SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
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 v whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes______________ No______v________
The number of shares of Common Stock outstanding as of November 12, 2002, was
10,079,646.
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of March 31, 2002
and September 30, 2002 2
Condensed Consolidated Statements of Earnings,
Three Months Ended September 30, 2001 and 2002 3
Condensed Consolidated Statements of Earnings, Six
Months Ended September 30, 2001 and 2002 4
Condensed Consolidated Statements of Cash Flows, Six
Months Ended September 30, 2001 and 2002 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
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 and Reports on Form 8-K 26
Signatures 27
Certifications 28
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2002 As of September 30, 2002
---------------------- -------------------------
ASSETS
Cash and cash equivalents $ 28,223,503 $ 24,365,042
Accounts receivable, net of allowance for doubtful
accounts of $3,719,207 and $3,483,140 as of
March 31, 2002 and September 30, 2002, respectively 41,397,320 65,703,339
Notes receivable 227,914 112,182
Employee advances 69,042 70,261
Inventories 871,857 2,316,678
Investment in leases and leased equipment - net 169,087,078 160,270,045
Property and equipment - net 6,144,061 5,709,063
Deferred tax asset 5,471,658 4,878,408
Other assets 5,419,813 1,256,228
Goodwill - net 22,083,308 19,147,132
------------------------- --------------------------
TOTAL ASSETS $ 278,995,554 $ 283,828,378
========================= ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 3,898,999 $ 5,529,702
Accounts payable - trade 15,104,985 28,839,755
Salaries and commissions payable 491,716 790,412
Accrued expenses and other liabilities 19,091,729 16,040,618
Income taxes payable 364,183 577,969
Recourse notes payable 4,659,982 1,491,650
Nonrecourse notes payable 129,095,051 121,718,276
------------------------- --------------------------
Total Liabilities 172,706,645 174,988,382
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; none issued or outstanding - -
Common stock, $0.01 par value; 50,000,000 shares authorized;
10,461,970 issued and 10,395,870 outstanding at March 31,
2002 and 10,517,297 issued and 10,079,646 outstanding at
September 30, 2002 $ 104,619 $ 105,172
Additional paid-in capital 62,414,067 62,764,929
Treasury stock, at cost, 66,100 and 437,651 shares,
respectively (574,800) (2,868,668)
Retained earnings 44,345,023 48,863,720
Accumulated other comprehensive income -
Foreign currency translation adjustment - (25,157)
------------------------- --------------------------
Total Stockholders' Equity
106,288,909 108,839,996
------------------------- --------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,995,554 $ 283,828,378
========================= ==========================
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
September 30,
2001 2002
---------------------------------
REVENUES
Sales of equipment $ 30,666,864 $ 64,295,558
Sales of leased equipment - -
---------------------------------
30,666,864 64,295,558
Lease revenues 12,008,725 12,790,040
Fee and other income 4,470,358 5,243,517
---------------------------------
16,479,083 18,033,557
---------------------------------
TOTAL REVENUES
47,145,947 82,329,115
---------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 25,845,889 57,001,834
Cost of sales, leased equipment - -
---------------------------------
25,845,889 57,001,834
Direct lease costs 2,246,428 1,420,229
Professional and other fees 393,231 693,687
Salaries and benefits 7,930,886 12,727,852
General and administrative expenses 3,599,512 3,908,843
Interest and financing costs 3,464,795 2,266,103
---------------------------------
17,634,852 21,016,714
---------------------------------
TOTAL COSTS AND EXPENSES 43,480,741 78,018,548
---------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,665,206 4,310,567
---------------------------------
PROVISION FOR INCOME TAXES 1,466,082 1,765,930
---------------------------------
NET EARNINGS $ 2,199,124 $ 2,544,637
=================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.22 0.25
=================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.22 0.25
=================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,160,182 10,285,312
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,226,148 10,287,160
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Six months ended
September 30,
2001 2002
-----------------------------------
REVENUES
Sales of equipment $ 66,815,384 $ 114,927,438
Sales of leased equipment 452,108 4,611,303
-----------------------------------
67,267,492 119,538,741
Lease revenues 22,800,780 23,365,442
Fee and other income 10,374,176 11,756,244
-----------------------------------
33,174,956 35,121,686
-----------------------------------
TOTAL REVENUES 100,442,448 154,660,427
-----------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 57,196,879 102,533,175
Cost of sales, leased equipment 427,370 4,535,001
-----------------------------------
57,624,249 107,068,176
Direct lease costs 5,534,816 2,331,004
Professional and other fees 1,123,338 1,466,759
Salaries and benefits 14,906,640 23,920,752
