Exhibit 99.2
BUSINESS
OVERVIEW AND BACKGROUND OF THE COMPANY
We provide Internet-based, business-to-business supply chain management
solutions for information technology and other operating resources. On November
2, 1999, we introduced our remotely-hosted electronic commerce solution,
ePlusSuite, which combines Internet-based tools with dedicated customer service
to provide a comprehensive outsourcing solution for the automated procurement,
management, financing and disposition of operating resources.
The ePlusSuite solution consists of four modules which can be operated
independently or integrated to provide a full suite of services:
- Procure(+) is an electronic procurement and content management solution
which allows customers to automate their internal workflow procedures for
the procurement of operating resources.
- Manage(+) is an electronic infrastructure management solution which
provides asset management through an asset repository and tracking
database.
- Finance(+) facilitates automated financing solutions for assets procured
through Procure(+) or Manage(+).
- Service(+) provides implementation and customization services,
fulfillment and asset disposition.
We have been in the business of selling, leasing, financing, and managing
information technology and other assets for nearly ten years and currently
derive most of our revenues from such activities. The introduction of ePlusSuite
reflects our transition to a business-to-business electronic commerce solutions
provider from our historical sales and financing business. Over time, we plan to
use our ePlusSuite platform to facilitate sales and financing transactions
between our customers and third parties rather than originate these transactions
as principal. As a result, we expect our electronic commerce revenues to
substantially increase and represent a greater portion of our total revenues.
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INDUSTRY BACKGROUND
Growth of the Internet as a Platform for Efficient Business-to-Business
Electronic Commerce.
The Internet is rapidly becoming the preferred channel for business-to-business
transactions. It has fundamentally changed how companies of all sizes
communicate and share information. In the intensely competitive global business
environment, businesses have increasingly adopted the Internet to streamline
their business processes, lower costs and make their employees more productive.
Traditional Areas of Business Process Automation
Businesses have traditionally attempted to reduce costs through the automation
of internal processes. In particular, these efforts focused on the procurement
of direct goods such as raw materials and unfinished products. Similar efforts
have been made to improve the procurement process for operating resources, which
include information technology and telecommunications equipment, office
equipment and supplies, travel and entertainment, professional services and
other repeat purchase items. The purchase and sale of these goods comprise a
large portion of business-to-business transactions.
Many organizations conduct procurement and management of operating resources
through costly paper-based processes that require actions by many individuals
both inside and outside the organization. We estimate that replacing a
traditional paper-based procurement system with an Internet-based system can
reduce the cost of processing a purchase request by at least two-thirds.
Traditional processes also do not generally feature automated spending and
procurement controls and, as a result, may fail to direct spending to preferred
vendors and may permit spending on unapproved goods and services.
Many large companies have installed enterprise resource planning and supply
chain automation systems and software to increase their procurement efficiency
for operating resources. These systems are often complex and are designed to be
used by a relatively small number of sophisticated users. They may not provide
the necessary interactivity with the vendor. In addition, a variety of
point-to-point solutions such as electronic data interchange have been
developed. However, the expense and
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complexity associated with licensing, implementing and managing these solutions
can make them unsuitable for all but the largest organizations.
Certain providers of business-to-business electronic commerce solutions have
attempted to link purchasers and vendors of operating resources and services
into trading communities over the Internet. Their solutions are software-based
and enable development of marketplaces to operate among participants with
similar systems and primarily cater to larger firms.
Opportunity for Business-to-Business Electronic Commerce and Supply Chain
Management Solutions
We believe that an opportunity exists to provide Internet-based supply chain
management solutions which are remotely-hosted. Our end-to-end business process
solutions integrate the procurement and management of assets with financing,
fulfillment and other asset services. These solutions streamline processes
within an organization and provide integrated access to third-party content,
commerce and services. Our comprehensive approach also facilitates relationships
with preferred vendors.
Our target customers are primarily middle-market companies, with revenues
between $25 million and $1 billion per year. We believe there are over 60,000
customers in our target market.
Our target customer has one or more of the following business characteristics
that we believe make ePlusSuite a preferred solution:
- seeks a lower cost alternative to enterprise software solutions;
- will benefit from the cost savings and efficiency gains that can be
obtained from an Internet-based procurement solution;
- prefers to retain the flexibility to negotiate prices with designated
vendors or buying exchanges;
- wants to lower its total cost of ownership of information technology
assets by standardizing configurations and proactively managing its fixed
asset base over the life of the asset; and
- seeks a comprehensive solution for its entire asset management supply
chain.
