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, 2004
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.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
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 9, 2004, was
8,921,258.
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of March 31, 2004 and June 30, 2004 2
Condensed Consolidated Statements of Earnings, Three Months Ended June 30, 2003 and 2004 3
Condensed Consolidated Statements of Cash Flows, Three Months Ended June 30, 2003 and 2004 4
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information:
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
1
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2004 As of June 30, 2004
------------------------------------------------
ASSETS
Cash and cash equivalents $ 25,155,011 $ 8,755,529
Accounts receivable, net of allowance for doubtful accounts of
$1,584,358 and $1,388,028 as of March 31, 2004 and June
30, 2004, respectively 51,188,640 70,488,274
Notes receivable 51,986 86,095
Inventories 899,748 3,590,763
Investment in leases and leased equipment - net 186,667,141 180,510,036
Property and equipment - net 5,230,473 4,910,259
Goodwill 20,243,310 26,222,765
Other assets 4,765,781 5,082,276
------------------------------------------------
TOTAL ASSETS $ 294,202,090 $ 299,645,997
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 9,993,077 $ 8,976,239
Accounts payable - trade 32,140,670 42,336,030
Salaries and commissions payable 583,934 482,818
Accrued expenses and other liabilities 11,983,798 16,933,911
Income taxes payable - 1,059,367
Recourse notes payable 5,863 2,403,835
Non-recourse notes payable 117,857,208 103,848,036
Deferred tax liability 10,053,226 10,246,330
------------------------------------------------
Total Liabilities 182,617,776 186,286,566
COMMITMENTS AND CONTINGENCIES - -
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;
10,717,242 issued and 8,939,958 outstanding at March 31, 2004
and 10,731,542 issued and 8,915,258 outstanding at June 30, 2004 $ 107,172 $ 107,315
Additional paid-in capital 64,339,988 64,445,799
Treasury Stock, at cost, 1,777,284 and 1,816,284 shares, respectively (17,192,886) (17,685,438)
Retained earnings 64,211,473 66,386,474
Accumulated other comprehensive income -
foreign currency translation adjustment 118,567 105,281
------------------------------------------------
Total Stockholders' Equity 111,584,314 113,359,431
------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,202,090 $ 299,645,997
================================================
See Notes to Condensed Consolidated Financial Statements.
2
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
June 30,
2003 2004
------------------------------------------------
REVENUES
Sales of product $ 65,295,787 $ 91,968,861
Lease revenues 12,375,547 12,155,741
Fee and other income 2,196,184 2,574,131
------------------------------------------------
TOTAL REVENUES 79,867,518 106,698,733
------------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 57,511,924 82,160,785
Direct lease costs 2,348,130 2,676,998
Professional and other fees 516,045 1,764,765
Salaries and benefits 10,147,191 10,798,131
General and administrative expenses 3,816,453 4,219,475
Interest and financing costs 1,746,349 1,392,137
------------------------------------------------
TOTAL COSTS AND EXPENSES 76,086,092 103,012,291
------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,781,426 3,686,442
------------------------------------------------
PROVISION FOR INCOME TAXES 1,478,098 1,511,441
------------------------------------------------
NET EARNINGS $ 2,303,328 $ 2,175,001
================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.24
================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.24 $ 0.23
================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,455,381 8,921,590
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,601,499 9,407,252
See Notes to Condensed Consolidated Financial Statements.
