SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 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.)
13595 Dulles Technology Drive, Herndon, VA 20171-3413
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 984-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ___ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ___] No [ X ]
The number of shares of common stock outstanding as of November 9, 2004, was
8,954,258.
ePlus inc.
Quarterly Report on Form 10-Q/A
For the Quarter Ended September 30, 2004
Introductory Note
This amendment is being filed to reflect the restatement of the Company's
condensed consolidated financial statements as discussed in Note 9 thereto and
other information related to such restated financial statements. Except for
Items 1, 2, and 4 of Part I and Item 6 of Part II, no other information included
in the original Form 10-Q is amended by this Form 10-Q/A.
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited (As Restated):
Condensed Consolidated Balance Sheets as of March 31, 2004 and September 30, 2004 2
Condensed Consolidated Statements of Earnings, Three Months Ended September 30, 2003 and 2004 3
Condensed Consolidated Statements of Earnings, Six Months Ended September 30, 2003 and 2004 4
Condensed Consolidated Statements of Cash Flows, Six Months Ended September 30, 2003 and 2004 5
Notes to 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 25
Item 4. Controls and Procedures 25
Part II. Other Information:
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
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 27
Signatures 28
-1-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2004 As of September 30, 2004
(1)
-----------------------------------------------
ASSETS
Cash and cash equivalents $ 25,155,011 $ 14,107,771
Accounts receivable, net of allowance for doubtful
accounts of $1,584,358 and $2,011,073 as of March
31, 2004 and September 30, 2004, respectively 51,188,640 99,211,485
Notes receivable 51,986 349,988
Inventories 899,748 5,864,713
Investment in leases and leased equipment - net 186,667,141 198,733,221
Property and equipment - net 5,230,473 4,524,322
Goodwill 20,243,310 26,427,485
Other assets 4,765,781 4,476,531
-----------------------------------------------
TOTAL ASSETS $ 294,202,090 $ 353,695,516
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 9,993,077 $ 20,228,996
Accounts payable - trade 32,140,670 58,278,525
Salaries and commissions payable 583,934 1,021,787
Accrued expenses and other liabilities 11,983,798 20,025,696
Income taxes payable - 123,411
Recourse notes payable 5,863 18,005,274
Non-recourse notes payable 117,857,208 109,381,529
Deferred tax liability 10,053,226 10,968,843
-----------------------------------------------
Total Liabilities 182,617,776 238,034,061
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 10,759,142
issued and 8,942,858 outstanding at September 30, 2004 $ 107,172 $ 107,591
Additional paid-in capital 64,339,988 64,645,092
Treasury Stock, at cost, 1,777,284 and 1,816,284 shares, respectively (17,192,886) (17,685,438)
Retained earnings 64,211,473 68,441,801
Accumulated other comprehensive income -
foreign currency translation adjustment 118,567 152,409
-----------------------------------------------
Total Stockholders' Equity 111,584,314 115,661,455
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,202,090 $ 353,695,516
===============================================
See Notes to Condensed Consolidated Financial Statements.
(1) As restated, see Note 9.
-2-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
September 30,
2003 2004
(1)
-----------------------------------------------
REVENUES
Sales of product $ 70,380,144 $ 138,065,002
Lease revenues 12,910,616 11,911,090
Fee and other income 2,345,971 3,209,606
-----------------------------------------------
TOTAL REVENUES 85,636,731 153,185,698
-----------------------------------------------
COSTS AND EXPENSES
Cost of sales, product $ 62,364,436 $ 123,342,547
Direct lease costs 2,396,770 2,930,271
Professional and other fees 820,813 2,815,485
Salaries and benefits 9,999,685 14,877,568
General and administrative expenses 3,662,850 4,435,573
Interest and financing costs 1,826,595 1,300,648
-----------------------------------------------
TOTAL COSTS AND EXPENSES 81,071,149 149,702,092
-----------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 4,565,582 3,483,606
-----------------------------------------------
PROVISION FOR INCOME TAXES 1,860,705 1,428,279
-----------------------------------------------
NET EARNINGS $ 2,704,877 $ 2,055,327
===============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.29 $ 0.23
===============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.27 $ 0.22
===============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,466,651 8,922,104
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,179,738 9,252,196
See Notes to Condensed Consolidated Financial Statements.
(1) As restated, see Note 9.
