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EPLUS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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, financing revenues and fee and other income. Our operations are conducted through two segments: technology and financing segment. Financial Summary In recent years, the United States experienced substantial uncertainty in the economic environment, including financial market disruption. In addition, the debt crisis in certain countries in the European Union has contributed to continuing economic weakness and uncertainty in the United States. A reoccurrence of the economic downturn could cause our current and potential customers to once again delay or reduce technology purchases and result in longer sales cycles, slower adoption of new technologies and increased price competition. 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, a reoccurrence of the economic downturn may adversely affect our access to additional capital. However, in calendar year 2011, IT spending in most categories increased, driven by the general economic recovery, the deferral of IT spending by many customers in prior years, customer interest in cloud computing, the positive return on investment that can be gained by virtualization technologies, and the reduction of manufacturer shipment delays in the supply chain. In 2012, IT spending in the United States increased by 4.0% as compared to 2011, according to industry analysts. Some analysts have lowered their forecast for overall IT spending for calendar year 2013 to less than 3.0% on average, with higher variability depending on industry. We believe that customers are continuing to focus on cost savings initiatives by utilizing technologies such as virtualization and cloud computing, and we continue to provide these and other advanced technology solutions to meet these needs. During the year ended March 31, 2013, total revenue increased 19.1% to $983.1 million and total costs and expenses increased 17.6% to $924.4 million. We believe that our growth outpaced the overall industry due to a gain in market share as we captured additional customer spend, and focused on faster growing segments within the market, such as virtualization, collaboration, and security. In addition, we added new customers both as a result of our own organic sales and marketing efforts as well as through increased vendor referrals. Net earnings increased 49.1% to $34.8 million, as compared to the prior fiscal year. Diluted earnings per share increased 54.8% to $4.32 per share for the year ended March 31, 2013 compared to $2.79 per share for the prior year. Gross margin for product and services was 18.0% during the year ended March 31, 2013 compared to 17.8% during the year ended March 31, 2012. Our gross margin on sales of product and services increased due to an improvement in margins from the sale of third-party products, as well as increases in service revenues, which was offset by a decrease in the amount of vendor incentives earned. For the years ended March 31, 2013 and 2012, we originated lease and financing volumes of $219.5 million and $162.3 million, respectively, which increased partly due to our participating in additional vendor financing transactions. Cash and cash equivalents increased $18.9 million or 56.1% to $52.7 million at March 31, 2013 compared to March 31, 2012, which was partially offset by a reduction in short-term investments of $6.4 million to $1.0 million from $7.4 million as of March 31, 2012. During the year, we paid a special cash dividend of $2.50 per share, or $20.1 million, to shareholders of record as of the close of business on December 17, 2012, and repurchased 19,423 shares of our common stock for a total purchase price of $0.6 million. Our cash and short-term investments on hand, funds generated from operations, amounts available under our credit facility and the possible monetization of our investment portfolio provide sufficient liquidity for our business. 27 -------------------------------------------------------------------------------- Table of Contents Business Segment Overview Technology Segment The technology segment sells IT equipment and software and related services primarily to corporate customers, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for information technology products. Our technology segment derives revenue from the sales of new equipment and service engagements. These revenues are reflected on our consolidated statements of operations under sales of product and services and fee and other income. Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with our company, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with governments is based on public bids and our written bid responses. A substantial portion of our sales of product and services are from sales of Cisco Systems and Hewlett Packard products, which represent approximately 48% and 11% of sales of product and services, respectively, for the year ended March 31, 2013 as compared to 45% and 15% of total revenues, respectively, for the year ended March 31, 2012, and 40% and 19% of total revenues, respectively, for the year ended March 31, 2011. Included in the sales of product and services are revenues derived from performing advanced professional services that may be bundled with sales of equipment which are integral to the successful delivery of such equipment. Our service engagements are generally governed by statements of work, and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials. We endeavor to minimize the cost of sales in our technology segment through vendor consideration programs provided by manufacturers and other incentives provided by distributors. The programs we qualify for are generally set 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 authorization levels are costly to maintain and these programs continually change and, therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs. We currently maintain the following authorization levels with our primary manufacturers: Manufacturer Manufacturer Authorization Level Apple Apple Authorized Corporate Reseller 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 Cisco Telepresence Video Master Partner ATP Rich Media Communications Master Security Specialization Master UC Specialization Master Managed Services Partner Citrix Systems, Inc. Citrix Gold (National) EMC Velocity Premier Level Hewlett Packard HP Preferred Elite Partner (National) IBM Premier IBM Business Partner (National) Lenovo Lenovo Premium (National) Microsoft Microsoft Gold (National) NetApp NetApp STAR PartnerOracle Gold Partner Sun SPA Executive Partner (National) Sun National Strategic Data Center Authorized VMware National Premier Partner 28-------------------------------------------------------------------------------- Table of Contents We also generate revenue in our technology segment through hosting arrangements, sales of our Internet-based business-to-business supply chain management software, agent fees received from various manufacturers, support fees, warranty reimbursements, settlement fees related to disputes or litigation and interest income. Our revenues also include 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. These revenues are reflected on our consolidated statements of operations under fee and other income. Financing