FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 2000
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 [ ]
The number of shares of Common Stock outstanding as of
February 12, 2001, was 9,718,401
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 2000 2
Condensed Consolidated Statements of Earnings, Three Months
Ended December 31, 1999 and 2000 3
Condensed Consolidated Statements of Earnings, Nine Months Ended
December 31, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows, Nine Months
Ended December 31, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information:
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2000 As of December 31, 2000
------------------------------------------------------
ASSETS
Cash and cash equivalents $ 21,909,784 $ 26,036,569
Accounts receivable 60,166,596 55,951,053
Notes receivable 1,195,263 980,277
Employee advances 94,693 20,236
Inventories 2,445,425 2,862,127
Investment in direct financing and sales type leases - net 221,884,864 220,690,846
Investment in operating lease equipment - net 10,114,392 5,492,755
Property and equipment - net 2,895,711 4,430,536
Other assets 24,628,020 19,081,693
-----------------------------------------------
TOTAL ASSETS $ 345,334,748 $ 335,546,092
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 22,975,545 $ 14,426,469
Accounts payable - trade 29,451,907 19,805,065
Salaries and commissions payable 956,762 1,988,319
Accrued expenses and other liabilities 8,519,353 30,247,331
Income taxes payable 3,685,870 2,795,461
Recourse notes payable 39,017,168 4,544,908
Nonrecourse notes payable 182,845,152 171,020,715
Deferred taxes 762,139 762,139
------------------------------------------------
Total Liabilities 288,213,896 245,590,407
COMMITMENTS AND CONTINGENCIES
- -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 and 50,000,000
authorized; 7,958,433 and 9,718,401 issued and outstanding
at March 31, 2000 and December 31, 2000, respectively 79,584 97,190
Additional paid-in capital 29,926,168 56,506,475
Retained earnings 27,115,100 33,352,020
----------------------------------------------------
Total Stockholders' Equity 57,120,852 89,955,685
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 345,334,748 $ 335,546,092
====================================================
See Notes to Condensed Consolidated Financial Statements.
2
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
December 31,
1999 2000
--------------------------------------------
REVENUES
Sales of equipment $ 47,188,893 $ 53,735,856
Sales of leased equipment 16,360,757 5,615,123
--------------------------------------------
63,549,650 59,350,979
Lease revenues 9,467,586 10,585,654
Fee and other income 2,925,506 1,978,577
ePlusSuite revenues 297,453 1,759,386
--------------------------------------------
12,690,545 14,323,617
--------------------------------------------
TOTAL REVENUES 76,240,195 73,674,596
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 42,315,260 43,627,009
Cost of sales, leased equipment 15,309,659 5,537,042
--------------------------------------------
57,624,919 49,164,051
Direct lease costs 3,116,460 4,734,039
Professional and other fees 566,365 726,790
Salaries and benefits 5,101,722 8,342,731
General and administrative expenses 1,841,111 3,653,835
Interest and financing costs 4,038,850 4,081,381
--------------------------------------------
14,664,508 21,538,776
--------------------------------------------
TOTAL COSTS AND EXPENSES 72,289,427 70,702,827
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,950,768 2,971,769
--------------------------------------------
PROVISION FOR INCOME TAXES 1,580,340 1,242,907
--------------------------------------------
NET EARNINGS $ 2,370,428 $ 1,728,862
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.30 $ 0.18
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.26 $ 0.18
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,885,729 9,707,436
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,092,317 9,866,573
See Notes to Condensed Consolidated Financial Statements.
3
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Nine months ended
December 31,
1999 2000
------------------------------------------------
REVENUES
Sales of equipment $ 118,850,359 $ 166,962,802
Sales of leased equipment 44,882,169 28,311,687
--------------------------------------------
163,732,528 195,274,489
Lease revenues 21,816,694 29,475,790
Fee and other income 5,956,374 5,332,912
ePlusSuite revenues 297,453 4,435,811
--------------------------------------------
28,070,521 39,244,513
--------------------------------------------
TOTAL REVENUES 191,803,049 234,519,002
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 106,363,250 141,484,589
Cost of sales, leased equipment 42,969,242 27,635,693
--------------------------------------------
149,332,492 169,120,282
Direct lease costs 5,408,846 9,644,163
Professional and other fees 1,387,540 2,405,892
Salaries and benefits 13,688,322 22,821,477
General and administrative expenses 4,817,067 8,595,970
Interest and financing costs 7,231,746 11,413,166
--------------------------------------------
32,533,521 54,880,668
--------------------------------------------
TOTAL COSTS AND EXPENSES 181,866,013 224,000,950
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 9,937,036 10,518,052
--------------------------------------------
PROVISION FOR INCOME TAXES 3,974,847 4,279,916
--------------------------------------------
NET EARNINGS $ 5,962,189 $ 6,238,136
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.78 $ 0.65
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.70 $ 0.60
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,618,700 9,594,984
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 8,554,461 10,364,288
See Notes to Condensed Consolidated Financial Statements.
