SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001
---------------
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ____ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Company, computed by reference to the price at which the stock was sold as of
June 20, 2001 was $35,875,863. The number of shares of Common Stock outstanding
as of June 20, 2001, was 10,172,987.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the following parts
of this Form 10-K:
Document Part
- --------------------------------------------------------------------------------
Portions of the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end. Part III
2
PART I
ITEM 1. BUSINESS
ePlus inc. CORPORATE STRUCTURE
ePlus inc. ("the Company" or "ePlus"), a Delaware corporation, was formed in
1996. The Company changed its name from MLC Holdings, Inc. to ePlus on October
19, 1999. ePlus engages in no other business other than serving as the parent
holding company for the following companies:
o ePlus Group, inc. ("ePlus Group" - name changed effective January 31,
2000 from MLC Group, Inc.);
o ePlus Technology of NC, inc. (name changed effective January 31, 2000
from MLC Network Solutions, Inc.);
o ePlus Technology of PA, inc. (name changed effective January 31, 2000
from Educational Computer Concepts, Inc. which conducted business as
MLC Integrated, Inc.);
o ePlus Technology, inc. (name changed effective January 31, 2000 from
PC Plus, Inc.);
o ePlus Government, inc. (name changed effective January 31, 2000 from
MLC Federal, Inc.);
o ePlus Capital, inc. (name changed January 31, 2000 from MLC Capital,
Inc.); and
o ePlus Systems, inc.
o ePlus Content Services, inc.
o MLC Leasing, S.A. de C.V., (a subsidiary wholly owned by ePlus Group,
inc. and ePlus Technology of NC, inc.)
ePlus Group also has a 5% membership interest in MLC/CLC LLC and serves as its
manager. ePlus Group previously had a 50% ownership interest in MLC/GATX Leasing
Corporation which was the general partner of MLC/GATX Limited Partnership I. On
December 31, 1998, ePlus Group terminated its ownership interest in MLC/GATX
Leasing Corporation and purchased all of the assets of MLC/GATX Limited
Partnership I. ePlus Government, inc. was incorporated on September 17, 1997 to
handle business servicing the federal government marketplace which includes
financing transactions that are generated through government contractors. ePlus
Capital, inc. did not transact any business during the fiscal year ended March
31, 2001 and is not expected to transact business in the near future. On October
22, 1997, the Company formed MLC Leasing, S.A. de C.V., which is directly owned
by ePlus Group, inc. and ePlus Technology of NC, inc., to provide a legal entity
capable of conducting a leasing business in Mexico. To date, this entity has
conducted no business and has no employees or business locations. ePlus Systems,
inc. and ePlus Content Services, inc. were incorporated on May 15, 2001 and are
the entities that hold certain assets and liabilities acquired from ProcureNet,
Inc.
3
Acquisitions
Business Accounting
Date Acquired Company Acquired Location Method Consideration Paid
- --------------------------- ------------------------ ------------------- ----------------- ---------------------------
July 24, 1997 Compuventures of Pitt Wilmington, Pooling of 260,978 shares of Common
County, Inc. (now Greenville, and Interests Stock valued at $3,384,564
named ePlus Technology Raleigh, NC
of NC, inc.)
September 29, 1997 Educational Computer Pottstown, PA Pooling of 498,998 shares of Common
Concepts, Inc. (now Interests Stock valued at $7,092,000
named ePlus Technology
of PA, inc.)
July 1, 1998 PC Plus, Inc. (now Herndon, VA Purchase 263,478 shares of Common
named ePlus Stock valued at $3,622,823
Technology, inc.) and $3,622,836 in cash
October 1, 1999 CLG, Inc. (merged into Raleigh, NC Purchase 392,990 shares of Common
ePlus Group, inc. upon Stock valued at
acquisition) $3,900,426, subordinated
notes to seller of
$3,064,574 and $29,535,000
in cash
May 15, 2001 Certain assets and Avon, CT and Purchase 442,833 shares of Common
liabilities from Houston, TX Stock valued at $3,873,150
ProcureNet, Inc. and $1,000,000 in cash
plus the assumption of
certain liabilities
The assets acquired from ProcureNet, Inc. on May 15, 2001 included the following
e-commerce procurement software products:
OneSourceTM Enterprise Procurement Software -a Web-enabled enterprise
procurement software application designed to support and streamline the
requisition, order approval, tracking and reporting of purchases using the
Internet, e-mail, and EDI to fully automate the procurement process. The
software incorporates catalog search technology, which allows key word, advanced
text-based and product attribute-driven searches. The search functionality is
enabled by the technology-driven content cleaning and catalog building services.
The software provides functionality that can be implemented to manage the
4
functionality includes the OrderPlaceTM electronic catalog containing customer
specific goods, rapid requisition entry for frequent users, user hot lists,
customized workflows for automating the approval cycle, budgeting, order status
checking, order history, and receiving. Back office functionality includes
purchase order processing, auto routing for fulfillment, reverse auction,
invoice processing, Evaluated Receipts Settlement (ERS), accounts payable,
foreign currency, inventory and asset management. The OneSourceTM software
application, which can be implemented with an integrated or hosted OrderPlaceTM,
integrates with PurchasePlaceTM our procurement portal containing an electronic
catalog with a wide range of commodities and specialty goods. OneSourceTM can be
integrated into a customers' ERP or legacy systems. The OneSourceTM software is
available over the Internet as a hosted solution using the Company's server
network, or as a non-hosted solution on a customers' network. It can run on
servers using Microsoft Windows NT and various UNIX operating systems, as well
as leading database platforms, including Oracle, MS SQL Server, and IBM's
UDB/DB2.
OneSourceTM MarketbuilderTM Software -Web-marketplace building software based on
the same core technology as the OneSourceTM enterprise procurement software,
which allows a company or group of companies to quickly and cost effectively
establish an Internet-based trading community. The OneSourceTM MarketBuilderTM
functionality includes direct Web-browser access or access through the
OneSourceTM procurement application, multilevel catalog views which allow
customization for various buying communities, auctions, order processing and
payment, distributed administration functionality, and reporting.
OneReqTM Search Technology - OneReqTM search technology represents an approach
to electronic catalog searching that reduces both requisition time and
procurement errors. Utilizing a commodity-specific database, OneReqTM
automatically prompts the customer to provide comprehensive product attributes.
Each attribute selected from a pull-down menu acts as a progressive filter to
narrow the customer's search for items that meet their specifications. If an
appropriate match is not found in the customer's OrderPlaceTM electronic
catalog, the customer can be transferred to the PurchasePlaceTM catalog.
Common Language Generator Data Cleansing Technology - Common Language Generator
technology is an advanced, proprietary software application for cleaning and
categorizing legacy product descriptions. Using a knowledge database of over
60,000 advanced pattern-matching rules, the Common Language Generator system
classifies incoming content, identifying product characteristics and then
standardizing and assigning their appropriate values. The Company maintains a
data cleansing staff that provides the commodity knowledge required to develop
the advanced pattern matching rules, which are constantly being extended and
improved. The Company's staff also provides validation and quality assurance of
the data output.
The Company also obtained certain ProcureNet, Inc. accounts receivable and fixed
assets and assumed liabilities relative to the maintenance of software products
to customers.
OUR BUSINESS
We provide Internet-based, business-to-business supply chain management
solutions for information technology and other operating resources. In November
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. On May 15, 2001 ePlus further
5
expanded its offering by acquiring the e-commerce procurement assets of
ProcureNet, Inc. (See "Acquisitions"). These assets include an e-commerce
procurement product that can be provided to customers as an internal stand-alone
program or as a hosted product provided through ePlus.
The ePlusSuite product offering consists of four modules that can be operated
independently or integrated to provide a full suite of services:
o Procure(+) is an electronic procurement and content management
solution which allows customers to automate their internal workflow
procedures for the procurement of operating resources;
o Manage(+) is an electronic infrastructure management solution, which
provides asset management through an asset repository and tracking
database;
o Finance(+) facilitates automated financing and leasing solutions for
assets procured through Procure(+) or Manage(+); and
o 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 over ten years and currently derive
the majority of our revenues from such activities. We sell, using our internal
sales force and through vendor relationships, primarily to commercial customers
and federal, state and local governments. We also lease and finance equipment,
software, and services directly and through relationships with vendors,
equipment manufacturers, and systems integrators. The introduction of ePlus
e-commerce products reflects our continuing transition to a business-to-business
electronic commerce platform. See Note 14 - SEGMENT REPORTING in the attached
Consolidated Financial Statements.
INDUSTRY BACKGROUND
Growth of the Internet as a Platform for Efficient Business-to-Business
Electronic Commerce
The Internet is 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. 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 still conduct procurement and management of operating
resources through costly paper-based processes that require actions by many
individuals both inside and outside the organization. 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.
6
Many large companies have installed enterprise resource planning ("ERP") 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 inter-activity with the vendor. In addition, a
variety of point-to-point solutions such as electronic data interchange have
been developed. However, the expense and 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 either in-house or 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 our customer's 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 makes ePlus offerings a preferred solution:
o seeks a lower cost alternative to enterprise software solutions;
o will benefit from the cost savings and efficiency gains that can be
obtained from an Internet-based procurement solution;
o prefers to retain the flexibility to negotiate prices with designated
vendors or buying exchanges;
o 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
o 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. The ePlus offering currently
includes Internet-based applications for the procurement and management of
operating resources that can be integrated with financing and other asset
services. In 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.
7
ePlus allows customers to automate and customize their existing business rules
and procurement processes using an Internet-based workflow tool. We offer
customers a choice of Internet products with either an in-house basis or a
remotely-hosted solution, which can reduce the up-front costs for customers,
facilitate a quick adoption, and eliminate the need for customers to maintain
and update software. We believe our solution can be implemented faster with less
customer training than many competing 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 into users of ePlusSuite
We have an existing client base of approximately 1,500 customers, the vast
majority of which are based in the United States. 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. We offer our
software-based services through both a hosted version that can be obtained
through a subscription fee basis or as a stand-alone product that can be
purchased and hosted internally by the customer.
Expand our sales force and marketing activities
We currently have approximately 117 people in our sales function, 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 may also selectively acquire companies that have attractive
customer relationships, skilled sales forces or have technology or services that
may enhance our ePlusSuite offerings.
Expand the functionality of our Internet-based solutions
We intend to continue to improve our ePlusSuite offering 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. 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 have entered into joint marketing
arrangements with the finance subsidiaries of Chase Manhattan, Inc. and Wachovia
Corporation that enable us to market ePlusSuite to their customers. We also will
be seeking to expand our offerings through joint venture or reseller
arrangements to suppliers that can better cover the marketplace within their
specific geographic locales. We believe these marketing relationships can be a
potential substantial source of growth.
8
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 believe we
can leverage our financing expertise and relationships to arrange programs with
specific institutions to provide financing directly to our electronic commerce
customers.
DESCRIPTION OF ePlusSuite
ePlusSuite consists of four services, 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 available as a stand alone license or as a remotely
hosted solution.
Procure(+) provides the following features and functions for the customer:
o 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.
o 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 the customer or
ePlus can make changes. Approval thresholds and routing rules can be
set by dollar amount, quantity, asset type or other criteria. No
coding or expensive programming is required at the customer level.
o 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.
o 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.
o Multiple Currency--contains the ability to handle multiple currency
issues.
The key benefits of Procure(+) include:
o easy to use, either as an Internet-based interface that requires no
software to be installed at a customer's location and limited training
or installed in-house and run on a customer's internal systems;
9
o easy implementation without the assistance of consultants;
o integration of multiple vendor catalogs and advanced search, filtering
and viewing capabilities that allow the customer to control views by
user groups;
o an easily configured workflow module that automates and controls each
customer's existing business processes for requisition or order
routing, approval and preparation;
o order status reporting throughout the requisition process as well as
real-time connections to suppliers for pricing and availability and
other critical information; and
o 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. Its core technology is based on Sybase's Enterprise
Application Server and CORBA (common object request broker architecture) and
JAVA script.
Manage(+) provides the following information to the customer:
o 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.
o Location Information--provides asset location information including an
address, building or room number, or other information required by the
customer.
o Cost Center Information-- supports invoicing assets to cost center or
budget categories.
o Invoice Information--maintains information from the original invoice
on the asset for warranty and tracking purposes.
o Financial Information--tracks all financial information on the asset,
including purchase price or lease cost, software licensing costs and
warranty and maintenance information.
o Customized Information--user specific information can also be
maintained.
