CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain statements that are, or may be
deemed to be, “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are made in reliance upon the protections
provided by such acts for forward-looking statements. Such statements are not
based on historical fact, but are based upon numerous assumptions about future
conditions that may not occur. Forward-looking statements are generally
identifiable by use of forward-looking words such as “may,” “should,” “intend,”
“estimate,” “will,” “potential,” “could,” “believe,”“expect,” “anticipate,”
“project,” and similar expressions. Readers are cautioned not to place undue
reliance on any forward-looking statements made by us or on our behalf.
Forward-looking statements are made based upon information that is currently
available or management’s current expectations and beliefs concerning future
developments and their potential effects upon us, speak only as of the date
hereof, and are subject to certain risks and uncertainties. We do not
undertake any obligation to publicly update or correct any forward-looking
statements to reflect events or circumstances that subsequently occur, or of
which we hereafter become aware. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. Our ability to consummate such transactions and achieve such
events or results is subject to certain risks and uncertainties. Such risks and
uncertainties include, but are not limited to, the matters set forth
below:
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we offer
a comprehensive set of solutions—the bundling of our direct IT sales,
professional services and financing with our proprietary software, and may
encounter some of the challenges, risks, difficulties and uncertainties
frequently faced by similar companies, such
as:
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managing
a diverse product set of solutions in highly competitive
markets;
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increasing
the total number of customers utilizing bundled solutions by up-selling
within our customer base and gaining new
customers;
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adapting
to meet changes in markets and competitive
developments;
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maintaining
and increasing advanced professional services by retaining highly skilled
personnel and vendor
certifications;
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integrating
with external IT systems, including those of our customers and vendors;
and
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continuing
to enhance our proprietary software and update our technology
infrastructure to remain competitive in the
marketplace.
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our
ability to hire and retain sufficient qualified
personnel;
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a
decrease in the capital spending budgets of our customers or purchases
from us;
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our
ability to protect our intellectual
property;
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the
creditworthiness of our customers;
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our
ability to raise capital, maintain, or increase as needed, our lines of
credit or floor planning facilities, or obtain non-recourse financing for
our transactions;
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our
ability to realize our investment in leased
equipment;
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our
ability to reserve adequately for credit losses;
and
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significant
adverse changes in, reductions in, or losses of relationships with major
customers or vendors.
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We cannot
be certain that our business strategy will be successful or that we will
successfully address these and other challenges, risks and uncertainties. For a
further list and description of various risks, relevant factors and
uncertainties that could cause future results or events to differ materially
from those expressed or implied in our forward-looking statements, see the Item
1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” sections contained elsewhere in
this report, as well as other reports that we file with the
SEC.
PART
I
GENERAL
Our
company was founded in 1990 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. Our second
segment is our financing business unit that consists of the equipment and
financing business to commercial, government, 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.
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Financing
Business
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ePlus Jamaica, inc.;
and
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On March
31, 2003, the former entities ePlus Technology of PA, inc.
and ePlus Technology of
NC, inc. were merged into ePlus Technology, inc. This
combination created one national entity to conduct our Technology sales and
services business. ePlus Systems, inc. and ePlus Content Services, inc.
were incorporated on May 15, 2001 and provide consulting services and
proprietary software for enterprise supply management. ePlus Capital, inc. owns 100
percent of ePlus Canada
Company, which was created on December 27, 2001 to transact business within
Canada. ePlus
Government, inc. was incorporated on September 17, 1997 to handle business
servicing the Federal government marketplace, which includes financing
transactions that are generated through government contractors. ePlus Document Systems, inc.
was incorporated on October 15, 2003 and provides proprietary software for
document management.
ePlus Jamaica, inc. was
incorporated on April 8, 2005 and ePlus Iceland, inc. was
incorporated on August 10, 2005. Both companies are subsidiaries of
ePlus Group, inc. and
were created to transact business in Jamaica and Iceland, respectively; however,
neither entity has conducted any significant business, or has any employees or
business locations outside the United States.
OUR
BUSINESS
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 technology solutions. Our
current offerings include:
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direct
marketing of information technology equipment and third-party
software;
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advanced
professional services;
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proprietary
software, including order-entry and order-management software
(OneSource®), procurement, asset management, document management and
distribution software, and electronic catalog content management software
and services; and
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leasing
and business process services.
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We have
been in the business of selling, leasing, financing, and managing information
technology and other assets for more than 18 years and have been providing
software for more than nine years. We currently derive the majority of our
revenues from Information Technology (“IT”) product sales, professional
services, and leasing. Our sales are generated primarily by our internal sales
force and through vendor relationships to our customers, which include
commercial accounts; federal, state and local governments; K-12 schools; and
higher education institutions. We also lease and finance equipment, and supply
software and services directly and through relationships with vendors and
equipment manufacturers.
Our broad
product offerings provide customers with a highly-focused, end-to-end, turnkey
solution for purchasing, lifecycle management, and financing for IT products and
services. In addition, we offer asset-based financing and leasing of capital
assets and lifecycle management solutions for the assets during their useful
life, including disposal. We offer our customers a multi-disciplinary approach
for implementing, controlling, and maintaining cost savings throughout their
organization, allowing our customers to simplify their administrative processes,
gain data transparency and visibility, and enhance internal controls and
reporting.
The
key elements of our business are:
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Direct IT Sales: We are
a direct marketer and authorized reseller of leading IT products via our
direct sales force and web-based ordering solution,
OneSource®.
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Advanced Professional Services:
We provide an array of Internet telephony and Internet
communications, 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 standalone solutions or be integrated as component of a bundled
solution. These include eProcurement, spend
management, asset management, document management, and product content
management software. These systems can be installed behind our client's
firewall or operated as a service hosted by ePlus.
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Our
proprietary software and associated business process services allow us to better
support and retain our customers in our technology sales and finance
businesses. We have developed and acquired these products and
services to distinguish us from our competition by providing a comprehensive
offering to customers.
Our
primary target customers are middle-market and larger companies in the United
States of America with annual revenues between $25 million and $2.5 billion. We
believe there are more than 50,000 target customers in this
market.
INDUSTRY
BACKGROUND
In the
current marketplace, we believe demand for IT equipment, services, and financing
is being driven by the following industry trends:
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With
industry analysts forecasting a decline in overall IT spending in the U.S.
in 2009, we believe that customers are focused on cost savings initiatives
to reduce their overall cost of information technology systems and
processes. We have continued to focus our advanced technology
solutions and resources which provide long-term cost savings such as
reduced energy consumption, footprint, and management costs include
server, storage, and desktop virtualization; and replacement of obsolete
technology hardware.
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We
believe customers are focused on improving their data and physical
security, from their data centers to their end-user mobile devices, and
all points between. These comprehensive and complex solutions
may include consulting, hardware, software, and implementation, and
ongoing maintenance and monitoring. We have continued to focus
our resources in these areas to meet expected customer
demand.
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We
believe that customers are seeking to reduce the number of vendors they do
business with for the purpose of improving internal efficiencies,
enhancing accountability and improving supplier management practices, and
reducing costs. We have continued to enhance our relationships with
premier manufacturers and gained the engineering and sales certifications
required to provide the most desired technologies for our
customers. In addition, we have continued to enhance our
automated business processes, including eProcurement and
electronic business solutions, such as OneSource®, to make transacting
business with us more efficient and cost effective for our
customers. We introduced OneSource IT+ in 2009 to improve
internal business processes efficiencies for clients ordering from
multiple suppliers. OneSource IT+ is positioned to help our clients and
prospects reduce the number of suppliers they purchase from, eliminate
multiple and unique ordering processes, provide a consolidated view of IT
purchases, consolidate invoice and payable processing and reduce the
complexities of IT spend through multiple
suppliers.
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We
believe that customers prefer bundled offerings to include IT
products/services and leasing, due to decreased liquidity in the global
financial markets, as customers seek to preserve cash balances and working
capital availability under bank
lines.
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We have
continuously evolved our advanced professional service and software
capabilities. We believe that we are distinctively positioned to take advantage
of this shift in client purchasing as evidenced by continued development of our
various integrated solutions, which we began developing in 1999 (earlier than
many other direct marketers) and we continue to believe that our bundled
solution set is 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, national and international firms, including manufacturers; other
direct marketers; national and regional resellers; and regional, national, and
international services providers. In addition, many computer manufacturers may
sell or lease directly to our customers, and our continued ability to compete
effectively may be affected by the policies of such
manufacturers.
We
believe that we offer enhanced solution capability, broader product selection
and availability, competitive prices, and greater purchasing convenience than
traditional retail stores or value-added resellers. In addition, our dedicated
account executives offer the necessary support functions (e.g., software,
purchases on credit terms, leasing, and efficient return processes) that
Internet-only sellers do not usually provide. We are not aware of any
competitors in the United States that offer the same set of bundled solution
offerings as we offer as a principal.
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, national and
international 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 OneSource®, OneSource® IT+ , Procure+®, Spend+®, Manage+®, Content+®, ePlus Leasing, strategic
sourcing, document management software, and business process
outsourcing.
In all of
our markets, some of our competitors have longer operating histories and greater
financial, technical, marketing, and other resources than we do. In addition,
some of these competitors may be able to respond more quickly to new or changing
opportunities, technologies, and 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 offerings are 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 2009, we extended the OneSource® brand by creating two
differentiated solutions: OneSourceIT, for purchasing from ePlus’ technology catalog,
and OneSourceIT+, for purchasing from ePlus and other technology
vendors. We continue to offer Procure+, Content+, and Spend+, a full
suite of eProcurement, catalog content management, and spend analysis
applications on an SAAS or enterprise basis.
In 2008,
we started a telesales group 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, 2009, the telesales group had
11 telesales professionals.
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.
Expanding
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, NetApp, and VMWare. We are especially focused on
virtualization, unified communications, 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
VMWare, HP, IBM, Cisco, and NetApp on both a national level, for strategic
purposes, and at the local level, for tactical objectives. Strategically,
national relationships with key manufacturers give us increased visibility and
legitimacy, and authenticate our services. In addition, by maintaining a number
of high level engineering certifications, we are promoted as a high level
solutions provider by certain manufacturers. On a tactical level, by having more
than 20 locations, we are able to maintain direct relationships with key sales
and marketing personnel from the manufacturer, who provide referral sales
opportunities that are unavailable to Internet-only and catalog-based direct
marketers.
Enhancing
the Effectiveness of our Internet-based solutions, especially
OneSource®
We will
continue to improve and expand the functionality of our integrated,
Internet-based solutions to better serve our customers’ needs. We intend to use
the flexibility of our platform to offer additional products and services when
economically feasible. As part of this strategy, we may also acquire technology
companies to expand and enhance the platform of solutions to provide additional
functionality and value-added services.
RESEARCH
AND DEVELOPMENT
In the
1990s, we utilized licensed software and outsourced development to provide
software and hosted software-related services to our customers, but with the
acquisition of software products and the hiring of employees from acquisitions
in the early 2000s, 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, development costs are
capitalized until the product is made available for release to customers. For
the year ended March 31, 2009, no such costs were capitalized and $167 thousand
was amortized. For the year ended March 31, 2008, no such costs were capitalized
and $189 thousand was amortized. We have also outsourced certain programming
tasks to an offshore software-development company to supplement our internal
development, support, and quality assurance. 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
(“SAAS”), or a services model, where our personnel may utilize our
software to provide one or more solutions to our
customers.
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We expect
that competitive factors will create a continuing need for us to improve and add
to our technology platform. The addition of new products and services will also
require that we continue to improve the technology underlying our applications.
We expect to continue to make significant investments in systems, personnel, and
offshore development 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 50,000 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 by a combination of salary and commission, with
commission becoming the primary component of compensation as the sales
representatives gain experience. To date, the majority of our customers have
been generated from direct sales. We market to different areas within a
customer’s organization depending on the products or services we are
selling. In 2008, we started a telesales group consisting of 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, 2009, our sales force was organized regionally in 30 office locations
throughout the United States. See Item 2, “Properties” of this Form
10-K for additional office location information. As of March 31, 2009, our sales
organization included 270 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, three catalog
management patents, and three image transmission management patents in the
United States, and currently have a hosted asset information management patent
application that has been allowed and is awaiting issuance by the United States
Patent and Trademark Office (“USPTO”), 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. Otherwise, the earliest of the three
electronic sourcing system patents is scheduled to expire in 2017, and the three
image transmission patents are scheduled to expire in 2018, and the earliest of
the catalog management patents is scheduled to expire in 2024, provided all
maintenance fees are paid in accordance with USPTO regulations. We also have the
following registered service/trademarks: ePlus, DirectSight, Procure+, Manage+,
Finance+, ePlus Leasing, Docpak, Viewmark, Digital Paper, OneSource, Content+,
eECM, and ePlus Enterprise Cost Management. 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 could be expected to be a persistent problem.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around our proprietary intellectual property.
SALES
AND FINANCING ACTIVITIES
We have
been in the business of selling, leasing, financing, providing procurement,
document management and asset management software and managing information
technology and various other assets for over 18 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 most important
manufacturer relationships include Cisco, HP, Sun Microsystem, NetApp, and IBM.
