form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
For
the
fiscal year ended March
31,
2008
OR
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from ___to___.
Commission
file number: 0-28926
ePlus
inc.
(Exact
name of registrant as specified in its charter)
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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:
Title
of
each class Name of each exchange on which registered
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.01 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
No
S
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
No
S
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
S No
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. S
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
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Accelerated
filer
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Non-accelerated
filer (Do not check if a smaller reporting company)
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Smaller
reporting company S
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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
No
S
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, 2007 was
$38,114,666. The outstanding number of shares of common stock of ePlus as of May 30,
2008, was
8,263,241.
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,” “will,” “should,”
“intend,” “estimate,” “believe,” “expect,” “anticipate,” “project” and similar
expressions. Readers are cautioned not to place undue reliance on any
forward-looking statements made by or on our behalf. Any such statement speaks
only as of the date the statement was made. Except to the extent otherwise
required by federal securities laws, we do not undertake to address or update
forward-looking statements in future filings or communications regarding our
business or operating results, and do not undertake to address how any of the
risks and uncertainties described below may have caused results to differ from
discussions or information contained in previous filings or communications.
In
addition, any of the matters discussed below may have affected past, as well
as
current, forward-looking statements about future results. There can be no
assurances that forward-looking statements will be achieved, and actual results
could differ materially from those suggested by the forward-looking statements.
Some of the important factors that could cause our actual results to differ
materially from those projected in any forward-looking statements include,
but
are not limited to, the following:
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changes
in the economy which impact overall spending levels for IT equipment,
and
the IT budget of our customers;
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our
reliance on the support of our vendors, manufacturers, and publishers
to
provide availability, competitive pricing, marketing funds, marketing
support, and other programs and incentives on products that we
resell;
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our
reliance on the support of our subcontractors and outsourced service
providers to render quality services at reasonable prices for
us;
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reliable
operation of our information technology systems including voice and
data
networks provided by third parties, and disaster recovery (if
needed);
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the
successful integration and operation of
acquisitions;
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actions
of competitors, including manufacturers and publishers of products
we
sell;
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the
informal inquiry from the Securities and Exchange Commission (“SEC”) and
stockholder litigation related to our historical stock option granting
practices and the related restatement of our consolidated financial
statements;
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the
risks associated with developing and licensing our proprietary
software;
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our
ability to maintain and increase advanced professional services by
retaining highly-skilled personnel and vendor
certifications;
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adverse
changes in the global capital markets that could increase our borrowing
costs, reduce availability of financing, or changes in terms and
conditions that adversely affect our ability to
borrow;
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energy
prices that could increase our shipping costs, our costs to market
to our
customers, or provide services
on-site;
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our
dependence on key personnel;
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risk
that purchased goodwill or amortizable intangible assets become
impaired;
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failure
to comply with the terms and conditions of our public sector
contracts;
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rapid
changes in product standards;
and
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intellectual
property infringement claims and challenges to our registered trademarks
and trade names.
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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—Results of Operations” sections contained elsewhere in this
report, as well as any subsequent Reports on Form 10-Q and Form 8-K
and
other filings with the SEC.
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PART
I
ITEM
1. BUSINESS
GENERAL
Our
company was founded in 1990 under the name Municipal Leasing Corporation.
Subsequently, the name was changed to MLC Group, Inc. In 1996, our company
engaged in a holding company reorganization whereby MLC Group became a wholly
owned subsidiary of MLC Holdings, Inc., a newly formed Delaware corporation.
MLC
Holdings, Inc. changed its name to ePlus inc. in
1999. 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 and consulting
services. Our second segment is our financing business unit that
consists of the equipment and financing business to both commercial and
government-related entities and the associated business process outsourcing
services. See Note 13, “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
Content Services, inc.;
and |
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ePlus
Document Systems,
inc. |
Financing
Business
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ePlus
Jamaica, inc.; and |
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 through which
our
IT reseller and technical support conducts 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 their respective countries; however, neither entity has conducted
any significant business, or has any employees or business locations outside
the
United States.
OUR
BUSINESS
We
have
evolved our product set by expanding our technology credentials with our key
vendors and developing proprietary software and consulting
services. Our primary focus is to deliver strategic business value
through the use of technology and 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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leasing
and business process services; and
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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.
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We
have
been in the business of selling, leasing, financing, and managing information
technology and other assets for more than 17 years and have been providing
software for more than eight years. We currently derive the majority of our
revenues from IT product sales, professional services, and leasing. We sell
primarily by using our internal sales force and through vendor relationships
to
commercial customers; 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. For the customer, we can offer a multi-disciplinary
approach for implementing, controlling, and maintaining cost savings throughout
their organization, allowing 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 solutions, such
as
OneSource®.
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Advanced
Professional
Services: We provide an array of Internet telephony and
Internet communications, 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 competitive and tailored leasing and financing options for IT
and
capital assets. These 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 stand-alone solutions or be a component of a
bundled
solution. These include eProcurement, asset management, document
management, and product content management
software.
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Consulting
Services:
We provide business process consulting, solution definition
and
implementation, and customer software application
design.
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Our
proprietary software and associated business process services are key functions
of supporting and retaining customers for our 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 70,000 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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We
believe there is increased demand for energy efficient (“green”) data
solutions and customers are directing their spending on solutions
that
reduce energy consumption, footprint, and costs. These
solutions include server consolidation and virtualization, advanced
Internet communications, and replacing older technology with more
energy
efficient new technology. We have continued to focus our
advanced technology solutions and 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 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.
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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 client purchasing as evidenced by our development of our
various integrated solutions beginning in 1999 (earlier than many other direct
marketers) and we continue to believe that our bundled solution set is
unsurpassed 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 clients 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 will become the 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, and national 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 are not aware of any
competitors in the United States with both the breadth and depth of solution
offerings that we have.
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 in all areas of business against local, regional, and
national firms, including banks, specialty finance companies, hedge funds,
vendors' captive finance companies, and third-party leasing companies. Banks
and
large specialty financial services companies sell directly to business clients,
particularly larger enterprise clients, 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 clients.
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 clients’ 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, dispute
resolution, 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 client 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 clients 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.
The
software market is in a constant state of change due to overall market
acceptance and economic conditions among other factors. There are a number
of
companies developing and marketing business-to-business electronic commerce
solutions targeted at specific vertical markets. Other competitors are also
attempting to migrate their technologies to an Internet-enabled platform. Some
of these competitors and potential competitors include enterprise resource
planning system vendors and other major software vendors that are expected
to
sell their procurement and asset management products along with their
application suites. These enterprise resource planning 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 Procure+®, 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 us. In addition,
some
of these competitors may be able to respond more quickly to new or changing
opportunities, technologies, and client 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
clients, 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 client
base;
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expanding
our client base;
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making
strategic acquisitions;
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expanding
our professional services
offerings;
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strengthening
vendor relationships; and
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enhancing
the effectiveness of our Internet offerings, especially
OneSource®.
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Selling
Additional Products and Services to Our Existing Client 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 offering is an
important differentiating factor from our competitors.
In
2006,
we rolled out a new software portal called OneSource®, which is an integrated
order entry platform that we expect will enhance product sales, increase
incremental sales, and reduce costs by eliminating touch-points for order
automation.
In
2008,
we started a telesales group consisting of 10 experienced telesales sales
professionals and two engineers. This group is focused on marketing
to existing and new customers primarily within the geographic reach of our
existing service areas.
Expanding
Our Client 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 client 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.
Expand
Advanced Professional Service Offerings
Since
2004, we have focused on gaining engineering certifications and advanced
professional services expertise in advanced technologies of strategic vendors,
such as Cisco Systems, IBM, HP, and Network Appliance. We are especially focused
on internetworking, 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
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 the tactical level, by having
more than 31 locations, we are able to maintain direct relationships with key
sales and marketing personnel, 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
Our
software has been acquired from third-party vendors or has been developed by
us.
In earlier stages of our development, we relied heavily on licensed software
and
outsourced development, but with the acquisition of the software products and
the hiring of the employees obtained from acquisitions over the past several
years, much of our current software development is handled by us. We
expense software development costs as they are 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, 2008, there were no such
costs capitalized and $189 thousand was amortized. For the year ended
March 31, 2007, $59 thousand was capitalized and $266 thousand was amortized
for
software to be made available to customers. We have also outsourced
certain programming tasks to an offshore software-development company. We
market both software that we own and software for which we have obtained
perpetual license rights and source code from a third party. Subject to certain
exceptions, we generally retain the source code and intellectual property rights
of the customized software.
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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on-demand,
hosted, or subscription; and
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software-as-a-service,
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 costs 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 70,000 potential
customers in our target market. We undertake many of our direct marketing
campaigns and 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 primarily on a commission basis. 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 10 experienced telesales sales professionals and two
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, 2008, our sales force was organized regionally in 34 office locations
throughout the United States. See Item 2, “Properties” of this Form 10-K for
additional office location information. As of March 31, 2008, our sales
organization included 256 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 three electronic sourcing system patents, two catalog
management patents, and three image transmission management patents in the
United States, among others. We have a counterpart of the electronic sourcing
system patents in nine European forums, and of the image transmission management
patents in four additional different 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 any 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. We also have the following registered
service/trademarks: ePlus, ePlusSuite,
Procure+,
Manage+, Service+, Finance+, ePlus Leasing, International
Computer Networks, Docpak, Simply Faster, Viewmark, Digital Paper, Intranetdocs,
OneSource, Content+, eECM, ICN, and ePlus
Enterprise Cost
Management. We also 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 can 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, leasing, financing, providing procurement,
document management and asset management software and managing information
technology and various other assets for over ten years and 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 larger manufacturer
relationships include HP, IBM, Cisco, and Microsoft Corporation. Tech Data
and
Ingram Micro, Inc. are our largest distributors. 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 a 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 to
a
minimum. The products we sell typically have payment account terms ranging
from
payment in advance, by credit card, due upon delivery, or up to a maximum 90
days to pay, depending on the customer’s credit and payment
structuring.
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. 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, medical
equipment, industrial-related 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 on 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 or leasing the equipment
to an
equipment broker or 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 all of 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 contract origination and management,
cash
management, servicing, collections, remarketing and accounting. Whenever
possible and financially prudent, we use non-recourse financing (which is
limited to the underlying equipment and the specific lessee 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. We try
to
obtain commitments for these asset sales before asset origination in a financing
transaction. 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
protect against entering into lease transactions that may have undesirable
financial terms or unacceptable levels of 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 on many of the items that we lease, sell and service. We rely on
our
experience or outside opinions in the process of setting and adjusting our
sale
prices, lease rate factors and the residual values.
Default
and Loss
Experience. During the fiscal year ended March 31, 2008, we reduced
reserves for credit losses by $0.2 million, and incurred actual credit
losses of $0.5 million. During the fiscal year ended March 31, 2007,
we reduced reserves for credit losses by $0.6 million, and incurred actual
credit losses of $0.7 million.
EMPLOYEES
As
of
March 31, 2008, we employed 640 full-time and 18 part-time
employees. These 658 employees operated through 34 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:
|
|
Number
of Employees
|
|
|
256 |
|
|
132 |
|
|
187 |
Software
and Implementations
|
75 |
|
|
8 |
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 of 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.
EXECUTIVE
OFFICERS
The
following table sets forth the name, age and position, as of March 31, 2008,
of
each person who was an executive officer of ePlus
on March 31, 2008. There are no family relationships between any
director or executive officer and any other director or executive officer of
ePlus.
|
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
|
|
|
|
|
|
Director,
Chairman of the Board, President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
Director
and Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice President and Treasurer
|
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.
Steven
J. Mencarini
joined us in June 1997 as Senior Vice President and CFO. 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.
Kleyton L. Parkhurst joined
us in May 1991
as Director of Finance. Mr. Parkhurst has served as Secretary or
Assistant Secretary and Treasurer since September
1996. Mr. Parkhurst is currently also a Senior Vice
President, and is responsible for all of our mergers and acquisitions, investor
relations, and marketing. Mr. Parkhurst is a 1985 graduate of
Middlebury College.
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 shall resign or be removed as provided by the
Bylaws.
ITEM
1A. RISK FACTORS
We
Have Received Inquiries
Related to Our Historical Stock Option Grant
Practices.
As
described elsewhere herein, we are involved in a shareholder derivative action
in connection with certain historical stock option grants. We have filed a
motion to dismiss the plaintiff’s amended complaint. In June 2006,
our Audit committee commenced a voluntary investigation (the “Audit Committee
Investigation” or “Investigation”) of our historical practices related to stock
option grants. In August 2006, we filed a Form 8-K which disclosed
that based on its review and assessment, the Audit Committee preliminarily
concluded that the appropriate measurement dates for determining the accounting
treatment for certain stock options we granted differ from the recorded
measurement dates used in preparing our Consolidated Financial
Statements. Accordingly, it was further disclosed that we would
restate our previously issued financial statements for the fiscal years ended
March 31, 2004 and 2005, as well as previously reported interim financial
information, to reflect additional non-cash charges for stock-based compensation
expense and the related tax effects in certain reported periods. The
Form 10-K for the year ended March 31, 2006 which included the restated
financial statements for the years ended March 31, 2004 and 2005 was filed
on
August 16, 2007. Also, in August 2006, the Audit Committee
voluntarily contacted and advised the staff of the SEC of its Investigation
and
the Audit Committee’s preliminary conclusion that a restatement would be
required. The staff of the SEC opened an informal
inquiry.
We
have
cooperated and intend to continue to cooperate with the SEC. The
inquiry of the staff of the SEC may look at the accuracy of the stated dates
of
our historical option grants, our disclosures regarding executive compensation,
whether all proper corporate and other procedures were followed, and whether
our
historical financial statements are materially accurate and other issues.
Counsel for the Audit Committee also received an inquiry from the Office of
the
United States Attorney for the Eastern District of Virginia in October
2006. We are currently being audited by the Internal Revenue Service
(“IRS”). In connection with this audit, the IRS has requested
information concerning stock options. Regardless of the outcome of
these inquiries and the derivative action, we may continue to incur substantial
costs, which could have a material adverse effect on our financial condition
and
results of operations. In addition, it is possible that other governmental
or
regulatory agencies may undertake inquiries with respect to our historical
option grants. Such inquiries could lead to formal proceedings
against us, as well as our officers and/or directors. We cannot
provide assurance that the SEC or the IRS will (i) agree with the manner in
which we have accounted for and reported, or not reported, the financial and
tax
impacts, or (ii) not find inappropriate activity in connection with our
historical stock option practices. If the SEC or the IRS disagree with our
financial or tax adjustments and such disagreement results in material changes
to our historical financial statements, we may have to further restate our
prior
financial statements, amend prior filings with the SEC, or take other actions
not currently contemplated.
Because
We Did Not File Our
Periodic Reports With the SEC on a Timely Basis, Our Common Stock Was Delisted
From The Nasdaq Global Market.
Due
to
the findings of the Audit Committee Investigation and the resulting restatement,
we did not file any of our periodic reports with the SEC on a timely basis
beginning with our Annual Report on Form 10-K for the fiscal year ended March
31, 2006. Consequently, our common stock was delisted from the Nasdaq
Global Market on July 20, 2007. As a result, the price of our stock
and the ability of our stockholders to trade in our stock may be adversely
affected. Although we are now current with SEC reporting
requirements, we cannot determine how long it will take for us to
regain compliance with the Nasdaq listing requirements and reapply for listing
of our common stock.
We
Have Identified Material Weaknesses
and Concluded that Our
Internal Control Over Financial Reporting was not Effective as of March 31,
2008.
We
have
identified material weaknesses related to the cut-off of accrued
liabilities and the presentation of the sale of several groups of operating
leases in the Condensed Consolidated Statement of Cash Flows for the nine months
ended December 31, 2007. As a result, we have concluded that our internal
control over financial reporting as of March 31, 2008 was not
effective. Remediation of these material weaknesses may be costly and
time consuming. The inability to maintain effective internal control
over financial reporting could adversely affect our financial results, the
market price of our common stock or our operations.
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.
We
May Not Reserve Adequately for Our Credit Losses.
Our
reserve for credit losses reflects management’s judgment of the loss potential.
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 for our
accounts payable process.
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 such suits are normal risks, and the
cost of defense are normal costs 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 downward turn in the economy, or an increase in
competition, sales of capital equipment may decrease, thus adversely affecting
our earnings.
We
Face Substantial
Competition From Larger Companies As Well As Our Vendors and Financial
Partners.
In
our
reseller business, direct marketing to end-users by manufacturers, rather than
through resellers such as us, may adversely affect future sales. Many
competitors compete principally on the basis of price and may have lower costs
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 gain additional business.
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. While the vendor consideration we received
results in a reduction of our cost of sales, product and services or selling
and
administrative expenses, the level of such consideration we receive from
some manufacturers may decline in the future. Such a decline could decrease
our
gross margin and have a material adverse effect on our earnings 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.
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.
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.
Our
earnings are susceptible to fluctuations for a number of reasons, including
the
seasonal and cyclical nature of our customers’ procurement patterns. Our
earnings will continue to be affected by fluctuations in our historical
business, such as lower sales of equipment, increased direct marketing
by
manufacturers rather than through distributors, reductions in realized
residual
values, fluctuations in interest rates, and lower overall sales activity.
In the
event our revenues or earnings 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.
We
May Not Be Able to
Realize Our Entire Investment in the Equipment We Lease.
