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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 December 31, 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 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 February 11, 2003, was
9,568,151.
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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 December 31, 2002 2
Condensed Consolidated Statements of Earnings, Three Months
Ended December 31, 2001 and 2002 3
Condensed Consolidated Statements of Earnings, Nine Months
Ended December 31, 2001 and 2002 4
Condensed Consolidated Statements of Cash Flows, Nine
Months Ended December 31, 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
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2002 As of December 31, 2002
---------------------------------------------------------
ASSETS
Cash and cash equivalents $ 28,223,503 $ 16,544,207
Accounts receivable, net of allowance for doubtful
accounts of $3,719,207 and $3,543,237 as of
March 31, 2002 and December 31, 2002, respectively 41,466,362 61,492,671
Notes receivable 227,914 155,822
Inventories 871,857 1,374,580
Investment in leases and leased equipment - net 169,087,078 165,822,167
Property and equipment - net 6,144,061 5,223,784
Deferred tax asset 5,471,658 -
Other assets 5,419,813 3,689,415
Goodwill - net 22,083,308 19,147,132
---------------------------------------------------------
TOTAL ASSETS $ 278,995,554 $ 273,449,778
=========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 3,898,999 $ 1,711,924
Accounts payable - trade 15,104,985 22,828,751
Salaries and commissions payable 491,716 848,143
Accrued expenses and other liabilities 19,091,729 16,930,747
Income taxes payable 364,183 -
Recourse notes payable 4,659,982 11,499
Nonrecourse notes payable 129,095,051 122,387,244
Deferred taxes - 957,843
---------------------------------------------------------
Total Liabilities $ 172,706,645 $ 165,676,151
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 10,528,635
issued and 9,568,151 outstanding at December 31, 2002 $ 104,619 $ 105,285
Additional paid-in capital 62,414,067 62,831,483
Treasury stock, at cost, 66,100 and 960,484 shares,
respectively (574,800) (6,595,924)
Retained earnings 44,345,023 51,459,934
Accumulated other comprehensive income -
Foreign currency translation adjustment - (27,151)
---------------------------------------------------------
Total Stockholders' Equity 106,288,909 107,773,627
---------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,995,554 $ 273,449,778
=========================================================
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
December 31,
-------------------------------------------------
2001 2002
-------------------------------------------------
REVENUES
Sales of equipment $ 31,378,590 $ 52,887,159
Sales of leased equipment 8,337,323 897,984
-------------------------------------------------
39,715,913 53,785,143
Lease revenues 11,537,725 12,381,795
Fee and other income 4,558,804 7,096,728
-------------------------------------------------
16,096,529 19,478,523
-------------------------------------------------
TOTAL REVENUES 55,812,442 73,263,666
-------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 27,535,908 48,010,795
Cost of sales, leased equipment 7,908,154 922,926
-------------------------------------------------
35,444,062 48,933,721
Direct lease costs 1,565,791 2,140,982
Professional and other fees 623,398 944,501
Salaries and benefits 9,235,834 11,633,540
General and administrative expenses 2,764,601 3,294,518
Interest and financing costs 2,617,346 1,920,372
-------------------------------------------------
16,806,970 19,933,913
-------------------------------------------------
TOTAL COSTS AND EXPENSES 52,251,032 68,867,634
-------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,561,410 4,396,032
-------------------------------------------------
PROVISION FOR INCOME TAXES 1,424,564 1,802,376
-------------------------------------------------
NET EARNINGS $ 2,136,846 $ 2,593,656
=================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.20 $ 0.26
=================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.20 $ 0.26
=================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,430,731 9,992,133
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,671,096 10,028,509
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Nine months ended
December 31,
-------------------------------------------------
2001 2002
-------------------------------------------------
REVENUES
Sales of equipment $ 98,200,146 $ 167,814,598
Sales of leased equipment 8,789,430 5,509,288
-------------------------------------------------
106,989,576 173,323,886
Lease revenues 34,338,505 35,747,237
Fee and other income 14,926,809 18,852,971
-------------------------------------------------
49,265,314 54,600,208
-------------------------------------------------
TOTAL REVENUES 156,254,890 227,924,094
-------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 85,673,752 150,543,970