THE ePLUS SOLUTION
We provide an integrated suite of Internet-based business-to-business supply
chain management solutions designed to improve productivity and enhance
operating efficiency on a company-wide basis. Our ePlusSuite currently includes
Internet-based applications for the procurement and management of operating
resources that can be integrated with financing and other asset services. In
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addition, our solution uses the Internet as a gateway between employees and
third-party content, commerce and service providers. We believe our solution
makes our customers' companies more efficient, while providing better
information to management.
ePlusSuite allows customers to automate and customize their existing business
rules and procurement processes using an Internet-based workflow tool. We offer
a remotely-hosted solution with a transaction-based fee structure that reduces
up-front costs for customers, facilitates quick adoption, and eliminates the
need for customers to maintain and update software. In addition, ePlusSuite
integrates effectively with existing legacy systems. We believe our solution can
be implemented faster with less customer training than many competing
software-based solutions.
STRATEGY
Our goal is to become a leading provider of Internet-based supply chain
management solutions. The key elements of our strategy include the following:
Convert our existing customer base to become users of ePlusSuite
We have an existing client base of approximately 1,500 customers. We believe our
years of experience in developing supply chain management solutions, including
financing, asset management and information technology sales and service, give
us significant advantages over our competitors. Consequently, we believe we are
well-positioned to offer a comprehensive Internet-based supply chain management
solution tailored to meet our customers' specific needs.
Since the introduction of ePlusSuite on November 2, 1999, we have implemented or
are in the process of implementing the EPlusSuite solution with 24 customers, 8
of which were our existing customers.
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Expand our sales force and marketing activities
We currently have approximately 68 salespersons in 16 locations, and we plan to
substantially increase the number of salespersons and locations in the next 12
months. We intend to expand our presence in locations that have a high
concentration of fast-growing middle market companies. In addition, we plan to
add sales staff to some of our existing offices. We will seek to hire
experienced personnel with established customer relationships and with
backgrounds in hardware and software sales, telecommunications sales, and supply
chain management. We also plan to create a national brand to increase market
awareness of ePlusSuite through advertising and public relations campaigns. We
may also selectively acquire companies that have attractive customer
relationships and skilled sales forces. For example, as a result of our recent
acquisition of CLG, Inc. we added 448 additional customers.
Expand the functionality of our Internet-based solutions
We intend to continue to modify ePlusSuite to expand its functionality to serve
customer needs. In addition, we intend to use the flexibility of our platform to
offer additional products and services through ePlusSuite. For example, we
believe that EPlusSuite can be expanded to include outsourcing of human
resources services and other non-core activities. As part of this strategy, we
may also acquire technology companies to expand and enhance the platform of
ePlusSuite to provide additional functionality and value added services.
Expand our strategic relationships to market and enhance ePlusSuite
We intend to expand and develop strategic relationships to accelerate market
acceptance of our electronic commerce business solutions. We believe these
strategic relationships will allow us to access a wider customer base and expand
the functionality of ePlusSuite. We recently entered into joint marketing
arrangements with finance subsidiaries of Chase Manhattan, Inc. and Wachovia
Corporation that enable them to market ePlusSuite to their customers. We believe
these marketing relationships can be a substantial source of growth.
Increase our role as intermediary in sales and financing transactions
Over time, we plan to use our ePlusSuite platform to facilitate sales and
financing transactions between our customers and third parties, rather than
originate these transactions as principal. We currently buy and sell information
technology assets and provide financing directly to our customers. We plan to
use our ePlusSuite platform to facilitate sales and financing transactions
between our customers and third parties rather than originate these transactions
as principal. We believe we can leverage our financing expertise and
relationships to arrange programs with specific institutions to provide
financing directly to our electronic commerce customers.
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DESCRIPTION OF ePLUSSUITE
ePlusSuite consists of four modules, Procure(+), Manage(+), Finance(+) and
Service(+). These components are fully integrated in that each component links
with and shares information with the other components. Procure(+) and Manage(+)
are remotely-hosted electronic commerce solutions, and Finance(+) and Service(+)
are services provided by us.
Procure(+). Procure(+) offers Internet-based procurement capabilities that
enable companies to reduce their purchasing costs while increasing their overall
supply chain efficiency. Cost reductions are achieved through user-friendly
application functionality designed to reduce off-contract, or unauthorized
purchases, automate unnecessary manual processes, improve leverage with
suppliers and provide links to a sophisticated asset information repository,
Manage(+). Procure(+) is a remotely-hosted solution with no applets or
executables to download. Its core technology is based on the Microsoft SQL
server and it uses XML and cXML software technology to permit scalability,
flexibility and open architecture standards.
Procure(+) provides the following features and functions for the customer:
- Electronic Catalogs--combines multiple vendor catalogs including
item pricing and availability information which can be updated as
required. Catalog content can be viewed in customized formats and can
include detailed product information.
- Workflow and Business Rules--graphically displays complex business
rules to build the internal workflow process to mirror the customer's
organization. Multiple business rules can be used, and changes can be
made by the customer or EPlus. Approval thresholds and routing rules
can be set by dollar amount, quantity, asset type or other criteria.
No coding or expensive programming is required.