4
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
1999 2000
---------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 5,962,189 $ 6,238,136
Adjustments to reconcile net earnings to net cash used by
operating activities:
Depreciation and amortization 4,979,393 7,917,332
Provision for credit losses 360,000 683,000
Gain on sale of operating lease equipment (402,036) (487,068)
Adjustment of basis to fair market value of equipment and inventories 9,000 1,590,760
Payments from lessees directly to lenders (4,043,648) (5,960,322)
Loss on disposal of property and equipment 45,798 17,864
Changes in:
Accounts receivable (16,369,538) 5,210,965
Other receivables (3,998,476) (1,108,046)
Employee advances (54,496) 69,366
Inventories 4,087,197 (385,462)
Other assets 341,043 6,019,152
Accounts payable - equipment 466,121 (8,549,076)
Accounts payable - trade 11,287,990 (3,488,887)
Salaries and commissions payable, accrued
expenses and other liabilities (3,413,888) 14,426,991
---------------------------------------
Net cash used (provided) by operating activities (743,351) 22,194,705
---------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 781,599 922,549
Purchases of operating lease equipment (1,385,105) (1,966,060)
Increase in investment in direct financing and sales-type leases (83,492,103) (20,745,428)
Purchases of property and equipment (980,036) (3,065,948)
Cash used in acquisitions, net of cash acquired (1,845,730) -
Increase in other assets (135,718) (1,906,752)
---------------------------------------
Net cash used in investing activities (87,057,093) (26,761,639)
---------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 82,444,589 79,124,615
Recourse 4,905,701 975,485
Repayments:
Nonrecourse (6,727,946) (63,224,284)
Recourse (938,773) (186,448)
Proceeds from issuance of capital stock, net of expenses 330,030 26,372,862
Issuance of common stock purchase warrants - 225,000
Net proceeds (repayment) from (of) lines of credit 11,582,522 (34,593,511)
---------------------------------------
Net cash provided by financing activities 91,596,123 8,693,719
---------------------------------------
Net Increase in Cash and Cash Equivalents 3,795,679 4,126,785
Cash and Cash Equivalents, Beginning of Period 7,891,661 21,909,784
---------------------------------------
Cash and Cash Equivalents, End of Period $ 11,687,340 $ 26,036,569
=======================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 2,797,802 $ 727,496
=======================================
Cash paid for income taxes $ 4,463,357 $ 2,532,091
=======================================
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 and reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
All adjustments made were normal, recurring accruals. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
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, 2000 (the "Company's
2000 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. INVESTMENT IN DIRECT FINANCING AND SALES TYPE LEASES
The Company's investment in direct financing and sales type leases consists of
the following components:
March 31, December 31,
2000 2000
(In Thousands)
-------------------------
Minimum lease payments $ 213,284 $ 213,135
Estimated unguaranteed residual value 33,584 31,972
Initial direct costs, net of amortization (1) 2,958 3,449
Less: Unearned lease income (26,093) (26,049)
Reserve for credit losses (1,848) (1,816)
----------- ---------
Investment in direct financing and sales
type leases, net $ 221,885 $ 220,691
========== =========
(1) Initial direct costs are shown net of amortization of $3,686 and $4,608
at March 31, 2000 and December 31, 2000, respectively.
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases primarily represents equipment leased for two to
three years and leases that are short-term renewals on month-to-month status.
The components of the net investment in operating lease equipment are as
follows:
6
March 31, December 31,
2000 2000
(In Thousands)
-------------------------
Cost of equipment under operating leases $ 26,979 $ 22,026
Initial direct costs 19 15
Less: Accumulated depreciation and
amortization (16,884) (16,548)
------------- ----------
Investment in operating lease equipment, net $ 10,114 $ 5,493
============= ==========
4. BUSINESS COMBINATION
On September 30, 1999, the Company purchased all of the stock of CLG, Inc., a
technology equipment leasing business, from Centura Bank. This business
acquisition has been accounted for as a purchase.
The following pro forma financial information presents the combined results of
operations of the Company and CLG, Inc. as if the acquisition had occurred as of
the beginning of the nine months ended December 31, 1999, after giving effect to
certain adjustments, including amortization of goodwill. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and CLG, Inc. constituted a single entity during
such periods.
Nine Months Ended
December 31, 1999
(Unaudited)
In Thousands (except
per share data)
----------------------
Total Revenues $208,458
Net Earnings 5,652
Net Earnings per Common Share - Basic 0.72
Net Earnings per Common Share - Diluted 0.64
5. ISSUANCES OF COMMON STOCK AND WARRANTS
On October 23, 1998, the Company sold 1,111,111 shares of common stock to TC
Leasing LLC, a Delaware limited liability company, for a price of $9.00 per
share. In addition, the Company granted to TC Leasing LLC, a stock purchase
warrant granting the right to purchase an additional 1,090,909 shares of common
stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant was exercisable through December 31, 2001, unless
extended pursuant to the terms of the warrant. On February 25, 2000, the Company
entered into an agreement, which was amended April 11, 2000, which allowed TC
Plus LLC (formerly TC Leasing LLC) to exercise the warrants on a cashless basis
at an exercise price of $11.00 per share, contingent upon the Company's
completion of a secondary offering which occurred on April 17, 2000. On April
11, 2000, TC Plus LLC exercised its options on a cashless basis and was issued
709,956 shares of common stock. Pursuant to the terms of this private placement,
7
the Company agreed to expand its Board of Directors to six persons, four of whom
to be appointed, in whole or in part, by TC Plus LLC. Additionally, the terms of
the private placement restricted the Company's ability to pay dividends until
October 23, 1999 without the consent of TC Plus LLC.
