issues or that may not have adequate internal controls as required
by Section 404 of the Sarbanes-Oxley Act of 2002.
Our e-Commerce Related
Products and Services Subjects Us to Challenges and Risks in a Rapidly Evolving
Market
As a
provider of a comprehensive set of solutions, which involves the bundling of
direct IT sales, professional services and financing with our proprietary
software, we expect to encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by companies providing new and/or bundled
solutions in rapidly evolving markets. Some of these challenges relate to our
ability to:
|
|
·
|
increase
the total number of users of our
services;
|
|
|
·
|
adapt
to meet changes in our markets and competitive developments;
and
|
|
|
·
|
continue
to update our technology to enhance the features and functionality of our
suite of products.
|
Our
business strategy may not be successful or successfully address these and other
challenges, risks and uncertainties.
The Electronic Commerce
Business-to-Business Solutions Market Is Highly Competitive and We May Not Be
Able to Compete Effectively
The
market for Internet-based, business-to-business electronic commerce solutions is
extremely competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. We may not
be able to compete successfully against current or future competitors, and
competitive pressures faced by us may harm our business, operating results or
financial condition. In addition, the market for electronic procurement
solutions is evolving. Our strategy of providing an Internet-based electronic
commerce solution may not be successful, or we may not execute it effectively.
Accordingly, our solution may not be widely adopted by businesses.
Because
there are relatively low barriers to entry in the electronic commerce market,
competition from other established and emerging companies may develop in the
future. Increased competition is likely to result in reduced margins, longer
sales cycles and loss of market share, any of which could materially harm our
business, operating results or financial condition. The business-to-business
electronic commerce solutions offered by our competitors now or in the future
may be perceived by buyers and suppliers as superior to ours. Our current or
future competitors may have more experience developing Internet-based software
and end-to-end purchasing solutions. They may also have greater
technical, financial, marketing and other resources than we do. As a result,
competitors may be able to develop products and services that are superior,
achieve greater customer acceptance or have significantly improved functionality
as compared to our products and services.
Over the
long term, we expect to derive more revenues from our software, which is
unproven. We expect to incur significant sales and marketing, and general and
administrative expenses in connection with the development of this area of our
business. These expected expenses may have a material adverse effect on our
future operating results as a whole.
Our Officers and Directors
Own a Significant Amount of Our Common Stock and May be Able to Exert a
Significant Influence over Corporate Matters
Our
officers and directors beneficially own, in the aggregate, approximately 51% of
our outstanding common stock as of March 31, 2010. As a result, these
stockholders acting together will be able to exert considerable influence over
the election of our directors and the outcome of most corporate actions
requiring stockholder approval. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change of control of ePlus and consequently could
affect the market price of our common stock.
If Our Products Contain
Defects, Our Business Could Suffer
Products
as complex as those used to provide our electronic commerce solutions often
contain unknown and undetected errors or performance problems. Many serious
defects are frequently found during the period immediately following
introduction of new products or enhancements to existing
products. Undetected errors or performance problems may not be
discovered in the future and errors considered by us to be minor may be
considered serious by our customers. In addition, our customers may
experience a loss in connectivity by our hosted solution as a result of a power
loss at our data center, internet interruption or defects in our software. This
could result in lost revenues, delays in customer acceptance or unforeseen
liabilities that would be detrimental to our reputation and to our
business.
If We Publish Inaccurate
Catalog Content Data, Our Business Could Suffer
Any
defects or errors in catalog content data could harm our customers or deter
businesses from participating in our offering, damage our business reputation,
harm our ability to attract new customers, and potentially expose us to legal
liability. In addition, from time to time vendors who provide us electronic
catalog data could submit to us inaccurate pricing or other catalog data. Even
though such inaccuracies are not caused by our work and are not within our
control, such inaccuracies could deter current and potential customers from
using our products or result in inaccurate pricing to our
customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
As of
March 31, 2010, we operated from 25 office locations, six of which are
home-based offices. Our total leased square footage as of March 31, 2010, was
approximately 153 thousand square feet for which we incurred rent expense of
approximately $233 thousand per month. Some of our companies operate in shared
office space to improve sales, marketing and cost efficiency. Some
sales and technical service personnel operate from either residential offices or
space that is provided for by another entity or are located on a customer site.
The following table identifies our largest locations, the number of employees as
of March 31, 2010, the square footage and the general office
functions.
|
Location
|
|
Company
|
|
Employees
|
|
|
Square
Footage
|
|
Function
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ePlus Group,
inc.
ePlus Technology,
inc.
ePlus Government,
inc.
ePlus Document Systems,
inc.
|
|
|
|
|
|
|
|
|
Corporate
and subsidiary headquarters, sales office, technical support and
warehouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical development
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
ePlus Group,
inc.
ePlus Technology,
inc.
|
|
|
|
|
|
|
|
|
Sales
office-shared, technical support and warehouse
|
|
|
|
ePlus Content Services,
inc.
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical development
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
offices and technical support
|
Home
Offices/Customer Sites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
largest office location is in Herndon, VA, which has a lease expiration date of
December 31, 2014. We have the right to terminate the least on December 31, 2012
in the event the facility no longer meets our needs, by giving six months’ prior
written notice, with no penalty fee.
ITEM 3. LEGAL PROCEEDINGS
Cyberco
Related Matters
We have
been involved in several matters relating to a customer named Cyberco Holdings,
Inc. ("Cyberco"). The Cyberco principals were perpetrating a scam, and at least
five principals have pled guilty to criminal conspiracy and/or related charges,
including bank fraud, mail fraud and money laundering. We have previously
disclosed our losses relating to Cyberco, and are pursuing avenues to recover
those losses.
We filed
suit against one of our lenders, Banc of America Leasing and Capital, LLC
(“BoA”), in the Superior Court in the State of California, County of San Diego
(“Superior Court”) seeking to recover losses relating to the Cyberco
transaction. In December, 2009, the Supreme Court of California
denied BoA’s Petition for Review of the California Court of Appeal’s reversal of
the trial court’s dismissal of the case, and the matter has been remanded to the
trial court. We are also the defendant in one Cyberco-related case, in which BoA
filed a lawsuit against ePlus in the Circuit Court
for Fairfax County, Virginia, on November 3, 2006, seeking to enforce a guaranty
in which ePlus inc.
guaranteed ePlus
Group’s obligations to BoA relating to the Cyberco matter. ePlus Group has already paid
to BoA $4.3 million, which was awarded to BoA in a prior lawsuit regarding the
Cyberco matter. The suit against ePlus inc. seeks attorneys’
fees BoA incurred in ePlus Group’s appeal of BoA’s suit against ePlus Group,
expenses BoA incurred in Cyberco’s bankruptcy proceedings, attorneys’ fees
incurred by BoA in defending the above-referenced case in the Superior Court in
California, and all attorneys’ fees and costs BoA has incurred arising in any
way from the Cyberco matter. The trial in this suit has been stayed
pending the outcome of ePlus Group’s suit against
BoA in California. We are vigorously defending the suit against us by
BoA. We cannot predict the outcome of this suit.
In June
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 Bank. The complaint alleges counts of aiding and abetting
fraud, aiding and abetting conversion, and statutory
conversion. While we believe that we have a basis for these claims to
recover certain of our losses related to the Cyberco matter, we cannot predict
whether we will be successful in our claims for damages, whether any award
ultimately received will exceed the costs incurred to pursue these matters, or
how long it will take to bring these matters to resolution.
Other
Matters
The
shareholder derivative action that was filed against us in 2007 has been
concluded. In April 2010, a Stipulation of Dismissal was filed with
the United States Court of Appeals for the District of Columbia Circuit,
dismissing the plaintiff’s appeal of the trial court’s dismissal of the action.
The suit, which related to stock option practices, named ePlus inc. as nominal
defendant and personally named eight individual defendants who at the time were
directors and/or executive officers of ePlus.
We may
become party to various legal proceedings arising in the ordinary 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 and claims related to alleged violations of laws and
regulations. Although we do not expect that the outcome in any of these matters,
individually or collectively, will have a material adverse effect on our
financial condition or results of operations, litigation is inherently
unpredictable. Therefore, judgments could be rendered or settlements
entered that could adversely affect our results of operations or cash flows in a
particular period. We provide for costs related to contingencies when a loss is
probable and the amount is reasonably determinable.
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
At March
31, 2010, our common stock traded on The Nasdaq Global Market (“NASDAQ”) under
the symbol “PLUS.” The following table sets forth the range of high
and low closing prices for our common
stock during each quarter of the two fiscal years ended March 31, 2010 and
2009.
|
Quarter
Ended
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May
28, 2010, the closing price of our common stock was $17.50 per
share. On May 28, 2010, there were 155 shareholders of record of our
common stock. We believe there are over 1,500 beneficial holders of our common
stock.
DIVIDEND
POLICIES AND RESTRICTIONS
Holders
of our common stock are entitled to dividends if and when declared by our Board
of Directors (“Board”) out of funds legally available. We have never
paid a cash dividend to stockholders. We have retained our earnings for use in
the business. Therefore, the payment of cash dividends on our common stock is
unlikely in the foreseeable future. Any future determination concerning the
payment of dividends will depend upon our financial condition, results of
operations and any other factors deemed relevant by our Board.
PURCHASES
OF OUR COMMON STOCK
The
following table provides information regarding our purchases of ePlus inc. common stock
during the fiscal year ended March 31, 2010.
|
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 (or approximate dollar value) of shares that may yet be
purchased under the plans or programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2009 through April 30, 2009
|
|
|
937 |
|
|
$ |
11.00 |
|
|
|
937 |
|
|
|
461,228 |
(2) |
|
May 1,
2009 through September 15, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
461,228 |
(3) |
|
September 16,
2009 through September 30, 2009
|
|
|
14,858 |
|
|
$ |
15.37 |
|
|
|
14,858 |
|
|
|
485,142 |
(4) |
|
October 1,
2009 through October 30, 2009
|
|
|
24,474 |
|
|
$ |
15.40 |
|
|
|
39,332 |
|
|
|
460,668 |
(5) |
|
November 1,
2009 through November 30, 2009
|
|
|
25,585 |
|
|
$ |
15.59 |
|
|
|
64,917 |
|
|
|
435,083 |
(6) |
|
December 1,
2009 through December 31, 2009
|
|
|
95,207 |
|
|
$ |
16.26 |
|
|
|
160,124 |
|
|
|
339,876 |
(7) |
|
January 1,
2010 through January 31, 2010
|
|
|
54,759 |
|
|
$ |
16.35 |
|
|
|
214,883 |
|
|
|
285,117 |
(8) |
|
February 1,
2010 through February 15, 2010
|
|
|
101,288 |
|
|
$ |
16.27 |
|
|
|
316,171 |
|
|
|
183,829 |
(9) |
|
February 16,
2010 through February 28, 2010
|
|
|
22,865 |
|
|
$ |
16.20 |
|
|
|
22,865 |
|
|
|
477,135 |
(10) |
|
March 1,
2010 through March 31, 2010
|
|
|
37,994 |
|
|
$ |
16.84 |
|
|
|
60,859 |
|
|
|
439,141 |
(11) |
|
|
(1)
|
All
shares acquired were in open-market purchases or purchases that otherwise
comply with Exchange Act Rule
10b-18.
|
|
|
(2)
|
The
share purchase authorization in place for the month ended April 30, 2009
had purchase limitations on the number of shares of up to 500,000
shares. As of April 30, 2009, the remaining authorized shares
to be purchased were 461,228.
|
|
|
(3)
|
No
shares were purchased from May 1, 2009 through September 15,
2009.
|
|
|
(4)
|
The
Board authorized a repurchase plan for 500,000 shares on August 14, 2009,
over a 12-month period with an effective date of September 16, 2009. The
share purchase authorization in place from September 16, 2009 to September
30, 2009 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of September 30, 2009, the
remaining authorized shares to be purchased were
485,142.
|
|
|
(5)
|
The
share purchase authorization in place from October 1, 2009 to October 31,
2009 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of October 31, 2009, the remaining
authorized shares to be purchased were
460,668.
|
|
|
(6)
|
The
share purchase authorization in place from November 1, 2009 to November
30, 2009 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of November 30, 2009, the
remaining authorized shares to be purchased were
435,083.
|
|
|
(7)
|
The
share purchase authorization in place from December 1, 2009 to December
31, 2009 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of December 31, 2009, the
remaining authorized shares to be purchased were
339,876.
|
|
|
(8)
|
The
share purchase authorization in place from January 1, 2010 to January 31,
2010 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of January 31, 2010, the remaining
authorized shares to be purchased were
285,117.
|
|
|
(9)
|
The
share purchase authorization in place from February 1, 2010 to February
15, 2010 had purchase limitations on the number of shares of up to 500,000
shares for the authorization period. As of February 15, 2010, the
remaining authorized shares to be purchased were
183,829.
|
| |
(10)
|
The
Board amended our current repurchase plan on February 12, 2010 with an
effective date of February 16, 2010. The share purchase authorization in
place from February 16, 2010 to February 28, 2010 had purchase limitations
on the number of shares of up to 500,000 shares for the authorization
period. As of February 28, 2010, the remaining authorized shares to be
purchased were 477,135.
|
| |
(11)
|
The
share purchase authorization in place from March 1, 2010 to March 31, 2010
had purchase limitations on the number of shares of up to 500,000 shares
for the authorization period. As of March 31, 2010, the remaining
authorized shares to be purchased were
439,141.
|
The
timing and expiration date of the stock repurchase authorizations as well as an
amendment to our current repurchase plan are included in Note 12, “Stock
Repurchase” to our Consolidated Financial Statements included elsewhere in this
report.
ITEM 6. SELECTED FINANCIAL DATA
This Item
has been omitted based on ePlus’ status as a "smaller
reporting company.”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the financial condition and results of
operations (“financial review”) of ePlus is intended to help
investors understand our company and our operations. The financial
review is provided as a supplement to, and should be read in conjunction with
the Consolidated Financial Statements and the related Notes included elsewhere
in this report.
EXECUTIVE
OVERVIEW
Business
Description
ePlus and its consolidated
subsidiaries provide leading IT products and services, flexible leasing
solutions, and enterprise supply management to enable our customers to optimize
their IT infrastructure and supply chain processes. Our revenues are composed of
sales of product and services, sales of leased equipment, lease revenues and fee
and other income. Our operations are conducted through two business segments:
our technology sales business unit and our financing business unit.
Financial
Summary
During
the year ended March 31, 2010, total revenue decreased 2.0% to $684.3 million
while total costs and expenses decreased 1.9% to $663.2 million. Net earnings
decreased 0.7% to $12.7 million, as compared to the prior fiscal year. During the first half of
our 2010 fiscal year, the economy contracted and our sales followed. However,
the contraction of the economy appears to have stabilized and we have had
sequential revenue growth over the past four quarters. In addition, we had a
34.5% increase in revenue for the fourth quarter of fiscal year 2010 compared to
the same period last year. Net earnings for the year ended March 31, 2010
included patent license and settlement income of $3.5 million and a goodwill
impairment charge of $4.0 million for the Leasing reporting unit. During the
third quarter when preparing the annual impairment test, the weakened U.S. economy and the
global credit crisis had accelerated the reduction in demand for leasing. As a
result of this reduced demand and a reduction in our overall portfolio from
prior sales of tranches of leases in our portfolio, we projected a temporary
decline in revenue in our Leasing reporting unit, which lowered the fair value
estimates of the reporting unit and resulted in a full impairment of this
reporting unit’s goodwill.
Gross
margin for product and services was 14.1% during the year ended March 31, 2010
compared to 13.9% during the year ended March 31, 2009. Our gross margin on
sales of product and services was affected by our customers’ investment in
technology equipment, the mix and volume of products sold and changes in
incentives provided to us by manufacturers. In addition, in certain
circumstances, we may modify terms with our vendors in order to achieve better
incentives which may enhance gross margin. Cash decreased $22.7 million or 21.1%
to $85.1 million at March 31, 2010 compared to March 31, 2009. The decrease in
cash was due, in part, to a gradual increase in sales during the current fiscal
year, which increased accounts receivable and inventory; the deferment of
non-recourse financing associated with certain lease investments to increase
interest earnings and a corresponding growth in lease investments; and our share
repurchase program.
The
United States and other countries around the world have been experiencing
deteriorating economic conditions, including unprecedented financial market
disruption. As a result of the financial market turmoil, softness in the housing
markets, difficulties in the financial services sector and continuing economic
uncertainties, the direction and relative strength of the U.S. economy is
somewhat uncertain. This has caused our current and potential customers to delay
or reduce technology purchases, which has reduced sales of our products and
services. Continuing deterioration of economic conditions could cause our
current and potential customers to further delay or reduce technology purchases
and result in longer sales cycles, slower adoption of new technologies and
increased price competition. Restrictions on credit may impact economic activity
and our results. Credit risk associated with our customers and vendors may also
be adversely impacted. In addition, although we do not anticipate the need for
additional capital in the near term due to our current financial position,
financial market disruption may adversely affect our access to additional
capital.
Business
Unit Overview
Technology
Sales Business Unit
The
technology sales business segment sells information technology equipment and
software and related services primarily to corporate customers, state and local
governments, and higher education institutions on a nationwide basis, with
geographic concentrations relating to our physical locations. The technology
sales business unit also provides Internet-based business-to-business supply
chain management solutions for information technology products.
Our
technology sales business segment derives revenue from the sales of new
equipment and service engagements. These revenues are reflected on our
Consolidated Statements of Operations under sales of product and services and
fee and other income. Customers who purchase information technology
equipment from us may have Master Purchase Agreements (“MPAs”) with us which
stipulate the terms and conditions of our relationship. Some MPAs contain
pricing arrangements. However, the MPAs do not contain purchase volume
commitments and most have 30-day termination for convenience clauses. Our other
customers place orders using purchase orders without an MPA in place or with
other documentation customary for the business. Our services engagements are
often governed by Master Services Agreements (“MSAs”) which may contain specific
Statements of Work (“SOWs”) and other terms and conditions customary in the
business. Often, our work with governments is based on public bids and our
written bid responses. A substantial portion of our sales of product and
services are from sales of CISCO, Hewlett Packard and Sun Microsystem products,
which represent approximately 37%, 18% and 7% of sales of product and services,
respectively, for the year ended March 31, 2010, as compared to 36%, 18% and 6%
of sales, respectively, for the year ended March 31, 2009.
Included
in the sales of product and services in our technology sales business unit are
certain service revenues that are bundled with sales of equipment and are
integral to the successful delivery of such equipment. Our service engagements
are generally governed by SOWs and MSAs, and are primarily fixed price (with
allowance for changes); however, some service agreements are based on time and
materials.
We
endeavor to minimize the cost of sales in our technology sales business segment
through vendor consideration programs provided by manufacturers and other
incentives provided by our distributors. The programs provided by manufacturers
are generally governed by our reseller authorization level with the
manufacturer. The authorization level we achieve and maintain governs the types
of products 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,
therefore, there is no guarantee of future reductions of costs provided by these
vendor consideration programs. We currently maintain the following authorization
levels with our major manufacturers:
|
Manufacturer
|
Manufacturer Authorization
Level
|
|
|
|
|
|
HP
Preferred Elite Partner (National)
|
|
|
Cisco
Gold DVAR (National)
|
|
|
|
|
|
Advanced
Unified Communications
|
|
|
Advanced
Data Center Storage Networking
|
|
|
Advanced
Routing and Switching
|
|
|
|
|
|
|
|
|
|
|
|
ATP
Rich Media Communications
|
|
|
Master
Security Specialization
|
|
|
|
|
|
Microsoft
Gold (National)
|
|
|
Sun
SPA Executive Partner (National)
|
|
|
Sun
National Strategic DataCenterAuthorized
|
|
|
Premier
IBM Business Partner (National)
|
|
|
Lenovo
Premium (National)
|
|
|
|
|
|
|
We also
generate revenue in our technology sales business segment through hosting
arrangements and sales of our Internet-based business-to-business supply chain
management software. These revenues are reflected on our Consolidated Statements
of Operations under fee and other income. In addition, fee and other income
results from: (1) income from events that occur after the initial sale of a
financial asset; (2) remarketing fees; (3) agent fees received from various
manufacturers; (4) settlement fees related to disputes or litigation; and (5)
interest and other miscellaneous income.