Segment The financing segment offers financing solutions to domestic governmental entities and corporations nationwide and in certain other countries. The financing segment derives revenue from leasing primarily IT and medical equipment and the disposition of that equipment at the end of the lease. These revenues are reflected under financing revenues on our consolidated statements of operations. The finance business also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services through notes receivable. These revenues are included in financing revenues on our consolidated statements of operations. Financing revenues consist of amortization of unearned income on notes receivables, direct financing and sales-type leases, rentals due under operating leases, net gains or losses on the sales of financing receivables, and sales of equipment at the end of a lease, as well as other post-term financing revenue. The types of revenue and costs recognized by us are determined by each lease's individual classification. Each lease is classified as either a direct financing lease, sales-type lease, or operating lease, as appropriate. · For direct financing and sales-type leases, we record the net investment in leases, which consists of the sum of the minimum lease payments, initial direct costs (direct financing leases only), and unguaranteed residual value (gross investment) less the unearned income. The unearned income is amortized over the life of the lease using the interest method. Under sales-type leases, the difference between the present value of minimum lease payments and the cost of the leased property plus initial direct costs (net margins) is recorded as profit 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 financing revenue. We account for the transfer of financing receivables that meet the definition of financial assets and certain criteria outlined in Transfers and Servicing in the Codification, including surrender of control, as sales for financial reporting purposes. The net gain on the transfer of these financial assets is recognized in financing revenues in our consolidated statements of operations. Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. The net gain or loss on these transactions is presented within financing revenue in our consolidated statement of operations. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from our "off lease" equipment. These revenues are reflected in our consolidated statements of operations under fee and other income. 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, changes in vendor incentive programs, interest rate fluctuations, general economic conditions, 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 a sale prior to the expiration of the lease term to the lessee or to a third-party or from other post-term events. We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and desirable geographic areas. These investments may reduce our results from operations in the short term. 29 -------------------------------------------------------------------------------- Table of Contents RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In June 2011, the FASB issued ASU 2011-12, "Comprehensive Income" (ASU 2011-12), which amended existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-12 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this amendment on April 1, 2012 and are presenting our components of net income and other comprehensive income in two separate but consecutive financial statements. CRITICAL ACCOUNTING ESTIMATES 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, residual values, vendor consideration, lease classification, goodwill and intangibles, reserves for credit losses and income taxes specifically relating to uncertain tax positions. 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 such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment. We consider the following accounting policies important in understanding the potential impact of our judgments and estimates on our operating results and financial condition. For additional information on these and other 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 the following sources: sales of third-party products, software, software assurance, maintenance and services; sales of our services and software, and financing revenues. The products and services we sell, and the manner in which they are bundled, are technologically complex and the characterization of these product and services require judgment in order to apply revenue recognition policies. For all these revenue sources, we determine whether we are the principal or agent in accordance with Codification Topic, Revenue Recognition, Subtopic Principal Agent Considerations. Our revenue recognition policies vary based upon these revenue sources and the mischaracterization of these products and services could result in misapplication of revenue recognition polices. Generally, sales of third-party products and software 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, the sales price is fixed or determinable and collectability is reasonably assured. Using these tests, the vast majority of our 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 an analysis of current quarter and historical delivery dates. We sell software assurance, maintenance and service contracts where the services are performed by a third-party. Software assurance is a service that allows customers to upgrade at no additional cost to the latest technology if new applications are introduced during the period that the software assurance is in effect. As we enter into contracts with third-party service providers, we evaluate whether we are acting as a principal or agent in the transaction. We conclude that we are acting as an agent and recognize revenue on a net basis at the date of sale when we are not responsible for the day-to-day provision of services in these arrangements and our customers are aware that the third-party service provider will provide the services to them. We also sell services that are performed by us in conjunction with product sales. We allocate the total arrangement consideration to the deliverables based on an estimated selling price of our products and services. We determine the estimated selling price using cost plus a reasonable margin for each deliverable, which was based on our established policies and procedures for providing customers with quotes, as well as historical gross margins for our products and services. Revenue from the sales of products is generally recognized upon delivery to the customers and revenue for the services performed by us is generally recognized when the services are complete, which normally occurs within 90 days after the products are delivered to the customer. 30 -------------------------------------------------------------------------------- Table of Contents Financing revenues include income earned from investments in leases, leased equipment, and financed third-party software and services. We classify our investments in leases and leased equipment as either direct financing lease, sales-type lease, or operating lease, as appropriate. Revenue on direct financing and sales-type leases is deferred at the inception of the leases and is recognized over the term of the lease using the interest method. Revenue on operating leases is recorded on a straight line basis over the lease term. We classify third-party software and services that we finance for our customers as notes receivable and recognize interest income over the term of the arrangement using the effective interest method. RESIDUAL VALUES. Residual values represent our estimated value of the equipment at the end of the initial lease term. 