3
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2003 2004
------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 2,303,328 $ 2,175,001
Adjustments to reconcile net earnings to net cash provided by
(used in)operating activities:
Depreciation and amortization 1,650,219 3,293,081
Write-off of non-recourse debt - (402,217)
Increase (decrease) in provision for credit losses 41,569 (196,330)
Deferred taxes 1,003,139 193,104
Payments from lessees directly to lenders (302,847) (1,000,711)
Loss (gain) on disposal of property and equipment 152,776 (4,306)
Changes in:
Accounts receivable (12,963,714) (18,305,032)
Notes receivable (54,357) (34,109)
Inventories (249,722) (2,691,015)
Other assets (383,022) (310,217)
Accounts payable - equipment 757,083 (1,016,838)
Accounts payable - trade (194,154) 10,143,642
Salaries and commissions payable, accrued expenses
and other liabilities 80,527 4,084,882
------------------------------------------------
Net cash used in operating activities (8,159,175) (4,071,065)
------------------------------------------------
Cash Flows From Investing Activities:
Purchases of operating lease equipment (4,155,067) (4,890,867)
Decrease in investment in direct financing and sales-type leases 3,306,168 2,259,486
Purchases of property and equipment (262,453) (352,128)
Proceeds from sale of operating equipment 98,511 134,020
Cash used in acquisitions - (5,000,000)
------------------------------------------------
Net cash used in investing activities (1,012,841) (7,849,489)
------------------------------------------------
4
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(UNAUDITED)
Three Months Ended
June 30,
2003 2004
------------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Non-recourse $ 17,729,162 $ 2,917,525
Repayments:
Non-recourse (10,510,823) (9,394,540)
Recourse (2,736,298) (1,858)
Purchase of treasury stock - (492,552)
Proceeds from issuance of capital stock, net of expenses 48,748 105,954
Net borrowings on lines of credit - 2,399,829
------------------------------------------------
Net cash provided by (used in) financing activities 4,530,789 (4,465,642)
------------------------------------------------
Effect of Exchange Rate Changes on Cash 17,383 (13,286)
------------------------------------------------
Net Decrease in Cash and Cash Equivalents (4,623,844) (16,399,482)
Cash and Cash Equivalents, Beginning of Period 27,784,090 25,155,011
------------------------------------------------
Cash and Cash Equivalents, End of Period $ 23,160,246 $ 8,755,529
================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 941,135 $ 763,834
================================================
Cash paid for income taxes $ 339,762 $ 218,922
================================================
See Notes to Condensed Consolidated Financial Statements.
5
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 (the "Company") included herein have been prepared by the
Company, pursuant to the rules and regulations of the Securities and Exchange
Commission (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, 2004 and 2003, accumulated other comprehensive
income increased (decreased) $13,286 and ($41,925), respectively, resulting in
total comprehensive income of $2,188,287 and $2,261,403, respectively.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K (No. 0-28926) for the year ended March 31, 2004 (the "Company's
2004 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. STOCK-BASED COMPENSATION
As of June 30, 2004, the Company had three stock-based employee compensation
plans. The Company accounts 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 Statement of
Financial Accounting Standards ("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,
2003 2004
-----------------------------------
Net earnings, as reported $ 2,303,328 $ 2,175,001
Stock based compensation expense (595,742) (208,904)
-----------------------------------
Net earnings, pro forma $ 1,707,586 $ 1,966,097
===================================
Basic earnings per share, as reported $ 0.24 $ 0.24
Basic earnings per share, pro forma $ 0.18 $ 0.22
Diluted earnings per share, as reported $ 0.24 $ 0.23
Diluted earnings per share, pro forma $ 0.18 $ 0.21
6
3. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of
March 31, 2004 June 30, 2004
(In Thousands)
------------------------------------------------
Investment in direct financing and sales-type leases-net $ 166,790 $ 157,859
Investment in operating lease equipment-net 19,877 22,651
----------------- -----------------
$ 186,667 $ 180,510
================= =================
The Company's net investment in leases is collateral for non-recourse and recourse equipment notes, if any.
INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of the following:
As of
March 31, 2004 June 30, 2004
(In Thousands)
------------------------------------------------
Minimum lease payments $ 161,008 $ 151,555
Estimated unguaranteed residual value 25,025 24,486
Initial direct costs, net of amortization (1) 2,342 2,175
Less: Unearned lease income (18,440) (17,212)
Reserve for credit losses (3,145) (3,145)
----------------- -----------------
Investment in direct financing and sales-type leases, net $ 166,790 $ 157,859
================= =================
(1) Initial direct costs are shown net of amortization of $2,184 and $2,312 at March 31 and June 30, 2004, 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
month-to-month status. The components of the net investment in operating lease
equipment are as follows:
As of
March 31, 2004 June 30, 2004
(In Thousands)
------------------------------------------------
Cost of equipment under operating leases $ 27,985 $ 32,130
Less: Accumulated depreciation and amortization (8,108) (9,479)
----------------- -----------------
Investment in operating lease equipment, net $ 19,877 $ 22,651
================= =================
4. PROVISION FOR CREDIT LOSSES
As of March 31 and June 30, 2004, the Company's provisions for credit losses
were $4,730,015 and $4,533,683, respectively. The Company's provisions for
credit losses are segregated between our accounts receivable and our lease
assets as follows (in thousands):
Investment in Direct
Accounts Receivable Financing Leases Total
------------------------ ------------------------ ------------------------
Balance April 1, 2003 $ 3,346 $ 3,407 $ 6,753
Provision for credit losses 23 24 47
Recoveries - - -
Write-offs and other (1,784) (286) (2,070)
------------------------ ------------------------ ------------------------
Balance March 31, 2004 1,585 3,145 4,730
------------------------ ------------------------ ------------------------
Bad Debts Expense (158) - (158)
Recoveries 6 - 6
Other (44) - (44)
------------------------ ------------------------ ------------------------
Balance June 30, 2004 $ 1,389 $ 3,145 $ 4,534
======================== ======================== ========================
7
5. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its traditional
financing business unit and its 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. The Company
evaluates segment performance on the basis of segment net earnings.
Both segments utilize the Company's 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 the Company's 2004 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.
Certain revenues, expenses, and assets for the three months ended and as of June
30, 2003 are shown different than as previously reported to conform with the
allocation method used in the quarter ended June 30, 2004 for certain amounts
related to ePlus inc., the parent company.
Financing Technology Sales
Business Unit Business Unit Total
----------------- -------------------- --------------
Three months ended June 30, 2003
Sales of product $ 778,871 $ 64,516,916 $ 65,295,787
Lease revenues 12,375,547 - 12,375,547
Fee and other income 670,902 1,525,282 2,196,184
----------------- -------------------- --------------
Total revenues 13,825,320 66,042,198 79,867,518
Cost of sales 747,801 56,764,123 57,511,924
Direct lease costs 2,348,130 - 2,348,130
Selling, general and administrative expenses 5,437,349 9,042,340 14,479,689
----------------- -------------------- --------------
Segment earnings before interest expense 5,292,040 235,735 5,527,775
Interest expense 1,584,212 162,137 1,746,349
----------------- -------------------- --------------
Earnings before income taxes $ 3,707,828 $ 73,598 $ 3,781,426
================= ==================== ==============
Assets $ 218,130,356 $ 61,484,443 $ 279,614,799
================= ==================== ==============
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) before interest expense 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
================= ==================== ==============
8
6. 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, 2003 and 2004
are as follows:
Three Months Ended
June 30,
2003 2004
----------- -----------
Basic common shares outstanding 9,455,381 8,921,590
Common stock equivalents 146,118 485,662
----------- -----------
Diluted common shares outstanding 9,601,499 9,407,252
=========== ===========
7. COMMITMENTS AND CONTINGENCIES
The Company is not party to any material legal proceedings. 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. BUSINESS COMBINATION
On May 28, 2004, the Company purchased certain fixed assets, customer lists and
contracts, and assumed certain liabilities of Manchester Technologies, Inc. The
purchase was made by ePlus Technology, inc., a wholly-owned subsidiary of ePlus
inc., and will add to our IT reseller and professional services business. The
acquisition will add approximately 125 former Manchester Technologies, Inc.
personnel as well as four established offices in metropolitan New York, South
Florida and Baltimore. The purchase price included $5.0 million in cash and the
assumption of certain liabilities of approximately $1.875 million. The purchase
price allocation has not been finalized as of the date of this publication
because final intangible asset valuations have not been completed. The
accompanying condensed consolidated statement of earnings for the three months
ended June 30, 2004 includes revenues and expenses from Manchester Technologies,
Inc. beginning May 28, 2004.
The following unaudited pro forma combined condensed statements of earnings set
forth the consolidated results of operations for the three months ended June 30,
2004 and 2003 as if the above-described acquisition had occurred at the
beginning of the periods presented. The pro forma results contain Manchester
Technologies, Inc. financial data for the three months ended April 30, 2004 and
2003, respectively. The unaudited pro forma information does not purport to be
indicative of the results that actually would have occurred if the combinations
had been in effect for the three-month periods ended June 30, 2004 and 2003.