Tech Data and Ingram Micro, Inc. are the largest distributors we utilize. We
have multiple vendor engineering certifications that authorize us to market
their products and enable us to provide advanced professional services. Our
flexible platform and customizable catalogs facilitate the addition of new
vendors with minimal incremental effort. Using the distribution systems
available, we usually sell products that are shipped from the distributors or
suppliers directly to our customer's location, which allows us to keep our
inventory of any product 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 and a
fixed amount of rent. These non-cancelable leases have a provision which
requires the lessee to make all lease payments without offset or counterclaim. A
net lease requires the lessee to make the full lease payment and pay any other
expenses associated with the use of equipment, such as maintenance, casualty and
liability insurance, sales or use taxes and personal property taxes. We
primarily lease computers, associated accessories and software,
communication-related equipment, and medical equipment, and we may also lease
industrial machinery and equipment, office furniture and general office
equipment, transportation equipment, and other general business equipment. In
anticipation of the expiration of the term of a lease, we initiate the
remarketing process for the related equipment. Our goal is to maximize revenues
from the remarketing effort by either (1) releasing or selling the equipment to
the initial lessee, (2) renting the equipment to the initial lessee on a
month-to-month basis, or (3) selling 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
specific to a lease’s 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. For
certain transactions, we may act as an intermediary and obtain commitments for
these asset sales before we consummate the lease. We also use agency purchase
orders to procure equipment for lease to our customers as an agent, not a
principal, and otherwise take measures to minimize our inventory. Additionally,
we use fixed-rate funding and issue proposals that adjust for material adverse
interest rate movements as well as material adverse changes to the financial
condition of the customer.
We have
an executive management review process and other internal controls in place to
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, 2009, we
increased reserves for credit losses by $364 thousand, incurred actual credit
losses of $420 thousand and had recoveries of $91 thousand. During the fiscal
year ended March 31, 2008, we increased reserves for credit losses by $190
thousand, incurred actual credit losses of $494 thousand and had recoveries of
$40 thousand.
EMPLOYEES
As of
March 31, 2009, we employed 638 full-time and 18 part-time
employees. These 656 employees operated through 30 office locations,
including our principal executive offices and regional sales offices. No
employees are represented by a labor union and we believe that we have good
relations with our employees. The functional areas of our employees are as
follows:
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Number of Employees
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Software
and Implementations
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U.S.
SECURITIES AND EXCHANGE COMMISSION REPORTS
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports, filed with or furnished to the
U.S. Securities and Exchange Commission (“SEC”), are available free of charge
through our Internet website, www.eplus.com, as
soon as reasonably practical after we have electronically filed such material
with, or furnished it to, the SEC. The public may read and copy any
materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov. The
contents on, or accessible through, these websites are not incorporated into
this filing. Further, our references to the URLs for these websites
are intended to be inactive textual references only.
The
following table sets forth the name, age and position, as of March 31, 2009, of
each person who was an executive officer of ePlus on March 31,
2009. There are no family relationships between any director or
executive officer and any other director or executive officer of ePlus.
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AGE
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POSITION
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Director,
Chairman of the Board, President and Chief Executive
Officer
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Director
and Executive Vice President
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Senior
Vice President of Business Operations
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Senior
Vice President and Assistant
Secretary
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The
business experience during the past five years of each executive officer of
ePlus is described
below.
Phillip G. Norton joined us
in March 1993 and has served since then as our Chairman of the Board and CEO.
Since September 1996, Mr. Norton has also served as our President. Mr. Norton is
a 1966 graduate of the U.S. Naval Academy.
Bruce M. Bowen founded our
company in 1990 and served as our President until September 1996. Since
September 1996, Mr. Bowen has served as our Executive Vice President, and from
September 1996 to June 1997 also served as our CFO. Mr. Bowen has served on our
Board since our founding. He is a 1973 graduate of the University of Maryland
and in 1978 received a Masters of Business Administration from the University of
Maryland.
Elaine D. Marion joined us in
1998. Ms. Marion became our Chief Financial Officer on September 1,
2008. Since 2004, Ms. Marion served as our Vice President of
Accounting. Prior to that, she was the Controller of ePlus Technology, inc., a
subsidiary of ePlus, from 1998 to 2004. Ms. Marion is a 1995 graduate of George
Mason University, where she earned a Bachelor’s of Science degree with a
concentration in Accounting.
Steven J. Mencarini joined us
in June 1997. On September 1, 2008 he became our Senior Vice
President of Business Operations. Prior to that, he served as our
Chief Financial Officer. Prior to joining us, Mr. Mencarini was
Controller of the Technology Management Group of CSC. Mr. Mencarini joined CSC
in 1991 as Director of Finance and was promoted to Controller in 1996. Mr.
Mencarini is a 1976 graduate of the University of Maryland and received a
Masters of Taxation from American University in 1985.
Kleyton L. Parkhurst joined
us in May 1991 as Director of Finance. Mr. Parkhurst has also served as
Secretary or Assistant Secretary and Treasurer. 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.
General Economic Weakness
May Harm Our Operating Results and Financial Condition
Our
results of operations are dependent to a large extent upon the state of the
economy. General economic weakness or weaker economic conditions in the United
States could adversely impact our customers and our results of operations and
financial condition. Challenging economic conditions may decrease our customers’
demand for our products and services or impair the ability of our customers to
pay for products and services they have purchased. As a result, our revenues
could decrease and reserves for our credit losses and write-offs of accounts
receivable may increase.
The Soundness of Financial
Institutions Could Adversely Affect Us
We have
relationships with many financial institutions, including lenders under our
credit facilities, and, from time to time, we execute transactions with
counterparties in the financial services industry. As a result, defaults by, or
even rumors or questions about, financial institutions or the financial services
industry generally, could result in losses or defaults by these institutions. In
the event that the volatility of the financial markets adversely affects these
financial institutions or counterparties, we or other parties to the
transactions with us may be unable to access credit facilities or complete
transactions as intended, which could adversely affect our business and results
of operations.
We May Be Required to Take
Additional Impairment Charges For Goodwill or Intangible Assets Related to
Acquisitions
We have
acquired certain portions of our business and certain assets through
acquisitions. Further, as part of our long-term business strategy, we may
continue to pursue acquisitions of other companies or assets. In connection with
prior acquisitions, we have accounted for the portion of the purchase price paid
in excess of the book value of the assets acquired as goodwill or intangible
assets, and we may be required to account for similar premiums paid on future
acquisitions in the same manner.
Under the
applicable accounting rules, goodwill is not amortized and is carried on our
books at its original value, subject to periodic review and evaluation for
impairment, whereas intangible assets are amortized over the life of the asset.
Changes in the business itself, the economic environment (including business
valuation levels and trends), or the legislative or regulatory environment may
trigger a periodic review and evaluation of our goodwill and intangible assets
for potential impairment. These changes may adversely affect either the fair
value of the business or the fair value of our individual reporting units and we
may be required to take an impairment charge to the extent that the carrying
values of our goodwill or intangible assets exceeds the fair value of the
business in the reporting unit with goodwill and intangible assets. Also, if we
sell a business for less than the book value of the assets sold, plus any
goodwill or intangible assets attributable to that business, we may be required
to take an impairment charge on all or part of the goodwill and intangible
assets attributable to that business.
We
determined that our goodwill was impaired, resulting in a non-cash impairment
charge of $4.6 million during the third quarter of fiscal 2009.
If market
and economic conditions deteriorate further, this could increase the likelihood
that we will need to record additional impairment charges to the extent the
carrying value of our goodwill exceeds the fair value of our overall
business.
We May Not Be Able to
Realize Our Entire Investment in the Equipment We Lease
The
realization of equipment values (residual values) during the life and at the end
of the term of a lease is an important element in our leasing business. At the
inception of each lease, we record a residual value for the leased equipment
based on our estimate of the future value of the equipment at the expected
disposition date.
A
decrease in the market value of leased equipment at a rate greater than the rate
we projected, whether due to rapid technological or economic obsolescence,
unusual wear and tear on the equipment, excessive use of the equipment, or other
factors, would adversely affect the current or the residual values of such
equipment. Further, certain equipment residual values are dependent on the
manufacturer’s or vendor’s warranties, reputation and other factors, including
market liquidity. In addition, we may not realize the full market value of
equipment if we are required to sell it to meet liquidity needs or for other
reasons outside of the ordinary course of business. Consequently, there can be
no assurance that we will realize our estimated residual values for
equipment.
The
degree of residual realization risk varies by transaction type. Direct financing
leases bear the least risk because contractual payments cover approximately 90%
or more of the equipment’s inception of lease cost. Operating leases have a
higher degree of risk because a smaller percentage of the equipment’s value is
covered by contractual cash flows at lease inception.
We 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. 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. 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 will (i) agree with the manner in which we
have accounted for and reported, or not reported, the financial impacts, or (ii)
not find inappropriate activity in connection with our historical stock option
practices. If the SEC disagrees with our financial 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.
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. Our credit agreement contains various net worth and
debt covenants that must be met each quarter. There can be no assurance that we
will continue to meet those debt covenants and failure to do so may limit
availability of, or cause us to lose, such financing. There can be no
assurance that such financing will continue to be available to us in the future
on acceptable terms.
We May Not Adequately
Protect Ourselves Through Our Contract Vehicles or Insurance
Policies.
We may
not properly create contracts to protect ourselves against the risks inherent in
our business including, but not limited to, warranties, limitations of
liability, human resources and subcontractors, patent and product liability, and
financing activities. Despite the non-recourse nature of the loans financing our
activities, non-recourse lenders have in the past brought suit when the
underlying transaction turns out poorly for the lenders. We have vigorously
defended such cases in the past and will do so in the future, however, investors
should be aware that we are subject to such suits and the cost of defending such
suits due to the nature of our business.
Costs to Protect Our
Intellectual Property May Affect Our Earnings.
The legal
and associated costs to protect our intellectual property may significantly
increase our expenses and have a material adverse effect on our operating
results. We may deem it necessary to protect our intellectual property rights
and significant expenses could be incurred with no certainty of the results of
these potential actions. Costs relative to lawsuits are usually expensed in the
periods incurred and there is no certainty in recouping any of the amounts
expended regardless of the outcome of any action.
We Face Risks of Claims From
Third Parties for Intellectual Property Infringement That Could Harm Our
Business.
We cannot
provide assurance that our products and services do not infringe on the
intellectual property rights of third parties. In addition, because
patent applications in the United States are not publicly disclosed until the
patent is issued, we may not be aware of applications that have been filed which
relate to our products or processes. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the event
of a claim of infringement, we and our customers may be required to obtain one
or more licenses from third parties. We may not be able to obtain such licenses
from third parties at a reasonable cost or at all. Defense of any lawsuit or
failure to obtain any such required license could significantly increase our
expenses and/or adversely affect our ability to offer one or more of our
services. In addition, in certain instances, third parties licensing software to
us have refused to indemnify us for possible infringement claims.
Capital Spending by Our
Customers May Decrease.
We rely
on our customers to purchase capital equipment from us to maintain or increase
our earnings. If there is a further decline in the economy, or an increase in
competition, sales of capital equipment may decrease, thus adversely affecting
our earnings. As a result of the recent financial crisis in the
credit markets and overall softening in the economy, our customers have
generally delayed their investment in capital equipment and we have experienced
a decrease in total sales. Continued weakness in the economy could
continue to adversely affect our results of operations and cash
flows.
We Face Substantial
Competition From Larger Companies As Well As Our Vendors and Financial
Partners.
In our
reseller business, manufacturers may choose to market their products directly to
end-users, rather than through resellers such as our company, and this could
adversely affect our future sales. Many competitors compete principally on the
basis of price and may have lower costs or accept lower selling prices than us
and, therefore, current gross margins may not be maintainable. In
addition, we do not have guaranteed commitments from our customers and,
therefore, our sales volume may be volatile.
In our
leasing business, we face competition from many sources including much larger
companies with greater financial resources. Our competition may even
come from some of our vendors or financial partners who choose to market
directly to customers. Our competition may lower lease rates in order
to 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. These programs are usually of finite terms and may
not be renewed or may be changed in a way that has an adverse effect on
us. Vendor consideration received pursuant to volume sales incentive
programs is recognized as a reduction to costs of sales, product and services in
the accompanying Consolidated Statements of Operations. Vendor consideration
received pursuant to volume purchase incentive programs is allocated to
inventories based on the applicable incentives from each vendor and is recorded
in cost of sales, product and services, as the inventory is sold. Vendor
consideration received pursuant to shared marketing expense programs is recorded
as a reduction of the related selling and administrative expenses in the period
the program takes place only if the consideration represents a reimbursement of
specific, incremental, identifiable costs. Consideration that exceeds the
specific, incremental, identifiable costs is classified as a reduction of cost
of sales, product and services. The amount of such consideration we receive from
some manufacturers may decline in the future as the incentive programs change
frequently or may be eliminated. Such a decline could decrease our gross margin
and have a material adverse effect on our earnings and cash flows.
There is a Risk that We
Could Lose a Large Customer Without Being Able to Find a Ready
Replacement.
For the
fiscal year 2009, no one customer accounted for 10% or more of our total
revenues. However, our sales do tend to be concentrated in a relatively few
accounts with our top five customers in fiscal year 2009 accounting for an
aggregate of 19% of total revenue, and our top twenty-five customers
representing an aggregate of 40% of total revenue.
Our
contracts for the provision of products are generally non-exclusive agreements
that are terminable by either party upon 30 days’ notice. Either the
loss of any large customer, or the failure of any large customer to pay its
accounts receivable on a timely basis, or a material reduction in the amount of
purchases made by any large customer could have a material adverse effect on our
business, financial position, results of operations and cash flows.
We May Not Be Able to Hire
and Retain Personnel That We Need to Succeed.