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, lease term, equipment supply and demand, and new product announcements by manufacturers. We evaluate residual values on a quarterly basis and record any required impairments of residual value, in the period in which the impairment is determined. No upward adjustment to residual values is made subsequent to lease inception. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the premium paid over the fair value of net tangible and intangible assets we have acquired in business combinations. We review our goodwill for impairment annually, or more frequently if indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rates, among others. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances, after tax cash flows and market capitalization. As part of our annual assessment, we elected to bypass the qualitative assessment and estimated the fair values of our reporting units using the best information available, including prices for similar assets and liabilities and other valuation techniques. We perform the two step process to assess our goodwill for impairment. First, we compare the fair value of each of our reporting units with its carrying value. We estimate the fair value of the reporting unit using various valuation methodologies, including discounted expected future cash flows. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further testing is necessary. If the net book value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the fair value of goodwill in the same manner as if our reporting unit were being acquired in a business combination. Specifically, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the estimated fair value of goodwill. If the estimated fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference. The fair values of our reporting units significantly exceeded their respective carrying values as of October 1, 2012 and we concluded the recoverability of goodwill would not have been impacted by a 10% change in the fair values. 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 quarters' sales activities and are primarily formula-based. Different programs have different vendor/program specific goals to achieve. These programs can be very complex to calculate and we estimate the amount of vendor consideration earned when it is probable and reasonably estimable using the best information available, including historical data. Vendor consideration received pursuant to volume sales incentive programs is recognized as a reduction to cost of sales, product and services on our consolidated statements of operations. Vendor consideration received pursuant to volume purchase incentive programs is allocated to inventories based on the applicable incentives from each vendor and is recorded in cost of sales, product and services, as the inventory is sold. Vendor consideration received pursuant to shared marketing expense programs is recorded as a reduction of the related selling and administrative expenses in the period the program takes place only if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of cost of sales, product and services on our consolidated statements of operations. 31 -------------------------------------------------------------------------------- Table of Contents RESERVES FOR CREDIT LOSSES. We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management's determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer's credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors. Management's determination of the adequacy of the reserve for credit losses for minimum lease payments associated with investments in direct financing and sales-type leases may be based on the following factors: an internally assigned credit quality rating, historical credit loss experience, current economic conditions, volume, growth, the composition of the lease portfolio, the fair value of the underlying collateral, and the funding status (i.e. not funded, funded on a recourse or partial recourse basis, or funded on non-recourse basis). The reserve for credit losses for the fiscal years ended March 31, 2013 and 2012 included a specific reserve of $2.8 million and $2.9 million, respectively, due to one specific customer, which filed for bankruptcy in May 2012. RESERVES FOR SALES RETURNS. Sales are reported net of returns and allowances, which are maintained at a level believed by management to be adequate to absorb potential returns of sales of product and services. Management's determination of the adequacy of the reserve is based on an evaluation of historical sales returns and other relevant factors. These determinations require considerable judgment in assessing the ultimate potential for sales returns and include consideration of the type and volume of product sold. INCOME TAXES. We make certain estimates and judgments in determining income tax expense for financial statement reporting 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 reporting purposes. We also must analyze income tax reserves, as well as determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. The calculation of our tax liabilities also involves considering uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain income tax positions based on our estimate of whether, and the extent to which, additional taxes will be required. BUSINESS COMBINATIONS. We account for business combinations using the acquisition method, which requires that the total purchase price of each of the acquired entities be allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The purchase price of the acquired entities may include an estimate of the fair value of contingent consideration. The allocation process requires an analysis of intangible assets, customer relationships, trade names, acquired contractual rights and assumed contractual commitments and legal contingencies to identify and record all assets acquired and liabilities assumed at their fair value. Any premium over the fair value of assets acquired and liabilities assumed is recorded as goodwill. To the extent the purchase price is less than the fair value of assets acquired and liabilities assumed we recognize a gain in our statements of operations. The results of operations for an acquired company are included in our financial statements from the date of acquisition. 