10-Q 1 f_10q123102.txt 10Q FOR 12-31-2002 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. -1- 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 -2- 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. -3- 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. -4-
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. -5- 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) ------------------------------- -6- 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. -7- 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. -8- 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. -10-
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 ================ ================ ================
-11-
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 -13- 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. -22- 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-