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 quarter ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____ to ____ .
Commission file number: 0-28926
ePlus inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13595 Dulles Technology Drive, Herndon, VA 20171-3413
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 984-8400
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 [ ___ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ___] No [ X ]
The number of shares of common stock outstanding as of August 8, 2005, was
8,469,792.
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of March 31, 2005 and June 30, 2005 2
Condensed Consolidated Statements of Earnings, Three Months Ended June 30, 2004 and 2005 3
Condensed Consolidated Statements of Cash Flows, Three Months Ended June 30, 2004 and 2005 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information:
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 23
Signatures 24
1
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2005 As of June 30, 2005
---------------------- ---------------------
ASSETS
Cash and cash equivalents $ 38,851,714 $ 22,233,273
Accounts receivable, net of allowance for doubtful accounts of
$1,959,049 and $1,999,581 as of March 31, 2005 and June 30,
2005, respectively 93,555,462 106,434,210
Notes receivable 114,708 346,000
Inventories 2,116,855 2,966,353
Investment in leases and leased equipment - net 189,468,926 196,411,966
Property and equipment - net 6,647,781 6,301,320
Other assets 3,859,791 3,539,028
Goodwill 26,125,212 26,125,212
---------------------- ---------------------
TOTAL ASSETS $ 360,740,449 $ 364,357,362
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 8,965,022 $ 13,078,093
Accounts payable - trade 55,332,993 63,446,474
Salaries and commissions payable 771,487 654,687
Accrued expenses and other liabilities 32,945,931 21,486,614
Income taxes payable - 364,778
Recourse notes payable 6,264,897 6,412,723
Non-recourse notes payable 114,838,994 116,963,549
Deferred tax liability 9,519,309 9,148,067
---------------------- ---------------------
Total Liabilities 228,638,633 231,554,985
COMMITMENTS AND CONTINGENCIES (Note 8) - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized;
10,807,392 issued and 8,581,492 outstanding at March 31,
2005 and 10,810,592 issued and 8,529,692 outstanding at June
30, 2005 $ 108,074 $ 108,106
Additional paid-in capital 65,181,862 65,218,009
Treasury stock, at cost, 2,225,900 and 2,280,900 shares, respectively (22,887,881) (23,510,131)
Retained earnings 89,499,096 90,796,229
Accumulated other comprehensive income -
Foreign currency translation adjustment 200,665 190,164
---------------------- ---------------------
Total Stockholders' Equity 132,101,816 132,802,377
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 360,740,449 $ 364,357,362
====================== =====================
See Notes to Condensed Consolidated Financial Statements.
2
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
June 30,
2004 2005
---------------------------------------------
REVENUES
Sales of product $ 91,968,861 $ 134,869,844
Lease revenues 12,155,741 11,294,197
Fee and other income 2,574,131 3,639,760
---------------------------------------------
TOTAL REVENUES 106,698,733 149,803,801
---------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 82,160,785 122,106,503
Direct lease costs 2,676,998 3,777,145
Professional and other fees 1,764,765 947,313
Salaries and benefits 10,798,131 14,793,571
General and administrative expenses 4,219,475 4,461,489
Interest and financing costs 1,392,137 1,537,725
---------------------------------------------
TOTAL COSTS AND EXPENSES 103,012,291 147,623,746
---------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,686,442 2,180,055
---------------------------------------------
PROVISION FOR INCOME TAXES 1,511,441 882,922
---------------------------------------------
NET EARNINGS $ 2,175,001 $ 1,297,133
=============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.15
=============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.23 $ 0.14
=============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 8,921,590 8,545,744
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,407,252 9,042,438
See Notes to Condensed Consolidated Financial Statements.
3
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2004 2005
---------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 2,175,001 $ 1,297,133
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 3,293,081 3,989,151
Provision for credit losses (196,330) (40,006)
Tax benefit of stock options exercised - 4,782
Deferred taxes 193,104 (371,242)
Gain on sale of operating lease equipment (206,699) (115,797)
Payments from lessees directly to lenders (1,000,711) (1,424,588)
(Gain) loss on disposal of property and equipment (4,306) 6,436
Changes in:
Accounts receivable (18,305,032) (12,838,742)
Notes receivable (34,109) (231,292)
Inventories (2,691,015) (849,498)
Investment in leases and leased equipment-net 1,857,269 1,751,280
Other assets (310,217) 320,763
Accounts payable - equipment (1,016,838) 4,113,071
Accounts payable - trade 10,143,642 8,113,481
Salaries and commissions payable, accrued expenses and
other liabilities 4,084,882 (11,211,339)
---------------------------------------------
Net cash used in operating activities (2,018,278) (7,486,407)
---------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating lease equipment 340,719 380,563
Purchases of operating lease equipment (4,890,867) (12,206,388)
Proceeds from sale of property and equipment - 44,205
Purchases of property and equipment (352,128) (524,918)
Cash used in acquisitions, net of cash acquired (5,000,000) -
---------------------------------------------
Net cash used in investing activities (9,902,276) (12,306,538)
---------------------------------------------
4
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(UNAUDITED)
2004 2005
---------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Non-recourse $ 2,917,525 $ 17,164,171
Repayments:
Non-recourse (9,394,540) (13,536,139)
Purchase of treasury stock (492,552) (622,250)
Proceeds from issuance of capital stock, net of expenses 105,954 31,397
Net borrowings from lines of credit 2,397,971 147,826
---------------------------------------------
Net cash provided by (used in) financing activities (4,465,642) 3,185,005
---------------------------------------------
Effect of Exchange Rate Changes on Cash (13,286) (10,501)
---------------------------------------------
Net Decrease in Cash and Cash Equivalents (16,399,482) (16,618,441)
Cash and Cash Equivalents, Beginning of Period 25,155,011 38,851,714
---------------------------------------------
Cash and Cash Equivalents, End of Period $ 8,755,529 $ 22,233,273
=============================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 763,834 $ 690,864
=============================================
Cash paid for income taxes $ 218,922 $ 723,238
=============================================
See Notes To Condensed Consolidated Financial Statements.
