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 September 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 ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ___] No [ X ]
The number of shares of common stock outstanding as of November 2, 2005, was
8,198,657
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
September 30, 2005 2
Condensed Consolidated Statements of Earnings, Three Months Ended
September 30, 2004 and 2005 3
Condensed Consolidated Statements of Earnings, Six Months Ended
September 30, 2004 and 2005 4
Condensed Consolidated Statements of Cash Flows, Six Months Ended
September 30, 2004 and 2005 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information:
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 25
Signatures 29
1
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2005 As of September 30, 2005
----------------------------------------------------
ASSETS
Cash and cash equivalents $ 38,851,714 $ 15,874,871
Accounts receivable, net of allowance for doubtful
accounts of $1,959,049 and $1,878,845 as of March
31, 2005 and September 30, 2005, respectively 93,555,462 121,617,829
Notes receivable 114,708 86,636
Inventories 2,116,855 3,904,925
Investment in leases and leased equipment - net 189,468,926 208,626,972
Property and equipment - net 6,647,781 6,066,853
Other assets 3,859,791 3,943,031
Goodwill 26,125,212 26,125,212
--------------------------------------------------
TOTAL ASSETS $ 360,740,449 $ 386,246,329
==================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 8,965,022 $ 10,927,485
Accounts payable - trade 54,751,962 58,621,902
Salaries and benefits payable 3,273,700 3,541,643
Accrued expenses and other liabilities 31,024,749 17,607,231
Income taxes payable - 575,381
Recourse notes payable 6,264,897 27,308,593
Non-recourse notes payable 114,838,994 125,002,488
Deferred tax liability 9,519,309 9,192,426
--------------------------------------------------
Total Liabilities 228,638,633 252,777,149
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;
10,807,392 issued and 8,581,492 outstanding at March 31, 2005
and 10,819,842 issued and 8,423,642 outstanding at September 30, 2005 108,074 108,198
Additional paid-in capital 65,181,862 65,308,746
Treasury stock, at cost, 2,225,900 and 2,396,200 shares, respectively (22,887,881) (24,964,091)
Retained earnings 89,499,096 92,714,797
Accumulated other comprehensive income -
foreign currency translation adjustment 200,665 301,530
--------------------------------------------------
Total Stockholders' Equity 132,101,816 133,469,180
--------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 360,740,449 $ 386,246,329
==================================================
See Notes to Condensed Consolidated Financial Statements.
2
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
September 30,
2004 2005
----------------------------------------------------
REVENUES
Sales of product $ 138,065,002 $ 159,408,606
Lease revenues 11,911,090 11,916,187
Fee and other income 3,209,606 2,917,855
----------------------------------------------------
TOTAL REVENUES 153,185,698 174,242,648
----------------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 123,342,547 143,741,909
Direct lease costs 2,930,271 3,798,228
Professional and other fees 2,815,485 1,776,496
Salaries and benefits 14,877,568 15,011,667
General and administrative expenses 4,435,573 4,975,093
Interest and financing costs 1,300,648 1,714,770
----------------------------------------------------
TOTAL COSTS AND EXPENSES 149,702,092 171,018,163
----------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,483,606 3,224,485
----------------------------------------------------
PROVISION FOR INCOME TAXES 1,428,279 1,305,917
----------------------------------------------------
NET EARNINGS $ 2,055,327 $ 1,918,568
====================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.23 $ 0.23
====================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.22 $ 0.21
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 8,922,104 8,474,301
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,252,196 9,070,969
See Notes to Condensed Consolidated Financial Statements.
