EPLUS INC - Quarter Report: 2013 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2013

 

OR

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from____ to ____ .

 

Commission file number: 1-34167

 

ePlus inc.

(Exact name of registrant as specified in its charter)

 

 

(Address, including zip code, of principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

The number of shares of common stock outstanding as of January 31, 2014 was 8,064,062.

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TABLE OF CONTENTS

 

ePlus inc. AND SUBSIDIARIES

 

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” 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— integrating information technology (IT) hardware sales, third-party maintenance, third-party software assurance, professional services, proprietary software, and financing, 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 with a small number of key vendors;

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increasing the total number of customers utilizing integrated solutions by up-selling within our customer base and gaining new customers;

•

adapting to meet changes in markets and competitive developments;

•

maintaining and increasing advanced professional services by retaining highly skilled personnel and vendor certifications;

•

integrating with external IT systems, including those of our customers and vendors;

•

continuing to enhance our proprietary software and update our technology infrastructure to remain competitive in the marketplace; and

•

reliance on third parties to perform some of our service obligations;

•

our dependence on key personnel, and our ability to hire and retain sufficient qualified personnel;

•

our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies;

•

a possible decrease in the capital spending budgets of our customers or purchases from us;

•

our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents, and, when appropriate, license required technology;

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the creditworthiness of our customers and our ability to reserve adequately for credit losses;

•

the possibility of goodwill impairment charges in the future;

•

uncertainty and volatility in the global economy and financial markets;

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changes in the IT industry and/or rapid changes in product offerings;

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our ability to secure our electronic and other confidential information;

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our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions;

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future growth rates in our core businesses;

•

our ability to realize our investment in leased equipment;

•

significant adverse changes in, reductions in, or losses of relationships with major customers or vendors;

•

our ability to successfully integrate acquired businesses;

•

our ability to maintain effective disclosure controls and procedures and internal control over financial reporting;

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reduction of manufacturer incentives provided to us;

•

exposure to changes in, interpretations of, or enforcement trends related to tax rules and other regulations; and

•

significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as other reports that we file with the Securities and Exchange Commission (“SEC”).

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

		As of December 31, 2013				As of March 31, 2013
ASSETS		(in thousands)
Cash and cash equivalents		$	40,498			$	52,720
Short-term investments			-				982
Accounts receivable—trade, net			214,123				173,445
Accounts receivable—other, net			27,821				18,809
Inventories—net			24,285				14,795
Notes receivable—net			43,312				31,893
Investment in leases and leased equipment—net			96,760				90,710
Property and equipment—net			4,253				2,213
Deferred costs			11,473				10,234
Other assets			9,238				9,107
Goodwill and other intangible assets			35,014				32,964
TOTAL ASSETS		$	506,777			$	437,872
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable—equipment		$	7,799			$	5,379
Accounts payable—trade			43,313				31,331
Accounts payable—floor plan			84,761				66,251
Salaries and commissions payable			12,274				12,911
Deferred revenue			23,108				16,970
Accrued expenses and other liabilities			17,897				20,264
Recourse notes payable			2,914				1,484
Non-recourse notes payable			50,451				40,255
Deferred tax liability			4,516				4,795
Total Liabilities			247,033				199,640
COMMITMENTS AND CONTINGENCIES  (Note 7)
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; 13,025,745 issued and 8,088,484 outstanding at December 31, 2013 and 12,899,386 issued and 8,149,706 outstanding at March 31, 2013			130				129
Additional paid-in capital			104,525				99,641
Treasury stock, at cost, 4,937,261 and 4,749,680 shares, respectively			(77,614	)			(67,306	)
Retained earnings			232,414				205,358
Accumulated other comprehensive income—foreign currency  translation adjustment			289				410
Total Stockholders' Equity			259,744				238,232
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	506,777			$	437,872

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		Three Months Ended December 31,								Nine Months Ended December 31,
		2013				2012				2013				2012
		(amounts in thousands)
NET EARNINGS		$	10,610			$	9,033			$	27,051			$	27,128
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustments			(84	)			(26	)			(121	)			15
Other comprehensive loss			(84	)			(26	)			(121	)			15
TOTAL COMPREHENSIVE INCOME		$	10,526			$	9,007			$	26,930			$	27,143