5
ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. RECLASSIFICATION OF CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Based on concerns raised by the staff of the Securities and Exchange Commission
("SEC") in guidance posted on the SEC website on February 15, 2005 concerning
the previous presentation of the cash flow effects of long-term customer
receivables, including sales-type lease receivables, management has determined
it is appropriate to change the classification of all cash flows related to our
direct financing and sales-type lease transactions within the condensed
consolidated statements of cash flows. When we finance equipment relating to
direct financing and sales-type lease transactions, generally no cash is
initially received from the customer and, therefore, the transaction is recorded
as an investment in lease receivables. Increases in investment in lease
receivables due to new transactions and decreases due to cash payments are both
reflected in operating activities. All intercompany transactions have been
eliminated and, therefore, there are no intercompany cash flows reflected in the
condensed consolidated statements of cash flows. Historically, we classified the
cash flows from direct financing and sales-type leases as investing activities
in the condensed consolidated statement of cash flows. We are now classifying
these cash flows as operating activities in the condensed consolidated
statements of cash flows. Therefore, no cash amounts related to direct financing
or sales-type leases are classified as investing activities. The condensed
consolidated statement of cash flows has been adjusted to reflect the
reclassification of these cash flows from investing activities as follows:
Three Months Ended June 30, 2004
As Previously
Reported As Restated
---------------------------------------------
Cash Flows From Operating Activities:
Decrease in investment in leases and leased equipment - net $ - $ 1,857,269
Write-off of non-recourse debt (402,217) -
Gain on sale of operating lease equipment - (206,699)
Net cash used in operating activities (4,071,065) (2,018,278)
Cash Flows From Investing Activities:
Decrease in investment in direct financing and sales-type leases 2,259,486 -
Proceeds from sale of operating equipment 134,020 340,719
Net cash used in investing activities (7,849,489) (9,902,276)
2. BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements of ePlus inc.
and subsidiaries included herein have been prepared by us, pursuant to the rules
and regulations of the SEC and reflect all adjustments that are, in the opinion
of management, necessary for a fair statement of results for the interim
periods. All adjustments made were normal, recurring accruals. Certain prior
period amounts have been reclassified to conform to the current period's
presentation.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to SEC
rules and regulations.
For the quarters ended June 30, 2005 and 2004, accumulated other comprehensive
income decreased $10,501 and $13,286, respectively, resulting in total
comprehensive income of $1,286,632 and $2,161,715, respectively.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the our Annual Report on
Form 10-K for the year ended March 31, 2005. Operating results for the interim
periods are not necessarily indicative of results for an entire year.
6
3. STOCK BASED COMPENSATION
As of June 30, 2005, we had three stock-based employee compensation plans. We
account for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations issued by the Financial Accounting Standards Board. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," to stock-based employee
compensation:
Three Months Ended June 30,
2004 2005
------------------------------------
Net earnings, as reported $ 2,175,001 $ 1,297,133
Stock based compensation expense (364,427) (215,284)
------------------------------------
Net earnings, pro forma $ 1,810,574 $ 1,081,849
====================================
Basic earnings per share, as reported $ 0.24 $ 0.15
Basic earnings per share, pro forma $ 0.20 $ 0.13
Diluted earnings per share, as reported $ 0.23 $ 0.14
Diluted earnings per share, pro forma $ 0.19 $ 0.12
4. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of
March 31, 2005 June 30, 2005
(In Thousands)
------------------- ------------------
Investment in direct financing and sales-type leases-net $ 157,519 $ 155,484
Investment in operating lease equipment - net 31,950 40,928
------------------- ------------------
Investments in leases and leased equipment - net $ 189,469 $ 196,412
=================== ==================
Our net investment in leases is collateral for non-recourse and recourse
equipment notes, if any.
7
INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
Our investment in direct financing and sales-type leases consists of the
following:
As of
March 31, 2005 June 30, 2005
(In Thousands)
--------------- ---------------
Minimum lease payments $ 151,139 $ 149,008
Estimated unguaranteed residual value (1) 23,794 23,229
Initial direct costs, net of amortization (2) 1,850 1,841
Less: Unearned lease income (16,208) (15,539)
Reserve for credit losses (3,056) (3,055)
--------------- ---------------
Investment in direct finance and sales-type leases - net $ 157,519 $ 155,484
=============== ===============
(1) Includes estimated unguaranteed residual values under SFAS 140 of $801,025 and $1,142,808 as of
March 31, 2005 and June 30, 2005, respectively, of direct financing leases that were sold.
(2) Initial direct costs are shown net of amortization of $2,387 and $2,375 at March 31, 2005 and June
30, 2005, respectively.
INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating lease equipment primarily represents leases that do not
qualify as direct financing leases or are leases that are short-term renewals on
a month-to-month status. The components of the net investment in operating lease
equipment are as follows:
As of
March 31, 2005 June 30, 2005
(In Thousands)
-------------------------------
Cost of equipment under operating leases $ 45,453 $ 55,294
Less: Accumulated depreciation and amortization (13,503) (14,366)
---------------- -------------
Investment in operating lease equipment - net $ 31,950 $ 40,928
================ =============
5. PROVISION FOR CREDIT LOSSES
As of March 31 and June 30, 2005, our provisions for credit losses were
$5,014,905 and $5,054,911 respectively. Our provisions for credit losses are
segregated between our accounts receivable and our lease assets as follows (in
thousands):
Accounts Investment in Direct
Receivable Financing Leases Total
------------- ---------------------- -----------
Balance April 1, 2004 $ 1,584 $ 3,146 $ 4,730
Bad Debts Expense 1,131 - 1,131
Recoveries (350) - (350)
Write-offs and other (406) (90) (496)
------------- ---------------------- -----------
Balance March 31, 2005 1,959 3,056 5,015
------------- ---------------------- -----------
Bad Debts Expense 190 - 190
Recoveries (98) - (98)
Write-offs and other (52) - (52)
------------- ---------------------- -----------
Balance June 30, 2005 $ 1,999 $ 3,056 $ 5,055
============= ====================== ===========
8
6. SEGMENT REPORTING
We manage our business segments on the basis of the products and services
offered. Our reportable segments consist of our traditional financing business
unit and our technology sales business unit. The financing business unit offers
lease-financing solutions to corporations and governmental entities nationwide.
The technology sales business unit sells information technology ("IT") equipment
and software and related services primarily to corporate customers on a
nationwide basis. The technology sales business unit also provides
Internet-based business-to-business supply-chain-management solutions for
information technology and other operating resources. We evaluate segment
performance on the basis of segment net earnings.
Both segments utilize our proprietary software and services throughout the
organization. Sales and services and related costs of e-procurement software are
included in the technology sales business unit. Service fees generated by our
proprietary software and services are also included in the technology sales
business unit.
The accounting policies of the financing and technology sales business units are
the same as those described in Note 1, "Organization and Summary of Significant
Accounting Policies," in our 2005 Form 10-K. Corporate overhead expenses are
allocated on the basis of revenue volume, estimates of actual time spent by
corporate staff, and asset utilization, depending on the type of expense.