We
lease
various types of equipment to customers through two distinct types of
transactions: capital leases and operating leases. The duration of an operating
lease is shorter relative to the equipment’s useful life. We bear a greater risk
in operating leases in that we may not be able to remarket the equipment on
terms that will allow us to fully recover our investment.
At
the
inception of each lease, we estimate the fair market value of the item as a
residual value for the leased equipment based on the terms of the lease
contract. A decrease in the market value of such equipment at a rate greater
than the rate we expected, whether due to rapid technological obsolescence
or
other factors, would adversely affect the residual values of such equipment.
Any
such loss, which is considered by management to be other than temporary in
nature, would be recognized in the period of impairment in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for
Leases.” Consequently, there can be no assurance that our
estimated residual values for equipment will be realized.
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 and leverage these
operations to generate revenue and earnings growth will 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.
If
Purchased Goodwill Or
Amortizable Intangible Assets Become Impaired, We May Be Required To Record
A
Significant Charge To Earnings.
In
accordance with U.S. generally accepted accounting principles, we perform an
annual review in the second quarter of every year, or more frequently if
indicators of potential impairment exist, to determine if the carrying value
of
the recorded goodwill is impaired. Events or circumstances that could trigger
an
impairment review include a significant adverse change in legal factors or
in
the business climate, unanticipated competition, a loss of key personnel,
significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, significant negative industry or economic
trends, significant declines in our stock price for a sustained period or
significant underperformance relative to expected historical or projected future
results of operations. We may be required to record a significant non-cash
charge to earnings in our consolidated financial statements during the period
in
which any impairment of our goodwill or amortizable intangible assets is
determined, resulting in a negative effect on our results of
operations.
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. We
cannot provide assurance that our means of protecting our intellectual property
rights will be adequate.
The
Limited Operating
History of Our e-Commerce Related Products and Services Makes It Difficult
to
Evaluate Our Business and Our Prospects.
Our
comprehensive set of solutions, introduced in May 2001, has had a limited
operating history. As a result, we expect to encounter some of the challenges,
risks, difficulties and uncertainties frequently encountered by early-stage
companies using new and unproved business models 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 Cannot
Provide Assurance That We Will 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 cannot
provide assurance that we will be able to compete successfully against current
or future competitors, or that competitive pressures faced by us will not harm
our business, operating results or financial condition. In addition, the market
for electronic procurement solutions is relatively new and 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.
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. 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 some participants in bundled services
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.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
As
of
March 31, 2008, we operated from 34 office locations, 13 of which are home
offices. Our total leased square footage as of March 31, 2008, was approximately
165 thousand square feet for which we incurred rent expense of approximately
$220 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 current
employees as of March 31, 2008, the square footage and the general office
functions.
|
Location
|
|
|
Company
|
|
|
Employees
|
|
|
Square
Footage
|
|
|
Function
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ePlus
Document Systems,
inc.
|
|
|
271
|
|
|
|
55,880
|
|
|
Corporate
and subsidiary headquarters, sales office, technical support and
warehouse
|
|
|
|
|
|
|
|
28
|
|
|
|
9,155 |
|
|
Sales
office and technical development
|
|
|
|
|
|
|
|
48
|
|
|
|
14,303 |
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
42
|
|
|
|
11,200 |
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
27
|
|
|
|
8,370 |
|
|
Sales
office, technical support and warehouse
|
|
|
|
|
|
|
|
21
|
|
|
|
8,000 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
29
|
|
|
|
6,228 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
19
|
|
|
|
5,121 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
17
|
|
|
|
4,000 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
12
|
|
|
|
5,092 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
18
|
|
|
|
8,428
|
|
|
Sales
office-shared, technical support and warehouse
|
|
|
|
|
ePlus
Content Services,
inc.
|
|
|
24
|
|
|
|
9,813 |
|
|
Subsidiary
headquarters, sales office and technical support
|
|
|
|
|
|
|
|
11
|
|
|
|
2,345 |
|
|
Subsidiary
headquarters, sales office and technical
development
|
|
|
|
|
|
|
|
9
|
|
|
|
4,718 |
|
|
Sales
office and technical support
|
|
|
|
|
|
|
|
12
|
|
|
|
3,190 |
|
|
Sales
office and technical support
|
|
|
|
|
28
|
|
|
|
9,121 |
|
|
Sales
offices and technical support
|
Home
Offices/Customer Sites
|
|
|
42
|
|
|
|
|
|
|
|
Our
largest office location is in Herndon, VA, which has a lease expiration date
of
December 31, 2009.
ITEM
3. LEGAL
PROCEEDINGS
Cyberco
Related Matters
We
have
been involved in several matters arising from four separate installment sales
to
a customer named Cyberco Holdings, Inc. (“Cyberco”). The Cyberco principals were
perpetrating a scam, which victimized several dozen leasing and lending
institutions. Five Cyberco principals have pled guilty to criminal conspiracy
and/or related charges including bank fraud, mail fraud and money laundering.
Cyberco, related affiliates, and at least one principal are in Chapter 7
bankruptcy. No future payments are expected from Cyberco.
Two
lenders who financed the Cyberco transactions filed claims against our
subsidiary, ePlus Group, inc., seeking to recover their losses. Those
lawsuits have been resolved. In the one remaining Cyberco-related
matter in which we are a defendant, one of the lenders, 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. ePlus Group has already paid to BoA $4.3
million awarded to BoA in the lawsuit between those parties. 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 a pending suit,
described below, by ePlus Group against BoA 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.
We
are
also pursuing avenues to recover our losses relating to Cyberco.We sought
insurance coverage from our insurance carrier, Travelers Property Casualty
Company of America (“Travelers”). We filed a Complaint seeking a declaratory
judgment that our liability to the two lenders referenced above is covered
by
our insurance policy. The court found that we did not have insurance coverage
for those matters, and granted summary judgment for Travelers. In March 2008,
the United States Court of Appeals for the Second Circuit affirmed the lower
court’s finding of no coverage. Two other matters are still
pending. First, we filed two claims in state court in California
against BoA seeking relief on matters not adjudicated between the parties in
Virginia. On or about May 2, 2008, one of those claims was dismissed, and a
motion to dismiss the other claim is pending. Second, 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
On
January 18, 2007 a shareholder derivative action related to stock option
practices was filed in the United States District Court for the District of
Columbia. The amended complaint names ePlus inc. as nominal defendant and
personally names eight individual defendants who are directors and/or executive
officers of ePlus inc. The amended complaint alleges violations of federal
securities law, and various state law claims such as breach of fiduciary duty,
waste of corporate assets and unjust enrichment. The amended complaint seeks
monetary damages from the individual defendants and that we take certain
corrective actions relating to option grants and corporate governance, and
attorneys’ fees. We have filed a motion to dismiss the amended complaint. We
cannot predict the outcome of this suit.
We
are
currently engaged in a dispute with the government of the District of Columbia
(“DC”) regarding personal property taxes on property we financed for our
customers. DC is seeking approximately $508 thousand, plus interest and
penalties, relating to property we financed for our customers. We believe the
tax is owed by our customers, and are seeking resolution in DC’s Office of
Administrative Hearings. We cannot predict the outcome of this matter. While
management does not believe this matter will have a material effect on its
financial condition and results of operations, resolution of this dispute is
ongoing.
There
can
be no assurance that these or any existing or future litigation arising in
the
ordinary course of business or otherwise will not have a material adverse effect
on our business, consolidated financial position, or results of operations
or
cash flows.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
At
the
time of filing this Annual Report on Form 10-K, our common stock is traded
over
the counter on the Pink Sheets under the symbol “PLUS.PK”. During the
fiscal year ended March 31, 2007, our common stock traded on The Nasdaq
Global Market (“NASDAQ”) under the
symbol “PLUS.” During the second quarter of fiscal year March 31, 2008, we
were delisted from NASDAQ due to a delay in the filings of our fiscal year
2006
and 2007 Form 10-K. With the filing of our Form 10-Q for the quarter
ended December 31, 2007 on May 5, 2008, all of our required quarterly and annual
reports have been filed with the SEC. The following table sets
forth the range of high and low sale prices for our common stock during each
quarter of the two fiscal years ended March 31, 2008.
|
Quarter
Ended
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
May
30, 2008, the closing price of our common stock was $11.90 per
share. On May 30, 2008, there were 156 shareholders of
record of our common stock. We believe there are over 400 beneficial holders
of
our common stock.
As
described in Note 15, “The Nasdaq Stock Market Proceedings” to our Consolidated
Financial Statements included elsewhere in this report, effective at the opening
of business on Friday, July 20, 2007, our common stock was delisted from The
Nasdaq Global Market due to non-compliance with financial statement reporting
requirements.
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. There is also a contractual restriction on our ability to pay
dividends. Our leasing business credit facility restricts dividends to 50%
of
net income accumulated after September 30, 2000. 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 the
elimination of this restriction and the absence of similar restrictions in
other
agreements, our financial condition, results of operations and any other factors
deemed relevant by our Board.
PURCHASES
OF OUR COMMON STOCK
We
did
not purchase any ePlus inc. common
stock
during the year ended March 31, 2008.
The
timing and expiration date of the stock repurchase authorizations are included
in Note 10, “Stock Repurchase” to our Consolidated Financial Statements
included elsewhere in this report.
ITEM
6. SELECTED
FINANCIAL DATA
This
Item
has been omitted based on the Company's 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
basic business segments: our technology sales business unit and our financing
business unit.
Financial
Highlights
During
the year ended March 31, 2008, sales increased 7.3% to $849.3 million and net
income decreased 5.9% to $16.4 million as compared to the prior fiscal
year. Gross margin for product and services increased 0.6% to
11.8%. Cash increased $18.7 million to $58.4 million while recourse
and non-recourse notes payable decreased $59.3 million to $93.8
million. Sales for the full year ended March 31, 2008 increased as
compared to the prior fiscal year. We observed that demand for our
product and services was not as strong in the second half of the year due to
an
overall slow down in the economy.
Business
Unit Overview
Technology
Sales Business Unit
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.
Our
technology sales business unit derives revenue from the sales of new
equipment and service engagements. These revenues are reflected in our
Consolidated Statements of Operations under sales of product and services and
fee and other income. Many customers purchase information technology
equipment from us using Master Purchase Agreements (“MPAs”) in which the terms
and conditions of our relationship are stipulated. Some MPAs contain
pricing arrangements. However, the MPAs do not contain purchase volume
commitments and most have 30-day terminations for convenience clauses. In
addition, many of our customers place orders using purchase orders without
an
MPA in place. A substantial portion of our sales of product and
services are from sales of Hewlett Packard and CISCO products, which
represent approximately 22% and 38% of sales, respectively, for the year
ended March 31, 2008.
Included
in the sales of product and services in our technology sales business unit
are
certain service revenues that are bundled with sales of equipment and are
integral to the successful delivery of such equipment. Our service
engagements are generally governed by Statements of Work and/or Master Service
Agreements. They are primarily fixed fee; however, some agreements are time
and materials or estimates. We endeavor to minimize the cost of sales in
our technology sales business unit through vendor consideration programs
provided by manufacturers. The programs are generally governed by our
reseller authorization level with the manufacturer. The authorization level
we achieve and maintain governs 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 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
Platinum Major (National)
|
|
|
Cisco
Gold DVAR (National)
|
|
|
Microsoft
Gold (National)
|
|
|
Sun
SPA Executive Partner (National)
|
|
|
Sun
National Strategic DataCenter Authorized
|
|
|
Premier
IBM Business Partner (National)
|
|
|
Lenovo
Premium (National)
|
|
|
|
|
|
|
Through
our technology sales business unit we also generate revenue through hosting
arrangements and sales of software. These revenues are reflected in 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) brokerage
fees earned for the placement of financing transactions; and (4) interest and
other miscellaneous income.
Financing
Business Unit
The
financing business unit 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 in our Consolidated
Statements of Operations under lease revenues and sales of leased
equipment.
Lease
revenues consist of rentals due under operating leases, amortization of unearned
income on direct financing and sales-type leases and sales of leased assets
to
lessees. These transactions are accounted for in accordance with SFAS No.
13. Each lease is classified as either a direct financing lease, sales-type
lease, or operating lease, as appropriate. Under the direct financing and
sales-type lease methods, we record the net investment in leases, which consists
of the sum of the minimum lease payments, initial direct costs (direct financing
leases only), and unguaranteed residual value (gross investment) less the
unearned income. The difference between the gross investment and the cost
of the leased equipment for direct finance leases is recorded as unearned income
at the inception of the lease. The unearned income is amortized over the
life of the lease using the interest method. Under sales-type leases, the
difference between the fair value and cost of the leased property plus initial
direct costs (net margins) is recorded as revenue at the inception of the
lease. For operating leases, rental amounts are accrued on a straight-line
basis over the lease term and are recognized as lease revenue. SFAS No. 140
establishes criteria for determining whether a transfer of financial assets
in
exchange for cash or other consideration should be accounted for as a sale
or as
a pledge of collateral in a secured borrowing. Certain assignments of
direct finance leases we make on a non-recourse basis meet the criteria for
surrender of control set forth by SFAS No. 140 and have, therefore, been treated
as sales for financial statement purposes.
Sales
of
leased equipment represent revenue from the sales of equipment subject to a
lease in which we are the lessor. 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. Such sales of leased equipment prior to the
expiration of the lease term may have the effect of increasing revenues and
net
earnings during the period in which the sale occurs, and reducing revenues
and
net earnings otherwise expected in subsequent periods.
We
have
expanded our product and service offerings under our comprehensive set of
solutions which represents the continued evolution of our original
implementation of our e-commerce products entitled ePlusSuite. The
expansion to our bundled solution is a framework that combines our IT sales
and
professional services, leasing and financing services, asset management software
and services, procurement software, and electronic catalog content management
software and services.
We
expect
to expand or open new sales locations and hire additional staff for specific
targeted market areas in the near future whenever we can find both experienced
personnel and qualified geographic areas.
As
a
result of our acquisitions and expansion of sales locations, our historical
results of operations and financial position may not be indicative of our future
performance over time.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”
(“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework
for measuring fair value in accordance with U.S. GAAP and expands disclosures
about fair value measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Therefore, a
fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. The provisions of
SFAS
No. 157 were scheduled to be effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. In February 2008, the
FASB issued Staff Position No. FAS 157-2, "Effective Dates of FASB
Statement
No. 157," which defers the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2007. We are in the process
of
evaluating the impact, if any, SFAS No. 157 will have on our financial condition
and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement No.
115” ("SFAS No. 159"). SFAS No. 159 permits an entity, at specified
election dates, to choose to measure certain financial instruments and other
items at fair value. The objective of SFAS No. 159 is to provide entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently, without having to apply complex
hedge accounting provisions. SFAS No. 159 is effective for accounting periods
beginning after November 15, 2007. We are in the process of evaluating the
impact, if any, SFAS No. 159 will have on our financial condition and results
of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
No. 141R”), which replaces SFAS 141. SFAS No. 141R applies to all
transactions in which an entity obtains control of one or more businesses,
including those without the transfer of consideration. SFAS No. 141R
defines the acquirer as the entity that obtains control on the acquisition
date. It also requires the measurement at fair value the acquired
assets, assumed liabilities and noncontrolling interest. In addition,
SFAS No. 141R requires the acquisition and restructuring related cost be
recognized separately from the business combinations. SFAS No. 141R
requires that goodwill be recognized as of the acquisition date, measured as
residual, which in most cases will result in the excess of consideration plus
acquisition-date fair value of noncontrolling interest over the fair values
of
identifiable net assets. Under SFAS No. 141R, “negative goodwill” in
which consideration given is less than the acquisition-date fair value of
identifiable net assets, will be recognized as a gain to the
acquirer. SFAS No. 141R is applied prospectively to business
combinations for which the acquisition date is on or after the first annual
reporting period beginning on or after December 15, 2008. We are
evaluating the impact of SFAS No. 141R, if any, to our financial position and
statement of operations. We will adopt SFAS No. 141R for future
business combinations that occur on or after April 1,
2009.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with 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 FIN 48. Estimates in the assumptions used in the valuation of our stock
option expense are updated periodically and reflect conditions that existed
at
the time of each new issuance of stock options. 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 routinely 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, leased revenues and sales of software. Our revenue
recognition policies vary based upon these revenue sources. We adhere
to guidelines and principles of sales recognition described in Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition,” issued
by the staff of the SEC. Under SAB No. 104, sales are recognized when the
title and risk of loss are passed to the customer, there is persuasive evidence
of an arrangement for sale, delivery has occurred and/or services have been
rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Using these tests, the vast majority of our 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 for these sales in accordance with Emerging Issues Task Force
("EITF") 00-21, “Accounting
for Revenue Arrangements with
Multiple Deliverables”.
Accordingly, we recognize sales
from delivered items only when the
delivered item(s) has value to the client on a stand alone basis, there is
objective and reliable evidence of the fair value of the undelivered item(s),
and 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.
We
evaluate residual values on a quarterly basis and record any required changes
in
accordance with SFAS No. 13, paragraph 17.d., in which impairments of residual
value, other than temporary, are recorded in the period in which the impairment
is determined. Residual values are affected by equipment supply and demand
and by new product announcements by manufacturers.
We
seek
to realize the estimated residual value at lease termination mainly through:
(1)
renewal or extension of the original lease; (2) the sale of the equipment either
to the lessee or on the secondary market; or (3) lease of the equipment to
a new
customer. The difference between the proceeds of a sale and the remaining
estimated residual value is recorded as a gain or loss in lease revenues when
title is transferred to the lessee, or if the equipment is sold on the secondary
market, in sales of product and services and cost of
sales, product and services when title is transferred to the
buyer.