		Nine Months Ended December 31,
		2013				2012
		(in thousands)
Cash Flows From Operating Activities:
Net earnings		$	27,051			$	27,128
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization			11,801				8,706
Reserves for credit losses, inventory obsolescence and sales returns			250				(97	)
Share-based compensation expense			2,965				2,495
Excess tax benefit from exercise of stock options			(1,366	)			(1,390	)
Deferred taxes			(278	)			(5	)
Payments from lessees directly to lenders—operating leases			(5,857	)			(3,799	)
Gain on disposal of property, equipment and operating lease equipment			(1,550	)			(843	)
Gain on sale of notes receivable			(5,707	)			(1,002	)
Excess increase in cash value of life insurance			(39	)			(137	)
Other			109				(7	)
Changes in:
Accounts receivable—trade			(39,585	)			(42,412	)
Accounts receivable—other			(3,599	)			(4,648	)
Notes receivable			282				(502	)
Inventories			(9,182	)			(629	)
Investment in direct financing and sale-type leases—net			(20,406	)			11,163
Deferred costs, other intangible assets and other assets			(410	)			(34,043	)
Accounts payable—equipment			2,453				(8,294	)
Accounts payable—trade			10,816				26,744
Salaries and commissions payable, deferred revenue and accrued expenses and other liabilities			5,486				35,356
Net cash (used in) provided by operating activities		$	(26,766	)		$	13,784
Cash Flows From Investing Activities:
Purchases of short-term investments		$	-			$	(1,233	)
Maturities of short-term investments			982				7,401
Proceeds from sale of property, equipment and operating lease equipment			3,280				1,629
Purchases of property, equipment and operating lease equipment			(7,938	)			(12,559	)
Purchases of assets to be leased			(8,278	)			-
Issuance of notes receivable			(68,033	)			(32,917	)
Repayments of notes receivable			33,497				13,977
Proceeds from sale or transfer of notes receivable			28,270				22,829
Premiums paid on life insurance			(163	)			(60	)
Cash used in acquisition, net of cash acquired			(2,845	)			-
Net cash (used in) investing activities		$	(21,228	)		$	(933	)

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		Nine Months Ended December 31,
		2013				2012
		(in thousands)
Cash Flows From Financing Activities:
Borrowings of non-recourse and recourse notes payable		$	29,020			$	20,234
Repayments of non-recourse and recourse notes payable			(2,247	)			(641	)
Repurchase of common stock			(10,308	)			(1,890	)
Dividends paid			(107	)			(20,100	)
Proceeds from issuance of capital stock through option exercise			559				1,167
Payments of contingent consideration			(1,027	)			(473	)
Excess tax benefit from share based compensation			1,366				1,390
Net borrowings (repayments) on floor plan facility			18,510				(4,164	)
Net cash provided by (used in) financing activities			35,766				(4,477	)
Effect of exchange rate changes on cash			6				1
Net Increase in Cash and Cash Equivalents			(12,222	)			8,375
Cash and Cash Equivalents, Beginning of Period			52,720				33,778
Cash and Cash Equivalents, End of Period		$	40,498			$	42,153
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest		$	100			$	15
Cash paid for income taxes		$	16,769			$	19,000
Schedule of Non-Cash Investing and Financing Activities:
Purchase of property and equipment included in accounts payable		$	75			$	153
Purchase of operating lease equipment included in accounts payable		$	308			$	175
Purchase of assets financed as notes receivables included in accounts payable		$	3,997			$	-
Proceeds from sales of operating lease equipment included in accounts receivable		$	10			$	50
Repayments of non-recourse and recourse notes payable		$	15,147			$	11,374
Dividends declared included in accrued expenses and other liabilities		$	-			$	278
Vesting of share-based compensation		$	7,804			$	4,621
Origination and concurrent sale of notes receivable		$	102,131			$	-

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																						Accumulated
										Additional												Other
		Common Stock								Paid-In				Treasury				Retained				Comprehensive
		Shares				Par Value				Capital				Stock				Earnings				Income				Total
Balance, April 1, 2013			8,149,706			$	129			$	99,641			$	(67,306	)		$	205,358			$	410			$	238,232
Issuance of shares for option exercises			40,000				-				559				-				-				-				559
Excess tax benefit of share-based compensation			-				-				1,366				-				-				-				1,366
Issuance of restricted stock awards			86,359				1				-				-				-				-				1
Share-based compensation											2,959				-				5				-				2,964
Repurchase of common stock			(187,581	)			-				-				(10,308	)			-				-				(10,308	)
Net earnings			-				-				-				-				27,051				-				27,051
Foreign currency translation adjustment (net of tax of $1)			-				-				-				-				-				(121	)			(121	)
Balance, December 31, 2013			8,088,484			$	130			$	104,525			$	(77,614	)		$	232,414			$	289			$	259,744

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ePlus inc. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION — Our company was founded in 1990 and is a Delaware corporation. ePlus inc. is sometimes referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” or “ePlus.” The unaudited condensed consolidated financial statements include the accounts of ePlus inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

INTERIM FINANCIAL STATEMENTS — The condensed consolidated financial statements for the three and nine months ended December 31, 2013 and 2012 are unaudited, but include all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income and cash flows for such periods. Operating results for the three and nine months ended December 31, 2013 and 2012 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending March 31, 2014 or any other future period. These unaudited condensed consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements. Our audited consolidated financial statements are contained in our annual report on Form 10-K for the year ended March 31, 2013 (“2013 Annual Report”), which should be read in conjunction with these interim financial statements.