3
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Six Months ended
September 30,
2004 2005
----------------------------------------------------
REVENUES
Sales of product $ 230,033,864 $ 294,278,450
Lease revenues 24,066,831 23,210,454
Fee and other income 5,783,737 6,557,615
----------------------------------------------------
TOTAL REVENUES 259,884,432 324,046,519
----------------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 205,503,332 265,829,803
Direct lease costs 5,607,270 7,594,053
Professional and other fees 4,580,250 2,723,809
Salaries and benefits 25,675,699 29,805,239
General and administrative expenses 8,655,049 9,436,582
Interest and financing costs 2,692,785 3,252,495
----------------------------------------------------
TOTAL COSTS AND EXPENSES 252,714,385 318,641,981
----------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 7,170,047 5,404,538
----------------------------------------------------
PROVISION FOR INCOME TAXES 2,939,720 2,188,839
----------------------------------------------------
NET EARNINGS $ 4,230,327 $ 3,215,699
====================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.47 $ 0.38
====================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.45 $ 0.36
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 8,921,848 8,509,827
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,350,598 9,057,606
See Notes to Condensed Consolidated Financial Statements.
4
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
2004 2005
----------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 4,230,327 $ 3,215,699
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 6,201,329 8,035,038
Write-off of non-recourse debt (489,607) (209,047)
Provision for credit losses 285,563 80,204
Tax benefit of stock options exercised - 17,957
Deferred taxes 915,617 (326,883)
Payments from lessees directly to lenders (2,086,250) (3,138,997)
(Gain) loss on disposal of property and equipment (3,765) 66,924
Gain on disposal of operating lease equipment (351,119) (224,050)
Changes in:
Accounts receivable (47,510,136) (28,142,571)
Other receivable (298,002) 28,072
Inventories (4,964,965) (1,788,070)
Investment in leases and leased equipment - net (13,610,488) (8,160,539)
Other assets 90,809 (83,240)
Accounts payable - equipment 10,235,919 1,962,463
Accounts payable - trade 26,070,419 3,288,909
Salaries and benefits payable, accrued expenses
and other liabilities 6,795,397 (11,993,164)
----------------------------------------------------
Net cash used in operating activities (14,488,952) (37,371,295)
----------------------------------------------------
Cash Flows From Investing Activities:
Purchases of operating lease equipment (9,575,281) (17,846,275)
Purchases of property and equipment (622,403) (1,177,882)
Proceeds from sale of operating equipment 563,764 685,262
Proceeds from sale of property and equipment - 44,405
Cash used in acquisitions, net of cash acquired (5,000,000) -
----------------------------------------------------
Net cash used in investing activities (14,633,920) (18,294,490)
----------------------------------------------------
5
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(UNAUDITED)
2004 2005
----------------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Non-recourse $ 24,741,606 $ 40,304,769
Repayments:
Non-recourse (24,512,197) (26,793,229)
Purchase of treasury stock (492,552) (2,076,210)
Proceeds from issuance of capital stock, net of expenses 305,523 109,051
Net borrowings on lines of credit 17,999,410 21,043,696
----------------------------------------------------
Net cash provided by financing activities 18,041,790 32,588,077
----------------------------------------------------
Effect of Exchange Rate Changes on Cash 33,842 100,865
----------------------------------------------------
Net Decrease in Cash and Cash Equivalents (11,047,240) (22,976,843)
Cash and Cash Equivalents, Beginning of Period 25,155,011 38,851,714
----------------------------------------------------
Cash and Cash Equivalents, End of Period $ 14,107,771 $ 15,874,871
====================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 1,411,684 $ 1,305,341
====================================================
Cash paid for income taxes $ 1,174,723 $ 1,587,895
====================================================
See Notes To Condensed Consolidated Financial Statements.
6
ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 six months ended September 30, 2004 and 2005, accumulated other
comprehensive income increased $33,842 and $100,865, respectively, resulting in
total comprehensive income of $4,264,169 and $3,316,564, respectively.
These interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K (No. 0-28926) for the year ended March 31, 2005. Operating
results for the interim periods are not necessarily indicative of results for an
entire year.