Financing Technology Sales
Business Unit Business Unit Total
--------------- ------------------ ---------------
Three months ended June 30, 2004
Sales of product $ 1,196,726 $ 90,772,135 $ 91,968,861
Lease revenues 12,155,741 - 12,155,741
Fee and other income 951,859 1,622,272 2,574,131
--------------- ------------------ ---------------
Total revenues 14,304,326 92,394,407 106,698,733
Cost of sales 865,483 81,295,302 82,160,785
Direct lease costs 2,676,998 - 2,676,998
Selling, general and administrative expenses 5,439,188 11,343,183 16,782,371
--------------- ------------------ ---------------
Segment earnings (loss) 5,322,657 (244,078) 5,078,579
Interest expense 1,354,101 38,036 1,392,137
--------------- ------------------ ---------------
Earnings (loss) before income taxes $ 3,968,556 $ (282,114) $ 3,686,442
=============== ================== ===============
Assets $ 208,683,058 $ 89,962,939 $ 298,645,997
=============== ================== ===============
Three months ended June 30, 2005
Sales of product $ 702,651 $ 134,167,193 $ 134,869,844
Lease revenues 11,294,197 - 11,294,197
Fee and other income 485,559 3,154,201 3,639,760
--------------- ------------------ ---------------
Total revenues 12,482,407 137,321,394 149,803,801
Cost of sales 752,991 121,353,512 122,106,503
Direct lease costs 3,777,145 - 3,777,145
Selling, general and administrative expenses 5,220,653 14,981,720 20,202,373
--------------- ------------------ ---------------
Segment earnings 2,731,618 986,162 3,717,780
Interest expense 1,495,630 42,095 1,537,725
--------------- ------------------ ---------------
Earnings before income taxes $ 1,235,988 $ 944,067 $ 2,180,055
=============== ================== ===============
Assets $ 262,380,894 $ 101,976,468 $ 364,357,362
=============== ================== ===============
9
7. EARNINGS PER SHARE
The weighted average number of common shares used in determining basic and
diluted net income per share for the three months ended June 30, 2004 and 2005
are as follows:
Three Months Ended
June 30,
2004 2005
----------------- -----------------
Basic common shares outstanding 8,921,590 8,545,744
Common stock equivalents 485,662 496,694
----------------- -----------------
Diluted common shares outstanding 9,407,252 9,042,438
================= =================
8. COMMITMENTS AND CONTINGENCIES
We are engaged in ordinary and routine litigation incidental to our business.
While we cannot predict the outcome of these various legal proceedings, it is
management's opinion that the resolution of these matters will not have a
material adverse effect on our financial position or results of operations.
9. RELATED PARTIES
On December 23, 2004, ePlus inc. entered into an office lease agreement with
Norton Building 1, LLC, the Landlord, pursuant to which we lease 50,322 square
feet for use as our principal headquarters. The property is located at 13595
Dulles Technology Drive, Herndon, Virginia. The term of the lease is for five
years with one five-year renewal option. The annual rent is $19.50 per square
foot for the first year, with a rent escalation of three percent per year for
each year thereafter. Phillip G. Norton is the Trustee of Norton Building 1, LLC
and is Chairman of the Board, President, and Chief Executive Officer of ePlus
inc. The lease is at or below market taking into consideration the rental
charges and the ability to terminate the lease. For the three months ended June
30, 2005, rent expense paid to the Landlord was $219,263.
During the quarter ended June 30, 2005, we reimbursed the Landlord for certain
construction costs in the amount of $280,163, which will be amortized over the
lease term.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of our results of operations and financial
condition should be read in conjunction with the condensed consolidated
financial statements and the related notes included in Item 1 of this report,
and our 2005 Form 10-K.
Overview
Certain statements contained herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that may not occur. 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. These risks and
uncertainties include, but are not limited to, the existence of demand for, and
acceptance of, our services, economic conditions, the impact of competition and
pricing, results of financing efforts and other factors affecting our business
that are beyond our control. We undertake no obligation and do not intend to
update, revise or otherwise publicly release the results of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances. See "Factors That May Affect Future Operating Results."
10
Our results of operations are susceptible to fluctuations for a number of
reasons, including, without limitation, customer demand for our products and
services, supplier costs, interest rate fluctuations and differences between
estimated residual values and actual amounts realized related to the equipment
we lease. Operating results could also fluctuate as a result of the sales of
equipment in our lease portfolio prior to the expiration of the lease term to
the lessee or to a third party. Such sales of leased equipment prior to the
expiration of the lease term may have the effect of increasing revenues and net
earnings during the period in which the sale occurs, and reducing revenues and
net earnings otherwise expected in subsequent periods. See "Potential
Fluctuations in Quarterly Operating Results."
We have expanded our product and service offerings under the Enterprise Cost
Management ("eECM") model which represents the continued evolution of our
original implementation of ePlus e-commerce products entitled ePlusSuite. Our
eECM model is our framework for combining IT sales and professional services,
leasing and financing services, asset management software and services,
procurement software, and electronic catalog content management software and
services. Our current operations consist of traditional financing and technology
sales. The financing business unit generates revenue by offering lease-financing
solutions to corporations and governmental entities nationwide. These revenues
are primarily made up of lease revenues and sales of products under eECM. Our
technology sales business unit generates revenue from the sale of IT equipment
and software and related services to corporations and governmental entities
nationwide. These revenues primarily consist of sales of products under eECM.
Our total sales and marketing staff at our 33 locations in the United States
consisted of 203 people as of June 30, 2005.
On May 28, 2004, we purchased certain assets and assumed certain liabilities of
Manchester Technologies, Inc. The acquisition added to our IT reseller and
professional services business. Approximately 125 former Manchester
Technologies, Inc. personnel have been hired by ePlus as part of the transaction
and are located in four established offices, two in metropolitan New York, one
in South Florida and one in Baltimore. These IT reseller activities and
services, and the associated expenses with this business acquisition have
substantially increased our expenses, and the ability to sell these products and
services is expected to fluctuate depending on the customer demand for these
products and services, which to date is still unproven. The products and
services from this acquisition are included in our technology sales business
unit segment, and are combined with our other sales of IT products and services.
As a result of all our acquisitions and changes in the number of sales
locations, our historical results of operations and financial position may not
be indicative of our future performance over time.