ASSUMPTIONS
RELATED TO GOODWILL. We account for our acquisitions using the purchase
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 would be 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.
As
goodwill is not amortized, goodwill balances are regularly assessed for
potential impairment. Such assessments require an analysis of future cash
flow projections as well as a determination of an appropriate discount rate
to
calculate present values. Cash flow projections are based on
management-approved estimates. Key factors used in estimating future cash
flows include assessments of labor and other direct costs on existing contracts,
estimates of overhead costs and other indirect costs, and assessments of new
business prospects and projected win rates. Significant changes in the
estimates and assumptions used in purchase accounting and goodwill impairment
testing can have a material effect on our consolidated financial
statements.
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, we estimate that we will obtain our targets based upon historical
data.
Vendor
consideration received pursuant to volume sales incentive programs is recognized
as a reduction to cost of sales, product and services in accordance with EITF
Issue No. 02-16, “Accounting
for Consideration Received from a Vendor by a Customer (Including a Reseller
of
the Vendor’s Products).” Vendor consideration received pursuant to volume
purchase incentive programs is allocated to inventories based on the applicable
incentives from each vendor and is recorded in cost of sales, product and
services, as the inventory is sold. Vendor consideration received pursuant
to shared marketing expense programs is recorded as a reduction of the related
selling and administrative expenses in the period the program takes place only
if the consideration represents a reimbursement of specific, incremental,
identifiable costs. Consideration that exceeds the specific, incremental,
identifiable costs is classified as a reduction of cost of sales, product and
services. The company accrues vendor consideration as earned based on sales
of
qualifying products or as services are provided in accordance with the terms
of
the related program. 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., discounted 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 in accordance with SFAS No. 48,“Revenue Recognition when
the Right
of Return Exists”. 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 products and services 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 dealing with 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. On April 1, 2006, we adopted SFAS No. 123 (revised
2004), “Share-Based
Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS
No. 123, “Accounting for
Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to
Employees,” and subsequently issued stock option related
guidance. We elected the modified-prospective transition method. Under the
modified-prospective method, we must recognize compensation expense for all
awards subsequent to adopting the standard and for the unvested portion of
previously granted awards outstanding upon adoption. We have recognized
compensation expense equal to the fair values for the unvested portion of
share-based awards at April 1, 2006 over the remaining period of service, as
well as compensation expense for those share-based awards granted or modified
on
or after April 1, 2006 over the vesting period based on the grant-date fair
values using the straight-line method. For those awards granted prior to the
date of adoption, compensation expense is recognized on an accelerated basis
based on the grant-date fair value amount as calculated for pro forma purposes
under SFAS No. 123.
RESULTS
OF OPERATIONS
The
Year Ended March 31, 2008 Compared to the Year Ended March 31, 2007
Revenues.
We
generated
total revenues during the year ended March 31, 2008 of $849.3 million compared
to revenues of $791.6 million for the year ended March 31, 2007, an increase
of
7.3%. This increase is due to increases in sales of product and
services and sales of leased equipment, partially offset by $17.5 million of
patent settlement income recognized in fiscal year 2007, which did not occur
in
fiscal year 2008.
Sales
of
product and services increased 4.3% to $731.7 million during the year ended
March 31, 2008 as compared to the prior fiscal year. This increase is
due to growth in our technology sales business unit, driven by a higher demand
from our existing customer base and the addition of new
customers. Sales of product and services represented 86.1% of total
revenue during the year ended March 31, 2008 as compared to 88.6% during the
prior fiscal year. The decrease in sales of product and services as a
percentage of total revenue is a result from a proportionately higher increase
in sales of leased equipment.
We
realized a gross margin on sales of product and services of 11.8% and 11.2%
for fiscal years ended March 31, 2008 and 2007, respectively. 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 vendors.
Lease
revenues increased 1.4% to $55.5 million for the year ended March 31, 2008
as
compared to the prior fiscal year. This increase is primarily driven
by sales of leased assets to our lessees, partially offset by the decrease
in revenue in our operating lease portfolio and direct financing sales
portfolio. From time to time, our lessees purchase leased assets from us
before and at the end of the lease term. During the year ended March
31, 2008, there was a 97.8% increase in the sale of leased assets to
lessees compared to the prior year. Our net investment
in
leased assets was $157.4 million as of March 31, 2008, a 27.5% decrease from
$217.2 million as of March 31, 2007. This decrease was primarily due to
a reduction in our direct financing and operating lease portfolio resulting
from the sale of lease schedules, terminations and the normal pay down by
customers of leases in our operating lease portfolio.
We
also
recognized revenue from the sale of leased equipment to non-lessee third
parties. During the years ended March 31, 2008 and March 31, 2007, we sold
a portion of our lease portfolio and recognized a gross margin of 3.9% and
2.1%,
respectively, on these sales. The revenue recognized on the sale of leased
equipment totaled approximately $45.5 million and $4.5 million, and the cost
of
leased equipment totaled $43.7 million and $4.4 million, for the years ended
March 31, 2008 and 2007, respectively. The revenue and gross margin
recognized on sales of leased equipment can vary significantly depending on
the
nature and timing of the sale, as well as the timing of any debt funding
recognized in accordance with SFAS No. 125, “Accounting for Transfers
and
Servicing of Financial Assets and Extinguishments of Liabilities,” as
amended by SFAS No. 140, “Accounting for Transfers
and
Servicing of Financial Assets and Extinguishments of
Liabilities.”
For
the
year ended March 31, 2008, fee and other income was $16.7 million, an increase
of 21.7% over the $13.7 million during the year ended March 31, 2007. This
increase was driven by increases in agent fees from manufacturers and revenue
from sales of our software in our technology sales business unit. 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 in our
normal course of business, but there is no guarantee that future transactions
of
the same nature, size or profitability will occur. Our ability to consummate
such transactions, and the timing thereof, may depend largely upon factors
outside the 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.
There
was
no patent settlement income during the year ended March 31,
2008. During the year ended March 31, 2007, patent settlement income
was $17.5 million. This settlement income was a result of a
settlement of a lawsuit filed against SAP America, Inc. and SAP AG in March
2006, as previously disclosed in our Form 10-K for the fiscal year ended March
31, 2007.
Costs
and Expenses. During
the year ended March 31, 2008, cost of sales, product and services increased
3.7% to $645.4 million as compared to $622.5 million during the same period
ended March 31, 2007. This increase corresponds to the increase in sales of
product and services in our technology sales business unit during the year
ended
March 31, 2008. Cost of sales, leased equipment increased 902.3% to
$43.7 million during the year ended March 31, 2008 as compared to the prior
fiscal year. This increase corresponds to the increase in sales of
leased equipment to non-lessee third parties in our financing business
unit.
Direct
lease costs increased 3.3% to $21.0 million during the year ended March 31,
2008
as compared to the same period in the prior fiscal year. The largest
component of direct lease cost is depreciation associated with operating
leases. Although our investment in operating leases decreased
at March 31, 2008 as compared to the prior year, the addition of
larger new equipment leases contributed to higher
depreciation.
Professional
and other fees decreased 20.3% to $12.9 million year ended March 31, 2008,
as compared to the prior fiscal year. This decrease is due to higher
expenses incurred in the year ended March 31, 2007 related to a lawsuit against
SAP and an investigation of stock option grants commenced by our Audit
Committee, as previously disclosed in our Form 10-K for the year ended March
31,
2007. The decrease was partially offset by an increase in audit fees and
legal fees during the year ended March 31, 2008.
Salaries
and benefits expense increased 2.0% to $72.3 million during the year ended
March 31, 2008 as compared to the same period in March 31, 2007. We
employed 658 people at March 31, 2008, as compared to 649 people at March 31,
2007. The salaries and benefits expense increased primarily due to
the recognition of share-based compensation expense of $1.6 million incurred
relating to the cancellation of 450,000 options during the first quarter of
fiscal 2008, as previously disclosed. This amount is partially offset
by a reversal of payroll taxes, interests and penalties of $243 thousand due
to
the expiration of statue of limitations.
General
and administrative expenses decreased 6.7% to $16.0 million during the year
ended March 31, 2008, as compared to the same period in the prior fiscal
year. This decrease was driven by increased efficiency in spending controls
coupled with costs related to lawsuit settlements that were incurred in the
prior fiscal year.
Interest
and financing costs decreased 19.8% to $8.1 million during the year ended March
31, 2008, as compared to the same period in the prior fiscal
year. This decrease is primarily due to lower interest costs and
related expenses as a result of a decrease in recourse and non-recourse notes
payable, as compared to same period in the prior fiscal year. The
decrease in non-recourse notes payable is due to a net reduction of
185 leases in our
debt portfolio during the year ended March 31, 2008, combined with a normal
reduction in principal and interest partially offset by new
leases. The decrease in recourse notes payable is due to the payment
of our balance of our credit facility with National City Bank on December 31,
2007.
Provision
for Income Taxes. Our provision for income taxes increased 6.7% to $13.6
million for the year ended March 31, 2008 as compared to $12.7 million during
the prior year. This increase is primarily due to an increase in
non-deductible share-based compensation expense related to the cancellation
of
450,000 options during the three months ended June 30, 2007. Our effective
income tax rates for the year ended March 31, 2008 and March 31, 2007 were
45.4%
and 42.3%, respectively.
Net
Earnings. The foregoing
resulted in net earnings of $16.4 million, a decrease of 5.9% for the year
ended
March 31, 2008, as compared to $17.4 million during the same period in the
prior
fiscal year.
Basic
and
fully diluted earnings per common share were $1.99 and $1.95 for the year
ended March 31, 2008, respectively, as compared to $2.11 and $2.04 for the year
ended March 31, 2007, respectively. Basic and diluted weighted average
common shares outstanding for the year ended March 31, 2008 were 8,231,741
and 8,378,683, respectively. For the year ended March 31, 2007, the
basic and diluted weighted average common shares outstanding were 8,224,929
and
8,534,608, 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 and payments
of principal and interest on indebtedness outstanding, acquisitions and to
repurchase our common stock.
Our
technology sales business segment, through our subsidiary ePlus Technology,
inc., finances its operations 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 will 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” in our Consolidated Balance
Sheets. Payments on the floor plan component are due on
three specified dates each month which is 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.
All
customer payments in our technology sales business segment are paid into lockbox
accounts. Once payments are cleared, the monies in the lockbox
accounts are automatically transferred to our accounts receivable facility
at
GECDF on a daily basis. To the extent the monies from the lockboxes
are insufficient to cover the amount due under the accounts receivable facility,
we make a cash payment to GECDF for the deficit. To the extent the
monies received from the lockbox account exceed the amounts due under the
accounts receivable facility, GECDF wires the excess funds to
us. These deficiency and excess payments are reflected as “net
repayments (borrowings) on recourse lines of credit” in our Consolidated
Statements of Cash Flows. We engage in this payment structure in
order to minimize our interest expense in connection with financing the
operations of our technology sales business segment.
We
believe that funds generated from operations, together with available credit
under our credit facilities, will be sufficient to finance our working capital,
capital expenditures and other requirements for at least the next twelve
calendar months. We expect to meet our cash requirements for the next
twelve months through a combination of cash on hand, cash generated from
operations and borrowings from our credit facilities.
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 declines, our cash flows from operations may be
substantially affected.
Cash
Flows
The
following table summarizes our sources and uses of cash over the periods
indicated (in thousands):
| |
|
Year
Ended |
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
11,824 |
|
|
$ |
(32,046 |
) |
|
Net
cash used in investing activities
|
|
|
(6,989 |
) |
|
|
(28,189 |
) |
|
Net
cash provided by financing activities
|
|
|
13,652 |
|
|
|
79,197 |
|
|
Effect
of exchange rate changes on cash
|
|
|
256 |
|
|
|
21 |
|
|
Net
increase in cash and cash equivalents
|
|
$ |
18,743 |
|
|
$ |
18,983 |
|
Cash
Flows from Operating
Activities. Cash provided by operating activities increased in the year
ended March 31, 2008, compared to the year ended March 31, 2007. Cash
flows from operations for the year ended March 31, 2008 resulted primarily
from
net earnings: (i) before depreciation and amortization and the impact of
stock-based compensation and (ii) after payments from lessees directly to
lenders – operating leases and investment
in leases and leased equipment—net . The decrease in
investment in leases and leased equipment—net and the gain on sale of
operating leases is primarily due to the sale of lease schedules and net
termination of operating leases. The loss on disposal of operating
lease equipment is a result of a combination of termination and sales of
leases. The increase in accounts receivable can be primarily
attributed to an increase of sales in the technology sales business segment
and
an increase in reserves.
Cash
Flows from Investing
Activities. Cash used in investing activities decreased in the
year ended March 31, 2008, compared to the year ended March 31,
2007. This decrease was primarily due to a decrease in our purchases
of operating lease equipment of $10.2 million for the year ended March 31,
2008
compared with $26.9 million for the year ended March 31, 2007. Cash
used in investing activities also included capital expenditures and were
partially offset by proceeds from the sale of operating lease
equipment.
Cash
Flows from Financing
Activities. Cash provided by financing activities decreased in
the year ended March 31, 2008, compared to the year ended March 31,
2007. Cash flows from financing activities for the year ended March 31, 2008
resulted primarily from non-recourse borrowings of $35.0 million, partially
offset by repayments of non-recourse borrowings and net repayments on recourse
lines of credit. Non-recourse borrowings decreased to $35.0 million
in the year ended March 31, 2008 from $95.4 million in prior fiscal year
primarily due to leases terminating and a subsequent reduction of non-recourse
borrowings from the termination of leases.
Liquidity
and Capital Resources
Debt
financing activities 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 (our equity investment in the equipment) must generally be
financed by cash flows from our operations, the sale of the equipment leased
to
third parties, or other internal means. Although we expect that the credit
quality of our leases and our residual return history will continue to allow
us
to obtain such financing, no assurances can be given that such financing will
be
available on acceptable terms, or at all. The financing necessary to support
our
leasing activities has principally been provided by non-recourse and recourse
borrowings. Historically, we have obtained recourse and non-recourse borrowings
from banks and finance companies. Non-recourse financings are loans whose
repayment is the responsibility of a specific customer, although we may make
representations and warranties to the lender regarding the specific contract
or
have ongoing loan servicing obligations. Under a non-recourse loan, we borrow
from a lender an amount based on the present value of the contractually
committed lease payments under the lease at a fixed rate of interest, and the
lender secures a lien on the financed assets. When the lender is fully repaid
from the lease payment, the lien is released and all further rental or sale
proceeds are ours. We are not liable for the repayment of non-recourse loans
unless we breach our representations and warranties in the loan agreements.
The
lender assumes the credit risk of each lease, and its only recourse, upon
default by the lessee, is against the lessee and the specific equipment under
lease. At March 31, 2008, our lease-related non-recourse debt
portfolio decreased 36.7% to $93.8 million as compared to $148.1 million at
March 31, 2007. This decrease is due to a net reduction of 185 leases in our debt
portfolio during the year ended March 31, 2008, combined with a normal
reduction in principal and interest partially offset by new
leases.
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, income tax accrual
and amounts collected and payable, such as sales taxes and lease rental payments
due to third parties. We had $30.4 million and $26.0 million of accrued expenses
and other liabilities as of March 31, 2008 and March 31, 2007, respectively,
an
increase of 17.0%.
Credit
Facility — Technology
Business
Our
subsidiary, ePlus
Technology, inc., has a financing facility from GECDF to finance its working
capital requirements for inventories and accounts receivable. There are two
components of this facility: (1) a floor plan component; and (2) an accounts
receivable component. As of March 31, 2008, the facility had an
aggregate limit of the two components of $125 million with an accounts
receivable sub-limit of $30 million. As of June 20, 2007, the facility had
an aggregate limit of the two components of $100 million. As of September
30, 2007, the facility with GECDF was amended to temporarily increase the total
credit facility limit to $100 million during the period from June 19, 2007
through August 15, 2007. On August 2, 2007, the period was extended from
August 15, 2007 to September 30, 2007 and then extended again on October 1,
2007
through October 31, 2007. Other than during the temporary increase periods
described above, the total credit facility limit was $85 million. The
accounts receivable component has a sub-limit of $30
million. Effective October 29, 2007, the aggregate limit of the
facility was increased to $125 million with an accounts receivable sub-limit
of
$30 million, and the temporary overline period was eliminated. Availability
under the GECDF facility may be limited by the asset value of equipment we
purchase and may be further limited by certain covenants and terms and
conditions of the facility. These covenants include but are not limited to
a minimum total tangible net worth and subordinated debt, and maximum debt
to
tangible net worth ratio of ePlus Technology,
inc. We were in compliance with these covenants as of March 31,
2008.
The
facility provided by GECDF requires a guaranty of up to $10.5 million by ePlus inc. The guaranty
requires ePlus inc. to
deliver its audited financial statements by certain dates. We have not
delivered the annual audited financial statements for the year ended March
31,
2008 included herein; however, GECDF has extended the delivery date to provide
the financial statements through August 15, 2008. The loss of the GECDF
credit facility could have a material adverse effect on our future results
as we
currently rely on this facility and its components for daily working capital
and
liquidity for our technology sales business and as an operational function
of
our accounts payable process.