On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares
of its common stock at a price of $28.50 per share. Net proceeds to the Company
were $25,999,884.
On May 25, 2000, the Company issued a common stock purchase warrant to a
business partner which allows the holder to purchase up to 50,000 shares of the
Company's common stock at a price of $18.75 per share over a two year period
beginning July 1, 2000.
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 and technology business units (previously known as the lease financing
and value added re-selling segments), as well as its newly created electronic
commerce ("e-commerce") business unit. The financing business unit offers lease
financing solutions to corporations and governmental entities nationwide. The
technology business unit sells information technology equipment and related
services primarily to corporate customers in the eastern United States. The
e-commerce business unit 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.
Sales of equipment for the e-commerce business unit represent customer equipment
purchases executed through Procure+, an element of the Company's e-commerce
business solution. The amounts charged for using Procure+ are presented as
ePlusSuite revenues in the statement of earnings. The e-commerce business unit's
assets consist primarily of capitalized software costs.
The accounting policies of the financing and technology business units are the
same as those described in Note 1, "Organization and Summary of Significant
Accounting Policies" in the Company's 2000 Form 10-K. Corporate overhead
expenses are allocated to the three segments on the basis of revenue volume,
estimates of actual time spent by corporate staff, and asset utilization,
depending on the type of expense.
Financing Technology E-commerce
Business Business Business
Unit Unit Unit Total
--------------------------------------------------------
Three months ended December 31, 1999
Sales of equipment $ 16,608,129 $ 45,417,558 $ 1,523,963 $ 63,549,650
Lease revenues 9,467,586 - - 9,467,586
Fee and other income 531,043 2,394,463 - 2,925,506
ePlusSuite revenues - - 297,453 297,453
--------------------------------------------------------
Total Revenues 26,606,758 47,812,021 1,821,416 76,240,195
8
Financing Technology E-commerce
Business Business Business
Unit Unit Unit Total
--------------------------------------------------------
Cost of sales 15,648,614 40,747,917 1,228,388 57,624,919
Direct lease costs 3,116,460 - - 3,116,460
Selling, general and administrative
expenses 2,962,062 4,367,465 179,671 7,509,198
--------------------------------------------------------
Segment earnings 4,879,622 2,696,639 413,357 7,989,618
Interest expense 3,917,808 121,042 - 4,038,850
--------------------------------------------------------
Earnings before income taxes 961,814 2,575,597 413,357 3,950,768
========================================================
Assets $ 271,330,332 47,967,618 $ 561,908 $ 319,859,858
Three months ended December 31, 2000
Sales of equipment $ 5,694,357 $ 40,431,490 $ 13,225,132 $ 59,350,979
Lease revenues 10,585,654 - - 10,585,654
Fee and other income 607,632 1,370,945 - 1,978,577
ePlusSuite revenues - - 1,759,386 1,759,386
--------------------------------------------------------
Total Revenues 16,887,643 41,802,435 14,984,518 73,674,596
Cost of sales 5,565,507 33,197,799 10,400,745 49,164,051
Direct lease costs 4,734,039 - - 4,734,039
Selling, general and administrative
expenses 3,981,836 5,883,919 2,857,601 12,723,356
--------------------------------------------------------
Segment earnings 2,606,261 2,720,718 1,726,172 7,053,150
Interest expense 3,986,650 94,731 - 4,081,381
--------------------------------------------------------
Earnings before income taxes (1,380,389) 2,625,987 1,726,172 2,971,769
========================================================
Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092
Nine months ended December 31, 1999
Sales of equipment $ 45,355,717 $116,852,848 $ 1,523,963 $ 163,732,528
Lease revenues 21,816,694 - - 21,816,694
Fee and other income 958,296 4,998,078 - 5,956,374
ePlusSuite revenues - - 297,453 297,453
--------------------------------------------------------
Total Revenues 68,130,707 121,850,926 1,821,416 191,803,049
Cost of sales 43,488,500 104,615,604 1,228,388 149,332,492
Direct lease costs 5,408,846 - - 5,408,846
Selling, general and administrative
expenses 7,997,014 11,716,244 179,671 19,892,929
--------------------------------------------------------
Segment earnings 11,236,347 5,519,078 413,357 17,168,782
Interest expense 7,010,940 220,806 - 7,231,746
Earnings before income taxes 4,225,407 5,298,272 413,357 9,937,036
========================================================
Assets $ 271,330,332 $ 47,967,618 $ 561,908 $ 319,859,858
Nine months ended December 31, 2000
Sales of equipment $ 28,735,761 $130,436,537 $ 36,102,191 $ 195,274,489
Lease revenues 29,475,790 - - 29,475,790
Fee and other income 1,424,884 3,908,028 - 5,332,912
ePlusSuite revenues - - 4,435,811 4,435,811
--------------------------------------------------------
Total Revenues 59,636,435 134,344,565 40,538,002 234,519,002
Cost of sales 28,077,667 110,556,982 30,485,633 169,120,282
Direct lease costs 9,644,163 - - 9,644,163
Selling, general and administrative
expenses 12,232,518 14,811,035 6,779,788 33,823,339
--------------------------------------------------------
Segment earnings 9,682,087 8,976,548 3,272,581 21,931,218
Interest expense 11,159,701 253,465 - 11,413,166
--------------------------------------------------------
Earnings before income taxes (1,477,614) 8,723,083 3,272,581 10,518,052
========================================================
Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092
9
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which, as
amended by FASB Statement No. 138, establishes accounting and reporting
standards for derivative instruments, including some derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 requires
companies to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair value and
gains and losses depends on the intended use of the derivative and its resulting
designation. The statement was originally effective for fiscal years beginning
after June 15, 1999. In June 1999, FASB delayed implementation of this statement
for all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 in the first quarter of fiscal year 2002 and is
evaluating the impact that implementation of this statement will have on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The guidelines in SAB No. 101 must be adopted by the fourth quarter
of 2000. We are in the process of evaluating the potential impact of this
statement on our financial position and results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," a replacement
of SFAS No. 125. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company does not anticipate the adoption of this Statement will have a
material impact on its financial position or results of operations.
