-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V0jNN0M5vJg1L1hzhse3DCa6hYnb4sntMzyMcBDVCRj+jQg0KlgZujRoMP+g8FPv excPLk2YCVCYTY2mlyNbRQ== 0001022408-03-000020.txt : 20030814 0001022408-03-000020.hdr.sgml : 20030814 20030814152508 ACCESSION NUMBER: 0001022408-03-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPLUS INC CENTRAL INDEX KEY: 0001022408 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 541817218 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28926 FILM NUMBER: 03847089 BUSINESS ADDRESS: STREET 1: 400 HERNDON PARKWAY CITY: HERNDON STATE: VA ZIP: 20176 BUSINESS PHONE: 7038345710 MAIL ADDRESS: STREET 1: 400 HERNDON PARKWAY STREET 2: SUITE B CITY: HERNDON STATE: VA ZIP: 20170 FORMER COMPANY: FORMER CONFORMED NAME: MLC HOLDINGS INC DATE OF NAME CHANGE: 19960906 10-Q 1 f_10q63003.txt 10Q 6-30-2003 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____ to ____ . Commission file number: 0-28926 ePlus inc. (Exact name of registrant as specified in its charter) Delaware 54-1817218 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Herndon Parkway, Herndon, VA 20170 (Address, including zip code, of principal offices) Registrant's telephone number, including area code: (703) 834-5710 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ___ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ___] No [ X ] The number of shares of common stock outstanding as of August 11, 2003, was 9,500,201. TABLE OF CONTENTS ePlus inc. AND SUBSIDIARIES
Part I. Financial Information: Item 1. Financial Statements - Unaudited: Condensed Consolidated Balance Sheets as of March 31, 2003 and June 30, 2003 2 Condensed Consolidated Statements of Earnings, Three Months Ended June 30, 2002 and 2003 3 Condensed Consolidated Statements of Cash Flows, Three Months Ended June 30, 2002 and 2003 4 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 20 Part II. Other Information: Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 23
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ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of March 31, 2003 As of June 30, 2003 ------------------------------------------- ASSETS Cash and cash equivalents $ 27,784,090 $ 23,160,246 Accounts receivable, net of allowance for doubtful accounts of $3,346,055 and $3,357,937 as of March 31, 2003 and June 30, 2003, respectively 38,384,841 51,306,987 Notes receivable 53,098 107,455 Inventories 1,373,168 1,622,889 Investment in leases and leased equipment - net 182,169,324 174,400,897 Property and equipment - net 5,249,087 4,706,223 Goodwill 19,147,132 19,154,038 Other assets 4,779,946 5,156,063 ------------------------------------------- TOTAL ASSETS $ 278,940,686 $ 279,614,798 =========================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable - equipment $ 5,635,776 $ 6,392,859 Accounts payable - trade 25,914,385 25,720,231 Salaries and commissions payable 619,860 486,082 Accrued expenses and other liabilities 13,978,942 14,074,823 Income taxes payable - 118,425 Recourse notes payable 2,736,298 - Nonrecourse notes payable 115,678,353 115,072,707 Deferred tax liability 4,760,029 5,763,168 ------------------------------------------- Total Liabilities 169,323,643 167,628,295 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued or outstanding - - Common stock, $.01 par value; 50,000,000 shares authorized; 10,540,135 issued and 9,451,651 outstanding at March 31, 2003 and 10,546,685 issued and 9,458,201 outstanding at June 30, 2003 $ 105,400 $ 105,466 Additional paid-in capital 62,905,727 62,954,409 Treasury Stock, at cost, 1,088,484 shares (7,511,124) (7,511,124) Retained earnings 54,057,732 56,420,369 Accumulated other comprehensive income - Foreign currency translation adjustment 59,308 17,383 ------------------------------------------- Total Stockholders' Equity 109,617,043 111,986,503 ------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,940,686 $ 279,614,798 =========================================== See Notes to Condensed Consolidated Financial Statements.