Floor
Plan Component
The
traditional business of ePlus Technology,
inc. as a
seller of computer technology, related peripherals and software products is
financed through a floor plan component in which interest expense for the first
thirty- to forty-five days, in general, is not charged. The floor plan
liabilities are recorded as accounts payable—floor plan on our Consolidated
Balance Sheets, as they are normally repaid within the thirty- to forty-five
day
time frame and represent an assigned accounts payable originally generated
with
the manufacturer/distributor. If the thirty- to forty-five day obligation is
not
paid timely, interest is then assessed at stated contractual rates.
The
respective floor plan component credit limits and actual outstanding balances
(in thousands) for the dates indicated were as follows:
|
Maximum Credit
Limit at
March 31, 2008
|
|
|
Balance as of
March 31, 2008
|
|
|
Maximum Credit
Limit at
March 31,
2007
|
|
|
Balance as of
March 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable Component
Included
within the floor plan component, ePlus Technology,
inc. has an
accounts receivable component from GECDF, which has a revolving line of
credit. On the due date of the invoices financed by the floor plan
component, the invoices are paid by the accounts receivable component of the
credit facility. The balance of the accounts receivable component is then
reduced by payments from our customers into a lockbox and our available
cash. The outstanding balance under the accounts receivable component is
recorded as recourse notes payable on our Consolidated Balance
Sheets.
The
respective accounts receivable component credit limits and actual outstanding
balances (in thousands) for the dates indicated were as follows:
|
Maximum
Credit
Limit
at
March 31,
2008
|
|
|
Balance
as of
March 31,
2008
|
|
|
Maximum
Credit
Limit
at
March 31,
2007
|
|
|
Balance
as of March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility — Leasing
Business
Working
capital for our leasing business is provided through a $35 million credit
facility which is currently contractually scheduled to expire on July 10,
2009. Participating in this facility are Branch Banking and Trust Company
($15 million) and National City Bank ($20 million), with National City Bank
acting as agent. The ability to borrow under this facility is limited
to the amount of eligible collateral at any given time. The credit
facility has full recourse to us and is secured by a blanket lien against all
of
our assets such as chattel paper (including leases), receivables, inventory
and
equipment and the common stock of all wholly-owned subsidiaries.
The
credit facility contains certain financial covenants and certain restrictions
on, among other things, our ability to make certain investments, and sell assets
or merge with another company. Borrowings under the credit facility bear
interest at London Interbank Offered Rates (“LIBOR”) plus an applicable margin
or, at our option, the Alternate Base Rate (“ABR”) plus an applicable
margin. The ABR is the higher of the agent bank’s prime rate or Federal
Funds rate plus 0.5%. The applicable margin is determined based on our
recourse funded debt ratio and can range from 1.75% to 2.50% for LIBOR loans
and
from 0.0% to 0.25% for ABR loans. As of March 31, 2008,
we
had no outstanding balance on the facility.
In
general, we may use the National City Bank facility to pay the cost of equipment
to be put on lease, and we repay borrowings from the proceeds of: (1) long-term,
non-recourse, fixed rate financing which we obtain from lenders after the
underlying lease transaction is finalized; or (2) sales of leases to third
parties. The availability of the credit facility is subject to a borrowing
base formula that consists of inventory, receivables, purchased assets and
lease
assets. Availability under the credit facility may be limited by the asset
value of the equipment purchased by us or by terms and conditions in the credit
facility agreement. If we are unable to sell the equipment or unable to finance
the equipment on a permanent basis within a certain time period, the
availability of credit under the facility could be diminished or
eliminated. The credit facility contains covenants relating to minimum
tangible net worth, cash flow coverage ratios, maximum debt to equity ratio,
maximum guarantees of subsidiary obligations, mergers and acquisitions and
asset
sales. We are in compliance with these covenants as of March 31,
2008.
The
National City Bank facility requires the delivery of our Audited and Unaudited
Financial Statements, and pro-forma financial projections, by certain
dates. As required by Section 5.1 of the facility, we have delivered all
financial statements.
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 or other contractually narrow or limited purposes. As of
March 31, 2008, we are 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 are reliant upon lines of credit and other financing facilities
which are subject to fluctuations in interest rates. These instruments, which
are denominated in U.S. Dollars, were entered into for other than trading
purposes and, with the exception of amounts drawn under the National City Bank
and GECDF facilities, bear interest at a fixed rate. Because the interest rate
on these instruments is fixed, changes in interest rates will not directly
impact our cash flows. Borrowings under the National City facility bear interest
at a market-based variable rate, based on a rate selected by us and determined
at the time of borrowing. Borrowings under the GECDF facility bear
interest at a market-based variable rate. Due to the relatively short
nature of the interest rate periods, we do not expect our operating results
or
cash flow to be materially affected by changes in market interest rates.
As of March 31, 2008, 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.
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
(a)
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,” pursuant to Exchange Act Rule
13a-15(b). 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 not
effective due to existing material weaknesses in our internal control over
financial reporting as discussed below.
(b)
Management’s Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining effective internal
control over financial reporting. 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, 2008, 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, 2008. 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.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. In our
assessment of the effectiveness of internal control over financial reporting
as
of March 31, 2008, we identified the following material weaknesses:
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|
·
|
During
the course of preparing our Condensed Consolidated Financial
Statements for the quarter ended December 31, 2006, we identified
a
material weakness related to the cut off of accrued liabilities. We
are continuing to remediate this material weakness related to the
cut off
of accrued liabilities as described
below.
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|
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·
|
During
the course of preparing our Form 10-K for the period ended March
31, 2008,
we identified a material weakness related to the presentation of
the sale
of several groups of operating leases in the Condensed Consolidated
Statement of Cash Flows for the nine months ended December 31,
2007. We have begun remediation of this material weakness as
described below.
|
In
light
of these material weaknesses management concluded that our internal control
over
financial reporting was not effective as of March 31, 2008.
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.
(c)
Remediation and Changes in
Internal Controls
During
the course of preparing our Condensed Consolidated Financial Statements for
the quarter ended December 31, 2006, we identified a material weakness related
to the service revenue recognition. As of March 31, 2008, we have
remediated this material weakness by performing additional procedures
surrounding proper cut-off and revenue recognition which includes improving
existing software applications to track service engagements, standardizing
sales
contract terms, hiring additional staff, and training.
In
connection with the preparation of our Consolidated Financial Statements
for the
year ended March 31, 2008, we performed additional procedures related to
the
cut-off of accrued liabilities noted above. In addition, we have developed
enhancements to our controls surrounding these cut-off issues including,
but not
limited to, electronically tracking liabilities incurred from third parties
related to service engagements, and enhanced monitoring of our accounts payable
obligations. We are continuing to remediate this material
weakness. The actions that we plan to take are subject to continued
management review supported by confirmation and testing as well as Audit
Committee oversight.
In
connection with the material weakness disclosed in our Form 10-Q/A for the
period ended December 31, 2007 and filed on June 30, 2008, we identified an
error in our Condensed Consolidated Statement of Cash Flows for nine months
ended December 31, 2007. Our internal controls over financial
reporting related to the process for the preparation and review of the condensed
consolidated statement of cash flows did not identify the error in time to
preclude a misstatement of the statement of cash flows. As a result
of this discovery, we have corrected the error in the classification of the
sale
of operating leases on the statement of cash flows in that Form
10-Q/A. Management has discussed the error described above with the
Audit Committee of the Board of Directors and our independent registered public
accountants. Management has reviewed its process for the
preparation of the Statement of Cash Flows with staff members, will provide
focused training on cash flow statements, and will develop further procedures
to
review the presentation of significant and infrequent transactions.
Other
than as described above, there have not been any other changes in our internal
control over financial reporting during the quarter ended March 31, 2008, 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 the Company's 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 the Company's fiscal year.
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
See
introductory paragraph of this Part III.
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
See
introductory paragraph of this Part III.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See
introductory paragraph of this Part III.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
See
introductory paragraph of this Part III.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND
SERVICES
See
introductory paragraph of this Part III.
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 10.7 and Exhibits 10.49 through 10.60 are management contracts
or
compensatory plans or arrangements.
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Exhibit
No.
|
Exhibit
Description
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| |
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2.1
|
Asset
Purchase Agreement by and between ePlus Technology,
inc.
and Manchester Technologies, Inc., dated May 28, 2004 (Incorporated
herein
by reference from Exhibit 2.1 to our Current Report on Form 8-K filed
on
May 28, 2004).
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3.1.1
|
Certificate
of Incorporation of ePlus, filed
on August
27, 1996 (Incorporated herein by reference to Exhibit 3.1 to our
Quarterly
Report on Form 10-Q for the period ended December 31,
2002).
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3.1.2
|
Certificate
of Amendment of Certificate of Incorporation of ePlus, filed
on
September 30, 1997 (Incorporated herein by reference to Exhibit 3.2
to our
Quarterly Report on Form 10-Q for the period ended December 31,
2002).
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3.1.3
|
Certificate
of Amendment of Certificate of Incorporation of ePlus, filed
on October
19, 1999 (Incorporated herein by reference to Exhibit 3.3 to our
Quarterly
Report on Form 10-Q for the period ended December 31,
2002).
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3.1.4
|
Certificate
of Amendment of Certificate of Incorporation of ePlus, filed
on May 23,
2002 (Incorporated herein by reference to Exhibit 3.4 to our Quarterly
Report on Form 10-Q for the period ended December 31,
2002).
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3.1.5
|
Certificate
of Amendment of Certificate of Incorporation of ePlus, filed
on
October 1, 2003 (Incorporated herein by reference to Exhibit 3.5
to our
Quarterly Report on Form 10-Q for the period ended September 30,
2003).
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3.2
|
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).
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4
|
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).
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10.1
|
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).
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10.2
|
Form
of Employment Agreement between ePlus and
Phillip G. Norton (Incorporated herein by reference to Exhibit
10.7 to our Registration Statement on Form S-1 (File No. 333-11737)
originally filed on September 11, 1996).
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10.3
|
Form
of Employment Agreement between ePlus and
Bruce M. Bowen (Incorporated herein by reference to Exhibit 10.8
to our Registration Statement on Form S-1 (File No. 333-11737) originally
filed on September 11, 1996).
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10.4
|
Employment
Agreement, dated as of October 31, 2007, between ePlus and
Kleyton L.
Parkhurst (Incorporated herein by reference to Exhibit 99.1 to our
Current
Report on Form 8-K filed on November 6, 2007).
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10.5
|
Form
of Employment Agreement between ePlus and
Steven J. Mencarini (Incorporated herein by reference to Exhibit
10.5 to our Current Report on Form 8-K filed on December 2,
2003).
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10.6
|
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).
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10.7
|
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).
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10.8
|
Form
of Irrevocable Proxy and Stock Rights Agreement (Incorporated herein
by
reference to Exhibit 10.11 to our Registration Statement on Form
S-1 (File
No. 333-11737) originally filed on September 11, 1996).
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10.9
|
Credit
Agreement dated September 23, 2005 among ePlus inc.
and its
subsidiaries named therein and National City Bank as Administrative
Agent
(Incorporated herein by reference to Exhibit 10.1 to our Current
Report on
Form 8-K filed on September 28, 2005).
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10.10
|
First
Amendment to the Credit Agreement dated July 11, 2006 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference Exhibit 10.1 to our Current Report on Form 8-K
filed
on July 13, 2006).
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10.11
|
Second Amendment
to the Credit Agreement dated July 28, 2006 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on August 3, 2006).
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10.12
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Third Amendment
to the Credit Agreement dated August 30, 2006 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on September 6, 2006).
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10.13
|
Fourth
Amendment to the Credit Agreement dated September 27, 2006 among
ePlus inc.
and
National City Bank and Branch Banking and Trust Company of Virginia
(Incorporated herein by reference to Exhibit 10.1 to our Current
Report on
Form 8-K filed on October 3, 2006).
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10.14
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Waiver
dated September 27, 2006 by National City Bank and Branch Banking and
Trust Company of Virginia (Incorporated herein by reference to Exhibit
10.2 to our Current Report on Form 8-K filed on October 3,
2006).
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10.15
|
Fifth
Amendment to the Credit Agreement dated November 15, 2006 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on November 17, 2006).
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10.16
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Sixth Amendment
to the Credit Agreement dated January 11, 2007 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on January 12, 2007).
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10.17
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Seventh Amendment
to the Credit Agreement dated March 12, 2007 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on March 15, 2007).
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10.18
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Eighth
Amendment to the Credit Agreement dated June 27, 2007 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company (Incorporated herein
by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on June
29, 2007).
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10.19
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Ninth
Amendment to the Credit Agreement dated August 22, 2007 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on August 29, 2007).
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10.20
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Tenth
Amendment to the Credit Agreement dated November 29, 2007 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on December 4, 2007).
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10.21
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Eleventh
Amendment to the Credit Agreement dated February 29, 2008 among ePlus inc.
and National
City Bank and Branch Banking and Trust Company of Virginia (Incorporated
herein by reference to Exhibit 10.1 to our Current Report on Form
8-K
filed on March 6, 2008).
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10.22
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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).
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10.23
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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).
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10.24
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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).
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10.25
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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).
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10.26
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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).
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10.27
|
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).
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10.28
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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).
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10.29
|
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).
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10.30
|
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).
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10.31
|
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).
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10.32
|
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).
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10.33
|
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).
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10.34
|
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).
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10.35
|
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).
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10.36
|
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).
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10.37
|
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).
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10.38
|
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).
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10.39
|
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).
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10.40
|
Agreement
for Wholesale Financing between Deutsche Financial Services Corporation
and ePlus
Technology of PA, inc., dated February 12, 2001 (Incorporated herein
by
reference to Exhibit 5.1 to our Current Report on Form 8-K filed
on March
13, 2001).
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10.41
|
Business
Financing Agreement between Deutsche Financial Services Corporation
and
ePlus Technology
of PA, inc., dated February 12, 2001 (Incorporated herein by reference
to
Exhibit 5.2 to our Current Report on Form 8-K filed on March 13,
2001).
|
|
|
|
|
10.42
|
Addendum
to Business Financing Agreement and Agreement for Wholesale Financing
between Deutsche Financial Services Corporation and ePlus Technology
of PA,
inc., dated February 12, 2001 (Incorporated herein by reference to
Exhibit
5.3 to our Current Report on Form 8-K filed on March 13,
2001).
|
|
|
|
|
10.43
|
Limited
Guaranty for
ePlus Technology of PA, inc. to Deutsche Financial Services
Corporation by ePlus inc.,
dated
February 12, 2001 (Incorporated herein by reference to Exhibit 5.4
to our
Current Report on Form 8-K filed on March 13,
2001).
|
|
10.44
|
Agreement
for Wholesale Financing between Deutsche Financial Services Corporation
and ePlus
Technology of NC, inc., dated February 12, 2001 (Incorporated herein
by
reference to Exhibit 5.6 to our Current Report on Form 8-K filed
on March
13, 2001).
|
| |
|
|
10.45
|
Addendum
to Agreement for Wholesale Financing between ePlus Technology
of NC,
inc. and Deutsche Financial Services Corporation, dated February
12, 2001
(Incorporated herein by reference to Exhibit 5.7 to our Current Report
on
Form 8-K filed on March 13, 2001).
|
|
|
|
|
10.46
|
Addendum
to Agreement for Wholesale Financing between ePlus Technology
of NC,
inc. and Deutsche Financial Services Corporation, dated February
12, 2001
(Incorporated herein by reference to Exhibit 5.8 to our Current Report
on
Form 8-K filed on March 13, 2001).
|
|
|
|
|
10.47
|
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).
|
|
|
|
|
10.48
|
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).
|
|
|
|
|
10.49
|
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).
|
|
|
|
|
10.50
|
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).
|
|
|
|
|
10.51
|
ePlus
inc. Supplemental
Benefit Plan for Kleyton L. Parkhurst (Incorporated herein by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed
on March
2, 2005).
|
|
|
|
|
10.52
|
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).
|
|
|
|
|
10.53
|
Incentive
Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan by and between ePlus and
Phillip G.
Norton (Incorporated herein by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on February 10, 2005).
|
|
|
|
|
10.54
|
Incentive
Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan by and between ePlus and
Bruce M.
Bowen (Incorporated herein by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed on February 10, 2005).
|
| |
|
|
10.55
|
Incentive
Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan by and between ePlus and
Kleyton L.
Parkhurst (Incorporated herein by reference to Exhibit 10.3 to our
Current
Report on Form 8-K filed on February 10, 2005).
|
| |
|
|
10.56
|
Incentive
Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan by and between ePlus and
Steven J.
Mencarini (Incorporated herein by reference to Exhibit 10.4 to our
Current
Report on Form 8-K filed on February 10, 2005).
|
|
|
|
|
10.57
|
Non-Qualified
Stock Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan by and between ePlus and
Phillip G.
Norton (Incorporated herein by reference to Exhibit 10.5 to our Current
Report on Form 8-K filed on February 10, 2005).
|
|
|
|
|
10.58
|
Form
of Incentive Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan (Incorporated herein by reference
to Exhibit 10.6 to our Current Report on Form 8-K filed on February
10,
2005).
|
|
10.59
|
Form
of Non-Qualified Stock Option Agreement under the ePlus inc.