Item 2. Management's Discussion and Analysis of RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this report, and the Company's 2000 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.
Such risks and uncertainties include, but are not limited to, the existence of
demand for and acceptance of the Company's services, economic conditions, the
impact of competition and pricing, results of financing efforts and other
factors affecting the Company's business that are beyond our control. The
Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
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, our bad debt experience
and differences between estimated residual values and actual amounts realized
related to the equipment we lease. Operating results could also fluctuate as a
result of the sale of equipment in our lease portfolio prior to the expiration
of the lease term to the lessee or to a third party. Such sales of leased
equipment prior to the expiration of the lease term may have the effect of
increasing revenues and net earnings during the period in which the sale occurs,
and reducing revenues and net earnings otherwise expected in subsequent periods.
10
In November 1999, we introduced ePlusSuite, a comprehensive business-to-business
electronic commerce supply chain management solution for information technology
and other operating resources. We currently derive the majority of our revenue
from sales and financing of information technology and other assets. The
introduction of ePlusSuite reflects our transition to a business-to-business
electronic commerce solutions provider from our historical sales and financing
business. Our long term strategy, which is wholly dependent upon third party
financing, is to significantly reduce our balance sheet risk over time by
outsourcing lease and other financing to third-party financial institutions
while charging a transaction fee. Our long term strategy also includes the
arranging of sales of information technology and other assets for a transaction
fee, rather than purchasing and reselling such assets ourselves.
We expect our electronic commerce revenues to be derived primarily from (1)
amounts charged or allocated to customers with respect to procurement activity
executed through Procure(+); (2) fees from third-party financing sources that
provide leasing and other financing for transactions that we arrange through
Procure(+) on behalf of our customers; (3) fees from third-party vendors for
sales in transactions that we arrange through Procure(+) on behalf of our
customers; and (4) amounts charged to customers for the Manage(+) service. We
expect to generate increased revenues in our electronic commerce business
segment, while revenues from our leasing and sales business may decrease over
time, if our long term strategy of generating fees is successful. Because
revenues for the sale of leased and other equipment include the full purchase
price of the item sold, total revenues may decline to the extent leasing and
sales revenues become net revenues in our e-commerce business. However, in the
near term, as we seek to implement our electronic commerce business strategy, we
will continue to derive most of our revenues from our traditional businesses.
We expect to incur substantial increases in the near term in our sales and
marketing, research and development, and general and administrative expenses. In
particular, we expect to significantly expand the marketing of our electronic
commerce business solution and increase spending on advertising and marketing.
To implement this strategy, we plan to hire additional sales personnel, open new
sales locations and hire additional staff for advertising, marketing and public
relations. We also plan to hire additional technical personnel and third parties
to assist in the implementation and upgrade of ePlusSuite and to develop
complementary electronic commerce business solutions. As a result of these
increases in expenses, we expect to incur significant losses in our ePlusSuite
business which may, in the near term, have a material adverse effect on
operating results for the Company as a whole.
To the extent the Company successfully implements these strategies, it expects
the business to become less capital intensive over time and this may result in a
future reduction of its receivables and lease assets along with the associated
liabilities including debt and equipment payables.
The Company has added new classifications to its financial statement
presentation in order to reflect the changes in its business. A line item,
ePlusSuite revenues, has been added to the statement of earnings which includes
the revenues associated with the e-commerce business unit. A new business
segment, e-commerce, has been added for segment reporting purposes to present
separately e-commerce business unit revenues.
11
As a result of the foregoing, the Company's historical results of operations and
financial position may not be indicative of its future performance over time.
However, the Company's results of operations and financial position will
continue to primarily reflect its traditional sales and financing businesses for
at least the next twelve months.
Selected Accounting Policies
Amounts allocated for the e-commerce business unit's Procure+ service are
recognized as services are rendered. Amounts charged for the Manage+ service
will be recognized on a straight line basis over the period the services are to
be provided.
The manner in which lease finance transactions are characterized and reported
for accounting purposes has a major impact upon reported revenue and net
earnings. Lease accounting methods significant to our business are discussed
below.
We classify our lease transactions, as required by the Statement of Financial
Accounting Standards No. 13, Accounting for Leases, or FASB No. 13, as: (1)
direct financing; (2) sales- type; or (3) operating. 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 inception 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 which 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. When the Company supplies the
equipment for lease through our technology sales business unit subsidiaries, the
dealer margin is presented in equipment sales revenue and cost of equipment
sales. Interest earned on the present value of the lease payments and residual
value is recognized over the lease term using the interest method and is
included as part of our lease revenues.