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ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended June 30, 2002 2003 ---------------------------------------- REVENUES Sales of product $ 52,886,739 $ 65,295,787 Sales of leased equipment 4,611,303 - ---------------------------------------- 57,498,042 65,295,787 Lease revenues 10,575,403 12,375,547 Fee and other income 4,101,835 2,196,184 ---------------------------------------- 14,677,238 14,571,731 ---------------------------------------- TOTAL REVENUES 72,175,280 79,867,518 ---------------------------------------- COSTS AND EXPENSES Cost of sales, product 46,183,424 57,511,924 Cost of sales, leased equipment 4,535,001 - ---------------------------------------- 50,718,425 57,511,924 Direct lease costs 910,776 2,348,130 Professional and other fees 773,073 516,045 Salaries and benefits 10,384,783 10,147,191 General and administrative expenses 3,628,301 3,816,453 Interest and financing costs 2,410,584 1,746,349 ---------------------------------------- 18,107,517 18,574,168 ---------------------------------------- TOTAL COSTS AND EXPENSES 68,825,942 76,086,092 ---------------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,349,338 3,781,426 ---------------------------------------- PROVISION FOR INCOME TAXES 1,373,203 1,478,098 ---------------------------------------- NET EARNINGS $ 1,976,135 $ 2,303,328 ======================================== NET EARNINGS PER COMMON SHARE - BASIC $ 0.19 $ 0.24 ======================================== NET EARNINGS PER COMMON SHARE - DILUTED $ 0.19 $ 0.24 ======================================== WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,404,895 9,455,381 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,506,489 9,601,499 See Notes to Condensed Consolidated Financial Statements.
-3- ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended June 30, 2002 2003 ------------------------------------------------ Cash Flows From Operating Activities: Net Earnings $ 1,976,135 $ 2,303,328 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 1,497,121 1,650,219 Provision for credit losses 222,223 41,569 Deferred taxes 395,500 1,003,139 Gain on sale of operating lease equipment (59,851) - Payments from lessees directly to lenders - (302,847) Loss on disposal of property and equipment - 152,776 Changes in: Accounts receivable (13,454,095) (12,963,714) Other receivables (708,952) (54,357) Inventories (598,512) (249,722) Other assets 302,276 (383,022) Accounts payable - equipment 842,273 757,083 Accounts payable - trade 11,374,535 (194,154) Salaries and commissions payable, accrued expenses and other liabilities 5,369,313 80,527 ------------------------------------------------ Net cash provided (used) by operating activities 7,157,966 (8,159,175) ------------------------------------------------ Cash Flows From Investing Activities: Purchases of operating lease equipment (254,575) (4,155,067) (Increase) decrease in investment in direct financing and sales-type leases (10,359,732) 3,306,168 Purchases of property and equipment (424,190) (262,453) Proceeds from sale of operating equipment - 98,511 ------------------------------------------------ Net cash used in investing activities (11,038,497) (1,012,841) ------------------------------------------------
-4- ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (UNAUDITED)
Three Months Ended June 30, 2002 2003 ------------------------------------------------ Cash Flows From Financing Activities: Borrowings: Nonrecourse 20,469,775 17,729,162 Repayments: Nonrecourse (11,400,914) (10,510,823) Recourse (75,778) (2,736,298) Purchase of treasury stock (347,000) - Proceeds from issuance of capital stock, net of expenses 271,128 48,748 Net payments on lines of credit (1,000,000) - ------------------------------------------------ Net cash provided by financing activities 7,917,211 4,530,789 ------------------------------------------------ Effect of Exchange Rate Changes on Cash - 17,383 ------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 4,036,680 (4,623,844) Cash and Cash Equivalents, Beginning of Period 28,223,503 27,784,090 ------------------------------------------------ Cash and Cash Equivalents, End of Period $ 32,260,183 $ 23,160,246 ================================================ Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 1,797,374 $ 941,135 ================================================ Cash paid for income taxes $ 261,142 $ 339,762 ================================================ See Notes To Condensed Consolidated Financial Statements.