CRITICAL ACCOUNTING POLICIES
SALES OF PRODUCT. Sales of product includes the following types of transactions:
(1) sales of new or used equipment which is not subject to any type of lease;
(2) service revenue in our technology sales business unit; (3) sales of
off-lease equipment to the secondary market; and (4) sales of procurement
software. Sales of new or used equipment are recognized upon shipment and sales
of off-lease equipment are recognized when constructive title passes to the
purchaser. Service revenue is recognized as the related services are rendered.
SOFTWARE SALES AND RELATED COSTS. Revenue from sales of procurement software is
recognized in accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as
amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2," and SOP 98-9, "Modification of SOP 97-2 With Respect to Certain
Transactions." We recognize revenue when all the following criteria exist: there
is persuasive evidence that an arrangement exists, delivery has occurred, no
significant obligations by us related to services essential to the functionality
of the software remain with regard to implementation, the sales price is
determinable, and it is probable that collection will occur. Our accounting
policy requires that revenue earned and related costs incurred on software
arrangements involving multiple elements be allocated to each element on the
relative fair values of the elements and recognized when earned. Revenue related
to maintenance and support is recognized ratably over the maintenance term
(usually one year) and revenue allocated to training, implementation or other
services is recognized as the services are performed.
11
Revenue from hosting arrangements is recognized in accordance with Emerging
Issues Task Force ("EITF") 00-3, "Application of AICPA Statement of Position
97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware." Hosting arrangements that are not in the scope of SOP 97-2
require that allocation of the portion of the fee allocated to the hosting
elements be recognized as the service is provided.
SALES OF LEASED EQUIPMENT. Sales of leased equipment consists of sales of
equipment subject to an existing lease, under which we are the lessor, including
any underlying financing related to the lease. Sales of equipment subject to an
existing lease are recognized when constructive title passes to the purchaser.
The manner in which lease finance transactions are characterized and reported
for accounting purposes has a major impact upon reported revenue and net
earnings. Lease accounting methods critical to our business are discussed below.
We classify our lease transactions in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 13, "Accounting for Leases," as: (1) direct
financing; (2) sales-type; or (3) operating leases. Revenues and expenses
between accounting periods for each lease term will vary depending upon the
lease classification.
For financial statement purposes, we present revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
DIRECT FINANCING AND SALES-TYPE LEASES. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectability of lease payments are
reasonably certain and it meets one of the following criteria: (1) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (2) the lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (4) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at the inception of the
lease.
Direct financing leases are recorded as investment in direct financing leases
upon acceptance of the equipment by the customer. At the commencement of the
lease, unearned lease income is recorded that represents the amount by which the
gross lease payments receivable plus the estimated residual value of the
equipment exceeds the equipment cost. Unearned lease income is recognized, using
the interest method, as lease revenue over the lease term.
Sales-type leases include a dealer profit or loss that is recorded by the lessor
at the inception of the lease. The dealer's profit or loss represents the
difference, at the inception of the lease, between the present value of minimum
lease payments computed at the interest rate implicit in the lease and its cost
or carrying amount. Interest earned on the present value of the lease payments
and residual value is recognized over the lease term using the interest method.
OPERATING LEASES. All leases that do not meet the criteria to be classified as
direct financing or sales-type leases are accounted for as operating leases.
Rental amounts are accrued on a straight-line basis over the lease term and are
recognized as lease revenue. Our cost of the leased equipment is recorded on the
balance sheet as investment in leases and leased equipment and is depreciated on
a straight-line basis over the lease term to our estimate of residual value.
Revenue, depreciation expense, and the resulting profit for operating leases are
recorded on a straight-line basis over the life of the lease.
Lease revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to our estimate of residual value. For the periods
subsequent to the lease term, where collectibility is certain, revenue is
recognized on an accrual basis. Where collectibility is not reasonably assured,
revenue is recognized upon receipt of payment from the lessee.
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As a result of these three classifications of leases for accounting purposes,
the revenues resulting from the "mix" of lease classifications during an
accounting period will affect the profit margin percentage for such period and
such profit margin percentage generally increases as revenues from direct
financing and sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
RESIDUAL VALUES. Residual values represent our estimated value of the equipment
at the end of the initial lease term. The residual values for direct financing
and sales-type leases are reported as part of the investment in direct financing
and sales-type leases, on a net present value basis. The residual values for
operating leases are included in the leased equipment's net book value and are
reported in the investment in operating lease equipment. The estimated residual
values will vary, both in amount and as a percentage of the original equipment
cost, and depend upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
We evaluate residual values on a quarterly basis and record any required changes
in accordance with SFAS No. 13, paragraph 17.d., in which impairments of
residual value, other than temporary, are recorded in the period in which the
impairment is determined. Residual values are affected by equipment supply and
demand and by new product announcements by manufacturers. In accordance with
accounting principles generally accepted in the United States of America,
residual value estimates are adjusted downward when such assets are impaired.
We seek to realize the estimated residual value at lease termination through:
(1) renewal or extension of the original lease; (2) sale of the equipment either
to the lessee or on the secondary market; or (3) lease of the equipment to a new
customer. The difference between the proceeds of a sale and the remaining
estimated residual value is recorded as a gain or loss in lease revenues when
title is transferred to the lessee, or, if the equipment is sold on the
secondary market, in sales of product and cost of sales, product when title is
transferred to the buyer.
INITIAL DIRECT COSTS. Initial direct costs related to the origination of direct
financing or operating leases are capitalized and recorded as part of the net
investment in direct financing leases, or net operating lease equipment, and are
amortized over the lease term.
OTHER SOURCES OF REVENUE. Amounts charged for hosting arrangements in which the
customer accesses the programs from an ePlus-hosted site and does not have
possession, and for Procure+, our e-procurement software package, are recognized
as services are rendered. Amounts charged for Manage+, our asset management
software service, are recognized on a straight-line basis over the period the
services are provided. Fee and other income also results from: (1) income from
events that occur after the initial sale of a financial asset; (2) re-marketing
fees; (3) brokerage fees earned for the placement of financing transactions; (4)
agent fees received from various manufacturers in the IT Technology business
unit; (5) settlement fees related to disputes or litigation; and (6) interest
and other miscellaneous income. These revenues are included in fee and other
income in our consolidated statements of earnings.
RESERVE FOR CREDIT LOSSES. The reserve for credit losses is maintained at a
level believed by management to be adequate to absorb potential losses inherent
in our lease and accounts receivable portfolio. Management's determination of
the adequacy of the reserve is based on an evaluation of historical credit loss
experience, current economic conditions, volume, growth, the composition of the
lease portfolio, and other relevant factors. The reserve is increased by
provisions for potential credit losses charged against income. Accounts are
either written off or written down when the loss is both probable and
determinable, after giving consideration to the customer's financial condition,
the value of the underlying collateral and funding status (i.e., discounted on a
non-recourse or recourse basis).