General and administrative expenses 7,184,514 7,537,144
Interest and financing costs 6,838,344 4,676,685
----------------------------------
35,587,652 39,932,344
----------------------------------
TOTAL COSTS AND EXPENSES 93,211,901 147,000,520
----------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 7,230,547 7,659,907
----------------------------------
PROVISION FOR INCOME TAXES 2,892,059 3,139,132
----------------------------------
NET EARNINGS $ 4,338,488 $ 4,520,775
==================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.43 0.43
==================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.43 0.43
==================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,056,233 10,400,941
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,112,357 10,460,660
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
2001 2002
----------------- -----------------
Cash Flows From Operating Activities:
Net earnings $ 4,338,488 $ 4,520,775
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation and amortization 3,076,893 2,439,100
(Recovery of) provision for credit losses (60,827) 245,541
Deferred taxes - 593,250
(Loss) gain on sale of operating lease equipment (366,351) 428,188
Adjustment of basis to fair market value of equipment and
inventories 1,001,169 -
Payments from lessees directly to lenders - operating leases (216,837) (213,567)
Loss on disposal of property and equipment 95,520 4,868
Changes in:
Accounts receivable 13,616,865 (24,860,632)
Other receivables 1,542,352 115,732
Employee advances (44,488) 1,219
Inventories 1,951,385 (1,952,775)
Other assets (3,333,933) 5,789,576
Accounts payable - equipment (3,875,559) 1,630,703
Accounts payable - trade (3,290,099) 12,228,679
Salaries and commissions payable, accrued
expenses and other liabilities (4,447,046) (2,349,799)
----------------- -----------------
Net cash (used) provided by operating activities 9,987,532 (1,379,142)
----------------- -----------------
Cash Flows From Investing Activities:
Purchases of operating lease equipment (887,976) (1,943,885)
Increase in investment in direct financing and sales-type leases (11,075,163) (15,632,387)
Purchases of property and equipment (987,462) (1,031,897)
Cash used in acquisitions, net of cash acquired (1,000,000) -
Increase in other assets (373,959) -
----------------- -----------------
Net cash used in investing activities (14,324,560) (18,608,169)
----------------- -----------------
-5-
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 38,150,598 $ 72,219,537
Recourse 32,639 1,448,388
Repayments:
Nonrecourse (26,014,820) (53,891,021)
Recourse (69,045) (556,261)
Pay-off of recourse debt due to settlement - (99,659)
Write-off of nonrecourse debt due to bankruptcy - (47,597)
Proceeds from issuance of capital stock, net of expenses 27,704 349,330
Purchase of treasury stock (42,865) (2,293,867)
Net proceeds (repayment) from (of) lines of credit 972,716 (1,000,000)
----------------- -----------------
Net cash provided by financing activities 13,056,927 16,128,850
----------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 8,719,899 (3,858,461)
Cash and Cash Equivalents, Beginning of Period 24,534,183 28,223,503
----------------- -----------------
Cash and Cash Equivalents, End of Period $ 33,254,082 $ 24,365,042
================= =================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 257,276 $ 4,062,714
================== =================
Cash paid for income taxes $ 3,969,504 $ 1,216,160
================== =================
See Notes To Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements of ePlus inc. and
subsidiaries (the "Company") included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (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
year amounts have been reclassified to conform to the current year's
presentation.
Certain information and footnote 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.
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, 2002 (the "Company's
2002 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of
March 31, September 30,
2002 2002
(In Thousands)
Investment in direct financing and --------------------------------
sales-type leases - net $ 167,628 $ 158,324
Investment in operating lease equipment - net 1,459 1,946
--------------- ----------------
Investments in leases and leased equipment - net $ 169,087 $160,270
=============== ================
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, September 30,
2002 2002
(In Thousands)
----------------------------------
Minimum lease payments $ 161,788 $ 153,871
Estimated unguaranteed residual value 25,880 23,861
Initial direct costs, net of amortization (1) 3,424 3,104
Less: Unearned lease income (20,412) (19,460)
Reserve for credit losses (3,052) (3,052)
----------------- ----------------
----------------- ----------------
Investment in direct financing and sales-
type leases, net $ 167,628 $ 158,324
================= ================
(1) Initial direct costs are shown net of amortization of $5,486 and
$6,410 at March 31, and September 30, 2002, respectively.
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The Company's net investment in direct financing and sales-type leases is
collateral for non-recourse and recourse equipment notes.
INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating lease equipment primarily represents equipment generally
leased for two-year terms 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, September 30,
2002 2002
(In Thousands)
----------------------------------
Cost of equipment under operating leases $ 13,916 $ 8,967
Initial direct costs 14 11
Less: Accumulated depreciation and
amortization (12,471) (7,032)
----------------------------------
Investment in operating lease equipment, net $ 1,459 $ 1,946
==================================
3. BUSINESS COMBINATIONS
On October 4, 2001, the Company purchased all the outstanding stock of SourceOne
Computer Corporation, a technology and services company located in Silicon
Valley. Total consideration paid of $2,807,500 included $800,006 in cash and
274,999 shares of unregistered common stock, valued at $7.30 per share. The
issuance of these securities was made in reliance on an exemption from
registration provided by Section 4(2) or Regulation D of the Securities Act, as
amended, as a transaction by an issuer not involving any public offering. The
shareholders of SourceOne represented their intention to acquire the securities
for investment only and not with a view to or for distribution in connection
with such transaction, and an appropriate legend was affixed to the share
certificates issued in the transaction. The shareholders of SourceOne had
adequate access to information about ePlus through information made available to
the shareholders of SourceOne. The shareholders of SourceOne were granted
certain registration rights in connection with the transaction.
On March 29, 2002, the Company purchased certain fixed assets, customer lists,
and contracts, and assumed certain liabilities, relating to Elcom International,
Inc.'s IT fulfillment and IT professional services business. The Elcom purchase
added offices in Boston, San Diego, New Jersey, and New York City. The purchase
price included $2,150,000 million in cash and the assumption of certain
liabilities of approximately $113,000.
The acquisitions of SourceOne Computer Corporation and Elcom International, Inc.
were not significant; therefore pro forma financial information is not
presented.
-8-
4. ISSUANCES OF COMMON STOCK, WARRANTS AND REPURCHASES OF COMMON STOCK
On September 20, 2001, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of its outstanding common stock to a maximum
of $5,000,000 over a period of time ending no later than September 20, 2002.
Since the inception of the repurchase authorization, as of September 30, 2002,
the Company had repurchased 437,651 shares of its outstanding common stock at an
average cost of $6.56 per share for a total of $2,868,867. Of the shares
repurchased, 331,551 shares were repurchased as a result of a settlement that
occurred during the quarter ended September 30, 2002.
On October 4, 2002, a stock repurchase program previously authorized by the
Company's Board of Directors became effective. The program authorizes 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.
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 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 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. Fees and other income
relative to services generated by our proprietary software and services are
included in the financing 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 2002 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.
The Company changed reporting segments during t
e year ended March 31, 2002. All
prior period balances have been reclassified to conform to the new reporting
segments.
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Technology
Financing Sales
Business Business
Unit Unit Total
---------------- ---------------- ----------------
Three months ended September 30, 2001
Sales $ 318,173 $ 30,348,691 $ 30,666,864
Lease revenues 12,008,725 - 12,008,725
Fee and other income 1,603,682 2,866,676 4,470,358
---------------- ---------------- ----------------
Total revenues 13,930,580 33,215,367 47,145,947
Cost of sales 540,070 25,305,819 25,845,889
Direct lease 2,246,428 - 2,246,428
Selling, general and administrative
expenses 4,958,583 6,965,046 11,923,629
---------------- ---------------- ----------------
Segment earnings 6,185,499 944,502 7,130,001
Interest expense 3,440,243 24,552 3,464,795
---------------- ---------------- ----------------
Earnings before income taxes $ 2,745,256 $ 919,950 $ 3,665,206
================ ================ ================
Assets $ 252,290,335 $ 45,341,260 $ 297,631,595
================ ================ ================
Three months ended September 30, 2002
Sales $ 495,987 $ 63,799,571 $ 64,295,558
Lease revenues 12,790,040 - 12,790,040
Fee and other income 2,037,583 3,205,934 5,243,517
---------------- ---------------- ----------------
Total revenues 15,323,610 67,005,505 82,329,115
Cost of sales 688,745 56,313,089 57,001,834
Direct lease costs 1,420,229 - 1,420,229
Selling, general and administrative
expenses 7,423,150 9,907,232 17,330,382
---------------- ---------------- ----------------
Segment earnings 5,791,486 785,184 6,576,670
Interest expense 2,195,563 70,540 2,266,103
---------------- ---------------- ----------------
Earnings before income taxes $ 3,595,923 $ 714,644 $ 4,310,567
================ ================ ================
Assets $ 226,247,510 $ 57,580,868 $ 283,828,378
================ ================ ================
Six months ended September 30, 2001
Sales $ 824,911 $ 66,442,581 $ 67,267,492
Lease revenues 22,800,780 - 22,800,780
Fee and other income 5,530,250 4,843,926 10,374,176
---------------- ---------------- ----------------
Total revenues 29,155,941 71,286,507 100,442,448
Cost of sales 1,478,437 56,145,812 57,624,249
Direct lease costs 5,534,816 - 5,534,816
Selling, general and administrative
expenses 10,329,450 12,885,042 23,214,492
---------------- ---------------- ----------------
Segment earnings 11,813,238 2,255,653 14,068,891
Interest expense 6,771,569 66,775 6,838,344
---------------- ---------------- ----------------
Earnings before income taxes $ 5,041,669 $ 2,188,878 $ 7,230,547