-3-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Six Months ended
September 30,
2003 2004
(1)
-----------------------------------------------
REVENUES
Sales of product $ 135,675,931 $ 230,033,864
Lease revenues 25,286,163 24,066,831
Fee and other income 4,542,155 5,783,737
-----------------------------------------------
TOTAL REVENUES 165,504,249 259,884,432
-----------------------------------------------
COSTS AND EXPENSES
Cost of sales, product $ 119,876,360 $ 205,503,332
Direct lease costs 4,744,900 5,607,270
Professional and other fees 1,336,858 4,580,250
Salaries and benefits 20,146,877 25,675,699
General and administrative expenses 7,479,303 8,655,049
Interest and financing costs 3,572,943 2,692,785
-----------------------------------------------
TOTAL COSTS AND EXPENSES 157,157,241 252,714,385
-----------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 8,347,008 7,170,047
-----------------------------------------------
PROVISION FOR INCOME TAXES 3,338,803 2,939,720
-----------------------------------------------
NET EARNINGS $ 5,008,205 $ 4,230,327
===============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.53 $ 0.47
===============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.50 $ 0.45
===============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,461,047 8,921,848
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,047,323 9,350,598
See Notes to Condensed Consolidated Financial Statements.
(1) As restated, see Note 9.
-4-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
2003 2004
(1) (1)
-----------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 5,008,205 $ 4,230,327
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,014,284 6,201,329
Write-off of non-recourse debt - (489,607)
Provision for credit losses 138,275 285,563
Deferred taxes 1,759,111 915,617
Payments from lessees directly to lenders (897,297) (2,086,250)
Loss (gain) on disposal of property and equipment 187,692 (3,765)
Loss (gain) on disposal of operating lease equipment 138,160 (351,119)
Changes in:
Accounts receivable (15,190,155) (47,510,136)
Notes receivable (17,397) (298,002)
Inventories (728,555) (4,964,965)
Investment in leases and leased equipment - net (3,943,194) (13,610,488)
Other assets (456,507) 90,809
Accounts payable - equipment 2,900,923 10,235,919
Accounts payable - trade 1,572,886 26,086,136
Salaries and commissions payable, accrued
expenses and other liabilities 313,356 6,779,680
-----------------------------------------------
Net cash used in operating activities $ (5,200,213) $ (14,488,952)
-----------------------------------------------
Cash Flows From Investing Activities:
Purchases of operating lease equipment $ (11,360,883) $ (9,575,281)
Purchases of property and equipment (932,604) (622,403)
Proceeds from sale of operating lease equipment 153,010 563,764
Cash used in acquisitions - (5,000,000)
-----------------------------------------------
Net cash used in investing activities $ (12,140,477) $ (14,633,920)
-----------------------------------------------
-5-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(UNAUDITED)
Six Months Ended
September 30,
2003 2004
(1) (1)
-----------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Non-recourse $ 45,495,688 $ 24,741,606
Repayments:
Non-recourse (29,376,795) (24,512,197)
Recourse (2,736,298) (1,858)
Purchase of treasury stock (2,278,747) (492,552)
Proceeds from issuance of capital stock, net of expenses 503,234 305,523
Net borrowings on lines of credit 607,500 18,001,268
-----------------------------------------------
Net cash provided by financing activities 12,214,582 18,041,790
-----------------------------------------------
Effect of Exchange Rate Changes on Cash 51,321 33,842
-----------------------------------------------
Net Decrease in Cash and Cash Equivalents (5,074,787) (11,047,240)
Cash and Cash Equivalents, Beginning of Period 27,784,090 25,155,011
-----------------------------------------------
Cash and Cash Equivalents, End of Period $ 22,709,303 $ 14,107,771
===============================================
Supplemental Disclosures of Cash-Flow Information:
Cash paid for interest $ 1,773,544 $ 1,411,684
===============================================
Cash paid for income taxes $ 312,353 $ 1,174,723
===============================================
See Notes To Condensed Consolidated Financial Statements.
(1) As restated, see Note 9.
-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 (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 six months ended September 30, 2004 and 2003, accumulated other
comprehensive income (decreased) increased ($33,842) and $7,987, respectively,
resulting in total comprehensive income of $4,196,485 and $5,016,192,
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. RECLASSIFICATION OF CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Based on concerns raised by the staff of the Securities and Exchange Commission
("SEC") in guidance posted on the SEC website on February 15, 2005 related to
the previous presentation of the cash flow effects of long-term customer
receivables, including sales-type lease receivables, management has determined
it is appropriate to change the classification of all cash flows related to its
direct financing and sales-type lease transactions within the condensed
consolidated statements of cash flows. When the Company finances equipment
relating to direct financing and sales-type lease transactions, generally no
cash is initially received from the customer and, therefore, the sale is
recorded in the investment in lease receivables. Increases in investment in
lease receivables due to new sales and decreases due to cash payments are both
reflected in operating activities. All intercompany transactions have been
eliminated and, therefore, there are no intercompany cash flows reflected in the
condensed consolidated statements of cash flows.