To
increase market awareness and sales of our offerings, we may need to expand our
sales operations and marketing efforts in the future. Our products and services
require a sophisticated sales effort and significant technical support. For
example, our sales and engineering candidates must have highly technical
hardware and software knowledge in order to suggest a customized solution for
our customers’ business processes. Competition for qualified sales, marketing
and technical personnel fluctuates depending on market conditions and we might
not be able to hire or retain sufficient numbers of such personnel to maintain
and grow our business. Increasingly, our competitors are requiring their
employees to agree to non-compete and non-solicitation agreements as part of the
employment, and this could make it more difficult for us to hire those
personnel.
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
impact of the economic environment on our customers’ procurement levels, the
outcome of litigation, interest rates, decrease in funds received from incentive
programs from manufacturers, and increases in our costs of goods sold and
overhead expenses. 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.
If We Are Unable to Protect
Our Intellectual Property, Our Business Will Suffer.
The
success of our business strategy depends, in part, upon proprietary technology
and other intellectual property rights. To date, we have relied primarily on a
combination of copyright, trademark, patent and trade secret laws and
contractual provisions with our subcontractors to protect our proprietary
technology. It may be possible for unauthorized third parties to copy certain
portions of our products or reverse engineer or obtain and use information that
we regard as proprietary. Some of our agreements with our customers and
technology licensors contain residual clauses regarding confidentiality and the
rights of third parties to obtain the source code for our products. These
provisions may limit our ability to protect our intellectual property rights in
the future that could seriously harm our business and operating results. Our
means of protecting our intellectual property rights may not be
adequate.
Our Ability to Consummate
and Integrate Acquisitions May Materially and Adversely Affect Our Profitability
if We Fail to Achieve Anticipated Revenue Improvements and Cost
Reductions.
Our
ability to successfully integrate the operations we acquire to reduce costs, or
leverage these operations to generate revenue and earnings growth, could
significantly impact future revenue and earnings. Integrating acquired
operations is a significant challenge and there is no assurance that we will be
able to manage the integrations successfully. Failure to successfully
integrate acquired operations may adversely affect our cost structure thereby
reducing our margins and return on investment. In addition, we may
acquire entities with unknown liabilities, fraud, cultural or business
environment issues or that may not have adequate internal controls as required
by Section 404 of the Sarbanes-Oxley Act of 2002.
Our e-Commerce Related
Products and Services Subjects Us to Challenges and Risks in a Rapidly Evolving
Market
As a
provider of a comprehensive set of solutions, which involves the bundling of
direct IT sales, professional services and financing with our proprietary
software, we expect to encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by companies providing new and/or bundled
solutions in rapidly evolving markets. Some of these challenges relate to our
ability to:
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increase
the total number of users of our
services;
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adapt
to meet changes in our markets and competitive developments;
and
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continue
to update our technology to enhance the features and functionality of our
suite of products.
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Our
business strategy may not be successful or successfully address these and other
challenges, risks and uncertainties.
The Electronic Commerce
Business-to-Business Solutions Market Is Highly Competitive and We May Not Be
Able to Compete Effectively.
The
market for Internet-based, business-to-business electronic commerce solutions is
extremely competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. We may not
be able to compete successfully against current or future competitors, and
competitive pressures faced by us may harm our business, operating results or
financial condition. In addition, the market for electronic procurement
solutions is 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.
Our Officers and Directors
Own a Significant Amount of Our Common Stock and May be Able to Exert a
Significant Influence over Corporate Matters.
Our
officers and directors beneficially own, in the aggregate, approximately 51.9%
of our outstanding common stock as of March 31, 2009. As a result,
these stockholders acting together will be able to exert considerable influence
over the election of our directors and the outcome of most corporate actions
requiring stockholder approval. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change of control of
ePlus and consequently
could affect the market price of our common stock.
If Our Products Contain
Defects, Our Business Could Suffer.
Products
as complex as those used to provide our electronic commerce solutions often
contain unknown and undetected errors or performance problems. Many serious
defects are frequently found during the period immediately following
introduction of new products or enhancements to existing
products. Undetected errors or performance problems may not be
discovered in the future and errors considered by us to be minor may be
considered serious by our customers. 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.
Not
applicable.
As of
March 31, 2009, we operated from 30 office locations, 9 of which are home
offices. Our total leased square footage as of March 31, 2009, was approximately
157 thousand square feet for which we incurred rent expense of approximately
$194 thousand per month. Some of our companies operate in shared office space to
improve sales, marketing and cost efficiency. Some sales and
technical service personnel operate from either residential offices or space
that is provided for by another entity or are located on a customer site. The
following table identifies our largest locations, the number of employees as of
March 31, 2009, the square footage and the general office
functions.
Location
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Company
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Employees
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Square
Footage
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Function
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|
|
ePlus Group,
inc.
ePlus Technology,
inc.
ePlus Government,
inc.
ePlus Document Systems,
inc.
|
|
|
252 |
|
|
|
55,880
|
|
Corporate
and subsidiary headquarters, sales office, technical support and
warehouse
|
|
|
|
|
20 |
|
|
|
3,622 |
|
Sales
office and technical development
|
|
|
|
|
49 |
|
|
|
14,303 |
|
Sales
office, technical support and warehouse
|
|
|
|
|
47 |
|
|
|
11,200 |
|
Sales
office, technical support and warehouse
|
|
|
|
|
24 |
|
|
|
8,370 |
|
Sales
office, technical support and warehouse
|
|
|
|
|
22 |
|
|
|
8,000 |
|
Sales
office and technical support
|
|
|
|
|
27 |
|
|
|
6,228 |
|
Sales
office and technical support
|
|
|
|
|
15 |
|
|
|
5,121 |
|
Sales
office and technical support
|
|
|
|
|
16 |
|
|
|
4,000 |
|
Sales
office and technical support
|
|
|
|
|
15 |
|
|
|
3,589 |
|
Sales
office and technical support
|
|
ePlus Group,
inc.
ePlus Technology,
inc.
|
|
|
14 |
|
|
|
7,296 |
|
Sales
office-shared, technical support and warehouse
|
|
ePlus Content Services, inc.
|
|
|
22 |
|
|
|
9,813 |
|
Sales
office and technical support
|
|
|
|
|
10 |
|
|
|
2,345 |
|
Sales
office and technical development
|
|
|
|
|
11 |
|
|
|
4,718 |
|
Sales
office and technical support
|
|
|
|
|
24 |
|
|
|
3,190 |
|
Sales
office and technical support
|
|
|
|
24 |
|
|
|
9,121 |
|
Sales
offices and technical support
|
Home
Offices/Customer Sites
|
|
|
64 |
|
|
|
|
|
|
Our
largest office location is in Herndon, VA, which has a lease expiration date of
December 31, 2009, with an option to renew for an additional five
years. We have the right to renew the lease with six months’ notice,
and we are currently negotiating the terms of a possible renewal.
ITEM 3. LEGAL PROCEEDINGS
Cyberco
Related Matters
We have
been involved in several matters relating to a customer named Cyberco Holdings,
Inc. ("Cyberco"). The Cyberco principals were perpetrating a scam, and at least
five principals have pled guilty to criminal conspiracy and/or related charges,
including bank fraud, mail fraud and money laundering. We have previously
disclosed our losses relating to Cyberco, and are pursuing avenues to recover
those losses. In September 2008, the Superior Court in the State of California,
County of San Diego, dismissed a claim we filed against one of our lenders, Banc
of America Leasing and Capital, LLC (“BoA”), relating to the Cyberco
transaction, and we timely filed a Notice of Appeal. We are also the
defendant in one Cyberco-related case, in which BoA filed a lawsuit
against ePlus in the
Circuit Court for Fairfax County, Virginia, on November 3, 2006, seeking to
enforce a guaranty in which ePlus inc. guaranteed ePlus Group’s obligations to
BoA relating to the Cyberco matter. ePlus Group has already paid
to BoA $4.3 million, which was awarded to BoA in a prior lawsuit regarding the
Cyberco matter. The suit against ePlus inc. seeks attorneys’
fees BoA incurred in ePlus Group’s appeal of BoA’s suit against ePlus Group,
expenses BoA incurred in Cyberco’s bankruptcy proceedings, attorneys’ fees
incurred by BoA in defending the above-referenced case in the Superior Court in
California, and all attorneys’ fees and costs BoA has incurred arising in any
way from the Cyberco matter. The trial in this suit has been stayed
pending the outcome of ePlus Group’s suit against
BoA in California. We are vigorously defending the suit against us by
BoA. We cannot predict the outcome of this suit.
In June
2007, ePlus Group, inc. and two other Cyberco victims filed suit in the United
States District Court for the Western District of Michigan against The
Huntington National Bank. The complaint alleges counts of aiding and abetting
fraud, aiding and abetting conversion, and statutory
conversion. While we believe that we have a basis for these claims to
recover certain of our losses related to the Cyberco matter, we cannot predict
whether we will be successful in our claims for damages, whether any award
ultimately received will exceed the costs incurred to pursue these matters, or
how long it will take to bring these matters to resolution.
Other
Matters
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 may
become party to various legal proceedings arising in the ordinary course of
business including preference payment claims asserted in client bankruptcy
proceedings, claims of alleged infringement of patents, trademarks, copyrights
and other intellectual property rights, claims of alleged non-compliance with
contract provisions and claims related to alleged violations of laws and
regulations. Although we do not expect that the outcome in any of these matters,
individually or collectively, will have a material adverse effect on our
financial condition or results of operations, litigation is inherently
unpredicatable. Therefore, judgments could be rendered or settlements
entered that could adversely affect our results of operations or cash flows in a
particular period. We provide for costs related to contingencies when a loss is
probable and the amount is reasonably determinable.
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 March
31, 2009, our common stock traded on The Nasdaq Global Market (“NASDAQ”) under
the symbol “PLUS.” During the second quarter of our fiscal year ended
March 31, 2008, we were delisted from NASDAQ due to a delay in the filing of our
fiscal year 2006 and 2007 Form 10-K. Our common stock was
subsequently traded over the counter on the Pink Sheets under the symbol
“PLUS.PK”. 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 had been filed with the SEC. Effective at the opening of the
market on September 3, 2008, our common stock was relisted and began trading on
NASDAQ. 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, 2009.
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008
|
|
|
|
|
|
|
June
30, 2007
|
|
$ |
10.90 |
|
|
$ |
9.32 |
|
September
30, 2007
|
|
$ |
9.90 |
|
|
$ |
6.75 |
|
December
31, 2007
|
|
$ |
10.55 |
|
|
$ |
8.78 |
|
March
31, 2008
|
|
$ |
10.19 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2009
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
$ |
13.80 |
|
|
$ |
9.50 |
|
September
30, 2008
|
|
$ |
13.85 |
|
|
$ |
10.82 |
|
December
31, 2008
|
|
$ |
10.99 |
|
|
$ |
8.01 |
|
March
31, 2009
|
|
$ |
12.33 |
|
|
$ |
10.16 |
|
On May
29, 2009, the closing price of our common stock was $14.30 per
share. On May 29, 2009, there were 157 shareholders of
record of our common stock. We believe there are over 1,500 beneficial holders
of our common stock.
DIVIDEND
POLICIES AND RESTRICTIONS
Holders
of our common stock are entitled to dividends if and when declared by our Board
of Directors (“Board”) out of funds legally available. We have never
paid a cash dividend to stockholders. We have retained our earnings for use in
the business. 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
The
following table provides information regarding our purchases of ePlus inc. common stock
during the fiscal year ended March 31, 2009.
Period
|
|
Total number of shares
purchased(1)
|
|
|
Average price paid per
share
|
|
|
Total number of shares purchased as part of
publicly announced plans or programs
|
|
|
Maximum number (or approximate dollar value) of
shares that may yet be purchased under the plans or
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1, 2008 through October 31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
(2) |
November
1, 2008 through November 30, 2008
|
|
|
216,019 |
|
|
$ |
9.40 |
|
|
|
216,019 |
|
|
|
283,981 |
|
(3) |
December
1, 2008 through December 31, 2008
|
|
|
86,854 |
|
|
$ |
10.27 |
|
|
|
86,854 |
|
|
|
197,127 |
|
(4) |
January
1, 2009 through January 31, 2009
|
|
|
87,976 |
|
|
$ |
10.55 |
|
|
|
87,976 |
|
|
|
109,151 |
|
(5) |
February
1, 2009 through February 11, 2009
|
|
|
7,980 |
|
|
$ |
10.38 |
|
|
|
7,980 |
|
|
|
101,171 |
|
(6) |
February
12, 2009 through February 28, 2009
|
|
|
13,625 |
|
|
$ |
10.71 |
|
|
|
13,625 |
|
|
|
486,375 |
|
(7) |
March
1, 2009 through March 31, 2009
|
|
|
24,210 |
|
|
$ |
10.98 |
|
|
|
24,210 |
|
|
|
462,165 |
|
(8) |
(1)
|
All
shares acquired were in open-market
purchases.
|
(2)
|
No
stock repurchases occurred during this
period.
|
(3)
|
The
share purchase authorization in place for the month ended
November 30, 2008 had purchase limitations on the number of
shares (500,000). As of November 30, 2008, the remaining
authorized shares to be purchased is
283,981.
|
(4)
|
The
share purchase authorization in place for the month ended
December 31, 2008 had purchase limitations on the number of
shares (500,000). As of December 31, 2008, the remaining
authorized shares to be purchased is
197,127.
|
(5)
|
The
share purchase authorization in place for the month ended
January 31, 2009 had purchase limitations on the number of
shares (500,000). As of January 31, 2009, the remaining
authorized shares to be purchased is
109,151.
|
(6)
|
The
share purchase authorization in place for the period
of February 1 - 11, 2009 had purchase limitations on the number
of shares (500,000). As of February 11, 2009, the remaining
authorized shares to be purchased is
101,171.
|
(7)
|
The
Board amended our current repurchase plan on February 12,
2009. The repurchase plan, as amended, had a purchase
liminations on the number of shares (500,000). As of February
28, 2009, the remaining authorized shares to be purchased is
486,375.
|
(8)
|
The
share purchase authorization in place for the month ended March
31, 2009 had purchase limitations on the number of shares
(500,000). As of March 31, 2009, the remaining authorized
shares to be purchased is 462,165.
|
The
timing and expiration date of the stock repurchase authorizations as well as an
amendment to our current repurchase plan 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 ePlus’ status as a "smaller
reporting company.”