SUBSEQUENT EVENTS — Management has evaluated subsequent events after the balance sheet date through the date our financial statements are issued.

 

USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangibles, reserves for credit losses, inventory obsolescence, and the recognition and measurement of income tax assets and other provisions and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

ACCOUNTS RECEIVABLE—TRADE — Trade accounts receivable are recorded at the invoiced amount and typically do not bear interest. The Company provides allowances for doubtful accounts related to accounts receivable for estimated losses resulting from the inability of its customers to make required payments. Our reserve for credit losses was $1.0 million as of December 31, 2013 and March 31, 2013.

ACCOUNTS RECEIVABLE—OTHER — Accounts receivable—other consists of advances and payments made on behalf of our customers, as well as amounts due from vendors. Prior to the effective date of a lease or financing arrangement with our customer, any payments made by our financing segment for products and services for our customers are presented in accounts receivable—other as we generally act as an agent of our customer until the financing arrangement is accepted by our customer. We also receive incentives from vendors, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. These incentives generally relate to vendor programs with specified performance requirements, and estimated amounts earned but not paid by the vendors are included in accounts receivable—other. Our reserve for credit losses was $0.2 million as of December 31, 2013 compared to $0.1 million as of March 31, 2013.

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

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Generally, sales of third party products and software are recognized when 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 and 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. For the sale of third party software assurance, maintenance and services, we concluded that we are acting as an agent and recognize revenue for these transactions on a net basis at the date of sale, which is presented within sales of products and services in our unaudited condensed consolidated statements of operations. Gross billings for all products and services for the three months ended December 31, 2013 and December 31, 2012 were $327.6 million and $277.8 million, respectively. Gross billings for all products and services for the nine months ended December 31, 2013 and December 31, 2012 were $952.0 million and $875.3 million, respectively.

We generally recognize service revenue upon completion of the project, and revenue from maintenance, managed service or hosting arrangements that for which we are the principal on a straight-line basis over the term of the arrangement.

We recognize revenues from lease and financing arrangements over the term of the arrangement and net gains from the sale of financial assets or leased equipment are recognized at the date of sale.

DEFERRED COSTS AND DEFERRED REVENUE – Deferred costs include internal and third party costs associated with deferred revenue arrangements. Deferred revenue relate to professional services, which are generally recognized upon completion, and maintenance, managed service or hosting arrangements that are recognized on a straight-line basis over the term of the arrangement.

EARNINGS PER SHARE — Basic earnings per share is calculated by dividing net earnings attributable to common shareholders by the basic weighted average number of shares of common stock outstanding during each period. Diluted earnings per share reflects the potential dilution of securities that could participate in our earnings, including incremental shares issuable upon the assumed exercise of “in-the-money” stock options and other common stock equivalents during each period. We use the two-class method to allocate net income between common shares and other participating securities. For additional information, see Note 8, “Earnings Per Share.”

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

A substantial portion of our sales of product and services are from sales of Cisco, Hewlett Packard, and NetApp products, which represented 45.9%, 9.9%, and 11.1%, and 48.8%, 10.2%, and 8.7%, respectively, of our sales of product and services for the three and nine months ended December 31, 2013, as compared to 42.7%, 12.6%, and 7.5%, and 48.7%, 10.9%, and 6.9%, respectively, of our sales of product and services for the three and nine months ended December 31, 2012. Any changes in our vendors’ ability to provide products could have a material adverse effect on our business, results of operations and financial condition.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS — There were no new accounting standards issued during the three months ended December 31, 2013 that materially impacted our condensed consolidated financial statements or could materially impact our financial statements or related disclosures in a future period.

2.	FINANCING INVESTMENTS

 

Our notes receivable, investments in leases, and leased equipment consist of assets that we financed for our customers, which we manage as a portfolio of investments. Our leases to our customers are accounted for as investments in direct financing, sales-type or operating leases in accordance with Codification Topic, Leases. We also finance third-party software, maintenance, and services for our customers, which are classified as notes receivables. Our notes receivables are interest bearing and are often due over a period of time that corresponds with the terms of the leased products. Our financing investments consist of the following (in thousands):

		December 31,				March 31,
		2013
Notes receivable		$	43,312			$	31,893
Investment in direct financing and sales-type leases—net			74,759				66,243
Investment in operating lease equipment—net			22,001				24,467
		$	140,072			$	122,603

NOTES RECEIVABLE—NET

 

Our notes receivable balance as of December 31, 2013 and March 31, 2013 consists of the following (in thousands):

 

		December 31,				March 31,
		2013
Notes receivable		$	46,163			$	35,030
Initial direct costs, net of amortization (1)			229				-
Less:  Reserve for credit losses (2)			(3,080	)			(3,137	)
Notes receivable—net		$	43,312			$	31,893

 

(1)

Initial direct costs are shown net of amortization of $115 thousand as of December 31, 2013.