================ ================ ================
Assets $ 252,290,335 $ 45,341,260 $ 297,631,595
================ ================ ================
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Technology
Financing Sales
Business Business
Unit Unit Total
---------------- ---------------- ----------------
Six months ended September 30, 2002
Sales $ 5,530,412 $ 114,008,329 $ 119,538,741
Lease revenues 23,365,442 - 23,365,442
Fee and other income 5,067,636 6,688,608 11,756,244
---------------- ---------------- ----------------
Total revenues 33,963,490 120,696,937 154,660,427
Cost of sales 5,938,175 101,130,001 107,068,176
Direct lease costs 2,331,004 - 2,331,004
Selling, general and administrative
expenses 14,085,962 18,838,693 32,924,655
---------------- ---------------- ----------------
Segment earnings 11,608,349 728,243 12,336,592
Interest expense 4,452,061 224,624 4,676,685
---------------- ---------------- ----------------
Earnings before income taxes $ 7,156,288 $ 503,619 $ 7,659,907
================ ================ ================
Assets $ 226,247,510 $ 57,580,868 $ 283,828,378
================ ================ ================
6. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company has adopted SFAS No. 142 retroactive to April 1, 2001, as
permitted. SFAS No. 142 requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS No. 142 requires the Company to perform a
transitional assessment of whether there is an indication that the goodwill is
impaired as of the date of adoption. The Company will then have a transition
period from the date of adoption to determine the fair value of each reporting
unit and if goodwill has been impaired. Any goodwill impairment loss will be
recognized as the cumulative effect of a change in accounting principle no later
than the end of the fiscal year of adoption. We have completed this test and
determined that no potential impairment existed. The Company will also be
required to review its other intangible assets for impairment and to reassess
the useful lives of such assets and make any necessary adjustments. As of
September 30, 2002 the Company had goodwill, net of accumulated amortization, of
$19.1 million, a decrease of $2.9 million from September 30, 2001 as a result of
a purchase price adjustment which occurred during the quarter. No goodwill
amortization expense was recognized during the six-month periods ended September
30, 2002 and 2001.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 establishes accounting standards for recognition and
measurement of a liability for the costs of asset retirement obligations. Under
SFAS 143, the costs of retiring an asset will be recorded as a liability when
the retirement obligation arises, and will be amortized to expense over the life
of the asset. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company does not expect that the
adoption of SFAS No. 143 will have a material impact on its financial position
or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and discontinued
operations. SFAS No. 144 supersedes previous guidance for financial accounting
-11-
and reporting for the impairment or disposal of long-lived assets and for
segments of a business to be disposed of. SFAS No. 144 retains the fundamental
provisions of existing generally accepted accounting principles with respect to
recognition and measurement of long-lived asset impairment contained in SFAS No.
121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived
Assets to be Disposed Of." However, SFAS No. 144 provides new guidance intended
to address certain significant implementation issues associated with SFAS No.
121, including expanded guidance with respect to appropriate cash flows to be
used, whether recognition of any long-lived asset impairment is required, and if
required, how to measure the amount of impairment. SFAS No. 144 also requires
that any net assets to be disposed of by sale be reported at the lower of
carrying value or fair market value less costs to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
company. On April 1, 2002, the Company adopted SFAS No. 144. The Company's
adoption of SFAS No. 144 did not have a material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4 and 64, which address the accounting for gains
and losses of the extinguishment of debt. SFAS No. 145 also rescinds SFAS No. 44
which addressed the accounting for intangible assets of motor carriers. Finally,
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases." The amendment to SFAS
No. 13 eliminates inconsistencies between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. On May 15, 2002, the
Company adopted SFAS No. 145. The Company's adoption of SFAS No. 145 did not
have a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task
Force (EITF) No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs incurred
in a Restructuring)." EITF No. 94-3 required that costs associated with a exit
or disposal activities be recorded as liabilities as of the date the exit or
disposal plan is approved by management. SFAS No. 146 requires a liability for a
cost associated with an exit or disposal activity be recognized at fair value on
the date the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
financial statements.
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 thereto included
elsewhere in this report, and the Company's 2002 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
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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. Such 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 sale 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, or 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 186 people at
September 30, 2002, derived from both the hiring of personnel and as a result of
the acquisitions of SourceOne Computer Corporation and Elcom International,
Inc., both of which were information technology sales and services entities.
These two acquisitions and our hiring of other sales persons has expanded our
current locations to 38, all of which are in the United States.