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- Order Tracking--provides detailed information online about every
order, including date and time stamps from requestors, approvers,
purchasers, vendors and shippers enabling customers to track orders
and to create detailed order audit trails.
- Order Information--contains multiple data fields which can be easily
customized to provide complete information to the customer, such as
accounting codes, budget costs, cost center information, notes, and
shipping and billing information.
The key benefits of Procure(+) include:
- easy to use, Internet-based interface that requires limited
training;
- easy implementation without the assistance of consultants, no
upfront license fees and no ongoing maintenance or upgrade costs;
- integration of multiple vendor catalogs and advanced search,
filtering and viewing capabilities that allow the customer to control
views by user groups;
- an easily configured workflow module that automates and controls
each customer's existing business processes for requisition or order
routing, approval and preparation;
- order status reporting throughout the requisition process as well as
real-time connections to suppliers for pricing and availability and
other critical information; and
- controls unauthorized purchasing and enables usage of preferred
vendors for volume discounts.
Manage(+). Manage(+) offers Internet-based asset management capabilities that
are designed to provide customers with comprehensive asset information to enable
them to proactively manage their fixed assets and lower the total cost of
ownership of the assets. Assets procured using Procure(+) or from other sources
populate the Manage(+) database to provide a seamless link. Manage(+) is a
remotely-hosted solution with no applets or executables to download. Its core
technology is an Oracle relational database system.
Manage(+) provides the following information to the customer:
- Asset Information--contains descriptive information on each asset
including serial number, tracking number, purchase order number,
manufacturer number, model number, vendor, category, billing code,
order date, shipping date, delivery date, install date, equipment
status and, if applicable, lease number, lease schedule, lease start
date, lease end date, lease term, remaining term and information on
any options ordered with the equipment.
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- Location Information--provides asset location information including
an address, building or room number, or other information required by
the customer.
- Cost Center Information--invoices assets to cost center or budget
categories. One asset can be billed to multiple cost centers and all
information will be listed under that asset record.
- Maintenance Information--maintains a history of the asset. As
maintenance and warranty repairs are made, information may be updated.
The information includes the date, a description of the service
performed and the cost.
- Invoice Information--maintains information from the original invoice
on the asset for warranty and tracking purposes.
- Financial Information--tracks all financial information on the
asset, including purchase price or lease cost, software licensing
costs and warranty and maintenance information.
- Customized Information--user specific information can also be
maintained.
The key benefits of Manage(+) include:
- an easy to use Internet-based interface that requires limited
training;
- easy implementation without the assistance of consultants and
entails no upfront license fee or ongoing maintenance or upgrade
costs;
- providing the information necessary to proactively manage the fixed
asset base, including property and sales tax calculations, upgrade and
replacement planning, technological obsolescence and total cost of
ownership calculations;
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- automating invoice reconciliation to reduce errors and track vendor
performance, including evaluating scheduled delivery versus actual
delivery performance;
- management of warranty and maintenance information to reduce
redundant maintenance fees and charges on equipment no longer in use;
- tracking of all pertinent financial, contractual, location, cost
center, configuration, upgrade and usage information for each asset
enabling customers to calculate the return of their investment by
model, vendor, department or other factors; and
- reducing overruns and assists with application rollouts and the
annual budgeting process.
Finance(+). Finance(+) is a service that facilitates the financing of purchases
on terms previously negotiated by a customer with a financing provider while
automating the accumulation of data to assist in the financing process.
Finance(+) allows customers to order equipment when desired and aggregate an
unlimited number of orders onto one or more financing transactions at the end of
a pre-determined order period (usually one to three months). The transactions
can then be invoiced by location, division, or business unit if so desired by
the customer. Finance(+) helps a customer simplify the process thereby, lowering
costs and increasing productivity.
We can assist customers in structuring loans, leases, sales/leasebacks,
tax-exempt financing, vendor programs, private label programs, off-balance sheet
leases and federal government financing in order to meet their requirements.
Service(+) is our technology business unit which provides implementation and
customization services for the rapid implementation of ePlusSuite, as well as
fulfillment and asset disposition services. Service(+) allows customers to
obtain high-quality services which can be seamlessly linked with other
components of our ePlusSuite solution. Assets which are procured through
Procure(+) can be configured, imaged, staged, and installed by us on the
customer site. Our services also assist our customers in managing their existing
information technology asset base, including maintenance, reverse logistics,
engineering, and other technology services.
ePLUSSUITE CUSTOMERS
We have approximately 1,500 customers in all of our businesses. We formally
introduced our ePlusSuite solution on November 2, 1999, and, as of February 23,
2000, we had fully-implemented ePlusSuite with the following customers:
Aatlas Commerce, LLC National Railraod Passenger Corporation
BlueStone Software, Inc. (AMTRAK)
Dain Rausher Corporation OneSoft Corporation
Forte Systems, LLC Pharmaceutical Product Development, Inc.