Operating Leases. All leases that do not meet the criteria to be classified as
direct financing or sales-type leases are accounted for as operating leases.
Rental amounts are accrued on a straight-line basis over the lease term and are
recognized as lease revenue. Our cost of the leased equipment is recorded on the
12
balance sheet as investment in operating lease equipment and is depreciated on a
straight-line basis over the lease term to our estimate of residual value.
Revenue, depreciation expense and the resulting profit for operating leases are
recorded on a straight-line basis over the life of the lease.
As a result of these three classifications of leases for accounting purposes,
the revenues resulting from the "mix" of lease classifications during an
accounting period will affect the profit margin percentage for such period and
such profit margin percentage generally increases as revenues from direct
financing and sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
Residual Values. Residual values represent our estimated value of the equipment
at the end of the initial lease term. The residual values for direct financing
and sales-type leases are recorded in 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
recorded in 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 FASB No. 13. Residual values are affected by equipment supply
and demand and by new product announcements and price changes by manufacturers.
In accordance with generally accepted accounting principles, residual value
estimates are adjusted downward when such assets are impaired.
We seek to realize the estimated residual value at lease termination through:
(1) renewal or extension of the original lease; (2) sale of the equipment either
to the lessee or the secondary market; or (3) lease of the equipment to a new
user. 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.
Initial Direct Costs. Initial direct costs related to the origination of direct
financing, sales-type 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. Sales revenue includes the following types of transactions: (1) sales of
new equipment (including some commercial software) and used equipment which is
not subject to any type of lease; (2) sales of equipment and commercial
software, subject to an existing lease, under which we are lessor, including any
underlying financing related to the lease; and (3) sales of off-lease equipment
to the secondary market.
Other Sources of Revenue. Amounts charged or allocated for the electronic
commerce business unit's Procure(+) service are recognized as services are
rendered. Amounts charged for the Manage(+) service will be recognized on a
straight line basis over the period the services are provided. These revenues
are included in our ePlusSuite revenues in our statement of earnings.
Fee and other income results from: (1) revenue from various technology related
services; (2) income from events that occur after the initial sale of a
financial asset such as escrow/prepayment income; (3) re-marketing fees; (4)
13
brokerage fees earned for the placement of financing transactions; and (5)
interest and other miscellaneous income. These revenues are included in fee and
other income in our statements of earnings.
RESULTS OF OPERATIONS - Three and Nine Months Ended December 31, 2000 Compared
to Three and Nine Months Ended December 31, 1999
Total revenues generated by the Company during the three-month period ended
December 31, 2000 were $73,674,596 compared to revenues of $76,240,195 during
the comparable period in the prior fiscal year, a decrease of 3.4%. During the
nine month period ended December 31, 2000, revenues were $234,519,002 compared
to revenues of $191,803,049 during the comparable period in the prior fiscal
year, an increase of 22.3%. These increases are primarily the result of
increased revenues from the sales of equipment, which increased 13.9% and 40.5%
during the three and nine months ended December 31, 2000. The Company's
acquisition of CLG, Inc. on September 30, 1999 also contributed to the increase
in revenues, primarily lease revenues. 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 equipment and sales of leased equipment,
decreased 6.6% to $59,350,979 during the three-month period ended December 31,
2000, as compared to $63,549,650 the corresponding period in the prior fiscal
year. For the nine-month period ended December, 2000, sales increased 19.3% to
$195,274,489 over the corresponding period in the prior year.
The majority of sales of equipment are generated through the Company's
technology business unit subsidiaries and represented 90.4% and 85.3% of total
sales revenue for the three and nine-months ended December 31, 2000. For the
three and nine-month periods ended December 31, 2000, equipment sales through
the Company's technology business unit subsidiaries accounted for 99.9% and
99.8% respectively, of sales of equipment, with the remainder being sales from
brokerage and re-marketing activities in the lease financing business segment.
Sales of equipment increased significantly during the three and nine-month
periods ended December 31, 2000, as compared to the prior fiscal year as a
result of increased customer purchase volume in the Company's technology
business unit subsidiaries. The acquisition of CLG, Inc. in September, 1999, did
not materially contribute to the increase in sales of equipment for the periods
presented.
The Company realized a gross margin on sales of equipment of 18.8% and 15.3% for
the three and nine-month periods ended December 31, 2000, as compared to a gross
margin of 10.3% and 10.5%, realized on sales of equipment during the comparable
periods in the prior fiscal year. This increase in net margin percentage can be
primarily attributed to the Company's technology business unit subsidiaries'
acquisition of higher profit margin customers and focus on selling higher margin
equipment and services. The Company's gross margin on sales of equipment 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 December 31, 2000, sales of leased equipment decreased
65.7% to $5,615,123. During the nine months ended December 31, 2000, sales of
lease equipment decreased 36.9% to $28,311,687. 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
14
recognized in accordance with SFAS No. 125. Prior to May 2000, the majority of
the Company's sales of leased equipment has historically been sold to MLC/CLC,
LLC, a joint venture in which the Company owns a 5% interest. During the three
and nine months ended December 31, 2000, sales to MLC/CLC, LLC, accounted for
0.0% and 57.9% of sales of leased equipment, respectively. During the comparable
three and nine month periods in the prior fiscal year, sales to MLC/CLC, LLC
accounted for 70.9% and 45.1% of leased equipment sales. Sales to the joint
venture require the consent of the joint venture partner. Firstar Equipment
Finance Corporation, which owns 95% of MLC/CLC, LLC, has discontinued their
investment in new lease acquisitions effective May 2000. The Company has
developed and will continue to develop relationships with additional lease
equity investors and financial intermediaries to diversify its sources of equity
financing.