Historically, the Company classified the cash flows from direct financing and
sales-type leases as investing activities in the condensed consolidated
statement of cash flows. The Company is now classifying these cash flows as
operating activities in the condensed consolidated statements of cash flows.
Therefore, no cash related to direct financing or sales-type leases is
classified as investing activities.
-7-
The condensed consolidated statement of cash flows has been adjusted to reflect
the reclassification of these cash flows as investing activities as follows:
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, Six Months Ended September 30,
2003 2004
As Previously As Previously
Reported As Restated Reported As Restated
--------------- ------------- --------------- -------------
Cash Flows From Operating Activities
Investment in leases and lesed equipment - net $ - $ (3,943,194) $ - $ (13,610,488)
Net cash used in operating activities (347,706) (5,200,213) (527,345) (14,488,952)
Cash Flows from Investing Activities
Increase in investment in direct financing and
sales-type leases - net (3,943,194) - (13,610,488) -
Net cash used in investing activities (16,992,984) (12,140,477) (28,595,527) (14,633,920)
In addition, in performing the reclassifications required by the SEC guidance as
described above, the Company also discovered certain amounts relating to
property and equipment, and operating leases which needed to be reclassified
between operating and investing activities. This correction increased net cash
used in operating activities and decreased net cash used in investing activities
by $909,313 and $351,119 for the six months ended September 30, 2003 and 2004,
respectively (see Note 9). Furthermore, certain amounts related to its
borrowings on lines of credit, which are included in financing activities, were
presented showing borrowings and repayments separately and are now presented
net.
3. STOCK-BASED COMPENSATION
As of September 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 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)
2003 2004 2003 2004
---------------- ---------------- ---------------- ----------------
Net earnings, as reported $ 2,704,877 $ 2,055,327 $ 5,008,205 $ 4,230,327
Stock-based compensation expense (632,394) (235,942) (1,264,788) (471,884)
---------------- ---------------- ---------------- ----------------
Net earnings, pro forma $ 2,072,483 $ 1,819,385 $ 3,743,417 $ 3,758,443
================ ================ ================ ================
Basic earnings per share, as reported $0.29 $0.23 $0.53 $0.47
Basic earnings per share, pro forma $0.22 $0.20 $0.40 $0.42
Diluted earnings per share, as reported $0.27 $0.22 $0.50 $0.45
Diluted earnings per share, pro forma $0.20 $0.20 $0.37 $0.40
-8-
Under SFAS No. 123, the fair value of stock-based awards to employees is derived
through the use of option-pricing models that require a number of subjective
assumptions. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Six Months Ended
September 30,
2003 2004
---------------- ----------------
Options granted under the Incentive
Stock-Option Plan:
Expected life of option 5 years 5 years
Expected stock price volatility 70.46% 71.18%
Expected dividend yield 0% 0%
Risk-free interest rate 2.96% 3.39%
4. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of
March 31, 2004 September 30, 2004
(In Thousands)
-------------------------------------------------
Investment in direct financing and sales-type leases-net $ 166,790 $ 173,530
Investment in operating lease equipment-net 19,877 25,203
-------------------------------------------------
$ 186,667 $ 198,733
=================================================
The Company's net investment in leases is collateral for non-recourse and
recourse equipment notes.
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 September 30, 2004
(In Thousands)
-------------------------------------------------
Minimum lease payments $ 161,008 $ 168,710
Estimated unguaranteed residual value 25,025 24,688
Initial direct costs, net of amortization (1) 2,342 2,073
Less: Unearned lease income (18,440) (18,796)
Reserve for credit losses (3,145) (3,145)
-------------------------------------------------
Investment in direct financing and sales-type leases, net $ 166,790 $ 173,530
=================================================
(1) Initial direct costs are shown net of amortization of $2,184 and $2,304 at
March 31 and September 30, 2004, respectively.
INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating lease equipment 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 September 30, 2004
(In Thousands)
-------------------------------------------------
Cost of equipment under operating leases $ 27,985 $ 36,264
Less: Accumulated depreciation and amortization (8,108) (11,061)
-------------------------------------------------
Investment in operating lease equipment, net $ 19,877 $ 25,203
=================================================
-9-
5. PROVISION FOR CREDIT LOSSES
As of March 31 and September 30, 2004, the Company's provisions for credit
losses were $4,730,015 and $5,156,728, respectively. The Company's provisions
for credit losses are segregated between our accounts receivable and our lease
assets as follows (in thousands):
Accounts Investment in Direct-
Receivable Financing Leases Total
-------------------- ----------------------------- -------------------
Balance April 1, 2003 $ 3,346 $ 3,407 $ 6,753
Provision for bad debts 23 24 47
Write-offs and other (1,785) (285) (2,070)
-------------------- ----------------------------- -------------------
Balance March 31, 2004 1,584 3,146 4,730
-------------------- ----------------------------- -------------------
Provision for bad debts 469 469
Write-offs and other (42) (42)
-------------------- ----------------------------- -------------------
Balance September 30, 2004 $ 2,011 $ 3,146 $ 5,157
==================== ============================= ===================
6. 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 six months ended and as of
September 30, 2003 are shown differently than as previously reported to conform
with the allocation method used in the quarter ended September 30, 2004 for
certain amounts related to ePlus inc., the parent company.
-10-
Financing Technology Sales
Business Unit Business Unit Total
------------------ ---------------------- -------------------
Three months ended September 30, 2003
Sales of product $ 640,306 $ 69,739,838 $ 70,380,144
Lease revenues 12,910,616 - 12,910,616
Fee and other income 738,698 1,607,273 2,345,971
------------------ ---------------------- -------------------
Total revenues 14,289,620 71,347,111 85,636,731
Cost of sales 532,053 61,832,383 62,364,436
Direct lease costs 2,396,770 - 2,396,770
Selling, general and administrative expenses 5,894,834 8,588,514 14,483,348
------------------ ---------------------- -------------------
Segment earnings 5,465,963 926,214 6,392,177
Interest expense 1,759,100 67,495 1,826,595
---------------------------------------------------------------------
Earnings before income taxes $ 3,706,863 $ 858,719 $ 4,565,582
=====================================================================
Assets as of September 30, 2003 $ 229,155,873 $ 65,186,766 $ 294,342,639
=====================================================================
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 483,753 2,725,853 3,209,606
-------------------- ---------------------- -------------------
Total revenues 12,938,920 140,246,778 153,185,698
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 5,637,582 16,491,044 22,128,626
-------------------- ---------------------- --------------------
Segment earnings 3,610,302 1,173,952 4,784,254
Interest expense 1,162,294 138,354 1,300,648
---------------------------------------------------------------------
Earnings before income taxes $ 2,448,008 $ 1,035,598 $ 3,483,606
=====================================================================
Assets as of September 30, 2004 $ 236,581,119 $ 117,114,397 $ 353,695,516
=====================================================================
Six months ended September 30, 2003
Sales of product $ 1,419,177 $ 134,256,754 $ 135,675,931
Lease revenues 25,286,163 - 25,286,163
Fee and other income 1,409,599 3,132,556 4,542,155
-------------------- ---------------------- --------------------
Total revenues 28,114,939 137,389,310 165,504,249
Cost of sales 1,279,855 118,596,505 119,876,360
Direct lease costs 4,744,900 - 4,744,900
Selling, general and administrative expenses 11,332,183 17,630,855 28,963,038
-------------------- ---------------------- --------------------
Segment earnings 10,758,001 1,161,950 11,919,951
Interest expense 3,404,088 168,855 3,572,943
---------------------------------------------------------------------
Earnings before income taxes $ 7,353,913 $ 993,095 $ 8,347,008
=====================================================================
Assets as of September 30, 2003 $ 229,155,873 $ 65,186,766 $ 294,342,639
=====================================================================
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 1,435,612 4,348,125 5,783,737
-------------------- ---------------------- --------------------
Total revenues 27,243,247 232,641,185 259,884,432
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 11,053,835 27,857,163 38,910,998
-------------------- ---------------------- ---------------------
Segment earnings 8,955,894 906,938 9,862,832
Interest expense 2,565,961 126,824 2,692,785
---------------------------------------------------------------------
Earnings before income taxes $ 6,389,933 $ 780,114 $ 7,170,047
=====================================================================
Assets as of September 30, 2004 $ 236,581,119 $ 117,114,397 $ 353,695,516
=====================================================================
-11-
7. 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,
2003 and 2004 are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Basic common shares outstanding 9,466,651 8,922,104 9,461,047 8,921,848
Common stock equivalents 713,087 330,092 86,276 428,750
------------ ------------- ------------ ------------
Diluted common shares outstanding 10,179,738 9,252,196 10,047,323 9,350,598
============ ============= ============ ============
8. COMMITMENTS AND CONTINGENCIES
The Company is not a defendant in 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.