Cost of sales, leased equipment 8,335,524 5,457,927
-------------------------------------------------
94,009,276 156,001,897
Direct lease costs 7,115,187 4,471,986
Professional and other fees 1,742,280 2,411,259
Salaries and benefits 24,142,473 35,554,292
General and administrative expenses 8,998,024 10,831,661
Interest and financing costs 9,455,691 6,597,048
-------------------------------------------------
51,453,655 59,866,246
-------------------------------------------------
TOTAL COSTS AND EXPENSES 145,462,931 215,868,143
-------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 10,791,959 12,055,951
-------------------------------------------------
PROVISION FOR INCOME TAXES 4,316,623 4,941,509
-------------------------------------------------
NET EARNINGS $ 6,475,336 $ 7,114,442
=================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.64 $ 0.70
=================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.61 $ 0.69
=================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,182,336 10,228,007
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,578,852 10,280,813
See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
-------------------------------
2001 2002
-------------------------------
Cash Flows From Operating Activities:
Net earnings $ 6,475,336 $ 7,114,442
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation, amortization and write off of depreciable assets 4,269,706 5,181,150
(Recovery of) provision for credit losses (58,417) 177,602
Deferred taxes (6,411,416) 6,429,501
Adjustment of basis to fair market value of equipment and
inventories 1,001,169 -
Payments from lessees directly to lenders - operating leases (347,028) (376,468)
Loss on disposal of property and equipment
95,520 65,850
Changes in:
Accounts receivable 21,104,450 (20,331,096)
Other receivables 1,848,836 35,482
Inventories 1,764,995 (506,235)
Other assets (2,097,098) 3,385,168
Accounts payable - equipment (4,462,782) (2,187,075)
Accounts payable - trade (4,644,042) 5,789,503
Salaries and commissions payable, accrued
expenses and other liabilities 12,162,944 (2,228,351)
-------------------------------
Net cash provided by operating activities 30,702,173 2,549,473
-------------------------------
Cash Flows From Investing Activities:
Purchases of operating lease equipment (931,556) (6,941,090)
Increase in investment in direct financing and sales-type leases (20,448,421) (24,444,647)
Proceeds from sale of property and equipment 53,734 -
Purchases of property and equipment (1,604,123) (1,213,413)
Cash used in acquisitions, net of cash acquired (1,820,084) -
Increase in other assets (373,959) -
-------------------------------
Net cash used in investing activities (25,124,409) (32,599,150)
-------------------------------
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Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 58,794,763 92,505,259
Recourse 32,639 1,448,388
Repayments:
Nonrecourse (40,738,319) (65,004,890)
Recourse (455,103) (2,035,004)
Pay-off of recourse debt due to settlement - (99,659)
Write-off of nonrecourse debt due to bankruptcy - (1,838,286)
Proceeds from issuance of capital stock, net of expenses 83,460 415,998
Purchase of treasury stock (125,070) (6,021,123)
Net repayment of lines of credit (5,027,284) (1,000,302)
-------------------------------
Net cash provided by financing activities 12,565,086 18,370,381
-------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 18,142,850 (11,679,296)
Cash and Cash Equivalents, Beginning of Period 24,534,183 28,223,503
-------------------------------
Cash and Cash Equivalents, End of Period 42,677,033 $ 16,544,207
===============================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 841,406 $ 6,037,026
===============================
Cash paid for income taxes $ 6,046,877 $ 1,333,698
===============================
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 (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
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, 2002 December 31, 2002
---------------------------------------
(In Thousands)
Investment in direct financing and sales-type leases - net $ 167,628 $ 160,587
Investment in operating lease equipment - net 1,459 5,235
---------------------------------------
Investments in leases and leased equipment - net $ 169,087 $ 165,822
=======================================
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, 2002 December 31, 2002
----------------------------------------
(In Thousands)
Minimum lease payments $ 161,788 $ 156,065
Estimated unguaranteed residual value 25,880 24,508
Initial direct costs, net of amortization (1) 3,424 3,116
Less: Unearned lease income (20,412) (19,609)
Reserve for credit losses (3,052) (3,493)
----------------------------------------
Investment in direct financing and sales-
type leases, net $ 167,628 $ 160,587
========================================
(1) Initial direct costs are shown net of amortization of $5,486 and $3,220 at
March 31, and December 31, 2002, respectively.