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the financial condition and results of
operations (“financial review”) of ePlus is intended to help
investors understand our company and our operations. The financial
review is provided as a supplement to, and should be read in conjunction with
the Consolidated Financial Statements and the related Notes included elsewhere
in this report.
EXECUTIVE
OVERVIEW
Business
Description
ePlus and its consolidated
subsidiaries provide leading IT products and services, flexible leasing
solutions, and enterprise supply management to enable our customers to optimize
their IT infrastructure and supply chain processes. Our revenues are composed of
sales of product and services, sales of leased equipment, lease revenues and fee
and other income. Our operations are conducted through two business segments:
our technology sales business unit and our financing business unit.
Financial
Summary
During
the year ended March 31, 2009, total revenue decreased 17.8% to $698.0 million
while total costs and expenses decreased 17.5% to $676.0 million. Net earnings
decreased 21.6% to $12.8 million, as compared to prior fiscal
year. These results included a goodwill impairment charge of $4.6
million during the third quarter of fiscal year 2009. Gross margin
for product and services improved from 11.8% to 13.9% during the year ended
March 31, 2009. Our gross margin on sales of product and services was affected
by our customers’ investment in technology equipment, the mix and volume of
products sold and changes in incentives provided to us by
manufacturers. Cash increased $49.4 million or 84.5% to $107.8
million at March 31, 2009 compared to March 31, 2008, due in part to
management’s effort to conserve our liquidity position. Total sales for the year
ended March 31, 2009 decreased as compared to the prior fiscal periods due to an
overall softening in the economy, which delays our customers’ investment in
capital equipment and a decision by management to decrease the sales of leased
equipment during this fiscal year as compared to the previous year. We
believe this trend may continue for the remainder of calendar year 2009 and we
believe that the recent credit market condition may intensify this
trend.
The
United States and other countries around the world have been experiencing
deteriorating economic conditions, including unprecedented financial market
disruption. As a result of the recent financial crisis in the credit markets,
softness in the housing markets, difficulties in the financial services sector
and continuing economic uncertainties, the direction and relative strength of
the U.S. economy has become increasingly uncertain. This has caused our current
and potential customers to delay or reduce technology purchases, which has
reduced sales of our products and services. Continuing deterioration of economic
conditions, could cause our current and potential customers to further delay or
reduce technology purchases and result in longer sales cycles, slower adoption
of new technologies and increased price competition. Restrictions on credit may
impact economic activity and our results. Credit risk associated with our
customers and vendors may also be adversely impacted. In addition, although we
do not anticipate the need for additional capital in the near term due to our
current financial position, financial market disruption may adversely affect our
access to additional capital.
We
completed our annual goodwill impairment test during the third quarter of our
fiscal year. We concluded that there was no impairment in our leasing,
technology and software document management reporting units. The weakening U.S.
economy and the global credit crisis have accelerated the reduction in demand
for certain software products. As a result of this reduced demand, we projected
a decline in revenue in our software procurement reporting unit, part of our
technology sales business segment, which lowered the fair value estimates of the
reporting unit. As a result of the lower fair value estimates, we concluded that
the carrying amount of the software procurement reporting unit exceeded its
respective fair value. We then compared the implied fair value of the goodwill
in the software procurement reporting unit with the carrying value and recorded
a $4.6 million impairment charge in the year ended March 31,
2009. This amount is reported on our Consolidated Statements of
Operations.
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 on 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 termination for convenience clauses. Our other
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
CISCO, Hewlett Packard and Sun Microsystem products, which represent
approximately 36%, 18% and 6% of sales, respectively, for the year ended March
31, 2009.
Included
in the sales of product and services in our technology sales business unit are
certain service revenues that are bundled with sales of equipment and are
integral to the successful delivery of such equipment. Our service
engagements are generally governed by 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
|
|
|
Hewlett
Packard
|
HP
Preferred Elite Partner (National)
|
Cisco
Systems
|
Cisco
Gold DVAR (National)
|
|
Advanced
Wireless LAN
|
|
Advanced
Unified Communications
|
|
Advanced
Data Center Storage Networking
|
|
Advanced
Routing and Switching
|
|
Advanced
Security
|
|
ATP
Video Surveillance
|
|
ATP
Telepresence
|
|
ATP
Rich Media Communications
|
|
Master
Security Specialization
|
|
Master
UC Specialization
|
Microsoft
|
Microsoft
Gold (National)
|
Sun
Microsystems
|
Sun
SPA Executive Partner (National)
|
|
Sun
National Strategic DataCenter Authorized
|
IBM
|
Premier
IBM Business Partner (National)
|
Lenovo
|
Lenovo
Premium (National)
|
NetApp
|
NetApp
STAR Partner
|
Citrix
Systems, Inc.
|
Citrix
Gold
(National)
|
Through
our technology sales business unit we also generate revenue through hosting
arrangements and sales of our software. These revenues are reflected on our
Consolidated Statements of Operations under fee and other income. In addition,
fee and other income results from: (1) income from events that occur after the
initial sale of a financial asset; (2) remarketing fees; (3) brokerage fees
earned for the placement of financing transactions; (4) agent fees received from
various manufacturers; (5) settlement fees related to disputes or litigation;
and (6) 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 on 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 Statement of
Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases” (“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 financing leases is recorded as unearned income
at the inception of the lease. The unearned income is amortized over the life of
the lease using the interest method. Under sales-type leases, the difference
between the fair value and cost of the leased property plus initial direct costs
(net margins) is recorded as revenue at the inception of the
lease. For operating leases, rental amounts are accrued on a
straight-line basis over the lease term and are recognized as lease
revenue. SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” (“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 financing 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 to a third party other than
the lessee of equipment subject to a lease in which we are the lessor. Such sales
of equipment may have the effect of increasing revenues and net income during
the quarter in which the sale occurs, and reducing revenues and net income
otherwise expected in subsequent quarters. If the rental stream on such lease
has non-recourse debt associated with it, sales revenue is recorded at the
amount of consideration received, net of the amount of debt assumed by the
purchaser. If there is no non-recourse debt associated with the rental stream,
sales revenue is recorded at the amount of gross consideration received, and
costs of sales is recorded at the book value of the lease.
Fluctuations
in Revenues
Our
results of operations are susceptible to fluctuations for a number of reasons,
including, without limitation, customer demand for our products and services,
supplier costs, interest rate fluctuations, and differences between estimated
residual values and actual amounts realized related to the equipment we lease.
Operating results could also fluctuate as a result of the sale of equipment in
our lease portfolio prior to the expiration of the lease term to the lessee or
to a third party.
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.
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
We
adopted SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”), as amended, on April 1, 2008. SFAS
No. 157 defines fair value, establishes a framework and gives guidance regarding
the methods used for measuring fair value, and expands disclosures about fair
value measurements. SFAS No.
157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. FASB Staff Position
(“FSP”) No. 157-3, “Determining the Fair Value of an
Asset When the Market For that Asset is not Active,” clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. As a
basis for considering such assumptions, SFAS No. 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
·
|
Level
1 - Observable inputs such as quoted prices in active
markets;
|
|
·
|
Level
2 - Inputs other than the quoted prices in active markets that are
observable either directly or indirectly;
and
|
|
·
|
Level
3 - Unobservable inputs in which there is little or no market data, which
require us to develop our own
assumptions.
|
This
hierarchy requires us to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. On a
recurring basis, we measure certain financial assets and liabilities at fair
value.
We
adopted SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115” (“SFAS No. 159”), on April 1, 2008. SFAS No.
159 expands the use of fair value accounting but does not affect existing
standards which require assets or liabilities to be carried at fair value. The
objective of SFAS No. 159 is to improve financial reporting by providing
companies 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. Under SFAS No. 159, a company may
elect to use fair value to measure eligible items at specified election dates
and report unrealized gains and losses on items for which the fair value option
has been elected, in earnings, at each subsequent reporting date. Eligible items
include, but are not limited to, accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees, issued debt and firm commitments. The adoption of
SFAS No. 159 did not have a material effect on our consolidated financial
statements as we have not elected the fair value option for eligible
items.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS No. 162 is effective November 15, 2008 and the adoption of
this provision did not have a material impact on our financial position or
results of operations.
In
October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active.” FSP No. 157-3 clarifies
the application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. The
provisions of FSP No. 157-3 were effective upon issuance and for financial
statements not yet reported. The adoption of FSP No. 157-3 did not have a
material impact on our Consolidated Financial Statements.
RECENT
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
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 of the acquired assets, assumed liabilities and
noncontrolling interest. In addition, SFAS No. 141R requires that the
acquisition and restructuring related costs 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.
In April
2008, the FASB issued Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of
Intangible Assets.” FSP No. 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142. The provisions of FSP No. 142-3 are effective for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal
years. We are in the process of evaluating the impact, if any, that FSP No.
142-3 will have on our Consolidated Financial Statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued three Staff
Positions (“FSPs”) that are intended to provide additional application guidance
and enhance disclosures about fair value measurements and impairments of
securities. FSP FAS 157-4 clarifies the objective and method of fair value
measurement even when there has been a significant decrease in market activity
for the asset being measured. FSP FAS 115-2 and FAS 124-2 establishes a new
model for measuring other-than-temporary impairments for debt securities,
including establishing criteria for when to recognize a write-down through
earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1 expands
the fair value disclosures required for all financial instruments within the
scope of SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”, to interim periods. All of these FSPs are
effective for us beginning April 1, 2009. We are assessing the potential impact
that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 may have on
our financial statements. FSP FAS 107-1 and APB 28-1 will result in increased
disclosures in our interim periods.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with U.S. GAAP requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. If our judgment or interpretation of the facts
and circumstances relating to various transactions had been different, or
different assumptions were made, it is possible that alternative accounting
policies would have been applied, resulting in a change in financial results. On
an ongoing basis, we reevaluate our estimates, including those related to
revenue recognition, residuals, vendor consideration, lease classification,
goodwill and intangibles, reserves for credit losses and income taxes
specifically relating to uncertain tax positions. Estimates in the assumptions
used in the valuation of our 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, lease revenues and sales of our
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” (“SAB
No. 104”), 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 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 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
renewal or extension of the original lease or the sale of the equipment either
to the lessee or on the secondary market. The difference between the proceeds of
a sale and the remaining estimated residual value is recorded as a gain or loss
in lease revenues when title is transferred to the lessee, or, if the equipment
is sold on the secondary market, in sales of product and services and cost of
sales, product and services when title is transferred to the buyer.
ASSUMPTIONS
RELATED TO GOODWILL. We 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 are based on significant estimates provided by us, such as
forecasted revenues or profits on contract-related intangibles. Numerous factors
are typically considered in the purchase accounting assessments. Changes in
assumptions and estimates of the acquired assets and liabilities would result in
changes to the fair values, resulting in an offsetting change to the goodwill
balance associated with the business acquired.
We review
our goodwill for impairment annually, or more frequently, if indicators of
impairment exist. Goodwill has been assigned to four reporting units for
purposes of impairment testing. Our reporting units are leasing, technology,
software procurement and software document management.
A
significant amount of judgment is involved in determining if an indicator of
impairment has occurred. Such indicators may include, among others: a
significant decline in our expected future cash flows; a sustained, significant
decline in our stock price and market capitalization; a significant adverse
change in legal factors or in the business climate; unanticipated competition;
the testing for recoverability of a significant asset group within a reporting
unit; and slower growth rates. Any adverse change in these factors could have a
significant impact on the recoverability of these assets and could have a
material impact on our Consolidated Financial Statements.
The
goodwill impairment test involves a two-step process. The first step is a
comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including market
information. We employ the discounted cash flow method and the guideline company
method, and compute a weighted average to determine the fair value of each
reporting unit. The discounted cash flow method uses a reporting unit’s
projection of estimated operating results and cash flows that is discounted
using a weighted-average cost of capital that reflects current market
conditions. The projection uses management’s best estimates of economic and
market conditions over the projected period including growth rates in sales,
costs, estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include terminal value
growth rates, future estimates of capital expenditures and changes in future
working capital requirements. We validate our estimates of fair value under the
discounted cash flow method by comparing the values to fair value estimates
using the guideline company method. The guideline company method estimates fair
value by applying earnings multiples to the reporting unit’s operating
performance. The multiples are derived from publicly traded companies with
similar operating and investment characteristics as our reporting
units.
If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment loss. The amount of impairment is determined by
comparing the implied fair value of a reporting unit's goodwill to the carrying
value of the goodwill in the same manner as if the reporting unit was being
acquired in a business combination. Specifically, we would allocate the fair
value to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of goodwill is
less than the recorded goodwill, we would record an impairment charge for the
difference.
During
the third quarter of our fiscal year, we completed our annual goodwill
impairment test. We concluded that there was no impairment in our leasing,
technology and software document management reporting units. The
weakening U.S. economy and the global credit crisis have accelerated the
reduction in demand for certain software products. As a result of
this reduced demand, we projected a decline in revenue in our software
procurement reporting unit, part of our technology sales business segment, which
lowered the fair value estimates of the reporting unit. As a result
of the lower fair value estimates, we concluded that the carrying amount of the
software procurement reporting unit exceeded its respective fair value. We then
compared the implied fair value of the goodwill in the software procurement
reporting unit with the carrying value and recorded a $4.6 million impairment
charge in the year ended March 31, 2009. This amount is reported on
our Consolidated Statement of Operations. See Note 3, “Impairment of
Goodwill,” for additional information.