Amended and
Restated 1998 Long-Term Incentive Plan (Incorporated herein by reference
to Exhibit 10.7 to our Current Report on Form 8-K filed on February
10,
2005).
|
|
|
|
|
10.60
|
ePlus
inc. Fiscal Year
2008 Executive Incentive Plan (Incorporated herein by reference to
Exhibit
10.2 to our Current Report on Form 8-K filed on March 6,
2008).
|
|
|
|
|
|
Subsidiaries
of
ePlus
|
|
|
|
|
23
|
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:
July 2, 2008
|
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:
July 2, 2008
|
|
|
|
|
|
/s/
BRUCE M. BOWEN
|
|
|
By:
Bruce M. Bowen, Director and Executive
|
|
|
Vice
President
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/
STEVEN J. MENCARINI
|
|
|
By:
Steven J. Mencarini, Senior Vice President,
|
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/
C. THOMAS FAULDERS,
III
|
|
|
By:
C. Thomas Faulders, III, Director
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/
TERRENCE O’DONNELL
|
|
|
By:
Terrence O’Donnell, Director
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/
LAWRENCE S.
HERMAN
|
|
|
By:
Lawrence S. Herman, Director
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/
MILTON E. COOPER,
JR.
|
|
|
By:
Milton E. Cooper, Jr., Director
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/ ERIC D. HOVDE
|
|
|
By:
Eric D. Hovde, Director
|
|
|
Date:
July 2, 2008
|
|
|
|
|
|
/s/ IRVING R. BEIMLER
|
|
|
By:
Irving R. Beimler, Director
|
|
|
Date:
July 2, 2008
|
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, 2008 and 2007
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended March 31, 2008 and
2007
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2008 and
2007
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended March 31, 2008
and 2007
|
|
|
|
|
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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of their operations and their
cash flows for each of the two fiscal years in the period ended March 31, 2008,
in conformity with accounting principles generally accepted in the United States
of America.
As
discussed in Notes 1 and 9 to the consolidated
financial statements, in fiscal year 2008, the Company changed its method of
accounting for uncertain tax positions to conform to Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes".
/s/
Deloitte & Touche LLP
McLean,
Virginia
July
2,
2008
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ePlus
inc. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
March 31,
2008
|
|
|
March 31,
2007
|
|
|
ASSETS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
58,423 |
|
|
$ |
39,680 |
|
|
Accounts
receivable—net
|
|
|
109,706 |
|
|
|
110,662 |
|
|
Notes
receivable
|
|
|
726 |
|
|
|
237 |
|
|
Inventories
|
|
|
9,192 |
|
|
|
6,851 |
|
|
Investment
in leases and leased equipment—net
|
|
|
157,382 |
|
|
|
217,170 |
|
|
Property
and equipment—net
|
|
|
4,680 |
|
|
|
5,529 |
|
|
Other
assets
|
|
|
13,514 |
|
|
|
11,876 |
|
|
Goodwill
|
|
|
26,125 |
|
|
|
26,125 |
|
|
TOTAL
ASSETS
|
|
$ |
379,748 |
|
|
$ |
418,130 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable—equipment
|
|
$ |
6,744 |
|
|
$ |
6,547 |
|
|
Accounts
payable—trade
|
|
|
22,016 |
|
|
|
21,779 |
|
|
Accounts
payable—floor plan
|
|
|
55,634 |
|
|
|
55,470 |
|
|
Salaries
and commissions payable
|
|
|
4,789 |
|
|
|
4,331 |
|
|
Accrued
expenses and other liabilities
|
|
|
30,372 |
|
|
|
25,960 |
|
|
Income
taxes payable
|
|
|
- |
|
|
|
- |
|
|
Recourse
notes payable
|
|
|
- |
|
|
|
5,000 |
|
|
Non-recourse
notes payable
|
|
|
93,814 |
|
|
|
148,136 |
|
|
Deferred
tax liability
|
|
|
2,677 |
|
|
|
4,708 |
|
|
Total
Liabilities
|
|
|
216,046 |
|
|
|
271,931 |
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;11,210,731 issued
and
8,231,741 outstanding at March 31, 2008 and 11,210,731 issued and
8,231,741 outstanding at March 31, 2007
|
|
|
112 |
|
|
|
112 |
|
|
Additional
paid-in capital
|
|
|
77,287 |
|
|
|
75,909 |
|
|
Treasury
stock, at cost, 2,978,990 and 2,978,990 shares,
respectively
|
|
|
(32,884 |
) |
|
|
(32,884 |
) |
|
Retained
earnings
|
|
|
118,623 |
|
|
|
102,754 |
|
Accumulated
other comprehensive income—foreign currency translation
adjustment
|
|
|
564 |
|
|
|
308 |
|
|
Total
Stockholders' Equity
|
|
|
163,702 |
|
|
|
146,199 |
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
379,748 |
|
|
$ |
418,130 |
|
See
Notes to Consolidated Financial Statements.
ePlus
inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Year
Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
731,654 |
|
|
$ |
701,237 |
|
|
Sales
of leased equipment
|
|
|
45,493 |
|
|
|
4,455 |
|
|
|
|
|
777,147 |
|
|
|
705,692 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
55,459 |
|
|
|
54,699 |
|
|
Fee
and other income
|
|
|
16,699 |
|
|
|
13,720 |
|
|
Patent
settlement income
|
|
|
- |
|
|
|
17,500 |
|
|
|
|
|
72,158 |
|
|
|
85,919 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
849,305 |
|
|
|
791,611 |
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
645,393 |
|
|
|
622,501 |
|
|
Cost
of leased equipment
|
|
|
43,702 |
|
|
|
4,360 |
|
|
|
|
|
689,095 |
|
|
|
626,861 |
|
|
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
20,955 |
|
|
|
20,291 |
|
|
Professional
and other fees
|
|
|
12,889 |
|
|
|
16,175 |
|
|
Salaries
and benefits
|
|
|
72,285 |
|
|
|
70,888 |
|
|
General
and administrative expenses
|
|
|
16,016 |
|
|
|
17,165 |
|
|
Interest
and financing costs
|
|
|
8,123 |
|
|
|
10,125 |
|
|
|
|
|
130,268 |
|
|
|
134,644 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (1)
|
|
|
819,363 |
|
|
|
761,505 |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
29,942 |
|
|
|
30,106 |
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
13,582 |
|
|
|
12,729 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
16,360 |
|
|
$ |
17,377 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
1.99 |
|
|
$ |
2.11 |
|
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
1.95 |
|
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,231,741 |
|
|
|
8,224,929 |
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
8,378,683 |
|
|
|
8,534,608 |
|
|
(1)
|
Includes
amounts to related parties of $1,052 thousand and $964 thousand for
the
years ended March 31, 2008 and March 31, 2007,
respectively.
|
See
Notes to Consolidated Financial Statements.
ePlus
inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
16,360 |
|
|
$ |
17,377 |
|
|
|
|
|
|
|
|
|
|
|
| Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,851 |
|
|
|
21,837 |
|
|
Reserves
for credit losses and sales returns
|
|
|
(99 |
) |
|
|
(400 |
) |
|
Provision
for inventory losses
|
|
|
(81 |
) |
|
|
84 |
|
|
Excess
tax benefit from exercise of stock options
|
|
|
- |
|
|
|
(95 |
) |
|
Tax
benefit of stock options exercised
|
|
|
- |
|
|
|
305 |
|
|
Impact
of stock-based compensation
|
|
|
1,349 |
|
|
|
934 |
|
|
Deferred
taxes
|
|
|
(2,245 |
) |
|
|
4,543 |
|
|
Payments
from lessees directly to lenders—operating
leases
|
|
|
(14,366 |
) |
|
|
(12,422 |
) |
|
Loss
on disposal of property and equipment
|
|
|
4 |
|
|
|
177 |
|
|
Gain
on sale of operating leases
|
|
|
(403 |
) |
|
|
- |
|
|
Loss
(gain) on disposal of operating lease equipment
|
|
|
103 |
|
|
|
(1,023 |
) |
|
Excess
increase in cash value of officers life insurance
|
|
|
(13 |
) |
|
|
- |
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable—net
|
|
|
(104 |
) |
|
|
(9,924 |
) |
|
Notes
receivable
|
|
|
(489 |
) |
|
|
93 |
|
|
Inventories
|
|
|
(1,477 |
) |
|
|
(3,059 |
) |
|
Investment
in direct financing and sales-type leases—net
|
|
|
(13,613 |
) |
|
|
(42,258 |
) |
|
Other
assets
|
|
|
(690 |
) |
|
|
(1,538 |
) |
|
Accounts
payable—equipment
|
|
|
742 |
|
|
|
(2,075 |
) |
|
Accounts
payable—trade
|
|
|
374 |
|
|
|
2,680 |
|
|
Salaries
and commissions payable, accrued expenses and other
liabilities
|
|
|
4,621 |
|
|
|
(7,282 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
11,824 |
|
|
|
(32,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of operating lease equipment
|
|
|
4,262 |
|
|
|
1,925 |
|
|
Proceeds
from sale of operating leases
|
|
|
892 |
|
|
|
- |
|
|
Purchases
of operating lease equipment
|
|
|
(10,161 |
) |
|
|
(26,911 |
) |
|
Proceeds
from sale of property and equipment
|
|
|
- |
|
|
|
2 |
|
|
Purchases
of property and equipment
|
|
|
(1,665 |
) |
|
|
(2,904 |
) |
|
Premiums
paid on officers' life insurance
|
|
|
(317 |
) |
|
|
(301 |
) |
|
Net
cash used in investing activities
|
|
|
(6,989 |
) |
|
|
(28,189 |
) |
ePlus
inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - continued
|
|
|
Year
Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
34,970 |
|
|
|
95,356 |
|
|
Repayments:
|
|
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
(16,482 |
) |
|
|
(23,021 |
) |
|
Purchase
of treasury stock
|
|
|
- |
|
|
|
(2,900 |
) |
|
Proceeds
from issuance of capital stock, net of expenses
|
|
|
- |
|
|
|
1,886 |
|
|
Excess
tax benefit from exercise of stock options
|
|
|
- |
|
|
|
95 |
|
|
Net
borrowings on floor plan facility
|
|
|
164 |
|
|
|
8,781 |
|
|
Net
repayments on recourse lines of credit
|
|
|
(5,000 |
) |
|
|
(1,000 |
) |
|
Net
cash provided by (used in) financing activities
|
|
|
13,652 |
|
|
|
79,197 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
256 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
18,743 |
|
|
|
18,983 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
39,680 |
|
|
|
20,697 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
58,423 |
|
|
$ |
39,680 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,204 |
|
|
$ |
2,528 |
|
|
Cash
paid for income taxes
|
|
$ |
14,605 |
|
|
$ |
8,140 |
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
of Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment included in accounts payable
|
|
$ |
47 |
|
|
$ |
184 |
|
|
Purchase of operating lease equipment included in accounts
payable |
|
$ |
368 |
|
|
$ |
497 |
|
|
Principal
payments from lessees directly to lenders
|
|
$ |
61,410 |
|
|
$ |
52,172 |
|
|
Repayment
of non-recourse debt to lenders from sales of operating
leases
|
|
$ |
11,400 |
|
|
$ |
- |
|
See
Notes to Consolidated Financial Statements.
ePlus
inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Compensation
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Expenses
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2006
|
|
|
8,267,223 |
|
|
$ |
110 |
|
|
$ |
72,811 |
|
|
$ |
(29,984 |
) |
|
$ |
(25 |
) |
|
$ |
85,377 |
|
|
$ |
287 |
|
|
$ |
128,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for option exercises
|
|
|
173,518 |
|
|
|
2 |
|
|
|
1,859 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,861 |
|
|
Tax
benefit of exercised stock options
|
|
|
- |
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
305 |
|
|
Effect
of share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
934 |
|
|
|
- |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
959 |
|
|
Purchase
of treasury stock
|
|
|
(209,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,900 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,900 |
) |
|
Comprehensive
income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,377 |
|
|
|
- |
|
|
|
17,377 |
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
21 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2007
|
|
|
8,231,741 |
|
|
|
112 |
|
|
|
75,909 |
|
|
|
(32,884 |
) |
|
|
- |
|
|
|
102,754 |
|
|
|
308 |
|
|
|
146,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
1,378 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,378 |
|
|
Comprehensive
income, net of tax:
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,360 |
|
|
|
- |
|
|
|
16,360 |
|
|
Adjustment
to retained earnings as a result of FIN 48 adoption
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(491 |
) |
|
|
- |
|
|
|
(491 |
) |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
256 |
|
|
|
256 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
8,231,741 |
|
|
$ |
112 |
|
|
$ |
77,287 |
|
|
$ |
(32,884 |
) |
|
$ |
- |
|
|
$ |
118,623 |
|
|
$ |
564 |
|
|
$ |
163,702 |
|
See
Notes to Consolidated Financial Statements.
ePlus
inc. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the Years Ended March 31, 2008 and 2007
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 are derived from three
sources: sales of products and services, leased revenues and sales of
software. Our revenue recognition policies vary based upon these
revenue sources.
Revenue
from Technology Sales Transactions
We
adhere
to guidelines and principles of sales recognition described in Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition,” issued
by the staff of the SEC. Under SAB No. 104, sales are recognized when the
title and risk of loss are passed to the customer, there is persuasive evidence
of an arrangement for sale, delivery has occurred and/or services have been
rendered, the sales price is fixed or determinable and collectability is
reasonably assured. Using these tests, the vast majority of our product
sales are recognized upon delivery.
We
also
sell services that are performed in conjunction with product sales, and
recognize revenue for these sales in accordance with EITF 00-21, “Accounting for Revenue Arrangements
with Multiple Deliverables”. Accordingly, we recognize sales from
delivered items only when the delivered item(s) has value to the client on
a
stand alone basis, there is objective and reliable evidence of the fair value
of
the undelivered item(s), and 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 those 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 determine
the completion date based upon our records.
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 in accordance with
the
sales recognition criteria outlined in SAB No. 104, EITF 99-19, “Reporting Revenue Gross
as a
Principal versus Net as an Agent” and Financial Accounting Standards
Board (“FASB”) Technical Bulletin 90-1, “Accounting for Separately
Priced
Extended Warranty and Product Contracts.” We must determine whether
we act as a principal in the transaction and assume the risks and rewards of
ownership or if we are simply acting as an agent or broker. Under gross
sales recognition, the entire selling price is recorded in sales of product
and
services and our costs to the third-party service provider or vendor is recorded
in cost of sales, product and services on the accompanying Consolidated
Statements of Operations. Under net sales recognition, the cost to the
third-party service provider or vendor is recorded as a reduction to sales
resulting in net sales equal to the gross profit on the transaction and there
is
no cost of sales.
In
accordance with EITF 00-10, “Accounting for Shipping
and Handling
Fees and Costs,” we record freight billed to our customers as sales of
product and services and the related freight costs as a cost of sales, product
and services.
Revenue
from Leasing Transactions
Our
leasing revenues are accounted for in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 13, “Accounting for
Leases.” The accounting for 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:
|
|
·
|
the
lease transfers ownership of the property to the lessee by the end
of the
lease term;
|
|
|
·
|
the
lease contains a bargain purchase
option;
|
|
|
·
|
the
lease term is equal to 75 percent or more of the estimated economic
life
of the leased property; or
|
|
|
·
|
the
present value at the beginning of the lease term of the minimum lease
payments equals or exceeds 90 percent of the excess of the fair value
of
the leased property at the inception of the
lease.
|
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. For direct finance 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 are recognized as the unearned income is amortized
over
the life of the lease using the interest method. For operating leases,
rental amounts are accrued on a straight-line basis over the lease term and
are
recognized as lease revenue.
Sales
of
leased equipment represent revenue from the sales of equipment subject to a
lease (lease schedule) in which we are the lessor. If the
rental stream on such lease has non-recourse debt associated with it, sales
revenue is recorded at the amount of consideration received, net of the amount
of debt assumed by the purchaser. If there is no non-recourse debt
associated with the rental stream, sales revenue is recorded at the amount
of
gross consideration received, and costs of sales is recorded at the book value
of the lease. Sales of leased equipment represents revenue generated
through the sale of equipment sold primarily through our financing business
unit.
Lease
revenues consist of rentals due under operating leases, amortization of unearned
income on direct financing and sales-type leases and sales of leased assets
to
lessees. Equipment under operating leases is recorded at cost and
depreciated on a straight-line basis over the lease term to the estimated
residual value.
SFAS
No.
140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,”
establishes criteria for determining whether a transfer of financial
assets in
exchange for cash or other consideration should be accounted for as a sale
or as
a pledge of collateral in a secured borrowing. Certain assignments of
direct finance leases we make on a non-recourse basis meet the criteria for
surrender of control set forth by SFAS No. 140 and have therefore been treated
as sales for financial statement purposes. 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 since we
have completed our obligations as of the assignment date, and we retain no
ownership interest in the equipment under lease.
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 clients.
Revenue
from hosting arrangements is recognized in accordance with EITF 00-3, “Application of AICPA
Statement of Position
97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entity’s Hardware.” Our hosting arrangements do not contain a contractual
right to take possession of the software. Therefore, our hosting
arrangements are not in the scope of Statement of Position 97-2 (“SOP 97-2”),
“Software Revenue
Recognition,” and require that the portion of the fee allocated to
the hosting elements be recognized as the service is provided. Currently,
the majority of our software revenue is generated through hosting agreements
and
is included in fee and other income on our Consolidated Statements of
Operations.