-5- 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 period amounts have been reclassified to conform to the current period'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, 2003 (the "Company's 2003 Form 10-K"). Operating results for the interim periods are not necessarily indicative of results for an entire year. 2. RECLASSIFICATIONS Certain service revenues and related costs which were directly related to the sale of certain products have been reclassified for the three months ended June 30, 2002 to conform to our current reporting format. $2.3 million of revenue was reclassified from fee and other income to sales of product, and $0.8 million of costs were reclassified from salaries and benefits to cost of sales, product. 3. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET Investments in leases and leased equipment - net consists of the following:
As of March 31, 2003 June 30, 2003 (In Thousands) -------------------------------------- Investment in direct financing and sales-type leases, net $ 173,394 $ 162,566 Investment in operating lease equipment, net 8,775 11,835 -------------------------------------- Investments in leases and leased equipment, net $ 182,169 $ 174,401 ======================================
The Company's net investment in leases is collateral for non-recourse and recourse equipment notes, if any. -6- 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, 2003 June 30, 2003 (In Thousands) ------------------------------------------ Minimum lease payments $ 168,385 $ 156,547 Estimated unguaranteed residual value 26,631 25,818 Initial direct costs, net of amortization (1) 3,072 2,783 Less: Unearned lease income (21,287) (19,175) Reserve for credit losses (3,407) (3,407) ------------------------------------------ Investment in direct financing and sales- type leases, net $ 173,394 $ 162,566 ==========================================
(1) Initial direct costs are shown net of amortization of $3,691 and $2,005 at March 31 and June 30, 2003, respectively. 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, 2003 June 30, 2003 (In Thousands) ------------------------------- Cost of equipment under operating leases $ 12,824 $ 16,155 Less: Accumulated depreciation and amortization (4,049) (4,320) ------------------------------- Investment in operating lease equipment, net $ 8,775 $ 11,835 =============================== 4. RESERVES FOR CREDIT LOSSES As of March 31 and June 30, 2003, the Company's reserve for credit losses was $6,753,433 and $6,765,314, respectively. The Company's reserves for credit losses are segregated between our accounts receivable and our lease assets as follows (in thousands):
Accounts Receivable Lease Assets Total -------------------------------------------------------- Balance April 1, 2002 $ 3,719 $ 3,052 $ 6,771 Provision for bad debts 176 440 616 Recoveries (140) - (140) Write-offs and other (409) (85) (494) -------------------------------------------------------- Balance March 31, 2003 $ 3,346 $ 3,407 $ 6,753 -------------------------------------------------------- Provision for bad debts 33 - 33 Write-offs and other (21) - (21) -------------------------------------------------------- Balance June 30, 2003 $ 3,358 $ 3,407 $ 6,765 ========================================================
Balances in "Write-offs and other" include actual write-offs and reclassifications from prior years. -7- 5. STOCK BASED COMPENSATION As of June 30, 2003, the Company had three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations issued by the Financial Accounting Standards Board. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," to stock-based employee compensation: Three Months Ended June 30, 2002 2003 ----------------------------------- Net earnings, as reported $ 1,976,135 $ 2,303,328 Stock based compensation expense (913,482) (595,742) ----------------------------------- Net earnings, pro forma $ 1,062,653 $ 1,707,586 =================================== Basic earnings per share, as reported $0.19 $0.24 Basic earnings per share, pro forma $0.10 $0.18 Diluted earnings per share, as reported $0.19 $0.24 Diluted earnings per share, pro forma $0.10 $0.18 6. SEGMENT REPORTING The Company manages its business segments on the basis of the products and services offered. The Company's reportable segments consist of its traditional financing business unit and its technology sales business unit. The financing business unit offers lease-financing solutions to corporations and governmental entities nationwide. The technology sales business unit sells information technology 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 2003 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. -8-
Technology Financing Sales Business Business Unit Unit Total ------------------------------------------------------- Three months ended June 30, 2002 Sales $ 5,034,425 $ 52,463,617 $ 57,498,042 Lease Revenues 10,575,403 - 10,575,403 Fee and other income 3,030,053 1,071,782 4,101,835 ------------------------------------------------------- Total revenues 18,639,881 53,535,399 72,175,280 Cost of sales 5,249,429 45,468,996 50,718,425 Direct lease costs - 910,776 - 910,776 Selling, general and administrative 6,662,813 8,123,344 14,786,157 expenses ------------------------------------------------------- Segment earnings 5,816,863 (56,941) 5,759,922 Interest expense 2,256,498 154,086 2,410,584 ------------------------------------------------------- Earnings (Loss) before income taxes $ 3,560,365 $ (211,027) $ 3,349,338 ======================================================= Assets $ 229,781,841 $ 63,298,486 $ 293,080,327 ======================================================= Three months ended June 30, 2003 Sales $ 778,871 $ 64,516,916 $ 65,295,787 Lease revenues 12,375,547 - 12,375,547 Fee and other income 671,372 1,524,812 2,196,184 ------------------------------------------------------- Total revenues 13,825,790 66,041,728 79,867,518 Cost of sales 747,801 56,764,122 57,511,923 Direct lease costs 2,348,130 - 2,348,130 Selling, general and administrative expenses 5,549,040 8,930,649 14,479,689 ------------------------------------------------------- Segment earnings 5,180,819 346,957 5,527,776 Interest expense 1,617,428 128,920 1,746,348 ------------------------------------------------------- Earnings before income taxes $ 3,563,391 $ 218,037 $ 3,781,428 ======================================================= Assets $ 233,711,261 $ 45,903,537 $ 279,614,798 =======================================================