We will
continue to monitor the market, our operational performance and general economic
conditions. A downward trend in one or more of these factors could cause us to
reduce the estimated fair value of our reporting units and recognize a
corresponding future impairment of our goodwill.
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 on the accompanying
Consolidated Statements of Operations 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 on the accompanying Consolidated Statements of Operations. We accrue
vendor consideration in accordance with the terms of the related program which
may include a certain amount of sales of qualifying products or as targets are
met or as the amounts are estimable and probable or as services are provided.
Actual vendor consideration amounts may vary based on volume or other sales
achievement levels, which could result in an increase or reduction in the
estimated amounts previously accrued, and can, at times, result in significant
earnings fluctuations on a quarterly basis.
RESERVES
FOR CREDIT LOSSES. The reserves for credit losses are maintained at a
level believed by management to be adequate to absorb potential losses inherent
in our lease and accounts receivable portfolio. Management's
determination of the adequacy of the reserve is based on an evaluation of
historical credit loss experience, current economic conditions, volume, growth,
the composition of the lease portfolio and other relevant factors. These
determinations require considerable judgment in assessing the ultimate potential
for collection of these receivables and include giving consideration to the
customer's financial condition and the value of the underlying collateral and
funding status (i.e., funded on a non-recourse or recourse basis).
SALES
RETURNS ALLOWANCE. The allowance for sales returns is maintained at a level
believed by management to be adequate to absorb potential sales returns from
product and services in accordance with SFAS No. 48,“Revenue Recognition when the Right
of Return Exists” (“SFAS No. 48”). 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. We currently have two equity incentive plans which provide us with the
opportunity to compensate directors and selected employees with stock options,
restricted stock and restricted stock units. A stock option entitles the
recipient to purchase shares of common stock from us at the specified exercise
price. Restricted stock and restricted stock units (“RSUs”) entitle the
recipient to obtain stock or stock units, which vest over a set period of time.
RSUs are granted at no cost to the employee and employees do not need to pay an
exercise price to obtain the underlying common stock. All grants or awards made
under the plans are governed by written agreements between us and the
participants. We also have options outstanding under three previous incentive
plans, under which we no longer issue equity awards.
We
account for share-based compensation under the provisions of SFAS No. 123
(revised 2004), “Share-Based
Payment.” We use the Black-Scholes option-pricing model to
value all options and the straight-line method to amortize this fair value as
compensation cost over the requisite service period.
Under the
fair value method of accounting for stock-based compensation, we measure stock
option expense at the date of grant using the Black-Scholes valuation model.
This model estimates the fair value of the options based on a number of
assumptions, such as interest rates, employee exercises, the current price and
expected volatility of our common stock and expected dividends, if any. The
expected life is a significant assumption as it determines the period for which
the risk-free interest rate, volatility and dividend yield must be applied. The
expected life is the average length of time in which we expect our employees to
exercise their options. The risk-free interest rate is the five-year nominal
constant maturity Treasury rate on the date of the award. Expected stock
volatility reflects movements in our stock price over a historical period that
matches the expected life of the options. The dividend yield assumption is zero
since we have historically not paid any dividends and do not anticipate paying
any dividends in the near future.
RESULTS
OF OPERATIONS
The
Year Ended March 31, 2009 Compared to the Year Ended March 31, 2008
REVENUES
Total Revenues. We generated
total revenues during the year ended March 31, 2009 of $698.0 million, compared
to revenues of $849.3 million for the year ended March 31, 2008, a decrease of
17.8%.
Sales of product and
services. Sales of product and services decreased 13.1% to
$636.1 million during the year ended March 31, 2009, compared to $731.7 million
during last fiscal year. The decrease in revenue for the year is
primarily attributed to the economic downturn, which generally resulted in our
customers' tendency to postpone technology equipment investments. Sales of
product and services represented 91.1% and 86.1% of total revenue during the
year ended March 31, 2009 and 2008, respectively. Sales of product and services
as a percentage of total revenue increased due to a proportionately larger
decrease in sales of leased equipment and lease revenue as compared to the prior
fiscal year.
We
realized a gross margin on sales of product and services of 13.9% and 11.8% for
the years ended March 31, 2009 and 2008, 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 manufacturers. While we saw
improvement in the gross margin this fiscal year related to manufacturer
incentives, we believe that manufacturers may begin tightening these programs
due to current market conditions. We believe our ability to maintain or increase
the level of manufacturer incentives may therefore be limited without increases
in the volume of products sold.
Lease
revenues. Lease revenues decreased 19.8% to $44.5 million for
the year ended March 31, 2009, compared to $55.5 million during the prior year.
This decrease is primarily due to having fewer leases in our operating and
direct financing lease portfolio as a result of higher sales of leased equipment
during fiscal year 2008. Sales of leased equipment fluctuate from quarter to
quarter, and are a component of our risk-mitigation process, which we conduct to
diversify our portfolio by customer, equipment type, and residual value
investments. The recent tightness in the credit market has affected some of our non-recourse debt
funding interest rates and prompted us to arrange funding earlier in our
transaction cycles.
From time
to time, our lessees purchase leased assets from us before and at the end of the
lease term. This amount is included in lease revenues on our
Consolidated Statements of Operations. During the year ended March
31, 2009, sales of leased assets to lessees decreased 34.0% to $9.8 million,
compared to $14.8 million at March 31, 2008.
Sales of leased
equipment. We also recognize revenue from the sale of leased
equipment to non-lessee third parties. During the year ended March 31, 2009,
sales of leased equipment decreased 89.9% to $4.6 million, compared to $45.5
million during the prior year. Gross margins recognized on the sales
of leased equipment are 5.6% and 3.9%, for the years ended March 31, 2009 and
2008, respectively. The decrease in sales of leased equipment was due to
management’s decision to sell part of the lease schedules in the prior fiscal
year, as part of a risk-mitigation process. 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 - a replacement
of FASB Statement No. 125.”
Fee and other
income. For the year ended March 31, 2009, fee and other
income decreased 23.5% to $12.8 million, compared to $16.7 million during the
prior year. This decrease was primarily driven by decreases in fees related to
early lease buyouts, software and related consulting revenue, short-term
investment income and agent fees from manufacturers for the year ended
March 31, 2009. Fee and other income may also include revenues from adjunct
services and fees, including broker and agent fees, support fees, warranty
reimbursements, monetary settlements arising from disputes and litigation and
interest income. Our fee and other income contains earnings from certain
transactions that are infrequent, and there is no guarantee that future
transactions of the same nature, size or profitability will occur. Our ability
to consummate such transactions, and the timing thereof, may depend largely upon
factors outside the direct control of management. The earnings from
these types of transactions in a particular period may not be indicative of the
earnings that can be expected in future periods.
COSTS AND
EXPENSES
Cost of sales, product and services.
During the year ended March 31, 2009, cost of sales, product and services
decreased 15.1% to $548.0 million, compared to $645.4 million during the prior
year. This decrease corresponded to the decrease in sales of product and
services in our technology sales business unit. Cost of sales, products and
services is also affected by incentives from manufacturers, product mix and
volume. Cost of sales, leased equipment decreased 90.0% to $4.4 million during
the year ended March 31, 2009, compared to $43.7 million for the year ended
March 31, 2008. This decrease corresponds to the decrease in sales of
leased equipment to non-lessee third parties in our financing business
segment.
Direct lease costs. During
the year ended March 31, 2009, direct lease costs decreased 32.1% to $14.2
million as compared to $21.0 million during the prior fiscal year. The largest
component of direct lease costs is depreciation expense for operating lease
equipment. Our investment in operating leases decreased 32.0% to $22.5 million
at March 31, 2009 compared to $33.1 million at March 31, 2008 primarily due to
the sale of a number of lease schedules in the prior fiscal year and a reduction
in the origination of operating leases.
Professional and other
fees. During the year ended March 31, 2009, professional and
other fees decreased 44.1% to $7.2 million, compared to $12.9 million during the
prior year. This decrease is primarily due to higher accounting and
legal expenses in
the same period last year relating to the delay in our SEC filings. The delay in
SEC filings was due to the investigation that was commenced by our Audit
Committee and previously disclosed in our Form 10-K for the year ended March 31,
2007. In addition, we reduced our legal and outside consulting fees
and other fees during the year ended March 31, 2009.
Salaries and
benefits. During the year ended March 31, 2009, salaries and
benefits expense increased 5.7% to $76.4 million, compared to $72.3 million
during the prior year. We employed 656 people at March 31, 2009 as
compared to 658 people at March 31, 2008. Although we have approximately the
same number of employees at the end of both fiscal years, salaries and benefits
increased during fiscal year 2009 due to the establishment of a telesales unit,
the employment of several former consultants as professional services staff and
additional support personnel. However, during the fourth quarter of fiscal year
2009, we had a net reduction of 16 employees. These increases are partially
offset by the recognition of $1.5 million share-based compensation expense from
the cancellation of options, during the prior fiscal year as previously
disclosed.
We also
provide our employees with a contributory 401(k) profit sharing
plan. Employer contribution percentages are determined by us and are
discretionary each year. The employer contributions vest over a four-year
period. For the year ended March 31, 2009 and 2008, our expenses for the plan
were approximately $367 thousand and $315 thousand, respectively.
General and administrative
expenses. During the year ended March 31, 2009, general and
administrative expenses decreased 4.3% to $15.3 million, as compared to $16.0
million in the prior fiscal year. This decrease is due to increased focus on
controlling spending, efforts to enhance productivity and a reduction in
depreciation.
Impairment of
goodwill. Impairment of goodwill for the year ended March 31,
2009 was $4.6 million. This non-cash impairment was related to our software
procurement reporting unit, which is part of our technology sales business
segment. See Note 3, “Impairment of Goodwill,” in the notes to the
Consolidated Financial Statements.
Interest and financing
costs. Interest and financing costs decreased 28.5% to $5.8
million during the year ended March 31, 2009, as compared to $8.1 million during
the prior year. This decrease is primarily driven by lower interest costs and
related expenses as a result of lower non-recourse note balances. Non-recourse
notes payable decreased 9.4% to $85.0 million at March 31, 2009 as compared to
$93.8 million at March 31, 2008.
Our
provision for income taxes decreased $4.4 million to $9.2 million for the year
ended March 31, 2009. This decrease is due to lower earnings as compared to the
same period in the prior fiscal year. Our effective income tax rates for the
year ended March 31, 2009 and 2008 were 41.8% and 45.4%,
respectively.
Net Earnings. The foregoing
resulted in net earnings of $12.8 million for the year ended March
31, 2009, a decrease of 21.6% as compared to $16.4 million in the prior fiscal
year.
Basic and
fully diluted earnings per common share were both $1.56 and $1.52, respectively,
for the year ended March 31, 2009. Basic and fully diluted earnings
per common share were $1.99 and $1.95, respectively, for the year ended March
31, 2008.
Basic and
diluted weighted average common shares outstanding for the year ended March 31,
2009 were 8,219,318 and 8,453,333, 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.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Overview
Our
primary sources of liquidity have historically been cash and cash equivalents,
internally generated funds from operations, and borrowings, both non-recourse
and recourse. We have used those funds to meet our capital requirements, which
have historically consisted primarily of working capital for operational needs,
capital expenditures, purchases of operating lease equipment, payments of
principal and interest on indebtedness outstanding, acquisitions and the
repurchase of shares of our common stock.
Our
subsidiary ePlus
Technology, inc., part of our technology sales business segment, finances its
operations with funds generated from operations, and with a credit facility with
GECDF, which is described in more detail below. There are two components of this
facility: (1) a floor plan component; and (2) an accounts receivable component.
After a customer places a purchase order with us and we have completed our
credit check, we place an order for the equipment with one of our vendors.
Generally, most purchase orders from us to our vendors are first financed under
the floor plan component and reflected in “accounts payable—floor plan” on our
Consolidated Balance Sheets. Payments on the floor plan component are due on
three specified dates each month, generally 40-45 days from the invoice date. At
each due date, the payment is made by the accounts receivable component of our
facility and reflected as “recourse notes payable” on our Consolidated Balance
Sheets. The borrowings and repayments under the floor plan component are
reflected as “net borrowings (repayments) on floor plan facility” in the cash
flows from financing activities section of our Consolidated Statements of Cash
Flows.
Most
customer payments in our technology sales business segment are received by our
lockboxes. Once payments are cleared, the monies in the lockbox accounts are
automatically transferred from our banks to GECDF as payments on the 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 payments
from the accounts receivable component to the floor plan component and
repayments from our lockboxes and repayments from our cash are reflected as “net
repayments on recourse lines of credit” in the cash flows from the financing
activities section of our Consolidated Statements of Cash Flows. We engage in
this payment structure in order to minimize our interest expense in connection
with financing the operations of our technology sales business
segment.
We
believe that cash on hand, and funds generated from operations, together with
available credit under our credit facilities, will be sufficient to finance our
working capital, capital expenditures and other requirements for at least the
next twelve calendar months.
Our
ability to continue to fund our planned growth, both internally and externally,
is dependent upon our ability to generate sufficient cash flow from operations
or to obtain additional funds through equity or debt financing, or from other
sources of financing, as may be required. While at this time we do not
anticipate needing any additional sources of financing to fund operations, if
demand for IT products further declines, our cash flows from operations may be
substantially affected. Given the current environment within the global
financial markets, management has maintained higher cash reserves to ensure
adequate cash is available to fund our working capital requirements should the
availability to the debt and equity markets be limited.