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. These products and services and
the associated expenses with this business acquisition have substantially
increased our expenses, and the ability to sell these services and products is
expected to fluctuate depending on the customer demand for these products and
services, which to date is still unproven. These products and services are
included in our technology sales business unit segment, 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 expansion of sales locations, the Company's
historical results of operations and financial position may not be indicative of
its future performance over time.
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SELECTED 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 significant to our business are discussed
below.
We classify our lease transactions, as required by the Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," or SFAS No. 13, 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 which 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 as part
of 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 lease 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.
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.
-14-
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
generally accepted accounting principles, 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 transactions subsequent to the
initial term, our policy is to recognize revenues upon the payment by the
lessee.
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 Equipment. Sales of equipment includes the following types of
transactions: (1) sales of new or used equipment which is not subject to any
type of lease; (2) sales of off-lease equipment to the secondary market; and (3)
sales of procurement software. Sales of new or used equipment are recognized
upon shipment. Sales of off-lease equipment are recognized when constructive
title passes to the purchaser. Revenue from sales of procurement software is
recognized in accordance with the Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. We recognize revenue
when all the following criteria exist: when there is persuasive evidence that an
arrangement exists, delivery has occurred, no significant obligations by the
Company with regard to implementation remain, the sales price is determinable,
and it is probable that collection will occur. Our accounting policy requires
that revenue earned on software arrangements involving multiple elements be
allocated to each element on the relative fair values of the elements and
recognized when earned. Revenue relative 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 Procure+ are recognized as
services are rendered. Amounts charged for the Manage+ service are recognized on
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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; and (4) 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. As of September 30,
2001 and 2002, the Company's reserve for credit losses was $5,202,319 and
$6,535,322, respectively. 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). The
Company's reserves for credit losses are segregated between our accounts
receivable and our investment in direct financing leases as follows (in
thousands):
Investment
Accounts in Direct
Receivable Financing Leases Total
-----------------------------------------------------
Balance April 1, 2001 $ 1,392 $ 2,887 $ 4,279
Bad Debts Expense 1,324 165 1,489
Recoveries (184) - (184)
Assumed in Acquisitions 73 - 73
Other 1,114 - 1,114
-----------------------------------------------------
Balance March 31, 2002 $ 3,719 $ 3,052 $ 6,771
=====================================================
Bad Debts Expense (135) - (135)
Recoveries (57) - (57)
Assumed in Acquisitions - - -
Other (44) - (44)
-----------------------------------------------------
Balance September 30, 2002 $ 3,483 $ 3,052 $ 6,535
=====================================================
Balances in "Other" include reclasses from prior years. The Company assumed
$72,631 in reserve for credit losses in the acquisition of SourceOne Computer
Corporation.
Investments. The Company had a 5% membership interest in MLC/CLC LLC, a joint
venture to which the Company sold leased equipment. MLC/CLC LLC stopped
purchasing leased equipment prior to the year ending March 31, 2002. The
Company's investment in MLC/CLC LLC was accounted for using the cost method. The
Company recorded an impairment of $628,218 during the six months ended September
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30, 2001 on this investment. The Company also wrote off a $420,711 investment in
a start-up venture during the six months ending September 30, 2001, as the
underlying equity did not support the carrying amount of the Company's
investment.
Capitalization of Software Costs 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." No costs for the development of internal-use
software were capitalized during the six months ended September 30, 2002.
$377,303 of internal use software was capitalized during the six months ended
September 30, 2001. These capitalized costs are included in the accompanying
condensed consolidated balance sheets as a component of property and equipment.
Capitalization of Software Costs 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.
Capitalized development costs totaled $128,920 for the six months ended
September 30, 2002.
RESULTS OF OPERATIONS
Three and Six Months Ended September 30, 2002 Compared to Three and Six Months
Ended September 30, 2001
Total revenues generated by the Company during the three-month period ended
September 30, 2002 were $82,329,115 compared to revenues of $47,145,947 during
the comparable period in the prior fiscal year, an increase of 74.6%. During the
six-month period ended September 30, 2002, revenues were $154,660,427 compared
to revenues of $100,442,448 during the comparable period in the prior fiscal
year, an increase of 54.0%. These increases are primarily the result of
increased sales of equipment and leased equipment. The Company's revenues are
composed of sales, lease revenues, and fee and other revenue, and may vary
considerably from period to period. See "Potential Fluctuations In Quarterly
Operating Results."
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 109.7% to $64,295,558 during the three-month period ended September
30, 2002, as compared to $30,666,864 generated during the corresponding period
in the prior fiscal year. For the six-month period ended September 30, 2002,
sales increased 77.7 % to $119,538,741 from $67,267,492 the corresponding period
in the prior year.