Logicon, Inc. (a subsidiary of Proxicom, Inc.
Northrop Grumman Corporation) SAGA SOFTWARE, Inc.
Martin Marietta Materials, Inc. The Ellerbe Becket Company
MicroStrategy, Incorporated WebMethods, Inc.
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We are currently implementing ePlusSuite with the following customers:
Catalytica Pharmaceuticals, Inc. MBM Corporation
Christian Broadcasting Network, Inc. Promotions.com inc.
Corning Incorporated Serviceco LLC (dba Road Runner)
Interpath Communications, Inc. Robroy Industries, Inc.
Lincoln National Management Womble Carlyle Sandridge & Rice, PLLC
Corporation (a subsidiary
of Lincoln National Corporation)
TECHNOLOGY
General. Our Procure(+) and Manage(+) applications are fully standards-based,
designed for the Internet and built upon an underlying architecture that is
based on Microsoft's and Sybases' distributed Internet application frameworks.
These Internet-based frameworks provide access security, load balancing,
resource pooling, message queuing, distributed transaction processing and
reusable components and services. We use XML software to enhance the
business-to-business transfer of data and documents between multiple systems.
Our development strategy relies on object-oriented programming and stresses
modularity, inheritance and reuse when feasible.
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Our applications are designed to be scalable, due to our multi-tier architecture
employing thin client, multi-threaded application servers and relational
databases. We use standard software programming languages, packages and
protocols, including Visual Basic, PowerBuilder, PowerDynamo, JavaScript, ASP,
C++, HTTP, HOP, DCOM, CORBA, Native and OBDC Data constructs. Our applications
are provided to our customers over any standard Internet browser, and there are
no applets or executables to download.
We use a component-based application infrastructure composed of
readily-configurable business rules, a workflow engine, advanced data management
capabilities and an electronic cataloging system. Each of these core elements
plays a crucial role in deploying enterprise-wide solutions that can capture a
customer's unique policies and processes and manage key business functions.
Business Rules. Our business rules engine allows Procure(+) to be configured so
that our customers can effectively enforce their requisition approval policies
while providing flexibility so that the business rules can be edited and
modified as our customer's policies change. Users of the system are presented
with appropriate guidance to facilitate adherence to corporate policies. The
business rules dramatically reduce reworking of procedures, track and resolve
policy exceptions online and eliminate re-keying of data into back-end systems.
The business rules permit management by exception, in which items requiring
managerial attention are automatically highlighted.
Workflow Engine. Our workflow engine permits that information flows through the
organization in a timely, secure and efficient manner. For example, in addition
to incorporating policy-based business rules, it incorporates time-based
standards to reroute purchase requisitions if the original recipient does not
respond within the allocated performance timeframe. Robust enterprise
applications require database-driven workflow, with e-mail-based messaging, to
provide increased security and reliability, data and transaction integrity,
real-time availability, optimization for high performance and usage reporting.
Our application also provides e-mail notification to users of the status of a
procedure or of events requiring attention, alteration and action, such as
notifying the creator of a purchase requisition of its location in the
purchasing cycle or notifying a manager of a requisition requiring attention.
Content Management. Our electronic catalog allows multiple vendor information to
be linked to customized customer catalogs. Information can be updated when
required by the customer. Our electronic cataloging system accepts XML, EDI and
other industry data standards for information transfer.
Asset Management. Manage(+) is an Oracle-based data management system that is
designed to be scalable and can be easily customized to provide
customer-specific fields and data elements. New functionality can also be
assigned to existing controls, or new controls, with little application
modification and minimal programming.
ePlusSuite can integrate with enterprise systems such as ERP systems, financial
management systems, human resource systems (for user information and
organizational structure), project accounting systems and corporate credit card
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systems. These interfaces allow for the automatic exchange of data between
ePlusSuite and other enterprise systems and for the downloading of data managed
by these enterprise systems into ePlusSuite. These integration processes are
scheduled according to the needs of our customer's information services and
finance departments.
Data Accuracy. Data input from internal departments is quality controlled within
the entering department before it is released for use to other functions.
Customer input is also quality controlled before it is released for use to other
functions.
System Security. Our security design provides multiple layers of
security--ranging from the Portal level (initial user contact occurs) to the
database level where users and roles are authenticated to the socket/protocol
layer. On the browser side (customer access), our software makes use of SSL
connections and 128-bit encryption technology. We currently use Check Point
Security software to protect our internal network systems from unauthorized
access. Check Point Firewall-1 is a comprehensive, security suite providing:
access control, content security, authentication, network address translation,
auditing and state table synchronization.
RESEARCH AND DEVELOPMENT
To date, the majority of our software development has been outsourced to
third-party software companies. We have obtained perpetual license rights and
object code from these third-party software companies. Subject to certain
exceptions, we generally retain the object code and intellectual property rights
of the customized software. To accelerate the development of our EPlusSuite, we
are building an internal software development team. We have recently hired four
software developers, two of whom previously worked for the companies which
licensed the software to us. In addition, since December 1998, we have retained
a consultant who has worked full time in the capacity of Chief Technology
Officer.