Revenue
from sales of our software is recognized in accordance with SOP 97-2, as amended
by SOP 98-4, “Deferral of the
Effective Date of a Provision of SOP 97-2,” and SOP 98-9, “Modification of SOP
97-2 With
Respect to Certain Transactions.” We recognize revenue when all the
following criteria exist:
|
|
·
|
there
is persuasive evidence that an arrangement
exists;
|
|
|
·
|
no
significant obligations by us related to services essential to the
functionality of the software remain with regard to
implementation;
|
|
|
·
|
the
sales price is determinable; and
|
|
|
·
|
it
is probable that collection will
occur.
|
Revenue
from sales of our software 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 SOP 97-2, we record revenue separately for the license and
service elements of these agreements. Generally, we consider that a
service is not essential to the functionality of the software based on various
factors, including if the services may be provided by independent third parties
experienced in providing such consulting and implementation in coordination
with
dedicated customer personnel. When consulting qualifies for separate
accounting, consulting revenues under time and materials billing arrangements
are recognized as the services are performed. Consulting revenues under
fixed-price contracts are generally recognized using the
percentage-of-completion method. If there is a significant uncertainty
about the project completion or receipt of payment for the consulting services,
revenue is deferred until the uncertainty is sufficiently
resolved. Consulting revenues are classified as fee and other income on our
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 either the percentage-of-completion or
completed-contract method of contract accounting. Under the
percentage-of-completion method, we may estimate the stage of completion of
contracts with fixed or “not to exceed” fees based on hours or costs incurred to
date as compared with estimated total project hours or costs at
completion. If we do not have a sufficient basis to measure progress
towards completion, revenue is recognized upon completion of the
contract. When total cost estimates exceed revenues, we accrue for the
estimated losses immediately. The use of the percentage-of-completion
method of accounting requires significant judgment relative to estimating total
contract costs, including assumptions relative to the length of time to complete
the project, the nature and complexity of the work to be performed, and
anticipated changes in salaries and other costs. When adjustments in
estimated contract costs are determined, such revisions may have the effect
of
adjusting, in the current period, the earnings applicable to performance in
prior periods.
For
agreements that include one or more elements to be delivered at a future date,
we generally use the residual method to recognize revenues from 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) brokerage fees
earned for the placement of financing transactions; (4) agent fees received
from
various manufacturers in the IT reseller business unit; (5) settlement fees
related to disputes or litigation; and (6) interest and other miscellaneous
income. These revenues are included in fee and other income on our
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. Vendor
consideration received pursuant to volume sales incentive programs is recognized
as a reduction to costs of sales, product and services in accordance with EITF
Issue No. 02-16, “Accounting
for Consideration Received from a Vendor by a Customer (Including a Reseller
of
the Vendor’s Products).” Vendor consideration received pursuant to volume
purchase incentive programs is allocated to inventories based on the applicable
incentives from each vendor and is recorded in cost of sales, product and
services, as the inventory is sold. Vendor consideration received pursuant
to shared marketing expense programs is recorded as a reduction of the related
selling and administrative expenses in the period the program takes place only
if the consideration represents a reimbursement of specific, incremental,
identifiable costs. Consideration that exceeds the specific, incremental,
identifiable costs is classified as a reduction of cost of sales, product and
services.
RESIDUALS
— Residual values, representing the estimated value of equipment at the
termination of a lease, are recorded in our Consolidated Financial Statements
at
the inception of each sales-type or direct financing lease as amounts estimated
by management based upon its experience and judgment. Unguaranteed residual
values for sales-type and direct financing leases are recorded at their net
present value and the unearned income is amortized over the life of the lease
using the interest method. The residual values for operating leases are
included in the leased equipment’s net book value.
We
evaluate residual values on an ongoing basis and record any downward adjustment,
if required. No upward revision of residual values is made subsequent to
lease inception.
RESERVES
FOR CREDIT LOSSES — The reserves 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 charged against
income. Accounts are either written off or written down when the loss is
both probable and determinable, after giving consideration to the customer’s
financial condition, the value of the underlying collateral and funding status
(i.e., discounted on a non-recourse or recourse basis).
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 SFAS No. 48,“Revenue Recognition when
the Right
of Return Exists”. 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 — Cash and cash equivalents include funds in operating accounts as
well as money market funds.
INVENTORIES
— Inventories are stated at the lower of cost (weighted average basis) or
market.
PROPERTY
AND EQUIPMENT — Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the related
assets, which range from three to ten years.
CAPITALIZATION
OF COSTS OF SOFTWARE FOR INTERNAL USE — We have capitalized certain costs for
the development of internal use software under the guidelines of SOP 98-1,
“Accounting for the Costs
of
Computer Software Developed or Obtained for Internal Use.” Software
capitalized for internal use was $825 thousand and $249 thousand during years
ended March 31, 2008 and March 31, 2007, respectively, which is included in
the accompanying Consolidated Balance Sheets as a component of property and
equipment—net. We had capitalized costs, net of amortization, of
approximately $1.2 million at March 31, 2008 and $651 thousand at March 31,
2007.
CAPITALIZATION
OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS — In accordance with SFAS
No. 86, “Accounting for Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed,” software
development costs are expensed as incurred until technological feasibility
has
been established. At such time such costs are capitalized until the product
is made available for release to customers. For the year ended March 31,
2008, there was no such costs capitalized, while for the year ended March 31,
2007, $59 thousand were capitalized for software to be made available to
customers. We had $572 thousand and $761 thousand of capitalized costs,
net of amortization, at March 31, 2008 and March 31, 2007,
respectively.
INTANGIBLE
ASSETS — In accordance with SFAS No. 142, “Goodwill
and Other Intangible
Assets,” we perform an impairment test for goodwill at September
30th of each year and follow the two-step process prescribed in SFAS No. 142
to
test our goodwill for impairment under the transitional goodwill impairment
test. The first step is to screen for potential impairment, while the
second step measures the amount of the impairment, if any.
IMPAIRMENT
OF LONG-LIVED ASSETS — We review long-lived assets, including property and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully recoverable. If
the total of the expected undiscounted future cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and the carrying value of the asset.
FAIR
VALUE OF FINANCIAL INSTRUMENTS — The carrying value of our financial
instruments, which include cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other liabilities, approximates fair
value due to their short maturities. The carrying amount of our
non-recourse and recourse notes payable approximates its fair value. We
determined the fair value of notes payable by applying the average portfolio
debt rate and applying such rate to future cash flows of the respective
financial instruments. The estimated fair value of our recourse and
non-recourse notes payable at March 31, 2008 and March 31, 2007 was $93.3
million and $153.4 million, respectively, compared to a carrying amount of
$93.8
million and $153.1 million, respectively.
TREASURY
STOCK — We account for treasury stock under the cost method and include treasury
stock as a component of stockholders’ equity.
INCOME
TAXES — Deferred income taxes are accounted for in accordance with SFAS
No. 109, “Accounting for
Income Taxes.” Under this method, deferred income tax assets
and liabilities are determined based on the temporary differences between the
financial statement reporting and tax bases of assets and liabilities, using
tax
rates currently in effect. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of these benefits
is considered to be more likely than not. In addition, on April 1, 2007, we
adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty
in Income
Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”).
Specifically, the pronouncement prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on the related derecognition,
classification, interest and penalties, accounting for interim periods,
disclosure and transition of uncertain tax positions. In accordance with
our accounting policy, we recognize accrued interest and penalties related
to
unrecognized tax benefits as a component of tax expense. This policy did
not change as a result of the adoption of FIN 48.
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 FIN 48 adjustment and
foreign currency translation adjustments. For the year ended March 31,
2008, other comprehensive income was $256 thousand, the adjustment to retained
earnings as a result of the adoption of FIN 48 was $491 thousand and net
income
was $16.4 million. This resulted in total comprehensive income of $16.1
million for the year ended March 31, 2008. For the year ended March
31, 2007, other comprehensive income was approximately $21 thousand and net
income was $17.4 million. This resulted in total comprehensive income of
$17.4 million for the year ended March 31, 2007.
EARNINGS
PER SHARE — Earnings per share (“EPS”) have been calculated in accordance with
SFAS No. 128, “Earnings per
Share.” In accordance with SFAS No. 128, basic EPS amounts
were calculated based on weighted average shares outstanding of 8,231,741 for
the year ended March 31, 2008 and 8,224,929 for the year ended March 31,
2007. Diluted EPS amounts were calculated based on weighted average shares
outstanding and potentially dilutive common stock equivalents of 8,378,683
and
8,534,608 for the year ended March 31, 2008 and March 31, 2007,
respectively. Additional shares included in the diluted EPS calculations
are attributable to incremental shares issuable upon the assumed exercise of
stock options and other common stock equivalents. Unexercised
employee stock options to purchase 337,007 and 844,707 shares of our common
stock were not included in the computations of diluted EPS for the year ended
March 31, 2008 and March 31, 2007, respectively, because the options’ exercise
prices were greater than the average market price of our common stock during
the
applicable periods.
STOCK-BASED
COMPENSATION — On April 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS
No. 123R. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock
Issued
to Employees” (“APB 25”), and subsequently issued stock option related
guidance. We elected the modified-prospective transition method. Under
the modified-prospective method, we must recognize compensation expense for
all
awards subsequent to adopting the standard and for the unvested portion of
previously granted awards outstanding upon adoption. We have recognized
compensation expense equal to the fair values for the unvested portion of
share-based awards at April 1, 2006 over the remaining period of service, as
well as compensation expense for those share-based awards granted or modified
on
or after April 1, 2006 over the vesting period based on the grant-date fair
values using the straight-line method. For those awards granted prior to
the date of adoption, compensation expense is recognized on an accelerated
basis
based on the grant-date fair value amount as calculated for pro forma purposes
under SFAS No. 123.
RECENT
ACCOUNTING PRONOUNCEMENTS — In September 2006, the FASB issued SFAS No. 157,
“Fair Value
Measurement” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with U.S. GAAP
and expands disclosures about fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based
on
the assumptions that market participants would use in pricing the asset or
liability. The provisions of SFAS No. 157 were scheduled to be effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. In February 2008, the FASB issued Staff Position No. FAS 157-2,
"Effective Dates of FASB
Statement No. 157," which defers the effective date of SFAS No. 157 for
all nonrecurring fair value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2007. We are in the process
of
evaluating the impact, if any, SFAS No. 157 will have on our financial condition
and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement No.
115” ("SFAS No. 159"). SFAS No. 159 permits an entity, at specified
election dates, to choose to measure certain financial instruments and other
items at fair value. The objective of SFAS No. 159 is to provide entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently, without having to apply complex
hedge accounting provisions. SFAS No. 159 is effective for accounting periods
beginning after November 15, 2007. We are in the process of evaluating the
impact, if any, SFAS No. 159 will have on our financial condition and results
of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
No. 141R”), which replaces SFAS 141. SFAS No. 141R applies to all
transactions in which an entity obtains control of one ore more business,
including those without the transfer of consideration. SFAS No. 141R
defines the acquirer as the entity that obtains control on the acquisition
date. It also requires the measurement at fair value the acquired
assets, assumed liabilities and noncontrolling interest. In addition,
SFAS No. 141R requires the acquisition and restructuring related cost be
recognized separately from the business combinations. SFAS No. 141R
requires that goodwill be recognized as of the acquisition date, measured as
residual, which in most cases will result in the excess of consideration plus
acquisition-date fair value of noncontrolling interest over the fair values
of
identifiable net assets. Under SFAS No. 141R, “negative goodwill” in
which consideration given is less than the acquisition-date fair value of
identifiable net assets, will be recognized as a gain to the
acquirer. SFAS No. 141R is applied prospectively to business
combinations for which the acquisition date is on or after the first annual
reporting period beginning on or after December 15, 2008. We are
evaluating the impact of SFAS No. 141R, if any, to our financial position and
statement of operations. We will adopt SFAF No. 141R for future
business combinations that occur on or after April 1,
2009.
2.
INVESTMENTS IN LEASES AND LEASED EQUIPMENT—NET
Investments
in leases and leased equipment—net consists of the following:
|
|
|
As
of
|
|
|
|
|
March 31,
2008
|
|
|
March 31,
2007
|
|
|
|
|
(in
thousands)
|
|
|
Investment
in direct financing and sales-type leases—net
|
|
$ |
124,254 |
|
|
$ |
158,471 |
|
|
Investment
in operating lease equipment—net
|
|
|
33,128 |
|
|
|
58,699 |
|
|
|
|
$ |
157,382 |
|
|
$ |
217,170 |
|
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,
2008
|
|
|
March 31,
2007
|
|
|
|
|
(in
thousands)
|
|
|
Minimum
lease payments
|
|
$ |
120,224 |
|
|
$ |
154,349 |
|
|
Estimated
unguaranteed residual value (1)
|
|
|
17,831 |
|
|
|
22,375 |
|
|
Initial
direct costs, net of amortization (2)
|
|
|
1,122 |
|
|
|
1,659 |
|
|
Less: Unearned
lease income
|
|
|
(13,568 |
) |
|
|
(18,271 |
) |
|
Reserve
for credit losses
|
|
|
(1,355 |
) |
|
|
(1,641 |
) |
|
Investment
in direct financing and sales-type leases—net
|
|
$ |
124,254 |
|
|
$ |
158,471 |
|
(1)
Includes estimated unguaranteed residual values of $2,315 thousand and
$1,191 thousand as of March 31, 2008 and 2007, respectively, for direct
financing leases which have been sold and accounted for under SFAS No.
140.
(2)
Initial direct costs are shown net of amortization of $1,536 thousand and $1,409
thousand as of March 31, 2008 and 2007, respectively.
Future
scheduled minimum lease rental payments as of March 31, 2008 are as follows
(in
thousands):
|
Year
ending March 31,2009
|
|
$ |
60,866 |
|
|
2010
|
|
|
35,665 |
|
|
2011
|
|
|
17,786 |
|
|
2012
|
|
|
3,367 |
|
|
2013
and thereafter
|
|
|
2,540 |
|
|
Total
|
|
$ |
120,224 |
|
Our
net
investment in direct financing and sales-type leases is collateral for
non-recourse and recourse equipment notes. See Note 6, “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,
2008
|
|
|
March 31,
2007
|
|
|
|
|
(in
thousands)
|
|
|
Cost
of equipment under operating leases
|
|
$ |
62,311 |
|
|
$ |
93,804 |
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(29,183 |
) |
|
|
(35,105 |
) |
|
Investment
in operating lease equipment—net
|
|
$ |
33,128 |
|
|
$ |
58,699 |
|
Future
scheduled minimum lease rental payments as of March 31, 2008 are as follows
(in
thousands):
|
Year
ending March 31,2009
|
|
$ |
12,979 |
|
|
2010
|
|
|
8,386 |
|
|
2011
|
|
|
3,144 |
|
|
2012
|
|
|
757 |
|
|
2013
and thereafter
|
|
|
77 |
|
|
Total
|
|
$ |
25,343 |
|
For
the
year ended March 31, 2008, we sold portions of our lease
portfolio. The sales were reflected in our financial statements as
sales of leased equipment totaling approximately $45.5 million and cost of
sales, leased equipment of $43.7 million. There was a reduction of
investment in leases and leased equipment—net of $43.7 million and non-recourse
notes payable of $12.4 million.
3.
RESERVES FOR CREDIT LOSSES
As
of
March 31, 2008 and 2007, activity in our reserves for credit
losses are as follows (in thousands):
|
|
|
Accounts
Receivable
|
|
|
Lease-Related
Assets
|
|
|
Total
|
|
|
Balance
April 1, 2006
|
|
$ |
2,060 |
|
|
$ |
2,913 |
|
|
$ |
4,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Bad Debts
|
|
|
460 |
|
|
|
(1,027 |
) |
|
|
(567 |
) |
|
Recoveries
|
|
|
23 |
|
|
|
- |
|
|
|
23 |
|
|
Write-offs
and other
|
|
|
(483 |
) |
|
|
(245 |
) |
|
|
(728 |
) |
|
Balance
March 31, 2007
|
|
|
2,060 |
|
|
|
1,641 |
|
|
|
3,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Bad Debts
|
|
|
55 |
|
|
|
(245 |
) |
|
|
(190 |
) |
|
Recoveries
|
|
|
40 |
|
|
|
- |
|
|
|
40 |
|
|
Write-offs
and other
|
|
|
(453 |
) |
|
|
(41 |
) |
|
|
(494 |
) |
|
Balance
March 31, 2008
|
|
$ |
1,702 |
|
|
$ |
1,355 |
|
|
$ |
3,057 |
|
Bad
debt
expenses were $0.6 million and $1.3 million for the years ended March 31, 2008
and March 31, 2007, respectively.
4.
PROPERTY AND EQUIPMENT—NET
Property
and equipment—net consists of the following:
|
|
|
As
of
|
|
|
|
|
March 31,
2008
|
|
|
March 31,
2007
|
|
|
|
|
(in
thousands)
|
|
|
Furniture,
fixtures and equipment
|
|
$ |
7,977 |
|
|
$ |
7,622 |
|
|
Vehicles
|
|
|
223 |
|
|
|
203 |
|
|
Capitalized
software
|
|
|
6,465 |
|
|
|
5,650 |
|
|
Leasehold
improvements
|
|
|
2,231 |
|
|
|
2,197 |
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(12,216 |
) |
|
|
(10,143 |
) |
|
Property
and equipment—net
|
|
$ |
4,680 |
|
|
$ |
5,529 |
|
For
the
years ended March 31, 2008 and 2007, depreciation expense on property and
equipment—net was $2,024 and $2,262 respectively.
5. GOODWILL
As
of
March 31, 2008 and 2007, we had goodwill of $26.1 million. We have
determined goodwill had not been impaired and that no potential impairment
existed based on testing performed on September 30, 2007 and 2006.