The Company's net investment in direct financing and sales-type leases is
collateral for non-recourse and recourse equipment notes.
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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, 2002 December 31, 2002
--------------------------------------------
(In Thousands)
Cost of equipment under operating leases $ 13,916 $ 10,587
Initial direct costs 14 -
Less: Accumulated depreciation and amortization (12,471) (5,352)
--------------------------------------------
--------------------------------------------
Investment in operating lease equipment, net $ 1,459 $ 5,235
============================================
3. BUSINESS COMBINATIONS
On October 4, 2001, the Company purchased all the outstanding stock of SourceOne
Computer Corporation (SourceOne), 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.
On March 29, 2002, the Company purchased certain fixed assets, customer lists,
and contracts, and assumed certain liabilities, relating to Elcom International,
Inc.'s (Elcom) information technology (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 was approximately $2.3 million,
including $2,150,000 in cash and the assumption of certain liabilities of
approximately $113,000.
The acquisitions of SourceOne and Elcom were not significant; therefore pro
forma financial information is not presented.
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 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 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.
During the three months ended December 31, 2002, the Company repurchased 522,833
shares of its outstanding common stock for a total of $3,727,256. Since the
inception of the Company's initial repurchase program on September 20, 2001, as
of December 31, 2002, the Company had repurchased 960,484 shares of its
outstanding common stock at an average cost of $6.87 per share for a total of
$6,595,924. Of the shares repurchased, 331,551 shares were repurchased as a
result of a settlement that occurred during the quarter ended September 30,
2002.
-9-
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 the 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 December 31, 2001
Sales $ 8,484,387 $ 31,231,526 $ 39,715,913
Lease revenues 11,537,725 - 11,537,725
Fee and other income 2,166,556 2,392,248 4,558,804
---------------- ---------------- ----------------
Total revenues 22,188,668 33,623,774 55,812,442
Cost of sales 8,310,854 27,133,208 35,444,062
Direct lease costs 1,565,791 - 1,565,791
Selling, general and administrative
expenses 5,911,486 6,712,347 12,623,833
---------------- ---------------- ----------------
Segment earnings 6,400,537 (221,781) 6,178,756
Interest expense 2,577,982 39,364 2,617,346
---------------- ---------------- ----------------
Earnings before income taxes $ 3,822,555 (261,145) 3,561,410
================ ================ ================
Assets $ 260,834,483 45,890,926 $ 306,725,409
================ ================ ================
Three months ended December 31, 2002
Sales $ 1,365,673 52,419,470 53,785,143
Lease revenues 12,381,795 - 12,381,795
Fee and other income 3,388,575 3,708,153 7,096,728
---------------- ---------------- ----------------
Total revenues 17,136,043 56,127,623 73,263,666
Cost of sales 1,572,120 47,361,601 48,933,721
Direct lease costs 2,140,982 - 2,140,982
Selling, general and administrative
expenses 6,711,382 9,161,177 15,872,559
---------------- ---------------- ----------------
Segment earnings 6,711,559 (395,155) 6,316,404
Interest expense 1,794,348 126,024 1,920,372
---------------- ---------------- ----------------
Earnings before income taxes $ 4,917,211 (521,179) 4,396,032
================ ================ ================
Assets 223,773,469 49,676,309 $ 273,449,778
================ ================ ================
Nine months ended December 31, 2001
Sales $ 9,309,297 97,680,279 $ 106,989,576
Lease revenues 34,338,505 - 34,338,505
Fee and other income 7,696,806 7,230,003 14,926,809
---------------- ---------------- ----------------
Total revenues 51,344,608 104,910,282 156,254,890
Cost of sales 9,789,291 84,219,985 94,009,276
Direct lease costs 7,115,187 - 7,115,187
Selling, general and administrative
expenses 16,226,355 18,656,422 34,882,777
---------------- ---------------- ----------------
Segment earnings 18,213,775 2,033,875 20,247,650
Interest expense 9,349,552 106,139 9,455,691
---------------- ---------------- ----------------
Earnings before income taxes $ 8,864,223 $ 1,927,736 $ 10,791,959
================ ================ ================
Assets $ 260,834,483 $ 45,890,926 $ 306,725,409
================ ================ ================
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Technology
Financing Sales
Business Business
Unit Unit Total
---------------- ---------------- ----------------
Nine months ended December 31, 2002
Sales $ 6,896,086 $ 166,427,800 $ 173,323,886
Lease Renewal 35,747,237 - 35,747,237
Fee and other income 8,456,211 10,396,760 18,852,971
---------------- ---------------- ----------------
Total revenues 51,099,534 176,824,560 227,924,094
Cost of sales 7,510,294 148,491,603 156,001,897
Direct lease costs 4,471,986 - 4,471,986
Selling, general and administrative
expenses 20,797,344 27,999,868 48,797,212
---------------- ---------------- ----------------
Segment earnings 18,319,910 333,089 18,652,999
Interest expense 6,246,410 350,638 6,597,048
---------------- ---------------- ----------------
Earnings before income taxes $ 12,073,500 $ (17,549) $ 12,055,951
================ ================ ================