2. STOCK-BASED COMPENSATION
As of September 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 the Company 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 Six Months Ended
September 30, September 30,
(unaudited) (unaudited)
2004 2005 2004 2005
------------------- ------------------- ---------------- ---------------
Net earnings, as reported $2,055,327 $1,918,568 $4,230,327 $3,215,699
Stock-based compensation expense (343,871) (209,986) (708,298) (425,270)
------------------- ------------------- ---------------- ---------------
Net earnings, pro forma $1,711,456 $1,708,582 $3,522,029 $2,790,429
=================== =================== ================ ===============
Basic earnings per share, as reported $0.23 $0.23 $0.47 $0.38
Basic earnings per share, pro forma $0.19 $0.20 $0.39 $0.33
Diluted earnings per share, as reported $0.22 $0.21 $0.45 $0.36
Diluted earnings per share, pro forma $0.18 $0.19 $0.38 $0.31
7
Six Months Ended
September 30,
2004 2005
--------------- ---------------
Options granted under the Incentive
Stock Option Plan:
Expected life of option 5 years 5 years
Expected stock price volatility 71.73% 48.05%
Expected dividend yield 0% 0%
Risk-free interest rate 3.39% 4.01%
3. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of
March 31, 2005 September 30, 2005
(In Thousands)
----------------------------------------------------
Investment in direct financing and sales-type leases-net $ 157,519 $ 165,371
Investment in operating lease equipment-net 31,950 43,256
------------------------- -------------------------
$ 189,469 $ 208,627
========================= =========================
Our net investment in leases is collateral for non-recourse and recourse
equipment notes, if any.
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 September 30, 2005
(In Thousands)
----------------------------------------------------
Minimum lease payments $ 151,139 $ 160,089
Estimated unguaranteed residual value (1) 23,794 23,837
Initial direct costs, net of amortization (2) 1,850 1,748
Less: Unearned lease income (16,208) (17,248)
Reserve for credit losses (3,056) (3,055)
------------------------- -------------------------
Investment in direct finance and sales-type leases-net $ 157,519 $ 165,371
========================= =========================
(1) Includes estimated unguaranteed residual values of $801 and $1,009 as of March 31, 2005 and September 30, 2005,
respectively, for direct financing SFAS 140 leases.
(2) Initial direct costs are shown net of amortization of $2,387 and $2,326 as of March 31, 2005 and September 30, 2005,
respectively.
8
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
month-to-month status. The components of the net investment in operating lease
equipment are as follows:
As of
March 31, 2005 September 30, 2005
(In Thousands)
--------------------------------------------------------
Cost of equipment under operating leases $ 45,453 $ 59,794
Less: Accumulated depreciation and amortization (13,503) (16,538)
---------------------------- --------------------------
Investment in operating lease equipment-net $ 31,950 $ 43,256
============================ ==========================
4. PROVISION FOR CREDIT LOSSES
As of March 31 and September 30, 2005, our provision for credit losses was
$5,014,905 and $4,934,175, respectively. Our provision for credit losses are
segregated between our accounts receivable and our lease-related assets as
follows (in thousands):
Accounts Lease-Related
Receivable Assets 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 492 - 492
Recoveries (130) - (130)
Write-offs and other (442) (1) (443)
---------------------- ---------------------- ----------------------
Balance September 30, 2005 $ 1,879 $ 3,055 $ 4,934
====================== ====================== ======================
5. 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
9
corporate staff, or asset utilization, depending on the type of expense. Certain
items have been reclassified in the three- and six-month periods ending
September 30, 2004 to conform to the September 30, 2005 presentation.