Cash
Flows
The
following table summarizes our sources and uses of cash over the periods
indicated (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$ |
21,214 |
|
|
$ |
11,824 |
|
Net
cash used in investing activities
|
|
|
(1,340
|
) |
|
|
(6,989 |
) |
Net
cash provided by financing activities
|
|
|
29,592 |
|
|
|
13,652 |
|
Effect
of exchange rate changes on cash
|
|
|
(101 |
) |
|
|
256 |
|
Net
increase in cash and cash equivalents
|
|
$ |
49,365 |
|
|
$ |
18,743 |
|
Cash Flows from Operating
Activities. Cash provided by operating activities totaled $21.2 million
in the year ended March 31, 2009, compared to cash provided by operations of
$11.8 million during the prior fiscal year. Cash flows provided by operations
for the year ended March 31, 2009 resulted primarily from net earnings and a net
collection of accounts receivable balances. The decrease in accounts
receivable—net is a result of a reduction in sales of products and services in
our fourth quarter, our continued focus in preserving liquidity and monitoring
the aging of our customers’ accounts. These inflows were offset by
$8.5 million in cash used by investment in direct financing and sales type
leases—net. While our investment in direct financing and sales-type leases—net
decreased $27.5 million on our Consolidated Balance Sheets (see Note 2,
“Investment in Leases and Leased Equipment—net,” in the notes to Consolidated
Financial Statements) over fiscal year 2009, which might otherwise be expected
to create a cash inflow, it resulted in a cash outflow of $8.5 million for new
leases. This was as a result of the repayment of $50.5 million in principal
payments by our lessees directly to our lenders which has the effect of
decreasing the investment in direct financing and sales-type leases—net, but is
not reported in our cash flows from operating activities. These lessee principal
payments are disclosed in our schedule of Non-Cash Investing and Financing
Activities. These payments by our lessees directly to our lenders also decreased
our non-recourse debt on our Consolidated Balance Sheets.
These
favorable changes are partially offset by unfavorable changes in balances
accounts payable – equipment, accounts payable – trade and salaries and
commission payable, accrued expenses and other liabilities.
Cash Flows from Investing
Activities. Cash used in investing activities decreased to $1.3 million
during the year ended March 31, 2009, as compared to $7.0 million during the
prior fiscal year. This decrease was primarily due to a $6.2 million
decrease in purchases of operating lease equipment and a $0.9 million decrease
in purchases of property and equipment as compared to the prior fiscal
year.
Cash Flows from Financing
Activities. Cash provided by financing activities increased to $29.6
million for the year ended March 31, 2009, an increase of $15.9 million compared
to $13.7 million for the prior fiscal year. The increase is primarily due to a
$12.9 million increase in borrowings of non-recourse debt. Cash flows
from non-recourse borrowings increased primarily due to the recordation of new
leases. Repayments of non-recourse debt decreased $10.7 million from the prior
year. However, principal payments from lessees of $50.5 million were
paid directly from our lessees to our lenders as disclosed in our Schedule of
Non-cash Investing and Financing Activities. Therefore, non-recourse debt
decreased during the year ended March 31, 2009.
In
addition, we generated $2.3 million from proceeds from the issuance of capital
stock as a result of stock options exercises. We also repaid $5.0
million in recourse lines of credit during the prior fiscal
year. Cash provided by financing activities was partially offset by
the increase in repayments on the floor plan facility of $10.5
million.
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. Given the current market, we have been monitoring our exposure
closely and conserving our capital. Historically, we have obtained recourse and
non-recourse borrowings from banks and finance companies. We continue to be able
to obtain financing through our traditional lending sources, however pricing has
increased and has become more volatile. Non-recourse financings are loans whose
repayment is the responsibility of a specific customer, although we may make
representations and warranties to the lender regarding the specific contract or
have ongoing loan servicing obligations. Under a non-recourse loan, we borrow
from a lender an amount based on the present value of the contractually
committed lease payments under the lease at a fixed rate of interest, and the
lender secures a lien on the financed assets. When the lender is fully repaid
from the lease payment, the lien is released and all further rental or sale
proceeds are ours. We are not liable for the repayment of non-recourse loans
unless we breach our representations and warranties in the loan agreements. The
lender assumes the credit risk of each lease, and its only recourse, upon
default by the lessee, is against the lessee and the specific equipment under
lease. At March 31, 2009, our lease-related non-recourse debt portfolio
decreased 9.4% to $85.0 million, as compared to $93.8 million at March 31,
2008.
Whenever
possible and desirable, we arrange for equity investment financing, which
includes selling assets, including the residual portions, to third parties and
financing the equity investment on a non-recourse basis. We generally retain
customer control and operational services, and have minimal residual risk. We
usually reserve the right to share in remarketing proceeds of the equipment on a
subordinated basis after the investor has received an agreed-to return on its
investment.
Accrued
expenses and other liabilities includes deferred expenses, deferred revenue and
amounts collected and payable, such as sales taxes and lease rental payments due
to third parties. We had $29.0 million and $30.4 million of accrued expenses and
other liabilities as of March 31, 2009 and March 31, 2008, respectively, a
decrease of 4.5%. The decrease is primarily driven by decreases in professional
and other fees as a result of higher expenses last year relating to our delay in
our SEC filings. The delay in SEC filings was due to the
investigation that was commenced by our Audit Committee and previously disclosed
in our Form 10-K for the year ended March 31, 2007.
Credit Facility — Technology
Business
Our
subsidiary ePlus
Technology, inc. has a financing facility from GECDF to finance its working
capital requirements for inventories and accounts receivable. There are two
components of this facility: (1) a floor plan component; and (2) an accounts
receivable component. This facility has full recourse to ePlus Technology, inc. and is
secured by a blanket lien against all its assets, such as chattel paper,
receivables and inventory. As of March 31, 2009, the facility had an
aggregate limit of the two components of $125 million with an accounts
receivable sub-limit of $30 million. Availability under the GECDF facility may
be limited by the asset value of equipment we purchase and 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, 2009. In addition, the
facility restricts the ability of ePlus Technology, inc. to
transfer funds to its affiliates in the form of dividends, loans or advances;
however, we do not expect these restrictions to have an impact on the ability of
ePlus inc. to meet its
cash obligations.
The
facility provided by GECDF requires a guaranty of up to $10.5 million by ePlus inc. The guaranty
requires ePlus inc. to
deliver its audited financial statements by certain dates. We have
delivered the annual audited financial statements for the year ended March 31,
2008 as required. The loss of the GECDF credit facility could have a material
adverse effect on our future results as we currently rely on this facility and
its components for daily working capital and liquidity for our technology sales
business and as an operational function of our accounts payable process. In
light of the credit market condition, we have had discussions with GECDF
recently to inquire about the strategic focus of their distribution finance
unit. Pursuant to these discussions, we believe that we can continue to rely on
the availability of this credit facility. Should the GECDF credit facility no
longer be available, we believe we can increase our lines of credit with our
vendors and utilize our cash for working capital.
Floor
Plan Component
The
traditional business of ePlus Technology, inc. as a
seller of computer technology, related peripherals and software products is in
part financed through a floor plan component in which interest expense for the
first forty to forty-five days, in general, is not charged. The floor plan
liabilities are recorded as accounts payable—floor plan on our Consolidated
Balance Sheets, as they are normally repaid within the forty- to forty-five-day
time frame and represent an assigned accounts payable originally generated with
the manufacturer/distributor. If the forty- to forty-five-day obligation is not
paid timely, interest is then assessed at stated contractual rates.
The
respective floor plan component credit limits and actual outstanding balances
for the dates indicated were as follows (in thousands):
Maximum Credit Limit at March 31,
2009
|
|
|
Balance as of March 31,
2009
|
|
|
Maximum Credit Limit at March 31,
2008
|
|
|
Balance as of March 31,
2008
|
|
$ |
125,000 |
|
|
$ |
45,127 |
|
|
$ |
125,000 |
|
|
$ |
55,634 |
|
Accounts
Receivable Component
Included
within the credit facility, ePlus Technology, inc. has an
accounts receivable component from GECDF, which has a revolving line of credit.
On the due date of the invoices financed by the floor plan component, the
invoices are paid by the accounts receivable component of the credit facility.
The balance of the accounts receivable component is then reduced by payments
from our 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. There was no outstanding balance at
March 31, 2009 or March 31, 2008.
The
respective accounts receivable component credit limits and actual outstanding
balances for the dates indicated were as follows (in thousands):
Maximum
Credit Limit at March 31, 2009
|
|
|
Balance
as of March 31, 2009
|
|
|
Maximum
Credit Limit at March 31, 2008
|
|
|
Balance
as of March 31, 2008
|
|
$ |
30,000 |
|
|
$ |
- |
|
|
$ |
30,000 |
|
|
$ |
- |
|
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.
We are currently negotiating the terms of a possible
renewal. 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, 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, 2009, 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 were in
compliance with these covenants as of March 31, 2009.
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 are in compliance with this
requirement.
Performance
Guarantees
In the
normal course of business, we may provide certain customers with performance
guarantees, which are generally backed by surety bonds. In general, we would
only be liable for the amount of these guarantees in the event of default in the
performance of our obligations. We are in compliance with the performance
obligations under all service contracts for which there is a performance
guarantee, and we believe that any liability incurred in connection with these
guarantees would not have a material adverse effect on our Consolidated
Statements of Operations.
Off-Balance
Sheet Arrangements
As part
of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K or other
contractually narrow or limited purposes. As of March 31, 2009, we were not
involved in any unconsolidated special purpose entity transactions.
Adequacy
of Capital Resources
The
continued implementation of our business strategy will require a significant
investment in both resources and managerial focus. In addition, we may
selectively acquire other companies that have attractive customer relationships
and skilled sales forces. We may also acquire technology companies to expand and
enhance the platform of bundled solutions to provide additional functionality
and value-added services. As a result, we may require additional financing to
fund our strategy, implementation and potential future acquisitions, which may
include additional debt and equity financing.
For the
periods presented herein, inflation has been relatively low and we believe that
inflation has not had a material effect on our results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Although
a substantial portion of our liabilities are non-recourse, fixed-interest-rate
instruments, we utilize our lines of credit and other financing facilities which
are subject to fluctuations in short-term interest rates. These instruments,
which are denominated in U.S. dollars, were entered into for other than trading
purposes and, with the exception of amounts drawn under the 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 Bank 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. As of March 31, 2009, 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 Securities Exchange Act
(“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 effective as of March 31, 2009.
(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, 2009, 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, 2009. Management’s assessment included
evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and
our overall control environment. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of
March 31, 2009.
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)
Changes in Internal Controls
There
have not been any changes in our internal control over financial reporting
during the fourth quarter of our fiscal year ended March 31, 2009, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations
on the Effectiveness of Controls
Our
management, including our CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect
all errors and all fraud. A control system cannot provide absolute assurance due
to its inherent limitations; it is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. A control system also can be circumvented by collusion or
improper management override. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of such
limitations, disclosure controls and internal control over financial reporting
cannot prevent or detect all misstatements, whether unintentional errors or
fraud. However, these inherent limitations are known features of the financial
reporting process; therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
ITEM 9B. OTHER INFORMATION
None.
PART
III
Except as
set forth below, the information required by Items 10, 11, 12, 13 and 14 is
incorporated by reference from our definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of our fiscal year.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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 10.14 and Exhibits 10.49 through 10.54 are management contracts or
compensatory plans or arrangements.
Exhibit
No.
|
Exhibit
Description
|
|
|
|
|
3.1
|
ePlus inc. Amended and
Restated Certificate of Incorporation, filed on September 19, 2008
(Incorporated herein by reference to Exhibit 3.1 to our Current Report on
Form 8-K filed on September 19, 2008).
|
|
|
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).
|
|
|
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).
|
|
|
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).
|
|
|
10.2
|
Summary
of employment terms between ePlus and Phillip G.
Norton, Chief Executive Officer.
|
|
|
10.3
|
Employment
Agreement between ePlus and Bruce M.
Bowen (Incorporated herein by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed on December 12, 2008).
|
|
|
10.4
|
Employment
Agreement, effective as of November 1, 2008, between ePlus and Kleyton L.
Parkhurst (Incorporated herein by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the period ended September 30,
2008).
|
|
|
10.5
|
Employment
Agreement between ePlus and Steven J.
Mencarini (Incorporated herein by reference to Exhibit 99.2 to our Current
Report on Form 8-K filed on September 2,
2008).
|
10.6
|
Employment
Agreement between ePlus and Elaine D.