Assets $ 223,773,469 $ 49,676,309 $ 273,449,778
================ ================ ================
6. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The Company 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 required the Company to perform a
transitional assessment of whether there was an indication that the goodwill was
impaired as of the date of adoption. The Company then had a transition period
from the date of adoption to determine the fair value of each reporting unit and
if goodwill had been impaired. Any goodwill impairment loss would have been
recognized as the cumulative effect of a change in accounting principle no later
than the end of the fiscal year of adoption. We completed this test and
determined that no potential impairment existed. The Company is also 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 December 31, 2002
the Company had goodwill, net of accumulated amortization, of $19,147,132, a
decrease of $762,788 from December 31, 2001 as a result of a purchase price
adjustment which occurred during the current fiscal year, offset somewhat by
increases due to the Elcom acquisition in the prior fiscal year. No goodwill
amortization expense was recognized during the nine-month periods ended December
31, 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 No. 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
-12-
operations. SFAS No. 144 supersedes previous guidance for financial accounting
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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtednes of Others." The Interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability of the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002 and the Company does not believe that adoption of the
recognition and measurement provision will have a material impact on its
financial statements. The Company adopted Interpretation No. 45 effective
December 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
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value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company does not expect that the adoption
of SFAS No. 148 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 included in Item 1 of
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
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, 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 190 people at
December 31, 2002, derived from both the hiring of personnel and as a result of
the acquisitions of SourceOne and Elcom both of which were information
technology sales and services entities. These two acquisitions and our hiring of
other sales persons have expanded our current locations to 36, all of which are
in the United States.
-14-
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.
CRITICAL ACCOUNTING POLICIES
The manner in which lease finance transactions are characterized and reported
for accounting purposes has a major impact upon reported revenue and net
earnings. Lease accounting methods significant to our business are discussed
below.
We classify our lease transactions, as required by 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 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.
-15-
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.
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 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: 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 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.
-16-
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+, our e-procurement
software package, are recognized as services are rendered. Amounts charged for
the 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; 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 December 31,
2002 and 2001, the Company's reserve for credit losses was $7,035,746 and
$5,486,182, 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 341 441 782
Recoveries (58) - (58)
Other (459) - (459)
---------------- ------------------ ------------
Balance December 31, 2002 $3,543 $3,493 $7,036
================ ================== ============
Balances in "Other" include actual write offs and reclassifications from prior
years. The Company assumed $72,631 in reserve for credit losses in the
acquisition of SourceOne.
-17-
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 nine months ended December
31, 2001 on this investment. The Company also wrote off a $420,711 investment in
a start-up venture during the nine months ending December 31, 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 nine months ended December 31, 2002. During
the nine months ended December 31, 2001, $617,038 of internal-use software was
capitalized. As of December 31, 2002, the Company had $723,189, net of
amortization, of capitalized costs for the development of internal-use software
as compared to $878,226, net of amortization, at March 31, 2002. These
capitalized costs are included in the accompanying condensed consolidated
balance sheets as a component of property and equipment - net.
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. During
the nine months ended December 31, 2002 and December 31, 2001, $128,920 and
$1,075,000 of costs for the development of software available to customers were
capitalized. As of December 31, 2002, the Company had $634,872, net of
amortization, of capitalized costs for the development of software available to
customers as compared to $776,389, net of amortization, at March 31, 2002. These
capitalized costs are included in the accompanying condensed consolidated
balance sheets as a component of property and equipment - net.