(2)

For details on reserve for credit losses, refer to Note 4, “Reserves for Credit Losses.”

INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES—NET

 

Our investment in direct financing and sales-type leases—net consists of the following (in thousands):

 

		December 31,				March 31,
		2013
Minimum lease payments		$	71,930			$	64,614
Estimated unguaranteed residual value (1)			8,114				7,557
Initial direct costs, net of amortization (2)			485				684
Less:  Unearned lease income			(4,785	)			(5,767	)
Less:  Reserve for credit losses (3)			(985	)			(845	)
Investment in direct financing and sales-type leases—net		$	74,759			$	66,243

(1)	Includes estimated unguaranteed residual values of $3,439 thousand and $3,361 thousand as of December 31, 2013 and March 31, 2013, respectively, for direct financing leases which have been sold and accounted for as sales under Codification Topic, Transfers and Servicing.

(2)	Initial direct costs are shown net of amortization of $359 thousand and $479 thousand as of December 31, 2013 and March 31, 2013, respectively.

(3)	For details on reserve for credit losses, refer to Note 4, “Reserves for Credit Losses.”

INVESTMENT IN OPERATING LEASE EQUIPMENT—NET

 

Investment in operating lease equipment—net primarily represents leases that do not qualify as direct financing leases. The components of the investment in operating lease equipment—net are as follows (in thousands):

 

		December 31,				March 31,
		2013
Cost of equipment under operating leases		$	43,030			$	46,106
Less:  Accumulated depreciation and amortization			(21,029	)			(21,639	)
Investment in operating lease equipment—net (1)		$	22,001			$	24,467

(1)	The total includes estimated unguaranteed residual values of $6,116 thousand and $7,763 thousand as of December 31, 2013 and March 31, 2013, respectively, for operating leases.

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TRANSFERS OF FINANCIAL ASSETS

We enter into arrangements to transfer the contractual payments due under financing investments, which are accounted for as sales or secured borrowings in accordance with Codification Topic, Transfers and Servicing. For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. See Note 6, “Notes Payable and Credit Facility.”

For transfers accounted for as sales, we derecognize the carrying value of the asset transferred and recognize a net gain or loss on the sale, which is presented within financing revenues in the unaudited condensed consolidated statement of operations. During the three months ended December 31, 2013 and 2012, we recognized net gains of $2.3 million and $2.7 million, respectively. Total proceeds from these sales were $45.7 million and $48.1 million for the three months ended December 31, 2013 and 2012, respectively. For the nine months ended December 31, 2013 and 2012, we recognized net gains of $7.9 million and $4.4 million, respectively, and total proceeds from these sales were $168.1 million and $91.5 million, respectively.

 

3.	GOODWILL AND OTHER INTANGIBLE ASSETS

Our goodwill and other intangible assets consist of the following (in thousands):

 

		December 31,				March 31,
		2013
Goodwill		$	29,570			$	28,660
Customer relationships			3,690				2,897
Capitalized software development			1,754				1,407
		$	35,014			$	32,964

 

The gross carrying amount and accumulated amortization of customer relationships were $8.0 million and $4.3 million, respectively, as of December 31, 2013, and $6.5 million and $3.6 million, respectively, as of March 31, 2013. The gross carrying amount and accumulated amortization of capitalized software development costs were $2.6 million and $0.8 million, respectively, as of December 31, 2013, and $1.8 million and $0.4 million, respectively, as of March 31, 2013. Customer relationships and capitalized software development costs are amortized over their estimated useful live, which is generally between 3 to 5 years.

We analyzed the goodwill in accordance with the provisions of Codification Topic Intangibles – Goodwill and Other, and concluded that the fair value of technology and software document management reporting units, more likely than not, exceed their respective carrying amounts as of October 1, 2013.

4.	RESERVES FOR CREDIT LOSSES

Activity in our reserves for credit losses for the nine months ended December 31, 2013 and 2012 were as follows (in thousands):

		Accounts Receivable				Notes Receivable				Lease-Related Receivables				Total
Balance April 1, 2013		$	1,147			$	3,137			$	845			$	5,129
Provision for bad debts			44				(57	)			140				127
Write-offs, net of recoveries			(17	)			-				-				(17	)
Balance December 31, 2013		$	1,174			$	3,080			$	985			$	5,239
		Accounts Receivable				Notes Receivable				Lease-Related Receivables				Total
Balance April 1, 2012		$	1,307			$	2,963			$	1,336			$	5,606
Provision for bad debts			(118	)			189				(328	)			(257	)
Write-offs, net of recoveries			(97	)			-				(3	)			(100	)
Balance December 31, 2012		$	1,092			$	3,152			$	1,005			$	5,249

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Our reserves for credit losses and minimum payments associated with our notes receivables and lease-related receivables disaggregated on the basis of our impairment method were as follows (in thousands):