10
Financing Technology Sales
Business Unit Business Unit Total
------------------------ ------------------------ ------------------------
Three months ended September 30, 2004
Sales of product $ 544,077 $ 137,520,925 $ 138,065,002
Lease revenues 11,911,090 - 11,911,090
Fee and other income 483,516 2,726,090 3,209,606
------------------------ ------------------------ ------------------------
Total revenues 12,938,683 140,247,015 153,185,698
Cost of sales 760,765 122,581,782 123,342,547
Direct lease costs 2,930,271 - 2,930,271
Selling, general and administrative expenses 5,524,367 16,604,259 22,128,626
------------------------ ------------------------ ------------------------
Segment earnings 3,723,280 1,060,974 4,784,254
Interest expense 1,148,124 152,524 1,300,648
------------------------ ------------------------ ------------------------
Earnings before income taxes $ 2,575,156 $ 908,450 $ 3,483,606
======================== ======================== ========================
Assets as of September 30, 2004 $ 230,857,969 $ 122,837,547 $ 353,695,516
======================== ======================== ========================
Three months ended September 30, 2005
Sales of product $ 1,378,841 $ 158,029,765 $ 159,408,606
Lease revenues 11,916,187 - 11,916,187
Fee and other income 314,956 2,602,899 2,917,855
------------------------ ------------------------ ------------------------
Total revenues 13,609,984 160,632,664 174,242,648
Cost of sales 1,520,065 142,221,844 143,741,909
Direct lease costs 3,798,228 - 3,798,228
Selling, general and administrative expenses 5,797,596 15,965,660 21,763,256
------------------------ ------------------------ ------------------------
Segment earnings 2,494,095 2,445,160 4,939,255
Interest expense 1,557,731 157,039 1,714,770
------------------------ ------------------------ ------------------------
Earnings before income taxes $ 936,364 $ 2,288,121 $ 3,224,485
======================== ======================== ========================
Assets as of September 30, 2005 $ 266,450,237 $ 119,796,092 $ 386,246,329
======================== ======================== ========================
Six months ended September 30, 2004
Sales of product $ 1,740,804 $ 228,293,060 $ 230,033,864
Lease revenues 24,066,831 - 24,066,831
Fee and other income 1,435,267 4,348,470 5,783,737
------------------------ ------------------------ ------------------------
Total revenues 27,242,902 232,641,530 259,884,432
Cost of sales 1,626,248 203,877,084 205,503,332
Direct lease costs 5,607,270 - 5,607,270
Selling, general and administrative expenses 10,857,495 28,053,503 38,910,998
------------------------ ------------------------ ------------------------
Segment earnings 9,151,889 710,943 9,862,832
Interest expense 2,565,961 126,824 2,692,785
------------------------ ------------------------ ------------------------
Earnings before income taxes $ 6,585,928 $ 584,119 $ 7,170,047
======================== ======================== ========================
Assets as of September 30, 2004 $ 230,857,969 $ 122,837,547 $ 353,695,516
======================== ======================== ========================
Six months ended September 30, 2005
Sales of product $ 2,081,492 $ 292,196,958 $ 294,278,450
Lease revenues 23,210,454 - 23,210,454
Fee and other income 800,515 5,757,100 6,557,615
------------------------ ------------------------ ------------------------
Total revenues 26,092,461 297,954,058 324,046,519
Cost of sales 2,254,448 263,575,355 265,829,803
Direct lease costs 7,594,053 - 7,594,053
Selling, general and administrative expenses 10,904,947 31,060,683 41,965,630
------------------------ ------------------------ ------------------------
Segment earnings 5,339,013 3,318,020 8,657,033
Interest expense 3,053,362 199,133 3,252,495
------------------------ ------------------------ ------------------------
Earnings before income taxes $ 2,285,651 $ 3,118,887 $ 5,404,538
======================== ======================== ========================
Assets as of September 30, 2005 $ 266,450,237 $ 119,796,092 $ 386,246,329
======================== ======================== ========================
11
6. EARNINGS PER SHARE
The weighted average number of common shares used in determining basic and
diluted net income per share for the three and six months ended September 30,
2004 and 2005 are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2004 2005 2004 2005
----------- ----------- ----------- -----------
Basic common shares outstanding 8,922,104 8,474,301 8,921,848 8,509,827
Common stock equivalents 330,092 596,668 428,750 547,779
----------- ----------- ----------- -----------
Diluted common shares outstanding 9,252,196 9,070,969 9,350,598 9,057,606
=========== =========== =========== ===========
7. 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.