9. RESTATEMENT OF LEASE REVENUES AND CASH FLOWS
Subsequent to the issuance of the Company's September 30, 2004 financial
statements on Form 10-Q, the Company's management determined that an error was
made in recording lease revenues. As a result of this error and its effects, the
condensed balance sheet, statements of earnings and statement of cash flows have
been restated from the amounts previously reported. The correction reduced the
net earnings from $2,493,931 to $2,055,327 for the three months ended September
30, 2004 and from $4,668,931 to $4,230,327 for the six months ended September
30, 2004. Amounts have been restated as follows:
Condensed consolidated balance sheet
At September 30, 2004
As Previously
Reported As Restated
--------------- --------------
Notes receivable $ 1,093,383 $ 349,988
Total assets 354,438,911 353,695,516
Income taxes payable 428,202 123,411
Total liabilities 238,338,852 238,034,061
Retained earnings 68,880,405 68,441,801
Total stockholders' equity 116,100,059 115,661,455
Total liabilities and stockholders' equity 354,438,911 353,695,516
Condensed consolidated statements of earnings
For the Three Months Ended For the Six Months Ended
September 30, 2004 September 30, 2004
As Previously As Previously
Reported As Restated Reported As Restated
--------------- -------------- --------------- --------------
Lease revenues $ 12,654,485 $ 11,911,090 $ 24,810,226 $ 24,066,831
Total revenues 153,929,093 153,185,698 260,627,827 259,884,432
Earnings before provision for income taxes 4,227,001 3,483,606 7,913,442 7,170,047
Provision for income taxes 1,733,070 1,428,279 3,244,511 2,939,720
Net earnings 2,493,931 2,055,327 4,668,931 4,230,327
Net earnings per common share - basic 0.28 0.23 0.52 0.47
Net earnings per common share - diluted 0.27 0.22 0.50 0.45
Condensed consolidated statement of cash flows
For the Six Months Ended
September 30, 2004
As Previously
Reported As Restated
--------------- --------------
Cash flows from operating activities:
Net earnings $ 4,668,931 $ 4,230,327
Changes in other receivables (1,041,397) (298,002)
Changes in salaries and commissions payable,
accrued expenses and other liabilities 7,084,471 6,779,680
-12-
In addition, in performing the reclassifications required by the SEC guidance as
described in Note 2, the Company also discovered certain amounts relating to
property and equipment, and operating leases which needed to be reclassified
between operating and investing activities. For the six months ended, September
30, 2003, this correction increased net cash used in operating activities and
decreased net cash used in investing activities by $909,313. For the six months
ended September 30, 2004, this correction increased cash used in operating
activities and decreased cash used in investing activities by $351,119.
Amounts have been restated as follows:
Condensed consolidated statements of cash flows
For the six months ended For the six months ended
September 30, 2003 September 30, 2004
As previously As previously
reported As restated reported As restated
--------------- ------------- --------------- --------------
Cash Flows From Operating Activities:
Loss (gain) on disposal of property and equipment $ 1,235,165 $ 187,692 $ - $ -
Loss (gain) on operating lease equipment - 138,160 - (351,119)
Cash Flows From Investing Activities:
Purchases of operating lease equipment - - (13,427,037) (9,575,281)
Purchases of property and equipment (1,980,077) (932,604) - -
Proceeds from sales of operating equipment 291,170 153,010 4,064,401 563,764
Furthermore, certain amounts related to its borrowings on lines of credit, which
are included in financing activities, were presented showing borrowings and
repayments separately and are now presented net.
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.
As discussed in Note 9 to the condensed consolidated financial statements, lease
revenues for the three and six months ended September 30, 2004 have been
restated, and the accompanying management's discussion and analysis of results
of operations and financial condition give effect to that restatement.
Furthermore, reclassifications have also been made between investing and
operating activities on the statements of cash flows and are therefore different
than previously reported.
-13-
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 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 213 people as of
September 30, 2004, at our 37 current locations, of which 36 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
four 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.
-14-
CRITICAL ACCOUNTING POLICIES
SALES OF PRODUCT. Sales of product include the following types of transactions:
(1) sales of new or used equipment which are 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 related to services essential to the
functionality of the software remain, the sales price is fixed and 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 consist 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.
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.
-15-
Sales-type leases include a dealer profit or loss that is recorded by the lessor
at the inception of the lease. The dealer's profit or loss represents the
difference, at the inception of the lease, between the present value of minimum
lease payments computed at the interest rate implicit in the lease and its cost
or carrying amount. Interest earned on the present value of the lease payments
and residual value is recognized over the lease term using the interest method.
OPERATING LEASES. All leases that do not meet the criteria to be classified as
direct-financing or sales-type leases are accounted for as operating leases.
Rental amounts are accrued on a straight-line basis over the lease term and are
recognized as lease revenue. Our cost of the leased equipment is recorded on the
balance sheet as investment in leases and leased equipment and is depreciated on
a straight-line basis over the lease term to our estimate of residual value.