		December 31, 2013								March 31, 2013
		Notes Receivable				Lease-Related Receivables				Notes Receivable				Lease-Related Receivables
Reserves for credit losses:
Ending balance: collectively evaluated for impairment		$	254			$	883			$	310			$	747
Ending balance: individually evaluated for impairment			2,826				102				2,827				98
Ending balance		$	3,080			$	985			$	3,137			$	845
Minimum payments:
Ending balance: collectively evaluated for impairment		$	43,155			$	71,560			$	31,793			$	64,246
Ending balance: individually evaluated for impairment			3,237				370				3,237				368
Ending balance		$	46,392			$	71,930			$	35,030			$	64,614

As of December 31, 2013, the age of the recorded minimum lease payments and net credit exposure associated with our investment in direct financing and sales-type leases that are past due, disaggregated based on our internally assigned credit quality ratings (“CQR”), were as follows (in thousands):

 

		31-60 Days Past Due				61-90 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Current				Unbilled Minimum Lease Payments				Total Minimum Lease Payments				Unearned Income				Non-Recourse Notes Payable				Net Credit Exposure
December 31, 2013
High CQR		$	84			$	638			$	166			$	888			$	317			$	40,554			$	41,759			$	(1,903	)		$	(10,748	)		$	29,108
Average CQR			82				27				25				134				302				29,365				29,801				(1,942	)			(12,269	)			15,590
Low CQR			-				-				61				61				-				309				370				(43	)			-				327
Total			166				665				252				1,083				619				70,228				71,930				(3,888	)			(23,017	)			45,025
March 31, 2013
High CQR		$	454			$	316			$	28			$	798			$	322			$	38,278			$	39,398			$	(2,777	)		$	(10,337	)		$	26,284
Average CQR			51				51				5				107				101				24,640				24,848				(1,596	)			(7,857	)			15,395
Low CQR			-				-				61				61				-				307				368				(39	)			-				329
Total			505				367				94				966				423				63,225				64,614				(4,412	)			(18,194	)			42,008

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As of December 31, 2013, the age of the recorded notes receivable balance disaggregated based on our internally assigned CQR were as follows (in thousands):

		31-60 Days Past Due				61-90 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Current				Unbilled Notes Receivable				Total Notes Receivable				Non- Recourse Notes Payable				Net Credit Exposure
December 31, 2013
High CQR		$	-			$	770			$	45			$	815			$	907			$	36,354			$	38,076			$	(18,330	)		$	19,746
Average CQR			303				-				-				303				43				4,733				5,079				(3,011	)			2,068
Low CQR			-				-				791				791				-				2,446				3,237				-				3,237
Total		$	303			$	770			$	836			$	1,909			$	950			$	43,533			$	46,392			$	(21,341	)		$	25,051
March 31, 2013
High CQR		$	1,342			$	127			$	832			$	2,301			$	3,450			$	22,097			$	27,848			$	(5,621	)		$	22,227
Average CQR			1,379				-				-				1,379				-				2,566				3,945				(1,203	)			2,742
Low CQR			-				-				726				726				-				2,511				3,237				-				3,237
Total		$	2,721			$	127			$	1,558			$	4,406			$	3,450			$	27,174			$	35,030			$	(6,824	)		$	28,206

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

5.	OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES

 

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

		December 31,				March 31,
		2013
Unbilled accounts receivable		$	413			$	3,095
Prepaid assets			3,029				2,667
Other			5,796				3,345
Total other assets		$	9,238			$	9,107

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6.	NOTES PAYABLE AND CREDIT FACILITY

 

Non-recourse and recourse obligations consist of the following (in thousands):

		December 31,				March 31,
		2013
Recourse note payable with interest ranging from 2.50% to 4.84% at December 31, 2013 and March 31, 2013		$	2,914			$	1,484
Non-recourse equipment notes secured by related investments in leases with interest rates ranging from 2.00% to 11.24% at December 31, 2013 and March 31, 2013		$	50,451			$	40,255

Principal and interest payments on the non-recourse notes payable are generally due monthly in amounts that are approximately equal to the total payments due from the customer under the leases or notes receivable that collateralize the notes payable.  The weighted average interest rate for our non-recourse notes payable was 3.46% and 4.23%, as of December 31, 2013 and March 31, 2013, respectively. The weighted average interest rate for our recourse notes payable was 3.93% and 4.84%, as of December 31, 2013 and March 31, 2013, respectively. Under recourse financing, in the event of a default by a customer, the lender has recourse to the customer, the assets serving as collateral, and us. Under non-recourse financing, in the event of a default by a customer, the lender generally only has recourse against the customer, and the assets serving as collateral, but not against us.