Pro forma
Three Months Ended June 30,
2004 2003
-----------------------------
(amounts in thousands, except per share amounts)
Revenue $ 137,591 $ 105,116
Net income 2,779 2,580
Earnings per share $ 0.31 $ 0.27
9
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 the Company's 2004 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, the Company's services, economic conditions, the impact of
competition and pricing, results of financing efforts and other factors
affecting the Company's business that are beyond our control. The Company
undertakes no obligation to, and does 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."
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 currently derive the majority of our revenue from sales and financing of
information technology and other assets. 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 total sales and marketing staff consisted of approximately 202 people as of
June 30, 2004, at our 36 locations, of which 35 are in the United States and 1
in Canada.
On May 15, 2001, we acquired from ProcureNet, Inc. the e-commerce procurement
software asset, products, and software technology for cleaning and categorizing
product descriptions for e-commerce catalogues. On October 10, 2003, the Company
acquired the software business of Digital Paper Corporation, a provider of
document access and collaboration solutions. On May 28, 2004, the Company
purchased certain assets and assumed certain liabilities of Manchester
Technologies, Inc. The acquisition will add 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
4 established offices in metropolitan New York, South Florida and Baltimore.
These combined software products, IT reseller activities and services, and the
associated expenses with these business acquisitions 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 these
acquisitions are included in our technology sales business unit segment, and are
combined with our other sales of IT products and services. Our leasing and
financing activities are included in our financing business unit segment in our
financial statements.
As a result of our acquisitions and changes in the number of sales locations,
the Company's historical results of operations and financial position may not be
indicative of its future performance over time.
10
CRITICAL ACCOUNTING POLICIES
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 fair value of the leased
property and its cost or carrying amount. The equipment subject to such leases
may be obtained in the secondary marketplace, but most frequently is the result
of re-leasing our own portfolio. This profit or loss that is recognized at lease
inception is included in net margin on sales-type leases. For equipment supplied
from our technology sales business unit subsidiaries, the dealer margin is
presented in equipment sales revenue and cost of equipment sales. Interest
earned on the present value of the lease payments and residual value is
recognized over the lease term using the interest method and is included in our
lease revenues.
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 the Company's estimate of residual value. For the periods
subsequent to the lease term, revenue is recognized upon receipt of payment from
the lessee, since collection of such payments is not reasonably assured. Such
revenues recognized were $1,833,141 and $2,140,894 for the three months ended
June 30, 2003 and 2004, respectively.
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.
11
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 an ongoing basis and record any required changes
in accordance with SFAS No. 13. 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 equipment sales revenues and cost of equipment sales when
title is transferred to the buyer. For lease periods subsequent to the initial
term, month-to-month continuation transactions, our policy is to recognize
revenue upon the payment by the lessee because collection of such amounts is not
reasonably assured.
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.
SALES OF PRODUCT. Sales of product includes the following types of transactions:
(1) sales of new or used equipment that 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 the Company with regard to implementation remain, the
sale 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.
SALES OF LEASED EQUIPMENT. Sales of leased equipment consists of sales of
equipment subject to an existing lease under which we are 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.
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 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 reseller business; and (5)
interest and other miscellaneous income. These revenues are included in fee and
other income in our consolidated statements of earnings.
12
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 the Company's lease and accounts receivable portfolios. 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).
CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE. The Company has
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 $1,191,054
and $1,242,315 as of June 30, 2004 and March 31, 2004, 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. The Company had
$954,456 and $780,667 of capitalized costs, net of amortization, as of March 31,
2004 and June 30, 2004 respectively.