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To successfully implement our business strategy, we have to provide hosted
software functionality and related services that meet the demands of our
customers and prospective customers. We expect that competitive factors will
create a continuing need for us to improve and add to our ePlusSuite. The
addition of new products and services will also require that we continue to
improve the technology underlying our applications. We intend to maintain our
competitive advantage by investing significantly greater resources in our
internal development efforts, including adding a significant number of in-house
software engineers, and executives. In addition, to complement our in-house
development efforts, we expect significant future expenditures on software
licenses and third-party software development and consulting costs.
SALES AND MARKETING
We focus our marketing efforts on achieving brand recognition, market awareness,
lead generation, and converting our existing customer base to our ePlusSuite
solution. The target market for our ePlusSuite is primarily middle market
companies with revenues between $25 million and $1 billion. We believe there are
over 60,000 customers in our target market. Our sales representatives are paid
on commission, with specific incentives for generating new ePlusSuite customers
and revenues.
We typically market to the senior financial officer or the senior information
officer in an organization. To date, the majority of our customers have been
generated from our direct sales. As part of our strategy to grow our electronic
commerce business, we intend to hire additional sales personnel and open new
sales locations. In the future, we plan to conduct public relations campaigns to
create brand and market awareness of product benefits, developments and major
initiatives. We anticipate that these will include advertising in business and
financial publications, Internet advertising, trade shows, seminars, and direct
mail. We also intend to develop strategic relationships to expand market
acceptance of our electronic commerce business solutions. We recently entered
into joint marketing arrangements with the finance subsidiaries of Chase
Manhattan, Inc. and Wachovia Corporation. We believe these strategic
relationships can be a substantial source of growth.
Our sales force is organized under three regional directors located in our
headquarters in Herndon, Virginia and our Pottstown, Pennsylvania and Raleigh,
North Carolina regional operating centers. We have sales locations in: Herndon,
Virginia; Dallas, Texas; Sacramento and San Diego, California; Greenville,
Wilmington and Raleigh, North Carolina; Pittsburgh, Pottstown and West Chester,
Pennsylvania; Golden, Colorado; and Baltimore, Maryland. As of March 2, 2000,
our sales organization included 68 direct sales representatives and additional
sales support personnel.
IMPLEMENTATION AND CUSTOMER SERVICE
We use a project management approach to the implementation of ePlusSuite with
each new ePlusSuite customer. Our multidisciplinary team consists of an
ePlusSuite implementation specialist, who is responsible for the customer audit
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and implementation of the solution, a customer relationship manager, who leads
the customer's long-term support team, and the appropriate Service(+) staff
members to provide technology services, if required, to the customer.
Our implementation of ePlusSuite is a multi-step process that requires, on
average, approximately four weeks and involves the following steps:
- We conduct an extensive operational audit to understand the
customer's business processes across multiple departments, existing
ERP and outsourced applications, future plans, procurement approval
processes and business rules and internal control structure.
- We design a customized procurement, management and service program
to fit the customer's organizational needs.
- We implement an Internet-based supply chain management system
including: customer workflow processes and business rules using our
graphical route-builder, custom catalogs linking to chosen vendors,
including ePlus, custom reporting and querying, and data capture
parameters for the Manage(+) asset repository.
- We beta test the site and train the customer's personnel.
We provide ePlusSuite as a service solution to our customers, and the ongoing
support of the customer and our commitment to the highest possible customer
satisfaction is fundamental to our strategy. We use a team approach to providing
customer care and assign each customer to a specific team so that they are able
to continue to interact with the same ePlus personnel who have experience and
expertise with the customer's specific business processes and requirements.
INTELLECTUAL PROPERTY RIGHTS
Our success depends in part upon proprietary business methodologies, and
technologies which we have licensed and modified. We rely on a combination of
copyright, service mark and trade secret protection, confidentiality and
nondisclosure agreements
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and licensing arrangements to establish and protect intellectual property
rights. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection.
We currently have no patents, although we have filed applications in the U.S.
Patent and Trademark Office to register the service marks ePlus, ePlusSuite,
Procure(+), Manage(+), Finance(+), Service(+), EPLUS LEASING, EPLUS ONLINE and
EPLUS.
ADVANTAGE. The applications for EPLUS LEASING, EPLUS ONLINE and EPLUS ADVANTAGE
are currently based on intent-to-use. The grant of registrations for these
intent-to-use marks is conditioned upon each mark being used in commerce,
assuming the mark is found to be allowable. We also may file provisional patent
applications with the U.S. Patent and Trademark Office relating to various
features and processes embodied in our applications. A provisional patent
application is a type of application under which a patent will not be issued,
but which provides a priority date for a regular patent application that is
filed within a one year period following the filing of the provisional patent
application. We cannot assure you that any regular patents will be filed based
on our provisional applications, or that any patents will issue on our pending
provisional applications from any such regular applications. Further, we cannot
provide any assurance that any patents, if issued, will prevent the development
of competitive products or that our patents will not be successfully challenged
by others or invalidated through administrative process or litigation.