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CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE. We have capitalized
certain costs for the development of internal-use software under the guidelines
of SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." These capitalized costs are included in our
condensed consolidated balance sheets as a component of property and equipment -
net. Capitalized costs, net of amortization, totaled $1,249,864 and $1,232,332
as of March 31, 2005 and June 30, 2005, respectively.
CAPITALIZATION OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS. In
accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," software development costs are expensed as
incurred until technological feasibility has been established, at such time such
costs are capitalized until the product is made available for release to
customers. These capitalized costs are included in our condensed consolidated
balance sheets as a component of other assets. We had $559,319 and $473,784 of
capitalized costs, net of amortization, as of March 31, 2005 and June 30, 2005,
respectively.
RESULTS OF OPERATIONS - Three Months Ended June 30, 2005 Compared to Three
Months Ended June 30, 2004
Total revenues generated by us during the three-month period ended June 30, 2005
were $149,803,801 compared to revenues of $106,698,733 during the comparable
period in the prior fiscal year, an increase of 40.4%. The increase is primarily
the result of increased sales of product. Our revenues are composed of sales,
lease, and other revenue, and may vary considerably from period to period. See
"POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS."
Sales of product are generated primarily through our technology sales business
unit subsidiaries. In addition, sales of product represented 90.0% and 86.2% of
total revenue for the three months ended June 30, 2005 and 2004, respectively.
Sales of product increased 46.7% to $134,869,844 during the current period
compared to $91,968,861 generated during the comparable period in the prior
fiscal year. The increase was a result of higher demand for our products from
our existing customers in our technology sales business unit subsidiaries and by
the acquisition of the customer base from Manchester Technologies, Inc. Included
in the sales of product in our technology sales business unit are certain
service revenues that are bundled with sales of equipment and are integral to
the successful delivery of such equipment. We realized a gross margin on sales
of product of 9.5% and 10.7% for the three-month periods ended June 30, 2005 and
2004, respectively. Our gross margin on sales of product is affected by the mix
and volume of products sold. The decline in gross margin is attributable to
purchases made by several large volume customers and a general increase in
competition.
Our lease revenues decreased 7.1% to $11,294,197 for the three months ended June
30, 2005 compared with the corresponding period in the prior fiscal year. This
decrease was due in part to the reduction in sales of leases due to a decrease
in activity in government-related leases.
For the three months ended June 30, 2005, fee and other income increased 41.4%
over the comparable period in the prior fiscal year. Fee and other income
includes revenues from adjunct services and fees, including broker and agent
fees, support fees, warranty reimbursements, monetary settlements arising from
disputes and litigation, and interest income. The current period increase in fee
and other income is attributable to an increase due to fees from new software
and service engagements, agent fees, and interest income. Our fee and other
income include earnings from certain transactions that are in our normal course
of business, but there is no guarantee that future transactions of the same
nature, size or profitability will occur. Our ability to consummate such
transactions, and the timing thereof, may depend largely upon factors outside
the 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.
For the three months ended June 30, 2005, cost of sales, product increased 48.6%
to $122,106,503 from $82,160,785 in the comparable period in the prior year.
This is primarily attributable to an increase in customer demand for IT
products, categorized as sales of product, of 46.7% from our existing customer
base and from customers obtained through recent acquisitions.
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Our direct lease costs increased 41.1% during the three-month period ended June
30, 2005 as compared to the same period in the prior fiscal year. The increase
is the result of an increase in operating lease depreciation due to a 32%
increase in our operating lease portfolio.
The decrease in professional and other fees of 46.3%, or $817,452, for the
current period over the comparable period in the prior fiscal year, was
primarily the result of a decrease in fees that we paid to Manchester
Technologies, Inc. for services rendered by people that were subsequently hired
and a decrease in legal and broker fees.
Salaries and benefits expenses increased 37.0% during the three-month period
ended June 30, 2005 over the same period in the prior year. Salaries and
benefits expense increased due to a combination of a 13.6% increase in
employees, due in part to the acquisition of Manchester Technologies, Inc.,
higher sales commissions attributed to higher sales volume, and a normal
increase in payroll and benefit expenses. We employed 651 people as of June 30,
2005 as compared to 573 people at June 30, 2004.
Our general and administrative expenses increased 5.7% to $4,461,489 during the
three months ended June 30, 2005, as compared to the same period in the prior
fiscal year. Such increase is largely due to a higher sales volume and an
increase in the number of offices and employees, resulting partly from the
Manchester Technologies, Inc. acquisition.
Interest and financing costs incurred by us for the three months ended June 30,
2005 increased 10.5% due to a slight increase in new lease-related non-recourse
debt and an increase in interest rates on non-recourse debt during the three
months ended June 30, 2005, as compared to the same period in the prior fiscal
year.
Our provision for income taxes decreased to $882,922 for the three months ended
June 30, 2005 from $1,511,441 for the three months ended June 30, 2004,
reflecting effective income tax rates of 40.5% and 41.0% respectively.
The foregoing resulted in a 40.4% decrease in net earnings for the three-month
period ended June 30, 2005 as compared to the same period in the prior fiscal
year. Basic and fully diluted earnings per common share were $0.15 and $0.14 for
the three months ended June 30, 2005, respectively, as compared to $0.24 and
$0.23 for the three months ended June 30, 2004, respectively. Basic and diluted
weighted average common shares outstanding for the three months ended June 30,
2005 were 8,545,744 and 9,042,438, respectively. For the three months ended June
30, 2004, the basic and diluted weighted average shares outstanding were
8,921,590 and 9,407,252, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended June 30, 2005, we used cash flows provided
by operating activities of $7,486,407 and used cash flows from investing
activities of $12,306,538. Cash flows provided by financing activities amounted
to $3,185,005 during the same period. The effect of exchange rate changes during
the period used cash flows of $10,501. The net effect of these cash flows was a
net decrease in cash and cash equivalents of $16,618,441 during the three-month
period. During the same period, our total assets increased $3,616,913 or 1.0%.
The cash balance at June 30, 2005 was $22,233,273 as compared to $38,851,714 at
March 31, 2005.
Based on concerns raised by the staff of the SEC in guidance posted on the SEC
website on February 15, 2005 concerning the previous presentation of the cash
flow effects of long-term customer receivables, including sales-type lease
receivables, management has determined it is appropriate to change the
classification of all cash flows related to our direct financing and sales-type
lease transactions within the condensed consolidated statements of cash flows.