The key benefits of Manage(+) include:
o an easy to use Internet-based interface that requires no software to
be installed at a customer's location and limited training;
10
o easy implementation without the assistance of consultants and entails
no upfront license fee or ongoing maintenance or upgrade costs;
o 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;
o automating invoice reconciliation to reduce errors and track vendor
performance, including evaluating scheduled delivery versus actual
delivery performance;
o management of warranty and maintenance information to reduce redundant
maintenance fees and charges on equipment no longer in use;
o 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
o 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 a
substantial number of orders onto one or more financing transactions at the end
of a pre-determined order period (usually one to three months). Transactions can
then be invoiced by location, division, or business unit if so desired by the
customer. Finance(+) can help a customer simplify the process, lower costs and
increase 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 that 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 that can be seamlessly linked with other components
of our ePlusSuite solution. Assets that 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, engineering, and other technology
services.
IMPLEMENTATION AND CUSTOMER SERVICE
We use a project management approach to the implementation of ePlusSuite with
each new ePlusSuite customer. Our team consists of ePlusSuite implementation
specialists, who are responsible for the customer evaluation and implementation
of the solution, customer relationship managers who lead 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:
11
o We conduct an 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.
o We design a customized procurement, management and service program to
fit the customer's organizational needs.
o We implement an Internet-based supply chain management system which
can include: 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.
o 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.
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 the Microsoft and Sybase distributed Internet application frameworks.
These frameworks provide access security, load balancing, resource pooling,
message queuing, distributed transaction processing and reusable components and
services
Our applications are designed to be scalable, due to our multi-tiered
architecture employing thin client, multi-threaded application servers and
relational databases. Our applications are provided to our customers over any
standard Internet browser without the need to download applets or executables.
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 routed.
Workflow Engine. Our workflow engine allows information to flow through the
customer 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 time frame. 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.
12
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.
Asset Management. Manage(+) is based upon an RDBMS (relational database
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 be integrated with external systems such as ERP systems,
financial management systems, human resource systems (for user information and
organizational structure) and project accounting systems. These interfaces allow
for the exchange of data between ePlusSuite and other enterprise systems. These
integration processes can be 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 design allows for multiple layers of security through the
use of defined users and roles, secured logins, digital certificates and
encryption. We currently use security software to protect our internal network
systems from unauthorized access. Our firewall is a comprehensive security suite
providing access control, authentication, network address translation, auditing
and state table synchronization.
RESEARCH AND DEVELOPMENT
To date, the majority of our software has been acquired from third-party vendors
and some development has been outsourced to third-party software companies. With
the acquisition of the software products and the hiring of the employees
obtained from the acquisition of ProcureNet, Inc. on May 15, 2001, much of the
internal software development will be handled within the company. We both own
programs that we market or we have obtained perpetual license rights and source
code from third-party software companies. Subject to certain exceptions, we
generally retain the source code and intellectual property rights of the
customized software.
To successfully implement our business strategy, we are providing both a hosted
and stand alone 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 significant resources in our
internal development efforts, including adding a significant number of in-house
software engineers, and management. 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,
13
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 a salary plus commission basis, 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 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. We also intend to develop strategic relationships to expand
market acceptance of our electronic commerce business solutions.
Our sales force is organized under four regional directors located in our
headquarters in Herndon, Virginia (2) and our Pottstown, Pennsylvania (1) and
Raleigh, North Carolina (1) regional operating centers. We have various sales
office locations in: Herndon, Virginia; Phoenix, Arizona; St. Louis, Missouri;
Morristown, New Jersey; Dallas, Texas; San Diego, Milpitas and Sacramento,
California; Greenville, Wilmington, Charlotte and Raleigh, and Pottstown, Camp
Hill and West Chester, Pennsylvania. Additionally, sales offices in Avon,
Connecticut and Houston, Texas were acquired as part of the purchase of certain
assets from ProcureNet, Inc., on May 15, 2001. As of June 17, 2001 our sales
organization included 117 total direct sales and sales support personnel.
INTELLECTUAL PROPERTY RIGHTS
Our success depends in part upon proprietary business methodologies, and
technologies that we have licensed and modified. We own certain software
programs or have entered into software licensing agreements in connection with
the development of ePlusSuite. Some of these agreements grant us a perpetual
license to the source 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. We rely on a combination of copyright,
service mark and trade secret protection, confidentiality and nondisclosure
agreements 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. The registration on Finance(+) has
been issued; the applications on Procure(+) and Manage(+) have been published,
and registration is expected in September, 2001, if no opposition is filed; and
the applications on EPLUS LEASING and Service(+) have been approved for
publication. 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 that any
regular patents will be filed based on our provisional applications, or that any
patents
14
will be issued 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.
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.
FINANCING AND SALES ACTIVITIES
We have been in the business of selling, leasing, financing, and managing
information technology and other assets for over ten years and currently derive
the majority 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 two categories, direct financing, and operating leases. Direct financing
transfers 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 become profit margin to us and can
significantly impact the degree of profitability of a lease transaction.
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
15
over 150 manufacturers, distributors, resellers, content management solution
providers and sourcing organizations. Our largest vendor relationships include
Ingram Micro, Inc., Compaq, Tech Data, Hewlett Packard, Dell Computer
Corporation, Microsoft Corporation, and Sun Microsystems, Inc. We have in excess
of 150 vendor authorizations to market specific products. 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 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.
Financing and Bank Relationships. We have a number of bank and finance company
relationships that 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. During the years ended March 31, 1999, 2000 and 2001, the
Company sold leased equipment to MLC/CLC LLC, a joint venture in which the
Company has a 5% ownership interest, that amounted to 42%, 11% and 5% of the
Company's revenues, respectively.See "Item 7, Management's Discussion and
Analysis of Results of Operations, Financial Condition, Liquidity and Capital
Resources."
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 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, including GE Capital Corporation, Key Corporate
Capital, Inc., Fleet Business Credit Corporation, Fifth Third Bank, and Citizens
Banking Corporation.
Whenever possible and desirable we manage our risk in assets by selling leased
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 have sold
assets in the current year to GE Capital Corporation, Heller Financial, Fleet
Business Credit Corporation, and in prior years to Firstar Equipment Finance
Company and John Hancock Leasing Corp., among others. We also use agency
purchase orders to procure equipment for lease to our customers as an agent, not
a principal, and otherwise take measures to minimize our inventory.
Additionally, we use fixed-rate funding and issue proposals that adjust for
material adverse interest rate movements as well as material adverse changes to
the financial condition 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
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 fiscal year ended March 31, 2001, we
reserved for $1,989,245 in credit losses and incurred actual credit losses of
$368,612. During the fiscal year ended March 31, 2000 we reserved for $732,839
in credit losses and incurred actual credit losses of $533,031.
16
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., Clarus Corporation, International
Business Machines Corporation, and General Electric. 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, which
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 leasing companies such as GE Capital Corporation and bank leasing
subsidiaries, as well as captive finance companies such as IBM Credit
Corporation. Many of these competitors are well established, 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
As of March 31, 2001 we employed 409 full-time and part-time employees who
operated through 16 offices, including our principal executive offices and
regional sales offices. We also have employees in 4 locations based from their
residences. No employees are represented by a labor union and we believe our
relationships with our employees are good. The functional areas of our employees
are as follows:
Number of Employees
-------------------------
Sales and Marketing 111
Technical Support 99
Contractual 57
Accounting and Finance 51
Administrative 60
Software and Development 17
Executive 14
17
On May 15, 2001, as part of the acquisition from Procurenet, inc., approximately
39 permanent sales and IT development employees joined our company as well as 10
data input specialists who are temporarily retained. Including the employees
from Procurenet, inc., our employee total would have been as follows:
Number of Employees
-------------------------
Sales and Marketing 117
Technical Support 99
Contractual 57
Accounting and Finance 51
Administrative 61
Software and Development 47
Executive 16
Data Input Temporaries 10
RISK FACTORS
The Limited Operating History Of Our ePlusSuite Business Makes It Difficult To
Evaluate Our Business And Our Prospects
Our ePlusSuite solution, introduced on November 2, 1999, has an extremely
limited operating history. Although we have been in the business of financing
and selling information technology equipment since 1990, we will encounter some
of the challenges, risks, difficulties and uncertainties frequently encountered
by early-stage companies using new business models in evolving markets. Some of
these challenges relate to our ability to:
o increase the total number of users of our ePlusSuite services;
o adapt to meet changes in our markets and competitive developments;
o hire sufficient sales and technical personnel to accommodate the expected
growth in our customer base which may negatively impact our profitability;
and
o continue to update our technology to enhance the features and functionality
of our suite of products.
We cannot be certain that our business strategy will be successful or that we
will successfully address these and other challenges, risks and uncertainties.
The Electronic Commerce Business-To-Business Solutions Market Is Highly
Competitive And We Cannot Assure You That We Will Be Able To Effectively Compete
18
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter the
market. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures faced by us
will not harm our business, operating results or financial condition. In
addition, the market for electronic procurement solutions is relatively new and
underdeveloped. Our strategy of providing an Internet-based electronic commerce
solution may not be successful, or we may not execute it effectively.
Accordingly, our solution may not be widely adopted by businesses.
Our current and potential competitors in the market include, among others,
Ariba, Inc., Commerce One, Inc., Clarus Corporation, Concur Technologies, Inc.,
Connect, Inc., Harbinger Corporation, i2 Technologies, Inc., International
Business Machines Corporation, Intellisys Group, Inc., Microsoft Corporation,
Netscape Communications Corporation, Oracle Corporation, PeopleSoft, Inc. and
SAP Corporation Systems. Because there are relatively low barriers to entry in
the electronic commerce market, competition from other established and emerging
companies may develop in the future. In addition, our customers may become
competitors in the future. Increased competition is likely to result in reduced
margins, longer sales cycles and loss of market share, any of which could
materially harm our business, operating results or financial condition. The
business-to-business electronic commerce solutions offered by our competitors
now or in the future may be perceived by buyers and suppliers as superior to
ours. Many of our competitors have, and potential competitors may have, more
experience developing Internet-based software and end-to-end purchasing
solutions, larger technical staffs, larger customer bases, greater brand
recognition and greater financial, marketing and other resources than we do. In
addition, competitors may be able to develop products and services that are
superior to our products and services, that achieve greater customer acceptance
or that have significantly improved functionality as compared to our existing
and future products and services.
If Our Products Contain Defects, Our Business Could Suffer
Products as complex as those used to provide our electronic commerce solutions
often contain known and undetected errors or performance problems. Many serious
defects are frequently found during the period immediately following
introduction of new products or enhancements to existing products. Although we
attempt to resolve all errors that we believe would be considered serious by our
customers, our products are not error-free. Undetected errors or performance
problems may not be discovered in the future and known errors considered minor
by us might be considered serious by our customers. This could result in lost
revenues, delays in customer acceptance or unforeseen liability that would be
detrimental to our reputation and to our business.
We May Not Be Able To Hire And Retain Sufficient Sales, Marketing And Technical
Personnel That We Need To Succeed
To increase market awareness and sales of our offerings, we need to
substantially expand our sales operations and marketing efforts. These products
and services require a sophisticated sales effort and significant technical
support. Hiring technical personnel and finding third-party technical support is
very competitive in the electronic commerce market due to the limited number of
people available with the necessary technical skills and understanding of the
Internet. Competition for qualified sales, marketing and technical personnel is
intense, and we might not be able to hire and retain sufficient numbers of such
personnel to grow our electronic commerce business.
If We Are Unable To Protect Our Intellectual Property, Our Business Will Suffer
19
The success of our business strategy depends, in part, upon proprietary
technology and other intellectual property rights. To date, we have relied
primarily on a combination of copyright, trade secret and service mark laws to
protect our proprietary technology. It may be possible for unauthorized third
parties to copy certain portions of our products or reverse engineer or obtain
and use information that we regard as proprietary. Some of our agreements with
our customers and technology licensors contain residual clauses regarding
confidentiality and the rights of third parties to obtain the source code for
our products. These provisions may limit our ability to protect our intellectual
property rights in the future that could seriously harm our business, operating
results and financial condition. We cannot assure you that our means of
protecting our intellectual property rights will be adequate. If any of these
events happen, our business, operating results and financial condition could be
harmed.
We Face Risks Of Claims From Third Parties For Intellectual Property
Infringement That Could Harm Our Business
Although we believe that our intellectual property rights are sufficient to
allow us to market our existing products without incurring liability to third
parties, we cannot assure you that our products and services do not infringe on
the intellectual property rights of third parties.