Financing
Business Unit
The
financing business segment offers lease financing solutions to corporations and
governmental entities nationwide. The financing business unit derives revenue
from leasing primarily information technology equipment and sales of leased
equipment. These revenues are reflected under lease revenues and sales of leased
equipment on our Consolidated Statements of Operations.
Lease
revenues consist of rentals due under operating leases, amortization of unearned
income on direct financing and sales-type leases, sales of leased assets to
lessees and other post-term lease revenue. The types of revenue and costs
recognized by us are determined by each lease contract’s individual
classification. Each lease is classified as either a direct financing lease,
sales-type lease, or operating lease, as appropriate.
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For
direct financing and sales-type leases, 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 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.
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For
operating leases, rental amounts are accrued on a straight-line basis over
the lease term and are recognized as lease
revenue.
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In some
direct financing lease transactions, where the non-recourse debt associated with
the lease may be assigned to a lender, and the transfer of financial assets in
these transactions meet the criteria for surrender of control, the net amount of
the lease and non-recourse debt, if any, is accounted for as a sale for
financial reporting purposes.
Sales of
leased equipment represent revenue from the sales to a third party other than
the lessee of equipment subject to a lease in which we are the lessor. 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. 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.
Fluctuations
in Revenues
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 and changes in incentive programs provided by
manufacturers.
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 desirable geographic areas.
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board (“FASB”) issued The FASB Accounting Standards
Codification and the Hierarchy
of Generally Accepted Accounting Principles. The FASB Accounting
Standards Codification (“Codification”) established the Codification as the
source of authoritative U.S. GAAP, recognized by the FASB to be applied by
nongovernmental entities. The FASB will no longer issue new standards in the
form of statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead, it will issue Accounting Standards Updates. The FASB will
not consider Accounting Standards Updates as authoritative in their own right;
these updates will serve only to update the Codification, provide background
information about the guidance, and provide bases for conclusions on the
change(s) in the Codification. The Codification is effective for interim and
annual periods ending after September 15, 2009. We have updated our disclosures
and consolidated financial statements to reflect the new Codification. In the
description of the Codification and Accounting Standards Updates throughout the
report, references in italics relate to
Codification Topics and Subtopics, and their descriptive titles, as
appropriate.
In
December 2009, the FASB issued an update to amend Subsequent Events in the
Codification that requires an SEC filer and conduit debt obligor to evaluate
subsequent events through the date the financial statements are
issued. All other entities are required to evaluate subsequent events
through the date the financial statements are available to be issued. In
addition, SEC filers are exempt from disclosing the date through which
subsequent events have been evaluated. This update is effective immediately for
us for financial statements that are issued or revised.
RECENT
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June
2009, the FASB issued an update to amend Transfers and Servicing in
the Codification. This update removes the concept of a qualifying
special-purpose entity and clarifies the determination of whether a transferor
and all of the entities included in the transferor’s financial statements being
presented have surrendered control over the transferred financial assets. That
determination must consider the transferor’s continuing involvement in the
transferred financial asset, including all arrangements or agreements made
contemporaneously with, or in contemplation of, the transfer, even if they were
not entered into at the time of the transfer. This update will be effective for
us beginning April 1, 2010. We are currently evaluating the future impact this
update will have on our results of operations and financial
condition.
In
October 2009, the FASB issued an update to amend Revenue Recognition in the
Codification. This update removes the fair value criterion from the separation
criteria that we use to determine whether a multiple deliverable arrangement
involves more than one unit of accounting. It also replaces references to “fair
value” with “selling price” to distinguish from the fair value measurements
required under Fair Value
Measurements and Disclosures in the Codification, provides a hierarchy
that entities must use to estimate the selling price, eliminates the use of the
residual method for allocation, and expands the ongoing disclosure requirements.
This update is effective for us beginning April 1, 2011 and can be applied
prospectively or retrospectively. Early application is permitted. We are
currently evaluating the timing and the effect that adoption of this update will
have on our results of operations and financial
condition.
Concurrently
to issuing the above update, the FASB also issued another update to the
Codification that excludes certain software from the scope of software revenue
recognition guidance. If software is contained in a tangible product and is
essential to the tangible product's functionality, the software and the tangible
product can be accounted for as a multiple deliverable arrangement under Revenue Recognition. This
update is effective for us beginning April 1, 2011 and can be applied
prospectively or retrospectively. Early application is permitted. We are
currently evaluating the timing and the effect that adoption of this update will
have on our results of operations and financial condition.
In
January 2010, the FASB issued an update to Fair Value Measurements and
Disclosures. This update requires new disclosures of transfers in and out
of Levels 1 and 2 and of activity in Level 3 fair value measurements. The update
also clarifies the existing disclosures for levels of disaggregation and about
inputs and valuation techniques. This update is effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years We are currently evaluating the timing and the effect that adoption
of this update will have on our results of operations and financial
condition.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with U.S. GAAP requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. If our judgment or interpretation of the facts
and circumstances relating to various transactions had been different, or
different assumptions were made, it is possible that alternative accounting
policies would have been applied, resulting in a change in financial results. On
an ongoing basis, we reevaluate our estimates, including those related to
revenue recognition, residuals, vendor consideration, lease classification,
goodwill and intangibles, reserves for credit losses and income taxes
specifically relating to uncertain tax positions. Estimates in the assumptions
used in the valuation of our share-based compensation expense are updated
periodically and reflect conditions that existed at the time of each new
issuance of equity based compensation. We base estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. For all of these estimates, we caution that
future events rarely develop exactly as forecasted, and therefore, these
estimates may require adjustment.
We
consider the following accounting policies important in understanding the
potential impact of our judgments and estimates on our operating results and
financial condition. For additional accounting policies, see Note 1,
“Organization and Summary of Significant Accounting Policies" to the
Consolidated Financial Statements included elsewhere in this
report.
REVENUE
RECOGNITION. The majority of our revenues are derived from three
sources: sales of products and services, lease revenues and sales of our
software. Our revenue recognition policies vary based upon these revenue
sources. Generally, 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 collectability is reasonably assured. Using these
tests, the vast majority of our product sales are recognized upon delivery due
to our sales terms with our customers and with our vendors. For proper cutoff,
we estimate the product delivered to our customers at the end of each quarter
based upon historical delivery dates.
We also
sell services that are performed in conjunction with product sales, and
recognize revenue only when the delivered item(s) has value to the customer on a
stand-alone basis, there is objective and reliable evidence of the fair value of
the undelivered item(s), and delivery of the undelivered item(s) is probable and
substantially under our control. For most of the arrangements with multiple
deliverables (hardware and services), we generally cannot establish reliable
evidence of the fair value of the undelivered items. Therefore, the
majority of revenue from these services and hardware sold in conjunction with
the services, is recognized when the service is complete and we have received an
acceptance certificate. However, in some cases, we do not receive an acceptance
certificate and we estimate the completion date based upon our
records.
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. Our 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. In some cases, we obtain
third party appraisals of the residual values.
We
evaluate residual values on a quarterly basis and record any required
impairments of residual value, in the period in which the impairment is
determined. Residual values may be 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
renewal or extension of the original lease, or the sale of the equipment either
to the lessee or on the secondary market. 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.
ASSUMPTIONS
RELATED TO GOODWILL. We have accounted for our acquisitions using the
acquisition method of accounting. This method requires estimates to determine
the fair values of assets and liabilities acquired including judgments to
determine any acquired intangible assets such as customer-related intangibles,
as well as assessments of the fair value of existing assets such as property and
equipment. Liabilities acquired can include balances for litigation and other
contingency reserves established prior to or at the time of acquisition, and
require judgment in ascertaining a reasonable value. Third-party valuation firms
may be used to assist in the appraisal of certain assets and liabilities, but
even those determinations are based on significant estimates provided by us,
such as forecasted revenues or profits on contract-related intangibles. Numerous
factors are typically considered in the purchase accounting assessments. Changes
in assumptions and estimates of the acquired assets and liabilities would result
in changes to the fair values, resulting in an offsetting change to the goodwill
balance associated with the business acquired.
We review
our goodwill for impairment annually, or more frequently, if events or
circumstances change that would more-likely-than-not reduce the fair value of a
reporting unit below its carrying amount. We have reportable segments based on
the product and services offered – financing business segment and technology
sales business segment. Below our reportable segments are reporting units. For
the purpose of testing for impairment, we have four distinct reporting units:
Leasing, Technology, Software procurement and Software document
management. In determining reporting units, we consider factors such
as nature of products, nature of production, type of customer, management and
the availability of separate and distinct financial statements for each entity.
We do not have any goodwill remaining in our Software procurement and Leasing
reporting unit.
A
significant amount of judgment is involved in determining if an indicator of
impairment has occurred. Such indicators may include, among others: a
significant decline in our expected future cash flows; a sustained, significant
decline in our stock price and market capitalization; a significant adverse
change in legal factors or in the business climate; unanticipated competition;
the testing for recoverability of a significant asset group within a reporting
unit; and slower growth rates. Any adverse change in these factors could have a
significant impact on the recoverability of these assets and could have a
material impact on our Consolidated Financial Statements.
Annual
Test
During
the third quarter of our fiscal year, we perform our annual goodwill impairment
test. The goodwill impairment test involves a two-step process. The first step
is a comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including prices for
similar assets and liabilities and other valuation techniques. We
employed both the market approach and the income approach to determine fair
value. The market approach measures the value of an entity through an
analysis of recent sales or by comparison to comparable companies. The income
approach measures the value of reporting units by discounting expected future
cash flows.
Consideration
was given to applying the transaction method which examines sales of stock of
private or public companies, which are in the same industry or similar lines of
business and are of comparable size and capital structure. However,
we concluded that there were insufficient transactions of similar firms with
available current financial information to make a valid comparison.
Under the
market approach, we used the guideline public company method whereby valuation
multiples of guideline companies were applied to the historical financial data
of our reporting units. We analyzed companies that were in the same industry,
performed the same or similar services, had similar operations, and are
considered competitors. In addition, the majority of the companies
selected were also used in the impairment test performed last year.
Multiples
that related to some level of earnings or cash flow were most appropriate for
the industry in which we operate. The multiples selected were based
on our analysis of the guideline companies’ profitability ratios and return to
investors. We compared the reporting units’ size and ranking against
the guidelines, taking into consideration risk, profitability and growth along
with guideline medians and averages. We then selected pricing
multiples, adjusted appropriately for size and risk, to apply to the reporting
unit's trailing twelve month financial data.
Multiples
were weighted based on the consistency and comparability of the guideline
companies along with the respective reporting units, including margins,
profitability and leverage. For each of the reporting units, we used
the following multiples: the price to earnings before tax
(“EBT”), price to net income (“NI”), market value of invested capital
(“MVIC”) to earnings before interest, taxes, depreciation and amortization
(“EBITDA”), and MVIC to earnings before interest and taxes
(“EBIT”).
Under the
income approach, we used the discounted future cash flow method to estimate the
fair value of each of the reporting units by discounting the expected future
cash flows of reporting units. We used the weighted average cost of capital to
discount the expected future cash flows for the reporting unit to its present
value. The weighted average cost of capital is the estimated rate of return on
alternative investments with comparable risks. The weighted average
cost of capital involves estimating the cost of debt and the cost of
equity. In addition, we also considered factors such as risk-free
rate of return, market equity risk premium, beta coefficient and firm specific
risk. We estimated our weighted average cost of capital at 8.3%,
12.9% and 13.6% for the Leasing, Technology and Software document management
reporting units, respectively. In addition, we estimated the average
annual compound cash flow growth rate for a five-year period of (3.3%), 11.7%
and 21%, for the Leasing, Technology, and Software document management reporting
units. Also, we estimated a long term growth rate for the Leasing
reporting unit of 2.0%, and a long term growth rate 3.5% for both the Technology
and Software document management reporting units.
The
estimated fair value of our reporting units is dependent on several significant
assumptions involving our forecasted cash flows and weighted average cost of
capital. The forecasted cash flows are based on management’s best estimates of
economic and market conditions over the projected period including business
plans, growth rates in sales, costs, estimates of future expected changes in
operating margins and cash expenditures. Any adverse change including
a significant decline in our expected future cash flows; a significant adverse
change in legal factors or in the business climate; unanticipated competition;
or slower growth rates may impact our ability to meet our forecasted cash flow
estimates.
We
averaged the results of the income and market methods and compared the estimated
fair value to our market capitalization which was computed by multiplying our
closing stock price to the shares outstanding on October 1,
2009. Comparison of the average fair values of the reporting units to
the overall market value of our equity indicated an implied control premium of
33.5%. This percentage falls within the range of currently observable market
data.
During
the third quarter when preparing our annual impairment test, the U.S. economy
and the global credit crisis weakened the demand for leasing. As a result of
this reduced demand and a reduction in our overall portfolio from prior sales of
tranches of leases in our portfolio, we projected a temporary decline in revenue
in our Leasing reporting unit, which lowered the fair value estimates of the
reporting unit. The result of averaging the estimated fair value computed using
the guideline public company and the discounted cash flow methods was that the
fair value of the Leasing reporting was below its carrying value.
As a
result, during the three months ended December 31, 2009, we recorded an
estimated impairment charge of $4.0 million in our Leasing reporting unit. This
represented the full amount of goodwill recorded for the Leasing reporting unit.
We believed that after assigning the fair value of the Leasing reporting unit to
all of the assets and liabilities, during the second step of the goodwill
testing, there would be not be any excess fair value over the amounts assigned
to allocate to goodwill. Therefore, the Leasing reporting unit’s goodwill was
fully impaired at October 1, 2009.
The
Technology and Software document management reporting units' fair values
exceeded their carrying values. Had the fair value been 10% lower
than calculated on each of the three reporting units, the results would not have
changed for any of the reporting units. The fair value of the Technology
reporting unit was 12.2% higher than the carrying value and the fair value of
the Software document management reporting unit was 245.8% higher than the
carrying value.
During
the fourth quarter of fiscal 2010, we performed the second step of the goodwill
impairment test in accordance with Codification Topic Intangibles- Goodwill and
Other. Based on this analysis, no additional impairment was recorded. We
did not have any triggering events between our annual test date and March 31,
2010. We have $16.5 million and $1.1 million of goodwill remaining in our
Technology and Software Document Management reporting units,
respectively.
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. Many of these
programs extend over one or more quarter’s sales activities and are primarily
formula-based. Different programs have different vendor/program
specific goals to achieve. These programs can be very complex to calculate and
sometimes involves estimates. Based on historical financial data for the
different programs, we may estimate that we will obtain these
goals.
Vendor
consideration received pursuant to volume sales incentive programs is recognized
as a reduction to cost of sales, product and services on the accompanying
Consolidated Statements of Operations. 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 on the accompanying Consolidated Statements of Operations.
We accrue
vendor consideration in accordance with the terms of the related program which
may include a certain amount of sales of qualifying products or as targets are
met or as the amounts are estimable and probable or as services are provided.
Actual vendor consideration amounts may vary based on volume or other sales
achievement levels, which could result in an increase or reduction in the
estimated amounts previously accrued, and can, at times, result in significant
earnings fluctuations on a quarterly basis.
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. These determinations require
considerable judgment in assessing the ultimate potential for collection of
these receivables and include giving consideration to the customer’s financial
condition and the value of the underlying collateral and funding status (i.e.
funded on a non-recourse or recourse basis).
SALES
RETURNS ALLOWANCE. The allowance for sales returns is maintained at a level
believed by management to be adequate to absorb potential sales returns from
product and services. Management’s determination of the adequacy of
the reserve is based on an evaluation of historical sales returns and other
relevant factors. These determinations require considerable judgment in
assessing the ultimate potential for sales returns and include consideration of
the type and volume of product sold.
INCOME
TAX. We make certain estimates and judgments in determining income tax expense
for financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which principally arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We also must analyze income tax reserves, as well
as determine the likelihood of recoverability of deferred tax assets, and adjust
any valuation allowances accordingly. Considerations with respect to the
recoverability of deferred tax assets include the period of expiration of the
tax asset, planned use of the tax asset, and historical and projected taxable
income as well as tax liabilities for the tax jurisdiction to which the tax
asset relates. Valuation allowances are evaluated periodically and will be
subject to change in each future reporting period as a result of changes in one
or more of these factors. The calculation of our tax liabilities also involves
considering uncertainties in the application of complex tax regulations. We
recognize liabilities for uncertain income tax positions based on our estimate
of whether, and the extent to which, additional taxes will be
required.
SHARE-BASED
PAYMENT. We currently have two equity incentive plans which provide us with the
opportunity to compensate directors with restricted stock and selected employees
with stock options, restricted stock and restricted stock units. A stock option
entitles the recipient to purchase shares of common stock from us at the
specified exercise price. Restricted stock and restricted stock units (“RSUs”)
entitle the recipient to obtain stock or stock units, which vest over a set
period of time. RSUs are granted at no cost to the employee and employees do not
need to pay an exercise price to obtain the underlying common stock. All grants
or awards made under the plans are governed by written agreements between us and
the participants. We also have options outstanding under three previous
incentive plans, under which we no longer issue equity awards.
Under the
fair value method of accounting for stock-based compensation, we measure stock
option expense at the date of grant using the Black-Scholes valuation model and
amortize the compensation expenses using the straight-line method over the
requisite service period. This model estimates the fair value of the options
based on a number of assumptions, such as interest rates, employee exercises,
the current price and expected volatility of our common stock and expected
dividends, if any. The expected life is a significant assumption as it
determines the period for which the risk-free interest rate, volatility and
dividend yield must be applied. The expected life is the average length of time
in which we expect our employees to exercise their options. The risk-free
interest rate is the five-year nominal constant maturity Treasury rate on the
date of the award. Expected stock volatility reflects movements in our stock
price over a historical period that matches the expected life of the options.
The dividend yield assumption is zero since we have historically not paid any
dividends and do not anticipate paying any dividends in the near
future.
RESULTS
OF OPERATIONS
The
Year Ended March 31, 2010 Compared to the Year Ended March 31,
2009
REVENUES
Total Revenues. We generated
total revenues during the year ended March 31, 2010 of $684.3 million, compared
to revenues of $698.0 million for the year ended March 31, 2009, a decrease of
2.0%.
Sales of product and
services. Sales of product and services decreased 1.3% to
$627.8 million during the year ended March 31, 2010, compared to $636.1 million
during last fiscal year. During the first half of fiscal 2010, the
economic downturn resulted in our customers' tendency to postpone technology
equipment investments. However, we have had sequential growth in sales of
product and services for the past four quarters. Sales of product and services
increased 17.7% from fourth quarter fiscal 2009 to first quarter 2010, 12.0%
from first to second quarter, 3.8% from second to third quarter and 2.3% from
third to fourth quarter of fiscal year 2010. Sales of product and
services represented 91.7% and 91.1% of total revenue during the year ended
March 31, 2010 and 2009, respectively.
At March
31, 2010, our open orders from customers increased approximately $20.0 million
over last year. This increase was a result of increased orders from customers
towards the later part of the quarter ended March 31, 2010, as well as orders
that were not fulfilled by our vendors in their normal time frames.
In
addition, we had deferred revenue of $22.3 million, an increase of approximately
$10.0 million at March 31, 2010, as compared to March 31, 2009, related to
bundled hardware and service arrangements that were not completed by the end of
the quarter. We will recognize revenue on multiple deliverable revenue
arrangements when the services are completed.