Historically, we classified the cash flows from direct financing and sales-type
leases as investing activities in the condensed consolidated statement of cash
flows. We are now classifying these cash flows as operating activities in the
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condensed consolidated statements of cash flows. Therefore, no cash amounts
related to direct financing or sales-type leases are classified as investing
activities. In addition, in performing the reclassifications required by the SEC
guidance above, we also discovered certain amounts relating to property and
equipment, and operating leases which needed to be reclassified between
operating and investing activities. This reclassification decreased net cash
used in operating activities and increased net cash used in investing activities
by $2,052,787.
Our debt financing activities typically provide approximately 80% to 100% of the
purchase price of the equipment purchased by us for lease to our customers. Any
balance of the purchase price (our equity investment in the equipment) must
generally be financed by cash flow from our operations, the sale of the
equipment leased to third parties, or other internal means. Although we expect
that the credit quality of our leases and our residual return history will
continue to allow us to obtain such financing, no assurances can be given that
such financing will be available on acceptable terms, or at all. The financing
necessary to support our leasing activities has principally been provided by
non-recourse and recourse borrowings. Historically, we have obtained recourse
and non-recourse borrowings from banks and finance companies. Non-recourse
financings are loans whose repayment is the responsibility of a specific
customer, although we may make representations and warranties to the lender
regarding the specific contract or have ongoing loan servicing obligations.
Under a non-recourse loan, we borrow from a lender an amount based on the
present value of the contractually committed lease payments under the lease at a
fixed rate of interest, and the lender secures a lien on the financed assets.
When the lender is fully repaid from the lease payment, the lien is released and
all further rental or sale proceeds are ours. We are not liable for the
repayment of non-recourse loans unless we breach our representations and
warranties in the loan agreements. The lender assumes the credit risk of each
lease, and its only recourse, upon default by the lessee, is against the lessee
and the specific equipment under lease. During the three-month period ended June
30, 2005, our lease-related non-recourse debt portfolio increased 1.9% to
$116,963,549.
Whenever possible and desirable, we arrange for equity investment financing
which includes selling assets, including the residual portions, to third parties
and financing the equity investment on a non-recourse basis. We generally retain
customer control and operational services, and have minimal residual risk. We
usually reserve the right to share in remarketing proceeds of the equipment on a
subordinated basis after the investor has received an agreed to return on its
investment.
Our "Accounts payable - equipment" represents equipment costs that have been
placed on a lease schedule, but for which we have not yet paid. The balance of
unpaid equipment cost can vary depending on vendor terms and the timing of lease
originations. As of June 30, 2005, we had $13,078,093 of unpaid equipment cost,
as compared to $8,965,022 at March 31, 2005.
Our "Accounts payable - trade" increased 14.7% from $55,332,993 at March 31,
2005 to $63,446,474 as of June 30, 2005, due to an increase in sales of product
of 16.4% in our technology business unit for the three months ended June 30,
2005.
Our "Accrued expenses and other liabilities" includes deferred income, accrued
salaries and benefits, and amounts collected and payable, such as sales taxes
and lease rental payments due to third parties. As of June 30, 2005, we had
$21,486,614 of accrued expenses and other liabilities.
Working capital for our leasing business is provided through a $45,000,000
credit facility, which expires on July 21, 2006. Participating in this facility
are Branch Banking and Trust Company ($15,000,000), Bank of America
($15,000,000) and National City Bank ($15,000,000), the agent. The ability to
borrow under this facility is limited to the amount of eligible collateral at
any given time. The credit facility has full recourse to us and is secured by a
blanket lien against all of our assets such as chattel paper (including leases),
receivables, inventory, and equipment and including the common stock of all
wholly-owned subsidiaries.
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The credit facility contains certain financial covenants and certain
restrictions on, among other things, our ability to make certain investments,
and sell assets or merge with another company. Borrowings under the credit
facility bear interest at London Interbank Offered Rates ("LIBOR") plus an
applicable margin or, at our option, the Alternate Base Rate ("ABR") plus an
applicable margin. The ABR is the higher of the Agent bank's prime rate or
Federal Funds plus 0.5%. The applicable margin is determined based on our
recourse funded debt ratio and can range from 1.75% to 2.50% for LIBOR loans and
from 0.0% to 0.25% for ABR loans. As of June 30, 2005, we had an outstanding
balance of $4.0 million on the facility.
In general, we use the National City Bank facility to pay the cost of equipment
to be put on lease, and we repay borrowings from the proceeds of: (1) long-term,
non-recourse, fixed rate financing which we obtain from lenders after the
underlying lease transaction is finalized or (2) sales of leases to third
parties. The loss of this credit facility could have a material adverse effect
on our future results as we may have to use this facility for daily working
capital and liquidity for our leasing business. The availability of the credit
facility is subject to a borrowing base formula that consists of inventory,
receivables, purchased assets, and lease assets. Availability under the credit
facility may be limited by the asset value of the equipment purchased by us or
by terms and conditions in the credit facility agreement. If we are unable to
sell the equipment or unable to finance the equipment on a permanent basis
within a certain time period, the availability of credit under the facility
could be diminished or eliminated. The credit facility contains covenants
relating to minimum tangible net worth, cash flow coverage ratios, maximum debt
to equity ratio, maximum guarantees of subsidiary obligations, mergers and
acquisitions and asset sales. We were in compliance with these covenants as of
June 30, 2005.
ePlus Technology, inc. has a credit facility from GE Commercial Distribution
Finance Corporation ("GECDF") to finance its working capital requirements for
inventories and accounts receivable. There are two components of this lending
facility: a floor plan credit facility and an accounts receivable facility.
Floor Plan Credit Facility
The traditional business of ePlus Technology, inc. as a seller of computer
technology and related peripherals and software products is financed through an
agreement known as a floor plan credit facility in which interest expense for
the first thirty to forty-five days, in general, is not charged but is paid by
the supplier/distributor. The floor plan liabilities are recorded as accounts
payable-trade, as they are normally repaid within the thirty to forty-five day
time-frame and represent an assigned accounts payable originally generated with
the supplier/distributor. If the thirty to forty-five day obligation is not paid
timely, interest is then assessed at stated contractual rates.