 

Our technology segment, through our subsidiary ePlus Technology, inc., finances its operations with funds generated from operations, and with a credit facility with GE Commercial Distribution Finance Corporation (“GECDF”). This facility provides short-term capital for our technology segment. There are two components of the GECDF credit facility: (1) a floor plan component and (2) an accounts receivable component. Under the floor plan component, we had outstanding balances of $84.8 million and $66.3 million as of December 31, 2013 and March 31, 2013, respectively. Under the accounts receivable component, we had no outstanding balances as of December 31, 2013 and March 31, 2013. As of December 31, 2013, the facility agreement had an aggregate limit of the two components of $175.0 million, and the accounts receivable component had a sub-limit of $30.0 million, which bears interest assessed at a rate of the One Month LIBOR plus two and one half percent.

 

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 December 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. 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 includes that other operational reports be provided on a regular basis. Either party may terminate with 90 days advance notice. We are not, and do not believe that we are reasonably likely to be, in breach of the GECDF credit facility. In addition, we do not believe that the covenants of the GECDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, ePlus Technology, inc. This credit facility is secured by the assets of only ePlus Technology, inc. and the guaranty as described below.

 

The facility provided by GECDF requires a guaranty of $10.5 million by ePlus inc. The guaranty requires ePlus inc. to deliver its annual audited financial statements by certain dates. We have delivered the annual audited financial statements for the year ended

March 31, 2013, 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.

We have an agreement with First Virginia Community Bank, (formerly 1st Commonwealth Bank of Virginia), to provide us with a $0.5 million credit facility, which matures on October 27, 2014. The credit facility is available for use by us and our affiliates and the lender has full recourse to us. Borrowings under this facility bear interest at the Wall Street Journal U.S. Prime rate plus 1%. The primary purpose of the facility is to provide letters of credit for landlords, taxing authorities and bids.  As of December 31, 2013 and March 31, 2013, we had no outstanding balance on this credit facility.

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7.	COMMITMENTS AND CONTINGENCIES

On May 19, 2009, we filed a complaint (the “Lawson litigation”) in the United States District Court for the Eastern District of Virginia (the “trial court”) against four defendants, alleging that they used or sold products, methods, processes, services and/or systems that infringe on certain of our patents. During July and August 2009, we entered into settlement and license agreements with three of the defendants. We obtained a jury verdict against the remaining defendant, Lawson Software, Inc. (“Lawson”) on January 27, 2011. The jury unanimously found that Lawson infringed certain ePlus patents relating to electronic procurement systems, and additionally found that all ePlus patent claims tried in court were not invalid.

On May 23, 2011, the trial court issued a permanent injunction, ordering Lawson and its successors to: immediately stop selling and servicing products relating to its electronic procurement systems that infringe our patents; cease providing any ongoing or future maintenance, training or installation of its infringing products; and refrain from publishing any literature or information that encourages the use or sale of its infringing products. Lawson appealed the trial court’s judgment, and we appealed the trial court’s evidentiary ruling which precluded us from seeking monetary damages. On November 21, 2012, the United States Court of Appeals for the Federal Circuit (the “Appeals Court”) reversed in part, vacated in part, affirmed in part, and remanded. The Appeals Court upheld the trial court’s ruling precluding us from seeking monetary damages. The Appeals Court also upheld the finding that the patent claims were not invalid and upheld, in part, the finding of infringement. On June 11, 2013, consistent with the Appeals Court’s decision, the trial court issued an Order modifying the injunction so that it would continue in full effect with respect to those configurations of Lawson’s electronic procurement systems that the Appeals Court affirmed are infringing.

On August 16, 2013, the trial court issued an order finding, by clear and convincing evidence, that Lawson is in contempt of the trial court’s May 23, 2011, injunction, entering judgment in our favor in the amount of $18.2 million, and ordering that Lawson pay to the court a daily coercive fine in the amount of $62,362 until Lawson establishes that it is in compliance with the injunction. Lawson has appealed both the order modifying the injunction, and the order finding it in contempt. Lawson posted a bond, and collection of the judgment and imposition of the coercive fine have been stayed pending the appeal. In light of the Appeals Court’s January 29, 2014, decision on the reexamination proceeding described below, we anticipate that the Appeals Court will vacate the injunction on a going-forward basis.  However, we continue to believe that we are entitled to enforce the contempt judgment.  Briefing on the appeals was completed in January 2014, however, we do not know if or when the Appeals Court will hold oral arguments, or when it will issue a ruling. Court calendars and rulings are inherently unpredictable, and we cannot predict when any motion or appeal will be resolved, or the outcome thereof.

Patent litigation is extremely complex and issues regarding a patent’s validity can arise even subsequent to a patent’s issuance. On November 8, 2013, the Appeals Court affirmed the United States Patent and Trademark Office’s Patent Trial and Appeal Board’s adverse decision in a reexamination proceeding concerning the validity of the patent at issue in the Lawson litigation.  On January 29, 2014, the Appeals Court denied our Motion for Rehearing. This unfavorable decision in the reexamination proceeding may adversely affect the Lawson litigation, including the probable termination of the injunction described above. As noted above, court calendars and rulings are inherently unpredictable, and we cannot predict when any motion or appeal will be resolved, or the outcome thereof.