32 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The Year Ended March 31, 2013 Compared to the Year Ended March 31, 2012 Technology Segment The results of operations for our technology segment for the years ended March 31, 2013 and 2012 were as follows (in thousands): Year Ended March 31, 2013 2012 Change Sales of product and services $ 936,228 $ 784,951 $ 151,277 19.3 % Fee and other income 6,949 7,455 (506 ) (6.8 %) Total revenues 943,177 792,406 150,771 19.0 % Cost of sales, product and services 767,447 645,558 121,889 18.9 % Professional and other fees 9,638 10,283 (645 ) (6.3 %) Salaries and benefits 100,447 88,321 12,126 13.7 % General and administrative expenses 19,028 16,627 2,401 14.4 % Interest and financing costs 89 93 (4 ) (4.3 %) Total costs and expenses 896,649 760,882 135,767 17.8 % Segment earnings $ 46,528 $ 31,524 $ 15,004 47.6 % Total revenue. Total revenues for the year ended March 31, 2013 increased by $150.8 million, or 19.0%, to $943.2 million due to increases in demand for product and services, particularly from Fortune 100 customers. We had year over year growth in our quarterly sales of product and services during the year ended March 31, 2013. We experienced sequential increases in quarterly sales of product and services during the first two quarters of 2013 and slight decreases during the third and fourth quarters. The sequential decrease in revenues over the last two quarters is primarily due to changes in customer demand. We have experienced sequential decreases in revenues between our third and fourth quarters as the IT spending cycle for many of our customers tend increase towards the end of their fiscal years. However, over the last several years, our revenues have increased on a year over year basis. The sequential and year over year change in sales of product and services is summarized below: Quarter Ended Sequential Year over Year June 30, 2012 11.7% 38.4% September 30, 2012 6.8% 29.3% December 31, 2012 (8.8%) 7.4% March 31, 2013 (1.9%) 6.6% We rely on our vendors to fulfill shipments to our customers, which have been occurring on a regular basis. Our average open orders for the years ended March 31, 2013 and 2012 were $76.8 million and $52.9 million, respectively. In addition, we had deferred revenue of $16.7 million at March 31, 2013, compared to $15.2 million at March 31, 2012. Total costs and expenses. Total costs and expenses for the year ended March 31, 2013 increased $135.8 million or 17.8%, to $896.6 million due to increases in cost of sales, product and services, salaries and benefits and general and administrative expenses, partially offset by professional and other fees. The increase in cost of sales, product and services was consistent with the increase in sales of product and services. Our gross margin on the sale of product and services increased to 18.0% for the year ended March 31, 2013, from 17.8% in the prior year. Our gross margin increased due to an improvement in margins from the sale of product, as well as increases in service revenues, which were offset by a decrease as a percentage of sales in vendor incentives earned. The change in the amount of vendor incentives earned during the year ended March 31, 2013 resulted in a decrease of 0.1% of gross margin for product and services. There are ongoing changes to the incentive programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of manufacturer incentives we are currently receiving, gross margins may decrease. 33 -------------------------------------------------------------------------------- Table of Contents Professional and other fees decreased $0.6 million, or 6.3%, to $9.6 million, compared to $10.3 million during the prior year. These decreases are primarily due to lower legal and other fees related to the patent infringement litigation, which were $3.3 million and $6.0 million for the years ended March 31, 2013 and 2012, respectively. These types of patent infringement cases are complex in nature, and are likely to have significant expenses associated with them. 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. These decreases are partially offset by increases in accounting and other professional fees of about $1.8 million. Salaries and benefits increased $12.1 million or 13.7% to $100.4 million, compared to $88.3 million during the prior year. This increase was driven by increases in the number of employees and higher commissions. Our technology segment had 835 employees as of March 31, 2013, an increase of 58 from 777 at March 31, 2012. Most of the increase relates to sales and support personnel in order to expand our geographical presence and solutions offerings. In addition, commissions increased due to the increase in the sales of product and services during the fiscal year ended March 31, 2013. General and administrative expenses increased $2.4 million, or 14.4%, to $19.0 million during the fiscal year ended March 31, 2013 compared to prior year, due to the higher travel and other expenses associated with the increase in sales and support personnel, and higher rent and amortization expenses related to acquisitions,. Segment earnings. As a result of the foregoing, segment earnings increased $15.0 million, or 47.6%, to $46.5 million for the year ended March 31, 2013. Financing Segment The results of operations for our financing segment for the years ended March 31, 2013 and 2012 were as follows (in thousands): Year Ended March 31, 2013 2012 Change Financing revenue $ 38,384 $ 30,899 $ 7,485 24.2 % Fee and other income 1,551 2,276 (725 ) (31.9 %) Total revenues 39,935 33,175 6,760 20.4 % Direct lease costs 10,892 8,508 2,384 28.0 % Professional and other fees 3,460 1,461 1,999 136.8 % Salaries and benefits 10,516 9,947 569 5.7 % General and administrative expenses 1,071 3,872 (2,801 ) (72.3 %) Interest and financing costs 1,779 1,337 442 33.1 % Total costs and expenses 27,718 25,125 2,593 10.3 % Segment earnings $ 12,217 $ 8,050 $ 4,167 51.8 % Total revenues. Total revenues increased by $6.8 million, or 20.4%, to $39.9 million for the year ended March 31, 2013 due to an increase in financing revenue and partially offset by a reduction in fee and other income revenue. Financing revenue generally falls into two categories: portfolio and transactional income. Portfolio income consists of earnings on notes receivable, direct financing leases, operating leases and other renewal rent, while transactional income consists of sales of financing receivables and leased equipment. For the year ended March 31, 2013, the increase in financing revenues was due to net gains associated with the early termination of certain lease agreements as well as increases in net gains on sales of financing receivables and leased equipment. For the years ended March 31, 2013 and 2012, we originated lease and financing volumes of $219.5 million and $162.3 million, respectively, which increased partly due to our participating in additional vendor financing transactions. Our investments in notes and leases decreased as of March 31, 2013 to $122.6 million from $140.3 million in the prior year, which was due to sales of financing receivables during the year. 34 -------------------------------------------------------------------------------- Table of Contents Total costs and expenses. Total costs and expenses increased $2.6 million, or 10.3% to $27.7 million. Direct lease costs increased $2.4 million, or 28.0%, to $10.9 million mostly due to increases in depreciation expense for equipment under operating leases and increases in amortization of capitalized costs from terminated leases. Professional and other fees increased by $2.0 million or 136.8% due largely to broker fees incurred in connection with the sale of a portion of our lease investment portfolio. Salary and benefits increased by $569 thousand, or 5.7% to $10.5 million due to higher commissions as a result of the increase in revenues during the period. Our financing segment employed 55 people as of March 31, 2013 down slightly from 56 people as of March 