The respective floor plan facility credit limits and actual outstanding balances
were as follows:
Credit Limit at Balance as of Credit Limit at Balance as of
Floor Plan Supplier March 31, 2005 March 31, 2005 June 30, 2005 June 30, 2005
- ------------------------------ ------------------ ----------------- ------------------ ----------------
GE Distribution Finance Corp. $ 75,000,000 $ 32,978,262 $ 50,000,000 $ 40,907,662
The limit is further defined as being $50,000,000 at all times other than during
the Seasonal Uplift Period. The Seasonal Uplift Period is defined as August 1st
through December 31st each calendar year. During the Seasonal Uplift Period, the
limit increases to $75,000,000.
Accounts Receivable Facility
In addition to the floor plan component, ePlus Technology, inc. has an accounts
receivable facility through GECDF. The accounts receivable facility was modified
on August 18, 2004 from a limit of $15,000,000 to include a Seasonal Uplift
Period as defined above to $20,000,000.
There was an outstanding balance of $2,412,723 and $6,263,471 on this facility
as of June 30, 2005 and March 31, 2005, respectively. The maximum available that
could be borrowed under the accounts receivable facility was $15,000,000 as of
June 30, 2005 and March 31, 2005. Availability under the lines of credit may be
limited by the asset value of the equipment we purchase and may be further
limited by certain covenants and terms and conditions of the facilities. We were
in compliance with these covenants as of June 30, 2005.
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On June 28, 2004, we modified our credit facility agreement with GECDF to
increase the credit limit to $50,000,000 from $26,000,000. The modification on
August 18, 2004 also included a provision that during the Seasonal Uplift
Period, the floor plan credit facility and the accounts receivable facility, in
aggregate, could not exceed the $75,000,000 credit limit. On January 10, 2005,
GECDF granted a temporary credit limit increase of up to $25,000,000 through
March 31, 2005. On July 22, 2005, we further modified the GECDF facility to
include a temporary credit limit increase of up to $25,000,000 through July 31,
2005, after which the Seasonal Uplift Period begins.
The facility provided by GECDF requires a guaranty of up to $10,500,000 by ePlus
inc. The loss of the GECDF credit facility could have a material adverse effect
on our future results as we currently rely on this facility and its components
for daily working capital and liquidity for our technology sales business unit
and operational accounts payable functions.
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 results of operations or financial position.
On November 17, 2004, a stock purchase program was authorized by our Board of
Directors. This program authorized the repurchase of up to 3,000,000 shares of
our outstanding common stock over a period of time ending no later than November
17, 2005 and is limited to a cumulative purchase amount of $7,500,000. On March
2, 2005, our Board of Directors approved an increase, from $7,500,000 to
$12,500,000, for the maximum total cost of shares that could be purchased.
During the three months ended June 30, 2005 and 2004, we repurchased 55,000 and
39,000 shares of our outstanding common stock for $622,250 and $492,552,
respectively. Since the inception of our initial repurchase program on September
20, 2001, and as of June 30, 2005, we had repurchased 2,280,900 shares of our
outstanding common stock at an average cost of $10.31 per share for a total of
$23,510,131.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our future quarterly operating results and the market price of our common stock
may fluctuate. In the event our revenues or earnings for any quarter are less
than the level expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of our common stock. Any such adverse impact could be greater if any such
shortfall occurs near the time of any material decrease in any widely followed
stock index or in the market price of the stock of one or more public equipment
leasing and financing companies or our major customers or vendors.
Our quarterly results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, our entry into the e-commerce market,
any reduction of expected residual values related to the equipment under our
leases, timing of specific transactions and other factors. See "Factors That May
Affect Future Operating Results." Quarterly operating results could also
fluctuate as a result of our sale of equipment in our lease portfolio, at the
expiration of a lease term or prior to such expiration, to a lessee or to a
third party. Such sales of equipment may have the effect of increasing revenues
and net income during the quarter in which the sale occurs, and reducing
revenues and net income otherwise expected in subsequent quarters.
We believe that comparisons of quarterly results of our operations are not
necessarily meaningful and that results for one quarter should not be relied
upon as an indication of future performance.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain statements contained in this Form 10-Q, other periodic reports filed by
us under the Securities Exchange Act of 1934, as amended, and any other written
or oral statements made by us or on our behalf are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. 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 the
use of forward-looking words such as "may," "will," "should," "intend,"
"estimate," "believe," "expect," "anticipate," "project," and similar
expressions. Readers are cautioned not to place undue reliance on any
forward-looking statements made by us or on our behalf. Any such statement
speaks only as the date the statement was made. 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.
Our traditional businesses of equipment leasing and financing and technology
sales have the following risks, among others, which are described in our 2005
Form 10-K:
- we may not be able to realize our entire investment in the equipment
we lease;
- we depend on creditworthy customers and may not have reserved
adequately for credit losses;
- capital spending by our customers may decrease;
- direct marketing by manufacturers rather than through distributors may
affect future sales;
- inventory and accounts receivable financing may not be available;
- our earnings may fluctuate;
- we are dependent upon our current management team;
- our disclosure controls and procedures and our internal controls over
financial reporting may not be effective to detect all errors or to
detect and deter wrongdoing, fraud or improper activities in all
instances;
- treating stock options and employee stock purchase plan participation
as a compensation expense could significantly impair our ability to
maintain profitability; and
- our assessment as to the adequacy of our internal controls over
financial reporting as required by section 404 of the Sarbanes-Oxley
Act of 2002 may cause our operating expenses to increase. If we are
unable to certify the adequacy of our internal controls and our
independent auditors are unable to attest thereto, investors could
lose confidence in the reliability of our financial statements, which
could result in a decrease in the value of our common stock.
Our eECM solution, introduced in May 2002, has had a limited operating history.
Although we have been in the business of financing and selling information
technology equipment since 1990, we will encounter some of the challenges,
risks, difficulties and uncertainties frequently encountered by early-stage
companies using new and unproven business models in rapidly evolving markets.
Some of these challenges relate to our ability to:
- increase the total number of users of eECM services;
- adapt to meet changes in our markets and competitive developments; and
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- continue to update our technology to enhance the features and
functionality of our suite of products.
We cannot be certain that our business strategy will be successful or that it
will successfully address these and other challenges, risks and uncertainties.
Over the longer term, we expect to derive a significant portion of our revenues
from our eECM business model, which is unproven. We expect to incur expenses
that may negatively impact profitability. We also expect to incur significant
sales and marketing, research and development, and general and administrative
expenses in connection with the development of this business. As a result, we
may incur significant expenses, which may have a material adverse effect on our
future operating results as a whole.