RESULTS OF OPERATIONS - Three Months Ended June 30, 2004 Compared to Three
Months Ended June 30, 2003
Total revenues generated by the Company during the three-month period ended June
30, 2004 were $106,698,733 compared to revenues of $79,867,518 during the
comparable period in the prior fiscal year, an increase of 33.6%. The increase
is primarily the result of increased sales of product and leased equipment. The
Company's revenues are composed of sales 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 the Company's technology sales
business unit subsidiaries and represented 99% of total sales revenue for the
three months ended June 30, 2004 and 2003. Sales of product increased 40.8% to
$91,968,861 during the current period compared to $65,295,787 generated during
the comparable period in the prior fiscal year. The increase was a result of
higher sales within our technology sales business unit subsidiaries, some of
which was generated by the acquisition of Manchester Technologies, Inc., several
large purchases by major customers and a general increase in sales from our
pre-Manchester customer base. 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. The
Company realized a gross margin on sales of product of 10.7% and 11.9% for the
three-month periods ended June 30, 2004 and 2003, respectively. The Company's
gross margin on sales of product is affected by the mix and volume of products
sold.
The Company's lease revenues decreased 1.8% to $12,155,741 for the three months
ended June 30, 2004 compared with the corresponding period in the prior fiscal
year. This decrease was due in part to the seasonal nature of government
leasing.
13
For the three months ended June 30, 2004, fee and other income increased 17.2%
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, and interest income. The current
period increase in fee and other income is attributable to an increase in
subscription fees and other fees derived from our eECM solution. The Company's
fee and other income includes earnings from certain transactions that are in the
Company's normal course of business, but there is no guarantee that future
transactions of the same nature, size or profitability will occur. The Company's
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.
The Company's direct lease costs increased 14.0% during the three-month period
ended June 30, 2004 as compared to the same period in the prior fiscal year. The
increase is the result of an increase in lease depreciation, specifically
depreciation on the increased operating lease assets and on the Company's
matured lease portfolio.
The increase in professional and other fees of 242.0%, or $1,248,720, for the
current period over the comparable period in the prior fiscal year, was
primarily the result of increased expenses related to the Company's pursuing
patent infringement litigation as well as an increase in the use of outside
professional services. Professional and other fees include expenses that the
Company paid to Manchester Technologies, Inc. for professional services rendered
by sixty-five people that will be hired in a subsequent period and a transition
team. As a result of the acquisition, the Company hired approximately 60 people
on June 1, 2004.
Salaries and benefits expenses increased 6.41% during the three-month period
ended June 30, 2004 over the same period in the prior year. Salaries and
benefits expense increased due to an increase in benefit costs and an increase
in the average number of employees during the three months ended June 30, 2004
as compared to the three months ended June 30, 2003. The Company employed
approximately 573 people as of June 30, 2004, including 60 employees from the
Manchester acquisition, as compared to 565 people at June 30, 2003.
The Company's general and administrative expenses increased 10.6% to $4,219,475
during the three months ended June 30, 2004, as compared to the same period in
the prior fiscal year. The increase is largely due to a higher sales volume and
an increase in the number of offices and employees, due in part to the
Manchester Technologies, Inc. acquisition.
Interest and financing costs incurred by the Company for the three months ended
June 30, 2004 decreased 20.3% due to decreased borrowing under the Company's
lines of credit and because our weighted average interest rate on new
lease-related non-recourse debt decreased during the three months ended June 30,
2004, as compared to the same period in the prior fiscal year. Interest and
financing costs relate to interest costs on the Company's indebtedness, both
lease-specific and general working capital. Payments for interest costs on the
majority of the Company's non-recourse and certain recourse notes are typically
remitted directly to the lender by the lessee.
The Company's provision for income taxes increased to $1,511,441 for the three
months ended June 30, 2004 from $1,478,098 for the three months ended June 30,
2003, reflecting effective income tax rates of 41.0% and 39.0% for the three
months ended June 30, 2004 and 2003, respectively. This increase was due in part
to individual states' treatment of bonus depreciation available in fiscal year
2004.
The foregoing resulted in a 5.6% decrease in net earnings for the three-month
period ended June 30, 2004 as compared to the same period in the prior fiscal
year. Basic and fully diluted earnings per common share were $0.24 and $0.23 for
the three months ended June 30, 2004, respectively, as compared to $0.24 and
$0.24 for the three months ended June 30, 2003, respectively. Basic and diluted
weighted average common shares outstanding for the three months ended June 30,
2004 were 8,921,590 and 9,407,252 respectively. For the three months ended June
30, 2003, the basic and diluted weighted average shares outstanding were
9,455,381 and 9,601,499, respectively.