7. EARNINGS PER SHARE The weighted average number of common shares used in determining basic and diluted net income per share for the three months ended June 30, 2002 and 2003 are as follows: Three Months Ended June 30, 2002 2003 ------------------------ Basic common shares outstanding 10,404,895 9,455,381 Common stock equivalents 101,594 146,118 ======================== Diluted common shares outstanding 10,506,489 9,601,499 8. COMMITMENTS AND CONTINGENCIES There are no material legal proceedings to which the Company is a party. We are engaged in ordinary and routine litigation incidental to our business. While we cannot predict the outcome of these various legal proceedings, it is management's opinion that the resolution of these matters will not have a material adverse effect on our financial position or results of operations. -9- 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 2003 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 180 people as of June 30, 2003, located at our 30 current locations, all of which are in the United States. On May 15, 2001, we acquired from ProcureNet, Inc. the e-commerce procurement software asset, products, and software technology for cleaning and categorizing product descriptions for e-commerce catalogues. These products and services and the associated expenses with this business acquisition have substantially increased our expenses, and the ability to sell these services and products is expected to fluctuate depending on the customer demand for these products and services, which to date is still unproven. These products and services are included in our technology sales business unit segment, combined with our other sales of IT products and services. Our leasing and financing activities are included in our financing business unit segment in our financial statements. As a result of our acquisitions and changes in the number of sales locations, the Company's historical results of operations and financial position may not be indicative of its future performance over time. -10- CRITICAL ACCOUNTING POLICIES The manner in which lease finance transactions are characterized and reported for accounting purposes has a major impact upon reported revenue and net earnings. Lease accounting methods critical to our business are discussed below. We classify our lease transactions, as required by Statement of Financial Accounting Standards 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 in our lease revenues. OPERATING LEASES. All leases that do not meet the criteria to be classified as direct financing or sales-type leases are accounted for as operating leases. Rental amounts are accrued on a straight-line basis over the lease term and are recognized as lease revenue. Our cost of the leased equipment is recorded on the balance sheet as investment in leases and 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. -11- As a result of these three classifications of leases for accounting purposes, the revenues resulting from the "mix" of lease classifications during an accounting period will affect the profit margin percentage for such period and such profit margin percentage generally increases as revenues from direct financing and sales-type leases increase. Should a lease be financed, the interest expense declines over the term of the financing as the principal is reduced. RESIDUAL VALUES. Residual values represent our estimated value of the equipment at the end of the initial lease term. The residual values for direct financing and sales-type leases are reported as part of the investment in direct financing and sales-type leases, on a net present value basis. The residual values for operating leases are included in the leased equipment's net book value and are reported in the investment in operating lease equipment. The estimated residual values will vary, both in amount and as a percentage of the original equipment cost, and depend upon several factors, including the equipment type, manufacturer's discount, market conditions and the term of the lease. We evaluate residual values on an ongoing basis and record any required changes in accordance with SFAS No. 13. Residual values are affected by equipment supply and demand and by new product announcements by manufacturers. In accordance with accounting principles generally accepted in the United States of America, residual value estimates are adjusted downward when such assets are impaired. We seek to realize the estimated residual value at lease termination through: (1) renewal or extension of the original lease; (2) sale of the equipment either to the lessee or on the secondary market; or (3) lease of the equipment to a new customer. The difference between the proceeds of a sale and the remaining estimated residual value is recorded as a gain or loss in lease revenues when title is transferred to the lessee, or, if the equipment is sold on the secondary market, in equipment sales revenues and cost of equipment sales when title is transferred to the buyer. For lease 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 PRODUCT. Sales of product includes the following types of transactions: (1) sales of new or used equipment which is not subject to any type of lease; (2) service revenue in our technology sales business unit which is recognized as services are rendered; (3) sales of off-lease equipment to the secondary market; and (4) sales of procurement software. Sales of new or used equipment are recognized upon shipment. Sales of off-lease equipment are recognized when constructive title passes to the purchaser. SOFTWARE SALES. 