We have entered into three software licensing agreements in connection with the
development of ePlusSuite. Each of these agreements grants us a perpetual
license to the object code or gives us the right to obtain such a license upon
payment of an additional fee. Each of these licenses is nonexclusive. The
agreements permit us to modify the software source code in conjunction with
normal use or upon payment of an additional fee. Generally, the agreements
provide that any software developed to interface with licensed software is our
property if such work is based on our proprietary information. The licensing
agreements provide the payment of initial and on going fees. In addition,
certain of our licensing agreements provide for additional fees based on
transaction volume. If we commit a material breach of any one of the agreements,
it may be terminated. These agreements do not provide any indemnification for
intellectual property infringement.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult,
and while we are unable to determine the extent to which piracy of our software
products exists, software piracy can be expected to be a persistent problem. Our
means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around our proprietary intellectual property.
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FINANCING AND SALES ACTIVITIES
We have been in the business of selling, leasing, financing, and managing
information technology and other assets for nearly ten years and currently
derive most of our revenues from such activities. Over time, we plan to use our
ePlusSuite platform to facilitate sales and financing transactions between our
customers and third parties rather than originate these transactions as
principal. We believe we can develop formal contractual arrangements with our
current as well as new financing sources to provide equipment financing and
leasing for our ePlusSuite customers.
Leasing and Financing. Our leasing and financing transactions generally fall
into three categories, direct financing, sales-type or operating leases. Direct
financing and sales-type leases transfer substantially all of the benefits and
risks of equipment ownership to the customer. Operating leases consist of all
other leases that do not meet the criteria to be direct financing or sales-type
leases. Our lease transactions include true leases and installment sales or
conditional sales contracts with corporations, not-for-profit entities and
municipal and federal government contracts. Substantially all of our lease
transactions are net leases with a specified non-cancelable lease term. These
non-cancelable leases have a provision which requires the lessee to make all
lease payments regardless of any lessee dissatisfaction with its equipment. A
net lease requires the lessee to make the full lease payment and pay any other
expenses associated with the use of equipment, such as maintenance, casualty and
liability insurance, sales or use taxes and personal property taxes.
In anticipation of the expiration of the initial term of a lease, we initiate
the remarketing process for the related equipment. Our goal is to maximize
revenues on the remarketing effort by either: (1) releasing or selling the
equipment to the initial lessee; (2) renting the equipment to the initial lessee
on a month-to-month basis; (3) selling or leasing the equipment to a different
customer; or (4) selling the equipment to equipment brokers or dealers. The
remarketing process is intended to enable us to recover or exceed the residual
value of the leased equipment. Any amounts received over the estimated residual
value less any commission expenses becomes profit margin to us and can
significantly impact the degree of profitability of a lease transaction.
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Our top ten commercial financing customers for the nine months ended December
31, 1999 were:
The American National Red Cross SAGA SOFTWARE, Inc.
BlueCross BlueShield of North Carolina Sandia Corporation
Burlington Industries, Inc. Sprint Communications Company, L.P.
Checkfree Corporation and its affiliates
Georgetown University U.S. Office Products Company
Hooper Holmes, Inc.
We aggressively manage the remarketing process of our leases to maximize the
residual values of our leased equipment portfolio. To date, we have realized a
premium over our original booked residual assumption. The majority of these
gains are attributable to early termination fees as a direct result of our
remarketing strategy.
Sales. We have been providing technology sales and services since 1997. We are
an authorized reseller or have the right to resell products and services from
over 150 manufacturers, distributors, resellers, content management solution
providers and sourcing organizations. Our largest vendor relationships include
Ingram Micro, Inc., Dell Computer Corporation, MicroSoft Corporation, and Sun
Microsystems, Inc. We expect the number of vendor relationships to grow
significantly as we expand Procure(+) beyond its traditional information
technology and telecommunications products. Our flexible platform and
customizable catalogs facilitate the addition of new vendors with little
incremental effort. Our value added reseller product transactions have varying
sales on account terms from net 45 days to collect on delivery, depending on the
customer's credit and payment term requirements.
Our top ten sales customers for the nine months ended December 31, 1999 were:
America Online, Inc. National Association of Securities Dealers,
AstraZeneca LP Inc.
Corning, Incorporated Pharmaceutical Products & Development, Inc.
DC Public Schools PSINet Inc.