14
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended June 30, 2004, the Company used cash flows
provided by operating activities of $4,071,065 and used cash flows from
investing activities of $7,849,489. Cash flows used in financing activities
amounted to $4,465,642 during the same period. The effect of exchange rate
changes during the period used cash flows of $13,286. The net effect of these
cash flows was a net decrease in cash and cash equivalents of $16,399,482 during
the three-month period. During the same period, the Company's total assets
increased $5,443,907 or 1.8%. The cash balance at June 30, 2004 was $8,755,529
as compared to $25,155,011 at March 31, 2004.
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flows from its
operations, the sale of the equipment leased to third parties, or other internal
means. Although the Company expects that the credit quality of its leases and
its 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 the Company's leasing
activities has principally been provided by non-recourse and recourse
borrowings. Historically, the Company has 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. Recently, the Company has funded its leasing activities
with Bank of America Vendor Finance, Inc. (including Fleet Business Credit LLC),
De Lage Landen Financial Services, Inc., Citizens Leasing Corporation, Fifth
Third Bank, GE Capital Corporation, Hitachi Capital America Corporation, JP
Morgan Leasing, Inc, and Wells Fargo Equipment Finance, Inc., among others.
During the three-month period ended June 30, 2004, the Company's lease related
non-recourse debt portfolio decreased 11.9% to $103,848,036.
Whenever possible and desirable, the Company arranges 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. The
Company generally retains customer control and operational services, and has
minimal residual risk. The Company usually preserves 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. We actively sell or finance
our equity investment with Bank of America, Fleet Business Credit Corporation
and GE Capital Corporation, among others.
The Company's "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 June 30, 2004, the Company had
$8,976,239 of unpaid equipment cost, as compared to $9,993,077 at March 31,
2004.
The Company's "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, 2004, the
Company had $16,933,911 of accrued expenses and other liabilities.
15
Working capital for our leasing business is provided through a $45,000,000
credit facility expiring on July 21, 2006. Participating in this facility are
Branch Banking and Trust Company, Bank of America, and National City Bank as
agent. Each bank has committed $15,000,000 to the facility. The ability to
borrow under this facility is limited to the amount of eligible collateral at
any given time. The credit facility is secured by certain of the Company's
assets such as chattel paper (including leases), receivables, inventory, and
equipment. In addition, we have entered into pledge agreements for the stock of
each of our Subsidiaries. The credit facility contains certain financial
covenants and certain restrictions on, among other things, the Company's ability
to make certain investments, and sell assets or merge with another company. As
of June 30, 2004, the Company had an outstanding balance of $500,000. 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 interest rates charged on borrowings under the National City Bank facility
are the higher of the LIBOR interest rate plus 1.75% to 2.50%, or the higher of
the Federal Funds Rate plus 0.5% to 0.75% or prime rate. The availability of the
credit facility is subject to a borrowing base formula that consists of
inventory, receivables, purchased assets, and leases. Availability under the
credit facility may be limited by the asset value of 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 the following: minimum tangible net worth; cash flow coverage
ratios; maximum debt-to-equity ratio; maximum amount of guarantees of subsidiary
obligations; mergers; acquisitions; and asset sales. The Company was in
compliance with said covenants as of June 30, 2004.
ePlus Technology has a separate credit facility from GE Commercial Distribution
Finance Corporation ("GECDF") to finance its working capital requirements for
inventories and accounts receivable. The traditional business of ePlus
Technology as a seller of computer technology and related peripherals and
software products is financed through an agreement known as "floor planning"
financing 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
planning 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. On June 28, 2004, the Company modified its
floor planning agreement with GECDF to increase the credit limit to $50,000,000
from existing $26,000,000.
The respective floor planning inventory agreement maximum credit limits and
actual outstanding balances were as follows:
Credit Limit at Balance as of March Credit Limit at Balance as of
Floor Plan Supplier March 31, 2004 31, 2004 June 30, 2004 June 30, 2004
- -----------------------------------------------------------------------------------------------------------
GE Distribution Finance Corp. $ 26,000,000 $ 21,637,077 $ 50,000,000 $ 32,137,980
The facility provided by GE Distribution Finance Corporation requires a guaranty
of up to $10,500,000 by ePlus inc. The loss of the GE Distribution Finance
Corporation floor planning facilities could have a material adverse effect on
our future results as we currently rely on these facilities for daily working
capital and liquidity for our technology sales business and operational accounts
payable functions.