Revenue, depreciation expense and the resulting profit for operating leases are
recorded on a straight-line basis over the life of the lease.
Lease revenues consist of rentals due under operating leases and amortization of
unearned income on direct-financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to 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 $1,335,094 and $2,280,663 for the three months ended
September 30, 2003 and 2004 and $3,168,235 and $4,421,698 for the six months
ended September 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.
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 regarding recognized
revenues is upon the payment by the lessee because collection of such amounts is
not reasonably assured.
-16-
INITIAL DIRECT COSTS. Initial direct costs related to the origination of direct
financing or operating leases are capitalized and recorded as part of the net
investment in direct financing leases, or net operating lease equipment, and are
amortized over the lease term.
OTHER SOURCES OF REVENUE. Amounts charged for hosting arrangements in which the
customer accesses the programs from an ePlus-hosted site and does not have
possession, and for Procure+, our e-procurement software package, are recognized
as services are rendered. Amounts charged for Manage+, our asset management
software service, are recognized on a straight-line basis over the period the
services are provided. Fee and other income 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.
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 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).
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 $1,114,578
and $1,242,315 as of September 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
$724,502 and $954,456 of capitalized costs, net of amortization, as of September
30, 2004 and March 31, 2004, respectively.
RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 2004 Compared
to Three and Six Months Ended September 30, 2003
Total revenues generated by the Company during the three-month period ended
September 30, 2004 were $153,185,698, compared to revenues of $85,636,731 during
the comparable period in the prior fiscal year, an increase of 78.9%. The
increase is primarily the result of increased sales of product and leased
equipment. Total revenues generated by the Company during the six-month period
ended September 30, 2004 were $259,884,432 compared to revenues of $165,504,249
during the comparable period in the prior fiscal year, an increase of 57.0%. 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 99.6% of the total sales of product
revenue for the three months ended September 30, 2004 and 2003. Sales of product
increased 96.2% to $138,065,002 during the three-month period ended September
30, 2004, as compared to $70,380,144 generated during the corresponding period
in the prior fiscal year. For the six-month period ended September 30, 2004,
-17-
sales increased 69.5% to $230,033,864 from $135,675,931 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. The
acquisition of Manchester Technologies, Inc. accounted for $34.1 million and
$6.7 million, for the quarters ended September 30, 2004 and June 30, 2004,
respectively. Other factors contributing to the increase include 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% for the three and
six months ended September 30, 2004, and 11.4% and 11.6% for the three and six
months ended September 30, 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 7.7% to $11,911,090 for the three months
ended September 30, 2004, compared with $12,910,616 during the corresponding
period in the prior fiscal year. For the six-month period ended September 30,
2004, lease revenues decreased 4.8% to $24,066,831 compared with $25,286,163
during the corresponding period in the prior fiscal year. This decrease is due
to a decrease in the total number of leases.
For the three months ended September 30, 2004, fee and other income increased
36.8% to $3,209,606 as compared to $2,345,971 in the comparable period in the
prior fiscal year. For the six months ended September 30, 2004, fee and other
income increased 27.3% to $5,783,737 as compared to $4,542,155 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, and interest income. The current period increase in fee
and other income is primarily attributable to an increase in professional
consulting fees from our eECM solution of approximately $863,635, most of which
is related to the acquision of Manchester Technologies, Inc.'s consulting
division. 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.
For the three months ended September 30, 2004, cost of sales, product increased
97.8% to $123,342,547 from $62,364,436 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, 2004, cost of sales, product
increased 71.4% from $119,876,360 to $205,503,332.
The Company's direct lease costs increased 22.3% and 18.2% to $2,930,271 and
$5,607,270 during the three- and six-month periods ended September 30, 2004,
respectively. 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 243.0%, or $1,994,672, for the
three months ended September 30, 2004 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 of approximately $883,401, as
well as an increase in the use of outside technical services. Professional and
other fees increased 242.6% or $3,243,392 for the six months ended September 30,
2004 as compared to the comparable period for the prior year. For the current
six-month period, approximately $1,053,625 of the increase was related to
patent-infringement litigation. Professional and other fees also include
expenses that the Company paid to Manchester Technologies, Inc. for professional
services rendered by people that became employees of the Company in a subsequent
period, as well as a transition team that was involved in the purchase of
Manchester Technologies, Inc.
Salaries and benefits expenses increased 48.8% and 27.4% to $14,877,568 and
$25,675,699, respectively, during the three- and six-month periods ended
September 30, 2004, as compared to the same period in the prior fiscal year.