RESULTS OF OPERATIONS
Three and Nine Months Ended December 31, 2002 Compared to Three and Nine Months
Ended December 31, 2001
Total revenues generated by the Company during the three-month period ended
December 31, 2002 were $73,263,666 compared to revenues of $55,812,442 during
the comparable period in the prior fiscal year, an increase of 31.3%. During the
nine-month period ended December 31, 2002, revenues were $227,924,094 compared
to revenues of $156,254,890 during the comparable period in the prior fiscal
year, an increase of 45.9%. These increases are primarily the result of
increased sales of equipment and offset somewhat by the sales of 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 35.4% to $53,785,143 during the three-month period ended December 31,
2002, as compared to $39,715,913 generated during the corresponding period in
the prior fiscal year. For the nine-month period ended December 31, 2002, sales
increased 62.0% to $173,323,886 from $106,989,576 the corresponding period in
the prior year.
Sales of equipment are generated primarily through the Company's technology
sales business unit subsidiaries and represented 98.3% and 96.8% of total sales
revenue for the three and nine months ended December 31, 2002 as compared to
79.0% and 91.8% for the three and nine months ended December 31, 2001. Sales of
equipment during the three months ended December 31, 2002 increased 68.6% to
$52,887,159 compared to $31,378,590 generated during the comparable period in
the prior fiscal year. Sales of equipment during the nine months ended December
-18-
31, 2002 increased 70.9% to $167,814,598 compared to $98,200,146 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 9.2% and 10.3% for the three and nine-month periods ended December
31, 2002 compared to a gross margin of 12.2% and 12.8% during the comparable
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 December 31, 2002 sales of leased equipment decreased
89.2% to $897,984 from $8,337,323 during the three months ended December 31,
2001. During the nine months ended December 31, 2002, sales of leased equipment
decreased 37.3% to $5,509,288 from $8,789,430 during the nine months ended
December 31, 2001. During the three months ended December 31, 2002 the Company
recognized a gross loss on leased equipment sales of 2.8% compared to a gross
margin of 5.1% for the comparable period in the prior fiscal year. During the
nine months ended December 31, 2002 the Company recognized a gross margin on
leased equipment sales of 0.9% compared to a gross margin of 5.2% for the
comparable period in the prior fiscal year. The significant decrease in leased
equipment sales reflects a lower 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 related cost, and therefore the gross margin, recognized on sales of
leased equipment can vary significantly depending on the nature and timing of
the sale, as well as the nature and timing of any lease rental earnings and/or
debt funding recognized in accordance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Instruments and Extinguishment of
Liabilities - a Replacement of FASB Statement No. 125".
The Company's lease revenues increased 7.3% to $12,381,795 for the three months
ended December 31, 2002 compared with $11,537,725 during the corresponding
period in the prior fiscal year. For the nine-month period ending December 31,
2002, lease revenues increased 4.1% to $35,747,237 compared with $34,338,505
during the corresponding period in the prior fiscal year.
For the three months ended December 31, 2002, fee and other income recognized
was $7,096,728, an increase of 55.7% from $4,558,804 recognized during the
comparable period in the prior fiscal year. For the nine months ended December
31, 2002, fee and other income recognized was $18,852,971, an increase of 26.3%
from $14,926,809 recognized during the comparable period in the prior fiscal
year. Fee and other income includes revenues from adjunct services and fees,
including broker fees and remarketing fees generated by the Company's financing
business unit subsidiaries, and 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, as well as to earnings from certain
transactions which are in the Company's normal course of business but for which
there is no guarantee that future transactions of the same nature, size or
profitability will occur. The Company's ability to consummate such transactions,
and the timing thereof, may depend largely upon factors outside the direct
control of management. The earnings from these types of transactions in a
particular period may not be indicative of the earnings that can be expected in
future periods.
The Company's direct lease costs increased 36.7% and decreased 37.2% during the
three and nine-month periods ended December 31, 2002 as compared to the same
period in the prior fiscal year. The increase for the three-month period is due
to an increase in the Company's reserve for credit losses. The decrease for the
nine-month period 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 51.5%, or $321,103, and 38.4%, or
$668,979 for the three and nine-month periods over the comparable periods in the
prior fiscal year, was primarily the result of expenses related to broker fees
and the difference in the timing of the accrual for audit fees.