In addition to the floor planning financing, ePlus Technology, inc. has an
accounts receivable facility through GE Distribution Finance Corporation with a
maximum amount that can be borrowed of $15,000,000. As of June 30, 2004 there
was a $1,899,829 outstanding balance on this facility. As of March 31, 2004, the
maximum available that could be borrowed under the accounts receivable facility
was $15,000,000 and there was no outstanding balance. Availability under the
lines of credit may be limited by the asset value of equipment purchased by the
Company and may be further limited by certain covenants and terms and conditions
of the facilities. The Company was in compliance with said covenants as of June
30, 2004.
16
In the normal course of business, the Company may provide certain customers with
performance guarantees, which are generally backed by surety bonds. In general,
the Company would only be liable for the amount of these guarantees in the event
of default in the performance of our obligations, the probability of which is
remote in management's opinion. The Company is in compliance with the
performance obligations under all service contracts for which there is a
performance guarantee, and any liability incurred in connection with these
guarantees would not have a material adverse effect on the Company's
consolidated results of operations or financial position. In addition, the
Company has other guarantees that represent parent guarantees in support of the
ePlus Technology, inc. floor planning and accounts receivable financing up to
$10.5 million.
On September 20, 2001, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of its outstanding common stock for a maximum
of $5,000,000 over a period of time ending no later than September 20, 2002. On
October 4, 2002, another stock repurchase program previously authorized by the
Company's Board of Directors became effective. This program authorized the
repurchase of up to 3,000,000 shares of the Company's outstanding common stock
over a period of time ending no later than October 3, 2003 and is limited to a
cumulative purchase amount of $7,500,000. On October 1, 2003, the Company's
Board of Directors authorized another stock repurchase program for the
repurchase of up to 3,000,000 shares of the Company's outstanding common stock
over a period of time ending September 30, 2004, with a cumulative purchase
maximum of $7,500,000. On May 5, 2004, the Company's Board of Directors approved
an increase in cumulative purchase maximum amount from $7,500,000 to
$12,000,000.
During the three months ended June 30, 2004, the Company repurchased 39,000
shares of its outstanding common stock for a total of $492,552. During the three
months ended June 30, 2003, no such repurchase occurred. Since the inception of
the Company's initial repurchase program on September 20, 2001, and as of June
30, 2004, the Company had repurchased 1,816,284 shares of its outstanding common
stock at an average cost of $9.74 per share for a total of $17,685,438. Of the
shares repurchased, 331,551 shares were repurchased at a price of $5.87 per
share as a result of a settlement that occurred in August, 2002.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's 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 the Company's 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 major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, its entry into the
e-commerce market, any reduction of expected residual values related to the
equipment under the Company's 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 the sale by the Company of
equipment in its 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.
The Company believes that comparisons of quarterly results of its 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 report 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. The Company's 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.
17
Our traditional businesses of equipment leasing and financing and technology
sales have the following risks, among others, which are described in the
Company's 2004 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; and
- inventory and accounts receivable financing may not be available.
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 the Company's ability to:
- increase the total number of users of eECM services;
- adapt to meet changes in its markets and competitive developments; and
- continue to update its technology to enhance the features and
functionality of its 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, the Company expects to derive a significant portion of its
revenues from its eECM business model, which is unproven. The Company expects to
incur expenses that may negatively impact profitability. The Company also
expects 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, the Company may incur significant expenses, which may
have a material adverse effect on the future operating results of the Company as
a whole.
Broad and timely acceptance of the eECM services, which is important to the
Company's 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 widespread commercial initial and
continued acceptance of the system;
- the pricing model may not be acceptable to customers;
- if the Company is unable to develop and increase volume from our eECM
services, it is unlikely that it 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 the Company's solution;
- the Company's ability to adapt to a new market that is characterized
by rapidly changing technology, evolving industry standards, new
product announcements and established competition;
- we may be unable to protect our intellectual property rights or face
claims from third parties for infringement of their products.