Marion (Incorporated herein by reference to Exhibit 99.1 to our Current
Report on Form 8-K filed on September 2, 2008).
|
|
|
10.7
|
1997
Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
10.25 to our Quarterly Report on Form 10-Q for the period ended September
30, 1997).
|
|
|
10.8
|
Amended
and Restated 1998 Long-Term Incentive Plan (Incorporated herein by
reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the
period ended September 30, 2003).
|
|
|
10.9
|
2008
Non-Employee Director Long-Term Incentive Plan (Incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
10.10
|
2008
Employee Long-Term Incentive Plan (Incorporated herein by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on September 19,
2008).
|
|
|
10.11
|
Form
of Award Agreement – Incentive Stock Options (Incorporated herein by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
10.12
|
Form
of Award Agreement – Nonqualified Stock Options (Incorporated herein by
reference to Exhibit 10.4 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
10.13
|
Form
of Award Agreement – Restricted Stock Awards (Incorporated herein by
reference to Exhibit 10.5 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
10.14
|
Form
of Award Agreement – Restricted Stock Units (Incorporated herein by
reference to Exhibit 10.6 to our Current Report on Form 8-K filed on
September 19, 2008).
|
|
|
10.15
|
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).
|
|
|
10.16
|
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).
|
|
|
10.17
|
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).
|
|
|
10.18
|
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).
|
|
|
10.19
|
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).
|
|
|
10.20
|
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).
|
|
|
10.21
|
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).
|
10.22
|
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).
|
|
|
10.23
|
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).
|
|
|
10.24
|
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).
|
|
|
10.25
|
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).
|
|
|
10.26
|
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).
|
|
|
10.27
|
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).
|
|
|
10.28
|
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).
|
|
|
10.29
|
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).
|
10.30
|
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).
|
|
|
10.31
|
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).
|
|
|
10.32
|
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).
|
|
|
10.33
|
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).
|
10.34
|
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).
|
|
|
10.35
|
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).
|
|
|
10.36
|
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).
|
|
|
10.37
|
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).
|
|
|
10.38
|
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).
|
|
|
10.39
|
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).
|
|
|
10.40
|
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).
|
|
|
10.41
|
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).
|
|
|
10.42
|
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).
|
|
|
10.43
|
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).
|
|
|
10.44
|
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).
|
10.45
|
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).
|
|
|
10.46
|
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).
|
|
|
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
|
Form
of Amendment to ePlus inc. Supplemental
Benefit Plan (Incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on December 12, 2008).
|
|
|
10.54
|
ePlus inc. Executive
Incentive Plan effective April 1, 2009 (Incorporated herein by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on May 5,
2009).
|
|
|
|
Subsidiaries
of
ePlus
|
|
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
Rule
13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer of
ePlus
inc.
|
|
|
|
Rule
13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer of
ePlus
inc.
|
|
|
|
Section
1350 certification of the Chief Executive Officer and Chief Financial
Officer of ePlus
inc.
|
(b)
See item 15(a)(3) above.
(c)
See Item 15(a)(1) and 15(a)(2) above.
Pursuant
to the requirements of Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
ePLUS
INC.
|
|
|
|
/s/ PHILLIP G. NORTON
|
|
By:
Phillip G. Norton, Chairman of the Board,
|
|
President
and Chief Executive Officer
|
|
Date:
June 16, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/ PHILLIP G. NORTON
|
|
By:
Phillip G. Norton, Chairman of the Board,
|
|
President,
Chief Executive Officer (Principal Executive Officer)
|
|
Date:
June 16, 2009
|
|
|
|
/s/ BRUCE M. BOWEN
|
|
By:
Bruce M. Bowen, Director and Executive
|
|
Vice
President
|
|
Date:
June 16, 2009
|
|
|
|
/s/ ELAINE D. MARION
|
|
By:
Elaine D. Marion, Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
|
Date:
June 16, 2009
|
|
|
|
/s/ C. THOMAS FAULDERS,
III
|
|
By:
C. Thomas Faulders, III, Director
|
|
Date:
June 16, 2009
|
|
|
|
/s/ TERRENCE O’DONNELL
|
|
By:
Terrence O’Donnell, Director
|
|
Date:
June 16, 2009
|
|
|
|
/s/ LAWRENCE S. HERMAN
|
|
By:
Lawrence S. Herman, Director
|
|
Date:
June 16, 2009
|
|
|
|
/s/ MILTON E. COOPER,
JR.
|
|
By:
Milton E. Cooper, Jr., Director
|
|
Date:
June 16, 2009
|
|
|
|
ERIC D. HOVDE
|
|
By:
Eric D. Hovde, Director
|
|
|
|
|
|
/s/ IRVING R. BEIMLER
|
|
By:
Irving R. Beimler, Director
|
|
Date:
June 16, 2009
|
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, 2009 and 2008
|
|
|
|
Consolidated
Statements of Operations for the Years Ended March 31, 2009 and
2008
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2009 and
2008
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended March 31, 2009 and
2008
|
|
|
|
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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their
cash flows for each of the two fiscal years in the period ended March 31, 2009,
in conformity with accounting principles generally accepted in the United States
of America.
/s/
Deloitte & Touche LLP
McLean,
Virginia
June 16,
2009
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
As
of
|
|
|
As
of
|
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
ASSETS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
107,788 |
|
|
$ |
58,423 |
|
Accounts
receivable—net
|
|
|
82,734 |
|
|
|
109,706 |
|
Notes
receivable
|
|
|
2,632 |
|
|
|
726 |
|
Inventories—net
|
|
|
9,739 |
|
|
|
9,192 |
|
Investment
in leases and leased equipment—net
|
|
|
119,256 |
|
|
|
157,382 |
|
Property
and equipment—net
|
|
|
3,313 |
|
|
|
4,680 |
|
Other
assets
|
|
|
16,809 |
|
|
|
13,514 |
|
Goodwill
|
|
|
21,601 |
|
|
|
26,125 |
|
TOTAL
ASSETS
|
|
$ |
363,872 |
|
|
$ |
379,748 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable—equipment
|
|
$ |
2,904 |
|
|
$ |
6,744 |
|
Accounts
payable—trade
|
|
|
18,833 |
|
|
|
22,016 |
|
Accounts
payable—floor plan
|
|
|
45,127 |
|
|
|
55,634 |
|
Salaries
and commissions payable
|
|
|
4,586 |
|
|
|
4,789 |
|
Accrued
expenses and other liabilities
|
|
|
29,002 |
|
|
|
30,372 |
|
Income
taxes payable
|
|
|
912 |
|
|
|
- |
|
Recourse
notes payable
|
|
|
102 |
|
|
|
- |
|
Non-recourse
notes payable
|
|
|
84,977 |
|
|
|
93,814 |
|
Deferred
tax liability
|
|
|
2,957 |
|
|
|
2,677 |
|
Total
Liabilities
|
|
|
189,400 |
|
|
|
216,046 |
|
|
|
|
|
|
|
|
|
|
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;11,504,167 issued and
8,088,513 outstanding at March 31, 2009 and 11,210,731 issued and
8,231,741 outstanding at March 31, 2008
|
|
|
115 |
|
|
|
112 |
|
Additional
paid-in capital
|
|
|
80,055 |
|
|
|
77,287 |
|
Treasury
stock, at cost, 3,415,654 and 2,978,990 shares,
respectively
|
|
|
(37,229 |
) |
|
|
(32,884 |
) |
Retained
earnings
|
|
|
131,452 |
|
|
|
118,623 |
|
Accumulated
other comprehensive income—foreign currency translation
adjustment
|
|
|
79 |
|
|
|
564 |
|
Total
Stockholders' Equity
|
|
|
174,472 |
|
|
|
163,702 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
363,872 |
|
|
$ |
379,748 |
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of product and services
|
|
$ |
636,142 |
|
|
$ |
731,654 |
|
Sales
of leased equipment
|
|
|
4,633 |
|
|
|
45,493 |
|
|
|
|
640,775 |
|
|
|
777,147 |
|
|
|
|
|
|
|
|
|
|
Lease
revenues
|
|
|
44,483 |
|
|
|
55,459 |
|
Fee
and other income
|
|
|
12,769 |
|
|
|
16,699 |
|
|
|
|
57,252 |
|
|
|
72,158 |
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
698,027 |
|
|
|
849,305 |
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, product and services
|
|
|
548,035 |
|
|
|
645,393 |
|
Cost
of leased equipment
|
|
|
4,373 |
|
|
|
43,702 |
|
|
|
|
552,408 |
|
|
|
689,095 |
|
|
|
|
|
|
|
|
|
|
Direct
lease costs
|
|
|
14,220 |
|
|
|
20,955 |
|
Professional
and other fees
|
|
|
7,199 |
|
|
|
12,889 |
|
Salaries
and benefits
|
|
|
76,380 |
|
|
|
72,285 |
|
General
and administrative expenses
|
|
|
15,320 |
|
|
|
16,016 |
|
Impairment
of goodwill
|
|
|
4,644 |
|
|
|
- |
|
Interest
and financing costs
|
|
|
5,808 |
|
|
|
8,123 |
|
|
|
|
123,571 |
|
|
|
130,268 |
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES (1)
|
|
|
675,979 |
|
|
|
819,363 |
|
|
|
|
|
|
|
|
|
|
EARNINGS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
22,048 |
|
|
|
29,942 |
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
9,219 |
|
|
|
13,582 |
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
12,829 |
|
|
$ |
16,360 |
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS PER COMMON SHARE—BASIC
|
|
$ |
1.56 |
|
|
$ |
1.99 |
|
NET
EARNINGS PER COMMON SHARE—DILUTED
|
|
$ |
1.52 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—BASIC
|
|
|
8,219,318 |
|
|
|
8,231,741 |
|
WEIGHTED
AVERAGE SHARES OUTSTANDING—DILUTED
|
|
|
8,453,333 |
|
|
|
8,378,683 |
|
(1)
|
Includes
amounts to related parties of $1,126 and $1,052 for the years
ended March 31, 2009 and March 31, 2008,
respectively.
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
12,829 |
|
|
$ |
16,360 |
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
15,181 |
|
|
|
21,851 |
|
Impairment
of goodwill
|
|
|
4,644 |
|
|
|
- |
|
Reserves
for credit losses and sales returns
|
|
|
(335 |
) |
|
|
(99 |
) |
Provision
for inventory allowances and inventory returns
|
|
|
(227 |
) |
|
|
(81 |
) |
Share-based
compensation expense
|
|
|
166 |
|
|
|
1,349 |
|
Excess
tax benefit from exercise of stock options
|
|
|
(9 |
) |
|
|
- |
|
Tax
benefit of stock options exercised
|
|
|
282 |
|
|
|
- |
|
Deferred
taxes
|
|
|
280 |
|
|
|
(2,245 |
) |
Payments
from lessees directly to lenders—operating
leases
|
|
|
(16,140 |
) |
|
|
(14,366 |
) |
Loss
on disposal of property and equipment
|
|
|
44 |
|
|
|
4 |
|
Gain
on sale of operating leases
|
|
|
- |
|
|
|
(403 |
) |
(Gain)
loss on sale or disposal of operating lease equipment
|
|
|
(1,769 |
) |
|
|
103 |
|
Excess
increase in cash value of officers' life insurance
|
|
|
(38 |
) |
|
|
(13 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable—net
|
|
|
27,364 |
|
|
|
(104 |
) |
Notes
receivable
|
|
|
(1,906 |
) |
|
|
(489 |
) |
Inventories—net
|
|
|
(321 |
) |
|
|
(1,477 |
) |
Investment
in direct financing and sale-type leases—net
|
|
|
(8,501 |
) |
|
|
(13,613 |
) |
Other
assets
|
|
|
(2,996 |
) |
|
|
(690 |
) |
Accounts
payable—equipment
|
|
|
(3,467 |
) |
|
|
742 |
|
Accounts
payable—trade
|
|
|
(3,216 |
) |
|
|
374 |
|
Salaries
and commissions payable, accrued expenses and other
liabilities
|
|
|
(651 |
) |
|
|
4,621 |
|
Net
cash provided by operating activities
|
|
|
21,214 |
|
|
|
11,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale or disposal of operating lease equipment
|
|
|
3,986 |
|
|
|
4,262 |
|
Proceeds
from sale of operating leases
|
|
|
- |
|
|
|
892 |
|
Purchases
of operating lease equipment
|
|
|
(3,919 |
) |
|
|
(10,161 |
) |
Purchases
of property and equipment
|
|
|
(728 |
) |
|
|
(1,665 |
) |
Premiums
paid on officers' life insurance
|
|
|
(315 |
) |
|
|
(317 |
) |
Cash
used in acquisition, net of cash acquired
|
|
|
(364 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(1,340 |
) |
|
|
(6,989 |
) |
ePlus inc. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - continued
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Financing Activities:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
Non-recourse
|
|
|
47,833 |
|
|
|
34,970 |
|
Recourse
|
|
|
102 |
|
|
|
- |
|
Repayments:
|
|
|
|
|
|
|
|
|
Non-recourse
|
|
|
(5,822 |
) |
|
|
(16,482 |
) |
Repurchase
of common stock
|
|
|
(4,345 |
) |
|
|
- |
|
Proceeds
from issuance of capital stock through option exercise
|
|
|
2,323 |
|
|
|
- |
|
Excess
tax benefit from exercise of stock options
|
|
|
9 |
|
|
|
- |
|
Net
(repayments) borrowings on floor plan facility
|
|
|
(10,508 |
) |
|
|
164 |
|
Net
repayments on recourse lines of credit
|
|
|
- |
|
|
|
(5,000 |
) |
Net
cash provided by financing activities
|
|
|
29,592 |
|
|
|
13,652 |
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
(101 |
) |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
49,365 |
|
|
|
18,743 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
58,423 |
|
|
|
39,680 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
107,788 |
|
|
$ |
58,423 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
458 |
|
|
$ |
1,204 |
|
Cash
paid for income taxes
|
|
$ |
9,547 |
|
|
$ |
14,605 |
|
|
|
|
|
|
|
|
|
|
Schedule
of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment included in accounts payable
|
|
$ |
80 |
|
|
$ |
47 |
|
Purchase
of operating lease equipment included in accounts payable
|
|
$ |
1 |
|
|
$ |
368 |
|
Principal
payments from lessees directly to lenders
|
|
$ |
50,520 |
|
|
$ |
61,410 |
|
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
(amounts
in thousands, except shares data)
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 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 (net of tax of $3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
256 |
|
|
|
256 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
8,231,741 |
|
|
$ |
112 |
|
|
$ |
77,287 |
|
|
$ |
(32,884 |
) |
|
$ |
118,623 |
|
|
$ |
564 |
|
|
$ |
163,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for option exercises
|
|
|
293,436 |
|
|
|
3 |
|
|
|
2,526 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,529 |
|
Tax
benefit of exercised stock options
|
|
|
- |
|
|
|
- |
|
|
|
184 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
184 |
|
Effect
of share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
Purchase
of treasury stock
|
|
|
(436,664 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,345 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,345 |
) |
Comprehensive
income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,829 |
|
|
|
- |
|
|
|
12,829 |
|
Foreign
currency translation adjustment (net of tax of $23)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(485 |
) |
|
|
(485 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
8,088,513 |
|
|
$ |
115 |
|
|
$ |
80,055 |
|
|
$ |
(37,229 |
) |
|
$ |
131,452 |
|
|
$ |
79 |
|
|
$ |
174,472 |
|
See
Notes to Consolidated Financial Statements.
ePlus inc. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the Years Ended March 31, 2009 and 2008
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF
PRESENTATION — Effective October 19, 1999, MLC Holdings, Inc. changed its name
to ePlus inc. (“ePlus”). Effective January
31, 2000, ePlus inc.’s
wholly-owned subsidiaries MLC Group, Inc., MLC Federal, Inc., MLC Capital, Inc.,
PC Plus, Inc., MLC Network Solutions, Inc. and Educational Computer Concepts,
Inc. changed their names to ePlus Group, inc., ePlus Government, inc., ePlus Capital, inc., ePlus Technology, inc., ePlus Technology of NC, inc.
and ePlus Technology of
PA, inc., respectively. Effective March 31, 2003, ePlus Technology of NC, inc.
and ePlus Technology of
PA, inc. were merged into ePlus Technology,
inc.