Gross Margin. We realized a
gross margin on sales of product and services of 14.1% and 13.9% for the years
ended March 31, 2010 and 2009, respectively. Our gross margin on
sales of product and services was affected by an increase in incentives provided
to us by our vendors. In addition, our gross margin was also affected by our
customers’ investment in technology equipment and the mix and volume of product
and services sold. There are ongoing changes to the programs offered to us by
our vendors which may be affected by the current economic conditions and thus,
we may not be able to maintain the level of manufacturer incentives we currently
are receiving, which may cause gross margins to decrease.
Lease revenues. Lease
revenues can be broadly categorized into two types - income generated from the
lease portfolio, including income from direct-financing leases and rent from
operating leases, and other lease-related income, including lease sales, sales
of leased assets to lessees and end of term income. Lease revenues decreased
$6.6 million, or 14.8% to $37.9 million for the year ended March 31, 2010,
compared to $44.5 million during the prior year. Earnings from direct financing
and operating leases during the leases’ original or extended terms decreased
about $3.4 million as compared to same period last year as a result of a smaller
lease portfolio throughout the year. At March 31, 2010, we had $153.6 million of
investment in leases compared to $119.3 million last year. A large portion of
the increase over last year occurred late in the fourth quarter, and therefore,
these leases were not generating earnings for us throughout the
year. Partially offsetting the decrease in lease revenue was the
sales of lease assets to lessee, which increased about $1.0 million to $10.6
million for the year ended March 31, 2010. These purchases by lessees fluctuate
primarily based upon portfolio maturity dates and amounts. Other components of
lease revenue including sales of leases and income related to end of lease
transactions also decreased about $3.9 million as compared to the same period
last year.
Sales of leased
equipment. We also recognize revenue from the sale of leased
equipment to non-lessee third parties. Sales of leased equipment are proceeds
from the sales of leased assets and underlying leases to non-lessee third
parties. Sales of leased equipment fluctuate from quarter to quarter because
management determines the timing of such sales as a component of our
risk-mitigation process, which we conduct periodically to diversify our
portfolio by customer, equipment type, and residual value investments. During
the year ended March 31, 2010, sales of leased equipment increased 16.8% to $5.4
million, compared to $4.6 million during the prior year. Gross margins
recognized on the sales of leased equipment are 2.0% and 5.6%, for the years
ended March 31, 2010 and 2009, respectively. The revenue and gross margin
recognized on sales of leased equipment can vary significantly depending on the
nature and timing of the sale.
Fee and other
income. For the year ended March 31, 2010, fee and other
income decreased 24.7% to $9.6 million, compared to $12.8 million during the
prior year. These decreases were primarily driven by decreases in software and
related consulting revenue, decreases in fee income in our leasing segment
driven by a decrease in remarketing income and litigation-related recoveries,
agent fees from manufacturers and short-term investment income for the year
ended March 31, 2010. Fee and other income may also include 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 infrequent, and 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 license and settlement
income. During the year ended March 31, 2010, we entered into settlement
and license agreements with three defendants wherein the complaint was dismissed
with prejudice and each defendant was granted a license in specified ePlus patents, which resulted
in payments totaling $3.5 million.
These
settlement agreements were the result of a lawsuit filed against four defendants
alleging that they used or sold products, methods, processes, services and/or
systems that infringe on certain of our patents. One such agreement includes an
additional payment of $125 thousand due on or before October 20, 2010. This
payment has not been recognized in our Consolidated Statement of Operations
because collectability is not reasonably assured. The earnings from these types
of transactions in a particular period may not be indicative of the earnings
that can be expected in future periods.
COSTS AND
EXPENSES
Cost of sales. During the
year ended March 31, 2010, cost of sales, product and services decreased 1.6 %
to $539.2 million, compared to $548.0 million during the prior year. This
decrease corresponded to the decrease in sales of product and services in our
technology sales business unit. Cost of sales, products and services is also
affected by incentives from manufacturers, product mix and volume. Cost of
sales, leased equipment increased 21.3% to $5.3 million during the year ended
March 31, 2010, compared to $4.4 million for the year ended March 31,
2009. Cost of sales, leased equipment is the net book value of the
leased assets recorded at the time of the sale. This increase corresponds to the
increase in sales of leased equipment to non-lessee third parties in our
financing business segment.
Direct lease costs. During
the year ended March 31, 2010, direct lease costs decreased 24.9% to $10.7
million as compared to $14.2 million during the prior fiscal year. The largest
component of direct lease costs is depreciation expense for operating lease
equipment. Our investment in operating leases decreased 10.1% to $20.3 million
at March 31, 2010 compared to $22.5 million at March 31, 2009 primarily due to
the sale of a number of lease schedules in the prior fiscal year and a reduction
in the origination of operating leases.
Professional and other
fees. During the year ended March 31, 2010, professional and
other fees increased 50.2% to $10.8 million, compared to $7.2 million during the
prior year. These increases are primarily due to increased legal
expense related to the patent infringement litigation, partially offset by lower
fees pertaining to our financial statement audit during the same periods last
year. These types of patent infringement 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 claims for damages, whether any award ultimately
received will exceed the costs incurred to pursue these matters, or how long it
will take to bring these matters to resolution.
Salaries and
benefits. During the year ended March 31, 2010, salaries and
benefits expense decreased 2.3% to $74.6 million, compared to $76.4 million
during the prior year. We employed 661 people at March 31, 2010 as
compared to 656 people at March 31, 2009. This decrease is driven by lower
salaries, benefits and commission expenses, partially offset by increases in
share-based compensation expense and certain incentive bonuses compared to prior
year.
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 year ended March 31, 2010 and 2009, our expenses for the plan were
approximately $377 thousand and $369 thousand, respectively.
General and administrative
expenses. During the year ended March 31, 2010, general and
administrative expenses decreased 6.1% to $14.4 million, as compared to $15.3
million in the prior fiscal year. These decreases are driven by lower expenses
in insurance, depreciation, travel and supplies, partially offset by increases
in certain telephone and data expenses and software licenses.
Interest and financing
costs. Interest and financing costs decreased 28.8% to $4.1
million during the year ended March 31, 2010, as compared to $5.8 million during
the prior year. This decrease is primarily driven by lower interest costs and
related expenses as a result of lower non-recourse note balances. Non-recourse
notes payable decreased 37.0% to $53.6 million at March 31, 2010 as compared to
$85.0 million at March 31, 2009.
Income taxes. Our provision
for income taxes decreased $0.9 million to $8.3 million for the year ended March
31, 2010. Our effective income tax rates for the years ended March 31, 2010 and
2009 were 39.6% and 41.8%, respectively. The decrease in effective income tax
rate is due to a reduction in state income tax, and state and foreign tax
valuation allowance, partially offset by an increase in non-deductible
compensation expense.
Net Earnings. The foregoing
resulted in net earnings of $12.7 million for the year ended March 31, 2010, a
decrease of 0.7% as compared to $12.8 million in the prior fiscal
year.
Basic and
fully diluted earnings per common share were $1.54 and $1.50, respectively, for
the year ended March 31, 2010. Basic and fully diluted earnings per common share
were $1.56 and $1.52, respectively, for the year ended March 31,
2009.
Weighted
average common shares outstanding used in the calculation of basic and diluted
earnings per common share for the year ended March 31, 2010 were 8,267,374, and
8,469,226, respectively. Weighted average common shares outstanding used in the
calculation of basic and diluted earnings per common share for the year ended
March 31, 2009 were 8,219,218 and 8,453,333, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Overview
Our
primary sources of liquidity have historically been cash and cash equivalents,
internally generated funds from operations, and borrowings, both non-recourse
and recourse. We have used those funds to meet our capital requirements, which
have historically consisted primarily of working capital for operational needs,
capital expenditures, purchases of operating lease equipment, payments of
principal and interest on indebtedness outstanding, acquisitions and the
repurchase of shares of our common stock.
Our
subsidiary ePlus
Technology, inc., part of our technology sales business segment, finances its
operations with funds generated from operations, and with a credit facility with
GECDF, which is described in more detail below. There are two components of this
facility: (1) a floor plan component; and (2) an accounts receivable component.
After a customer places a purchase order with us and we have completed our
credit check, we place an order for the equipment with one of our vendors.
Generally, most purchase orders from us to our vendors are first financed under
the floor plan component and reflected in “accounts payable—floor plan” on our
Consolidated Balance Sheets. Payments on the floor plan component are due on
three specified dates each month, generally 40-45 days from the invoice date. At
each due date, the payment is made by the accounts receivable component of our
facility and reflected as “recourse notes payable” on our Consolidated Balance
Sheets. The borrowings and repayments under the floor plan component are
reflected as “net borrowings (repayments) on floor plan facility” in the cash
flows from financing activities section of our Consolidated Statements of Cash
Flows.
Most
customer payments in our technology sales business segment are paid to our
lockboxes. Once payments are cleared, the monies in the lockbox accounts are
automatically transferred to our operating account on a daily basis. On the due
dates of the floor plan component, we make cash payments to GECDF. These
payments from the accounts receivable component to the floor plan component and
repayments from our cash are reflected as “net (borrowings) repayments on
recourse lines of credit” in the cash flows from the financing activities
section of our Consolidated Statements of Cash Flows. We engage in this payment
structure in order to minimize our interest expense and bank fees in connection
with financing the operations of our technology sales business
segment.
We
believe that cash on hand, and funds generated from operations, together with
available credit under our credit facility, will be sufficient to finance our
working capital, capital expenditures and other requirements for at least the
next twelve calendar months.
Our
ability to continue to fund our planned growth, both internally and externally,
is dependent upon our ability to generate sufficient cash flow from operations
or to obtain additional funds through equity or debt financing, or from other
sources of financing, as may be required. While at this time we do not
anticipate needing any additional sources of financing to fund operations, if
demand for IT products further declines, our cash flows from operations may be
substantially affected. Given the current environment within the global
financial markets, management has maintained higher cash reserves to ensure
adequate cash is available to fund our working capital requirements should the
availability to the debt and equity markets be limited.
Cash
Flows
The
following table summarizes our sources and uses of cash over the periods
indicated (in thousands):
|
|
|
Year
Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities. Cash used in operating activities totaled $37.0 million in
the year ended March 31, 2010, compared to cash provided by operations of $21.2
million during the prior fiscal year. Cash flows used in operations
for the year ended March 31, 2010 resulted primarily from $71.9 million in cash
used by investment in direct financing and sales type leases—net. Our investment
in direct financing and sales-type leases—net increased $36.5 million on our
Consolidated Balance Sheets (see Note 2, “Investment in Leases and Leased
Equipment—net,”) during the year ended March 31, 2010. The schedule of non-cash
investing and financing activities contained repayments of $41.9 million in
principal payments by our lessees directly to our lenders for certain leases
secured by non-recourse debt. This direct repayment from our lessees directly to
our lenders is not reflected in our cash used in operating activities and hence,
had the effect of increasing our cash used in operating activities. In addition,
there was an increase in accounts receivable that resulted in cash used in
operating activities of $26.8 million. The increase in accounts receivable is
consistent with the increase in sales of product and services from fourth
quarter of fiscal year 2010 over the previous fourth quarter of fiscal 2009.
Sales of product and services increased about 41% from $120.5 million during the
fourth quarter of 2009 to $170.0 million during the fourth quarter of 2010. The
effect of the increase in sales of product and services on accounts receivable
is partially offset by an increase in collection during the fourth quarter of
fiscal 2010. These changes are partially offset by favorable changes in balances
of accounts payable – equipment and depreciation and amortization expenses.
Accounts payable – equipment increased approximately $38.0 million at March 31,
2010 compared to last year. This increase is related to the purchase
of equipment for lease during the month of March.
Cash Flows from Investing
Activities. Cash used in investing activities increased to $5.8 million
during the year ended March 31, 2010, as compared to $1.3 million during the
prior fiscal year. This increase was primarily driven by cash used in
purchases of operating lease equipment of $10.2 million, partially offset by
proceeds from sale or disposal of operating lease equipment of $5.2
million.
Cash Flows from Financing
Activities. Cash provided by financing activities was $20.2 million for
the year ended March 31, 2010, mostly driven by borrowings of non-recourse notes
payable for our Leasing segment and borrowings from our floor plan facility. The
schedule of non-cash investing and financing activities contained a repayment of
$41.9 million in principal payments by our lessees directly to our lenders for
certain leases secured by non-recourse debt. This repayment from our lessees
directly to our lenders is not reflected in our cash provided by financing
activities and hence, had the effect of decreasing our cash used in repayment of
non-recourse debt. In addition, we generated $3.1 million from proceeds from the
issuance of capital stock as a result of stock option
exercises. These changes are partially offset by our repayments of
non-recourse debt of $6.3 million and repurchases of common stock of $6.1
million.
Compared
to the same period last year, cash provided by financing activities decreased
$9.9 million primarily as a result of a net decrease of $8.1 million from
borrowings of non-recourse debt and floor plan facility.
Liquidity
and Capital Resources
Non-recourse
debt financing activities may provide approximately 80% to 100% of the purchase
price of the equipment we purchase for leases to our customers. Any
balance of the purchase price remaining after non-recourse funding and any
upfront payments received from the lessee (our equity investment in the
equipment) must generally be financed by cash flows from our operations, the
sale of the equipment leased to third parties, or other internal means. Although
we expect that the credit quality of our leases and our residual return history
will continue to allow us to obtain such financing, such financing may not be
available on acceptable terms, or at all.
The
financing necessary to support our leasing activities has principally been
provided by non-recourse borrowings. Given the current market, we have been
monitoring our exposure closely and conserving our capital. Historically, we
have obtained recourse and non-recourse borrowings from banks and finance
companies. We continue to be able to obtain financing through our traditional
lending sources, however, pricing has increased and has become more volatile.
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 the lender’s only recourse, upon default by the lessee, is against
the lessee and the specific equipment under lease. At March 31, 2010, our
lease-related non-recourse debt portfolio decreased 37.0% to $53.6 million, as
compared to $85.0 million at March 31, 2009.
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 its
investment.
Accrued
expenses and other liabilities includes deferred expenses, deferred revenue and
amounts collected and payable, such as sales taxes and lease rental payments due
to third parties. We had $40.5 million and $29.0 million of accrued expenses and
other liabilities as of March 31, 2010 and March 31, 2009, respectively, an
increase of 39.7%. The increase is primarily driven by approximately $10 million
increase in deferred revenue related to bundled hardware and service
arrangements that were not completed by the end of the quarter.
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. This facility has full recourse to ePlus Technology, inc. and is
secured by a blanket lien against all its assets, such as chattel paper,
receivables and inventory. As of March 31, 2010, the facility had an
aggregate limit of the two components of $125 million with an accounts
receivable sub-limit of $30 million. Availability under the GECDF facility may
be limited by the asset value of equipment we purchase and the aging of our
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 total tangible net worth and subordinated debt of ePlus Technology, inc., and
maximum debt to tangible net worth ratio of ePlus Technology, inc. We
were in compliance with these covenants as of March 31, 2010. 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;
however, we do not expect these restrictions to have an impact on the ability of
ePlus inc. to meet its
cash obligations or materially restrict its ability to undertake additional debt
or equity financing. 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
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 up to $10.5 million by ePlus inc. The guaranty
requires ePlus inc. to
deliver its audited financial statements by certain dates. We have
delivered the annual audited financial statements for the year ended March 31,
2009 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 and as an operational function of our accounts payable process. In
light of the credit market conditions, we continue to have discussions with
GECDF to inquire about the strategic focus of their distribution finance unit.
Pursuant to these discussions, we believe that we can continue to rely on the
availability of this credit facility. Should the GECDF credit facility no longer
be available, we believe we can increase our lines of credit with our vendors
and utilize our cash for working capital.
Floor
Plan Component
The
traditional business of ePlus Technology, inc. as a
seller of computer technology, related peripherals and software products is in
part financed through a floor plan component in which interest expense for the
first forty to forty-five days, in general, is not charged. The floor plan
liabilities are recorded as accounts payable—floor plan on our Consolidated
Balance Sheets, as they are normally repaid within the forty- to forty-five-day
time frame and represent an assigned accounts payable originally generated with
the manufacturer/distributor. If the forty- 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
for the dates indicated were as follows (in thousands):
|
Maximum
Credit Limit at March 31, 2010
|
|
|
Balance
as of March 31, 2010
|
|
|
Maximum
Credit Limit at March 31, 2009
|
|
|
Balance
as of March 31, 2009
|
|
|
$
|
125,000
|
|
|
$
|
57,613
|
|
|
$
|
125,000
|
|
|
$
|
45,127
|
|
Accounts
Receivable Component
Included
within the credit facility, 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 available cash. The outstanding balance under the accounts
receivable component is recorded as recourse notes payable on our Consolidated
Balance Sheets. There was no outstanding balance at March 31, 2010 or March 31,
2009, while the maximum credit limit was $30.0 million for both
periods.
Credit Facility — Leasing
Business
The
National City $35 million credit facility expired on July 10,
2009. We allowed the expiration of this credit facility pursuant to
its terms. The expiration of this facility did not have a
material impact on our leasing business or liquidity as we have no outstanding
balance on this facility upon expiration. We may, in the future, explore
opportunities, if any, to supplement our liquidity with an additional credit
facility.
Credit Facility —
General
1st
Commonwealth Bank of Virginia provides us with a $0.5 million credit facility,
which will mature on October 26, 2010. This credit facility is available for use
by us and our affiliates and is full recourse to us. Borrowings under this
facility bear interest at 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 March 31, 2010, we have no
outstanding balance on this credit facility
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 Consolidated
Statements of Operations.
Off-Balance
Sheet Arrangements
As part
of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K or other
contractually narrow or limited purposes. As of March 31, 2010, we were not
involved in any unconsolidated special purpose entity
transactions.
Adequacy
of Capital Resources
The
continued implementation of our business strategy will require a significant
investment in both resources and managerial focus. In addition, we may
selectively acquire other companies that have attractive customer relationships
and skilled sales forces. We may also acquire technology companies to expand and
enhance the platform of bundled solutions to provide additional functionality
and value-added services. As a result, we may require additional financing to
fund our strategy, implementation and potential future acquisitions, which may
include additional debt and equity financing.
For the
periods presented herein, inflation has been relatively low and we believe that
inflation has not had a material effect on our results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Although
a substantial portion of our liabilities are non-recourse, fixed-interest-rate
instruments, we utilize our lines of credit and other financing facilities which
are subject to fluctuations in short-term interest rates. These instruments,
which are denominated in U.S. dollars, were entered into for other than trading
purposes and, with the exception of amounts drawn under the GECDF facility, 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 GECDF facility bear interest at a market-based variable
rate. As of March 31, 2010, 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 such,
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.
We also
have leasing transactions in Iceland. To date, Icelandic operations
have been insignificant and we believe that potential fluctuations in Icelandic
krona currency exchange rates will not have a material effect on our financial
position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
See the
Consolidated Financial Statements and Schedules listed in the accompanying
“Index to Financial Statements and Schedules.”
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation
of 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, or “disclosure controls,” as defined in Securities Exchange Act
(“Exchange Act”) Rule 13a-15(e). Disclosure controls are controls and procedures
designed to reasonably ensure that information required to be disclosed in our
reports filed under the Exchange Act, such as this annual report, is recorded,
processed, summarized and reported within the time periods specified in the U.S.
Securities and Exchange Commission’s rules and forms. Disclosure controls
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to our management, including our CEO and CFO, or
persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. Our disclosure controls include some, but not
all, components of our internal control over financial reporting. Based upon
that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of March 31, 2010.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Exchange Act Rule 13a-15(f). This
system is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of Consolidated Financial Statements for
external purposes in accordance with generally accepted accounting
principles.
Our
internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of Consolidated Financial Statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on the Consolidated Financial
Statements.