31, 2012. General and administrative expenses decreased $2.8 million for the year ended March 31, 2013, as compared to the prior year, due to lower reserves for credit losses. Our provision for bad debts decreased due to a reserve of $2.9 million recognized in fiscal year 2012 due to a specific customer that declared bankruptcy. Interest and financing costs increased $442 thousand or 33.1% to $1.8 million during the year ended March 31, 2013, as compared to $1.3 million during the prior year. This increase is primarily due to higher non-recourse note balances as well as lower interest rates. Non-recourse notes payable increased 52.9% to $40.3 million at March 31, 2013 as compared to $26.3 million at March 31, 2012; this was partially offset by the reduction of $243 thousand in recourse notes payable as of March 31, 2013, compared to $1.7 million in recourse notes payable as of March 31, 2012. Segment earnings. As a result of the foregoing, segment earnings increased $4.2 million, or 51.8%, to $12.2 million for the year ended March 31, 2013. Consolidated Income taxes. Our provision for income taxes increased $7.7 million or 47.6% to $23.9 million for the year ended March 31, 2013. Our effective income tax rates for the years ended March 31, 2013 and 2012 were 40.7% and 41.0%, respectively. The decrease in effective income tax rate is primarily due to changes in state apportionment factors. Net earnings. Net earnings were $34.8 million for the year ended March 31, 2013, an increase of 49.1% as compared to $23.4 million in the prior fiscal year. Basic and fully diluted earnings per common share were $4.37 and $4.32, respectively, for the year ended March 31, 2013. Basic and fully diluted earnings per common share were $2.82 and $2.79, respectively, for the year ended March 31, 2012. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the year ended March 31, 2013 were 7,809,938 and 7,902,871 and for the year ended March 31, 2012 were 8,002,191, and 8,095,192, respectively. The Year Ended March 31, 2012 Compared to the Year Ended March 31, 2011 Technology Segment The results of operations for our technology segment for the years ended March 31, 2012 and 2011 were as follows (in thousands): Year Ended March 31, 2012 2011 Change Sales of product and services $ 784,951 $ 672,303 $ 112,648 16.8 % Fee and other income 7,455 8,260 (805 ) (9.7 %) Patent settlement income - 125 (125 ) (100.0 %) Total revenues 792,406 680,688 111,718 16.4 % Cost of sales, product and services 645,558 551,860 93,698 17.0 % Professional and other fees 10,283 14,014 (3,731 ) (26.6 %) Salaries and benefits 88,321 74,706 13,615 18.2 % General and administrative expenses 16,627 13,220 3,407 25.8 % Interest and financing costs 93 84 9 10.7 % Total costs and expenses 760,882 653,884 106,998 16.4 % Segment earnings $ 31,524 $ 26,804 $ 4,720 17.6 % 35-------------------------------------------------------------------------------- Table of Contents Total revenues. Total revenues for the year ended March 31, 2012 increased by $111.7 million, or 16.4%, to $792.4 million, due to increased sales of product and services. In calendar year 2011, IT spending in most categories increased driven by the general economic recovery, the deferral of IT spending by many customers in prior years, and the investment in new technologies. As a result, demand for our product and services increased over the prior year. We had year over year growth in our quarterly sales of product and services during the year ended March 31, 2012. We experienced sequential increases in quarterly sales of product and services during the 2012 fiscal year, except for a slight decrease in the quarter ended March 31, 2012, as we had higher demand for our product and services during our second and third quarters. The sequential and year over year change in sales of product and services is summarized below: Quarter Ended Sequential Year over Year June 30, 2011 1.9% 13.8% September 30, 2011 14.3% 10.6% December 31, 2011 9.7% 16.4% March 31, 2012 (1.2%) 26.3% We rely on our vendors to fulfill shipments to our customers, which have been occurring on a regular basis. Our average open orders for the years ended March 31, 2012 and 2011 were $52.9 million and $47.9 million, respectively. In addition, we had deferred revenue of $10.9 million at March 31, 2012, compared to $30.3 million at March 30, 2011, relating to bundled hardware and service arrangements entered into prior to our adoption of ASU 2009-13 Multiple-Deliverable Revenue Arrangements. These arrangements were not completed at March 31, 2011 and therefore, were not recognized as revenue. We recognize revenue on these multiple deliverable revenue arrangements when the services are completed. Total costs and expenses. Total costs and expenses for the year ended March 31, 2012 increased $107.0 million or 16.4%, to $760.9 million due to increases in cost of sales, product and services, salaries and benefits and general and administrative expenses, partially offset by professional and other fees. The increase in cost of sales, product and services was consistent with the increase in sales of product and services. Our gross margin on the sale of product and services decreased to 17.8% for the year ended March 31, 2012, from 17.9% in the prior year. Our gross margin was affected by the mix between product and services, vendor incentives earned, and competitive pricing pressures. The change in the amount of vendor incentives earned during the year ended March 31, 2012 resulted in a 0.3% decrease in gross margin for product and services. There are ongoing changes to the incentives programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of manufacturer incentives we are currently receiving, gross margins may decrease. Professional and other fees decreased $3.7 million, or 26.6%, to $10.3 million, compared to $14.0 million during the prior year. These decreases are primarily due to lower legal and other fees related to the patent infringement litigation, which were $6.0 million and $10.5 million for the years ended March 31, 2012 and 2011, respectively. These types of patent infringement cases are complex in nature, and are likely to have significant expenses associated with them. We cannot predict whether we will be successful in our claims for damages, whether any award ultimately received will exceed the costs incurred to pursue these matters, or how long it will take to bring these matters to resolution. Salaries and benefits increased $13.6 million or 18.2% to $88.3 million, compared to $74.7 million during the prior year. This increase was driven by increases in the number of employees and higher commissions. Our technology segment had 777 employees as of March 31, 2012, an increase of 115 from 662 at March 31, 2011. A total of 77 employees were added as a result of the three acquisitions we completed during the year, the remaining increase was due to organic growth. Most of the increase relates to sales, marketing and engineering personnel. We continue to invest in sales and support personnel through hiring and strategic acquisitions in order to expand our geographical presence in the continental U.S. as well as extend our advanced technology solutions offerings. In addition, commissions increased due to the increase in the sales of product and services during the fiscal year ended March 31, 2012. General and administrative expenses increased $3.4 million, or 25.8%, to $16.6 million during the fiscal year ended March 31, 2012 compared to prior year, due to the higher travel and other expenses associated with the increase in sales and support personnel, higher rent and depreciation expenses related to acquisitions. Segment earnings. As a result of the foregoing, segment earnings increased $4.7 million, or 17.6%, to $31.5 million for the year ended March 31, 2012. 