PRINCIPLES
OF CONSOLIDATION — The Consolidated Financial Statements include the accounts of
ePlus inc. and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated.
REVENUE
RECOGNITION — The majority of our revenues is derived from three sources: sales
of products and services, lease revenues and sales of our software. Our revenue
recognition policies vary based upon these revenue sources.
Revenue
from Technology Sales Transactions
We adhere
to guidelines and principles of sales recognition described in Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB
No. 104”), 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 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 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 cost of sales, product and
services on the accompanying Consolidated Statements of
Operations.
Revenue
from Leasing Transactions
Our
leasing revenues are accounted for in accordance with SFAS No. 13. 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 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 financing leases, the
difference between the gross investment and the cost of the leased equipment is
recorded as unearned income at the inception of the lease. Under sales-type
leases, the difference between the fair value and cost of the leased property
plus initial direct costs (net margins) is recorded as unearned revenue at the
inception of the lease. Revenue for both sales-type and direct financing leases
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 to a third party other than
the lessee of equipment subject to a lease (lease schedule) in which we are the
lessor. If the rental stream on such a lease has non-recourse debt associated
with it, sales revenue is recorded at the amount of consideration received, net
of the amount of debt assumed by the purchaser. If there is no 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 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 because 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 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 on the accompanying
Consolidated Statements of Operations 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 on the accompanying Consolidated Statements of Operations.
RESIDUALS
— Residual values, representing the estimated value of equipment at the
termination of a lease, are recorded on our Consolidated Financial Statements at
the inception of each sales-type or direct financing lease as amounts estimated
by management based upon its experience and judgment. The estimated residual
values will vary, both in amount and as a percentage of the original equipment
cost, and depend upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
Unguaranteed residual values for sales-type and direct financing leases are
recorded at their net present value and the unearned income is amortized over
the life of the lease using the interest method. The residual values for
operating leases are included in the leased equipment’s net book
value.
We
evaluate residual values on an ongoing basis and record any downward adjustment,
if required. No upward revision of residual values is made subsequent to lease
inception.
RESERVES
FOR CREDIT LOSSES —The reserve for credit losses (the “Reserve”) is maintained
at a level believed by management to be adequate to absorb 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., not
funded or funded on a recourse or partial recourse basis, or funded on a
non-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.
Management's determination of the adequacy of the reserve is based on an
evaluation of historical sales returns, current economic conditions, volume and
other relevant factors. These determinations require considerable judgment in
assessing the ultimate potential for sales returns and include consideration of
the type and volume of products and services sold.
CASH AND
CASH EQUIVALENTS — We consider all highly liquid investments, including those
with an original maturity of three months or less, to be cash equivalents. Cash
and cash equivalents consist primarily of interest-bearing accounts and money
market account that consist of short-term U.S. treasury securities with original
maturities less than or equal to 90 days. Interest income on these short-term
investments is recognized when earned. There are no restrictions on the
withdrawal of funds from our money market account.
INVENTORIES
— Inventories are stated at the lower of cost (weighted average basis) or market
and are shown net of allowance for obsolescence.
PROPERTY
AND EQUIPMENT — Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the related assets,
which range from three to ten years. Hardware is depreciated over
three years. Software is depreciated over five years. Furniture and
certain fixtures are depreciated over five to ten years. Telephone
equipment is depreciated over seven years.
CAPITALIZATION
OF COSTS OF SOFTWARE FOR INTERNAL USE — We have capitalized certain costs for
the development of internal use software under the guidelines of SOP 98-1,
“Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.” Software
capitalized for internal use was $34 thousand and $825 thousand during years
ended March 31, 2009 and March 31, 2008, respectively, and 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
$0.9 million at March 31, 2009 and $1.2 million at March 31, 2008.
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, 2009 and
2008, no such costs were capitalized. We had $405 thousand and $572
thousand of capitalized costs, net of amortization, at March 31, 2009 and March
31, 2008, respectively.
GOODWILL
AND INTANGIBLE ASSETS — We record, as goodwill,
the excess of purchase price over the fair value of the identifiable net assets
acquired in a purchase transaction. In accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS No. 142”) we perform an annual impairment test for
goodwill during the third quarter of our fiscal year, or when events or
circumstances indicate there might be impairment, and follow the two-step
process prescribed in SFAS No. 142. The first step is to screen for potential
impairment, while the second step measures the amount of the impairment, if any.
Intangible assets with finite lives are amortized over the estimated useful
lives using the straight-line method. An impairment loss on such assets is
recognized if the carrying amount of an intangible asset is not recoverable and
its carrying amount exceeds its fair value.
Application
of the goodwill impairment test requires judgment, including the determination
of the fair value of each reporting unit. We have two operating
segments and four reporting units: leasing, technology, software
document management and software procurement. In determining
potential impairment, we estimate the market value of each of the four reporting
units using the best information available to us. We employ the
discounted cash flow method and the guideline company method. The
discounted cash flow method takes into account management’s best projections of
revenue and profitability and the weighted average cost of capital. The
guideline company method compares the earnings multiples from publicly traded
companies with similar operating characteristics as the reporting
units. We then compare the fair value of each reporting unit to its
carrying value to determine if there is an impairment of goodwill.
The
estimates and judgments that most significantly affect the fair value
calculation are assumptions related to estimates of economic and market
conditions over the projected period, including growth rates in sales, costs,
estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and
changes in future working capital requirements. During our annual
impairment test for goodwill, we recognized an impairment of goodwill for our
software procurement reporting unit, which is part of our technology sales
business segment. See Note 3, “Impairment of Goodwill,” for more
information on the impairment charges taken.
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 MEASUREMENT— We adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), as
amended, on April
1, 2008. SFAS No. 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. In February 2008, the FASB released a
FASB Staff Position (FSP FAS 157-2—Effective Date of FASB Statement No. 157)
which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008. The partial adoption of SFAS No.
157 for financial assets and liabilities did not have a material impact on our
consolidated financial position, results of operations or cash flows. We are
currently analyzing the impact, if any, of adopting SFAS No. 157 for
nonfinancial assets and liabilities.
SFAS No.
157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. FASB Staff Position
(“FSP”) No. 157-3, “Determining the Fair Value of an
Asset When the Market For that Asset is not Active,” clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. As a
basis for considering such assumptions, SFAS No. 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
·
|
Level
1 - Observable inputs such as quoted prices in active
markets;
|
|
·
|
Level
2 - Inputs other than the quoted prices in active markets that are
observable either directly or indirectly;
and
|
|
·
|
Level
3 - Unobservable inputs in which there is little or no market data, which
require us to develop our own
assumptions.
|
This
hierarchy requires us to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. On a
recurring basis, we measure certain financial assets and liabilities at fair
value.
We
adopted SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115” (“SFAS No. 159”), on April 1, 2008. SFAS No.
159 expands the use of fair value accounting but does not affect existing
standards which require assets or liabilities to be carried at fair value. The
objective of SFAS No. 159 is to improve financial reporting by providing
companies 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. Under SFAS No. 159, a company may
elect to use fair value to measure eligible items at specified election dates
and report unrealized gains and losses on items for which the fair value option
has been elected, in earnings, at each subsequent reporting date. Eligible items
include, but are not limited to, accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees, issued debt and firm commitments. The adoption of
SFAS No. 159 did not have a material effect on our consolidated financial
statements as we have not elected the fair value option for eligible
items.
For the
financial instruments that are not accounted for under SFAS 157, which consist
primarily of cash and cash equivalents, short-term government debt instruments,
accounts receivables, accounts payable and accrued expenses and other
liabilities, we consider the recorded value of the financial instruments to
approximate the fair value due to their short maturities.
TREASURY
STOCK — We account for treasury stock under the cost method and include treasury
stock as a component of stockholders’ equity on the accompanying Consolidated
Balance Sheets. See Note 10, “Stock Repurchase,” for additional
information.
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. We review our deferred tax assets at least annually and
make necessary valuation adjustments.
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. We have recorded a cumulative effect adjustment to reduce
our fiscal 2008 balance of beginning retained earnings by $491 thousand on our
Consolidated Financial Statements.
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, 2009, other comprehensive loss was $485 thousand, and net income was $12.8
million. This resulted in total comprehensive income of $12.4 million for the
year ended March 31, 2009. 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.
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 8,219,318 for
the year ended March 31, 2009 and of 8,231,741 for the year ended March 31,
2008. Diluted EPS amounts were calculated based on weighted average shares
outstanding and potentially dilutive common stock equivalents of 8,453,333 and
8,378,683 for the year ended March 31, 2009 and March 31, 2008,
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 282,500
and 337,007 shares of our common stock were not included in the computations of
diluted EPS for the year ended March 31, 2009 and March 31, 2008, respectively,
because the options’ exercise prices were greater than the average market price
of our common stock during the applicable periods.
SHARE-BASED
COMPENSATION — We currently have two equity incentive plans which provide us
with the opportunity to compensate directors and selected employees with stock
options, restricted stock and restricted stock units. A stock option entitles
the recipient to purchase shares of common stock from us at the specified
exercise price. Restricted stock and restricted stock units (“RSUs”) entitle the
recipient to obtain stock or stock units, which vest over a set period of time.
RSUs are granted at no cost to the employee and employees do not need to pay an
exercise price to obtain the underlying common stock. All grants or awards made
under the Plans are governed by written agreements between us and the
participants. We also have options outstanding under three previous incentive
plan, under which we no longer grant awards.
We
account for share-based compensation under the provisions of SFAS No. 123
(revised 2004), "Share-Based
Payment" (“SFAS No. 123R”). We use the Black-Scholes
option-pricing model to value all options and the straight-line method to
amortize this fair value as compensation cost over the requisite service
period.
Total
share-based compensation expense, which includes expense recognized for the
grants of options and restricted stock for our employees and non-employee
directors, was $166 thousand and $1.6 million for the year ended March 31, 2009
and 2008, respectively. As previously disclosed, during the year
ended March 31, 2008, 450,000 options were cancelled which resulted in the
recognition of the remaining nonvested share-based compensation expense of $1.5
million for that period. At March 31, 2009, there was no unrecognized
compensation expense related to nonvested options since all options were vested.
Unrecognized compensation expense related to restricted stock was $312 thousand
at March 31, 2009, which will be fully recognized over the next 18
months.
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS — We
adopted SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”), as amended, on April 1, 2008. SFAS
No. 157 defines fair value, establishes a framework and gives guidance regarding
the methods used for measuring fair value, and expands disclosures about fair
value measurements. SFAS No.
157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. FASB Staff Position
(“FSP”) No. 157-3, “Determining the Fair Value of an
Asset When the Market For that Asset is not Active,” clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. As a
basis for considering such assumptions, SFAS No. 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
·
|
Level
1 - Observable inputs such as quoted prices in active
markets;
|
|
·
|
Level
2 - Inputs other than the quoted prices in active markets that are
observable either directly or indirectly;
and
|
|
·
|
Level
3 - Unobservable inputs in which there is little or no market data, which
require us to develop our own
assumptions.
|
This
hierarchy requires us to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. On a
recurring basis, we measure certain financial assets and liabilities at fair
value.
We
adopted SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115” (“SFAS No. 159”), on April 1, 2008. SFAS No.
159 expands the use of fair value accounting but does not affect existing
standards which require assets or liabilities to be carried at fair value. The
objective of SFAS No. 159 is to improve financial reporting by providing
companies 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. Under SFAS No. 159, a company may
elect to use fair value to measure eligible items at specified election dates
and report unrealized gains and losses on items for which the fair value option
has been elected, in earnings, at each subsequent reporting date. Eligible items
include, but are not limited to, accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees, issued debt and firm commitments. The adoption of
SFAS No. 159 did not have a material effect on our consolidated financial
statements as we have not elected the fair value option for eligible
items.