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. -12- 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. Management's determination of the adequacy of the reserve is based on an evaluation of historical credit loss experience, current economic conditions, volume, growth, the composition of the lease portfolio, and other relevant factors. The reserve is increased by provisions for potential credit losses charged against income. Accounts are either written off or written down when the loss is both probable and determinable, after giving consideration to the customer's financial condition, the value of the underlying collateral and funding status (i.e., discounted on a non-recourse or recourse basis). CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE. The Company has capitalized certain costs for the development of internal-use software under the guidelines of SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." These capitalized costs are included in the accompanying condensed consolidated balance sheets as a component of property and equipment - net. As of June 30, 2003, capitalized costs, net of amortization, totaled $1,259,484 as compared to $1,316,123 as of March 31, 2003. CAPITALIZATION OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS. In accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," software development costs are expensed as incurred until technological feasibility has been established, at such time such costs are capitalized until the product is made available for release to customers. These capitalized costs are included in the accompanying condensed consolidated balance sheets as a component of other assets. The Company had $293,265 of capitalized costs as of March 31, 2003 and June 30, 2003. RESULTS OF OPERATIONS - Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Total revenues generated by the Company during the three-month period ended June 30, 2003 were $79,867,518 compared to revenues of $72,175,280 during the comparable period in the prior fiscal year, an increase of 10.7%. The increase is primarily the result of increased sales of product and leased equipment. The Company's revenues are composed of sales and other revenue, and may vary considerably from period to period. See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS". Sales revenue, which includes sales of product and sales of leased equipment, increased 13.6% to $65,295,787 during the three-month period ended June 30, 2003, as compared to $57,498,042 generated during the corresponding period in the prior fiscal year. Sales of product are generated primarily through the Company's technology sales business unit subsidiaries and represented 100% and 92.0% total sales revenue for the three months ended June 30, 2003 and 2002, respectively. Sales of product increased 23.5% to $65,295,787 during the current period compared to -13- $52,886,739 generated during the comparable period in the prior fiscal year. Included in the sales of product in our technology sales business unit are certain service revenues which are bundled with sales of equipment and are integral to the successful delivery of such equipment. The increase was a result of higher sales within our technology sales business unit subsidiaries. The Company realized a gross margin on sales of product of 11.9% and 12.7% for the three-month periods ended June 30, 2003 and 2002, respectively. The Company's gross margin on sales of product is affected by the mix and volume of products sold. The Company also recognizes revenue from the sale of leased equipment. During the three months ended June 30, 2003, the Company recognized no sales of leased equipment. During the three months ended June 30, 2002, the Company recognized a gross margin of 1.7% on leased equipment sales of $4,611,303. Leased equipment sales reflects equity that the Company sold to outside investors. Leases that are not equity-sold to investors remain on the Company's books and lease earnings are recognized accordingly. In addition, the revenue and gross margin recognized on sales of leased equipment can vary significantly depending on the nature and timing of the sale, as well as the timing of any debt funding recognized in accordance with SFAS No. 140. The Company's lease revenues increased 17.0% to $12,375,547 for the three months ended June 30, 2003 compared with the corresponding period in the prior fiscal year. The increase is the result of an increase in sales of off-lease equipment to lessees and also an increase in revenue recognized based on sales of lease receivables, offset somewhat by a decrease in renewal rent revenue. For the three months ended June 30, 2003, fee and other income decreased 46.5% over the comparable period in the prior fiscal year. Fee and other income includes revenues from adjunct services and fees, including broker and agent fees, support fees, warranty reimbursements, and interest income. The current period decrease in fee and other income is attributable to settlement money of $2.0 million received from Toshiba during the three months ended June 30, 2002, while no such settlement income was received for the three months ended June 30, 2003. The Company's fee and other income includes earnings from certain transactions which are in the Company's normal course of business, but there is no guarantee that future transactions of the same nature, size or profitability will occur. The Company's ability to consummate such transactions, and the timing thereof, may depend largely upon factors outside the direct control of management. The earnings from these types of transactions in a particular period may not be indicative of the earnings that can be expected in future periods. The Company's direct lease costs increased 157.8% during the three-month period ended June 30, 2003 as compared to the same period in the prior fiscal year. The increase is the result of an increase in lease depreciation, specifically depreciation on the increased operating lease assets and on the Company's matured lease portfolio. The decrease in professional and other fees of 33.3%, or $257,028, for the current period over the comparable period in the prior fiscal year was primarily the result of decreased expenses related to the Company's outside technical services. Salaries and benefits expenses decreased 2.3% during the three-month period ended June 30, 2003 over the same period in the prior year. Salaries and benefits expense decreased due a decrease in the average number of employees during the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. The Company employed approximately 565 and 590 people as of June 30, 2003 and 2002, respectively. The Company's general and administrative expenses increased 5.2% to $3,816,453 during the three months ended June 30, 2003, as compared to the same period in the prior fiscal year. Interest and financing costs incurred by the Company for the three months ended June 30, 2003 decreased 27.6% due to decreased borrowing under the Company's -14- lines of credit and because our weighted average interest rate on new lease-related non-recourse debt decreased during the three months ended June 30, 2003, as compared to the same period in the prior fiscal year. Interest and financing costs relate to interest costs on the Company's indebtedness, both lease-specific and general working capital. Payments for interest costs on the majority of the Company's non-recourse and certain recourse notes are typically remitted directly to the lender by the lessee. The Company's provision for income taxes increased to $1,478,098 for the three months ended June 30, 2003 from $1,373,203 for the three months ended June 30, 2002, reflecting effective income tax rates of 39% for the three months ended June 30, 2003 and 41% for the three months ended June 30, 2002. The reduction in the effective tax rate for the period ended June 30, 2003 as compared to the comparable period in the prior year is due primarily to "bonus depreciation" tax laws put into effect in prior years. The foregoing resulted in a 16.6% increase in net earnings for the three-month period ended June 30, 2003 as compared to the same period in the prior fiscal year. Basic and fully diluted earnings per common share were $0.24 and $0.24 for the three months ended June 30, 2003, as compared to $0.19 and $0.19 for the three months ended June 30, 2002. Basic and diluted weighted average common shares outstanding for the three months ended June 30, 2003 were 9,455,381 and 9,601,499 respectively. For the three months ended June 30, 2002, the basic and diluted weighted average shares outstanding were 10,404,895 and 10,506,489, respectively. LIQUIDITY AND CAPITAL RESOURCES During the three-month period ended June 30, 2003, the Company used cash flows from operations of $8,159,175 and used cash flows from investing activities of $1,012,841. Cash flows generated by financing activities amounted to $4,530,789 during the same period. The effect of exchange rate changes during the period provided cash flows of $17,383. The net effect of these cash flows was a net decrease in cash and cash equivalents of $4,623,844 during the three-month period. During the same period, the Company's total assets increased $674,112, or 0.2%. The cash balance at June 30, 2003 was $23,160,246 as compared to $27,784,090 at March 31, 2003. The Company's debt financing activities typically provide approximately 80% to 100% of the purchase price of the equipment purchased by the Company for lease to its customers. Any balance of the purchase price (the Company's equity investment in the equipment) must generally be financed by cash flow from its operations, the sale of the equipment leased to third parties, or other internal means. Although the Company expects that the credit quality of its leases and its residual return history will continue to allow it to obtain such financing, no assurances can be given that such financing will be available on acceptable terms, or at all. The financing necessary to support the Company's leasing activities has principally been provided by non-recourse and recourse borrowings. Historically, the Company has obtained recourse and non-recourse borrowings from banks and finance companies. Non-recourse financings are loans whose repayment is the responsibility of a specific customer, although we may make representations and warranties to the lender regarding the specific contract or have ongoing loan servicing obligations. Under a non-recourse loan, we borrow from a lender an amount based on the present value of the contractually committed lease payments under the lease at a fixed rate of interest, and the lender secures a lien on the financed assets. When the lender is fully repaid from the lease payment, the lien is released and all further rental or sale proceeds are ours. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk of each lease, and their only recourse, upon default by the lessee, is against the lessee and the specific equipment under lease. The Company has programs with Key Corporate Capital, Inc. and Fleet Business Credit Corporation. In addition to these programs, recently the Company has regularly funded its leasing activities with Citizens Leasing Corporation, GE Capital Corporation, De Lage Landen Financial Services, Inc., Hitachi Leasing America, and Fifth Third Bank, among others. These programs require that each transaction is specifically approved and done solely at the lender's discretion. During the three-month period ended June 30, -15- 2003, the Company's lease related non-recourse debt portfolio decreased 0.5% to $115,072,707. Whenever possible and desirable, the Company arranges for equity investment financing which includes selling assets, including the residual portions, to third parties and financing the equity investment on a non-recourse basis. The Company generally retains customer control and operational services, and has minimal residual risk. The Company usually preserves the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed to return on its investment. We actively sell or finance our equity investment with Bank of America, Fleet Business Credit Corporation and GE Capital Corporation, among others. The Company's "Accounts payable - equipment" represents equipment costs that have been placed on a lease schedule, but for which the Company has not yet paid. The balance of unpaid equipment cost can vary depending on vendor terms and the timing of lease originations. As of June 30, 2003, the Company had $6,392,859 of unpaid equipment cost, as compared to $5,635,776 at March 31, 2003. The Company's "Accrued expenses and other liabilities" includes deferred income, reserves for credit losses, and amounts collected and payable, such as sales taxes and lease rental payments due to third parties. As of June 30, 2003, the Company had $14,074,823 of accrued expenses and other liabilities. Working capital for our leasing business is provided through a $35,000,000 credit facility that was originally set to expire on April 17, 2004. Participating in this facility are Branch Banking and Trust Company ($15,000,000) 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. As of June 30, 2003, the Company had no outstanding balance on this 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. On July 21, 2003, the Company early renewed this facility, increasing the