During the three and nine months ended December, 2000, the Company recognized a
gross margin of 1.4% and 2.4% on leased equipment sales of $5,615,123 and
$28,311,687. During the three and nine-month periods in the prior fiscal year,
the Company realized a gross margin of 6.4% and 4.3% on leased equipment sales
of $16,360,757 and $44,882,169. This decrease in both volume of equipment sales
and margin is the result of decreased sales to the Company's equity joint
venture partner.
The Company's lease revenues increased 11.8% to $10,585,654 for the three months
ended December 31, 2000 compared with the corresponding period in the prior
fiscal year. For the nine-month period, lease revenues increased 35.1% to
$29,475,790. The increase consists of increased lease earnings and rental
revenues reflecting a higher average investment in direct financing and sales
type leases. The investment in direct financing and sales type leases at
December 31, 1999 and 2000 was $204,280,675 and $220,690,846, respectively. The
December 31, 2000 balance represents an increase of $16,410,171 or 8.0% over the
balance as of December 31, 1999. The increase in lease revenues for the nine
month period was due in large part to the acquisition of CLG, Inc which was
reflected on the Company's balance sheet as of September 30, 1999.
For the three and nine months ended December 31, 2000, fee and other income
decreased 32.4% and 10.5%, respectively, over the comparable periods in the
prior fiscal year. Fee and other income includes revenues from adjunct services
and fees, including broker fees, support fees, warranty reimbursements, and
learning center revenues generated by the Company's technology business unit
subsidiaries. Included in the Company's fee and other income are 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.
For the three and nine months ended December 31, 2000, the Company recorded
$1,759,386 and $4,435,811 in ePlusSuite revenues, as compared to $297,453 for
the three and nine months ended December 31, 1999. These revenues consisted
primarily of amounts charged for the arrangement of procurement transactions
executed through Procure+, a component of ePlusSuite. During the three and nine
months ended December 31, 1999 and 2000, the selling, general and administrative
expenses allocated to the e-commerce business unit consisted primarily of direct
expenses and allocated corporate overhead.
15
The Company's direct lease costs increased 51.9% and 78.3%, respectively, during
the three and nine-month periods ended December 31, 2000 as compared to the same
periods in the prior fiscal year. These increases are partially attributable to
increases in the Company's default and bankruptcy allowance. Additionally, the
increase for the nine-month period is partially attributable to the acquisition
of CLG, Inc., which significantly increased the Company's operating lease
portfolio and therefore its depreciation expense.
Salaries and benefits expenses increased 63.5% during the three-month period
ended December 31, 2000 over the same period in the prior year. For the fiscal
year to date through December 31, 2000, salaries and benefits increased 66.7%
over the prior year. This increase reflects the increased number of personnel
employed by the Company, higher commission expenses in the technology business
unit, and, for the nine-month period, the acquisition of CLG, Inc.
Interest and financing costs incurred by the Company for the three and nine
months ended December 31, 2000 increased 1% and 57.8%, respectively, and relate
to interest costs on the Company's indebtedness. The significant increase for
the nine month period is attributable to the acquisition of CLG, Inc. Payments
for interest costs on the majority of non-recourse and certain recourse notes
are typically remitted directly to the lender by the lessee.
The Company's provision for income taxes decreased to $1,242,907 for the three
months ended December 31, 2000 from $1,580,340 for the three months ended
December 31, 1999, reflecting effective income tax rates of 40% for both
periods. For the nine months ended December 31, 2000, the Company's provision
for income taxes was $4,279,916 as compared to $3,974,847 during the comparable
prior year period, reflecting effective income tax rates of 40% for both
periods.
The foregoing resulted in a 27.1% decrease and 4.6% increase in net earnings for
the three and nine-month periods ended December 31, 2000, respectively, as
compared to the same periods in the prior fiscal year. Basic and fully diluted
earnings per common share were $.18 for both methods for the three months ended
December 31, 2000, as compared to $.30 for basic and $.26 for fully diluted
earnings for the three months ended December 31, 1999. Basic and diluted
weighted average common shares outstanding for the three months ended December
31, 2000 were 9,707,436 and 9,866,573, respectively. For the three months ended
December 31, 1999, the basic and diluted weighted average shares outstanding
were 7,885,729 and 9,092,317, respectively. For the fiscal year to date through
December 31, 2000, the Company's basic and fully diluted earnings per common
share were $.65 and $.60, respectively, as compared to basic and diluted
earnings per common share of $.78 and $.70, respectively, for the same period in
1999, based on weighted average common shares outstanding of 9,594,984 and
10,364,288, respectively, for 2000, and 7,618,700 and 8,554,461, respectively,
for 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended December 31, 2000, the Company generated cash
flows in operations of $22,194,705 and used cash flows from investing activities
of $26,761,639. A significant contributing factor to the cash flows from
operations was an approximately $12.5 million assigned customer payment which
was received by the Company prior to December 31, 2000 and remitted to the
lender in January 2001. Cash flows generated by financing activities amounted to
$8,693,719 during the same period. The net effect of these cash flows was a net
increase in cash and cash equivalents of $4,126,785 during the nine-month
period. During the same period, the Company's total assets decreased $9,788,656,
or 2.8%. On April 17, 2000 the Company completed a secondary offering of
1,000,000 shares of its common stock at a price of $28.50 per share. Net
proceeds to the Company were $25,999,884.