There
was
no change in the carrying amount of goodwill for the years ended March 31,
2008
and 2007.
6.
RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse
and non-recourse obligations consist of the following:
|
|
|
As
of
|
|
|
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
National
City Bank – Recourse credit facility of $35 million expiring on July 21,
2009. At our option, the carrying interest rate is either LIBOR
rate plus 175–250 basis points, or the Alternate Base Rate of the higher
of prime, or federal funds rate plus 50 basis points, plus 0-25 basis
points of margin. The interest rate at March 31, 2007 was
6.875%.
|
|
$ |
- |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
recourse obligations
|
|
$ |
- |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
equipment notes secured by related investments in leases with interest
rates ranging from 4.02% to 10.77% for fiscal years ended March
31, 2008 and March 31, 2007.
|
|
$ |
93,814 |
|
|
$ |
148,136 |
|
For
the
year ended March 31, 2008, we sold portions of our lease
portfolio. The sales were reflected in our financial statements as
sales of leased equipment totaling approximately $45.5 million and cost of
sales, leased equipment of $43.7 million. There was a reduction of
investment in leases and leased equipment – net of $43.7 million and
non-recourse notes payable of $12.4 million.
Principal
and interest payments on the recourse and 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.
There
are
two components of the GE Commercial Distribution Finance Corporation (“GECDF”)
credit facility: (1) a floor plan component and (2) an accounts receivable
component. Under the floor plan component, we had outstanding
balances of $55.6 million and $55.5 million as of March 31, 2008 and March
31,
2007, respectively. Under the accounts receivable component, we had
no outstanding balances as of March 31, 2008 and March 31, 2007. As
of March 31, 2008, 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 7.75%.
Effective October 29, 2007, the facility with GECDF was amended to increase
the
aggregate limit to $125 million from $100 million with a sub-limit on the
accounts receivable component of $30 million. The temporary overline
periods in the previous agreement were eliminated. Availability under the
GECDF facility may be limited by the asset value of equipment we purchase and
may be further limited by certain covenants and terms and conditions of the
facility. These covenants include but are not limited to a minimum total
tangible net worth and subordinated debt, and maximum debt to tangible net
worth
ratio of ePlus
Technology, inc. We were in compliance with these covenants as of
March 31, 2008. Either party may terminate with 90 days’ advance
notice.
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
not delivered the annual audited financial statements for the year ended March
31, 2008 included herein; however, GECDF has extended the delivery date to
provide the financial statements through August 15, 2008. The loss of the
GECDF credit facility could have a material adverse effect on our future results
as we currently rely on this facility and its components for daily working
capital and liquidity for our technology sales business and as an operational
function of our accounts payable process.
Borrowings
under our $35 million line of credit from National City Bank are subject to
and
in compliance with certain covenants regarding minimum consolidated tangible
net
worth, maximum recourse debt to net worth ratio, cash flow coverage, and minimum
interest expense coverage ratio. We are in compliance with these covenants
as of March 31, 2008. The borrowings are secured by our assets such as
leases, receivables, inventory, and equipment. Borrowings are limited to our
collateral base, consisting of equipment, lease receivables, and other current
assets, up to a maximum of $35 million. In addition, the credit agreement
restricts, and under some circumstances prohibits, the payment of
dividends.
The
National City Bank facility requires the delivery of our audited and unaudited
financial statements, and pro-forma financial projections, by certain
dates. As required by Section 5.1 of the facility, we have delivered all
financial statements.
Recourse
and non-recourse notes payable as of March 31, 2008, mature as
follows:
|
|
|
Non-Recourse
Notes Payable
|
|
|
|
|
(in
thousands)
|
|
|
Year
ending March 31,2009
|
|
$ |
52,394 |
|
|
2010
|
|
|
29,266 |
|
|
2011
|
|
|
10,198 |
|
|
2012
|
|
|
1,686 |
|
|
2013
and after
|
|
|
270 |
|
|
|
|
$ |
93,814 |
|
7.
RELATED PARTY TRANSACTIONS
From
April 1, 2007 to June 30, 2007, we leased approximately 50,232 square feet
for
use as our principal headquarter from Norton Building 1, LLC for a monthly
rent
payment of approximately $76 thousand. Effective July 1, 2007 and
through March 31, 2008, we entered into an amendment which increased the leased
square footage to 55,880 and the monthly rent payment to approximately $86
thousand. 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.
As of May 31, 2007, Mr. Norton, our President and CEO, has no managerial or
executive role in Norton Building 1, LLC. The lease was approved by the
Board of Directors prior to its commencement, and viewed by the Board as being
at or below comparable market rents, and ePlus has the right
to
terminate up to 40% of the leased premises for no penalty, with six months’
notice. During the years ended March 31, 2008 and March 31, 2007, we paid
rent in the amount of $1,052 thousand and $964 thousand,
respectively.
8.
COMMITMENTS AND CONTINGENCIES
We
lease
office space and certain office equipment to conduct our business. Rent
expense relating to these operating leases was $2.7 million and $2.5 million
for
the years ended March 31, 2008 and 2007, respectively. As of March 31, 2008,
the
future minimum lease payments are due as follows:
|
|
|
(in
thousands)
|
|
|
Year
ended March 31,2009
|
|
$ |
2,548 |
|
|
2010
|
|
|
1,790 |
|
|
2011
|
|
|
527 |
|
|
2012
|
|
|
135 |
|
|
2013
and after
|
|
|
132 |
|
|
|
|
$ |
5,132 |
|
Litigation
We
have
been involved in several matters, which are described below, arising from four
separate installment sales to a customer named Cyberco Holdings, Inc.
(“Cyberco”), which was perpetrating a fraud related to installment sales that
were assigned to various lenders and were non-recourse to us.
On
November 3, 2006, Banc of America Leasing and Capital, LLC (“BoA”) filed a
lawsuit against ePlus inc., seeking to enforce a guaranty in which ePlus inc.
guaranteed ePlus Group’s obligations to BoA relating to the Cyberco transaction.
In June 2007, ePlus Group paid to BoA the full amount of a judgment against
ePlus Group in favor of BoA. The suit against ePlus inc. seeks
attorneys’ fees BoA incurred in ePlus Group’s appeal of BoA’s suit against ePlus
Group referenced above, expenses that BoA incurred in a bankruptcy adversary
proceeding relating to Cyberco, attorneys’ fees incurred by BoA in defending a
pending suit by ePlus Group against BoA, and any other costs or fees relating
to
any of the described matters. The trial has been stayed pending the resolution
of litigation in California state court in which ePlus is the plaintiff in
a
suit against BoA. We are vigorously defending the suit against us by BoA. We
cannot predict the outcome of this suit. We do not believe a loss is probable;
therefore, we have not accrued for this matter.
In
a
bankruptcy adversary proceeding, which was filed on December 7, 2006, Cyberco’s
bankruptcy trustee sought approximately $775 thousand as alleged preferential
transfers. In January 2008, we entered into a settlement agreement with the
trustee and agreed to pay to the trustee $95 thousand, which we recorded in
the
year ended March 31, 2007.
On
January 18, 2007, a stockholder derivative action related to stock option
practices was filed in the United States District Court for the District of
Columbia. The amended complaint names ePlus inc. as nominal defendant, and
personally names eight individual defendants who are directors and/or executive
officers of ePlus. The amended complaint alleges violations of federal
securities law, and various state law claims such as breach of fiduciary duty,
waste of corporate assets and unjust enrichment. We have filed a Motion to
Dismiss the plaintiff’s amended complaint. The amended complaint seeks monetary
damages from individual defendants and that we take certain corrective actions
relating to option grants and corporate governance, and attorneys’ fees. We
cannot predict the outcome of this suit. We do not believe a loss is probable;
therefore, we have not accrued for this matter.
We
are
also engaged in other ordinary and routine litigation incidental to our
business. While we cannot predict the outcome of these various legal
proceedings, management believes that a loss is not probable and no amount
has
been accrued for these matters.
Regulatory
and Other Legal Matters
In
June
2006, the Audit Committee commenced an investigation of our stock option grants
since our initial public offering in 1996. In August 2006, the Audit Committee
voluntarily contacted and advised the staff of SEC of its investigation and
the
Audit Committee’s preliminary conclusion that a restatement would be required.
This restatement was included in our Form 10-K for the fiscal year ended March
31, 2006 and was filed with the SEC on August 16, 2007. The SEC opened an
informal inquiry and we have and will continue to cooperate with the staff.
No
amount has been accrued for this matter.
We
are
currently engaged in a dispute with the government of the District of Columbia
(“DC”) regarding personal property taxes on property we financed for our
customers. DC is seeking approximately $508 thousand plus interest and
penalties, relating to property we financed for our customers. We believe the
tax is owed by our customers, and are seeking resolution in DC’s Office of
Administrative Hearings. We cannot predict the outcome of this matter. We do
not
believe a loss is probable; therefore, we have not accrued for this
matter.
9.
INCOME TAXES
On
April
1, 2007, we adopted Financial Accounting Standards Board Interpretation No.
48,
“Accounting
for Uncertainty in Income Taxes-An
Interpretation of FASB Statement No. 109" (“FIN 48”). Specifically,
the pronouncement prescribes a recognition threshold and 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.
As
a
result of the implementation of FIN 48, we recorded a $735 thousand increase
in
the liability for unrecognized tax positions, comprised of $460 thousand of
unrecognized tax benefits and $275 thousand of interest and penalties. The
$735
thousand increase in liabilities is also partially offset by federal and state
tax benefits of $244 thousand. The net effect of $491 thousand was
recorded as a decrease to the opening balance of retained earnings on April
1,
2007. As of April 1, 2007 and March 31, 2008, we had $712 thousand of
total gross unrecognized tax benefits, which consists of $460 thousand gross
unrecognized tax benefits recorded during the implementation of FIN 48 and
$252
thousand recorded in previous years under SFAS No. 5, "Accounting
for Contingencies". The balance at March 31,
2008, that would affect the effective tax rate if recognized, would be $523
thousand. A reconciliation of the beginning and ending amount of
gross unrecognized tax benefits is a follows (in thousands):
|
Balance
at April 1, 2007
|
|
$ |
712 |
|
|
Additions
based on positions related to current year
|
|
|
- |
|
|
Additions
for tax positions of prior years
|
|
|
- |
|
|
Reductions
for tax positions of prior years
|
|
|
- |
|
|
Balance
at March 31, 2008
|
|
$ |
712 |
|
We
recognized accrued interest and penalties related to unrecognized tax benefits
in income tax expense. During the fiscal year ended March 31,
2008, we recognized $50 thousand of interest related to FIN 48 liabilities,
and
did not recognize any additional penalties.
There
were no increases to gross unrecognized tax benefits during the year ended
March
31, 2008. We expect the amount of unrecognized tax benefits will decrease
by approximately $250 thousand in the next 12 months due to the payment of
the
current IRS audit assessment.
We
file
income tax returns, including returns for our subsidiaries, with federal, state,
local, and foreign jurisdictions. We are currently under audit by the Internal
Revenue Service (“IRS”) for fiscal years 2004, 2005 and 2006. We recorded a
liability associated with preliminary results of the audit of $252 thousand
in
fiscal year 2007. We expect the audit to close during the fourth quarter of
fiscal year 2009. Tax years 2003, 2004, 2005 and 2006 are subject to examination
by state taxing authorities. In addition, 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:
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
35 |
% |
|
|
35 |
% |
|
Income
tax expense computed at the U.S. statutory federal rate
|
|
$ |
10,480 |
|
|
$ |
10,537 |
|
|
State
income tax expense—net of federal benefit
|
|
|
1,972 |
|
|
|
1,027 |
|
|
Change
in state rate and estimate
|
|
|
34 |
|
|
|
725 |
|
|
Change
in valuation allowance
|
|
|
76 |
|
|
|
(28 |
) |
|
Meals
and entertainment expense
|
|
|
118 |
|
|
|
120 |
|
|
Non-taxable
interest income
|
|
|
(18 |
) |
|
|
(22 |
) |
|
Fines
and penalties
|
|
|
14 |
|
|
|
27 |
|
|
Officers’
life insurance premiums
|
|
|
3 |
|
|
|
8 |
|
| Stock-based
compensation on cancelled options |
|
|
724 |
|
|
|
- |
|
|
Other
|
|
|
179 |
|
|
|
335 |
|
|
Provision
for income taxes
|
|
$ |
13,582 |
|
|
$ |
12,729 |
|
|
Effective
income tax rate
|
|
|
45.4 |
% |
|
|
42.3 |
% |
The
components of the provision for income taxes are as follows:
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$ |
12,637 |
|
|
$ |
6,467 |
|
|
State
|
|
|
3,035 |
|
|
|
1,580 |
|
|
Foreign
|
|
|
155 |
|
|
|
131 |
|
|
Total
current expense
|
|
|
15,827 |
|
|
|
8,178 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,354 |
) |
|
|
3,856 |
|
|
State
|
|
|
109 |
|
|
|
695 |
|
|
Total
deferred expense (benefit)
|
|
|
(2,245 |
) |
|
|
4,551 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
13,582 |
|
|
$ |
12,729 |
|
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:
|
|
|
For
the Year Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
Accrued
vacation
|
|
$ |
929 |
|
|
$ |
761 |
|
|
Provision
for bad debts
|
|
|
1,424 |
|
|
|
1,438 |
|
|
Delinquent
rent
|
|
|
46 |
|
|
|
84 |
|
|
State net
operating loss carryforward
|
|
|
694 |
|
|
|
835 |
|
|
Basis
difference in fixed assets
|
|
|
815 |
|
|
|
759 |
|
|
Lawsuit
settlement and judgment reserve
|
|
|
127 |
|
|
|
124 |
|
|
Book
compensation on discounted stock options
|
|
|
1,453 |
|
|
|
1,422 |
|
|
Payroll
tax—stock options
|
|
|
139 |
|
|
|
211 |
|
|
Other
accruals and reserves
|
|
|
1,592 |
|
|
|
1,847 |
|
|
Gross
deferred tax assets
|
|
|
7,219 |
|
|
|
7,481 |
|
|
Less:
valuation allowance
|
|
|
(906 |
) |
|
|
(737 |
) |
|
Net
deferred tax assets
|
|
|
6,313 |
|
|
|
6,744 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Basis
difference in operating lease items
|
|
|
(5,753 |
) |
|
|
(9,015 |
) |
|
Basis
difference in tax deductible goodwill
|
|
|
(2,631 |
) |
|
|
(2,093 |
) |
|
Other
deferred tax liabilities
|
|
|
(606 |
) |
|
|
(344 |
) |
|
Total
deferred tax liabilities
|
|
|
(8,990 |
) |
|
|
(11,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$ |
(2,677 |
) |
|
$ |
(4,708 |
) |
The
net
effective income tax rate for the year ended March 31, 2008 increased from
42.3%
to 45.4%. This increase was primarily due to the increase in
non-deductible share based compensation expense related to the cancellation
of
450,000 options during the first quarter of fiscal year 2008.
We have
state net operating losses of approximately
$18.5 million, which predominantly will begin to expire in the year 2022.
We also have foreign tax credit carryforwards of approximately $151 thousand.
Credits generated at March 31, 2004 will begin to expire at March 31, 2009,
and
the remaining credits will begin to expire at March 31, 2015.
The
net
change in the valuation allowance during the year ended March 31, 2008 was
an increase of $169 thousand. This change related primarily to an
increase in foreign tax credits and an increase in state net operating
loss. The valuation allowance 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 $212 thousand and state net operating loss deferred tax
asset balance of $694 thousand will not be realized.
10. STOCK
REPURCHASE
On
November 18, 2005, the Board authorized a new stock repurchase program of up
to
3,000,000 shares with a cumulative purchase limit of $12.5 million, which
expired on November 17, 2006. During the year ended March 31, 2008, we
did not repurchase any shares of our outstanding common stock. During
the year ended March 31, 2007, we repurchased 209,000 shares of our
outstanding common stock for a total purchase price of approximately $2.9
million. Since the inception of our initial repurchase program on
September 20, 2001, as of March 31, 2008, we have repurchased 2,978,990 shares
of our outstanding common stock at an average cost of $11.04 per share for
a
total purchase price of $32.9 million.
11.
STOCK-BASED COMPENSATION
Contributory
401(k) Profit Sharing Plan
We
provide our employees with a contributory 401(k) profit sharing plan. To be
eligible to participate in the plan, employees must be at least 21 years of
age
and have completed a minimum service requirement. Employer
contribution percentages are determined by us and are discretionary each
year. The employer contributions vest over a four-year period. For the
years ended March 31, 2008 and 2007, our expense for the plan was approximately
$315 thousand and $360 thousand, respectively.
SFAS
No. 123R
On
April
1, 2006, we adopted SFAS No. 123R using the modified prospective transition
method. We have recognized compensation cost equal to the fair values for
the unvested portion of share-based awards at April 1, 2006 over the remaining
period of service, as well as compensation cost expense for those share-based
awards granted or modified on or after April 1, 2006 over the vesting period
based on the grant-date fair values using the straight-line method. The
fair values were estimated using the Black-Scholes option pricing
model.