maximum amount that can be borrowed to $45,000,000, expiring on July 21, 2006. Participating in this facility are Branch Banking and Trust Company, Bank of America, and National City Bank as agent. Each bank has committed $15,000,000 to the facility. Borrowings under the $45,000,000 facility will bear interest at LIBOR plus 175 basis points or, at our option, at an alternative base rate which is the higher of (i) the prime commercial lending rate of the Administrative Agent, in its individual capacity as a bank, as announced from time to time at its head office, or (ii) the Federal Funds Rate plus 1/2 of 1% (one-half of one percent). The credit facility is secured by certain of the Company's assets such as chattel paper (including leases), receivables, inventory, and equipment. In addition, we have entered into pledge agreements for the stock of each of our Subsidiaries. The availability of the credit facility is subject to a borrowing base formula that consists of inventory, receivables, purchased assets, and leases. Availability under the credit facility may be limited by the asset value of equipment purchased by us or by terms and conditions in the credit facility agreement. If we are unable to sell the equipment or unable to finance the equipment on a permanent basis within a certain time period, the availability of credit under the facility could be diminished or eliminated. The credit facility contains covenants relating to the following: minimum tangible net worth; cash flow coverage ratios; maximum debt to equity ratio; maximum amount of guarantees of subsidiary obligations; mergers; acquisitions; and asset sales. -16- ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology, inc., until they were merged on March 31, 2003, had separate credit facilities to finance their working capital requirements for inventories and accounts receivable. After the entities were merged into ePlus Technology, inc., the credit facilities were effectively merged into one by GE Distribution Finance Corporation. The floor planning line from IBM Credit Corporation was terminated on March 31, 2003 and the outstanding balances were subsequently repaid. The traditional business of ePlus Technology as a seller of computer technology and related network equipment and software products is financed through an agreement known as "floor planning" financing in which interest expense for the first thirty to forty-five days 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. The respective floor planning inventory agreement maximum credit limits and actual outstanding balances were as follows:
Credit Limit at Balance as of Credit Limit at Balance as of Floor Plan Supplier March 31, 2003 March 31, 2003 June 30, 2003 June 30, 2003 - ----------------------------------------------------------------------------------------------------------------- GE Distribution Finance Corp. $ 26,000,000.00 $ 15,158,501.00 $ 26,000,000.00 $ 18,383,313.00 IBM Credit Corporation $ - $ 26,328.00 $ - $ -
The facility provided by GE Distribution Finance Corporation requires a guaranty of up to $6,900,000 by ePlus inc. The loss of the GE Distribution Finance Corporation floor planning facilities could have a material adverse effect on our future results as we currently rely on these facilities for daily working capital and liquidity for our technology sales business and operational accounts payable functions. In addition to the floor planning financing, ePlus Technology, inc. has an accounts receivable facility through GE Distribution Finance Corporation with a maximum amount that can be borrowed of $7,000,000. As of June 30, 2003 there was no outstanding balance on this facility. As of March 31, 2003, the maximum available that could be borrowed under the accounts receivable facility was $7,000,000 and there was an outstanding balance of $2,726,347. 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. In the normal course of business, the Company may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, the Company would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which is remote in management's opinion. The Company is in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and any liability incurred in connection with these guarantees would not have a material adverse effect on the Company's consolidated results of operations or financial position. In addition, the Company has other guarantees that represent parent guarantees in support of the ePlus Technology, inc. floor planning and accounts receivable financing up to $6.9 million. -17- 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. Our traditional businesses of equipment leasing and financing and technology sales have the following risks, among others, which are described in the Company's 2003 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, -18- risks, difficulties and uncertainties frequently encountered by early-stage companies using new and unproven business models in rapidly evolving markets. Some of these challenges relate to the Company's ability to: - increase the total number of users of eECM services; - adapt to meet changes in its markets and competitive developments; and - continue to update its technology to enhance the features and functionality of its suite of products. We cannot be certain that our business strategy will be successful or that it will successfully address these and other challenges, risks and uncertainties. Over the longer term, the Company expects to derive a significant portion of its revenues from its eECM business model, which is unproven. The Company expects to incur expenses that may negatively impact profitability. The Company also expects to incur significant sales and marketing, research and development, and general and administrative expenses in connection with the development of this business. As a result, the Company may incur significant expenses, which may have a material adverse effect on the future operating results of the Company as a whole. Broad and timely acceptance of the eECM services, which is important to the Company's future success, is subject to a number of significant risks. These risks include: - the electronic commerce business-to-business solutions market is highly competitive; - the system's ability to support large numbers of buyers and suppliers is unproven; - significant enhancement of the features and services of our eECM solution may be needed to achieve widespread commercial initial and continued acceptance of the system; - the pricing model may not be acceptable to customers; - if the Company is unable to develop and increase volume from our eECM services, it is unlikely that it will ever achieve or maintain profitability in this business; - businesses that have already made substantial up-front payments for e-commerce solutions may be reluctant to replace their current solution and adopt the Company's solution; - the Company's ability to adapt to a new market that is characterized by rapidly changing technology, evolving industry standards, new product announcements and established competition; - we may be unable to protect our intellectual property rights or face claims from third parties for infringement of their products. 