8. RELATED PARTIES
On December 23, 2004, we 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 its 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 base 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 and six months ended September
30, 2005, rent expense paid to the Landlord was $219,263 and $438,525,
respectively. 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 results of operations and financial
condition of the Company should be read in conjunction with the condensed
consolidated financial statements and the related notes included in Item 1 of
this report, and our Annual Report on Form 10-K (No. 0-28926) for the year ended
March 31, 2005. Operating results for interim periods are not necessarily
indicative of results for an entire year.
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
12
these forward-looking statements that may be made to reflect future events or
circumstances. See "Factors That May Affect Future Operating Results."
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 government 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 207 people as of September 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 our 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 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; (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 our 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
13
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.
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.
LEASE CLASSIFICATION. 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.
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.
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.
14
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 on the balance sheet as investment in
leases and leased equipment 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 collectability is certain, revenue is recognized on an accrual
basis. Where collectability is not reasonably assured, revenue is recognized
upon receipt of payment from the lessee.
RESIDUAL VALUES. Residual values represent our estimated value of the equipment
at the end of the initial lease term. The residual values for direct financing
and sales-type leases are included as part of the investment in direct financing
and sales-type leases. The residual values for operating leases are included in
the leased equipment's net book value and are reported in the investment in
leases and leased equipment. 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 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. In addition, other sources of revenue are derived 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
reseller business unit; (5) settlement fees related to disputes or litigation;
and (6) interest and other miscellaneous income. These revenues are included in
fee and other income in our condensed 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).
15
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 the
accompanying condensed consolidated balance sheets as a component of property
and equipment - net. Capitalized costs, net of amortization, totaled $1,249,864
and $1,255,019 and as of March 31, 2005 and September 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 the accompanying condensed
consolidated balance sheets as a component of other assets. We had $559,319 and
$388,250 of capitalized costs, net of amortization, as of March 31, 2005 and
September 30, 2005, respectively.
RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 2005 Compared
to Three and Six Months Ended September 30, 2004
Total revenues generated by us during the three-month period ended September 30,
2005 were $174,242,648, compared to revenues of $153,185,698 during the
comparable period in the prior fiscal year, an increase of 13.7%. The increase
is primarily the result of increased sales of product and leased equipment.
Total revenues generated by us during the six-month period ended September 30,
2005 were $324,046,519 compared to revenues of $259,884,432 during the
comparable period in the prior fiscal year, an increase of 24.7%. Our revenues
are composed of sales, leases, 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. Sales of product represented 90.1% and 91.5% of total revenue
for the three months ended September 30, 2005 and 2004, respectively. Sales of
product increased 15.5% to $159,408,606 during the three-month period ended
September 30, 2005, as compared to $138,065,002 generated during the
corresponding period in the prior fiscal year. For the six-month period ended
September 30, 2005, sales increased 27.9% to $294,278,450 from $230,033,864
generated during the corresponding period in the prior fiscal year. The increase
was a result of higher sales within 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 9.8% and 9.7% for the three and
six months ended September 30, 2005, respectively, and 10.7% for the three and
six months ended September 30, 2004. Our gross margin on sales of product is
affected by the mix and volume of products sold.
Our lease revenues increased less than 0.1% to $11,916,187 for the three months
ended September 30, 2005, compared with $11,911,090 during the corresponding
period in the prior fiscal year. For the six-month period ended September 30,
2005, lease revenues decreased 3.6% to $23,210,454 compared with $24,066,831
during the corresponding period in the prior fiscal year. This decrease is
primarily due to a decrease in sale-type financing arrangements which are
recognized under Financial Accounting Standard 140.