Our
management performed an assessment of the effectiveness of our internal control
over financial reporting as of March 31, 2010, utilizing the criteria described
in the “Internal Control — Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The objective of
this assessment was to determine whether our internal control over financial
reporting was effective as of March 31, 2010. Management’s assessment included
evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and
our overall control environment. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of
March 31, 2010.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting
during the fourth quarter of our fiscal year ended March 31, 2010, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations
on the Effectiveness of Controls
Our
management, including our CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect
all errors and all fraud. A control system cannot provide absolute assurance due
to its inherent limitations; it is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. A control system also can be circumvented by collusion or
improper management override. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of such
limitations, disclosure controls and internal control over financial reporting
cannot prevent or detect all misstatements, whether unintentional errors or
fraud. However, these inherent limitations are known features of the financial
reporting process; therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
ITEM 9B. OTHER INFORMATION
None.
PART
III
Except as
set forth below, the information required by Items 10, 11, 12, 13 and 14 is
incorporated by reference from our definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of our fiscal year.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
about our directors may be found under the caption “Proposals – Proposal 1 –
Election of Directors” in our Proxy Statement for the 2010 Annual Meeting of
Shareholders (the “Proxy Statement”). The information in the Proxy Statement set
forth under the captions of “Section 16 (a) Beneficial Ownership Reporting
Compliance, Related Person Transactions and Indemnification”, “Committees of the
Board of Directors” and “Corporate Governance” is incorporated herein by
reference.
The
information under the heading “Executive Officers” in Item 1 of this report is
incorporated in this section by reference.
Code
of Ethics
We have a
code of ethics that applies to all of our employees, including our principal
executive officer, principal financial officer, principal accounting officer and
our Board. The Standard of Conduct and Ethics for Employees, Officers
and Directors of ePlus
inc. is available on our website at www.ePlus.com/ethics.
We will disclose on our website any amendments to or waivers from any provision
of the Standard of Conduct and Ethics that applies to any of the directors or
officers.
ITEM 11. EXECUTIVE COMPENSATION
The
information in the Proxy Statement set forth under the captions “Directors’
Compensation” and “Executive Compensation” is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information in the Proxy Statement set forth under the captions “Executive
Compensation – Equity Compensation Plan Information,” “Security Ownership of
Certain Beneficial Owners” and “Security Ownership by Management” is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The
information in the Proxy Statement set forth under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance, Related Person Transactions and
Indemnification” and “Corporate Governance” is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The
information in the Proxy Statement set forth under the caption “Proposals –
Proposal 2 – Ratification of the appointment of Deloitte and Touche LLP as our
independent auditors for our fiscal year ending March 31, 2011” is incorporated
herein by reference.
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a)(1)
Financial Statements
The
Consolidated Financial Statements listed in the accompanying Index to Financial
Statements and Schedules are filed as a part of this report and incorporated
herein by reference.
(a)(2)
Financial Statement Schedule
None. Financial
Statement Schedules are omitted because they are not required, inapplicable or
the required information is shown in the Consolidated Financial Statements or
Notes thereto.
(a)(3)
Exhibit List
Exhibits
10.2 through 10.19 are management contracts or compensatory plans or
arrangements.
|
Exhibit
No.
|
Exhibit
Description
|
|
|
|
|
|
|
|
|
ePlus inc. Amended and
Restated Certificate of Incorporation, filed on September 19, 2008
(Incorporated herein by reference to Exhibit 3.1 to our Current Report on
Form 8-K filed on September 19, 2008).
|
|
|
|
|
|
Amended
and Restated Bylaws of
ePlus (Incorporated herein by reference to Exhibit 3.1 to our
Current Report on Form 8-K filed on July 1,
2008).
|
|
|
|
|
|
Specimen
Certificate of Common Stock (Incorporated herein by reference to Exhibit
4.1 to our Registration Statement on Form S-1 (File No. 333-11737)
originally filed on September 11, 1996).
|
|
|
|
|
|
Form
of Indemnification Agreement entered into between ePlus and its directors
and officers (Incorporated herein by reference to Exhibit 10.5 to our
Registration Statement on Form S-1 (File No. 333-11737) originally filed
on September 11, 1996).
|
|
|
|
|
|
Employment
Agreement between ePlus inc. and Phillip
G. Norton (Incorporated herein by reference to Exhibit 99.1 to our Current
Report on Form 8-K filed on September 11, 2009).
|
|
|
|
|
|
Employment
Agreement between ePlus and Bruce M.
Bowen (Incorporated herein by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on October 6, 2009).
|
|
|
|
|
|
Employment
Agreement, effective as of April 22, 2010, between ePlus and Mark P.
Marron (Incorporated herein by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on April 22, 2010).
|
|
|
|
|
|
Employment
Agreement between ePlus and Steven J.
Mencarini (Incorporated herein by reference to Exhibit 10.3 to our Current
Report on Form 8-K filed on October 6, 2009).
|
|
|
|
|
|
Employment
Agreement between ePlus and Elaine D. Marion (Incorporated herein by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed on
October 6, 2009).
|
|
|
|
|
10.7
|
1997
Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
10.25 to our Quarterly Report on Form 10-Q for the period ended September
30, 1997).
|
|
|
|
|
10.8
|
Amended
and Restated 1998 Long-Term Incentive Plan (Incorporated herein by
reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the
period ended September 30, 2003).
|
|
|
|
|
10.9
|
2008
Non-Employee Director Long-Term Incentive Plan (Incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
10.10
|
2008
Employee Long-Term Incentive Plan (Incorporated herein by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on September 19,
2008).
|
|
|
|
|
|
Form
of Award Agreement – Incentive Stock Options (Incorporated herein by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
|
|
|
Form
of Award Agreement – Nonqualified Stock Options (Incorporated herein by
reference to Exhibit 10.4 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
|
|
|
Form
of Award Agreement – Restricted Stock Awards (Incorporated herein by
reference to Exhibit 10.5 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
|
|
|
Form
of Award Agreement – Restricted Stock Units (Incorporated herein by
reference to Exhibit 10.6 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
|
|
|
ePlus inc. Supplemental
Benefit Plan for Bruce M. Bowen (Incorporated herein by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on March 2,
2005).
|
|
|
|
|
|
ePlus inc. Supplemental
Benefit Plan for Steven J. Mencarini (Incorporated herein by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on March 2,
2005).
|
|
|
|
|
|
ePlus
inc. Form of Supplemental Benefit Plan Participation Election Form
(Incorporated herein by reference to Exhibit 10.4 to our Current Report on
Form 8-K filed on March 2, 2005).
|
|
|
|
|
|
Form
of Amendment to ePlus inc. Supplemental Benefit Plan (Incorporated herein
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
December 12, 2008).
|
|
|
|
|
|
ePlus inc. Executive
Incentive Plan effective April 1, 2009 (Incorporated herein by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on May 5,
2009).
|
|
|
|
|
|
Business
Financing Agreement dated August 31, 2000 among GE Commercial Distribution
Finance Corporation (as successor to Deutsche Financial Services
Corporation) and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Agreement
for Wholesale Financing dated August 21, 2000 among GE Commercial
Distribution Finance Corporation (as successor to Deutsche Financial
Services Corporation) and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.2 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Paydown
Addendum to Business Financing Agreement between GE Commercial
Distribution Finance Corporation (as successor to Deutsche Financial
Services Corporation) and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.3 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Addendum
to Business Financing Agreement and Agreement for Wholesale Financing
dated February 12, 2001 between GE Commercial Distribution Finance
Corporation (as successor to Deutsche Financial Services Corporation) and
ePlus Technology,
inc. (Incorporated herein by reference to Exhibit 10.4 to our Current
Report on Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Addendum
to Business Financing Agreement and Agreement for Wholesale Financing
dated April 3, 2003 between GE Commercial Distribution Finance Corporation
and ePlus
Technology, inc. (Incorporated herein by reference to Exhibit 10.5 to our
Current Report on Form 8-K filed on November 17,
2005).
|
|
|
Amendment
to Business Financing Agreement and Agreement for Wholesale Financing,
dated March 31, 2004 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.6 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Amendment
to Business Financing Agreement and Agreement for Wholesale Financing,
dated June 24, 2004 between GE Commercial Distribution Finance Corporation
and ePlus
Technology, inc. (Incorporated herein by reference to Exhibit 10.7 to our
Current Report on Form 8-K filed on November 17,
2005).
|
|
|
|
|
|
Amendment
to Business Financing Agreement and Agreement for Wholesale Financing
dated August 13, 2004 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.8 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Amendment
to Business Financing Agreement and Agreement for Wholesale Financing
dated November 14, 2005 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.9 to our Current Report on
Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Limited
Guaranty dated June 24, 2004 between GE Commercial Distribution Finance
Corporation and ePlus inc.
(Incorporated herein by reference to Exhibit 10.10 to our Current Report
on Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Collateral
Guaranty dated March 30, 2004 between GE Commercial Distribution Finance
Corporation and ePlus Group, inc.
(Incorporated herein by reference to Exhibit 10.11 to our Current Report
on Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Amendment
to Collateralized Guaranty dated November 14, 2005 between GE Commercial
Distribution Finance Corporation and ePlus Group, inc.
(Incorporated herein by reference to Exhibit 10.12 to our Current Report
on Form 8-K filed on November 17, 2005).
|
|
|
|
|
|
Agreement
Regarding Collateral Rights and Waiver between GE Commercial Distribution
Finance Corporation and National City Bank, as Administrative Agent, dated
March 24, 2004 (Incorporated herein by reference to Exhibit 10.13 to our
Current Report on Form 8-K filed on November 17,
2005).
|
|
|
|
|
|
Amendment
to Business Financing Agreement and Agreement for Wholesale Financing
dated June 29, 2006 between GE Commercial Distribution Finance and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on July 13, 2006).
|
|
|
|
|
|
Amendment
to Agreement for Wholesale Financing and Business Financing Agreement
dated June 20, 2007 between GE Commercial Distribution Finance Corporation
and ePlus
Technology, inc. (Incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on June 25,
2007).
|
|
|
|
|
|
Amendment
to Agreement for Wholesale Financing and Business Financing Agreement
dated August 2, 2007 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on August 7, 2007).
|
|
|
|
|
|
Amendment
to Agreement for Wholesale Financing and Business Financing Agreement
dated October 1, 2007 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on October 4,
2007).
|
|
|
Amendment
to Agreement for Wholesale Financing and Business Financing Agreement
dated October 29, 2007 between GE Commercial Distribution Finance
Corporation and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on November 6, 2007).
|
|
|
|
|
|
Addendum
to Business Financing Agreement and Agreement for Wholesale Financing
between ePlus
Technology, inc. and Deutsche Financial Services Corporation, dated
February 12, 2001, amending the Business Financing Agreement and Wholesale
Financing Agreement, dated August 31, 2000 (Incorporated herein by
reference to Exhibit 5.9 to our Current Report on Form 8-K filed on March
13, 2001).
|
|
|
|
|
|
Deed
of Lease by and between ePlus inc. and Norton
Building I, LLC dated as of December 23, 2004 (Incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
December 27, 2004).
|
|
|
|
|
|
Amendment
#1 to Deed of Lease by and between ePlus inc. and Norton
Building I, LLC, datd as of July 1, 2007.
|
|
|
|
|
|
Amendment
#2 to Deed of Lease by and between ePlus inc. and Norton
Building I, LLC, dated as of June 18, 2009 (Incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June
23, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
Rule
13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer of
ePlus
inc.
|
|
|
|
|
|
Rule
13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer of
ePlus
inc.
|
|
|
|
|
|
Section
1350 certification of the Chief Executive Officer and Chief Financial
Officer of ePlus
inc.
|
(b)
See item 15(a)(3) above.
(c)
See Item 15(a)(1) and 15(a)(2) above.
Pursuant
to the requirements of Section 13 or Section 15(d) 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.
|
|
|
|
|
|
/s/ PHILLIP G. NORTON
|
|
|
By:
Phillip G. Norton, Chairman of the Board,
|
|
|
President
and Chief Executive Officer
|
|
|
Date:
June 15, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
/s/ PHILLIP G. NORTON
|
|
|
By:
Phillip G. Norton, Chairman of the Board,
|
|
|
President,
Chief Executive Officer (Principal Executive Officer)
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ BRUCE M. BOWEN
|
|
|
By:
Bruce M. Bowen, Director and Executive
|
|
|
Vice
President
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ ELAINE D. MARION
|
|
|
By:
Elaine D. Marion, Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ C. THOMAS FAULDERS,
III
|
|
|
By:
C. Thomas Faulders, III, Director
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ TERRENCE O’DONNELL
|
|
|
By:
Terrence O’Donnell, Director
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ LAWRENCE S. HERMAN
|
|
|
By:
Lawrence S. Herman, Director
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ MILTON E. COOPER,
JR.
|
|
|
By:
Milton E. Cooper, Jr., Director
|
|
|
Date:
June 15, 2010
|
|
|
|
|
|
/s/ ERIC D. HOVDE
|
|
|
By:
Eric D. Hovde, Director
|
|
|
Date:
June 15, 2010
|
ePlus inc. AND
SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS AND SCHEDULES
|
|
PAGE
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2010 and 2009
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended March 31, 2010 and
2009
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2010 and
2009
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended March 31, 2010 and
2009
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of ePlus inc.
Herndon,
Virginia
We have
audited the accompanying consolidated balance sheets of ePlus inc. and subsidiaries
(the “Company”) as of March 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
two fiscal years in the period ended March 31, 2010. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such Consolidated Financial Statements present fairly, in all material
respects, the financial position of ePlus inc. and subsidiaries
as of March 31, 2010 and 2009, and the results of their operations and their
cash flows for each of the two fiscal years in the period ended March 31, 2010,
in conformity with accounting principles generally accepted in the United States
of America.
/s/
Deloitte & Touche LLP
McLean,
Virginia
June 15,
2010
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
ASSETS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
85,077 |
|
|
$ |
107,788 |
|
|
Accounts
receivable—net
|
|
|
108,752 |
|
|
|
82,734 |
|
|
Notes
receivable
|
|
|
1,991 |
|
|
|
2,632 |
|
|
Inventories—net
|
|
|
9,316 |
|
|
|
9,739 |
|
|
Investment
in leases and leased equipment—net
|
|
|
153,553 |
|
|
|
119,256 |
|
|
Property
and equipment—net
|
|
|
2,057 |
|
|
|
3,313 |
|
|
Other
assets
|
|
|
27,312 |
|
|
|
16,809 |
|
|
Goodwill
|
|
|
17,573 |
|
|
|
21,601 |
|
|
TOTAL
ASSETS
|
|
$ |
405,631 |
|
|
$ |
363,872 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable—equipment
|
|
$ |
40,894 |
|
|
$ |
2,904 |
|
|
Accounts
payable—trade
|
|
|
17,501 |
|
|
|
18,833 |
|
|
Accounts
payable—floor plan
|
|
|
57,613 |
|
|
|
45,127 |
|
|
Salaries
and commissions payable
|
|
|
5,763 |
|
|
|
4,586 |
|
|
Accrued
expenses and other liabilities
|
|
|
40,502 |
|
|
|
29,002 |
|
|
Income
taxes payable
|
|
|
2,385 |
|
|
|
912 |
|
|
Recourse
notes payable
|
|
|
102 |
|
|
|
102 |
|
|
Non-recourse
notes payable
|
|
|
53,577 |
|
|
|
84,977 |
|
|
Deferred
tax liability
|
|
|
1,803 |
|
|
|
2,957 |
|
|
Total
Liabilities
|
|
|
220,140 |
|
|
|
189,400 |
|
|
|
|
|
|
|
|
|
|
|
|
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;11,917,129 issued and
8,123,508 outstanding at March 31, 2010and 11,504,167 issued and 8,088,513
outstanding at March 31, 2009
|
|
|
119 |
|
|
|
115 |
|
|
Additional
paid-in capital
|
|
|
84,100 |
|
|
|
80,055 |
|
|
Treasury
stock, at cost, 3,793,621 and 3,415,654 shares,
respectively
|
|
|
(43,346 |
) |
|
|
(37,229 |
) |
|
Retained
earnings
|
|
|
144,197 |
|
|
|
131,452 |
|
|
Accumulated
other comprehensive income—foreign currency
|
|
|
|
|
|
|
|
|
|
translation
adjustment
|
|
|
421 |
|
|
|
79 |
|
|
Total
Stockholders' Equity
|
|
|
185,491 |
|
|
|
174,472 |
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
405,631 |
|
|
$ |
363,872 |
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Year
Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
627,784 |
|
|
$ |
636,142 |
|
|
Sales
of leased equipment
|
|
|
5,413 |
|
|
|
4,633 |
|
|
|
|
|
633,197 |
|
|
|
640,775 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
37,908 |
|
|
|
44,483 |
|
|
Fee
and other income
|
|
|
9,621 |
|
|
|
12,769 |
|
|
Patent
settlement income
|
|
|
3,525 |
|
|
|
- |
|
|
|
|
|
51,054 |
|
|
|
57,252 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
684,251 |
|
|
|
698,027 |
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
539,216 |
|
|
|
548,035 |
|
|
Cost
of leased equipment
|
|
|
5,303 |
|
|
|
4,373 |
|
|
|
|
|
544,519 |
|
|
|
552,408 |
|
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
10,676 |
|
|
|
14,220 |
|
|
Professional
and other fees
|
|
|
10,814 |
|
|
|
7,199 |
|
|
Salaries
and benefits
|
|
|
74,612 |
|
|
|
76,380 |
|
|
General
and administrative expenses
|
|
|
14,384 |
|
|
|
15,320 |
|
|
Impairment
of goodwill
|
|
|
4,029 |
|
|
|
4,644 |
|
|
Interest
and financing costs
|
|
|
4,135 |
|
|
|
5,808 |
|
|
|
|
|
118,650 |
|
|
|
123,571 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (1)
|
|
|
663,169 |
|
|
|
675,979 |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
21,082 |
|
|
|
22,048 |
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
8,337 |
|
|
|
9,219 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
12,745 |
|
|
$ |
12,829 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
1.54 |
|
|
$ |
1.56 |
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
1.50 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,267,374 |
|
|
|
8,219,318 |
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
8,469,226 |
|
|
|
8,453,333 |
|
|
(1)
|
Includes
amounts to related parties of $1,220 and $1,126 for the years ended
March 31, 2010 and March 31, 2009,
respectively.