36 -------------------------------------------------------------------------------- Table of Contents Financing Segment The results of operations for our financing segment for the years ended March 31, 2012 and 2011 were as follows (in thousands): Year Ended March 31, 2012 2011 Change Financing revenue $ 30,899 $ 35,367 $ (4,468 ) (12.6 %) Fee and other income 2,276 2,460 (184 ) (7.5 %) Total revenues 33,175 37,827 (4,652 ) (12.3 %) Direct lease costs 8,508 9,212 (704 ) (7.6 %) Professional and other fees 1,461 1,369 92 6.7 % Salaries and benefits 9,947 9,541 406 4.3 % General and administrative 3,872 1,461 2,411 165.0 % Interest and financing costs 1,337 2,480 (1,143 ) (46.1 %) Total costs and expenses 25,125 24,063 1,062 4.4 % Segment earnings $ 8,050 $ 13,764 $ (5,714 ) (41.5 %) Total revenues. Total revenues decreased by $4.7 million, or 12.3%, to $33.2 million for the year ended March 31, 2012 due to a decrease in financing revenue and fee and other income revenue. Financing revenue generally falls into two categories: portfolio income, which consists of earnings on notes, direct financing leases, operating leases and other renewal rent, and transactional income, which consists of sales of financing receivables and leased equipment. For the year ended March 31, 2012, financing revenue decreased $4.5 million, or 12.6%, due to a decrease in portfolio income of $2.7 million as a result of a decrease in our average investment in direct financing and sales-type leases during the year combined with a lower earnings rate on the portfolio. For the years ended March 31, 2012 and 2011, we originated $162.3 million and $135.5 million, respectively. Our investments in notes and leases increased as of March 31, 2012 to $140.3 million from $123.5 million in the prior year, which was due to additional investments made during the quarter ended March 31, 2012. Total costs and expenses. Total costs and expenses increased $1.1 million, or 4.4%, primarily due to increases in general and administrative costs, which increased $2.4 million, or 165.1%, to $3.9 million. The increase in general and administrative costs is primarily due to an increase in our reserve for credit losses of $2.9 million of which a significant portion is due to a specific customer, which filed for bankruptcy in May 2012. Our financing segment employed 56 people as of March 31, 2012 which decreased from 63 people employed as of March 31, 2011. Offsetting this increase was a decrease in interest and financing costs by $1.1 million or 46.1% to $1.3 million during the year ended March 31, 2012, as compared to $2.5 million during the prior year. This decrease is primarily due to lower non-recourse note balances as well as lower interest rates. Non-recourse notes payable decreased 11.0% to $26.3 million at March 31, 2012 as compared to $29.6 million at March 31, 2011; this was partially offset by the addition of $1.7 million in recourse notes payable as of March 31, 2012. There was no recourse notes payable as of March 31, 2011. Segment earnings. As a result of the foregoing, segment earnings decreased $5.7 million, or 41.5%, to $8.1 million for the year ended March 31, 2012 Consolidated Income taxes. Our provision for income taxes decreased $0.6 million or 3.8% to $16.2 million for the year ended March 31, 2012. Our effective income tax rates for the years ended March 31, 2012 and 2011 were 41.0% and 41.5%, respectively. The decrease in effective income tax rate is primarily due to a change in state apportionment factors and a decrease in the reserve for uncertain tax positions. Net earnings. Net earnings were $23.4 million for the year ended March 31, 2012, a decrease of 1.5% as compared to $23.7 million in the prior fiscal year. 37 -------------------------------------------------------------------------------- Table of Contents Basic and fully diluted earnings per common share were $2.82 and $2.79, respectively, for the year ended March 31, 2012. Basic and fully diluted earnings per common share were $2.83 and $2.78, respectively, for the year ended March 31, 2011. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the year ended March 31, 2012,were 8,002,191 and 8,095,192 and for the year ended March 31, 2011 were 8,200,557, and 8,352,921, 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 equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock. In December 2012, our Board of Directors declared and paid a special cash dividend of $2.50 per common share. Our subsidiary ePlus Technology, inc., part of our technology segment, finances its operations with funds generated from operations, and with a credit facility with GE Capital, Commercial Distribution Finance ("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" in our consolidated balance sheets. Payments on the floor plan component are due on three specified dates each month, ranging from 15 to 60 days from the invoice date. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no outstanding balance at March 31, 2013 or March 31, 2012, while the maximum credit limit was $30.0 million for both periods. The borrowings and repayments under the floor plan component are reflected as "net borrowings 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 segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis via a three-party lockbox agreement between us, GECDF and our bank. This agreement grants GECDF security interest in the lockbox accounts and the ability to route cleared funds from the accounts directly to GECDF to pay down the accounts receivable portion of the facility should we begin to carry a balance on the accounts receivable facility. We engage in this payment structure in order to minimize our interest expense and bank fees in connection with financing the operations of our technology segment. We believe that cash on hand, and funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures and other requirements for at least the next twelve calendar months. Our working capital generally fluctuates as a result of changes in demand for our products and services; however, specific changes in certain elements of working capital may not coincide with changes in other elements of our financial statements. For example, our accounts receivable balance may change by more or less than the change in our revenues, as there are variables impacting accounts receivable that may not impact revenues, such as the amount of third-party software assurance, maintenance and services invoiced, for which revenues are presented on a net basis, or significant changes in our deferred revenues. During the year ended March 31, 2013, the increases in accounts receivable, accounts payable - trade, and deferred revenues, were generally consistent with our increase in revenues. The increase in accounts receivables are not the result of changes in payment terms or slowed collections from our customers. 