In addition, because patent applications in the United States are not publicly
disclosed until the patent is issued, we may not be aware of applications that
have been filed which relate to our products or processes. We could incur
substantial costs in defending ourselves and our customers against infringement
claims. In the event of a claim of infringement, we and our customers may be
required to obtain one or more licenses from third parties. We cannot assure you
that such licenses could be obtained from third parties at a reasonable cost or
at all. Defense of any lawsuit or failure to obtain any such required license
could harm our business, operating results and financial condition. In addition,
in certain instances, third parties licensing software to us have refused to
indemnify us for possible infringement claims.
If We Publish Inaccurate Catalog Content Data, Our Business Could Suffer
Any defects or errors in catalog content data could harm our customers or deter
businesses from participating in our offering, damage our business reputation,
harm our ability to attract new customers and potentially expose us to legal
liability. In addition, from time to time some participants in ePlusSuite could
submit to us inaccurate pricing or other catalog data. Even though such
inaccuracies are not caused by our work and are not within our control, such
inaccuracies could deter current and potential customers from using our products
and could harm our business, operating results and financial condition.
We Depend On Having Creditworthy Customers
Our leasing and technology sales business requires sufficient amounts of debt
and equity capital to fund our equipment purchases. If the credit quality of our
customer base materially decreases, or if we experience a material increase in
our credit losses, we may find it difficult to continue to obtain the capital we
require and our business, operating results and financial condition may be
harmed. In addition to the impact on our ability to attract capital, a material
increase in our delinquency and default experience would itself have a material
adverse effect on our business, operating results and financial condition.
Failure to find alternative purchasers of our leased equipment may have a
material adverse effect on our business, operating results and financial
condition.
20
We May Not Be Able To Realize Our Entire Investment In The Equipment We Lease
We lease various types of equipment to customers through two distinct types of
transactions: direct financing leases and operating leases. A direct financing
lease passes substantially all of the risks and rewards of owning the related
equipment to the customer. Lease payments during the initial term of a direct
financing lease cover approximately 90% of the underlying equipment's cost at
the inception of the lease. The duration of an operating lease, however, is
shorter relative to the equipment's useful life. We bear greater risk in
operating leases in that we may not be able to remarket the equipment on terms
that will allow us to fully recover our investment.
At the inception of each lease, we estimate the fair market value of the item as
a residual value for the leased equipment based on the terms of the lease
contract. Residual values are determined and approved by our investment
committee. A decrease in the market value of such equipment at a rate greater
than the rate we expected, whether due to rapid technological obsolescence or
other factors, would adversely affect the residual values of such equipment. Any
such loss, which is considered by management to be permanent in nature, would be
recognized in the period of impairment in accordance with Statement of Financial
Accounting Standard No. 13, "Accounting for Leases." Consequently, there can be
no assurance that our estimated residual values for equipment will be realized.
We May Not Reserve Adequately For Our Credit Losses
We maintain a consolidated reserve for credit losses on finance receivables. Our
consolidated reserve for credit losses reflects management's judgment of the
loss potential. Our management bases its judgment on the nature and financial
characteristics of our obligors, general economic conditions and our charge-off
experience. It also considers delinquency rates and the value of the collateral
underlying the finance receivables.
We cannot be certain that our consolidated reserve for credit losses will be
adequate over time to cover credit losses in our portfolio because of
unanticipated adverse changes in the economy or events adversely affecting
specific customers, industries or markets. If our reserves for credit losses are
not adequate, our business, operating results and financial condition may
suffer.
Our Earnings May Fluctuate
Our earnings are susceptible to fluctuations for a number of reasons, including
the seasonal and cyclical nature of our customers' procurement patterns. Our
earnings will continue to be affected by fluctuations in our historical
business, such as reductions in realized residual values, lower sales of
equipment and lower overall leasing activity. In the event our revenues or
earnings 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 our common stock's market price.
We Are Dependent Upon Our Current Management Team
Our operations and future success depend on the efforts, abilities and
relationships of our Chairman, Chief Executive Officer and President, Phillip G.
Norton; our founder and Executive Vice President, Bruce M. Bowen, who also
serves as a director; Steven J. Mencarini, Senior Vice President and Chief
Financial Officer; Kleyton L. Parkhurst, Senior Vice President, Secretary and
Treasurer; Vincent Marino, President of ePlus Technology of PA, inc.; David
Rose, President of ePlus Technology of NC, inc.; and Nadim Achi, President of
ePlus Technology, inc. The loss of any of these key management officers or
21
personnel could have a material adverse effect on our business, operating
results and financial condition. Each of these officers has entered into an
employment agreement with us. We maintain key-man life insurance only on Mr.
Norton.
ITEM 2. PROPERTIES
The Company operates from sixteen leased offices, of which three have warehouse
space on site and one remote warehouse site. Some sales and service personnel
operate from residential offices or space that is provided for by another
entity. Our total leased square footage is approximately 78,965 square feet and
we pay rental of approximately $114,500 per month. Some of our companies share
office space to improve consolidated corporate marketing of our products and to
provide better cost efficiency. We do not own any real estate.
Number of Approximate Square
Location Company Employees Footage Function
- -------------------- --------------- ------------- ------------------ -----------------------------
Herndon, VA ePlus Group 142 10,053 Corporate headquarters
and sales-shared
Raleigh, NC ePlus Group 12 8,000 Sales
Sacramento, CA ePlus Group 3 954 Sales
West Chester, PA ePlus Group 3 635 Sales
Dallas, TX ePlus Group 2 943 Sales
Columbia, MD ePlus Group 1 100 Sales
St. Louis, MO ePlus Group 1 150 Sales
Morristown, NJ ePlus Group 1 100 Sales
Milpitas, CA ePlus Group 1 100 Sales
Other locations ePlus Group 4 Sales - home based
Herndon, VA ePlus Government 11 1,400 Corporate headquarters
-shared
Wilmington, NC ePlus 52 4,460 Subsidiary headquarters,
Technology of sales office and warehouse
NC, inc.
Greenville, NC ePlus 10 6,119 Sales office and warehouse
Technology of
NC, inc.
Charlotte, NC ePlus 4 2,185 Sales office-shared
Technology of
NC, inc.
Pottstown, PA ePlus 70 17,000 Subsidiary headquarters,
Technology of sales office and warehouse
PA, inc.
Camp Hill, PA ePlus 5 1,174 Sales office
Technology of
PA, inc
Herndon, VA ePlus 86 13,245 Subsidiary headquarters-
Technology, inc. shared, annex location and
warehouse
22
Herndon, VA ePlus 1,616 Storage warehouse
Technology, inc.
Avon, CT ePlus Systems, 14 5,030 Subsidiary headquarters,
inc. sales and technical
development
Great River, NY ePlus Systems, 4 Sales
inc.
Raleigh , NC ePlus Systems, 2 Sales and service
inc.
Other Locations ePlus Systems, 3 Sales and service
inc
Houston, TX ePlus Content 26 4,000 Subsidiary headquarters,
Services, inc. sales and e-commerce
catalog service center
ePlus inc., ePlus Group, inc., ePlus Government and ePlus Technology, inc. share
space in the same building in Herndon, VA. The two largest locations are
Herndon, VA and Pottstown, PA that have lease expiration dates of November 30,
2004 and June 30, 2005 respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings that
would have a material adverse effect upon the Company's business, financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since November 1, 1999, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "PLUS." Previously, the Company's Common Stock
was traded on the Nasdaq National Market from November 20, 1996 to October 31,
1999 under the symbol "MLCH." The following table sets forth the range of high
and low sale prices for the Common Stock for the period April 1, 1999 through
March 31, 2001, by quarter.
Quarter Ended High Low
- ------------- ---- ---
June 30, 1999 $ 9.50 $7.50
September 30, 1999 $11.25 $7.00
December 31, 1999 $46.00 $8.75
March 31, 2000 $74.63 $27.13
June 30, 2000 $37.12 $12.50
September 30, 2000 $30.50 $14.62
December 31, 2000 $23.62 $7.28
March 31, 2001 $17.75 $7.37
On June 20, 2001 the closing price of the Common Stock was $9.00 per share. On
June 20, 2001, there were 184 shareholders of record of our common stock. We
believe there are over 400 beneficial holders of the Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend to stockholders. We have retained our
earnings for use in the business. There is also a contractual restriction in our
ability to be able to pay dividends. Our National City Bank Facility restricts
dividends to 50% of net income accumulated after September 30, 2000. Therefore,
the payment of cash dividends on the Common Stock is unlikely in the foreseeable
future. Any future determination concerning the payment of dividends will depend
upon the elimination of this restriction and the absence of similar restrictions
in other agreements, our financial condition, results of operations and any
other factors deemed relevant by our Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On September 30, 1999, the Company acquired all of the outstanding stock of CLG,
Inc., a wholly-owned subsidiary of Centura Bank. Total consideration for the
acquisition was $36.5 million, including $29.5 million in cash, a subordinated
note in the amount of $3.1 million and 392,990 shares of the Company's Common
Stock.
On April 11, 2000, the Company issued to TC Plus, LLC 709,956 shares of Common
Stock upon the cashless exercise by TC Plus, LLC of a stock purchase warrant for
24
1,090,909 shares, with an exercise price of $11.00 per share. The cashless
exercise was made based on the closing price of the Company's Common Stock on
April 11, 2000.
On May 15, 2001, the Company issued 422,833 shares of Common Stock as part of
the consideration for the acquisition of certain assets and liabilities of
ProcureNet, Inc. The remaining consideration was the payment of $1,000,000 of
cash and the assumption of certain liabilities.
The issuances of securities described above were made in reliance on exemptions
from registration provided by Section 4(2) or Regulation D of the Securities Act
of 1933, as amended, as issuances by the issuer not involving a public offering.
The entities receiving securities from us in the transactions described above
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access to information about the
Company, through their relationships with the Company or through information
about the Company made available to them.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements of the Company and
related Notes thereto and the information included under "Item 7, Management's
Discussion and Analysis of Results of Operations, Financial Condition, Liquidity
and Capital Resources - As of and For the Years Ended March 31, 1999, 2000 and
2001" and "Item 1, Business."
25
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except
per share data)
Year Ended March 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Sales of equipment $ 52,167 $ 47,419 $ 83,516 166,252 $ 216,183
Sales of leased equipment 21,634 50,362 84,379 57,360 34,031
Lease revenues 9,909 14,882 20,611 31,374 42,694
Fee and other income 2,503 5,779 5,464 8,371 7,993
ePlusSuite revenues - - - 1,376 5,685
---------------------------------------------------------------------
Total revenues 86,213 118,442 193,970 264,733 306,586
---------------------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 42,180 37,423 71,367 147,209 182,474
Cost of sales of leased equipment 21,667 49,669 83,269 55,454 33,329
Direct lease costs 4,761 5,409 6,184 8,025 16,535
Professional and other costs 577 1,073 1,222 2,126 3,363
Salaries and benefits 8,241 10,357 11,880 19,189 30,611
General and administrative expenses 2,286 3,694 5,152 7,090 10,766
Interest and financing costs 1,649 1,837 3,601 11,390 15,523
Nonrecurring acquisition costs - 250 - - -
---------------------------------------------------------------------
Total costs and expenses 81,361 109,712 182,675 250,483 292,601
---------------------------------------------------------------------
Earnings before provision for income taxes 4,852 8,730 11,295 14,250 13,985
Provision for income taxes 1,360 2,691 4,579 5,875 5,667
---------------------------------------------------------------------
Net earnings $ 3,492 $ 6,039 $ 6,716 $ 8,375 $ 8,318
=====================================================================
Net earnings per common share - Basic $ 0.67 $ 1.00 $ 0.99 $ 1.09 $ 0.86
=====================================================================
Pro forma net earnings (1) $ 3,133 $ 5,426
==============================
Pro forma net earnings per common share - Basic $ 0.60 $ 0.90
==============================
Weighted average shares outstanding - Basic 5,184,261 6,031,085 6,769,732 7,698,287 9,625,891
(1) Pro forma net earnings as if companies which were subchapter S corporations
prior to their business combination with the Company, which were accounted
for under the pooling of interests method, had been subject to federal
income tax throughout the periods presented.