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(in
thousands)
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
12,745 |
|
|
$ |
12,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,393 |
|
|
|
15,181 |
|
|
Impairment
of goodwill
|
|
|
4,029 |
|
|
|
4,644 |
|
|
Reserves
for credit losses and sales returns
|
|
|
950 |
|
|
|
(335 |
) |
|
Provision
for inventory allowances and inventory returns
|
|
|
479 |
|
|
|
(227 |
) |
|
Share-based
compensation expense
|
|
|
474 |
|
|
|
166 |
|
|
Excess
tax benefit from exercise of stock options
|
|
|
(224 |
) |
|
|
(9 |
) |
|
Tax
benefit of stock options exercised
|
|
|
447 |
|
|
|
282 |
|
|
Deferred
taxes
|
|
|
(1,154 |
) |
|
|
280 |
|
|
Payments
from lessees directly to lenders—operating
leases
|
|
|
(7,045 |
) |
|
|
(16,140 |
) |
|
Loss
on disposal of property and equipment
|
|
|
15 |
|
|
|
44 |
|
|
Gain
on sale or disposal of operating lease equipment
|
|
|
(1,595 |
) |
|
|
(1,769 |
) |
|
Excess
increase in cash value of officers' life insurance
|
|
|
(44 |
) |
|
|
(38 |
) |
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable—net
|
|
|
(26,823 |
) |
|
|
27,364 |
|
|
Notes
receivable
|
|
|
642 |
|
|
|
(1,906 |
) |
|
Inventories—net
|
|
|
(55 |
) |
|
|
(321 |
) |
|
Investment
in direct financing and sale-type leases—net
|
|
|
(71,860 |
) |
|
|
(8,501 |
) |
|
Other
assets
|
|
|
(10,215 |
) |
|
|
(2,996 |
) |
|
Accounts
payable—equipment
|
|
|
37,970 |
|
|
|
(3,467 |
) |
|
Accounts
payable—trade
|
|
|
(1,272 |
) |
|
|
(3,216 |
) |
|
Salaries
and commissions payable, accrued expenses and other
liabilities
|
|
|
14,128 |
|
|
|
(651 |
) |
|
Net
cash (used in) provided by operating activities
|
|
|
(37,015 |
) |
|
|
21,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale or disposal of operating lease equipment
|
|
|
5,178 |
|
|
|
3,986 |
|
|
Purchases
of operating lease equipment
|
|
|
(10,217 |
) |
|
|
(3,919 |
) |
|
Purchases
of property and equipment
|
|
|
(597 |
) |
|
|
(728 |
) |
|
Premiums
paid on officers' life insurance
|
|
|
(198 |
) |
|
|
(315 |
) |
|
Cash
used in acquisition, net of cash acquired
|
|
|
- |
|
|
|
(364 |
) |
|
Net
cash used in investing activities
|
|
|
(5,834 |
) |
|
|
(1,340 |
) |
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - continued
|
|
|
Year
Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash
Flows From Financing Activities:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
16,740 |
|
|
|
47,833 |
|
|
Recourse
|
|
|
- |
|
|
|
102 |
|
|
Repayments:
|
|
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
(6,262 |
) |
|
|
(5,822 |
) |
|
Repurchase
of common stock
|
|
|
(6,117 |
) |
|
|
(4,345 |
) |
|
Proceeds
from issuance of capital stock through option exercise
|
|
|
3,128 |
|
|
|
2,323 |
|
|
Excess
tax benefit from exercise of stock options
|
|
|
224 |
|
|
|
9 |
|
|
Net
borrowings (repayments) on floor plan facility
|
|
|
12,486 |
|
|
|
(10,508 |
) |
|
Net
cash provided by financing activities
|
|
|
20,199 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
(61 |
) |
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(22,711 |
) |
|
|
49,365 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
107,788 |
|
|
|
58,423 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
85,077 |
|
|
$ |
107,788 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
289 |
|
|
$ |
458 |
|
|
Cash
paid for income taxes
|
|
$ |
7,955 |
|
|
$ |
9,547 |
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment included in accounts payable
|
|
$ |
19 |
|
|
$ |
80 |
|
|
Purchase
of operating lease equipment included in accounts payable
|
|
$ |
15 |
|
|
$ |
1 |
|
|
Principal
payments from lessees directly to lenders
|
|
$ |
41,928 |
|
|
$ |
50,520 |
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts
in thousands, except shares data)
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
8,231,741 |
|
|
$ |
112 |
|
|
$ |
77,287 |
|
|
$ |
(32,884 |
) |
|
$ |
118,623 |
|
|
$ |
564 |
|
|
$ |
163,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for option exercises
|
|
|
293,436 |
|
|
|
3 |
|
|
|
2,526 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,529 |
|
|
Tax
benefit of exercised stock options
|
|
|
- |
|
|
|
- |
|
|
|
184 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
184 |
|
|
Effect
of share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
Purchase
of treasury stock
|
|
|
(436,664 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,345 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,345 |
) |
|
Comprehensive
income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,829 |
|
|
|
- |
|
|
|
12,829 |
|
|
Foreign
currency translation adjustment (net of tax of $23)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(485 |
) |
|
|
(485 |
) |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,344 |
|
|
Balance,
March 31, 2009
|
|
|
8,088,513 |
|
|
$ |
115 |
|
|
$ |
80,055 |
|
|
$ |
(37,229 |
) |
|
$ |
131,452 |
|
|
$ |
79 |
|
|
$ |
174,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for option exercises and vesting of restricted
shares
|
|
|
412,962 |
|
|
|
4 |
|
|
|
3,102 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,106 |
|
|
Tax
benefit of exercised stock options
|
|
|
- |
|
|
|
- |
|
|
|
469 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
469 |
|
|
Effect
of share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
474 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
474 |
|
|
Purchase
of treasury stock
|
|
|
(377,967 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,117 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,117 |
) |
|
Comprehensive
income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,745 |
|
|
|
- |
|
|
|
12,745 |
|
|
Foreign
currency translation adjustment (net of tax of $9)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
342 |
|
|
|
342 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,087 |
|
|
Balance,
March 31, 2010
|
|
|
8,123,508 |
|
|
$ |
119 |
|
|
$ |
84,100 |
|
|
$ |
(43,346 |
) |
|
$ |
144,197 |
|
|
$ |
421 |
|
|
$ |
185,491 |
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the Years Ended March 31, 2010 and 2009
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF
PRESENTATION — Effective October 19, 1999, MLC Holdings, Inc. changed its name
to ePlus inc. (“ePlus”). Effective January
31, 2000, ePlus inc.’s
wholly-owned subsidiaries MLC Group, Inc., MLC Federal, Inc., MLC Capital, Inc.,
PC Plus, Inc., MLC Network Solutions, Inc. and Educational Computer Concepts,
Inc. changed their names to ePlus Group, inc., ePlus Government, inc., ePlus Capital, inc., ePlus Technology, inc., ePlus Technology of NC, inc.
and ePlus Technology of
PA, inc., respectively. Effective March 31, 2003, ePlus Technology of NC, inc.
and ePlus Technology of
PA, inc. were merged into ePlus Technology,
inc.
PRINCIPLES
OF CONSOLIDATION — The consolidated financial statements include the accounts of
ePlus inc. and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated.
REVENUE
RECOGNITION — The majority of our revenues is derived from three sources: sales
of products and services, lease revenues and sales of our software. Our revenue
recognition policies vary based upon these revenue sources.
Revenue
from Technology Sales Transactions
The
company adheres to the guidelines and principles of Accounting Standards
Codification (“Codification”) Topic Revenue
Recognition. Revenue must be realized or realizable and
earned. Therefore, revenue is generally recognized when all of the following
criteria are met:
|
|
·
|
title
and risk of loss are passed to the
customers;
|
|
|
·
|
there
is persuasive evidence of an arrangement for
sale;
|
|
|
·
|
delivery
has occurred and/or services have been
rendered;
|
|
|
·
|
sales
price is fixed or determinable; and
|
|
|
·
|
collectability
is reasonably assured.
|
Using
these tests, the majority of the revenue for technology product sales is
recognized upon delivery to the customers.
We also
sell services that are performed in conjunction with product sales, and
recognize revenue for these sales in accordance with the guidance from
Codification Topic Multiple
Elements Arrangements. Accordingly, we recognize sales from
delivered items only when:
|
|
·
|
the
delivered services have value to the customer on a stand alone
basis;
|
|
|
·
|
there
is objective and reliable evidence of the fair value of the undelivered
items; and
|
|
|
·
|
delivery
of the undelivered service is probable and substantially under our
control.
|
For most
of our arrangements with multiple deliverables (hardware and services bundled
together), we generally cannot establish reliable evidence of the fair value of
the undelivered services when the hardware is delivered. Therefore, the majority
of revenue from these bundled arrangements is recognized when the services are
complete and we have received an acceptance certificate from the customer.
However, in some cases, we do not receive an acceptance certificate and we
determine the completion date based upon our records. The majority of our
bundled arrangements are less than one month in duration.
We also
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. When
evaluating such sales, we follow the guidance in Codification Topic Revenue Recognition, Subtopic
Principal Agent
Considerations, and Subtopic Services. 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
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. Under the same guidance, we record freight billed to our
customers as sales of product and services and the related freight costs as cost
of sales, product and services on the accompanying Consolidated Statements of
Operations.
Revenue
from Leasing Transactions
Lease
revenues are accounted for in accordance with the Codification Topic Leases. The accounting for
lease revenue is different depending on the type of lease. Each lease is
classified as either a direct financing lease, sales-type lease, or operating
lease, as appropriate. If a lease meets one or more of the following
four criteria, the lease is classified as either a sales-type or direct
financing lease; otherwise, it will be classified as an operating
lease:
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the
lease transfers ownership of the property to the lessee by the end of the
lease term;
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the
lease contains a bargain purchase
option;
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the
lease term is equal to 75 percent or more of the estimated economic life
of the leased property; or
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the
present value at the beginning of the lease term of the minimum lease
payments equals or exceeds 90 percent of the fair value of the leased
property at the inception of the
lease.
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Revenue
on direct financing and sales-type leases is deferred at the inception of the
leases and is recognized over the term of the lease using the interest method.
At the inception of our leases, 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. For direct financing leases, the difference between the
gross investment and the cost of the leased equipment is recorded as unearned
income at the inception of the lease. 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 unearned revenue at the inception of the lease.
Revenue for both sales-type and direct financing leases is recognized as the
unearned income is amortized over the life of the lease using the interest
method. The amortization of unearned income is a component of lease revenue in
our Consolidated Statements of Operations.
At the
inception of an operating lease, equipment under operating leases is recorded at
cost and depreciated on a straight-line basis over the lease term to the
estimated residual value. Rental amounts are therefore amortized and recognized
as ratably as lease revenue over the terms of the leases and is a component of
lease revenue in Consolidated Statements of Operations.
Codification
Topic Transfers and Servicing,
Subtopic Sales of
Financial Assets, 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 this subtopic and have
therefore been treated as sales for financial statement purposes. We assign all
rights, title, and interests in a number of our leases to third-party financial
institutions without recourse. These assignments are recorded as sales because
we have completed our obligations as of the assignment date, and we retain no
ownership interest in the equipment under lease. Revenue from these
types of sales is recognized at the date of sale. The costs for direct-financing
leases are defined as the remaining receivable. The costs for operating leases
are generally the book value of the equipment. The proceeds and the
costs are then netted and presented as a component of lease revenue in our
Consolidated Statements of Operations.
Sales of
leased equipment represents revenue from the sales to a third party other than
the lessee of equipment subject to a lease (lease schedule) in which we are the
lessor. Revenues from sales of leased equipment are recognized at the date of
the sale. If the rental stream on such a 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
nonrecourse debt associated with the lease, sales revenue is recorded at
the amount of gross consideration received, and costs of sales is recorded at
the book value of the lease. This type of revenue is presented separately as
“sales of leased equipment” on our Consolidated Statements of
Operations.
Revenue
from Software Sales Transactions
We derive
revenue from licensing our proprietary software for a fixed term or for
perpetuity in an enterprise license. In addition, we receive revenues from
hosting our proprietary software for our customers. Revenue from hosting
arrangements is recognized in accordance with Codification Topic Software, Subtopic Revenue Recognition. 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 Topic
Software, Subtopic
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 within our Technology business
segment and is included in fee and other income on our Consolidated Statements
of Operations.
Revenue
from sales of our software is recognized in accordance with Codification Topic
Software, Subtopic
Revenue
Recognition. We recognize revenue when all the following
criteria exist:
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there
is persuasive evidence that an arrangement
exists;
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no
significant obligations by us remain related to services essential to the
functionality of the software with regard to
implementation;
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the
sales price is determinable; and
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it
is probable that collection will
occur.
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Revenue
from sales of our software is derived by our Technology Business Segment and is
included in fee and other income on our Consolidated Statements of
Operations.
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 Codification Topic Software, Subtopic Revenue Recognition, 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.
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 completed contract method because there is uncertainty about the timing of
the project completion, revenue is deferred until the uncertainty is
sufficiently resolved. Consulting revenue is included as a component in fee and
other income in the Consolidated Statements of Operations.
If a
service arrangement is essential to the functionality of the licensed software
and therefore does not qualify for separate accounting of the license and
service elements, then license revenue is recognized together with the
consulting services using the completed-contract method of contract accounting.
Generally, we do not have a sufficient basis to measure progress towards
completion, and, therefore, cannot utilize the percentage-of-completion method.
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.
For
agreements that include one or more elements to be delivered at a future date,
we generally use the residual method to recognize revenues 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 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 Consolidated Statements
of Operations.
Revenue
from Other Transactions
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) agent fees received
from various manufacturers in the IT reseller business unit; (4) settlement fees
related to disputes or litigation; and (5) interest and other miscellaneous
income. These revenues are included in fee and other income on our Consolidated
Statements of Operations.
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. Many of these programs
extend over one or more quarter’s sales activities and are primarily
formula-based. These programs can be very complex to calculate and, in some
cases, targets are estimated based upon historical data.
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Vendor
consideration received pursuant to volume sales incentive programs is
recognized as a reduction to costs of sales, product and services on the
Consolidated Statements of Operations in accordance with Codification
Topic Revenue
Recognition, Subtopic Vendor's Accounting for
Consideration Given to a
Customer.
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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.
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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.
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RESIDUALS
— Residual values, representing the estimated value of equipment at the
termination of a lease, are recorded on our Consolidated Financial Statements at
the inception of each lease as amounts estimated by management based upon its
experience and judgment and by appraisals from an independent appraiser. 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, term of the lease,
equipment supply and demand and by new product announcements by
manufacturers.
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.
Residual
values are evaluated on a quarterly basis and any impairment, other than
temporary, are recorded in the period in which the impairment is determined. No
upward revision of residual values is made subsequent to lease
inception.
Residual
values at lease termination are realized mainly through renewal or extension of
the original lease or the sale of the equipment either to the lessee or on the
secondary market. The difference between the proceeds of a sale and the
remaining 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.
RESERVES
FOR CREDIT LOSSES —The reserve for credit losses (the “Reserve”) is 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 which increases expenses.
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., not
funded or funded on a recourse or partial recourse basis, or funded on a
non-recourse basis).
RESERVES
FOR SALES RETURNS —Sales are reported net of returns and allowances. Allowance
for sales returns is maintained at a level believed by management to be adequate
to absorb potential sales returns from product and services in accordance with
Codification Topic Revenue, Subtopic Product. Management's
determination of the adequacy of the reserve is based on an evaluation of
historical sales returns, current economic conditions, volume and other relevant
factors. These determinations require considerable judgment in assessing the
ultimate potential for sales returns and include consideration of the type and
volume of products and services sold.
CASH AND
CASH EQUIVALENTS — We consider all highly liquid investments, including those
with an original maturity of three months or less, to be cash equivalents. Cash
and cash equivalents consist primarily of interest-bearing accounts and money
market account that consist of short-term U.S. treasury securities with original
maturities less than or equal to 90 days. Interest income on these short-term
investments is recognized when earned. There are no restrictions on the
withdrawal of funds from our money market accounts. In addition, we hold some of
our cash in certificates of deposit, all of which mature in less than 12 months.
There is no penalty for early withdrawal except loss of interest income in some
cases.
INVENTORIES
— Inventories are stated at the lower of cost (weighted average basis) or market
and are shown net of allowance for obsolescence.
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. Hardware is depreciated over
three years. Software is depreciated over five years. Furniture and
certain fixtures are depreciated over five to ten years. Telephone
equipment is depreciated over seven 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 Codification
Topic Intangibles—Goodwill and
Other Intangibles, Subtopic Internal-Use Software. Software capitalized for
internal use was $379 thousand and $34 thousand during the years ended March 31,
2010 and March 31, 2009, respectively, and is included in the accompanying
Consolidated Balance Sheets as a component of property and equipment—net and
other assets. We had capitalized costs, net of amortization, of approximately
$0.9 million at both March 31, 2010 and March 31, 2009.
CAPITALIZATION
OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS — In accordance with
Codification Topic Software,
Subtopic Costs of
Software to Be Sold, Leased, or 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 year ended March 31, 2010 and 2009, no such costs
were capitalized. We had $243 thousand and $405 thousand of
capitalized costs, net of amortization, at March 31, 2010 and March 31, 2009,
respectively.
GOODWILL
AND INTANGIBLE ASSETS — Goodwill is recorded in
excess of the purchase price over the fair value of the identifiable net assets
acquired in purchase transactions. Our annual impairment test for goodwill is
performed during the third quarter of our fiscal year, or when events or
circumstances indicate there might be impairment, and follows the two-step
process prescribed in Intangibles- Goodwill and
Other. We have two reportable segments based on the product
and services offered – the financing business segment and the technology sales
business segment. Below business segments are reporting units. Based on the
nature of products, the nature of production, the type of customers and
management, we have four reporting units. Our reporting units are Leasing,
Technology, Software Procurement and Software Document Management, three of
which contained goodwill as of October 1, 2009.
During
the third quarter of our fiscal year, we perform our annual goodwill impairment
test. The goodwill impairment test involves a two-step process. The first step
is a comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including prices for
similar assets and liabilities and other valuation techniques. We
employed both the market approach and the income approach to determine fair
value. The market approach measures the value of an entity through an
analysis of recent sales or by comparison to comparable companies. The income
approach measures the value of reporting units by discounting expected future
cash flows.
Consideration
was given to applying the transaction method which examines sales of stock of
private or public companies, which are in the same industry or similar lines of
business and are of comparable size and capital structure. However,
we concluded that there were insufficient transactions of similar firms with
available current financial information to make a valid comparison.
Under the
market approach, we used the guideline public company method whereby valuation
multiples of guideline companies were applied to the historical financial data
of our reporting units. We analyzed companies that were in the same industry,
performed the same or similar services, had similar operations, and are
considered competitors. In addition, the majority of the companies
selected were also used in the impairment test performed last year.
Multiples
that related to some level of earnings or cash flow were most appropriate for
the industry in which we operate. The multiples selected were based
on our analysis of the guideline companies’ profitability ratios and return to
investors. We compared the reporting units’ size and ranking against
the guidelines, taking into consideration risk, profitability and growth along
with guideline medians and averages. We then selected pricing
multiples, adjusted appropriately for size and risk, to apply to the reporting
unit's trailing twelve month financial data.
Multiples
were weighted based on the consistency and comparability of the guideline
companies along with the respective reporting units, including margins,
profitability and leverage. For each of the reporting units, we used
the following multiples: the price to earnings before tax (“EBT”), price to net
income (“NI”), market value of invested capital (“MVIC”) to earnings before
interest, taxes, depreciation and amortization (“EBITDA”), and MVIC to earnings
before interest and taxes (“EBIT”).
Under the
income approach, we used the discounted future cash flow method to estimate the
fair value of each of the reporting units by discounting the expected future
cash flows of the reporting units. We used the weighted average cost of capital
to discount the expected future cash flows for the reporting unit to its present
value. The weighted average cost of capital is the estimated rate of return on
alternative investments with comparable risks. The weighted average
cost of capital involves estimating the cost of debt and the cost of
equity. In addition, we also considered factors such as risk-free
rate of return, market equity risk premium, beta coefficient and firm specific
risk. We estimated our weighted average cost of capital at 8.3%,
12.9% and 13.6% for the Leasing, Technology and Software document management
reporting units, respectively. In addition, we estimated the average
annual compound cash flow growth rate for a five-year period of (3.3%), 11.7%
and 21%, for the Leasing, Technology, and Software document management reporting
units, respectively. Also, we estimated a long term growth rate for
the Leasing reporting unit of 2.0%, and a long term growth rate 3.5% for both
the Technology and Software document management reporting units.
The
estimated fair value of our reporting units is dependent on several significant
assumptions involving our forecasted cash flows and weighted average cost of
capital. The forecasted cash flows are based on management’s best estimates of
economic and market conditions over the projected period including business
plans, growth rates in sales, costs, estimates of future expected changes in
operating margins and cash expenditures. Any adverse change including
a significant decline in our expected future cash flows; a significant adverse
change in legal factors or in the business climate; unanticipated competition;
or slower growth rates may impact our ability to meet our forecasted cash flow
estimates.