Sales of equipment are generated primarily through the Company's technology
sales business unit subsidiaries and represented 100% and 96.14% of total sales
revenue for the three and six months ended September 30, 2002 as compared to
100% and 99.33% for the three and six months ended September 30, 2001. Sales of
equipment during the three months ended September 30, 2002 increased 109.7% to
$64,295,558 compared to $30,666,864 generated during the comparable period in
the prior fiscal year. Sales of equipment during the six months ended September
30, 2002 increased 72.0% to $114,927,438 compared to $66,815,384 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 as well
as additional sales resulting from the acquisition of SourceOne in October 2001
and Elcom in March 2002. The Company realized a gross margin on sales of
equipment of 11.3% and 10.8% for the three and six month periods ended September
30, 2002 compared to a gross margin of 15.7% and 14.4% during the comparable
-17-
periods in the prior fiscal year. The Company's gross margin on sales of
equipment is affected by the mix and volume of products sold, as well as
increased competition in a slower economy.
The Company also recognizes revenue from the sale of leased equipment. During
the three months ended September 30, 2002 and 2001, the Company recorded no
sales of leased equipment. During the six months ended September 30, 2002, sales
of leased equipment increased 919.9% to $4,611,303 from $452,108 during the six
months ended September 30, 2001. During the six months ended September 30, 2002
the Company recognized a gross margin on leased equipment sales of 1.7% compared
to a gross margin of 5.5% for the comparable period in the prior fiscal year.
The significant increase in leased equipment sales reflects the higher volume of
lease equity that the Company sold to outside investors. Leases that are not
equity-sold to investors remain on the Company's books and lease earnings are
recognized accordingly. In addition, the revenue and gross margin recognized on
sales of leased equipment can vary significantly depending on the nature and
timing of the sale, as well as the timing of any debt funding recognized in
accordance with SFAS No. 140.
The Company's lease revenues increased 6.5% to $12,790,040 for the three months
ended September 30, 2002 compared with $12,008,725 during the corresponding
period in the prior fiscal year. For the six-month period ending September 30,
2002, lease revenues increased 2.5% to $23,365,442 compared with $22,800,780
during the corresponding period in the prior fiscal year.
For the three months ended September 30, 2002, fee and other income recognized
was $5,243,517, an increase of 17.3% from $4,470,358 recognized during the
comparable period in the prior fiscal year. For the six months ended September
30, 2002, fee and other income recognized was $11,756,244, an increase of 13.3%
from $10,374,176 recognized during the comparable period in the prior fiscal
year. Fee and other income includes revenues from adjunct services and fees,
including broker fees, support fees, warranty reimbursements, and learning
center revenues generated by the Company's technology sales business unit
subsidiaries. The current period increase in fee and other income is
attributable to additional revenues resulting from the purchase of SourceOne in
October 2001 and Elcom in March 2002. The Company's fee and other income
contains earnings from certain transactions which 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 decreased 36.8% and 57.9% during the three and
six-month periods ended September 30, 2002 as compared to the same period in the
prior fiscal year. The decrease is the result of a lease impairment charge of
approximately $1.0 million taken in the quarter ended June 30, 2001, as well as
a reduction in our depreciable portfolio.
The increase in professional and other fees of 76.4%, or $300,456, and 30.6%, or
$343,421 for the three and six-month periods over the comparable periods in the
prior fiscal year, was primarily the result of expenses related to the Company's
outside technical services.
Salaries and benefits expenses increased 60.5% and 60.5% during the three and
six-month periods ended September 30, 2002 over the same periods in the prior
year. The increase is the result of additional expense related to the Company's
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recent acquisitions, SourceOne Computer Corporation and Elcom International,
Inc, increased commissions resulting from the increase in sales, and payment of
executive bonuses.
The Company's general and administrative expenses increased 8.6% to $3,908,843
during the three months ended September 30, 2002, as compared to $3,599,512 in
the same period in the prior fiscal year. The Company's general and
administrative expenses increased 4.9% to $7,537,144 during the six months ended
September 30, 2002, as compared to $7,184,514 in the same period in the prior
fiscal year.
Interest and financing costs incurred by the Company for the three months and
six months ended September 30, 2002 decreased 34.6% and 31.6% as compared to
corresponding periods in the prior fiscal year and relates to interest costs on
the Company's indebtedness, both lease-specific and general working capital. The
decrease is attributable to lower interest rates and an overall reduction of
debt.
The Company's provision for income taxes increased to $1,765,930 for the three
months ended September 30, 2002 from $1,466,082 for the three months ended
September 30, 2001, and increased to $3,139,132 for the six months ended
September 30, 2002 from $2,892,059 for the six months ended September 30, 2001,
reflecting effective income tax rates of 41% for the three and six-month periods
ending September 30, 2002 and 40% for the three and six-month periods ending
September 30, 2001.