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 -19- National City Bank and GE Distribution Finance Corporation facilities, bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. Borrowings under the National City and GE Distribution Finance Corporation facilities bear interest at a market-based variable rate, based on a rate selected by the Company and determined at the time of borrowing. If the amount borrowed is not paid at the end of the rate period, the rate is reset in accordance with the Company's selection and changes in market rates. Due to the relatively short nature of the interest rate periods, we do not expect our operating results or cash flow to be materially affected by changes in market interest rates. As of June 30, 2003, the aggregate fair value of our recourse borrowings approximated their carrying value. During the year ended March 31, 2003, the Company began transacting business in Canada. As such, the Company has entered into lease contracts and non-recourse, fixed interest rate financing denominated in Canadian Dollars. To date, Canadian operations have been insignificant and the Company believes that potential fluctuations in currency exchange rates will not have a material effect on its financial position. Item 4. CONTROLS AND PROCEDURES Based on an evaluation carried out, as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective. As of the end of the period covered by this report, there have been no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -20- PART II. OTHER INFORMATION Item 1. Legal Proceedings On November 22, 2002, an affiliate of 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 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 (Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002). 3.2 Certificate of Amendment of Incorporation of the Company, filed September 30, 1997 (Incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company, filed October 19, 1999 (Incorporated herein by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002). 3.4 Certificate of Amendment of Certificate of Incorporation of the Company, filed May 23, 2002 (Incorporated herein by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002). -21- 3.5 Bylaws of the Company, as amended to date (Incorporated herein by reference to Exhibit 3.5 to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2002). 31.1 Certification Of the Chief Executive Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). 31.2 Certification Of the Chief Financial Officer of ePlus inc. pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a). 32.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C.ss.1350. 32.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C.ss.1350. (b) Reports on Form 8-K On June 26, 2003, the Company furnished pursuant to Item 9 a Current Report on Form 8-K announcing a press release reporting its financial results for the fiscal quarter and year ended March 31, 2003. -22- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ePlus inc. Date: August 14, 2003 /s/ PHILLIP G. NORTON ---------------------------------------------- By: Phillip G. Norton, Chairman of the Board, President and Chief Executive Officer Date: August 14, 2003 /s/ STEVEN J. MENCARINI ---------------------------------------------- By: Steven J. Mencarini, Senior Vice President and Chief Financial Officer -23- EX-31 3 exh31_1.txt EXHIBIT 31.1 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Phillip G. Norton, President and Chief Executive Officer of ePlus inc., certify that: 1. I have reviewed this Quarterly Report of ePlus inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: August 14, 2003 /s/ PHILLIP G. NORTON ------------------------------------- Phillip G. Norton President and Chief Executive Officer EX-31 4 exh31_2.txt EXHIBIT 31.2 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Steven J. Mencarini, Senior Vice President and Chief Financial Officer of ePlus inc., certify that: 1. I have reviewed this Quarterly Report of ePlus inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: August 14, 2003 /s/ STEVEN J. MENCARINI ------------------------------------------ Steven J. Mencarini Vice President and Chief Financial Officer EX-32 5 exh32_1.txt EXHIBIT 32.1 STATEMENT OF CEO EXHIBIT 32.1 STATEMENT OF THE CHIEF EXECUTIVE OFFICER OF EPLUS INC. PURSUANT TO 18 U.S.C. ss. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned hereby certifies in his capacity as an officer of ePlus inc. (the "Company") that, to his knowledge, this quarterly report on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (this "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ PHILLIP G. NORTON ------------------------------------- Phillip G. Norton President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ePlus inc. and will be retained by ePlus inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 6 exh32_2.txt EXHIBIT 32.2 STATEMENT OF CFO EXHIBIT 32.2 STATEMENT OF THE CHIEF FINANCIAL OFFICER OF EPLUS INC. PURSUANT TO 18 U.S.C. ss. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned hereby certifies in his capacity as an officer of ePlus inc. (the "Company") that, to his knowledge, this quarterly report on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (this "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ STEVEN J. MENCARINI ---------------------------------- Steven J. Mencarini Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ePlus inc. and will be retained by ePlus inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----