We
averaged the results of the income and market methods and compared the estimated
fair value to our market capitalization which was computed by multiplying our
closing stock price to the shares outstanding on October 1,
2009. Comparison of the average fair values of the reporting units to
the overall market value of our equity indicated an implied control premium of
33.5%. This percentage falls within the range of currently observable market
data.
During
our third quarter when preparing the annual impairment test, the U.S. economy
and the global credit crisis weakened the demand for leasing. As a result of
this reduced demand and a reduction in our overall portfolio from prior sales of
tranches of leases in our portfolio, we projected a temporary decline in revenue
in our Leasing reporting unit, which lowered the fair value estimates of the
reporting unit using the discounted cash flow method. The result of averaging
the estimated fair value computed using the guideline public company and the
discounted cash flow methods was that the fair value of the Leasing reporting
was below its carrying value.
As a
result, during the three months ended December 31, 2009, we recorded an
estimated impairment charge of $4.0 million in our Leasing reporting unit. This
represented the full amount of goodwill recorded for the Leasing reporting unit.
We believed that after assigning the fair value of the Leasing reporting unit to
all of the assets and liabilities during the second step of the goodwill
testing, there would be not be any excess fair value over the amounts assigned
to allocate to goodwill. Therefore, the Leasing reporting unit’s goodwill was
fully impaired at October 1, 2009.
The
Technology and Software Document Management reporting units' fair values
exceeded their carrying values. Had the fair value been 10% lower
than calculated on each of the three reporting units, the results would not have
changed for any of the reporting units. The fair value of the Technology
reporting unit was 12.2% higher than the carrying value and the fair value of
the Software document management reporting unit was 245.8% higher than the
carrying value.
During
the fourth quarter of fiscal 2010, we performed the second step of the goodwill
impairment test in accordance with Codification Topic Intangibles- Goodwill and
Other. Based on this analysis, no additional impairment was
recorded. We did not have any triggering events between our annual test date and
March 31, 2010. We have $16.5 million and $1.1 million of goodwill
remaining in our Technology and Software Document Management reporting units,
respectively.
IMPAIRMENT
OF LONG-LIVED ASSETS — We review long-lived assets, including property and
equipment, and other long term assets 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. No such
impairment was recorded in the years ended March 31, 2010 and 2009.
FAIR
VALUE MEASUREMENT— We follow the guidance in Codification Topic Fair Value Measurements and
Disclosures in measuring the fair value of our financial instruments.
Topic Fair Value Measurements
and Disclosures establishes a three-tier value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
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Level
1 - Observable inputs such as quoted prices in active
markets;
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Level
2 - Inputs other than the quoted prices in active markets that are
observable either directly or indirectly;
and
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Level
3 - Unobservable inputs in which there is little or no market data, which
require us to develop our own
assumptions.
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This
hierarchy requires us to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. On a
recurring basis, we measure certain financial assets and liabilities at fair
value. Our goodwill is subjected to non-recurring fair value
measurement. For the financial instruments that are not accounted for under
Topic Fair Value Measurements
and Disclosures, which consist primarily of cash and cash equivalents,
short-term government debt instruments, accounts receivables, accounts payable
and accrued expenses and other liabilities, we consider the recorded value of
the financial instruments to approximate the fair value due to their short
maturities.
TREASURY
STOCK — We account for treasury stock under the cost method and include treasury
stock as a component of stockholders’ equity on the accompanying Consolidated
Balance Sheets. See Note 12, “Stock Repurchase,” for additional
information.
INCOME
TAXES — Deferred income taxes are accounted for in accordance with Codification
Topic 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. We review our deferred tax assets at least annually and make necessary
valuation adjustments.
In
addition, on April 1, 2007, we adopted the recognition threshold and measurement
attribute in accordance with Codification Topic Income Taxes for uncertain
tax positions. Specifically, the Topic 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. In accordance with our accounting policy, we recognize
accrued interest and penalties related to unrecognized tax benefits as a
component of tax expense.
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, the uncertain tax position
adjustment and foreign currency translation adjustments. For the year ended
March 31, 2010, other comprehensive income was $342 thousand, and net income was
$12.7 million. This resulted in total comprehensive income of $13.1 million for
the year ended March 31, 2010. For the year ended March 31, 2009,
other comprehensive loss was $485 thousand and net income was $12.8 million.
This resulted in total comprehensive income of $12.4 million for the year ended
March 31, 2009.
SHARE-BASED
COMPENSATION — We currently have two equity incentive plans which provide us
with the opportunity to compensate directors and selected employees with stock
options, restricted stock and restricted stock units. A stock option entitles
the recipient to purchase shares of common stock from us at the specified
exercise price. Restricted stock and restricted stock units (“RSUs”) entitle the
recipient to obtain stock or stock units, which vest over a set period of time.
RSUs are granted at no cost to the employee and employees do not need to pay an
exercise price to obtain the underlying common stock. All grants or awards made
under the Plans are governed by written agreements between us and the
participants. We also have options outstanding under three previous incentive
plans, under which we no longer grant awards.
We
account for share-based compensation in accordance with Codification Topic Compensation—Stock
Compensation. We use the Black-Scholes option-pricing model to
value all options and the straight-line method to amortize this fair value as
compensation cost over the requisite service period.
Total
share-based compensation expense, which includes expense recognized for the
grants of options and restricted stock for our employees and non-employee
directors, was $474 thousand and $166 thousand for the year ended March 31, 2010
and 2009, respectively. At March 31, 2010, there was no unrecognized
compensation expense related to nonvested options since all options were vested.
Unrecognized compensation expense related to restricted stock was $1.5 million
at March 31, 2010, which will be fully recognized over the next 33
months.
We report
the benefit of tax deductions in excess of recognized stock compensation
expense, or excess tax benefits, as financing cash inflows rather than operating
cash inflows in our Consolidated Statements of Cash
Flows. Accordingly, for the years ended March 31, 2010 and 2009, we
reported $224 thousand and $9 thousand, respectively, of excess tax benefits as
a financing cash inflow.
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS — In June 2009, the Financial Accounting
Standards Board (“FASB”) issued The FASB Accounting Standards
Codification and the Hierarchy
of Generally Accepted Accounting Principles. The FASB Accounting
Standards Codification (“Codification”) established the Codification as the
source of authoritative U.S. GAAP, recognized by the FASB to be applied by
nongovernmental entities. The FASB will no longer issue new standards in the
form of statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead, it will issue Accounting Standards Updates. The FASB will
not consider Accounting Standards Updates as authoritative in their own right;
these updates will serve only to update the Codification, provide background
information about the guidance, and provide bases for conclusions
on the change(s) in the Codification. The Codification is effective for interim
and annual periods ending after September 15, 2009. We have updated our
disclosures and consolidated financial statements to reflect the new
Codification. In the description of the Codification and Accounting Standards
Updates throughout the report, references in italics relate to
Codification Topics and Subtopics, and their descriptive titles, as
appropriate.
In
December 2009, the FASB issued an update to amend Subsequent Events in the
Codification that requires an SEC filers and conduit debt obligor to evaluate
subsequent events through the date the financial statements are issued. All
other entities are required to evaluate subsequent events through the date the
financial statements are available to be issued. In addition, SEC filers are
exempt from disclosing the date through which subsequent events have been
evaluated. This update is effective immediately for us for financial statements
that are issued or revised.
RECENT
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED—In June 2009, the FASB issued an
update to amend Transfers and
Servicing in the Codification. This update removes the concept of a
qualifying special-purpose entity and clarifies the determination of whether a
transferor and all of the entities included in the transferor’s financial
statements being presented have surrendered control over the transferred
financial assets. That determination must consider the transferor’s continuing
involvement in the transferred financial asset, including all arrangements or
agreements made contemporaneously with, or in contemplation of, the transfer,
even if they were not entered into at the time of the transfer. This update will
be effective for us beginning April 1, 2010. We are currently evaluating the
future impact this update will have on our consolidated results of operations
and financial condition.
In
October 2009, the FASB issued an update to amend Revenue Recognition in the
Codification. This update removes the fair value criterion from the separation
criteria that we use to determine whether a multiple deliverable arrangement
involves more than one unit of accounting. It also replaces references to “fair
value” with “selling price” to distinguish from the fair value measurements
required under Fair Value
Measurements and Disclosures in the Codification, provides a hierarchy
that entities must use to estimate the selling price, eliminates the use of the
residual method for allocation, and expands the ongoing disclosure requirements.
This update is effective for us beginning April 1, 2011 and can be applied
prospectively or retrospectively. Early application is permitted. We are
currently evaluating the timing and the effect that adoption of this update will
have on our consolidated results of operations and financial
condition.
Concurrently
to issuing the above update, the FASB also issued another update to the
Codification that excludes certain software from the scope of software revenue
recognition guidance. If software is contained in a tangible product and is
essential to the tangible product's functionality, the software and the tangible
product can be accounted for as a multiple deliverable arrangement under Revenue Recognition. This
update is effective for us beginning April 1, 2011 and can be applied
prospectively or retrospectively. Early application is permitted. We are
currently evaluating the timing and the effect that adoption of this update will
have on our consolidated results of operations and financial
condition.
In
January 2010, the FASB issued an update to Fair Value Measurements and
Disclosures. This update requires new disclosures of transfers in and out
of Levels 1 and 2 and of activity in Level 3 fair value measurements. The update
also clarifies the existing disclosures for levels of disaggregation and about
inputs and valuation techniques. This update is effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years We are currently evaluating the timing and the effect that adoption
of this update will have on our results of operations and financial
condition.
2. INVESTMENTS
IN LEASES AND LEASED EQUIPMENT—NET
Investments
in leases and leased equipment—net consists of the following:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
Investment
in direct financing and sales-type leases—net
|
|
$ |
135,221 |
|
|
$ |
98,340 |
|
|
Investment
in operating lease equipment—net
|
|
|
20,262 |
|
|
|
22,515 |
|
|
Less:
Reserve for credit losses
|
|
|
(1,930 |
) |
|
|
(1,599 |
) |
|
|
|
$ |
153,553 |
|
|
$ |
119,256 |
|
INVESTMENT
IN DIRECT FINANCING AND SALES-TYPE LEASES—NET
Our
investment in direct financing and sales-type leases—net consists of the
following:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
Minimum
lease payments
|
|
$ |
135,352 |
|
|
$ |
93,840 |
|
|
Estimated
unguaranteed residual value (1)
|
|
|
11,246 |
|
|
|
13,001 |
|
|
Initial
direct costs, net of amortization (2)
|
|
|
847 |
|
|
|
859 |
|
|
Less:
Unearned lease income
|
|
|
(12,224 |
) |
|
|
(9,360 |
) |
|
Investment
in direct financing and sales-type leases—net
|
|
$ |
135,221 |
|
|
$ |
98,340 |
|
|
(1)
|
Includes
estimated unguaranteed residual values of $2,457 thousand and $1,790
thousand as of March 31, 2010 and 2009, 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 $810 thousand and $940
thousand as of March 31, 2010 and 2009,
respectively.
|
Future
scheduled minimum lease rental payments as of March 31, 2010 are as follows (in
thousands):
|
Year
ending March 31, 2011
|
|
$ |
79,527 |
|
|
2012
|
|
|
38,883 |
|
|
2013
|
|
|
12,257 |
|
|
2014
|
|
|
3,272 |
|
|
2015
and thereafter
|
|
|
1,413 |
|
|
Total
|
|
$ |
135,352 |
|
Our net
investment in direct financing and sales-type leases is collateral for
non-recourse and recourse equipment notes. See Note 7, “Recourse and
Non-Recourse Notes Payable.”
INVESTMENT
IN OPERATING LEASE EQUIPMENT—NET
Investment
in operating lease equipment—net primarily represents leases that do not qualify
as direct financing leases or are leases that are short-term renewals on a
month-to-month basis. The components of the net investment in operating lease
equipment—net are as follows:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
Cost
of equipment under operating leases
|
|
$ |
46,639 |
|
|
$ |
53,227 |
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(26,377 |
) |
|
|
(30,712 |
) |
|
Investment
in operating lease equipment—net (1)
|
|
$ |
20,262 |
|
|
$ |
22,515 |
|
|
(1)
|
Includes
estimated unguaranteed residual values of $9,750 thousand and $14,178
thousand as of March 31, 2010 and March 31, 2009, respectively, for
operating leases.
|
During
the years ended March 31, 2010 and March 31, 2009, we sold portions of our lease
portfolio. The sales were reflected on our Consolidated Financial Statements as
sales of leased equipment totaling approximately $5.4 million and $4.6 million,
and cost of leased equipment of $5.3 million and $4.4 million for the year ended
March 31, 2010 and March 31, 2009, respectively. There was a corresponding
reduction of investment in leases and leased equipment—net of $5.3 million and
$4.4 million at March 31, 2010 and 2009, respectively.
Future
scheduled minimum lease rental payments as of March 31, 2010 are as follows (in
thousands):
|
Year
ending March 31, 2011
|
|
$ |
7,288 |
|
|
2012
|
|
|
3,672 |
|
|
2013
|
|
|
2,299 |
|
|
2014
|
|
|
862 |
|
|
2015
and thereafter
|
|
|
181 |
|
|
Total
|
|
$ |
14,302 |
|
3.
IMPAIRMENT OF GOODWILL
Goodwill
is recorded in excess of the purchase price over the fair value of the
identifiable net assets acquired in purchase transactions. Our annual impairment
test for goodwill is performed during the third quarter of our fiscal year, or
when events or circumstances indicate there might be impairment, and follows the
two-step process prescribed in Intangibles- Goodwill and
Other. We have two reportable segments based on the product
and services offered – the financing business segment and the technology sales
business segment. Below business segments are reporting units. Based on the
nature of products, the nature of production, the type of customers and
management, we have four reporting units. Our reporting units are Leasing,
Technology, Software Procurement and Software Document Management, three of
which contained goodwill as of October 1, 2009. During the year ended
March 31, 2010, we recognized a goodwill impairment charge in the amount of $4.0
million for our Leasing reporting unit, leaving no goodwill remaining in the
Leasing reporting unit. The following table summarizes the amount of
goodwill allocated to our reporting units:
|
|
|
Financing
Business Segment
|
|
|
Technology
Sales Business Segment
|
|
|
|
|
|
|
|
Leasing
|
|
|
Technology
|
|
|
Software
Procurement
|
|
|
Software
Document Management
|
|
|
Total
|
|
|
Balance
April 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of our fiscal year, we perform our annual goodwill impairment
test. The goodwill impairment test involves a two-step process. The first step
is a comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including prices for
similar assets and liabilities and other valuation techniques. We
employed both the market approach and the income approach to determine fair
value. The market approach measures the value of an entity through an
analysis of recent sales or by comparison to comparable companies. The income
approach measures the value of reporting units by discounting expected future
cash flows.
Consideration
was given to applying the transaction method which examines sales of stock of
private or public companies, which are in the same industry or similar lines of
business and are of comparable size and capital structure. However,
we concluded that there were insufficient transactions of similar firms with
available current financial information to make a valid comparison.
Under the
market approach, we used the guideline public company method whereby valuation
multiples of guideline companies were applied to the historical financial data
of our reporting units. We analyzed companies that were in the same industry,
performed the same or similar services, had similar operations, and are
considered competitors. In addition, the majority of the companies
selected were also used in the impairment test performed last year.
Multiples
that related to some level of earnings or cash flow were most appropriate for
the industry in which we operate. The multiples selected were based
on our analysis of the guideline companies’ profitability ratios and return to
investors. We compared the reporting units’ size and ranking against
the guidelines, taking into consideration risk, profitability and growth along
with guideline medians and averages. We then selected pricing
multiples, adjusted appropriately for size and risk, to apply to the reporting
unit's trailing twelve month financial data.
Multiples
were weighted based on the consistency and comparability of the guideline
companies along with the respective reporting units, including margins,
profitability and leverage. For each of the reporting units, we used
the following multiples: the price to earnings before tax (“EBT”), price to net
income (“NI”), market value of invested capital (“MVIC”) to earnings before
interest, taxes, depreciation and amortization (“EBITDA”), and MVIC to earnings
before interest and taxes (“EBIT”).
Under the
income approach, we used the discounted future cash flow method to estimate the
fair value of each of the reporting units by discounting the expected future
cash flows of the reporting units. We used the weighted average cost of capital
to discount the expected future cash flows for the reporting unit to its present
value. The weighted average cost of capital is the estimated rate of return on
alternative investments with comparable risks. The weighted average
cost of capital involves estimating the cost of debt and the cost of
equity. In addition, we also considered factors such as risk-free
rate of return, market equity risk premium, beta coefficient and firm specific
risk. We estimated our weighted average cost of capital at 8.3%,
12.9% and 13.6% for the Leasing,
Technology and Software document management reporting units,
respectively. In addition, we estimated the average annual compound
cash flow growth rate for a five-year period of (3.3%), 11.7% and 21%, for the
Leasing, Technology, and Software Document Management reporting
units. Also, we estimated a long term growth rate for the Leasing
reporting unit of 2.0%, and a long term growth rate 3.5% for both the Technology
and Software document management reporting units.
The
estimated fair value of our reporting units is dependent on several significant
assumptions involving our forecasted cash flows and weighted average cost of
capital. The forecasted cash flows are based on management’s best estimates of
economic and market conditions over the projected period including business
plans, growth rates in sales, costs, estimates of future expected changes in
operating margins and cash expenditures. Any adverse change including
a significant decline in our expected future cash flows; a significant adverse
change in legal factors or in the business climate; unanticipated competition;
or slower growth rates may impact our ability to meet our forecasted cash flow
estimates.
We
averaged the results of the income and market methods and compared the estimated
fair value to our market capitalization which was computed by multiplying our
closing stock price to the shares outstanding on October 1,
2009. Comparison of the average fair values of the reporting units to
the overall market value of our equity indicated an implied control premium of
33.5%. This percentage falls within the range of currently observable market
data.
During
our third quarter when preparing the annual impairment test, the U.S. economy
and the global credit crisis weakened the demand for leasing. As a result of
this reduced demand and a reduction in our overall portfolio from prior sales of
tranches of leases in our portfolio, we projected a temporary decline in revenue
in our Leasing reporting unit, which lowered the fair value estimates of the
reporting unit using the discounted cash flow method. The result of averaging
the estimated fair value computed using the guideline public company and the
discounted cash flow methods was that the fair value of the Leasing reporting
was below its carrying value.
During
the three months ended December 31, 2009, we recorded an estimated impairment
charge of $4.0 million in our Leasing reporting unit. This represented the full
amount of goodwill recorded for the Leasing reporting unit. We believed that
after assigning the fair value of the Leasing reporting unit to all of the
assets and liabilities during the second step of the goodwill testing, there
would be not be any excess fair value over the amounts assigned to allocate to
goodwill. Therefore, the Leasing reporting unit’s goodwill was fully impaired at
October 1, 2009.
The
Technology and Software Document Management reporting units' fair values
exceeded their carrying values. Had the fair value been 10% lower
than calculated on each of the three reporting units, the results would not have
changed for any of the reporting units. The fair value of the Technology
reporting unit was 12.2% higher than the carrying value and the fair value of
the Software document management reporting unit was 245.8% higher than the
carrying value.
During
the fourth quarter of fiscal 2010, we performed the second step of the goodwill
impairment test in accordance with Codification Topic Intangibles- Goodwill and
Other. Based on this analysis, no additional impairment was recorded. We
did not have any triggering events between our annual test date and March 31,
2010. We have $16.5 million and $1.1 million of goodwill remaining in
our Technology and Software Document Management reporting units,
respectively.