26
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except
per share data)
As of March 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and cash equivalents $ 6,654 $ 18,684 $ 7,892 $ 21,910 $ 24,534
Accounts receivable 8,846 16,383 44,090 60,167 57,627
Notes receivable 2,154 3,802 547 1,195 1,862
Inventories 1,278 1,214 658 2,445 2,651
Investment in direct financing and sales
type leases, net 17,473 32,496 83,371 221,885 198,563
Investment in operating lease equipment, net 11,065 7,296 3,530 10,114 4,283
Other assets 741 2,137 12,357 24,628 15,754
All other assets 813 1,184 1,914 2,991 5,593
---------------------------------------------------------------------
Total assets $ 49,024 $ 83,196 $ 154,359 $ 345,335 $ 310,867
=====================================================================
Liabilities:
Accounts payable - equipment $ 4,946 $ 21,284 $ 18,049 $ 22,976 $ 9,227
Accounts payable - trade 3,007 6,865 12,518 29,452 18,926
Salaries and commissions payable 672 390 536 957 1,293
Recourse notes payable 439 13,037 19,081 39,017 8,876
Nonrecourse notes payable 19,705 13,028 52,429 182,845 157,960
All other liabilities 3,778 5,048 7,932 12,967 22,678
---------------------------------------------------------------------
Total liabilities 32,547 59,652 110,545 288,214 218,960
Stockholders' equity 16,477 23,544 43,814 57,121 91,907
---------------------------------------------------------------------
Total liabilities and stockholders' equity $ 49,024 $ 83,196 $ 154,359 $ 345,335 $ 310,867
=====================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES - AS OF AND FOR THE YEARS ENDED MARCH
31, 1999, 2000 AND 2001
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes included elsewhere in this report.
Our results of operations are susceptible to fluctuations for a number of
reasons, including, without limitation, customer demand for our products and
services, supplier costs, interest rate fluctuations and differences between
estimated residual values and actual amounts realized related to the equipment
we lease. Operating results could also fluctuate as a result of the 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.
27
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 strategy is to reduce or eliminate our balance sheet risk over
time by outsourcing lease and other financing to third-party financial
institutions, while charging a transaction fee and arranging the 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 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 from our electronic commerce business unit, while
revenues from our leasing and sales business may decrease over time. 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 begin to represent a smaller portion of our total revenues.
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 that 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 this strategy, it expects the
business to become less capital intensive over time. As a result, management
expects total assets and total liabilities to decrease. The Company expects to
significantly reduce 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 that 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. On May 15, 2001, we acquired from
ProcureNet, Inc., the e-commerce procurement software asset products and
software technology for cleaning and categorizing product descriptions for
e-commerce catalogues. These products and services and associated expenses with
this business acquisition will substantially increase our expenses in the near
term and the ability to sell these services and products is expected to
fluctuate depending on the customer demand for these products and services,
which to date is still unproven. We also expect that the results of adding these
offerings may cause management to redefine the internal business reporting
process and impact the segment reporting in the first quarter of the next fiscal
year which will end March 31, 2002.
28
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 year.
SELECTED ACCOUNTING POLICIES
Amounts charged for the e-commerce business unit's Procure+ service are
recognized as services are rendered. Amounts charged for the Manage+ service are
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 leases. Revenues and expenses
between accounting periods for each lease term will vary depending upon the
lease classification.
For financial statement purposes, we present revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectability of lease payments are
reasonably certain and it meets one of the following criteria: (1) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (2) the lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (4) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at the inception of the
lease.
Direct finance 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 that is recorded by the lessor
at the inception of the lease. The dealer's profit or loss represents the
difference, at the inception of the lease, between the fair value of the leased
property and its cost or carrying amount. The equipment subject to such leases
may be obtained in the secondary marketplace, but most frequently is the result
of re-leasing our own portfolio. This profit or loss that is recognized at lease
inception, is included in net margin on sales-type leases. For equipment sold
through our technology 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.
29
Rental amounts are accrued on a straight-line basis over the lease term and are
recognized as lease revenue. Our cost of the leased equipment is recorded on the
balance sheet as investment in 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. The proceeds from any subsequent lease are accounted
for as lease revenues at the time such transaction is entered into.
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 or used equipment which is not subject to any type of lease; (2) sales of
equipment 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 for the electronic commerce business
unit's Procure(+) service are recognized as services are rendered. Amounts
charged for the Manage(+) service are recognized on a straight-line basis over
the period the services are provided. These revenues are included in our
ePlusSuite revenues in our consolidated statement of earnings.
Fee and other income results from (1) income from events that occur after the
initial sale of a financial asset such as escrow/prepayment income, (2)
re-marketing fees, (3) brokerage fees earned for the placement of financing
transactions and (4) interest and other miscellaneous income. These revenues are
included in fee and other income in our consolidated statements of earnings.
30
RESULTS OF OPERATIONS
The Year Ended March 31, 2001 Compared to the Year Ended March 31, 2000
Total revenues generated by the Company during the year ended March 31, 2001
were $306.6 million compared to revenues of $264.7 million for the year ended
March 31, 2000, an increase of 15.8%. This increase is primarily attributable to
increases in equipment sales and lease revenues. The Company's revenues are
composed of sales, lease revenues, ePlusSuite revenues, and fee and other
revenue, and may vary considerably from period to period.
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 11.9% to $250.2 million during the year ended March 31, 2001, as
compared to $223.6 million in the prior fiscal year.
The majority of sales of equipment are generated through the Company's
technology business unit subsidiaries. Sales of used and/or off-lease equipment
are also generated from the Company's brokerage and re-marketing activities. For
the year ended March 31, 2001, equipment sales through the Company's technology
business unit subsidiaries accounted for 99.6% of sales of equipment. For the
year ended March 31, 2001, sales of equipment increased 30.0% to $216.2 million,
a result of increased technology sales through the Company's 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 15.6% for the year
ended March 31, 2001, as compared to 11.5% during the year ended March 31, 2000.
This increase in net margin percentage can be attributed to improved vendor
pricing negotiations and variations in the mix and volume of products sold.
The Company also recognizes revenue from the sale of leased equipment. During
the year ended March 31, 2001 compared to the prior fiscal year, sales of leased
equipment decreased 40.7% to $34.0 million. The revenue and gross margin
recognized on sales of leased equipment can vary significantly depending on the
nature and timing of the sale, as well as the timing of any debt funding
recognized in accordance with SFAS No. 125. The decrease in sales of leased
equipment can be primarily attributed to the decline in the volume of leases
sold to MLC/CLC, LLC, a joint venture in which the Company owns a 5% interest.
During the years ended March 31, 2001 and 2000, sales to MLC/CLC, LLC, accounted
for 43.1% and 50.0% of sales of leased equipment, respectively. Sales to the
joint venture require the consent of the joint venture partner. Firstar
Equipment Finance Corporation, which owns 95% of MLC/CLC, LLC, discontinued
their continued 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 year ended March 31, 2001, the Company recognized a gross margin of
2.1% on leased equipment sales of $34.0 million as compared to a gross margin of
3.3% on leased equipment sales of $57.4 million during the prior fiscal year.
The Company's lease revenues increased 36.1% to $42.7 million for the year ended
March 31, 2001, compared with the prior fiscal year. This increase consists of
increased lease earnings and rental revenues, as well as increased remarketing
revenues.
31
For the year ended March 31, 2001, fee and other income decreased 4.5% over the
prior fiscal year. 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 year ended March 31, 2001, the Company recorded $5.7 million in
ePlusSuite revenues, as compared to $1.4 million in the year ended March 31,
2000. This represents an increase of 313.2%. These revenues consist of amounts
charged for the arrangement of procurement transactions executed through
Procure+, and Manage+, components of ePlusSuite.
The Company's direct lease costs increased 106.0% during the year ended March
31, 2001, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense on operating lease equipment. The
acquisition of CLG, Inc., which had a higher percentage of operating leases,
contributed to the increase, as did increases in the Company's reserves for
credit losses.
Salaries and benefits expenses increased 59.5% during the year ended March 31,
2001, as compared to the prior fiscal year. General and administrative expenses
increased 51.9% over the prior fiscal year. These increases reflect the
increased number of personnel employed by the Company, higher commission
expenses in the technology business unit, and increased costs associated with
the implementation of the Company's strategies, as well as the acquisition of
CLG, Inc.
Interest and financing costs incurred by the Company for the year ended March
31, 2001 increased 36.3%, and relate to interest costs on the Company's
indebtedness. In addition to increased borrowing under the Company's lines of
credit, the Company's lease related non-recourse debt portfolio increased
significantly (See "Liquidity and Capital Resources"). Payment 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 $5.7 million for the year
ended March 31, 2001 from $5.9 million for the prior fiscal year, reflecting
effective income tax rates of 40.5% and 41.2%, respectively.
The foregoing resulted in a 0.7% decrease in net earnings for the year ended
March 31, 2001, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $0.86 and $0.80 for the
year ended March 31, 2001, as compared to $1.09 and $0.91 for the year ended
March 31, 2000, based on weighted average common shares outstanding of 9,625,891
and 10,383,467, respectively, for 2001 and 7,698,287 and 9,155,056,
respectively, for 2000.
The Year Ended March 31, 2000 Compared to the Year Ended March 31, 1999
Total revenues generated by the Company during the year ended March 31, 2000
were $264.7 million compared to revenues of $194.0 million for the year ended
March 31, 1999, an increase of 36.5%. This increase is primarily attributable to
an increase in equipment sales. The increase in total revenues for the year
ended March 31, 2000, without the inclusion of the operations of CLG, Inc.,
would have been 31.1%.
32
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 33.2% to $223.6 million during the year ended March 31, 2000, as
compared to $167.9 million in the prior fiscal year.
For the year ended March 31, 2000, equipment sales through the Company's
technology business unit subsidiaries accounted for 98.1% of sales of equipment,
with the remainder being sales from brokerage and re-marketing activities. Sales
of equipment increased significantly during the year ended March 31, 2000,
primarily a result of increased technology sales through the Company's
subsidiaries. For the year ended March 31, 2000, sales of equipment increased
99.1% to $166.3 million. 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 11.5% for the year
ended March 31, 2000, as compared to a gross margin of 14.5% realized on sales
of equipment generated during the year ended March 31, 1999. This decrease in
net margin percentage can be primarily attributed to increased sales to larger
volume customers who are more price competitive. The Company's gross margin on
sales of equipment may be affected by the mix and volume of products sold.
During the year ended March 31, 2000 compared to the prior fiscal year, sales of
leased equipment decreased 32% to $57.4 million. The decrease in sales of leased
equipment can be primarily attributed to the decline in the volume of leases
sold to MLC/CLC, LLC. During the years ended March 31, 2000 and 1999, sales to
MLC/CLC, LLC, accounted for 50% and 96.1% of sales of leased equipment,
respectively.
During the year ended March 31, 2000, the Company recognized a gross margin of
3.3% on leased equipment sales of $57.4 million as compared to a gross margin of
1.3% on leased equipment sales of $84.4 million during the prior fiscal year.
The increase in gross margin is due primarily to increased origination fees
charged to the equity purchasers of leased equipment.
The Company's lease revenues increased 52.2% to $31.4 million for the year ended
March 31, 2000, compared with the prior fiscal year. This 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 March 31, 2000 and March 31, 1999 were $221.9
million and $83.4 million, respectively. The March 31, 2000 balance represents
an increase of $138.5 million or 166.1% over the balance as of March 31, 1999.
The increase in the net investment in direct financing and sales-type leases, as
well as the corresponding lease revenues, was due in large part to the
acquisition of CLG, Inc. The increases in lease revenues for the year ended
March 31, 2000, without the operations of CLG, Inc., would have been 14.5%.
For the year ended March 31, 2000, fee and other income increased 53.2% over the
prior fiscal year. This increase is attributable to increases in 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
consumate such transactions, and the timing thereof, may depend largely upon
factors outside the direct control of management. The earnings from these types
of transactions in a particular period may not be indicative of the earnings
that can be expected in future periods. The acquisition of CLG, Inc. did not
materially affect the increases for the periods presented.
33
For the year ended March 31, 2000, the Company recorded $1.4 million in
ePlusSuite revenues. These revenues consisted of amounts charged for the
arrangement of procurement transactions executed through Procure+, and Manage+,
components of ePlusSuite. There were no ePlusSuite revenues recorded in the
fiscal year ended March 31, 1999, as ePlusSuite was introduced on November 2,
1999. During the year ended March 31, 2000, the selling, general and
administrative expenses allocated to the e-commerce busines unit consisted
primarily of a corporate overhead allocation.