Broad and timely acceptance of the eECM services, which is important to our
future success, is subject to a number of significant risks. These risks
include:
- the electronic commerce business-to-business solutions market is
highly competitive;
- the system's ability to support large numbers of buyers and suppliers
is unproven;
- significant enhancement of the features and services of our eECM
solution may be needed to achieve initial widespread commercial and
continued acceptance of the system;
- the pricing model may not be acceptable to customers;
- if we are unable to develop and increase volume from our eECM
services, it is unlikely that we will ever achieve or maintain
profitability in this business;
- businesses that have already made substantial up-front payments for
e-commerce solutions may be reluctant to replace their current
solution and adopt our solution;
- our ability to adapt to a new market that is characterized by rapidly
changing technology, evolving industry standards, new product
announcements and established competition; and
- we may be unable to protect our intellectual property rights or face
claims from third parties for infringement of their products or incur
significant costs to protect our patents, which may affect our
earnings.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the our liabilities are non-recourse, fixed
interest rate instruments, we are reliant upon lines of credit and other
financing facilities that are subject to fluctuations in interest rates. These
instruments were entered into for other than trading purposes, are denominated
in U.S. Dollars, and, with the exception of amounts drawn under the National
City Bank and GE Commercial Distribution Finance Corporation facilities, bear
interest at a fixed rate. Because the interest rate on these instruments is
fixed, changes in interest rates will not directly impact our cash flows.
Borrowings under the National City and GE Commercial Distribution Finance
Corporation facilities bear interest at a market-based variable rate. Due to the
relatively short nature of the interest rate periods, we do not expect our
operating results or cash flow to be materially affected by changes in market
interest rates. As of June 30, 2005, the aggregate fair value of our recourse
borrowings approximated their carrying value.
During the year ended March 31, 2003, we began transacting business in Canada.
As a result, we have entered into lease contracts and non-recourse, fixed
interest rate financing denominated in Canadian Dollars. To date, Canadian
operations have been insignificant and we believe that potential fluctuations in
currency exchange rates will not have a material effect on our financial
position.
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Item 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as
amended ("Exchange Act"), we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the quarter
covered by this report. Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective in alerting them, on a timely basis, to material
information relating to us (including our consolidated subsidiaries) required to
be included in the our periodic SEC filings.
There have been no significant changes in our internal controls over financial
reporting during the most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in three lawsuits arising from four separate leasing schedules
with a lessee named Cyberco Holdings, Inc. ("Cyberco"). The Cyberco principals
were allegedly perpetrating a scam. Cyberco, related affiliates, and at least
one principal are in Chapter 7 bankruptcy, and no future lease payments are
expected. The first two lawsuits, both in the U.S.D.C. for the Southern District
of New York, involve three of the schedules, which we had assigned on a
non-recourse basis to GMAC Commercial Finance, LLC ("GMAC"). GMAC filed suit
against us seeking repayment of the underlying non-recourse promissory note,
which is approximately $10,646,000. The same day, we filed suit against GMAC,
Travelers Property Casualty Company of America ("Travelers") and Banc of America
Leasing and Capital, LLC ("BoA"), seeking a declaratory judgment that any
potential liability is covered by our liability policy with Travelers, and that
we have no liability to GMAC or BoA. The two cases have been administratively
consolidated, and we subsequently dismissed BoA from the suit. The suits are
proceeding between us, GMAC and Travelers, and are in the discovery phase. We
continue to believe that we have no liability to GMAC, and that Travelers is
responsible for the costs of defense and any potential judgment.
The third lawsuit, which stems from the remaining schedule between Cyberco and
us, is between BoA and us in the Circuit Court for Fairfax County, Virginia. We
sold the schedule to BoA under a Program Agreement. BoA seeks to recover its
loss of approximately $3,063,000. We are vigorously asserting our defenses in
this suit, and believe that we have no liability to BoA, and that Travelers is
responsible for the costs of defense and any potential judgment.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Total number of
shares purchased Maximum number
Total number as part of of shares that may
of shares Average publicly yet be purchased
purchased price per announced plans under the plans
Period (1) share or programs or programs
- ---------------------------------------------------------------------------------------------------------------------
April 1, 2005 through April 30, 2005 30,000 $ 11.20 30,000 621,212 (2)
May 1, 2005 through May 31, 2005 25,000 $ 11.97 25,000 557,577 (3)
June 1, 2005 through June 30, 2005 - $ 12.45 - 536,342 (4)
(1) All shares acquired were in open-market purchases.
(2) The share purchase authorization in place for the month ended April 30, 2005 had purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of April 30, 2005, the remaining
authorized dollar amount to purchase shares was $6,960,058 and, based on April's average price per share of
$11.204, 621,212 represents the maximum shares that may yet be purchased.
(3) The share purchase authorization in place for the month ended May 31, 2005 had purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of May 31, 2005, the remaining
authorized dollar amount to purchase shares was $6,675,308 and, based on May's average price per share of
$11.972, 557,577 represents the maximum shares that may yet be purchased.
(4) The share purchase authorization in place for the month ended June 30, 2005 had purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of June 30, 2005, the remaining
authorized dollar amount to purchase shares was $6,675,308 and, based on June's average price per share of
$12.446, 536,342 represents the maximum shares that may yet be purchased.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. EXHIBITS
Exhibit No. Exhibit Description
3.1 Certificate of Incorporation of the Company, filed August 27, 1996 (Incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002).
3.2 Certificate of Amendment of Certificate of Incorporation of the Company, filed December 31, 1997 (Incorporated
herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended December 31,
2002).
3.3 Certificate of Amendment of Certificate of Incorporation of the Company, filed October 19, 1999 (Incorporated
herein by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended December 31,
2002).
22
3.4 Certificate of Amendment of Certificate of Incorporation of the Company, filed May 23, 2002 (Incorporated herein by
reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002).
3.5 Certificate of Amendment of Certificate of Incorporation of the Company, filed October 1, 2003 (Incorporated herein
by reference to Exhibit 3.5 to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
2003).
3.6 Bylaws of the Company, as amended to date (Incorporated herein by reference to Exhibit 3.5 to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 2002).
31.1 Certification of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a)
and 15d-14(a).
31.2 Certification of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a)
and 15d-14(a).
32.1 Statement of the Chief Executive Officer of ePlus inc. pursuant to 18 U.S.C. ss. 1350.
32.2 Statement of the Chief Financial Officer of ePlus inc. pursuant to 18 U.S.C. ss. 1350.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ePlus inc.
Date: August 15, 2005 /s/ PHILLIP G. NORTON
------------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: August 15, 2005 /s/ STEVEN J. MENCARINI
------------------------------------------------
By: Steven J. Mencarini, Chief Financial Officer
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