For the three months ended September 30, 2005, fee and other income decreased
9.1% to $2,917,855 as compared to $3,209,606 in the comparable period in the
prior fiscal year. For the six months ended September 30, 2005, fee and other
income increased 13.4% to $6,557,615 as compared to $5,783,737 in 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 decrease in fee and other
income is primarily attributable to a decrease in license fees of our eECM
product. Our fee and other income includes earnings from certain transactions
16
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 September 30, 2005, cost of sales, product increased
16.5% to $143,741,909 from $123,342,547 in the comparable period in the prior
year. This is primarily attributable to the correlating increase in sales of
product. For the six months ended September 30, 2005, cost of sales, product
increased 29.4% from $205,503,332 to $265,829,803.
Our direct lease costs increased 29.6% and 35.4% to $3,798,228 and $7,594,053
during the three- and six-month periods ended September 30, 2005 as compared to
September 30, 2004. The increase is the result of an increase in lease
depreciation, specifically depreciation on the increased operating lease assets.
Professional and other fees decreased for the three and six months ended
September 30, 2005 by 36.9%, or $1,038,989, and 40.5%, or $1,856,411,
respectively from the same period in the previous year. The decline was
primarily due to the decrease in expenses that we paid to Manchester
Technologies, Inc. for professional services rendered by people that became our
employees in a subsequent period, as well as a transition team that was involved
in the purchase of Manchester Technologies, Inc. Additionally, there was a
decrease in expense related to the Company's pursuing patent-infringement
litigation. In the three-month period ended September 30, 2004 and the six-month
period ended September 30, 2004 the expense related to patent-infringement
litigation was approximately $833,401 and $1,053,625 respectively. In the
three-month period ended September 30, 2005 and the six-month period ended
September 30, 2005 the expense related to patent-infringement litigation was
approximately $590,044 and $808,656 respectively.
Salaries and benefits expenses increased 0.9% and 16.1% to $15,011,667 and
$29,805,239, respectively, during the three- and six-month periods ended
September 30, 2005, as compared to the same period in the previous fiscal year.
These increases are due in part to an increase in benefit costs and an increase
in the average number of employees. We employed approximately 649 people as of
September 30, 2005, as compared to 625 people at September 30, 2004.
Our general and administrative expenses increased 12.2% to $4,975,093 during the
three months ended September 30, 2005, as compared to the same period in the
prior fiscal year. For the six-month period ended September 30, 2005, general
and administrative expenses increased 9.0% to $9,436,582 as compared to the same
period in the prior fiscal year. These increases are largely due to expenses
relating to higher sales and an increase in the number of offices and the number
of employees, due in part to the Manchester Technologies, Inc. acquisition.
Interest and financing costs incurred by us for the three- and six-month periods
ended September 30, 2005 increased 31.8% and 20.8% to $1,714,770 and $3,252,495,
respectively. This resulted from our increasing non-recourse debt portolio from
$109,381,529 on September 30, 2004 to $125,002,488 on September 30, 2005.
Interest and financing costs include interest costs on our lease-specific and
general working capital indebtedness.
Our provision for income taxes decreased to $1,305,917 for the three months
ended September 30, 2005 from $1,428,279 for the three months ended September
30, 2004, reflecting effective income tax rates of 40.5% for the three months
ended September 30, 2005 and 41.0% for the three months ended September 30,
2004. Our provision for income taxes decreased to $2,188,839 for the six-month
period ended September 30, 2005 from $2,939,720 for the six-month period ended
September 30, 2004. This decrease was due to reduced earnings.