Geico Corporation Serviceco LLC (dba Road Runner)
UUNet Technologies Incorporated
Financing and Bank Relationships. We have a number of bank and finance company
relationships which we use to provide working capital for all of our businesses
and long term financing for our lease financing businesses. Our finance
department is responsible for maintaining and developing relationships with a
diversified pool of regional commercial banks, money-center banks, finance
companies, insurance companies and financial intermediaries with varying terms
and conditions.
Working capital financing in our leasing business is provided by a $65 million
committed line of credit provided through First Union National Bank, N.A. This
line of credit has been in place since December 1998, was renewed for another
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one-year period on December 19, 1999, has full recourse to the company, and is
secured by a blanket lien against all of our assets. In addition, we have
entered into pledge agreements to pledge the common stock of each of our
wholly-owned subsidiaries. The interest rates charged under this facility are
LIBOR plus 1.5% or Prime minus .5%, depending on the term of the borrowing. The
facility expires on December 19, 2000.
In general, we use this 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 line is collateral based and our ability to borrow is limited to
the amount of eligible collateral at any given time. Collateral is eligible
under the line for up to a year. However, we generally finance the underlying
contracts on a non-recourse basis as soon as practical.
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 a default under a lease by the lessee, is
against the lessee and the specific equipment under lease.
Non-recourse debt and debt that is partially recourse is provided by various
lending institutions. We have formal programs with Heller Financial, Inc., Key
Corporate Capital, Inc., and Fleet Business Credit Corporation. These programs
require that each transaction is specifically approved and done solely at the
lender's discretion.
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We sell our leases to a number of financial institutions. In particular, through
MLC/CLC LLC, we have a formal joint venture arrangement with an institutional
investor, that purchases a substantial portion of our total equipment under
lease. Firstar Equipment Finance, a subsidiary of Firstar Corporation, a bank
holding company, is an unaffiliated investor that owns 95% of MLC/CLC LLC.
MLC/CLC LLC represented approximately $81.1 million of our leased equipment
sales of $84.4 million or 96.1% for the year ended March 31, 1999. It
represented approximately $17.0 million of our leased equipment sales of $44.9
million or 37.8% for the nine months ended December 31, 1999. We have received
notice that Firstar Equipment Finance Corporation intends to discontinue its
investment in new lease acquisitions effective May 2000.
When we sell a lease, we generally retain little or no residual risk, and we
usually preserve 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 obtain working capital for the financing of accounts receivables and
inventory in our technology sales subsidiaries from various floor planning
agreements in place between the subsidiaries with BankAmerica Credit ($15
million), Finova Capital Corporation ($11.0 million), IBM Credit Corporation
($750,000), and PNC Banks, N.A. ($2.5 million). These facilities are fully
recourse to our subsidiary companies and have various levels of recourse to us.
Interest charges under the floor planning facilities are paid by the
manufacturers of the products through the distributor for up to 40 days after
the sale, and we are responsible for interest charges thereafter.
Risk Management and Process Controls. It is our goal to minimize our on-balance
sheet financial asset risk. To accomplish this goal we use and maintain
conservative underwriting policies and disciplined credit approval processes. We
also have strong internal control processes, including contract origination and
management, cash management, servicing, collections, remarketing and accounting.
Whenever possible, we use non-recourse financing for which we try to obtain
lender commitments before asset origination. We have over 35 non-recourse
financing sources that we use regularly, including GE Capital Corporation, Key
Corporate Capital, Inc., Fleet Business Credit Corporation, Citizens Banking
Corporation and BancOne Leasing Corporation.
Whenever possible and desirable we sell assets, including the residual portion
of leases, to third-parties rather than maintaining them on our balance sheet.
We try to obtain commitments for these asset sales before asset origination in a
financing transaction. We regularly sell assets to GE Capital Corporation,
Firstar Equipment Finance Company, Fleet Business Credit Corporation, Bombardier
Capital, Inc. and John Hancock Leasing Corp., among others. We also use agency
purchase orders to procure equipment as an agent, not a principal, and otherwise
take measures to minimize our inventory. Additionally, we use match funding to
reduce interest rate risk and issue proposals that adjust for material adverse
interest rate movements as well as material adverse changes of the customer.
We have an executive management review process and other internal controls in
place to protect against entering into lease transactions that may have
undesirable financial terms or unacceptable levels of risk. Our leases and sales
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contracts are reviewed by senior management for pricing, structure,
documentation and credit quality. Due in part to our strategy of focusing on a
few equipment categories, we have extensive product knowledge, historical
re-marketing information and experience on the products we lease, sell and
service. We rely on our experience in setting and adjusting our sale prices,
lease rate factors and the residual values.
Default and Loss Experience. During the first nine months of this fiscal year we
reserved for $385,000 in credit losses and incurred actual credit losses of
$72,473. During the fiscal year ended March 31, 1999, we reserved for $810,565
in credit losses and incurred actual credit losses of $12,452. Until the fiscal
year ended March 31, 1998, when we incurred a $17,350 credit loss, we had not
taken any write-offs due to credit losses with respect to lease transactions
since our inception.