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 requiring any additional sources of financing to fund operations, if demand for IT products declines, our cash flows from operations may be substantially affected. 38 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table summarizes our sources and uses of cash over the periods indicated (in thousands): Year Ended March 31, 2013 2012 2011 Net cash provided by (used in) operating activities $ 41,270 $ (21,596 ) $ (9,398 ) Net cash used in investing activities (12,658 ) (38,223 ) (11,100 ) Net cash (used in) provided by financing activities (9,667 ) 17,846 11,171 Effect of exchange rate changes on cash (3 ) (5 ) 6 Net increase (decrease) in cash and cash equivalents $ 18,942 $ (41,978 ) $ (9,321 ) Cash flows from operating activities. Cash used in operating activities totaled $41.3 million in the year ended March 31, 2013, primarily due to an increase in net earnings to $34.8 million, a decrease in investment in direct financing and sale-type leases of $18.2 million, increase in depreciation and amortization expenses of $12.2 million, and decrease in inventories-net of $8.8 million. Partially offsetting the cash provided by operating activities are increase in accounts receivable-net of $17.8 million and decrease in accounts payable-equipment of $11.7 million. Cash used in operating activities totaled $21.6 million in the year ended March 31, 2012, primarily due to an increase in accounts receivable of $50.4 million, increase inventories of $13.8 million and net investments in direct financing and sales-type leases of $12.1 million. In addition, salaries and commissions payable, accrued expenses and other liabilities also decreased by $10.5 million as we have less deferred revenue related to bundled hardware and services arrangement. These increases in cash used are due to a significant increase in sales over the previous fiscal year. Partially offsetting the cash used was a decrease in other assets of $20.1 million mainly due to lower deferred costs and prepaid taxes, and increases of accounts payable-equipment and accounts payable-trade of $9.7 million and $10.2 million, respectively, as a result of increased sales. Cash used in operating activities totaled $9.4 million in the year ended March 31, 2011, resulted primarily from a decrease in accounts payable-equipment of $33.6 million as we paid for equipment associated with leases and an increase of $11.3 million related to accounts receivable-net. This decrease was partially offset by a decrease of $13.5 million in increase in investment in direct financing and sale-type leases-net, and $8.7 million increase in salaries and commissions payable, accrued expenses and other liabilities. Cash flows from investing activities. Cash used in investing activities were $12.7 million during the year ended March 31, 2013, primarily due to cash used in purchases of property, equipment and operating lease equipment of $15.6 million and net issuance of notes receivable of $5.3 million, partially offset by net maturity of short-term investments of $6.4 million. Cash used in investing activities were $38.2 million during the year ended March 31, 2012, primarily due to cash used in acquisitions of $11.8 million, purchase of property, equipment and operating lease equipment of $7.7 million, increase in short-term investments of $7.4 million, and the net issuance of notes receivable of $13.5 million. This use of cash was offset by proceeds from sales of property, equipment and operating lease equipment of $2.2 million. Cash used in investing activities were $11.1 million during the year ended March 31, 2011, primarily driven by purchases of property, equipment and operating lease equipment of $13.4 million, partially offset by proceeds from sale or disposal of operating lease equipment of $4.2 million. Cash flows from financing activities. Cash used in financing activities was $9.7 million for the year ended March 31, 2013, mostly driven by dividends paid of $20.1 million and net repayments on floor plan facility of $19.7 million. This cash used is partially offset by net borrowings of non-recourse and recourse notes payable of $29.6 million. Cash provided by financing activities were $17.8 million and $11.2 million for the years ended March 31, 2012 and 2011, respectively, which was driven by borrowings of recourse and non-recourse notes payable and net borrowings from our floor plan facility. 39 -------------------------------------------------------------------------------- Table of Contents Non-Cash Activities We assign lease payments to third-party financial institutions, which are accounted for as non-recourse notes payable financing activities. As a condition to the assignment agreement, certain financial institutions may request that the lessee remit their lease payments to a trust; rather than to us, and the trust pays the financial institution. Alternatively, if the structure of the agreement does not require a trustee, the lessee will continue to make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either assignment structure is similar, in that the assigned lease receivable is paid by the lessee and remitted to the lender to pay down the corresponding non-recourse notes payable. However, these assignment structures are classified differently within our consolidated statements of cash flows. More specifically, we are required to exclude non-cash transactions from our consolidated statement of cash flows, so lease payments made by the lessee to the trust are excluded from our operating cash receipts and the corresponding repayment of the non-recourse notes payable from the trust to the third-party financial institution are excluded from our cash flows from financing activities. Given the assignment of lease payments is economically the same regardless of the structure of the payments, we evaluate our cash flows from operating and financing activities as if the assignments of lease payments have been structured without an intermediary. The non-GAAP financial measure for our cash flows from operating activities for the years ended March 31, 2013, 2012 and 2011 is as follows (in thousands): Year Ended March 31, 2013 2012 2011 GAAP: net cash provided by (used in) operating activities $ 41,270 $ (21,596 ) $ (9,398 ) Principal payments from lessees directly to lenders 15,872 15,671 27,397 Non-GAAP: adjusted net cash provided by (used in) operating activities $ 57,142 $ (5,925 ) $ 17,999 The non-GAAP financial measure for our cash flows from financing activities for the years ended March 31, 2013, 2012 and 2011 is as follows (in thousands): Year Ended March 31, 2013 2012 2011 GAAP: net cash (used in) provided by financing activities $ (9,667 ) $ 17,846 $ 11,171 Principal payments from lessees directly to lenders (15,872 ) (15,671 ) (27,397 ) Non-GAAP: adjusted net cash used in financing activities $ (25,539 ) $ 2,175 $ (16,226 ) A "non-GAAP financial measure" is a numerical measure of a company's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows of the company; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. We use the financial measures in internal evaluation and management of our business. We believe that these measures and the information they provide are useful to investors because they permit investors to view our performance using the same tools that we use to