The foregoing resulted in a 6.7% decrease in net earnings to $1,918,568 for the
three-month period ended September 30, 2005 as compared to the same period in
the prior fiscal year and a 24.0% decrease in net earnings to $3,215,699 for the
six-month period ended September 30, 2005. Basic and fully diluted earnings per
common share were $0.23 and $0.21 for the three months ended September 30, 2005,
respectively, as compared to $0.23 and $0.22 for the three months ended
September 30, 2004, respectively. Basic and diluted weighted average common
17
shares outstanding for the three months ended September 30, 2005 were 8,474,301
and 9,070,969, respectively. For the three months ended September 30, 2004, the
basic and diluted weighted average shares outstanding were 8,922,104 and
9,252,196, respectively. Basic and fully diluted earnings per common share were
$0.38 and $0.36 for the six months ended September 30, 2005, as compared to
$0.47 and $0.45 for the six months ended September 30, 2004. Basic and diluted
weighted average common shares outstanding for the six months ended September
30, 2005 were 8,509,827 and 9,057,606, respectively. For the six months ended
September 30, 2004, the basic and diluted weighted average shares outstanding
were 8,921,848 and 9,350,598, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended September 30, 2005, we used cash flows in
operating activities of $37,371,295 and used cash flows in investing activities
of $18,294,490. Cash flows generated by financing activities amounted to
$32,588,077 during the same period. The effect of exchange rate changes during
the period generated cash flows of $100,865. The net effect of these cash flows
was a net decrease in cash and cash equivalents of $22,976,843 during the
six-month period. During the same period, the Company's total assets increased
$25,505,880, or 7.1%. The cash balance at September 30, 2005 was $15,874,871 as
compared to $38,851,714 at March 31, 2005.
Our debt financing activities typically provide approximately 80% to 100% of the
purchase price of the equipment purchased by us for lease to its 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 it 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 six-month period ended
September 30, 2005, our lease-related non-recourse debt portfolio increased 8.9%
to $125,002,488.
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 the Company has not yet paid. The
balance of unpaid equipment cost can vary depending on vendor terms and the
timing of lease originations. As of September 30, 2005, we had $10,927,485 of
unpaid equipment cost, as compared to $8,965,022 at March 31, 2005.
Our "Accounts payable - trade" increased 7.1% from $54,751,962 to $58,621,902
due to an increase in sales of product and, consequently, an increase in cost of
goods sold, product from our technology business unit. This increase in
purchases subsequently increased our trade payables.
Our "Accrued expenses and other liabilities" includes deferred income and
amounts collected and payable, such as sales taxes and lease rental payments due
18
to third parties. As of September 30, 2005, we had $17,607,231 of accrued
expenses and other liabilities.
Working capital for our leasing business is provided through a credit facility
which was scheduled to expire on July 21, 2006. On September 26, 2005, we
terminated our $45,000,000 credit facility and simultaneously entered into a
new, coterminous, $35,000,000 credit facility. Participating in this facility
are Branch Banking and Trust Company ($15,000,000) and National City Bank
($20,000,000) as agent. The ability to borrow under this facility is limited to
the amount of eligible collateral at any given time. The credit facility has
full recourse to us and is secured by a blanket lien against all of our assets
such as chattel paper (including leases), receivables, inventory and equipment,
and the common stock of all wholly-owned subsidiaries.
The credit facility contains certain financial covenants and certain
restrictions on, among other things, our ability to make certain investments,
and sell assets or merge with another company. Borrowings under the credit
facility bear interest at London Interbank Offered Rates ("LIBOR") plus an
applicable margin or, at our option, the Alternate Base Rate ("ABR") plus an
applicable margin. The ABR is the higher of the Agent bank's prime rate or
Federal Funds 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 September 30, 2005, we had an
outstanding balance of $6.75 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
September 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. The
principle amounts outstanding of the two components may not exceed, in the
aggregate, $75 million. However, the accounts receivable facility has a sublimit
as described below.
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 manufacturer/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 manufacturer/distributor. If the thirty- to forty-five-day
obligation is not paid timely, interest is then assessed at stated contractual
rates.
The respective floor plan 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 September 30, 2005 September 30, 2005
- ----------------------------------------------------------------------------------------------------------------
GE Distribution Finance Corp. $ 75,000,000 $ 32,978,262 $ 75,000,000 $ 38,219,120
19
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 $20,558,593 and $6,263,471 on this facility
as of September 30, 2005 and March 31, 2005, respectively. The maximum available
that could be borrowed under the accounts receivable facility was $20,000,000
and $15,000,000 as of September 30, 2005 and March 31, 2005, respectively. At
September 30, 2005, GECDF temporarily increased the accounts receivable line to
accomodate the increase in purchases this quarter. Availability under the lines
of credit may be limited by the asset value of equipment we purchase and may be
further limited by certain covenants and terms and conditions of the facilities.