The foregoing resulted in a 15.7% increase in net earnings for the three-month
period ended September 30, 2002 as compared to the same period in the prior
fiscal year, and a 4.2% increase in net earnings for the six-month period ended
September 30, 2002 as compared to the same period in the prior fiscal year.
Basic and diluted earnings per common share were $0.25 and $0.25 for the three
months ended September 30, 2002, as compared to $0.22 for basic and $0.22 for
diluted earnings for the three months ended September 30, 2001. Basic and
diluted weighted average common shares outstanding for the three months ended
September 30, 2002 were 10,285,312 and 10,287,160, respectively. For the three
months ended September 30, 2001, basic and diluted weighted average shares
outstanding were 10,160,182 and 10,226,148, respectively. Basic and diluted
earnings per common share were $0.43 and $0.43 for the six months ended
September 30, 2002, as compared to $0.43 for basic and $0.43 for diluted
earnings for the six months ended September 30, 2001. Basic and diluted weighted
average common shares outstanding for the six months ended September 30, 2002
were 10,400,941 and 10,460,660, respectively. For the six months ended September
30, 2001, the basic and diluted weighted average shares outstanding were
10,056,233 and 10,112,357, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended September 30, 2002, the Company used cash
flows from operations of $1,379,142 and used cash flows from investing
activities of $18,608,169. Cash flows generated by financing activities amounted
to $16,128,850 during the same period. The net effect of these cash flows was a
net decrease in cash and cash equivalents of $3,858,461 during the six-month
period. During the same period, the Company's total assets increased $4,832,824,
or 1.7%. The cash balance at September 30, 2002 was $24,365,042 as compared to
$28,223,503 at March 31, 2002.
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
-19-
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 non-recourse and 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 The Company's. The Company is 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 their only recourse, upon default by the lessee, is against the
lessee and the specific equipment under lease. The Company has formal programs
with Key Corporate Capital, Inc. and Fleet Business Credit Corporation. In
addition to these programs, recently the Company has regularly funded its
leasing activities with Citizens Leasing Corporation, GE Capital Corporation, De
Lage Landen Financial Services, Inc., Hitachi Leasing America, and Fifth Third
Bank, among others. These programs require that each transaction be specifically
approved and done solely at the lender's discretion. During the six-month period
ending September 30, 2002, the Company's lease related non-recourse debt
portfolio decreased 5.7% to $121,718,276.
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, 2002, the Company had
$5,529,702 of unpaid equipment cost, as compared to $3,898,999 at March 31,
2002.
The Company's "Accrued expenses and other liabilities" includes deferred income,
reserves for credit losses, and amounts collected and payable, such as sales
taxes and lease rental payments due to third parties. As of September 30, 2002,
the Company had $16,040,618 of accrued expenses and other liabilities.
Working capital for our leasing business is provided through a $35 million
credit facility that expires on April 17, 2004. Participating in this facility,
are, among others, Branch Banking and Trust Company ($10 million), PNC Bank N.A.
($5 million) and National City Bank, the agent. The ability to borrow under this
facility is limited to the amount of eligible collateral at any given time. The
credit facility has full recourse to the Company and is secured by a blanket
-20-
lien against all of the Company's assets including the common stock of all
wholly-owned 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. The
interest rates charged on borrowings are the LIBOR interest rate plus 1.75% to
2.5%. As of September 30, 2002, the Company had no outstanding balance on the
facility. 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.
In general, we use the National City 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 Company had two subordinated recourse notes payable with a total
principal amount due of $3.1 million to Centura Bank resulting from the
acquisition of CLG, Inc. in September 1999. These notes were originally due in
October 2006, but could be repaid at any earlier date, and had an 11% interest
rate payable monthly. These notes were paid off on August 30, 2002 in connection
with a settlement.
ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology,
inc. have separate credit facilities to finance their working capital
requirements for inventories and accounts receivable. Their traditional business
as sellers of computer technology and related network equipment and software
products is financed through agreements known as "floor planning" financing in
which interest expense for the first thirty to forty-five days 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.
In addition to the floor planning financing, ePlus Technology, inc. and ePlus
Technology of PA, inc. have accounts receivable facilities through Deutsche
Financial Services Corporation. Of the total $33 million facility provided by
Deutsche Financial Services Corporation, $26 million is for traditional
inventory floor planning and $7 million is available for accounts receivable
financing. The maximum available under the accounts receivable facilities for
ePlus Technology, inc. and ePlus Technology of PA, inc. are $5 million and $2
million respectively and as of September 30, 2002 there was an outstanding
balance of $1,448,388 on these account receivable facilities. 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.