evaluate our ongoing business performance. These measures should not be considered an alternative to measurements required by GAAP, such as net income and earnings per share. These non-GAAP measures are unlikely to be comparable to non-GAAP information provided by other companies. Liquidity and Capital Resources Recourse and non-recourse notes payable financing activities may provide approximately 80% to 100% of the purchase price of the equipment we purchase for leases to our customers. Any balance of the purchase price remaining after recourse and non-recourse funding and any upfront payments received from the lessee (our equity investment in the equipment) must generally be financed by cash flows from our operations, the sale of the equipment leased to third parties, or other internal means. Although we expect that the credit quality of our leases and our residual return history will continue to allow us to obtain financing, such financing may not be available on acceptable terms, or at all. The financing necessary to support our leasing activities has been provided by our cash and recourse and non-recourse borrowings. We monitor our exposure closely. 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. 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. 40 -------------------------------------------------------------------------------- Table of Contents When the lender is fully repaid from the lease payments, the lien is released and all further rental or sale proceeds are ours. We generally are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk of each lease, and the lender's only recourse, upon default by the lessee, is against the lessee and the specific equipment under lease. At March 31, 2013, our non-recourse notes payable portfolio increased 52.9% to $40.3 million, as compared to $26.3 million at March 31, 2012. Our recourse notes payable decreased by $243 thousand to $1.5 million in recourse notes payable as of March 31, 2013, compared to $1.7 million in recourse notes payable as of March 31, 2012. Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, 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. Credit Facility - Technology 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, 2013, the facility had an aggregate limit of the two components of $175.0 million with an accounts receivable sub-limit of $30.0 million. The credit facility with GECDF was amended and restated in July 2012 which increased the credit limit from $125 million to $175 million and modified the covenants, interest rate and other requirements within the facility. The credit facility has full recourse to ePlus Technology, inc. and is secured by a blanket lien against all its assets, such as receivables and inventory. Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable, and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and minimum earnings before interest, taxes, depreciation and amortization (EBITDA) of ePlus Technology, inc. We were in compliance with these covenants as of March 31, 2013. In addition, the facility restricts the ability of ePlus Technology, inc. to transfer funds to its affiliates in the form of dividends, loans or advances with certain exceptions for dividends to ePlus inc. Interest on the facility is assessed at a rate of the One Month LIBOR plus two and one half percent if the payments are not made on the three specified dates each month. The facility also requires that financial statements of ePlus Technology, inc. be provided within 45 days of each quarter and 90 days of each fiscal year end and also requires other operational reports be provided on a regular basis. Either party may terminate the facility with 90 days advance written notice. We are not, and do not believe that we are reasonably likely to be, in breach of the GECDF credit facility. In addition, we do not believe that the covenants of the GECDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. This credit facility is secured by the assets of only ePlus Technology, inc. and the guaranty as described below. The facility provided by GECDF requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2012, as required. The loss of the GECDF credit facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process. Floor Plan Component The traditional business of ePlus Technology, inc. as a seller of computer technology, related peripherals and software products, is in part financed through a floor plan component in which interest expense for the first fifteen 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 fifteen to forty-five-day time frame and represent an assigned accounts payable originally generated with the manufacturer/distributor. If the payment is not paid timely, interest is then assessed at stated contractual rates. The respective floor plan component credit limits and actual outstanding balance payables for the dates indicated were as follows (in thousands): Maximum Credit Maximum Credit Limit at Balance as of Limit at Balance as of March 31, 2013 March 31, 2013 March 31, 2012 March 31, 2012 $175,000 $66,251 $125,000 $85,911 41-------------------------------------------------------------------------------- Table of Contents Accounts Receivable Component Included within the credit facility, ePlus Technology, inc. has an accounts receivable component from GECDF, which has a revolving line of credit. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no balance outstanding for the accounts receivable component at March 31, 2013 or March 31, 2012, while the maximum credit limit was $30.0 million for both periods. Credit Facility - General First Virginia Community Bank, (formerly 1st Commonwealth Bank of Virginia), provides us with a $0.5 million credit facility, which will mature on October 26, 2013. This credit facility is available for us and our affiliates and is full recourse to us. Borrowings under this facility bear interest at Wall Street Journal U.S. Prime rate plus 1%. The primary purpose of the facility is to provide letters of credit for landlords, taxing authorities and bids. As of March 31, 2013 and March 31, 2012, we had no outstanding balance on this credit facility. Performance Guarantees In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K or other contractually narrow or limited purposes. As of March 31, 2013 and March 31, 2012, 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 start offices in new geographic areas, which may require a significant investment of cash. 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. Inflation 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. 42 -------------------------------------------------------------------------------- Table of Contents Future Contractual Obligations The impact that our contractual obligations as of March 31, 2013 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands): Payments Due by Period More than Total 1 year Years 2 & 3 Years 4 & 5 5 years Recourse & non-recourse notes payable (1) $ 41,739 $ 22,559 $ 13,516 $ 5,664 $ - Operating lease obligations (2) 6,809 3,347 2,818 644 - Total $ 48,548 $ 25,906 $ 16,334 $ 6,308 $ - (1) Non-recourse notes payable obligations in which the specific lease receivable payments have been assigned to the lender. Payments reflected principal amounts related to the recourse and non-recourse notes payable. (2) Rental and services obligations |