The Company's direct lease costs increased 29.8% during the year ended March 31,
2000, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense on operating lease equipment. The increase
for the year ended March 31, 2000 is attributable to the acquisition of CLG,
Inc., which has a higher percentage of operating leases, and as a result, added
$3.4 million in direct lease costs.
Salaries and benefits expenses increased 61.5% during the year ended March 31,
2000 over the same period in the prior year. These increases reflect the
increased number of personnel employed by the Company, higher commission
expenses in the technology business unit, and the acquisition of CLG, Inc.
Interest and financing costs incurred by the Company for the year ended March
31, 2000 increased 216.3%, and relate to interest costs on the Company's
indebtedness. In addition to increased borrowing under the Company's lines of
credit, the Company's lease related non-recourse debt portfolio increased
significantly (See "Liquidity and Capital Resources"). Payment 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 increased to $5.9 million for the year
ended March 31, 2000 from $4.6 million for the prior fiscal year, reflecting
effective income tax rates of 41.2% and 40.5%, respectively.
The foregoing resulted in a 24.7% increase in net earnings for the year ended
March 31, 2000, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $1.09 and $0.91 for the
year ended March 31, 2000, as compared to $0.99 and $0.98 for both methods for
the year ended March 31, 1999, based on weighted average common shares
outstanding of 7,698,287 and 9,155,056, for 2000 and 6,769,732 and 6,827,528,
respectively, for 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2001, the Company generated cash flows from
operations of $10.5 million, and used cash flows from investing activities of
$18.6 million. Cash flows generated by financing activities amounted to $10.8
million during the same period. The net effect of these cash flows was a net
increase in cash and cash equivalents of $2.6 million during the year. During
the same period, our total assets decreased $34.5 million, or 10.0%, primarily
the result of decreases in the Company's net investment in direct financing and
operating leases. On April 17, 2000, a secondary offering of 1,000,000 shares of
our common stock was completed that generated net proceeds of $25,936,388. The
Company's net investments in direct financing and operating lease equipment
decreased $23.3 million, or 10.5%, and $5.8 million, or 57.7%, respectively,
during the period. The cash balance at March 31, 2001 was $24.5 million as
compared to $21.9 million the prior year.
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
34
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
facility had been in place since December 1998, was previously 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 had full recourse to the
Company, and was 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. 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 was determined by a matrix that was 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 PNC Bank, N.A. ($5 million) were added to
the facility and National City was 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 March 31, 2001, the Company had an outstanding balance of $5 million on
the National City Credit Facility. The loss of this relationship could have a
material adverse effect on our future results as we rely on this facility for
daily working capital and liquidity for our leasing business.
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. As of March 31, 2000, the outstanding balance on this First Union
Facility amounted to $34.5 million, and represented 88.4% of the outstanding
recourse debt. As of March 31, 2001, the outstanding balance on the National
City Facility amounted to $5 million, and represented 56.3% of the outstanding
recourse debt. The Company has a $3.1 million subordinated recourse note payable
due to Centura Bank resulting from the acquisition of CLG, Inc. This note comes
due in October, 2006 and has an 11% interest rate payable monthly.
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 personal computers 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. The 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. and ePlus
Technology of NC, inc. have accounts receivable facilities through Deutsche
35
Financial Services Corporation. Of the total $33 million dollar facility
provided by Deutsche Financial Services Corporation, $26 million is for
traditional inventory floor planning and $7 million is available for accounts
receivable financing. The maximum available under the accounts receivable
facilities for ePlus Technology, inc. and ePlus Technology of PA, inc. are $5
million and $2 million respectively and as of March 31, 2001 the balance of
these account receivable facilities, which is included in recourse notes
payable, were $112,618 and $0 respectively. As of March 31, 2001 the respective
floor planning inventory agreement maximum credit limits and actual outstanding
balances are as follows:
Balance at
Entity Floor Plan Supplier Credit Limit March 31, 2001
- ----------------------- ----------------------- ------------ -----------------
ePlus Technology of NC, Deutsche Financial $ 3,500,000 $1,554,793
inc. Services,Inc.
IBM Credit Corporation $ 250,000 $ 0
ePlus Technology of PA, Deutsche Financial $ 9,000,000 $7,893,419
inc. Services,Inc.
IBM Credit Corporation $ 2,000,000 $1,056,318
ePlus Technology, Deutsche Financial $13,500,000 $8,663,724
inc. Services, Inc.
Until it was terminated on February 15, 2001, ePlus Technology of PA, inc. had a
line of credit in place with PNC Bank, N.A. with a maximum loan limit of
$2,500,000 and it was guaranteed by ePlus, inc. The facilities provided by
Deutsche Financial Services Corporation for ePlus Technology of PA, inc. and
ePlus Technology , inc. requires a separate guaranty of up to $4,900,000 and
$2,000,000 respectively, by ePlus inc. The floor planning facility provided by
IBM Credit Corporation to ePlus Technology of PA, inc. also requires a guaranty
by ePlus, inc. for the total balance outstanding.
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. agreements with Finova Capital Corp.
were terminated on February 25, 2001. Both ePlus Technology of PA, inc. and
ePlus Technology of NC, inc. replaced these facilities under agreements with
Deutsche Financial Services Corporation. The loss of the Deutsche Financial
Services Corporation relationship could have a material adverse effect on our
future results as we rely on these facilities for daily working capital and
liquidity for our technology sales business.
Non-recourse notes payable decreased to $158.0 million at March 31, 2001 from
$182.8 million as of March 31, 2000. The decrease is primarily the result of
loan paydowns on the debt portfolio through customer lease payments.
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
36
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.
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, which 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 $14.7 million of our total leased
equipment sales of $34.0 million or 43.1% for the year ended March 31, 2001. It
represented approximately $28.7 million of our leased equipment sales of $57.4
million or 50.0% for the year ended March 31, 2000. Firstar Equipment Finance
Corporation discontinued its investment in new lease acquisitions effective May
31, 2000.
As of March 31, 2001 amounts due to vendors for inventory and general expenses
("Accounts Payable - trade") and amounts due to vendors for equipment that will
be placed on lease ("Accounts Payable - equipment") totaled $28.2 million, as
compared to $52.4 million at March 31, 2000.
As of March 31, 2001 and 2000, the Company had $1.9 and $1.2 million in notes
receivable, respectively. As of March 31, 2000, we had an outstanding note
receivable of $.8 million from a corporation in which we also had warrants to
acquire a major equity share. Subsequent to year-end, the maker of the note was
acquired and the note receivable was converted into cash from partial repayment,
common stock and additional warrants of the acquiring entity.
ADEQUACY OF CAPITAL RESOURCES
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.
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
37
uncertainties frequently encountered by early stage companies using new and
unproven 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, which is based on an unproven business model.
The Company expects to incur increased 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 large 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 acceptance of the system;
o the pricing model 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, frequent
new product announcements and established competition;
o significant expansion of internal resources is needed to support
planned growth of the Company's ePlusSuite services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the Company's liabilities are non-recourse,
fixed interest rate instruments, the Company is reliant upon lines of credit and
other financing facilities which are subject to fluctuations in interest rates.
These instruments were entered into for other than trading purposes, are
denominated in U.S. Dollars, and, with the exception of amounts drawn under the
National City Bank and Deutsche facilities, bear interest at a fixed rate.
Because the interest rate on these instruments is fixed, changes in interest
rates will not directly impact our cash flows. Borrowings under the National
City and Deutsche facilities bear interest at a market-based variable rate,
based on a rate selected by the Company and determined at the time of borrowing.
If the amount borrowed is not paid at the end of the rate period, the rate is
reset in accordance with the Company's selection and changes in market rates.
38
Due to the relatively short nature of the interest rate periods, we do not
expect our operating results or cash flow to be materially affected by changes
in market interest rates. As of March 31, 2001, the aggregate fair value of our
recourse borrowings approximated their carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying Table of Contents to Financial Statements and Schedule on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Except as set forth below, the information required by Items 10, 11, 12 and 13
is incorporated by reference from the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the close of the Company's fiscal year.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company of
each person who is an executive officer, director or significant employee.
NAME AGE POSITION CLASS
- ---- --- -------- -----
Phillip G. Norton.............57 Director, Chairman of the Board, III
President and Chief
Executive Officer
Bruce M. Bowen................49 Director and Executive Vice III
President
Steven J. Mencarini...........45 Senior Vice President and
Chief Financial Officer
Kleyton L. Parkhurst..........38 Senior Vice President, Secretary,
and Treasurer
Terrence O'Donnell............57 Director II
Carl J. Rickertsen............41 Director II
C. Thomas Faulders, III.......51 Director I
David Rose....................40 President, ePlus Technology of NC, inc.
39
Vincent M. Marino.............43 President, ePlus Technology of PA, inc.
Nadim Achi....................39 President, ePlus Technology, inc.
On May 4, 2001 Mr. Rickertsen resigned as a Director of the Company. On March
30, 2001, Mr. Lawrence S. Herman was elected to the Board of Directors. On June
18, 2001, Mr. Thomas L. Hewitt was elected to the Board of Directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements listed in the accompanying Index to
Financial Statements and Schedule are filed as a part of this report and
incorporated herein by reference.
(a)(2) Financial Statement Schedule
The financial statement schedule listed in the accompanying Index to Financial
Statements and Schedules are filed as a part of this report and incorporated
herein by reference.
(b) Reports on Form 8-K
The Company filed four Form 8-K's during the last quarter of the period covered
by this report.
Form 8-K filed with the Commission on January 5, 2001 regarding the press
release of the third and fourth quarter earning release. No financial statements
were included.
Form 8-K filed on February 2, 2001 announcing that ePlus inc along with its
wholly-owned subsidiaries ePlus Group, inc, ePlus Capital, inc. and ePlus
Government, inc. had established with National City Bank, as administrative
agent, an amended and restated credit agreement with a $35 million dollar limit.
No financial statements were included.
Form 8-K dated February 28, 2001 and filed with the Commission on March 13, 2001
reporting on the establishment of floor planning agreements and account
receivable financing agreements with ePlus Technology, inc., ePlus Technology of
PA, inc., and ePlus Technology of NC, inc. and Deutsche Financial Services
Corporation. The agreements establish a total of $33 million dollars of floor
planning and accounts receivable financing facility. No financial statements
were included.
40
(c) Exhibits
Exhibit
Number Description
------------------------------------------------------------------------
2.1(7) Stock Purchase Agreement, dated as of October 23, 1998 by
and between MLC Holdings, Inc. and TC Leasing, LLC
2.2(9) Agreement, dated as of February 25, 2000 by and between ePlus
inc. and TC Plus, LLC waiving certain provisions of the Stock
Purchase Agreement dated as of October 23, 1998 by and between
MLC Holdings, Inc. and TC Leasing, LLC
2.3(10) Amendment, dated as of April 11, 2000, to the Agreement,
dated as of February 25, 2000 by and between ePlus inc. and TC
Plus, LLC
3.1(4) Certificate of Incorporation of the Company, as amended
3.2 Certificate of Amendment to Certificate of Incorporation
3.3(1) Bylaws of the Company
4.1(1) Specimen certificate of Common Stock of the Company
10.1(1) Form of Indemnification Agreement entered into between the
Company and its directors and officers
10.2(1)* Form of Employment Agreement between the Registrant and
Phillip G. Norton
10.3(1)* Form of Employment Agreement between the Registrant and Bruce
M. Bowen
10.4(1)* Form of Employment Agreement between the Registrant and
Kleyton L. Parkhurst
10.5(3)* Form of Employment Agreement between the Registrant and Steven
J. Mencarini
10.6(5)* Form of Employment Agreement between the Registrant and Nadim
Achi
10.7(4)* MLC Master Stock Incentive Plan
10.8(4)* Amended and Restated Incentive Stock Option Plan
10.9(4)* Amended and Restated Outside Director Stock Option Plan
10.10(4)* Amended and Restated Nonqualified Stock Option Plan
10.11(4)* 1997 Employee Stock Purchase Plan
10.12(6) 1998 Long Term Incentive Plan
41
10.13(2) First Amendment to Loan and Security Agreement dated March 12,
1997 between MLC Group, Inc. and Heller Financial, Inc.
10.14 Amended and Restated Stockholders Agreement dated as of April
11, 2000, by and among ePlus inc., TC Plus, LLC, Phillip G.