18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the Company's liabilities are non-recourse,
fixed-interest-rate instruments, the Company is 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 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 Distribution Finance Corporation
facilities bear interest at a market-based variable rate, based on a rate
selected by the Company and determined at the time of borrowing. If the amount
borrowed is not paid at the end of the rate period, the rate is reset in
accordance with the Company's selection and changes in market rates. Due to the
relatively short nature of the interest rate periods, we do not expect our
operating results or cash flows to be materially affected by changes in market
interest rates. As of June 30, 2004, the aggregate fair value of our recourse
borrowings approximated their carrying value.
During the year ended March 31, 2003, the Company began transacting business in
Canada. As a result, the Company has entered into lease contracts and
non-recourse, fixed interest rate financing denominated in Canadian Dollars. To
date, Canadian operations have been insignificant and the Company believes that
potential fluctuations in currency exchange rates will not have a material
effect on its 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"), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer along with the Company's Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the quarter covered by this
report. Based upon that evaluation, the Company's Chief Executive Officer along
with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in alerting them, on a timely
basis, to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings. There have been no significant changes in the Company's internal
controls over financial reporting during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits 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 the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 26, 2004 the Company filed a complaint against Ariba, Inc. in the United
States District Court for the Eastern District of Virginia. The complaint
alleges that Ariba, Inc. used or sold products, methods, processes, services
and/or systems that infringe on certain of the Company's patents. The Company is
seeking injunctive relief and an unspecified amount of monetary damages.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
PURCHASES OF OUR COMMON STOCK
The following table provides information regarding our purchases of ePlus inc.
Common Stock during the quarter ended June 30, 2004:
Total number of Maximum number
Total number shares purchased of shares that may
of shares Average as part of yet be purchased
purchased price per publicly announced under the
Period (1) share plans or programs plans or programs
- -----------------------------------------------------------------------------------------------------------------------
April 1, 2004 through April 30, 2004 39,000 $ 12.63 39,000 - (2)
May 1, 2004 through May 31, 2004 - $ - - 393,681 (3)
June 1, 2004 through June 30, 2004 - - - 391,697 (4)
(1) All shares acquired were in open-market purchases.
(2) The share purchase authorization in place for the month ended April 30, 2004 has purchase limitations on both
the number of shares (3,000,000) and a total dollar cap ($7,500,000). As of April 30, 2004, the remaining
authorized dollar amount to purchase shares was $0. The average price per share is based on the average purchase
price during the month of April 2004.
(3) The share purchase authorization in place for the quarter ended June 30, 2004 has purchase limitations on both
the number of shares (3,000,000) and a total dollar cap ($12,000,000). As of May 31, 2004, the remaining
authorized dollar amount to purchase shares was $4,430,094 and, based on May's average price per share of $11.253,
393,681 represents the maximum number of shares that may yet be purchased.
(4) The share purchase authorization in place for the quarter ended June 30, 2004 has purchase limitations on both the
number of shares (3,000,000) and a total dollar cap ($12,000,000). As of June 30, 2004, the remaining
authorized dollar amount to purchase shares was $4,430,094 and, based on June's average price per share of $11.31,
391,697 represents the maximum number of 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
20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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).
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.
(b) Reports on Form 8-K
On April 2, 2004, the Company furnished a Current Report on Form 8-K enclosing documents amending an existing credit
facility between ePlus Technology, inc., a wholly owned subsidiary of ePlus inc., and GE Commercial Distribution Finance
Corporation.
On May 7, 2004, the Company furnished a Current Report on Form 8-K enclosing a press release reporting the authorization
by the Board of Directors of an increase in the cumulative maximum purchase amount of outstanding common stock of the
Company from $7,500,000 to $12,000,000.
On May 28, 2004, the Company furnished a Current Report on Form 8-K enclosing the asset purchase and sale agreement, and
a press release reporting the acquisition by the Company of certain assets and liabilities of Manchester Technologies,
Inc.
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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 16, 2004 /s/ PHILLIP G. NORTON
----------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: August 16, 2004 /s/ STEVEN J. MENCARINI
----------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
22