We were in compliance with these covenants as of September 30, 2005.
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 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 September 30, 2005, we repurchased 115,300 shares
of our outstanding common stock for a total of $1,453,960, whereas during the
three months ended September 30, 2004, there were no stock repurchases. During
the six months ended September 30, 2005 and 2004, we repurchased 170,300 and
39,000 shares of our outstanding common stock for $2,076,210 and $492,552,
respectively. Since the inception of the Company's initial repurchase program on
September 20, 2001, and as of September 30, 2005, we had repurchased 2,396,200
shares of our outstanding common stock at an average cost of $10.42 per share
for a total of $24,964,091.
20
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our future quarterly operating results and the market price of our 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 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 IT reseller or software competitor or major
customers or vendors of ours.
Our quarterly results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, reduction in IT spending, our entry
into the e-commerce market, any reduction of expected residual values related to
the equipment under our leases, timing and mix 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.
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 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;
21
- 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 model, 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
- 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 more revenues from our asset
management, procurement and electronic catalog content software, 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 area of our 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 our asset management, procurement and electronic
catalog content software, 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 software
applications may be needed to achieve initial widespread commercial
and continued acceptance of the systems;
- the pricing model may not be acceptable to customers;
- if we are unable to develop and increase volume from our software
applications, 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
22
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 effect our
earnings.
23
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 September 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.
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 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 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.
24
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 discovery is nearly complete. 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. The bulk of discovery is expected to begin in
January 2006. We are rigorously asserting our defense in this lawsuit and
believe that we have no liability to BoA, and that Travelers is responsible for
the costs of defense and any potential judgment.
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)
July 1, 2005 through July 31, 2005 49,300 $ 12.70 49,300 476,890 (5)
August 1, 2005 through August 31, 2005 20,000 $ 12.86 20,000 450,693 (6)
September 1, 2005 through September 30, 2005 46,000 $ 12.76 46,000 409,293 (7)
(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.
25
(5) The share purchase authorization in place for the month ended July 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 July 31, 2005, the remaining
authorized dollar amount to purchase shares was $6,056,503 and, based on
July's average price per share of $12.700, 476,890 represents the maximum
shares that may yet be purchased.
(6) The share purchase authorization in place for the month ended August 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 August 31, 2005, the
remaining authorized dollar amount to purchase shares was $5,796,808 and,
based on August's average price per share of $12.862, 450,693 represents
the maximum shares that may yet be purchased.
(7) The share purchase authorization in place for the month ended September 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 September 30, 2005, the
remaining authorized dollar amount to purchase shares was $5,221,348 and,
based on September's average price per share of $12.757, 409,293 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
On September 22, 2005, the Company held its annual meeting of stockholders. At
the annual meeting, Phillip G. Norton and Bruce M. Bowen were re-elected to the
Board of Directors as Class III Directors to hold office for three years and
until their successors are duly elected and qualified. The votes were cast as
follows:
For Withholding Authority
-----------------------------------------
Phillip G. Norton 8,029,903 251,665
Bruce M. Bowen 8,055,374 226,194
Immediately upon approval of this item, the Company's directors were Phillip G.
Norton, Bruce M. Bowen, Terrence O'Donnell, Milton E. Cooper, Jr., Lawrence S.
Herman, and C. Thomas Faulders III.
Stockholders also voted to ratify the appointment of Deloitte and Touche LLP as
the Company's independent auditors for the Company's fiscal year ending March
31, 2006. The votes were cast as follows:
For Against Abstained
-------------------------------------------------------
8,213,747 67,056 765
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).
26
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).
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).
10.8 Amendment and Restated 1998 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 2003).
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.
27
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: November 14, 2005 /s/ PHILLIP G. NORTON
---------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: November 14, 2005 /s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini
Chief Financial Officer
28