These increases are due in part to an increase in benefit costs and an increase
in the average number of employees. The Company employed approximately 625 as of
September 30, 2004, as compared to 540 people at September 30, 2003.
-18-
The Company's general and administrative expenses increased 21.1% to $4,435,573
during the three months ended September 30, 2004, as compared to the same period
in the prior fiscal year. For the six-month period ended September 30, 2004,
general and administrative expenses increased 15.7% to $8,655,049 as compared to
the same period in the prior fiscal year. Such increase is largely due to a
higher sales volume, which, in turn, created a larger bad-debt and inventory
allowance; 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- and
six-month periods ended September 30, 2004 decreased 28.8% and 24.6% to
$1,300,648 and $2,692,785, respectively. This resulted from a combination of our
decreasing non-recourse debt portfolio from $123,378,815 on September 30, 2003
to $109,381,529 on September 30, 2004 and a decrease in our weighted average
interest rate on new lease-related non-recourse debt during the three- and
six-month periods ended September 30, 2004. Interest and financing costs include
interest costs on the Company's lease-specific and general working capital
indebtedness.
The Company's provision for income taxes decreased to $1,428,279 for the three
months ended September 30, 2004 from $1,860,705 for the three months ended
September 30, 2003, because of less pre-tax earnings. Both three-month periods
had effective income tax rates of 41.0%. The Company's provision for income
taxes decreased to $2,939,720 for the six-month period ended September 30, 2004
from $3,338,803 for the six-month period ended September 30, 2003. This decrease
was due to reduced earnings.
The foregoing resulted in a 24% decrease in net earnings to $2,055,327 for the
three-month period ended September 30, 2004 as compared to the same period in
the prior fiscal year and a 15.5% decrease in net earnings to $4,230,327 for the
six-month period ended September 30, 2004. Basic and fully diluted earnings per
common share were $0.23 and $0.22 for the three months ended September 30, 2004,
respectively, as compared to $0.29 and $0.27 for the three months ended
September 30, 2003, respectively. Basic and diluted weighted average common
shares outstanding for the three months ended September 30, 2004 were 8,922,104
and 9,252,196, respectively. For the three months ended September 30, 2003, the
basic and diluted weighted average shares outstanding were 9,466,651 and
10,179,738, respectively. Basic and fully diluted earnings per common share were
$0.47 and $0.45 for the six months ended September 30, 2004, as compared to
$0.53 and $0.50 for the six months ended September 30, 2003. Basic and diluted
weighted average common shares outstanding for the six months ended September
30, 2004 were 8,921,848 and 9,350,598, respectively. For the six months ended
September 30, 2003, the basic and diluted weighted average shares outstanding
were 9,461,047 and 10,047,323, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended September 30, 2004, the Company used cash
flows in operating activities of $14,488,952 and used cash flows in investing
activities of $14,633,920. Cash flows generated by financing activities amounted
to $18,041,790 during the same period. The net effect of these cash flows was a
net decrease in cash and cash equivalents of $11,047,240 during the six-month
period. During the same period, the Company's total assets increased
$59,493,426, or 20.2%. The cash balance at September 30, 2004 was $14,107,771 as
compared to $25,155,011 at March 31, 2004.
Based on concerns raised by the staff of the Securities and Exchange Commission
("SEC") in guidance posted on the SEC website on February 15, 2005 concerning
the previous presentation of the cash flow effects of long-term customer
receivables, including sales-type lease receivables, management has determined
it is appropriate to change the classification of all cash flows related to its
direct financing and sales-type lease transactions within the condensed
consolidated statements of cash flows.
-19-
Historically, the Company classified the cash flows from direct financing and
sales-type leases as investing activities in the condensed consolidated
statement of cash flows. The Company is now classifying these cash flows as
operating activities in the condensed consolidated statements of cash flows.
Therefore, no cash amounts related to direct financing or sales-type leases are
classified as investing activities.
In addition, in performing the reclassifications required by the SEC guidance as
described in Note 2, the Company also discovered certain amounts relating to
property and equipment, and operating leases which needed to be reclassified
between operating and investing activities. For the six months ended, September
30, 2003, this correction increased net cash used in operating activities and
decreased net cash used in investing activities by $909,313. For the six months
ended September 30, 2004, this correction increased cash used in operating
activities and decreased cash used in investing activities by $351,119.
Furthermore, certain amounts related to its borrowings on lines of credit, which
are included in financing activities, were presented showing borrowings and
repayments separately and are now presented net.
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 flow 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 six-month period ended September 30, 2004, the Company's lease
related non-recourse debt portfolio decreased 7.2% to $109,381,529.