Stock
Option Plans
We
issued
only incentive and non-qualified stock option awards and, except as noted below,
each grant was issued under one of the following five plans: (1) the 1996
Stock Incentive Plan (the “1996 SIP”), (2) Amendment and Restatement of the 1996
Stock Incentive Plan (the “Amended SIP”) (collectively the “1996 Plans”), (3)
the 1998 Long-Term Incentive Plan (the “1998 LTIP”), (4) Amendment and
Restatement of the 1998 Stock Incentive Plan (2001) (the “Amended LTIP (2001)”)
or (5) Amendment and Restatement of the 1998 Stock Incentive Plan (2003) (the
“Amended LTIP (2003)”). Sections of note are detailed below. All the
stock option plans require the use of the previous trading day's closing price
when the grant date falls on a date the stock was not traded.
In
addition, at the IPO, there were 245,000 options issued that were not part
of
any plan, but issued under various employment agreements.
1996
Stock Incentive Plan
The
allowable number of outstanding shares under this plan was 155,000. On
September 1, 1996, the Board adopted this plan, and it was effective on November
8, 1996 when the SEC declared our Registration Statement on Form S-1 effective
in connection with our IPO on November 20, 1996. The 1996 SIP is comprised
of an Incentive Stock Option Plan, a Nonqualified Stock Option Plan, and an
Outside Director Stock Option Plan. Each of the components of the 1996
Plans provided that options would only be granted after execution of an Option
Agreement. Except for the number of options awarded to directors, the
salient provisions of the 1996 SIP are identical to the Amended SIP, which
is
described below.
With
regard to director options, the 1996 Outside Director Stock Option Plan provided
for 10,000 options to be granted to each non-employee director upon completion
of the IPO, and 5,000 options to be granted to each non-employee director on
the
anniversary of each full year of his or her service as a director of ePlus. As with the other
components of the 1996 Plans, the director options would be granted only after
execution of an Option Agreement.
Amendment
and Restatement of the 1996 Stock Incentive Plan
The
1996
SIP was amended via an Amendment and Restatement of the 1996 Stock Incentive
Plan. The primary purpose of the amendment was to increase the aggregate
number of shares allocated to the plan by making the shares available a
percentage (20%) of total shares outstanding rather than a fixed
number. The Amended SIP also modified the annual grants to directors from
5,000 options to 10,000 options.
The
Amended SIP also provided for an employee stock purchase plan, and permitted
the
Board to establish other restricted stock and performance-based stock awards
and
programs. The Amended SIP was adopted by the Board and became effective on
May 14, 1997, subject to approval at the annual shareholders meeting that
fall. The Amended SIP was adopted by shareholders at the annual meeting on
September 30, 1997.
1998
Long-Term Incentive Plan
The
1998
LTIP was adopted by the Board on July 28, 1998, which is its effective date,
and
approved by the shareholders on September 16, 1998. The allowable number of
shares under the 1998 LTIP is 20% of the outstanding shares, less shares
previously granted and shares purchased through our employee stock purchase
program. The 1998 LTIP shares many characteristics of the earlier
plans. It continues to specify that options shall be priced at not less
than fair market value. The 1998 LTIP consolidated the preexisting plans
and made the Compensation Committee of the Board responsible for its
administration. In addition, the 1998 LTIP eliminated the language of the
1996 Plans that “options shall be granted only after execution of an Option
Agreement.” Thus, while the 1998 LTIP does require that grants be evidenced
in writing, the writing is not a condition precedent to the grant of the
award.
Another
change to note is the modification of the LTIP as it relates to options awarded
to directors. Under the 1998 LTIP, instead of being awarded on the
anniversary of the director’s service, the options are to be automatically
awarded the day after the annual shareholders meeting to all 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, is our current plan, and covers option grants for employees,
executives and outside directors.
As
of
March 31, 2008, a total of 2,223,594 shares of common stock have been reserved
for issuance upon exercise of options granted under the Amended LTIP
(2003).
Stock-Based
Compensation Expense
In
accordance with SFAS No. 123R, we recognized $1.3 million of stock-based
compensation expense for the year ended March 31, 2008 as compared to $0.9
million for the year ended March 31, 2007. Messrs. Norton, Bowen,
Parkhurst and Mencarini entered into separate stock option cancellation
agreements pursuant to which options to purchase 300,000 options, 50,000
options, 50,000 options, and 50,000 options, respectively, were
cancelled. On May 11, 2007, these 450,000 options were cancelled
which resulted in the recognition of the remaining nonvested
share-based compensation expense of $1.6 million for the full
year. This amount is partially offset by a reversal of payroll taxes,
interests and penalties of $243 thousand due to the expiration of a statue
of
limitations. As of March 31, 2008, there was $58 thousand of
unrecognized compensation expense related to nonvested options. This
expense is expected to be fully recognized over the next six
months.
Stock
Option Activity
During
the year ended March 31, 2008, there were no stock options granted to
employees. During the year ended March 31, 2007, 40,000 stock options
were granted to employees. We use the Black-Scholes option-pricing
model to estimate the fair value of the stock-based option
rewards. During the year ended March 31, 2007, the following
assumptions were utilized:
| Options
granted under the Amended LTIP: |
|
|
|
Expected
life of option
|
|
|
5
years
|
|
Expected
stock price volatility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life of the option is the period of time that we expect the options granted to
be outstanding. Expected stock price volatility is based on historical
volatility of our stock. Expected dividend yield is zero as we do not
expect to pay any dividends, nor have we historically paid any
dividends. Risk-free interest rate is the five-year nominal constant
maturity treasury rate on the date of the award.
A
summary
of stock option activity during the two years ended March 31, 2008 is as
follows:
|
|
|
Number
of Shares
|
|
|
Exercise Price Range
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Contractual Life Remaining
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2006
|
|
|
1,999,911 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
9.93 |
|
|
|
|
|
|
|
|
Options
granted
|
|
|
40,000 |
|
|
$ |
10.25 |
|
|
$ |
10.25 |
|
|
|
|
|
|
|
|
Options
exercised (1)
|
|
|
(173,518 |
) |
|
$ |
6.23
- $10.75 |
|
|
$ |
7.36 |
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(77,780 |
) |
|
$ |
8.75
- $17.38 |
|
|
$ |
9.97 |
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2007
|
|
|
1,788,613 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
10.20 |
|
|
|
4.6 |
|
|
$ |
2,539,778 |
|
|
Vested
or expected to vest at March 31, 2008
|
|
|
1,788,613 |
|
|
|
|
|
|
$ |
10.20 |
|
|
|
4.6 |
|
|
$ |
2,539,778 |
|
|
Exercisable,
March 31, 2007
|
|
|
1,486,613 |
|
|
|
|
|
|
$ |
10.00 |
|
|
|
3.9 |
|
|
$ |
2,539,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2007
|
|
|
1,788,613 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
10.20 |
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(547,800 |
) |
|
$ |
8.75
- $13.25 |
|
|
$ |
11.16 |
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
1,240,813 |
|
|
$ |
6.23
- $17.38 |
|
|
$ |
9.78 |
|
|
|
2.8 |
|
|
$ |
1,294,628 |
|
|
Vested
or expected to vest at March 31, 2008
|
|
|
1,240,813 |
|
|
|
|
|
|
$ |
9.78 |
|
|
|
2.8 |
|
|
$ |
1,294,628 |
|
|
Exercisable,
March 31, 2008
|
|
|
1,220,813 |
|
|
|
|
|
|
$ |
9.72 |
|
|
|
2.7 |
|
|
$ |
1,294,628 |
|
(1)
The
total intrinsic value of stock options exercised during the year ended March
31,
2007 was $991 thousand.
Additional
information regarding options outstanding as of March 31, 2008 is as
follows:
| |
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Range
of Exercise Prices
|
|
|
Options
Outstanding
|
|
|
Weighted
Avg. Exercise Price per Share
|
|
|
Weighted
Avg. Contractual Life Remaining
|
|
|
Options
Exercisable
|
|
|
Weighted
Avg. Exercise Price per Share
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
6.23
- $9.00 |
|
|
|
863,806 |
|
|
$ |
7.70 |
|
|
|
2.2 |
|
|
|
863,806 |
|
|
$ |
7.70 |
|
| $ |
9.01
- $13.50 |
|
|
|
166,500 |
|
|
$ |
11.51 |
|
|
|
5.5 |
|
|
|
146,500 |
|
|
$ |
11.29 |
|
| $ |
13.51
- $17.38 |
|
|
|
210,507 |
|
|
$ |
16.90 |
|
|
|
3.0 |
|
|
|
210,507 |
|
|
$ |
16.90 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
6.23
- $17.38 |
|
|
|
1,240,813 |
|
|
$ |
9.78 |
|
|
|
2.8 |
|
|
|
1,220,813 |
|
|
$ |
9.72 |
|
We
issue
shares from our authorized but unissued common stock to satisfy stock option
exercises.
A
summary
of nonvested option activity is presented below:
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at April 1, 2007
|
|
|
302,000 |
|
|
$ |
7.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
Vested
|
|
|
(102,000 |
) |
|
$ |
7.57 |
|
|
Forfeited
|
|
|
(180,000 |
) |
|
$ |
7.76 |
|
|
Nonvested
at March 31, 2008
|
|
|
20,000 |
|
|
$ |
6.13 |
|
12.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following disclosure of the estimated fair value of our financial instruments
is
in accordance with the provisions of SFAS No. 107, “Disclosures About Fair Value
of
Financial Instruments.” The valuation methods we used are set forth
below.
The
accuracy and usefulness of the fair value information disclosed herein is
limited by the following factors:
—
These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
—
These
estimates do not reflect any premium or discount that could result from offering
for sale at one time our entire holding of a particular financial
asset.
—
SFAS
No. 107 excludes from its disclosure requirements lease contracts and various
significant assets and liabilities that are not considered to be financial
instruments.
Because
of these and other limitations, the aggregate fair value amounts presented
in
the following table do not represent the underlying value. We
determine the fair value of notes payable by applying an average portfolio
debt
rate and applying such rate to future cash flows of the respective financial
instruments. The fair value of cash and cash equivalents is determined to equal
the book value.
The
carrying amounts and estimated fair values of our financial instruments are
as
follows (in thousands):
|
|
|
As
of March 31, 2008
|
|
|
As
of March 31, 2007
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
58,423 |
|
|
$ |
58,423 |
|
|
$ |
39,680 |
|
|
$ |
39,680 |
|
|
Accounts
receivable
|
|
|
109,706 |
|
|
|
109,706 |
|
|
|
110,662 |
|
|
|
110,662 |
|
|
Notes
receivable
|
|
|
726 |
|
|
|
726 |
|
|
|
237 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
84,394 |
|
|
|
84,394 |
|
|
|
83,796 |
|
|
|
83,796 |
|
|
Accrued
expenses and other liabilities
|
|
|
30,372 |
|
|
|
30,372 |
|
|
|
25,960 |
|
|
|
25,960 |
|
|
Non-recourse
notes payable
|
|
|
93,814 |
|
|
|
93,297 |
|
|
|
148,136 |
|
|
|
148,445 |
|
|
Recourse
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
5,000 |
|
|
|
5,000 |
|
13.
SEGMENT REPORTING
We
manage
our business segments on the basis of the products and services offered. Our
reportable segments consist of our traditional financing business unit and
technology sales business unit. The financing business unit offers
lease-financing solutions to corporations and governmental entities nationwide.
The technology sales business unit sells information technology equipment and
software and related services primarily to corporate customers on a nationwide
basis. The technology sales business unit also provides Internet-based
business-to-business supply chain management solutions for information
technology and other operating resources. We evaluate segment performance on
the
basis of segment net earnings.
Both
segments utilize our proprietary software and services throughout the
organization. Sales and services and related costs of e-procurement software
are
included in the technology sales business unit. Income related to services
generated by our proprietary software and services are included in the
technology sales business unit.
The
accounting policies of the segments are the same as those described in Note
1,
“Organization and Summary of Significant Accounting Policies.” Corporate
overhead expenses are allocated on the basis of employee headcount.
|
|
|
Year
ended March 31, 2008
|
|
|
|
|
Financing
Business Unit
|
|
|
Technology
Sales Business Unit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
4,495 |
|
|
$ |
727,159 |
|
|
$ |
731,654 |
|
|
Sales
of leased equipment
|
|
|
45,493 |
|
|
|
- |
|
|
|
45,493 |
|
|
Lease
revenues
|
|
|
55,459 |
|
|
|
- |
|
|
|
55,459 |
|
|
Fee
and other income
|
|
|
1,479 |
|
|
|
15,220 |
|
|
|
16,699 |
|
|
Total
revenues
|
|
|
106,926 |
|
|
|
742,379 |
|
|
|
849,305 |
|
|
Cost
of sales
|
|
|
47,126 |
|
|
|
641,969 |
|
|
|
689,095 |
|
|
Direct
lease costs
|
|
|
20,955 |
|
|
|
- |
|
|
|
20,955 |
|
|
Selling,
general and administrative expenses
|
|
|
14,790 |
|
|
|
86,400 |
|
|
|
101,190 |
|
|
Segment
earnings
|
|
|
24,055 |
|
|
|
14,010 |
|
|
|
38,065 |
|
|
Interest
and financing costs
|
|
|
7,986 |
|
|
|
137 |
|
|
|
8,123 |
|
|
Earnings
before income taxes
|
|
$ |
16,069 |
|
|
$ |
13,873 |
|
|
$ |
29,942 |
|
|
Assets
|
|
$ |
231,301 |
|
|
$ |
148,447 |
|
|
$ |
379,748 |
|
|
|
|
Year
ended March 31, 2007
|
|
|
|
|
Financing
Business Unit
|
|
|
Technology
Sales Business Unit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
3,903 |
|
|
$ |
697,334 |
|
|
$ |
701,237 |
|
|
Sales
of leased equipment
|
|
|
4,455 |
|
|
|
- |
|
|
|
4,455 |
|
|
Lease
revenues
|
|
|
54,699 |
|
|
|
- |
|
|
|
54,699 |
|
|
Fee
and other income
|
|
|
1,462 |
|
|
|
12,258 |
|
|
|
13,720 |
|
|
Patent
settlement income
|
|
|
- |
|
|
|
17,500 |
|
|
|
17,500 |
|
|
Total
revenues
|
|
|
64,519 |
|
|
|
727,092 |
|
|
|
791,611 |
|
|
Cost
of sales
|
|
|
7,162 |
|
|
|
619,699 |
|
|
|
626,861 |
|
|
Direct
lease costs
|
|
|
20,291 |
|
|
|
- |
|
|
|
20,291 |
|
|
Selling,
general and administrative expenses
|
|
|
17,959 |
|
|
|
86,269 |
|
|
|
104,228 |
|
|
Segment
earnings
|
|
|
19,107 |
|
|
|
21,124 |
|
|
|
40,231 |
|
|
Interest
and financing costs
|
|
|
9,904 |
|
|
|
221 |
|
|
|
10,125 |
|
|
Earnings
before income taxes
|
|
$ |
9,203 |
|
|
$ |
20,903 |
|
|
$ |
30,106 |
|
|
Assets
|
|
$ |
289,807 |
|
|
$ |
128,323 |
|
|
$ |
418,130 |
|
Included
in the Financing Business Unit above are inter-segment accounts receivable
of
$47.5 million and $42.7 million for the years ended March 31, 2008 and
2007, respectively. Included in the Technology Sales Business Unit
above are inter-segment accounts payable of $47.5 million and $42.7
million for the years ended March 31, 2008 and 2007, respectively.
For
the
years ended March 31, 2008 and March 31, 2007, our technology sales business
unit sold products to our financing business unit of $2.1 million and $2.4
million, respectively. These revenues were eliminated in our
technology sales business unit for the same periods.
14. LEGAL
SETTLEMENTS
On
December 11, 2006, ePlus inc. and SAP
America,
Inc. and its German parent, SAP AG (collectively, “SAP”) entered into a Patent
License and Settlement Agreement (the “Agreement”) to settle a patent lawsuit
between the companies which was filed on April 20, 2005. Under the terms of
the
Agreement, we licensed to SAP our existing patents as well as patents developed
and/or acquired by us within the next five years in exchange for a one-time
cash
payment of $17.5 million, which was paid on January 16, 2007. No royalties
or
additional payments of any kind are required to keep this Agreement in full
force. We are not engaged in licensing patents in the normal course of our
business and do not perform research and development activities to obtain
patentable processes or products; however, we may patent our existing business
processes or products. We do not anticipate incurring any additional costs
arising as a result of this Agreement and there are no further actions that
are
required to be taken by us. In addition, SAP has agreed not to pursue legal
action against us for patent infringement as to any of our current lines of
business on any of SAP’s patents for a period of five years. The Agreement also
provided for general release, indemnification for its violation, and dismissed
the litigation with prejudice. We recorded the transaction in the quarter
ended December 31, 2006 in patent settlement income on the
accompanying Consolidated Statements of Operations. The
following table shows the line items on the Consolidated Statement of Operations
that were impacted by the settlement (in thousands):
|
|
|
|
|
|
Professional
and other fees
|
|
|
|
|
|
|
|
|
|
|
Net
amount realized before income taxes
|
|
|
|
|
15.
THE NASDAQ STOCK MARKET PROCEEDINGS
Effective
at the opening of business on July 20, 2007, our common stock was delisted
from
The Nasdaq Global Market due to non-compliance with financial statement
reporting requirements. Specifically, in determining to delist our common
stock, Nasdaq cited the delay of more than one year from the final due date
for
the filing of our fiscal year 2006 Annual Report on Form 10-K with the
SEC. We filed our fiscal year 2006 Form 10-K with the SEC on August
16, 2007, and all
subsequent quarterly and annual reports.
F-28