4. RESERVES
FOR CREDIT LOSSES
As of
March 31, 2010 and 2009, activity in our reserves for credit losses are as
follows (in thousands):
|
|
|
Accounts
Receivable
|
|
|
Lease-Related
Assets
|
|
|
Total
|
|
|
Balance
April 1, 2008
|
|
$ |
1,702 |
|
|
$ |
1,355 |
|
|
$ |
3,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Bad Debts
|
|
|
(139 |
) |
|
|
503 |
|
|
|
364 |
|
|
Recoveries
|
|
|
91 |
|
|
|
- |
|
|
|
91 |
|
|
Write-offs
and other
|
|
|
(161 |
) |
|
|
(259 |
) |
|
|
(420 |
) |
|
Balance
April 1, 2009
|
|
$ |
1,493 |
|
|
$ |
1,599 |
|
|
$ |
3,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Bad Debts
|
|
|
420 |
|
|
|
308 |
|
|
|
728 |
|
|
Recoveries
|
|
|
69 |
|
|
|
49 |
|
|
|
118 |
|
|
Write-offs
and other
|
|
|
(327 |
) |
|
|
(26 |
) |
|
|
(353 |
) |
|
Balance
March 31, 2010
|
|
$ |
1,655 |
|
|
$ |
1,930 |
|
|
$ |
3,585 |
|
Included
in our Consolidated Statements of Operations are an increase in bad debt
expenses of $728 thousand for the year ended March 31, 2010 and an increase in
bad debt expense of $364 thousand for the year ended March 31,
2009.
5.
PROPERTY AND EQUIPMENT—NET
Property
and equipment—net consists of the following:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
Furniture,
fixtures and equipment
|
|
$ |
8,588 |
|
|
$ |
8,542 |
|
|
Vehicles
|
|
|
268 |
|
|
|
268 |
|
|
Capitalized
software
|
|
|
6,447 |
|
|
|
6,498 |
|
|
Leasehold
improvements
|
|
|
2,236 |
|
|
|
2,167 |
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(15,482 |
) |
|
|
(14,162 |
) |
|
Property
and equipment - net
|
|
$ |
2,057 |
|
|
$ |
3,313 |
|
For the
years ended March 31, 2010 and 2009, depreciation expense on property and
equipment—net was $1,775 thousand and $2,139 thousand,
respectively.
6.
OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
Our other
assets and accrued expenses and other liabilities consist of the
following:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Deferred
costs related to sales of bundled hardware and services
|
|
$ |
19,879 |
|
|
$ |
10,427 |
|
|
Other
|
|
|
7,433 |
|
|
|
6,382 |
|
|
Other
assets
|
|
$ |
27,312 |
|
|
$ |
16,809 |
|
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue related to sales of bundled hardware and services
|
|
$ |
22,289 |
|
|
$ |
12,111 |
|
|
Other
|
|
|
18,213 |
|
|
|
16,891 |
|
|
Accrued
expenses and other liabilities
|
|
$ |
40,502 |
|
|
$ |
29,002 |
|
Other
assets includes deferred costs, prepaid assets, certain intangible assets and
intercompany accounts. We had $27.3 million and $16.8 million of other assets as
of March 31, 2010 and March 31, 2009, respectively, an increase of 62.5%. This
increase is primarily driven by the deferred costs of $19.9 million, an increase
of $9.5 million at March 31, 2010, as compared to March 31, 2009. The deferred
costs is related to bundled hardware and service arrangements that were not
completed by the end of the quarter. We will recognize revenue on multiple
deliverable revenue arrangements when service is completed.
Accrued
expenses and other liabilities includes deferred expenses, deferred revenue and
amounts collected and payable, such as sales taxes and lease rental payments due
to third parties. We had $40.5 million and $29.0 million of accrued expenses and
other liabilities as of March 31, 2010 and March 31, 2009, respectively, an
increase of 39.7%. The increase is primarily driven by deferred revenue of $22.3
million, an increase of $10.2 million at March 31, 2010, as compared to March
31, 2009. The deferred revenue is related to bundled hardware and service
arrangements that were not completed by the end of the quarter. We will
recognize revenue on multiple deliverable revenue arrangements when service is
completed.
7.
RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse
and non-recourse obligations consist of the following:
|
|
|
As
of
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Bank of Highland Park recourse note payable at 5.5% expires on April 1,
2011 or when the early termination option of a lease is
enacted.
|
|
$ |
102 |
|
|
$ |
102 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
equipment notes secured by related investments in leases with interest
rates ranging from 4.00% to 9.50% for the year ended March 31,
2010 and 4.34% to 8.76% for the year ended March 31, 2009.
|
|
$ |
53,577 |
|
|
$ |
84,977 |
|
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. 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 reseller business. 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 $57.6 million and $45.1 million as of March 31, 2010 and March 31,
2009, respectively. Under the accounts receivable component, we had no
outstanding balances as of March 31, 2010 and March 31, 2009. As of March 31,
2010, the facility agreement had an aggregate limit of the two components of
$125 million, and the accounts receivable component had a sub-limit of $30
million, which bears interest at prime less 0.5%, or 4.75%. Availability under
the GECDF 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 total tangible net worth and subordinated debt of ePlus Technology, inc., and
maximum debt to tangible net worth ratio of ePlus Technology, inc. We
were in compliance with these covenants as of March 31, 2010. 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 GECDF credit facility. In addition, we
do not believe that the covenants of the GECDF credit facility materially limit
its 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 up to $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,
2009, 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 and as an operational function of our accounts payable
process.
On
October 26, 2009, we entered into an agreement with 1st Commonwealth Bank of
Virginia to provide us with a $0.5 million credit facility, which will mature on
October 26, 2010. This 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 March 31, 2010, we have no
outstanding balance on this credit facility.
National
City Bank (a wholly-owned subsidiary of PNC Financial Services Group, Inc.)
provided a credit facility which could have been used for all ePlus inc.’s subsidiaries.
This credit facility expired July 10, 2009. Borrowings under our $35 million
line of credit from National City Bank were subject to certain covenants. We had
no balance on this facility as of the expiration date.
Non-recourse
notes payable as of March 31, 2010, mature as follows:
|
|
|
|
Non-Recourse
Notes Payable
|
|
|
|
|
|
(in
thousands)
|
|
|
Year
ending March 31, 2011
|
|
|
$ |
32,659 |
|
|
2012
|
|
|
|
13,215 |
|
|
2013
|
|
|
|
5,147 |
|
|
2014
|
|
|
|
2,265 |
|
|
2015
|
and thereafter
|
|
|
291 |
|
|
|
|
|
$ |
53,577 |
|
8.
RELATED PARTY TRANSACTIONS
During
the year ended March 31, 2010, we leased approximately 55,880 square feet for
use as our principal headquarters from Norton Building 1, LLC for a monthly
payment of approximately $102 thousand which includes rent and operating
expenses. Norton Building 1, LLC is a limited liability company owned
in part by Mr. Norton’s spouse and in part in trust for his children. Mr.
Norton, our President and CEO, has no managerial or executive role in Norton
Building 1, LLC. On June 18, 2009, we entered into Amendment No. 2 to
the office lease agreement with Norton Building 1, LLC pursuant to which we will
continue to lease 55,880 square feet for use as our principal
headquarters. The term of the amended lease began on January 1, 2010,
and will continue through December 31, 2014. In addition, we have the
right to terminate the lease on December 31, 2012 in the event that the facility
no longer meets our needs, by giving six months’ prior written notice, with no
penalty fee. The annual base rent, which includes an expenses factor,
is $21.50 per square foot for the first year, with an annual rent escalation for
operating cost increases, if any, plus 2.75% of the annual base rent, net of the
expenses factor, for each year thereafter. The amended lease was
approved by the Nominating and Corporate Governance Committee in accordance with
our Related Person Transactions Policy, and was subsequently approved by our
Board of Directors, with Mr. Norton abstaining. We paid rent, which
includes operating expenses, in the amount of $1,220 thousand during the year
ended March 31, 2010, and $1,126 thousand during the same period in
2009.
9.
COMMITMENTS AND CONTINGENCIES
We lease
office space and certain office equipment to conduct our business. Annual rent
expense relating to these operating leases was $2.4 million for the year ended
March 31, 2010 and $2.7 million for the year ended March 31, 2009. As of March
31, 2010, the future minimum lease payments are due as follows (in
thousands):
|
|
|
(in
thousands)
|
|
|
Year
ended March 31, 2011
|
|
$ |
1,628 |
|
|
2012
|
|
|
1,135 |
|
|
2013
|
|
|
971 |
|
|
2014
|
|
|
740 |
|
|
2015
|
|
|
560 |
|
|
|
|
$ |
5,034 |
|
Litigation
We have
been involved in several matters relating to a customer named Cyberco Holdings,
Inc. (“Cyberco”). The Cyberco principals were perpetrating a scam, and at least
five principals have pled guilty to criminal conspiracy and/or related charges,
including bank fraud, mail fraud and money laundering. One lender who financed
our transaction with Cyberco, Banc of America Leasing and Capital, LLC (“BoA”),
filed a lawsuit against ePlus inc. in the Circuit
Court for Fairfax County, Virginia on November 3, 2006, seeking to enforce a
guaranty in which ePlus
inc. guaranteed ePlus
Group’s obligations to BoA relating to the Cyberco transaction. Although
discovery has not begun, we believe the suit against ePlus inc. seeks attorneys’
fees BoA incurred in ePlus Group’s appeal of BoA’s
suit against ePlus
Group, expenses BoA incurred in Cyberco’s bankruptcy proceedings, and other
attorneys’ fees BoA has incurred relating in any way to the Cyberco
matter. ePlus Group has already paid
to BoA $4.3 million, which was awarded to BoA in a prior lawsuit regarding the
Cyberco matter. The suit has been stayed pending the resolution of
other Cyberco-related matters. We are vigorously defending this suit. As we do
not believe a loss is probable or the amount is reasonably estimable, we have
not accrued for this matter.
The
shareholder derivative action that was filed against us in 2007 has been
concluded. In April 2010, a Stipulation of Dismissal was filed with
the United States Court of Appeals for the District of Columbia Circuit,
dismissing the plaintiff’s appeal of the trial court’s dismissal of the
action. The suit, which related to stock option practices, named
ePlus inc. as nominal
defendant and personally named eight individual defendants who at the time were
directors and/or executive officers of ePlus.
On May
19, 2009, we filed a complaint in the United States District Court for the
Eastern District of Virginia 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. Pursuant to the
settlement agreements, we received payments in the aggregate amount of
approximately $3.5 million, and the complaint has been dismissed with prejudice
with regard to those three defendants. The settlement agreements also
grant each of those defendants a license in specified ePlus
patents. With regard to the remaining defendant, we are seeking
injunctive relief and an unspecified amount of monetary damages. 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 claims for damages, whether
any award ultimately received will exceed the costs incurred to pursue these
matters, or how long it will take to bring these matters to
resolution.
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 does not believe that the ultimate resolution will have
a material effect on our financial condition, results of operations, or cash
flows.
10.
EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income by the basic weighted
average number of shares of common stock outstanding during each period. Diluted
earnings per share is calculated by dividing net income 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 income per common share as disclosed on
our Consolidated Statements of Operations for the year ended March 31, 2010 and
March 31, 2009 (in thousands, except per share data):
|
|
|
Year
ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders—basic and diluted
|
|
$ |
12,745 |
|
|
$ |
12,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding — basic
|
|
|
8,267 |
|
|
|
8,219 |
|
|
Effect
of dilutive shares
|
|
|
202 |
|
|
|
234 |
|
|
Weighted
average shares outstanding — diluted
|
|
$ |
8,469 |
|
|
$ |
8,453 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.54 |
|
|
$ |
1.56 |
|
|
Diluted
|
|
$ |
1.50 |
|
|
$ |
1.52 |
|
Unexercised
employee stock options to purchase 151,000 and 282,500 shares of our common
stock were not included in the computations of diluted EPS for the year ended
March 31, 2010 and March 31, 2009, respectively. These options were
excluded because the options’ exercise prices were greater than the average
market price of our common stock during the applicable
periods. Inclusion of these options in our diluted EPS calculation
would have been anti-dilutive.
11.
INCOME TAXES
We
account for our tax position in accordance with Codification Topic Income Taxes. Under the
guidance, we evaluate our uncertain tax position based on the two-step approach.
The first step is to evaluate each uncertain tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained in an audit, including resolution
of related appeals or litigation processes, if any. For tax positions that are
more likely than not of being sustained upon audit, the second step requires us
to estimate and measure the tax benefit as the largest amount that is more than
50 percent likely of being realized upon ultimate settlement.
As of
March 31, 2009, we had $525 thousand of total gross unrecognized tax benefits.
This amount consists of $64 thousand recorded in accordance with Codification
Topic Contingencies
prior to the implementation of uncertain income tax position, and $461 thousand
recorded for uncertain income tax position in accordance with Income Taxes in the
Codification. During the year ended March 31, 2010, we filed Amended
Tax Returns for the period ending March 31, 2005 and March 31, 2007, which
reduced this liability by $64 thousand.
A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits is as follows (in thousands):
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Additions
based on positions related to current year
|
|
|
|
|
|
|
|
|
Additions
for tax positions of prior years
|
|
|
|
|
|
|
|
|
Reductions
for settlement of tax positions of prior years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March
31, 2010, if the unrecognized tax benefits of $461 thousand were to be
recognized, including the effect of interest, penalties and federal tax benefit,
the impact would have been $583 thousand. At March 31, 2009, if the
unrecognized tax benefits of $525 thousand were to be recognized, including the
effect of interest, penalties and federal tax benefit, the impact would have
been $561 thousand.
In
accordance with our accounting policy, we recognize accrued interest and
penalties related to unrecognized tax benefits in income tax expense. During the
fiscal years ended March 31, 2010 and 2009, we recognized $35 thousand and $43
thousand, respectively, of interest related to uncertain tax positions, and did
not recognize any additional penalties. We had $128 thousand and $93
thousand accrued for the payment of interest and penalties at March 31, 2010 and
2009, respectively.
We file
income tax returns, including returns for our subsidiaries, with federal, state,
local, and foreign jurisdictions. Tax years 2006, 2007 and 2008 are subjected to
examination by federal and state taxing authorities. Various state and local
income tax returns are also under examination by taxing authorities. We do not
believe that the outcome of any examination will have a material impact on our
financial statements.
A
reconciliation of income taxes computed at the statutory federal income tax rate
of 35% to the provision for income taxes included in the Consolidated Statements
of Operations is as follows (in thousands, except percentages):
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
35 |
% |
|
|
35 |
% |
|
Income
tax expense computed at the U.S. statutory federal rate
|
|
$ |
7,379 |
|
|
$ |
7,717 |
|
|
State
income tax expense—net of federal benefit
|
|
|
865 |
|
|
|
1,170 |
|
|
Non-deductible
executive compensation
|
|
|
264 |
|
|
|
- |
|
|
Share
based compensation
|
|
|
- |
|
|
|
60 |
|
|
Other
|
|
|
(171 |
) |
|
|
272 |
|
|
Provision
for income taxes
|
|
$ |
8,337 |
|
|
$ |
9,219 |
|
|
Effective
income tax rate
|
|
|
39.6 |
% |
|
|
41.8 |
% |
The
components of the provision for income taxes are as follows (in
thousands):
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(in
thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$ |
7,760 |
|
|
$ |
6,975 |
|
|
State
|
|
|
1,698 |
|
|
|
1,681 |
|
|
Foreign
|
|
|
33 |
|
|
|
283 |
|
|
Total
current expense
|
|
|
9,491 |
|
|
|
8,939 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(865 |
) |
|
|
118 |
|
|
State
|
|
|
(289 |
) |
|
|
162 |
|
|
Total
deferred expense (benefit)
|
|
|
(1,154 |
) |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
8,337 |
|
|
$ |
9,219 |
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets and liabilities were as follows (in thousands):
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(in
thousands)
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
Accrued
vacation
|
|
$ |
1,037 |
|
|
$ |
940 |
|
|
Provision
for bad debts
|
|
|
1,325 |
|
|
|
1,203 |
|
|
State net
operating loss carryforward
|
|
|
1,210 |
|
|
|
748 |
|
|
Basis
difference in fixed assets
|
|
|
539 |
|
|
|
851 |
|
|
Book
compensation on discounted stock options
|
|
|
793 |
|
|
|
1,253 |
|
|
Deferred
compensation
|
|
|
637 |
|
|
|
567 |
|
|
Deferred
revenue
|
|
|
247 |
|
|
|
255 |
|
|
Foreign
tax credit
|
|
|
40 |
|
|
|
194 |
|
|
Other
accruals and reserves
|
|
|
768 |
|
|
|
959 |
|
|
Gross
deferred tax assets
|
|
|
6,596 |
|
|
|
6,970 |
|
|
Less:
valuation allowance
|
|
|
(1,250 |
) |
|
|
(941 |
) |
|
Net
deferred tax assets
|
|
|
5,346 |
|
|
|
6,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Basis
difference in operating lease items
|
|
|
(6,820 |
) |
|
|
(7,658 |
) |
|
Basis
difference in tax deductible goodwill
|
|
|
(329 |
) |
|
|
(1,328 |
) |
|
Total
deferred tax liabilities
|
|
|
(7,149 |
) |
|
|
(8,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$ |
(1,803 |
) |
|
$ |
(2,957 |
) |
The net
effective income tax rate for the year ended March 31, 2010 was 39.6%, decreased
from 41.8% of the previous fiscal year. The decrease in effective
income tax rate is primarily due to a reduction in state income tax, partially
offset by an increase in non-deductible compensation expense.
We have
state net operating losses of approximately $25.0 million, which will begin to
expire in the year 2022. We also have foreign tax credit
carryforwards of approximately $40 thousand. Credits will begin to expire at
March 31, 2015.
The
valuation allowance of $1,250 thousand resulted from management's determination,
based on available evidence, that it was more likely than not that the foreign
tax credit deferred tax asset of $40 thousand and state net operating loss
deferred tax asset balance of $1,210 thousand may not be realized.
12.
SHARE REPURCHASE
On August
11, 2009, our Board authorized a share repurchase plan commencing on September
16, 2009. The share repurchase plan is for a 12-month period ending
September 15, 2010 for up to 500,000 shares of ePlus’ outstanding common
stock. The previous stock repurchase program commenced on July 31,
2008 and expired on September 15, 2009. On February 12, 2010, our
Board amended the current share repurchase plan, which commenced September 16,
2009. Under the plan, as amended the Company may repurchase up to 500,000 shares
of ePlus’ outstanding common stock beginning February 15, 2010 through September
15, 2010. 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 year ended March 31, 2010, we repurchased 377,967 shares of our outstanding
common stock at an average cost of $16.18 per share for a total purchase price
of $6.1 million. Since the inception of our initial repurchase program on
September 20, 2001, as of March 31, 2010, we have repurchased 3,793,621shares of
our outstanding common stock at an average cost of $11.43 per share for a total
purchase price of $43.3 million.
13.
SHARE-BASED COMPENSATION
Share-Based
Plans
We have
issued share-based awards under the following plans: (1) the 1998
Long-Term Incentive Plan (the “1998 LTIP”), (2) Amendment and Restatement of the
1998 Stock Incentive Plan (2001) (the “Amended LTIP (2001)”), (3) Amendment and
Restatement of the 1998 Stock Incentive Plan (2003) (the “Amended LTIP (2003)”),
(4) the 2008 Non-Employee Director Long-Term Incentive Plan (“2008 Director
LTIP”) and (5) the 2008 Employee Long-Term Incentive Plan (“2008 Employee
LTIP”). Currently, awards are only issued under the 2008 Director LTIP and the
2008 Employee LTIP. Sections of these plans are summarized below. 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.
Vesting
periods varied for the 1998 LTIP, the Amended LTIP (2001), and the Amended LTIP
(2003) depending on individual award agreement. Vesting periods for the 2008
Director LTIP and the 2008 Employee LTIP are discussed below.
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 was 20% of the outstanding shares, less shares
previously granted and shares purchased through our then-existing employee stock
purchase program. It specified that options shall be priced at not less than
fair market value. The 1998 LTIP consolidated our preexisting stock incentive
plans and made the Compensation Committee of the Board of Directors
(“Compensation Committee”) responsible for its administration. The 1998 LTIP
required that grants be evidenced in writing, but the writing was not a
condition precedent to the grant of the award.