While we believe that we have a basis for our claims, these types of cases are complex in nature, are likely to have significant expenses associated with them, and we cannot predict whether we will be successful in our claim for a contempt finding or damages, whether any award ultimately received will exceed the costs incurred to pursue this matter, or how long it will take to bring this matter to resolution.

Other Matters

We may become party to various legal proceedings arising in the normal course of business, including preference payment claims asserted in customer bankruptcy proceedings, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions, employment related claims, claims by competitors, vendors or customers, and claims related to alleged violations of laws and regulations. We accrue for costs associated with these contingencies when a loss is probable and the amount is reasonably estimable. Refer to Note 4, "Reserves for Credit Losses," for additional information regarding loss contingencies associated with our accounts, notes and lease-related receivables.

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8.	EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net earnings attributable to common shares by the weighted average number of common shares outstanding for the period. Diluted net earnings per share include the potential dilution of securities that could participate in our earnings, but not securities that are anti-dilutive. Certain unvested shares of restricted stock awards (“RSAs”) contain non-forfeitable rights to dividends, whether paid or unpaid. As a result, these RSAs are considered participating securities because their holders have the right to participate in earnings with common stockholders. We use the two-class method to allocate net income between common shares and other participating securities. As of December 31, 2013, we had 45 thousand shares of RSAs that contained non-forfeitable rights to dividends, which vest over the next six months. In addition, we no longer grant RSAs that contain non-forfeitable rights to dividends.

The following table provides a reconciliation of the numerators and denominators used to calculate basic and diluted net earnings per common share as disclosed in our unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2013 and December 31, 2012 (in thousands, except per share data).

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2013				2012				2013				2012
Basic and diluted shares outstanding
Weighted average shares outstanding — basic			7,950				7,843				7,947				7,778
Effect of dilutive shares			32				-				66				90
Weighted average shares outstanding — diluted			7,982				7,843				8,013				7,868
Calculation of earnings per share - basic
Net earnings		$	10,610			$	9,033			$	27,051			$	27,128
Net earnings attributable to participating securities			60				342				261				507
Net earnings attributable to common shareholders		$	10,550			$	8,691			$	26,790			$	26,621
Earnings per share - basic		$	1.33			$	1.11			$	3.37			$	3.42
Calculation of earnings per share - diluted
Net earnings attributable to common shareholders— basic		$	10,550			$	8,691			$	26,790			$	26,621
Add: undistributed earnings attributable to participating securities			-				-				2				1
Net earnings attributable to common shareholders— diluted		$	10,550			$	8,691			$	26,792			$	26,622
Earnings per share - diluted		$	1.32			$	1.11			$	3.34			$	3.38

All unexercised stock options were included in the computations of diluted earnings per share for the three and nine months ended December 31, 2012. As of December 31, 2013, we had no unexercised stock options.

9.	STOCKHOLDERS’ EQUITY

On November 13, 2013, our board of directors has authorized the Company to repurchase up to 750,000 shares of ePlus’ outstanding common stock over a 12-month period commencing on November 14, 2013. The purchases may be made from time to time in the open market, or in privately negotiated transactions, subject to availability. Any repurchased shares will have the status of treasury shares and may be used, when needed, for general corporate purposes.

During the nine months ended December 31, 2013, we repurchased 145,508 shares of our outstanding common stock at an average cost of $53.62 per share for a total purchase price of $7.8 million. Since the inception of our initial repurchase program on September 20, 2001 to December 31, 2013, we have repurchased 4.8 million shares of our outstanding common stock at an average cost of $15.14 per share for a total purchase price of $73.1 million.

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10.	SHARE-BASED COMPENSATION

 

Share-Based Plans

As of December 31, 2013 and March 31, 2013, we had share-based awards outstanding under the following plans: (1) the Amended and Restated 1998 Stock Incentive Plan (the “Amended LTIP (2003)”), (2) the 2008 Non-Employee Director Long-Term Incentive Plan (“2008 Director LTIP”), (3) the 2008 Employee Long-Term Incentive Plan (“2008 Employee LTIP”) and (4) the 2012 Employee Long-Term Incentive Plan ("2012 Employee LTIP"). All the share-based plans defined fair market value as the previous trading day's closing price when the grant date falls on a date the stock was not traded.

For a summary of descriptions and vesting periods of the Amended LTIP (2003), the 2008 Director LTIP, the 2008 Employee LTIP, and the 2012 Employee LTIP discussed above, refer to our 2013 Annual Report.

Stock Option Activity

 

During the three and nine months ended December 31, 2013 and 2012, there were no stock options granted. As of April 1, 2013, we had 40,000 options outstanding with an average exercise price between $12.73 and $15.25. During the nine months ended December 31, 2013, all 40,000 shares were exercised. As of December 31, 2013, we had no outstanding shares of stock options.