Norton, Bruce M. Bowen, J.A.P. Investment Group, L.P., Kevin
M. Norton and Patrick J. Norton, Jr.
10.15(1) Form of Irrevocable Proxy and Stock Rights Agreement
10.16(10) Credit Agreement dated January 19, 2001 between ePlus, inc.,
ePlus Group, inc., ePlus Government, inc., and ePlus Capital,
inc., with National City Bank, Inc., as Agent
10.17(11) Business Financing greement dated September 8, 2000 between
Deutsche Financial Services Corporation and ePlus Technology,
inc.
10.18(11) Agreement for Wholesale Financing dated September 8, 2000
between Deutsche Financial Services and ePlus Technology, inc.
10.19(11) Paydown Addendum to Business Financing Agreement between
Deutsche Financial Services and ePlus Technology, inc.
10.20(11) Limited Guaranty dated September 8, 2000 between Deutsche
Financial Services and ePlus, inc.
10.21(12) Agreement for Wholesale Financing between Deutsche Financial
Services and ePlus Technology of PA, inc., dated February 12,
2001
10.22(12) Business Financing Agreement between Deutsche Financial
Services Corporation and ePlus Technology of PA, inc., dated
February 12, 2001
10.23(12) Addendum to Business Financing Agreement and Agreement for
Wholesale Financing between Deutsche Financial Services
Corporation and ePlus Technology of PA, inc., dated
February 12, 2001
10.24(12) Limited Guaranty for ePlus Technology of PA, Inc. to
Deutsche Financial Services Corporation by ePlus, inc., dated
February 12, 2001
10.25(12) Intercreditor Subordination Agreement between Deutsche
Financial Services Corporation and IBM Credit Corporation and
ePlus Technology of PA, inc., dated February 26, 2001
10.26(12) Agreement for Wholesale Financing between Deutsche Financial
Services Corporation and ePlus Technology of NC, inc., dated
February 12, 2001
10.27(12) Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc. and Deutsche Financial Services
Corporation, dated February 12, 2001
10.28(12) Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc. and Deutsche Financial Services
Corporation, dated February 12, 2001
42
10.29(12) Addendum to Business Financing Agreement and Agreement for
Wholesale Financing between ePlus Technology, inc.and Deutsche
Financial Services Corporation, dated February 12, 2001,
amending the Business Financing Agreement and Wholesale
Financing Agreement, dated September 8, 2000
10.30 Deed of Lease between CALEAST INDUSTRIAL INVESTORS, LLC
(Landlord) and ePlus, inc. (Tenant)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
----------------------------------------------------
*Indicates a management contract or compensatory plan or arrangement
(1) Incorporated herein by reference to the indicated exhibit filed
as part of the Registrant's Registration Statement on Form S-1
(No. 333-11737)
(2) Incorporated herein by reference to Exhibit 5.2 filed as part of
the Registrant's Form 8-K filed March 28, 1997
(3) Incorporated herein by reference to the indicated exhibit filed
as part of the Registrant's Form 10-K filed on June 30, 1997
(4) Incorporated herein by reference to the indicated exhibit filed
as part of the Registrant's Form 10-Q filed on November 14, 1997
(5) Incorporated herein by reference to the indicated exhibit filed
as a part of the Registrant's Form 8-K filed on July 31, 1998
(6) Incorporated herein by reference to Exhibit 1.1 filed as a part
of the Registrant's Form 10-Q filed on November 12, 1998
(7) Incorporated herein by reference to the indicated exhibit filed
as a part of the Registrant's Form 8-K filed on December 31, 1998
(8) Incorporated herein by reference to Exhibit 99.3 filed as part of
the Registrant's Form 8-K filed on March 9, 2000
(9) Incorporated herein by reference to Exhibit 99.2 filed as part of
the Registrant's Form 8-K filed on May 12, 2000
(10) Incorporated herein by reference to Exhibit 5.1 filed as part of
the Registrant's Form 8-K filed on February 2, 2001
(11) Incorporated herein by reference to Exhibits 5.1, 5.2, 5.3 and
5.4 filed as part of the Registrant's Form 8-K filed on September
22, 2000
(12) Incorporated herein by reference to Exhibits 5.1, 5.2, 5.3, 5.4,
5.5, 5.6, 5.7, 5.8 and 5.9 filed as part of the Registrant's Form
8-K filed on March 13, 2001
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ePlus inc.
/s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 27, 2001
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.
/s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 27, 2001
/s/ BRUCE M. BOWEN
---------------------------------------------
By: Bruce M. Bowen, Director and Executive
Vice President
Date: June 27, 2001
/s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, Principal Accounting Officer
Date: June 27, 2001
/s/ C. THOMAS FAULDERS, III
---------------------------------------------
By: C. Thomas Faulders, III, Director
Date: June 27, 2001
/s/ LAWRENCE S. HERMAN
---------------------------------------------
By: Lawrence S. Herman, Director
Date: June 27, 2001
/s/ THOMAS L. HEWITT
---------------------------------------------
By: Thomas L. Hewitt, Director
Date: June 27, 2001
/s/ TERRENCE O'DONNELL
--------------------------------------------
By: Terrence O'Donnell, Director
Date: June 27, 2001
44
ePlus inc. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 2000 and 2001 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1999, 2000, and 2001 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 2000 and 2001 F-6
Notes to Consolidated Financial Statements F-8
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years
S-1 Ended March 31, 1999, 2000 and 2001.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ePlus inc.
Herndon, Virginia
We have audited the accompanying consolidated balance sheets of ePlus inc. and
subsidiaries as of March 31, 2001 and 2000, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ePlus inc. and subsidiaries as of
March 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
June 22, 2001
F-2
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2000 As of March 31, 2001
-------------------------------------------------
ASSETS
Cash and cash equivalents $ 21,909,784 $ 24,534,183
Accounts receivable, net of allowance for doubtful
accounts of $811,545 and $1,392,297 as of
March 31, 2000 and 2001, respectively 60,166,596 57,627,231
Notes receivable (1) 1,195,263 1,862,488
Employee advances 94,693 66,082
Inventories 2,445,425 2,651,087
Investment in direct financing and sales-type leases - net 221,884,864 198,563,222
Investment in operating lease equipment - net 10,114,392 4,282,985
Property and equipment - net 2,895,711 5,216,123
Deferred tax asset - 310,476
Other assets (2) 24,628,020 15,753,599
-------------------------------------------------
TOTAL ASSETS $ 345,334,748 $310,867,476
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 22,975,545 $ 9,226,813
Accounts payable - trade 29,451,907 18,925,939
Salaries and commissions payable 956,762 1,292,722
Accrued expenses and other liabilities 8,519,353 21,351,575
Income taxes payable 3,685,870 1,327,591
Recourse notes payable 39,017,168 8,875,595
Nonrecourse notes payable 182,845,152 157,959,706
Deferred tax liability 762,139 -
----------------------------------------------------
Total Liabilities 288,213,896 218,959,941
COMMITMENTS AND CONTINGENCIES (Note 7) - -
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 9,730,154 issued and outstanding
at March 31, 2000 and 2001, respectively 79,584 97,301
Additional paid-in capital 29,926,168 56,376,934
Retained earnings 27,115,100 35,433,300
----------------------------------------------------
Total Stockholders' Equity 57,120,852 91,907,535
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 345,334,748 $ 310,867,476
====================================================
(1) Includes amounts with related parties of $985,767 and $0 as of
March 31, 2000 and 2001, respectively.
(2) Includes amounts with related parties of $1,509,450 and $1,020,633 as
of March 31, 2000 and 2001, respectively.
See Notes to Consolidated Financial Statements.
F-3
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
1999 2000 2001
------------ ------------- -------------
REVENUES
Sales of equipment $ 83,516,254 $ 166,252,178 $ 216,183,181
Sales of leased equipment 84,378,800 57,360,366 34,031,381
167,895,054 223,612,544 250,214,562
Lease revenues 20,610,542 31,374,244 42,693,839
Fee and other income 5,464,242 8,371,115 7,992,752
ePlusSuite revenues - 1,375,901 5,684,743
26,074,784 41,121,260 56,371,334
TOTAL REVENUES (1) 193,969,838 264,733,804 306,585,896
COSTS AND EXPENSES
Cost of sales, equipment 71,367,090 147,209,320 182,473,685
Cost of sales, leased equipment 83,269,110 55,454,033 33,329,403
154,636,200 202,663,353 215,803,088
Direct lease costs 6,183,562 8,025,343 16,534,992
Professional and other fees 1,222,080 2,125,523 3,363,324
Salaries and benefits 11,880,062 19,189,271 30,610,437
General and administrative expenses 5,151,494 7,090,070 10,766,333
Interest and financing costs 3,601,348 11,389,682 15,522,897
28,038,546 47,819,889 76,797,983
TOTAL COSTS AND EXPENSES (2) 182,674,746 250,483,242 292,601,071
Earnings before provision for income taxes 11,295,092 14,250,562 13,984,825
Provision for income taxes 4,578,625 5,875,194 5,666,625
NET EARNINGS $ 6,716,467 $ 8,375,368 $ 8,318,200
NET EARNINGS PER COMMON SHARE - BASIC $ 0.99 $ 1.09 $ 0.86
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.98 $ 0.91 $ 0.80
==================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,769,732 7,698,287 9,625,891
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,827,528 9,155,056 10,383,467
(1) Includes amounts from related parties of $82,652,623, $28,976,999 and
$14,923,606 for the fiscal years ended March 31, 1999, 2000 and 2001,
respectively.
(2) Includes amounts from related parties of $80,966,659, $28,261,282 and
$15,588,046 for the fiscal years ended March 31, 1999, 2000 and 2001,
respectively.
See Notes to Consolidated Financial Statements.
F-4
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
----------------------------- Paid-in Retained
Shares Par Value Capital Earnings TOTAL
----------------------------- ------------- ---------------- ----------------
Balance April 1, 1998 6,071,505 $ 60,715 $ 11,460,331 $ 12,023,265 $ 23,544,311
Issuance of shares for option exercise 10,500 105 91,770 - 91,875
Issuance of shares to employees 14,001 140 112,452 - 112,592
Issuance of shares in business
combination 263,478 2,635 3,620,188 - 3,622,823
Sale of common shares 1,111,111 11,111 9,714,630 - 9,725,741
Net earnings - - - 6,716,467 6,716,467
----------------------------- ---------------- ---------------- ----------------
Balance, March 31, 1999 7,470,595 74,706 24,999,371 18,739,732 43,813,809
----------------------------- ---------------- ---------------- ----------------
Issuance of shares for option exercise 61,044 610 662,406 - 663,016
Issuance of shares to employees 33,804 338 315,395 - 315,733
Issuance of shares in business
combination 392,990 3,930 3,896,496 - 3,900,426
Issuance of common stock purchase warrants - - 52,500 - 52,500
Net earnings - - - 8,375,368 8,375,368
----------------------------- ---------------- ---------------- ----------------
Balance, March 31, 2000 7,958,433 79,584 29,926,168 27,115,100 57,120,852
---------------------------------------------------------------------------------
Issuance of shares for option exercise 37,685 7,476 155,861 - 163,337
Issuance of shares to employees 24,080 241 143,517 - 143,758
Issuance of shares for stock purchase
warrant 709,956 - - - -
Expense related to stock purchase warrant - - 225,000 - 225,000
Issuance of common stock-secondary
offering 1,000,000 10,000 25,926,388 25,936,388
Net earnings - - - 8,318,200 8,318,200
----------------------------- ---------------- ---------------- ----------------
Balance, March 31, 2001 9,730,154 $ 97,301 $ 56,376,934 $ 35,433,300 $ 91,907,535
============================= ================ ================ ================
See Notes to Consolidated Financial Statements.