-19-
Salaries and benefits expenses increased 26.0% and 47.3% during the three and
nine-month periods ended December 31, 2002 over the same periods in the prior
year. The increase is the result of additional expense related to the Company's
recent acquisitions of SourceOne and Elcom, and increased commissions resulting
from the increase in sales.
The Company's general and administrative expenses increased 19.2% to $3,294,518
during the three months ended December 31, 2002, as compared to $2,764,601 in
the same period in the prior fiscal year. The Company's general and
administrative expenses increased 20.4% to $10,831,661 during the nine months
ended December 31, 2002, as compared to $8,998,024 in the same period in the
prior fiscal year.
Interest and financing costs incurred by the Company for the three months and
nine months ended December 31, 2002 decreased 26.6% and 30.2% 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 $1,802,376 for the three
months ended December 31, 2002 from $1,424,564 for the three months ended
December 31, 2001, and increased to $4,941,509 for the nine months ended
December 31, 2002 from $4,316,623 for the nine months ended December 31, 2001,
reflecting effective income tax rates of 41% for the three and nine-month
periods ending December 31, 2002 and 40% for the three and nine-month periods
ending December 31, 2001.
The foregoing resulted in a 21.4% increase in net earnings for the three-month
period ended December 31, 2002 as compared to the same period in the prior
fiscal year, and a 9.9% increase in net earnings for the nine-month period ended
December 31, 2002 as compared to the same period in the prior fiscal year. Basic
and diluted earnings per common share were $0.26 and $0.26 for the three months
ended December 31, 2002, as compared to $0.20 for basic and $0.20 for diluted
earnings for the three months ended December 31, 2001. Basic and diluted
weighted average common shares outstanding for the three months ended December
31, 2002 were 9,992,133 and 10,028,509, respectively. For the three months ended
December 31, 2001, basic and diluted weighted average shares outstanding were
10,430,731 and 10,671,096, respectively. Basic and diluted earnings per common
share were $0.70 and $0.69 for the nine months ended December 31, 2002, as
compared to $0.64 for basic and $0.61 for diluted earnings for the nine months
ended December 31, 2001. Basic and diluted weighted average common shares
outstanding for the nine months ended December 31, 2002 were 10,228,007 and
10,280,813, respectively. For the nine months ended December 31, 2001, the basic
and diluted weighted average shares outstanding were 10,182,336 and 10,578,852,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended December 31, 2002, the Company generated cash
flows from operations of $2,549,473 and used cash flows from investing
activities of $32,599,150. Cash flows generated by financing activities amounted
to $18,370,381 during the same period. The net effect of these cash flows was a
net decrease in cash and cash equivalents of $11,679,296 during the nine-month
period. During the same period, the Company's total assets decreased $5,545,776
or 2.0%. The cash balance at December 31, 2002 was $16,544,207 as compared to
$28,233,503 at March 31, 2002.
Other Assets, which consist primarily of prepaid expenses, deposit, advances,
and certain other receivables, decreased to $3,689,415 at December 31, 2002 from
$5,419,813 at March 31, 2002. This decrease is attributable to the receipt of
$0.8 million of previously-disputed amounts due from a settlement, as well as to
the timing of prepayments to lenders.
-20-
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 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, 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 nine-month
period ending December 31, 2002, the Company's lease related non-recourse debt
portfolio decreased 5.2% to $122,387,244.
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 December 31, 2002, the Company had
$1,711,924 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
and amounts collected and payable, such as sales taxes and lease rental payments
due to third parties, and as such can vary significantly depending on the timing
of payments from customers. As of December 31, 2002, the Company had $16,930,747
of accrued expenses and other liabilities, as compared to $19,091,729 at March
31, 2002.
Working capital for our leasing business is provided through a $35,000,000
credit facility that expires on April 17, 2004. Participating in this facility,
are, Branch Banking and Trust Company ($10,000,000), PNC Bank N.A. ($5,000,000),
and National City Bank ($20,000,000), the agent. The ability to borrow under
this facility is limited to the amount of eligible collateral at any given time.