Under the
1998 LTIP, options were to be automatically awarded to non-employee directors
the day after the annual shareholders meeting to all non-employee directors in
service as of that day. No automatic annual grants may be awarded under the LTIP
after September 1, 2006. The LTIP 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. 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. Primarily, the amendment modified the
aggregate number of shares available under the plan to a fixed number
(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, and covered option grants for employees, executives and outside
directors.
On
September 15, 2008, our shareholders approved the 2008 Director LTIP and the
2008 Employee LTIP. Both of the plans were adopted by the Board on
June 25, 2008. As a result of the approval of these plans, we do not intend to
grant any awards under the Amended LTIP (2003) or any earlier
plan.
2008
Non-Employee Director Plan
Under the
2008 Director LTIP, 250,000 shares were authorized for grant to non-employee
directors. The purpose of the 2008 Director LTIP is to align the economic
interests of the directors with the interests of shareholders by including
equity as a component of pay and to attract, motivate and retain experienced and
knowledgeable directors. Under the 2008 Director LTIP, each non-employee
director received a one-time grant of a number of restricted shares of common
stock having a grant-date fair value of $35 thousand. The grant-date fair value
for this one-time grant was determined based on the share closing price on
September 25, 2008. In addition, each director will receive an annual
grant of restricted stock having a grant-date fair value equal to the cash
compensation earned by an outside director during our fiscal year ended
immediately before the respective annual grant-date. Directors may elect to
receive their cash compensation in restricted stock. These restricted shares are
prohibited from being sold, transferred, assigned, pledged or otherwise
encumbered or disposed of. Half of these shares will vest on the one-year and
second-year anniversary from the date of the grant.
2008
Employee Long-Term Incentive Plan
Under the
2008 Employee LTIP, 1,000,000 shares were authorized for grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock, restricted stock units, performance awards, or other share-based awards
to ePlus employees. The
purposes of the 2008 Employee LTIP are to encourage our employees to acquire a
proprietary interest in the growth and performance of ePlus, thus enhancing the
value of ePlus for the
benefit of its stockholders, and to enhance our ability to attract and retain
exceptionally qualified individuals. The 2008 Employee LTIP is administered by
the Compensation Committee. Shares issuable under the 2008 Employee LTIP may
consist of authorized but unissued shares or shares held in our treasury. Shares
under the 2008 Employee LTIP will not be used to compensate our outside
directors, who may be compensated under the separate 2008 Director LTIP, as
discussed above. Under the 2008 Employee LTIP, the Compensation Committee will
determine the time and method of exercise of the awards.
Stock
Option Activity
During
the years ended March 31, 2010 and March 31, 2009, there were no stock options
granted to employees and all options were vested. We issue shares from our
authorized but unissued common stock to satisfy stock option
exercises.
A summary
of stock option activity during the two years ended March 31, 2010 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, 2008
|
|
|
1,240,813 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
9.78 |
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(293,436 |
) |
|
$ |
6.24
- $9.31 |
|
|
$ |
7.92 |
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(39,087 |
) |
|
$ |
6.86
- $17.38 |
|
|
$ |
11.65 |
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
908,290 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
10.29 |
|
|
|
2.2 |
|
|
$ |
2,403,133 |
|
|
Vested
at March 31, 2009
|
|
|
908,290 |
|
|
|
|
|
|
$ |
10.29 |
|
|
|
2.2 |
|
|
$ |
2,403,133 |
|
|
Exercisable
at March 31, 2009
|
|
|
908,290 |
|
|
|
|
|
|
$ |
10.29 |
|
|
|
2.2 |
|
|
$ |
2,403,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2009
|
|
|
908,290 |
|
|
$ |
6.86
- $17.38 |
|
|
$ |
10.29 |
|
|
|
2.2 |
|
|
$ |
2,403,133 |
|
|
Options
exercised (1)
|
|
|
(393,690 |
) |
|
$ |
6.86
- $13.00 |
|
|
$ |
7.89 |
|
|
|
|
|
|
$ |
2,956,560 |
|
|
Options
forfeited
|
|
|
(6,900 |
) |
|
$ |
9.00
- $17.38 |
|
|
$ |
15.07 |
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2010
|
|
|
507,700 |
|
|
$ |
6.86
- $17.38 |
|
|
$ |
12.09 |
|
|
|
2.3 |
|
|
$ |
2,770,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
at March 31, 2010
|
|
|
507,700 |
|
|
|
|
|
|
$ |
12.09 |
|
|
|
2.3 |
|
|
$ |
2,770,219 |
|
|
Exercisable
at March 31, 2010
|
|
|
507,700 |
|
|
|
|
|
|
$ |
12.09 |
|
|
|
2.3 |
|
|
$ |
2,770,219 |
|
|
(1)
|
The
total intrinsic value of stock options exercised during the year ended
March 31, 2010 was $3.0 million.
|
Additional
information regarding options outstanding as of March 31, 2010 is as
follows:
| |
|
|
Options
Outstanding and Exercisable
|
|
|
Range
of Exercise Prices
|
|
|
Options
Outstanding
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Contractual Life Remaining
|
|
| |
|
|
|
|
|
|
|
|
|
|
| $6.86
- $9.00 |
|
|
|
193,700 |
|
|
$ |
7.25 |
|
|
|
1.7 |
|
| $9.01
- $13.50 |
|
|
|
123,000 |
|
|
$ |
12.22 |
|
|
|
5.0 |
|
| $13.51
- $17.38 |
|
|
|
191,000 |
|
|
$ |
16.93 |
|
|
|
1.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $6.86
- $17.38 |
|
|
|
507,700 |
|
|
$ |
12.09 |
|
|
|
2.3 |
|
Restricted
Stock Activity
Under the
2008 Director LTIP, each director will receive an annual grant of restricted
stock having a grant-date fair value equal to the cash compensation earned by an
outside director during our fiscal year ended immediately before the respective
annual grant-date. Directors may elect to receive their cash
compensation in restricted stock. These restricted shares are
prohibited from being sold, transferred, assigned, pledged or otherwise
encumbered or disposed of. These shares will vest over a two-year
period and we will recognize share-based compensation expense over the service
period. We estimate the forfeiture rate of the restricted stock to be zero. As
of March 31, 2010, we have granted 59,427 shares under the 2008 Director
LTIP.
Under the
2008 Employee LTIP, employees may receive grants of restricted stock as
determined by the Compensation Committee. These restricted shares are prohibited
from being sold, transferred, assigned, pledged or otherwise encumbered or
disposed of. The vesting schedule of restricted stock will be determined by the
Compensation Committee, at its discretion. We estimate the forfeiture rate of
the restricted stock to be zero. As of March 31, 2010, we have granted 85,000
restricted shares under the 2008 Employee LTIP.
A summary
of restricted stock activity during the year ended March 31, 2010 is as
follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2009
|
|
|
38,532 |
|
|
$ |
10.90 |
|
|
Shares
granted (1)(2)(3)
|
|
|
105,895 |
|
|
$ |
15.72 |
|
|
Shares
forfeited
|
|
|
- |
|
|
|
|
|
|
Outstanding,
March 31, 2010
|
|
|
144,427 |
|
|
$ |
14.43 |
|
|
|
(1)
|
Three
of our non-employee directors received restricted shares in lieu of their
quarterly cash compensation.
Therefore, during the three months ended June 30, 2009, September 30,
2009, December 31, 2009 and March 31, 2010, the directors were issued 748
shares each with a grant-date fair value of $11.69 per share, 587 shares
each with a grant-date value of $14.91 per share, 569 shares each with a
grant-date value of $15.36 per share, and 523 shares each with a
grant-date value of $16.73 per share,
respectively.
|
|
|
(2)
|
Includes
an annual grant of restricted shares to all six of our non-employee
directors of 2,269 shares each with a grant-date value of $15.42 per
share.
|
|
|
(3)
|
Includes
grants of 85,000 restricted shares to employees with a grant-date value of
$15.88 per share. One third of these shares will vest on the one-year,
second-year and third-year anniversary from the date of the
grant.
|
A summary
of the nonvested restricted shares activity is presented as
follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested
April 1, 2009
|
|
|
38,532 |
|
|
$ |
10.90 |
|
|
Granted
|
|
|
105,895 |
|
|
$ |
15.72 |
|
|
Vested
|
|
|
(19,272 |
) |
|
$ |
10.90 |
|
|
Forefeited
|
|
|
- |
|
|
|
|
|
|
Nonvested
March 31, 2010
|
|
|
125,155 |
|
|
$ |
14.98 |
|
Share-based
Compensation Expense
Share-based
compensation expense for stock options is calculated by valuing all options at
their grant-date fair value using the Black-Scholes option-pricing model. The
Black-Scholes model uses various assumptions to estimate the fair value of these
options, including: historical volatility of our stock, risk-free interest rate,
and estimated forfeitures rates. The estimated fair values of these options are
then amortized using the straight-line method as compensation cost over the
requisite service period. Share-based compensation expense for restricted stock
is calculated by multiplying the shares granted by the closing price of the
shares on the date of the awards and amortizing it over the vesting
period.
During
the year ended March 31, 2010, we recognized $474 thousand of total share-based
compensation expense, all of which was related to restricted
stock. This amount was recorded as salaries and benefits in our
Consolidated Statements of Operations.
During
the year ended March 31, 2009, we recognized $166 thousand of total share-based
compensation expense. Shared-based compensation recognized for the restricted
stock was approximately $109 thousand for the year ended March 31,
2009. Share-based compensation expense related to stock options was
$58 thousand for the year ended March 31, 2009. This amount was recognized as
salaries and benefits in our Consolidated Statement of Operations.
At March
31, 2010, there was no unrecognized compensation expense related to nonvested
options because all the options were vested. Unrecognized compensation expense
related to the restricted stock was $1.5 million which will be fully recognized
over the next 33 months.
14.
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. For
additional information, see Note 1, “Organization and Summary of Significant
Accounting Policies” included elsewhere in this report. The following table
summarizes the fair value hierarchy of our financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
|
|
|
March 31,
2010
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable
Inputs (Level 3)
|
|
|
Total
Gains (Losses)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
17,573 |
|
|
|
|
|
|
$ |
17,573 |
|
|
$ |
(4,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
notes payable
|
|
$ |
53,577 |
|
|
|
$ |
53,333 |
|
|
|
|
|
|
$ |
244 |
|
|
Recourse
notes payable
|
|
$ |
102 |
|
|
|
$ |
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
|
|
|
March 31,
2009
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable
Inputs (Level 3)
|
|
|
Total
Gains (Losses)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
21,601 |
|
|
|
|
|
|
$ |
21,601 |
|
|
$ |
(4,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
notes payable
|
|
$ |
84,977 |
|
|
|
$ |
84,551 |
|
|
|
|
|
|
$ |
426 |
|
|
Recourse
notes payable
|
|
$ |
102 |
|
|
|
$ |
102 |
|
|
|
|
|
|
|
|
|
The
carrying value of $17.6 million for goodwill in our Consolidated Balance Sheets
as of March 31, 2010, is net of an impairment charge of $4.0 million related to
our Leasing reporting unit. This impairment charge was included in our
Consolidated Statement of Operations for the year ended March 31, 2010. In
accordance with the provision of Intangibles – Goodwill and
Other, goodwill with a carrying amount of $4.0 million for our Leasing
reporting unit was written down to its implied fair value of zero, resulting in
an estimated impairment charge of $4.0 million. The carrying value of $53.6
million for non-recourse notes payable approximate the fair value of $53.3
million.
15.
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 unit sells information
technology 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. The financing business
unit offers lease-financing solutions to corporations and governmental entities
nationwide. We evaluate segment performance on the basis of segment revenue and
earnings.
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.
|
|
|
Year
ended March 31, 2010
|
|
|
Year
ended March 31, 2009
|
|
|
|
|
Technology
Sales Business Segment
|
|
|
Financing
Business Segment
|
|
|
Total
|
|
|
Technology
Sales Business Segment
|
|
|
Financing
Business Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
625,607 |
|
|
$ |
2,177 |
|
|
$ |
627,784 |
|
|
$ |
632,227 |
|
|
$ |
3,915 |
|
|
$ |
636,142 |
|
|
Sales
of leased equipment
|
|
|
- |
|
|
|
5,413 |
|
|
|
5,413 |
|
|
|
- |
|
|
|
4,633 |
|
|
|
4,633 |
|
|
Lease
revenues
|
|
|
- |
|
|
|
37,908 |
|
|
|
37,908 |
|
|
|
- |
|
|
|
44,483 |
|
|
|
44,483 |
|
|
Fee
and other income
|
|
|
9,011 |
|
|
|
610 |
|
|
|
9,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
and license settlement income
|
|
|
3,525 |
|
|
|
- |
|
|
|
3,525 |
|
|
|
11,356 |
|
|
|
1,413 |
|
|
|
12,769 |
|
|
Total
revenues
|
|
|
638,143 |
|
|
|
46,108 |
|
|
|
684,251 |
|
|
|
643,583 |
|
|
|
54,444 |
|
|
|
698,027 |
|
|
Cost
of sales
|
|
|
537,128 |
|
|
|
7,392 |
|
|
|
544,520 |
|
|
|
544,721 |
|
|
|
7,687 |
|
|
|
552,408 |
|
|
Direct
lease costs
|
|
|
- |
|
|
|
10,676 |
|
|
|
10,676 |
|
|
|
- |
|
|
|
14,220 |
|
|
|
14,220 |
|
|
Selling,
general and administrative expenses
|
|
|
86,409 |
|
|
|
13,400 |
|
|
|
99,809 |
|
|
|
83,458 |
|
|
|
15,441 |
|
|
|
98,899 |
|
|
Impairment
of goodwill
|
|
|
- |
|
|
|
4,029 |
|
|
|
4,029 |
|
|
|
4,644 |
|
|
|
- |
|
|
|
4,644 |
|
|
Segment
earnings
|
|
|
14,606 |
|
|
|
10,611 |
|
|
|
25,217 |
|
|
|
10,760 |
|
|
|
17,096 |
|
|
|
27,856 |
|
|
Interest
and financing costs
|
|
|
77 |
|
|
|
4,058 |
|
|
|
4,135 |
|
|
|
120 |
|
|
|
5,688 |
|
|
|
5,808 |
|
|
Earnings
before income taxes
|
|
$ |
14,529 |
|
|
$ |
6,553 |
|
|
$ |
21,082 |
|
|
$ |
10,640 |
|
|
$ |
11,408 |
|
|
$ |
22,048 |
|
|
Assets
|
|
$ |
193,194 |
|
|
$ |
212,437 |
|
|
$ |
405,631 |
|
|
$ |
181,098 |
|
|
$ |
182,774 |
|
|
$ |
363,872 |
|
Included
in the technology sales business segment above are inter-segment accounts
payable of $37.8 million and $35.1 million for the years ended March 31, 2010
and 2009, respectively. Included in the financing business segment above are
inter-segment accounts receivable of $37.8 million and $35.1 million for the
years ended March 31, 2010 and 2009, respectively.
Our
technology sales business segment sells products to our financing business
segment. For the year ended March 31, 2010, we eliminated revenue of
$2.1 million, in our technology sales business segment as a result of these
intersegment transactions. For the year ended March 31, 2009, we
eliminated revenue of $1.8million, in our technology sales business segment as a
result of these intersegment transactions.
During
the year ended March 31, 2010, we recorded an impairment of goodwill in the
amount of $4.0 million in our financing business segment. During the
year ended March 31, 2009, we recorded an impairment of goodwill in the amount
of $4.6 million in our software procurement reporting unit, which is part of our
technology sales business
segment.
16.
QUARTERLY DATA —UNAUDITED
Condensed
quarterly financial information is as follows (amounts in thousands, except per
share amounts).
|
|
|
Year
Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
141,938 |
|
|
$ |
158,059 |
|
|
$ |
163,178 |
|
|
$ |
170,022 |
|
|
$ |
633,197 |
|
|
Total
revenues
|
|
|
152,420 |
|
|
|
172,715 |
|
|
|
178,711 |
|
|
|
180,405 |
|
|
|
684,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
121,981 |
|
|
|
135,139 |
|
|
|
141,234 |
|
|
|
146,165 |
|
|
|
544,519 |
|
|
Total
costs and expenses
|
|
|
149,082 |
|
|
|
163,916 |
|
|
|
174,687 |
|
|
|
175,484 |
|
|
|
663,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before provision for income taxes
|
|
|
3,338 |
|
|
|
8,799 |
|
|
|
4,024 |
|
|
|
4,921 |
|
|
|
21,082 |
|
|
Provision
for income taxes
|
|
|
1,437 |
|
|
|
3,801 |
|
|
|
1,708 |
|
|
|
1,391 |
|
|
|
8,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1,901 |
|
|
$ |
4,998 |
|
|
$ |
2,316 |
|
|
$ |
3,530 |
|
|
$ |
12,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share—Basic
|
|
$ |
0.23 |
|
|
$ |
0.61 |
|
|
$ |
0.27 |
|
|
$ |
0.43 |
|
|
$ |
1.54 |
|
|
Net
earnings per common share—Diluted
|
|
$ |
0.23 |
|
|
$ |
0.58 |
|
|
$ |
0.27 |
|
|
$ |
0.42 |
|
|
$ |
1.50 |
|
|
|
|
Year
Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
167,024 |
|
|
$ |
181,673 |
|
|
$ |
171,557 |
|
|
$ |
120,521 |
|
|
$ |
640,775 |
|
|
Total
revenues
|
|
|
182,286 |
|
|
|
196,858 |
|
|
|
184,724 |
|
|
|
134,159 |
|
|
|
698,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
144,943 |
|
|
|
156,448 |
|
|
|
146,224 |
|
|
|
104,793 |
|
|
|
552,408 |
|
|
Total
costs and expenses
|
|
|
176,019 |
|
|
|
186,029 |
|
|
|
181,316 |
|
|
|
132,615 |
|
|
|
675,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before provision for income taxes
|
|
|
6,267 |
|
|
|
10,829 |
|
|
|
3,408 |
|
|
|
1,544 |
|
|
|
22,048 |
|
|
Provision
for income taxes
|
|
|
2,574 |
|
|
|
4,409 |
|
|
|
1,446 |
|
|
|
790 |
|
|
|
9,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
3,693 |
|
|
$ |
6,420 |
|
|
$ |
1,962 |
|
|
$ |
754 |
|
|
$ |
12,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share—Basic
|
|
$ |
0.45 |
|
|
$ |
0.77 |
|
|
$ |
0.24 |
|
|
$ |
0.10 |
|
|
$ |
1.56 |
|
|
Net
earnings per common share—Diluted
|
|
$ |
0.43 |
|
|
$ |
0.74 |
|
|
$ |
0.24 |
|
|
$ |
0.10 |
|
|
$ |
1.52 |
|
17.
LEGAL SETTLEMENT
On May
19, 2009, we filed a complaint in the United States District Court for the
Eastern District of Virginia 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 which granted
each of those defendants a license in specified ePlus patents. Pursuant to
the settlement agreements, we received payments in the aggregate amount of
approximately $3.5 million, and the complaint was dismissed with prejudice with
regard to those three defendants. We do not anticipate incurring any
additional costs arising as a result of these settlement agreements and there
are no further actions to be taken by us. We recognize the related
legal fees and expenses as they incur in the accompanying Consolidated
Statements of Operations.
In
addition, one of the above-referenced settlement agreements included an
additional payment of $125 thousand due on or before October 20, 2010. This
payment has not been recognized in our Consolidated Statements of Operations
because collectability is not reasonably assured. If this payment is
not received in accordance with the terms of the settlement agreement, the
patent license automatically terminates.