F-5
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
---------------------------------------
1999 2000 2001
---------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 6,716,467 $8,375,368 $ 8,318,200
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,720,241 7,574,165 11,248,760
Provision for credit losses 500,000 374,580 1,772,768
Deferred taxes 1,805,210 (2,530,071) (1,072,615)
Loss (Gain) on sale of operating lease equipment 57,984 (753,787) (333,299)
Adjustment of basis to fair market value of
operating lease equipment and investments 306,921 12,000 1,593,760
Payments from lessees directly to lenders (970,483) (7,523,540) (6,112,406)
Expense related to issuance of warrants - 52,500 225,000
Loss on disposal of property and equipment 26,246 47,492 14,765
Changes in:
Accounts receivable (19,809,403) (17,839,402) 3,191,633
Notes receivable (1) 3,316,261 (494,622) (1,971,904)
Employee advances 33,028 (48,736) 22,929
Inventories 1,293,081 6,791,464 (177,422)
Other assets (2) (4,094,505) (3,939,783) 8,375,710
Accounts payable - equipment (3,964,145) 4,926,486 (13,748,732)
Accounts payable - trade 528,181 16,175,112 (9,559,862)
Salaries and commissions payable, accrued
expenses and other liabilities 1,097,776 7,279,067 8,679,370
--------------------------------------
Net cash provided by (used in) (8,437,140) 18,478,293 10,466,655
operating activities --------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 138,003 820,015 922,549
Purchase of operating lease equipment (487,418) (1,904,985) (2,568,445)
Increase in investment in direct financing and
sales-type leases (3) (80,744,494) (120,118,484) (10,197,101)
Proceeds from sale of property and equipment 2,000 - -
Purchases of property and equipment (1,249,214) (1,608,190) (3,840,655)
Cash used in acquisitions, net of cash acquired (3,485,279) (1,845,730) -
Increase in other assets (4) (788,856) (219,603) (2,942,046)
---------------------------------------
Net cash used in investing activities (86,615,258) (124,876,977) (18,625,698)
---------------------------------------
F-6
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
------------------------------------------
1999 2000 2001
------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $79,941,563 $126,758,387 $ 90,908,400
Recourse 415,606 732,276 325,446
Repayments:
Nonrecourse (10,200,352) (22,234,446) (76,961,083)
Recourse (195,892) (1,408,934) (183,515)
Proceeds from issuance of capital stock, net of expenses 9,930,209 978,749 307,095
Proceeds from sale of stock, net of underwriting - - 25,936,388
Proceeds from (repayments of) lines of credit 4,369,129 15,590,775 (29,549,289)
------------------------------------------
Net cash provided by financing activities 84,260,263 120,416,807 10,783,442
------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (10,792,135) 14,018,123 2,624,399
Cash and Cash Equivalents, Beginning of Period 18,683,796 7,891,661 21,909,784
------------------------------------------
Cash and Cash Equivalents, End of Year $ 7,891,661 $ 21,909,784 $ 24,534,183
==========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 1,475,497 $ 3,591,943 $ 849,598
==========================================
Cash paid for income taxes $ 2,913,818 $ 6,473,357 $ 4,559,378
==========================================
(1) Includes amounts provided (used by) by related parties of $3,291,681,
$(466,812) and $0, for the fiscal years ended March 31, 1999, 2000 and
2001.
(2) Includes amounts provided by (used by) related parties of $ 329,275,
$(1,383) and $(27,510) for the fiscal years ended March 31, 1999, 2000 and
2001.
(3) Includes amounts provided by related parties of $80,510,214, $28,033,282
and $14,254,197 for the fiscal years ended March 31, 1999, 2000 and 2001.
(4) Includes amounts provided by (used by) related parties of $652,701,
$(219,603) and $1,376,246 for the fiscal years ended March 31, 1999, 2000
and 2001.
See Notes To Consolidated Financial Statements.
F-7
ePlus inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years Ended March 31, 1999, 2000, and 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective October 18, 1999, MLC Holdings, Inc. changed
its name to ePlus inc. ("ePlus" or the "Company"). Effective January 31, 2000,
ePlus inc.'s wholly-owned subsidiaries MLC Group, Inc., MLC Federal, Inc., MLC
Capital, Inc., PC Plus, Inc., MLC Network Solutions, Inc. and Educational
Computer Concepts, Inc. changed their names to ePlus Group, inc., ePlus
Government, inc., ePlus Capital, inc., ePlus Technology, inc., ePlus Technology
of NC, inc. and ePlus Technology of PA, inc., respectively. The accompanying
consolidated financial statements include the accounts of the wholly owned
subsidiary companies (MLC Network Solutions, Inc. and Educational Computer
Concepts, Inc.) at historical amounts as if the business combinations had
occurred on March 31, 1997 in a manner similar to a pooling of interest. The
accompanying consolidated financial statements also include the accounts of the
wholly owned subsidiary (PC Plus, Inc.) from July 1, 1998, accounted for as a
purchase.
Principles of Consolidation - The consolidated financial statements include the
accounts of ePlus inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Business Combinations - On July 1, 1998, the Company, through a new wholly-owned
subsidiary, MLC Network Solutions of Virginia, Inc., issued 263,478 common
shares, valued at $3,622,823, and paid cash of $3,622,836 for a purchase of all
the outstanding common shares of PC Plus, Inc., a value-added reseller of
personal computers, related network equipment and software products and provider
of various support services to its customers from its facility in Reston,
Virginia. Subsequent to the acquisition, MLC Network Solutions of Virginia, Inc.
changed its name to PC Plus, Inc. This business combination has been accounted
for using the purchase method of accounting, and accordingly, the results of
operations of PC Plus, Inc. have been included in the Company's consolidated
financial statements from July 1, 1998. The Company's other assets include
goodwill of $6,045,330 calculated as the excess of the purchase price over the
fair value of the net identifiable assets acquired, and is being amortized on a
straight-line basis over 27.5 years. As of March 31, 2000 and 2001, the net
balance of such goodwill is $5,657,159 and $5,437,329, respectively. See Note
12.
On October 1, 1999, the Company purchased all of the stock of CLG, Inc., a
technology equipment leasing business, from Centura Bank. The acquisition added
approximately 400 customers and $93 million of assets to the Company's leasing
customer base in the Raleigh and Charlotte, North Carolina, Greenville, North
Carolina, and southern Virginia commercial markets. Total consideration for the
acquisition was $36.5 million, paid by the issuance of 392,990 shares of ePlus
inc. common stock valued at $3,900,426 (based on $9.925 per share), subordinated
debt of $3,064,574 and $29,535,000 in cash. The subordinated debt bears annual
interest at 11%, payable monthly, and the principal repayment is due on October
10, 2006. The note may be prepaid in whole at anytime at its par value. The cash
portion was partially financed by a non-recourse borrowing under an agreement
F-8
with Fleet Business Credit Corporation, which provided $27,799,499 of cash at
7.25% and is collateralized by certain CLG, Inc. leases. Goodwill of $6,444,447
is being amortized on a straight-line basis over a fifteen-year period. As of
March 31, 2000 and 2001, the net balance of such goodwill is $6,229,462 and
$5,799,493, respectively. Concurrent with the acquisition, CLG, Inc. was merged
into MLC Group, Inc., a wholly-owned subsidiary of ePlus inc. See Note 12.
Asset Purchase - On July 12, 1999, the Company purchased certain assets and the
sales operations of Daghigh Software Company, Inc., which operated its
technology sales business as International Computer Networks and as ICN in the
metropolitan Washington, DC area. The purchase price of $751,452 consisted of
$251,452 in cash and a $500,000, 8% interest bearing, non-negotiable promissory
note, payable monthly, which matured on August 9, 2000. The assets and staff
were merged into PC Plus, Inc., a wholly-owned subsidiary of the Company.
Goodwill of $635,441 is being amortized on a straight-line basis over a fifteen
year period. As of March 31, 2000 and 2001, the net balance of such goodwill is
$607,199 and $564,836, respectively.
Revenue Recognition - The Company sells information technology equipment to its
customers and recognizes revenue from equipment sales at the time equipment is
accepted by the customer. The Company is the lessor in a number of its
transactions and these are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Each
lease is classified as either a direct financing lease, sales-type lease, or
operating lease, as appropriate. Under the direct financing and sales-type lease
methods, the Company records the net investment in leases, which consists of the
sum of the minimum lease term payments, initial direct costs, and unguaranteed
residual value (gross investment) less the unearned income. The difference
between the gross investment and the cost of the leased equipment for direct
finance leases is recorded as unearned income at the inception of the lease. The
unearned income is amortized over the life of the lease using the interest
method. Under sales-type leases, the difference between the fair value and cost
of the leased property (net margins) is recorded as revenue at the inception of
the lease. The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" effective
January 1, 1997. This standard establishes criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Certain assignments of direct finance leases made on a non-recourse basis by the
Company after December 31, 1996 meet the criteria for surrender of control set
forth by SFAS No. 125 and have therefore been treated as sales for financial
statement purposes. SFAS No. 125 prohibits the retroactive restatement of
transactions consummated prior to January 1, 1997.
Sales of leased equipment represents revenue from the sales of equipment subject
to a lease in which the Company is the lessor. If the rental stream on such
lease has non-recourse debt associated with it, sales revenue is recorded at the
amount of consideration received, net of the amount of debt assumed by the
purchaser. If there is no non-recourse debt associated with the rental stream,
sales revenue is recorded at the amount of gross consideration received, and
costs of sales is recorded at the book value of the lease. Sales of equipment
represents revenue generated through the sale of equipment sold primarily
through the Company's technology business unit. For equipment sold through the
Company's technology business unit subsidiaries, the dealer margin is presented
in equipment sales revenue and cost of equipment sales.
F-9
Lease revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to the Company's estimate of residual value.
The Company assigns all rights, title, and interests in a number of its leases
to third-party financial institutions without recourse. These assignments are
accounted for as sales since the Company has completed its obligations at the
assignment date, and the Company retains no ownership interest in the equipment
under lease.
Amounts charged for the Company's electronic commerce business unit's Procure+
service are recognized as services are rendered. Amounts charged for the Manage+
service are recognized on a straight-line basis over the contractual period the
services are provided.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in fianncial statements. There was no effect of implementing SAB 101 on
the consolidated financial statements.
In July 2000, the Emerging Issues Task Force reached a consensus on EITF Issue
No. 99-19, "Reporting Revenue Gross as a Principal verses Net as an Agent,"
which addresses whether a company should recognize revenue based on the gross
amount billed to the customer because it has earned revenue from the sale of the
goods or whether the company should recognize revenue based on the net amount
retained because, in substance, it has earned a commission. In September 2000,
the Emerging Issues Task Force reached a consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," which addresses the
statement of operations classification of shipping and handling fees billed to
customers and shipping and handling costs incurred by companies that sell goods.
The adoption of EITF Issues No. 99-19 and No. 00-10 in the fourth quarter of
fiscal year 2001 did not have a material impact on our financial position or
results of operations.
Stock-based Compensation - The Company accounts for stock-based compensation for
employees in accordance with Accounting Principle Board, or APB, Opinion No. 25,
"Accounting for Stock Issued to Employees," and comply with the disclosure
provisions of Statement of Financial Accounting Standards, or SFAS, No. 123,
"Accounting for Stock-based Compensation." Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the measurement
date, between the fair value of the common stock and the relevant exercise
price. When aplicable, the Company accounts for stock-based compensation to
non-employees in accordance with the provisions of SFAS No. 123 and other
applicable principals.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25," which clarifies the application of APB
Opinion No. 25 for some issues, including: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequences of
various modifications to the terms of a previously fixed stock option or award;
and the accounting for an exchange of stock compensation awards in a business
combination.
Interpretation No. 44 became effective July 1, 2000, but some of the conclusions
cover specific events that occurred before its effectiveness. The adoption of
this guidance did not have a material impact on the Company's financial position
or results of operations.
F-10
Residuals - Residual values, representing the estimated value of equipment at
the termination of a lease, are recorded in the consolidated financial
statements at the inception of each sales-type or direct financing lease as
amounts estimated by management based upon its experience and judgment. The
residual values for operating leases are included in the leased equipment's net
book value.
The Company evaluates residual values on an ongoing basis and records any
required adjustments. In accordance with generally accepted accounting
principles, no upward revision of residual values is made subsequent to lease
inception. Residual values for sales-type and direct financing leases are
recorded at their net present value and the unearned income is amortized over
the life of the lease using the interest method.
Reserve for Credit Losses - The reserve for credit losses (the "reserve") is
maintained at a level believed by management to be adequate to absorb potential
losses inherent in the Company's lease and accounts receivable portfolio.
Management's determination of the adequacy of the reserve is based on an
evaluation of historical credit loss experience, current economic conditions,
volume, growth, the composition of the lease portfolio, and other relevant
factors. The reserve is increased by provisions for potential credit losses
charged against income. Accounts are either written off or written down when the
loss is both probable and determinable, after giving consideration to the
customer's financial condition, the value of the underlying collateral and
funding status (i.e., discounted on a non-recourse or recourse basis). As of
March 31, 2000 and 2001, the Company's reserve for credit losses was $2,658,846
and $4,279,479, respectively.
Cash and Cash Equivalents - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less.
Inventories - Inventories are stated at the lower of cost (weighted average
basis) or market.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets, which range from three to seven years.
Income Taxes - Deferred income taxes are accounted for in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under this method, deferred income tax
liabilities and assets are based on the difference between financial statement
and tax bases of assets and liabilities, using tax rates currently in effect.