-20-
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 September 30, 2004, the Company had
$20,228,996 of unpaid equipment cost, as compared to $9,993,077 at March 31,
2004.
The Company's "Accounts payable - trade" increased 81.3% from $32,140,670 to
$58,278,525 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 increases our trade payables.
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 September 30, 2004,
the Company had $20,025,696 of accrued expenses and other liabilities.
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 September 30, 2004, the Company had no outstanding balance. 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 September 30, 2004.
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 floorplan credit facility and an accounts receivable facility.
-21-
Floorplan Credit Facility
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 a floorplan credit facility in which interest expense for the first
thirty to forty-five days, in general, is not charged but is paid by the
supplier/distributor. The floorplan liabilities are recorded as accounts
payable-trade, as they are normally repaid within the thirty- to forty-five day
time-frame and represent an assigned accounts payable originally generated with
the supplier/distributor. If the thirty- to forty-five day obligation is not
paid timely, interest is then assessed at stated contractual rates.
The respective floorplan facility credit limits and actual outstanding balances
were as follows:
Floorplan Supplier Credit Limit at Balance as of March Credit Limit at Balance as of
March 31, 2004 31, 2004 September 30, 2004 September 30, 2004
---------------------------------------------------------------------------------------------------------------------
GE Distribution Finance Corp. $ 26,000,000 $ 21,637,077 $ 75,000,000 $ 38,876,843
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 floorplan 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.
As of September 30, 2004 there was an outstanding balance of $18,002,005 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 September 30, 2004.
On June 28, 2004, the Company modified its 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 floorplan credit facility and the accounts receivable facility, in
aggregate, could not exceed the $75,000,000 credit limit.
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, 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. floorplan and accounts receivable facility of up to $10.5
million.
-22-
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 September 30, 2003, the Company repurchased
163,300 shares of its outstanding common stock for a total of $2,278,747,
whereas during the three months ended September 30, 2004, there were no stock
repurchases. During the six months ended September 30, 2004 and 2003, the
Company repurchased 39,000 and 163,300 shares of its outstanding common stock
for $492,552 and $2,278,747, respectively. Since the inception of the Company's
initial repurchase program on September 20, 2001, and as of September 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.
-23-
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.
-24-
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 flow to be materially affected by changes in market
interest rates. As of September 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
In connection with the preparation of its consolidated financial statements for
the quarter ended December 31, 2004, the Company determined that there was a
"material weakness" (as defined under standards established by the American
Institute of Certified Public Accountants) in its internal control over
financial reporting relating to a split payment lease transaction that had been
incorrectly recorded during the quarter ended September 30, 2004. The Company
identified this error after the filing of the Form 10-Q for the second quarter
ended September 30, 2004; however, the Company's internal controls relating to
overall financial review and analysis in the context of the closing process did
not identify the error in time to preclude a misstatement of the balance sheet
and statements of earnings. As a result of this discovery, the Company has
corrected the error in recording this split payment lease and this Form 10-Q/A
reflects the restatement of its assets as of September 30, 2004, and its
earnings for the three- and six-month periods ended September 30, 2004. Company
management has discussed the accounting error described above with the Audit
Committee of the Board of Directors and its independent registered public
accountants. Management is working with the Audit Committee to identify and
implement corrective actions, where required, to improve the effectiveness of
its internal controls, including the enhancement of systems, accounting and
review procedures and communications among its staff. Also, management has
determined not to enter into any more split payment financing arrangements until
the Company's accounting processes can be revised to accurately record them.
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 and subsequent evaluations conducted, the
Company's Chief Executive Officer along with the Company's Chief Financial
Officer concluded that as a result of the material weakness discussed above, the
Company's disclosure controls and procedures as of September 30, 2004 were not
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
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.
-25-
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. On
November 19, 2004, a hearing is scheduled regarding a cross motion for summary
judgment.
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On September 14, 2004, the Company held its annual meeting of stockholders. At
the annual meeting, Terrance O'Donnell and Milton E. Cooper, Jr. were elected to
the Board of Directors as Class II Directors to hold office for three years and
until their successors are duly elected and qualified. The votes were cast as
follows:
For Withhold Authority
--------- ------------------
Terrence O'Donnell 8,413,591 32,634
Milton E. Cooper, Jr. 8,432,108 14,117
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, 2005. The votes were cast as follows:
For Against Abstain
--------- ------- -------
8,440,376 1,634 4,215
Item 5. Other Information
Not Applicable
-26-
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 December31, 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.
-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: February 23, 2005 /s/ PHILLIP G. NORTON
------------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: February 23, 2005 /s/ STEVEN J. MENCARINI
------------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
-28-