 

Restricted Stock Activity

For the nine months ended December 31, 2013, we granted 9,244 restricted shares under the 2008 Director LTIP, and 77,115 restricted shares under the 2012 Employee LTIP. For the nine months ended December 31, 2012, we granted 8,234 restricted shares under the 2008 Director LTIP, and 96,590 restricted shares under the 2008 Employee LTIP. A summary of the restricted shares is as follows:

 

		Number of Shares				Weighted Average Grant-date Fair Value
Nonvested April 1, 2013			246,048			$	26.32
Granted			86,359			$	57.34
Vested			(132,031	)		$	24.41
Nonvested December 31, 2013			200,376			$	41.11

Compensation Expense

 

We recognize compensation cost for awards of restricted stock with graded vesting on a straight line basis over the requisite service period and estimate the forfeiture rate to be zero, which is based on historical experience. There are no additional conditions for vesting other than service conditions. During the three months ended December 31, 2013 and 2012, we recognized $1.0 million and $0.9 million, respectively, of total share-based compensation expense. During the nine months ended December 31, 2013 and 2012, we recognized $3.0 million and $2.5 million, respectively, of total share-based compensation expense. Unrecognized compensation expense related to non-vested restricted stock was $6.1 million, which will be fully recognized over the next thirty (30) months.

We also provide our employees with a contributory 401(k) profit sharing plan. Employer contribution percentages are determined by us and are discretionary each year. The employer contributions vest pro-ratably over a four-year service period by the employees, after which all employer contributions will be fully vested. For the three months ended December 31, 2013 and 2012, our contribution expense for the plan was approximately $255 thousand and $221 thousand, respectively. For the nine months ended December 31, 2013 and 2012, our contribution expense for the plan was approximately $779 thousand and $686 thousand, respectively.

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11.	INCOME TAXES

 

We recognize interest and penalties for uncertain tax positions. As of December 31, 2013, our gross liability related to uncertain tax positions was $316 thousand. At December 31, 2013, if the unrecognized tax benefits of $316 thousand were to be recognized, including the effect of interest, penalties and federal tax benefit, the impact would be $441 thousand. We also recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We recorded interest expense of $4 thousand and $13 thousand for the three months and nine months ended December 31, 2013 and 2012. We did not recognize any additional penalties. We had $210 thousand and $193 thousand accrued for the payment of interest at December 31, 2013 and 2012, respectively.

12.	FAIR VALUE OF FINANCIAL INSTRUMENTS

We account for the fair values of our assets and liabilities in accordance with Codification Topic Fair Value Measurement and Disclosure. Accordingly, we established a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. The fair value of our contingent consideration liability is calculated using the discounted cash flow approach based on significant unobservable inputs, which is considered a level 3 measurement.

 

The following table summarizes the fair value hierarchy of our contingent consideration liability as of March 31, 2013 (in thousands):

 

		Fair Value Measurement Using
		March 31, 2013				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant  Unobservable Inputs (Level 3)				Total Gains (Losses)
Liabilities:
Contingent consideration		$	918			$	-			$	-			$	918			$	-

For the nine months ended December 31, 2013, the adjustment to the fair value of the contingent consideration was an increase of $355 thousand, which was presented within general and administrative expenses in our unaudited consolidated statement of operations. During the nine months ended December 31, 2013, we paid $1,272 thousand in consideration to satisfy our contingent liability. As of December 31, 2013, there were no outstanding amounts due under the contingent consideration arrangement.

For the nine months ended December 31, 2012, the adjustment to the fair value of the contingent consideration was an increase of $77 thousand, which was presented as a reduction to general and administrative expenses in our unaudited consolidated statement of operations.

 

13.	SEGMENT REPORTING

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

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Both segments utilize our proprietary software and services within the organization. Our reportable segment information is as follows (in thousands):

		Three Months Ended December 31, 2013												Three Months Ended December 31, 2012
		Technology				Financing				Total				Technology				Financing				Total
Sales of product and services		$	255,747			$	-			$	255,747			$	228,053			$	-			$	228,053
Financing revenue			-				9,228				9,228				-				12,510				12,510
Fee and other income			2,193				14				2,207				1,360				102				1,462
Total revenues			257,940				9,242				267,182				229,413				12,612				242,025
Cost of sales, product and services			207,378				-				207,378				188,103				-				188,103
Direct lease costs			-				3,055				3,055				-				2,934				2,934
Professional and other fees			1,770				238				2,008				2,041				457				2,498
Salaries and benefits			28,460				2,335				30,795				24,330				3,205				27,535
General and administrative expenses			5,082				315				5,397				4,733				176				4,909
Interest and financing costs			19				477				496				19				498				517
Total costs and expenses			242,709				6,420				249,129				219,226				7,270				226,496
Segment earnings		$	15,231			$	2,822			$	18,053			$	10,187			$	5,342			$	15,529
Total assets		$	302,487			$	204,290			$	506,777			$	319,252			$	180,621			$	499,873