The credit facility has full recourse to the Company and is secured by a blanket
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
-21-
2.5%. As of December 31, 2002, the Company had no outstanding balance on the
facility. In general, we use the National City Bank facility to pay the cost of
equipment to be put on lease, and we repay borrowings from the proceeds of: (1)
long-term, non-recourse, fixed rate financing which we obtain from lenders after
the underlying lease transaction is finalized or (2) sales of leases to third
parties. The loss of this credit facility could have a material adverse effect
on our future results as we may have to use this facility for daily working
capital and liquidity for our leasing business.
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.
As of March 31, 2002 and December 31, 2002, the respective floor planning
inventory agreement maximum credit limits and actual outstanding balances were
as follows:
Entity Floor Plan Supplier Credit Limit at Balance as of Credit Limit at Balance as of
March 31, 2002 March 31, 2002 December 31, 2002 December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
ePlus Technology of NC, GE Distribution Finance Corp.(a) $ 3,500,000 $1,554,793 $3,500,000 $1,959,660
inc. IBM Credit Corporation $ 250,000 $ - $ 250,000 $ 147,179
ePlus Technology of PA, GE Distribution Finance Corp.(a) $ 9,000,000 $7,893,419 $9,000,000 $2,929,408
inc. IBM Credit Corporation $ 2,000,000 $1,056,318 $1,250,000 $ 162,093
ePlus Technology, inc. GE Distribution Finance Corp.(a) $ 13,500,000 $8,663,724 $13,500,000 $8,926,613
(a) Subsequent to March 31, 2002, GE Distribution Finance Corp. became the
successor to Duetsche Financial Services Corporation.
The facilities provided by GE Distribution Finance Corp. (formerly 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 GE Distribution Finance
Corp. 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.
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In addition to the floor planning financing, ePlus Technology, inc. and ePlus
Technology of PA, inc. have accounts receivable facilities through GE
Distribution Finance Corp. in the aggregate amount of $7,000,000. The maximum
available under the accounts receivable facilities for ePlus Technology, inc.
and ePlus Technology of PA, inc. are $5,000,000 and $2,000,000 respectively and
as of December 31, 2002 there was no outstanding balance 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.
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.
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 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 2002 Annual Report:
- - 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;
-24
- - 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.
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 Bank and GE Distribution Finance Corp. facilities, bear interest
at a fixed rate. Borrowings under the National City Bank and GE Distribution
Finance Corp. 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 March 31, 2002 and December 31, 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
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 22, 2002, one of ePlus' lenders filed a complaint against ePlus
inc., as successor in interest to CLG, Inc., in the Supreme Court of the State
of New York. ePlus acquired CLG in September 1999. In the complaint, the lender
alleges that CLG misrepresented that it had good title to certain assets that it
had leased to a customer and financed on a non-recourse basis with the lender.
The customer subsequently defaulted on its payments and then filed for
bankruptcy in Delaware. The bankruptcy court found that title to the financed
assets had passed to the customer and that CLG was simply a lien holder. The
lender is seeking approximately $2.6 million in damages, plus interest, late
charges and attorney fees. ePlus has removed the case to the United States
District Court for the Southern District of New York. Although the ultimate
outcome and liability, if any, cannot be determined, the Company
-25-
believes that it has meritorious defenses in connection with the lawsuit and
intends to vigorously contest it. In the opinion of management, resolution of
this lawsuit is not expected to have a material adverse effect on the financial
position of the Company.
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
Not Applicable
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, filed August 27, 1996.
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company, filed September 30, 1997.
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, filed October 19, 1999.
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company, filed May 23, 2002.
3.5 Bylaws of the Company, as amended to date.
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)).
99.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350.
99.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350.
(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.
On December 27, 2002, the Company filed a Current Report on Form 8-K announcing
the purchase of 522,833 shares of its common stock, for a total consideration of
$3,726,256, under its stock repurchase plan in privately negotiated
transactions.
-26-
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 14, 2003 /s/ PHILLIP G. NORTON
---------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: February 14, 2003 /s/ STEVEN J. MENCARINI
----------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
-27-
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
this 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: February 14, 2003 /s/ PHILLIP G. NORTON
---------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
-28-
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
this 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: February 14, 2003 /s/ STEVEN J. MENCARINI
----------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
-29-