During the quarter ended December 31, 1999, a customer of CLG, Inc., which we
recently acquired, filed for voluntary bankruptcy protection. During our due
diligence process prior to the acquisition, we had identified the customer,
Tultex, as well as several other potential problem credits, and we required
Centura Bank, the seller of CLG, Inc., to provide financing on a non-recourse
basis for a portfolio of identified bad credit customers. The interest costs and
principal for this non-recourse debt is paid solely from amounts collected from
customers, and the only costs to us are the costs of collection and managing the
accounts. Therefore, should these accounts need to be written-off, there would
be a corresponding write-off of the underlying non-recourse debt and there would
be no loss of income to us. The book value of Tultex is less than $52,000, and
the total non-recourse debt associated with these identified potential bad
credits is approximately $1,608,000.
During the fiscal year ended March 31, 1999, two customers filed for voluntary
bankruptcy protection. The largest was Allegheny Health, Education & Research
Foundation, or AHERF, which was a Pittsburgh based not-for-profit hospital
entity. As of December 31, 1999, our net book value of leases to AHERF was
approximately $415,000 and receivable balance was approximately $478,000. We
will probably sustain a loss, and have accordingly provided for such loss in the
statement of earnings for the year ended March 31, 1999.
The undetermined status of our claims in the bankruptcy court and amount and
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timing of such loss cannot be accurately estimated at this time due to the size
and nature of this bankruptcy. During the quarter ended December 31, 1998, PHP
Healthcare, Inc. a lessee of ours, was placed in receivership by the New Jersey
Insurance Commission which led to them filing for voluntary bankruptcy
protection. As of December 31, 1999, we have a net book value of assets totaling
approximately $421,000 at risk with this lessee. We believe that as of December
31, 1999, our reserves are adequate to provide for the potential losses
resulting from these customers.
COMPETITION
The market for our electronic commerce products is intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. Our primary source of
direct competition comes from independent software vendors of procurement
applications. We also face indirect competition from potential customers'
internal development efforts and have to overcome potential customers'
reluctance to move away from existing legacy systems and processes.
Our current and potential competitors in the electronic commerce market include,
among others, Ariba, Inc., Commerce One, Inc., Comdisco, Inc., Clarus
Corporation, Concur Technologies, Inc., Connect, Inc., Harbinger Corporation, i2
Technologies, International Business Machines Corporation, Intellisys Group,
Inc., Microsoft Corporation, Netscape Communications Corporation, Oracle
Corporation, PeopleSoft, Inc. and SAP Corporation Systems. In addition, there
are a number of companies developing and marketing business-to-business
electronic commerce solutions targeted at specific vertical markets. Some of
these competitors offer Internet-based solutions that are designed to enable an
enterprise to buy more effectively from its suppliers. Other competitors are
also attempting to migrate their technologies to an Internet-enabled platform.
Some of these competitors and potential competitors include ERP vendors, that
are expected to sell their procurement products along with their application
suites. These ERP vendors have a significant installed customer base and have
the opportunity to offer additional products to those customers as additional
components of their respective application suites.
We believe that the principal competitive factors for business-to-business
electronic commerce solutions are scalability, functionality, ease-of-use,
ease-of-implementation ability to integrate with existing legacy systems,
experience in business-to-business supply chain management and knowledge of a
business' asset management needs. We believe we compete favorably with our
competitors in these areas.
In addition, we expect to continue to compete in the information technology and
telecommunications equipment leasing and financing market. We compete directly
with various independent leasing companies, such as El Camino Resources, Ltd.,
Comdisco, Inc. and GE Capital Corporation as well as captive finance companies
such as IBM Credit Corporation. Many of these competitors are well established,
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have substantially greater financial, marketing, technical and sales support
than we do and have established reputations for success in the purchase, sale
and lease of computer-related products. In addition, many computer manufacturers
may sell or lease directly to our customers, and our continued ability to
compete effectively may be affected by the policies of such manufacturers.
EMPLOYEES AND FACILITIES
As of December 31, 1999, we employed 337 full-time and part-time employees who
operated through our 16 locations, including our principal executive offices and
regional sales offices. We believe our relationships with our employees are
good.
Our 12 leased offices are located in the following metropolitan and suburban
locations: Herndon, Virginia; Dallas, Texas; Sacramento and San Diego,
California; Greenville, Wilmington and Raleigh, North Carolina; Pittsburgh,
Pottstown and West Chester, Pennsylvania; Golden, Colorado; and Baltimore,
Maryland. All of our office facilities are leased, and our monthly rental for
all of our office space is approximately $65,925.
LITIGATION
We are not involved in any legal proceedings, and are not aware of any pending
or threatened legal proceedings, that would have a material adverse effect on
our business, operating results and financial condition.