16
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, at 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. The Company has formal programs
with Key Corporate Capital, Inc. and Fleet Business Credit Corporation. In
addition to these programs, recently the Company has regularly funded its
leasing activities with Wachovia Bank and Trust, Citizens Leasing Corporation,
GE Capital Corporation, National City Bank, Hitachi Leasing America, Fifth Third
Bank and Heller Financial, Inc., among others. These programs require that each
transaction is specifically approved and done solely at the lender's discretion.
During the nine-month period ending December 31, 2000, the Company's lease
related non-recourse debt portfolio decreased 6.5% to $171,020,715.
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 retain customer control and operational services, and have minimal
residual risk. The Company 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.
Through MLC/CLC, LLC, the Company had a joint venture agreement that had
historically provided the equity investment financing for certain of the
Company's transactions. Firstar Equipment Finance Company ("FEFCO"), formerly
Cargill Leasing Corporation, is an unaffiliated investor which owns 95% of
MLC/CLC, LLC. FEFCO's parent company, Firstar Corporation, is a $20 billion bank
holding company that is publicly traded on the New York Stock Exchange under the
symbol "FSR". This joint venture arrangement enabled the Company to invest in a
significantly greater portfolio of business than its limited capital base would
otherwise allow. A significant portion of the Company's revenue generated by the
sale of leased equipment is attributable to sales to MLC/CLC, LLC. (See "RESULTS
OF OPERATIONS"). FEFCO has discontinued new lease acquisition transactions
effective May 2000. We actively sell or finance our equity investment with
Heller Financial, Inc., Fleet Business Credit Corporation and GE Capital
Corporation, among others.
The Company's "Accounts payable - equipment" represents equipment costs that
have been placed on a lease schedule, but for which the Company has not yet
paid. The balance of unpaid equipment cost can vary depending on vendor terms
and the timing of lease originations. As of December 31, 2000, the Company had
$14,426,469 of unpaid equipment cost, as compared to $22,975,545 at March 31,
2000.
Working capital financing in our leasing business was, through December 16, 2000
when it expired, provided by a $65 million committed credit facility which was a
short-term, secured, recourse facility provided through First Union National
Bank, N.A. and which had syndicated the facility to the following participants
and in the following amounts: National City Bank ($15 million); Summit Bank ($10
million); Bank Leumi USA ($10 million); and Key Bank ($10 million). This credit
17
facility had been in place since December 1998, was renewed for a one-year
period on December 19, 1999, had full recourse to the Company, and was secured
by a blanket lien against all of the Company's assets. In addition, the Company
had entered into pledge agreements to pledge the common stock of all wholly
owned subsidiaries. The interest rates charged under the facility were LIBOR
plus 1.5% or Prime minus .5%, depending on the term of the borrowing. The
facility expired on December 16, 2000. Effective December 15, 2000, the Company
entered into a $20 million 364 day, committed, secured recourse facility through
National City Bank. It has full recourse to the Company, and is secured by a
blanket lien against all of the Company's assets. In addition, the Company
entered into pledge agreements to pledge 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
December 31, 2000, the Company was in compliance with all of the covenants and
restrictions. The interest rates charged under the facility are LIBOR plus a
margin ranging from 1.50% to 2.25% or Prime plus a margin ranging from 0% to
.25%. The margin is determined by a matrix which is based on a ratio of the
Company's total recourse funded debt to EBITDA (earnings before interest, tax,
depreciation, and amortization) as determined under the facility.
Subsequently, on January 19, 2001, the $20 million National City credit facility
was amended and increased to $35 million and the term was lengthened to 3 1/4
years. The new facility expires on April 17, 2004. In addition, Branch Banking
and Trust Company ($10 million) and PCN Bank, N.A. ($5 million) have been added
to the facility and National City has been appointed agent. The margin related
to the LIBOR interest rate option was increased from 1.50% to 2.25% to 1.75% to
2.50%. As of December 31, 2000, the Company had no outstanding balance on the
National City Credit Facility.
ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology,
inc. have separate credit facilities to finance their working capital
requirements for inventories and accounts receivable. Their traditional business
as sellers of PC's and related network equipment and software products is
financed through agreements known as "floor planning" financing in which
interest expense for the first thirty to forty days is not charged but is paid
by the supplier/distributor. These floor planning liabilities are recorded as
accounts payable-trade, as they are normally repaid within the thirty to forty
day time frame and represent an assigned accounts payable originally generated
with the supplier/distributor. If the thirty to forty day obligation is not paid
timely, interest is then assessed at stated contractual rates.