As of September 30, 2002, the respective floor planning inventory agreement
maximum credit limits and actual outstanding balances were as follows:
Balance as of
Entity Floor Plan Supplier Credit Limit September 30, 2002
------------------------------- -------------------------------- ---------------- -------------------
ePlus Technology of NC, inc. Deutsche Financial Services, $ 3,500,000 $ 2,693,183
Inc.
IBM Credit Corporation $ 250,000 $ 94,171
ePlus Technology of PA, inc. Deutsche Financial Services, $ 9,000,000 $ 4,394,350
Inc.
IBM Credit Corporation $ 1,250,000 $ 206,179
ePlus Technology, inc. Deutsche Financial Services, $13,500,000 $11,958,039
Inc.
-21-
The facilities provided by Deutsche Financial Services Corporation for ePlus
Technology of PA, inc. and ePlus Technology, inc. require a separate guaranty of
up to $4,900,000 and $2,000,000, respectively, by ePlus inc. The floor planning
facility provided by IBM Credit Corporation to ePlus Technology of PA, inc. also
requires a guaranty by ePlus inc. for the total balance outstanding. The loss of
the Deutsche Financial Services Corporation or the IBM Credit Corporation floor
planning facilities could have a material adverse effect on our future results
as we rely on these facilities for daily working capital and liquidity for our
technology sales business.
The continued implementation of the Company's eECM business model could require
a significant investment in both cash and managerial focus. In addition, the
Company may selectively acquire other companies that have attractive customer
relationships and skilled sales forces. The Company may also acquire technology
companies to expand and enhance the eECM platform to provide additional
functionality and value added services. As a result, the Company may require
additional financing to fund its strategy implementation and potential future
acquisitions, which may include additional debt and equity financing.
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 herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
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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.
Our traditional businesses of equipment leasing and financing and technology
sales have the following risks:
- 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 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 business models in evolving markets. As a result, the
Company will encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by early stage companies using new and
unproven business models in new and 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.
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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 Enterprise
Cost Management 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
Enterprise Cost Management 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, frequent
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.
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 which 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 and Deutsche Financial Services facilities, bear interest at a
fixed rate. Borrowings under the National City and Deutsche Financial Services
facilities bear interest at a market-based variable rate. Due to the relatively
short nature of the interest rate periods, we do not expect our operating
results or cash flow to be materially affected by changes in market interest
rates. As of September 30, 2002, the aggregate fair value of our recourse
borrowings approximated their carrying value.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
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Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their last evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults UPON Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On September 19, 2002, the Company held its annual meeting of stockholders. At
the annual meeting, Bruce M. Bowen and Phillip G. Norton were elected to the
Board of Directors as Class III Directors to hold office for three years until a
successor has been duly elected and qualified. The votes were cast as follows:
For Against Abstained
-----------------------------------------------
Bruce M. Bowen 8,470,575 0 981,709
Phillip G. Norton 8,470,565 0 981,719
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, 2003. The votes were cast as follows:
For Against Abstained
-----------------------------------------------------
9,444,780 3,054 4,450
Item 5. Other Information
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.Exhibit Description
3.1 Certificate of Incorporation of the Company, as
amended (Incorporated herein by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997).
3.2 Certificate of Amendment to Certificate of Incorporation
(Incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
March 31, 2000).
3.3 Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.3 of the Company's Registration Statement on
Form S-1 (File No. 333-11737).
4.1 Specimen certificate of Common Stock of the Company
(Incorporated herein by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-1
(File No. 333-11737)).
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(b) Reports on Form 8-K
On October 4, 2002, the Company filed a Current Report on Form 8-K announcing
the authorization of a stock repurchase program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
ePlus inc.
Date: November 14, 2002 /s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: November 14, 2002 /s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
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CERTIFICATIONS
I, Phillip G. Norton, Chairman of the Board, President and Chief Executive
Officer of ePlus inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ePlus inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report ("Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
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I, Steven J. Mencarini, Senior Vice President and Chief Financial Officer of
ePlus inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ePlus inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report ("Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
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STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF
FINANCIAL OFFICER OF EPLUS INC.
PURSUANT TO 18 U.S.C. SECTION 1350
Each of the undersigned hereby certifies in his capacity as an officer of ePlus
inc. (the "Company") that this Quarterly Report on Form 10-Q for the period
ended September 30, 2002, as filed with the Securities and Exchange Commission
on the date hereof (this "Report"), fully complies with the requirements of
Section 13(a) and 15(d) of the Securities Exchange Act of 1934, and the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Dated: November 14, 2002 /s/ PHILLIP G. NORTON
------------------------------------------
Phillip G. Norton
President and Chief Executive Officer
Dated: November 14, 2002 /s/ STEVEN J. MENCARINI
------------------------------------------
Steven J. Mencarini
Senior Vice President and
Chief Financial Officer
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