In addition to the floor planning financing, ePlus Technology, inc. has an
accounts receivable facility through Deutsche Financial Services Corporation. As
of December 31, 2000 the balance of this facility was $725,610 and is included
in recourse notes payable.
As of December 31, 2000 the floor planning agreements are as follows:
Balance at
December 31,
Entity Floor Plan Supplier Credit Limit 2000
- --------------------- ----------------------------------------- ----------------
ePlus
Technology of Finova Capital Corp. $ 4,000,000 $ 1,945,667
NC, inc.
18
IBM Credit Corp. 250,000 26,968
ePlus
Technology of Finova Capital Corp. 7,000,000 5,622,495
PA, inc.
IBM Credit Corp. 750,000 209,778
ePlus
Technology, Deutsche Financial
inc Services Corp. 19,000,000 8,663,724
ePlus Technology of PA, inc. also has a line of credit in place with PNC Bank,
N.A. with a maximum loan limit of $2,500,000 that expires on November 30, 2001
and is guaranteed by ePlus, inc. As of December 31, 2000, there was no
outstanding balance on the credit facility. The credit facility provided by
Finova Capital Corporation is required to be guaranteed by ePlus inc. for the
greater of one half the outstanding balance or $5,500,000. The facility provided
by Deutsche Financial Services Corporation, requires a guaranty of up to
$2,000,000 of the outstanding balance by ePlus inc.
Availability under the revolving 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.
ePlus Technology, inc. was previously supplied a floor planning facility by
BankAmerica Credit who terminated the agreement, effective August 16, 2000.
ePlus Technology, inc. contracted with Deutsche Financial Services Corporation
on August 30, 2000, to replace the previous supplier. Both ePlus Technology of
NC, inc. and ePlus Technology of PA, inc. were notified on December 26, 2000
that Finova Capital Corp. was terminating the floor planning agreements as of
February 25, 2001, as provided within their contractual notice period for
terminating the agreements. Both entities are expected to obtain alternative
financing sources prior to this expiration date.
The continued implementation of the Company's e-commerce business strategy will
require a significant investment in both cash and managerial focus. In addition,
the Company may selectively acquire other companies that have attractive
customer relationships and skilled sales forces. The Company may also acquire
technology companies to expand and enhance the platform of ePlusSuite to provide
additional functionality and value added services. As a result, the Company may
require additional financing to fund its strategy implementation and potential
future acquisitions, which may include additional debt and equity financing.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
19
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.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first three quarters of the fiscal year.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain statements contained herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
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.
The Company's e-commerce business has an extremely limited operating history.
Although it has been in the business of financing and selling information
technology equipment since 1990, the Company expects to derive a significant
portion of its future revenues from its ePlusSuite services. As a result, the
Company will encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by early stage companies using new and
web-enabled business models in new and rapidly evolving markets. Some of these
challenges relate to the Company's ability to:
o increase the total number of users of ePlusSuite services;
o adapt to meet changes in its markets and competitive developments; and
o continue to update its technology to enhance the features and functionality
of its suite of products.
The Company cannot be certain that its 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 ePlusSuite services. The Company expects to incur increased
20
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 losses in its e-commerce business
unit in the foreseeable future, which may have a material adverse effect on the
future operating results of the Company as a whole.
The Company began operating its ePlusSuite services in November 1999. Broad and
timely acceptance of the ePlusSuite services, which is critical to the Company's
future success, is subject to a number of significant risks. These risks
include:
o operating resource management and procurement on the Internet is a new
market;
o the system's ability to support larger numbers of buyers and suppliers is
unproven;
o significant enhancement of the features and services of ePlusSuite services
is needed to achieve widespread commercial initial and continued widespread
acceptance of the system;
o the pricing models may not be acceptable to customers;
o if the Company is unable to develop and increase transaction volume on
ePlusSuite, it is unlikely that it will ever achieve or maintain
profitability in this business;
o businesses that have made substantial up-front payments for e-commerce
solutions may be reluctant to replace their current solution and adopt the
Company's solution;
o the Company's ability to adapt to a new market that is characterized by
rapidly changing technology, evolving industry standards and frequent new
product announcements;
o significant expansion of internal resources is needed to support planned
growth of the Company's ePlusSuite services.
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.
Should interest rates significantly increase, the Company would incur increased
interest expense, which could potentially lower earnings.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On April 11, 2000, the Company issued 709,956 shares of common stock to
TC Plus LLC pursuant to a cashless exercise of a warrant, based on an
exercise price of $11.00 per share. Due to the sophisticated nature of
the investor, the Company relied on the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended, in the
issuance of the shares pursuant to the exercise.
On May 25, 2000, the Company issued a common stock purchase warrant to
a business partner which allows the holder to purchase up to 50,000
shares of the Company's common stock at a price of $18.75 per share
over a two year period beginning July 1, 2000. Due to the institutional
and sophisticated nature of the investor, the Company relied on the
exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, in the issuance of the warrant.
21
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(a) Exhibits
None
Item 6(b) Reports on Form 8-K
Form 8-K dated December 19, 2000, and filed with the SEC on December 28, 2000,
to report the National City Bank Amended Credit Agreement to provide a 364
day credit facility with a $20 million dollar limit.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
ePlus inc.
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: February 14, 2001
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: February 14, 2001