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
F-11
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications - Certain items have been reclassified in the March 31, 1999
and 2000 financial statements to conform to the March 31, 2001 presentation.
Earnings Per Share - Earnings per share (EPS) have been calculated in accordance
with SFAS No. 128, "Earnings Per Share." In accordance with SFAS No. 128, basic
EPS amounts were calculated based on weighted average shares outstanding of
6,769,732 in fiscal 1999, 7,698,287 in 2000, and 9,625,891 in 2001. Diluted EPS
amounts were calculated based on weighted average shares outstanding and common
stock equivalents of 6,827,528 in fiscal 1999, 9,155,056 in 2000, and 10,383,467
in 2001. Additional shares included in the diluted earnings per share
calculations are attributable to incremental shares issuable upon the assumed
exercise of stock options and other common stock equivalents.
Capital Structure - On October 23, 1998, the Company sold 1,111,111 shares of
common stock for a price of $9.00 per share to TC Plus LLC, a Delaware limited
liability company (formerly TC Leasing LLC). In addition, the Company granted TC
Plus LLC stock purchase warrants 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 it was extended under the terms of the warrant. Pursuant to a
purchase agreement, the Company's ability to pay dividends was restricted
through October 23, 1999. On February 25, 2000, the Company entered into an
agreement, which was amended April 11, 2000, which allowed TC Plus 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. On
April 11, 2000, TC Plus LLC exercised their options on a cashless basis and were
issued 709,956 shares of common stock.
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 SFAS No. 138, establishes accounting and
reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts, and for hedging activities. The
statement 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. Effective April 1, 2001, the Company
adopted SFAS No. 133, as amended. The adoption did not have a material impact on
the company's consolidated financial statements.
Effective April 1, 2001, the Company adopted SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125," which revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over the majority of
SFAS No. 125's provisions without reconsideration. The Company's adoption of
SFAS No. 140 did not have a material impact on its financial position or results
of operations.
F-12
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of
the following:
As of March 31,
2000 2001
(In Thousands)
------------------------------
Minimum lease payments $ 213,284 $ 191,792
Estimated unguaranteed residual value 33,584 29,231
Initial direct costs, net of amortization (1) 2,958 3,531
Less: Unearned lease income (26,093) (23,104)
Reserve for credit losses (1,848) (2,887)
-------------- ---------------
Investment in direct finance and sales
type leases, net $ 221,885 $ 198,563
============== ===============
(1) Initial direct costs are shown net of amortization of $3,686 and $5,014 at
March 31, 2000 and 2001, respectively.
Future scheduled minimum lease rental payments as of March 31, 2001 are as
follows:
(In Thousands)
Year ending March 31, 2002 $ 114,852
2003 60,718
2004 12,783
2005 1,833
2006 and thereafter 1,606
----------------
$ 191,792
================
The Company's net investment in direct financing and sales-type leases is
collateral for non-recourse and recourse equipment notes. See Note 5.
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:
As of March 31,
2000 2001
(In Thousands)
----------------------------
Cost of equipment under operating leases $ 26,979 $ 20,589
Initial direct costs 19 15
Less: Accumulated depreciation and
Amortization (16,884) (16,321)
----------- ----------------
Investment in operating lease equipment, net $ 10,114 $ 4,283
================= ==========
F-13
Future scheduled minimum lease rental payments, as of March 31, 2001, are as
follows:
(In Thousands)
----------------------
Year Ending March 31, 2002 $ 5,746
2003 1,222
2004 172
2005 1
----------------------
$ 7,141
======================
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of March 31,
2000 2001
(In Thousands)
-------------------------------
Furniture, fixtures and equipment $ 3,086 $ 4,580
Vehicles 140 139
Capitalized software 1,350 3,603
Leasehold improvements 241 228
Less: Accumulated depreciation and
amortization (1,921) (3,334)
----------------- -------------
Property and equipment, net $ 2,896 $ 5,216
================= =============
5. RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse and non-recourse obligations consist of the following:
As of March 31,
2000 2001
(In Thousands)
-------------------
Recourse equipment notes secured by related
investments in leases with varying interest
rates ranging from 6.9% to 7.9% in fiscal years
2000 and 2001 $ 637 $ 479
Recourse line of credit with a maximum balance
of $65,000,000 bearing interest at the LIBOR rate
plus 150 basis points, or, at the Company's option,
prime less 1/2% expired December, 2000 34,500 -0-
Recourse line of credit with a maximum balance of
$35,000,000 bearing interest at the LIBOR rate plus
F-14
150 basis points for thirty day draws, or, at the
Company's option, prime for overnight draws
expiring April, 2004; 8.0% interest rate effective
on balance as of March 31, 2001 -0- 5,000
Recourse line of credit with a maximum balance of
$33,000,000 bearing interest at prime less .5% -0- 113
Recourse equipment notes with varying interest rates
ranging from 7.13% to 8.25%, secured by related
investment in equipment 316 220
Promissory notes with interest rate of 8% per terms
and conditions of the Asset Purchase Agreement between
ePlus Technology, inc and Daghigh Software Company, Inc. 500 -0-
Recourse note payable secured by investment in
leases with 11% interest payable monthly, and
principal balance due October, 2006 3,064 3,064
--------- ----------
Total recourse obligations $ 39,017 $ 8,876
========= ==========
Non-recourse equipment notes secured by related
investments in leases with interest rates ranging
from 5.14% to 14.00% in fiscal years 2000 and 2001
$182,845 $157,960
========== =========
Principal and interest payments on the recourse and non-recourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral, and
the Company. Under non-recourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the Company.
Borrowings under the Company's $35 million line of credit are subject to certain
covenants regarding minimum consolidated tangible net worth, maximum recourse
debt to net worth ratio, cash flow coverage, and minimum interest expense
coverage ratio. The borrowings are secured by the Company's assets such as
leases, receivables, inventory, and equipment. Borrowings are limited to the
Company's collateral base, consisting of equipment, lease receivables and other
current assets, up to a maximum of $35 million. In addition, the credit
agreement restricts, and under some circumstances prohibits, the payment of
dividends.
Recourse and non-recourse notes payable as of March 31, 2001, mature as follows:
F-15
Recourse Notes Non-recourse
Payable Notes Payable
(In Thousands)
------------------------------------
Year ending March 31, 2002 $ 5,365 $ 89,199
2003 247 51,754
2004 200 12,684
2005 0 2,632
2006 and thereafter 3,064 1,691
-------------- ----------------
$ 8,876 $ 157,960
============== ================
6. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees, the balances of which
amounted to $94,693 and $66,082 as of March 31, 2000 and 2001, respectively.
Such balances are to be repaid from commissions earned on successful sales or
financing arrangements obtained on behalf of the Company, or via payroll
deductions.
As of March 31, 2000 and 2001, the Company's other assets includes $99,219 and
$97,349, respectively, payable to United Federal Leasing, which is owned in part
by an individual related to a Company executive.
During the year ended March 31, 1999, the Company recognized remarketing fees of
$216,828 from a company in which an employee/stockholder has a 45% ownership
interest.
During the year ended March 31, 2000, the Company advanced money to an entity in
which the Company owns a stock purchase warrant. As of March 31, 2000, the
balance of advances to this entity was $816,506, and is included in notes
receivable. During the year ended March 31, 2001, $420,711 of unpaid advances
were converted into a common stock investment in a successor entity, and is
included in other assets.
During the years ended March 31, 1999, 2000, and 2001, the Company sold leased
equipment to MLC/CLC LLC, a joint venture in which the Company has a 5%
ownership interest, that amounted to 42%, 11% and 5% of the Company's revenues,
respectively. Revenue recognized from the sales was $81,089,883, $28,666,120 and
$14,654,844, respectively. The basis for the equipment sold was $80,510,214,
$28,033,282 and $14,254,197, respectively. Notes receivable as of March 31, 2000
includes $169,261 due from the joint venture. Other assets reflects the
investment in the joint venture of $1,608,669 and $628,218, as of March 31, 2000
and 2001, respectively, accounted for using the cost method, and reflects an
impairment of $1,085,000 recognized during the year ended March 31, 2001. The
Company receives an origination fee on leased equipment sold to the joint
venture. In addition, the Company recognized $301,708, $310,879 and $268,762 for
the years ended March 31, 1999, 2000 and 2001 for accounting and administrative
services provided to MLC/CLC LLC.
F-16
The Company leases certain office space from entities that are owned, in part,
by executives of subsidiaries of the Company. During the years ended March 31,
1999, 2000, and 2001, rent expense paid to these related parties was $269,558,
$228,000, and $248,849, respectively.
The Company is reimbursed for certain general and administrative expenses by a
company owned, in part, by an executive of a subsidiary of the Company. The
reimbursement totaled $25,500 for the year ended March 31, 1999.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment for the conduct of
its business. Rent expense relating to these operating leases was $629,456,
$799,384, and $1,222,389 for the years ended March 31, 1999, 2000, and 2001,
respectively. As of March 31, 2001, the future minimum lease payments are due as
follows:
(In Thousands)
--------------
Year Ending March 31, 2002 $ 1,113
2003 951
2004 790
2005 379
--------------
$ 3,233
==============
8. INCOME TAXES
A reconciliation of income taxes computed at the statutory federal income tax
rate to the provision for income taxes included in the consolidated statements
of earnings is as follows:
For the Year Ended March 31,
1999 2000 2001
(In Thousands)
-----------------------------------
Statutory federal income tax rate 34% 34% 34%
Income tax expense computed at the
statutory federal rate $ 3,840 $ 4,845 $ 4,755
State income tax expense,
net of federal tax 529 547 678
Non-taxable interest income (16) (21) (15)
Non-deductible expenses 226 504 249
------------ ----------- ----------
Provision for income taxes $ 4,579 $ 5,875 $ 5,667
============ =========== ==========
Effective income tax rate 40.58% 41.23% 40.52%
============ =========== ==========
The components of the provision for income taxes are as follows:
F-17
For the Year Ended March 31,
1999 2000 2001
(In Thousands)
----------------------------------------------
Current:
Federal $ 2,519 $ 7,126 $ 5,237
State 255 1,278 1,502
--------------- -------------- ---------------
2,774 8,404 6,739
--------------- -------------- ---------------
Deferred:
Federal $ 1,259 $ (2,080) $ (762)
State 546 (449) (310)
--------------- -------------- ---------------
1,805 (2,529) (1,072)
--------------- -------------- ---------------
$ 4,579 $ 5,875 $ 5,667
=============== ============== ===============
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
For the Year Ended March 31,
1999 2000 2001
(In Thousands)
-------------------------------------------
Alternative minimum tax $ (1,307) $ (161) $ 1,701
Lease revenue recognition 3,083 (1,681) (198)
Other 29 (687) (2,575)
------------ -------------- ---------------
$ 1,805 $ (2,529) $ (1,072)
============ ============== ===============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of items
comprising the Company's deferred tax asset (liability) consists of the
following:
For the Year Ended March 31,
1999 2000 2001
(In Thousands)
---------------------------------------
Alternative minimum tax $ 1,539 $ 1,701 $ 0
Lease revenue recognition (4,720) (3,039) (2,841)
Allowance for doubtful
accounts and credit reserves 282 314 2,377
Other (393) 262 774
------------- -------------- ----------
$ (3,292) $ (762) $ 310
============= ============== ==========
9. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and non-recourse notes payable
(Note 5) associated with its direct finance and operating lease activities from
F-18
payments made directly by customers to third-party lenders amounting to
$10,733,555, $28,739,422 and $33,004,241 for the years ended March 31, 1999,
2000, and 2001, respectively. In addition, the Company realized a reduction in
recourse and non-recourse notes payable from the sale of the associated assets
and liabilities amounting to $10,231,793, $22,727,174 and $5,828,340 for the
years ended March 31, 1999, 2000 and 2001, respectively.
10. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with contributory 401(k) profit sharing
plans. To be eligible to participate in the plan, employees must be at least 21
years of age and have completed a minimum service requirement. Full vesting in
the plans vary from after the fourth to the sixth consecutive year of plan
participation. Employer contribution percentages are determined by the Company
and are discretionary each year. The Company's expense for the plans was
$104,617, $88,500 and $370,082 for the years ended March 31, 1999, 2000 and
2001, respectively.
The Company has established a stock incentive program (the "Master Stock
Incentive Plan") to provide an opportunity for directors, executive officers,
independent contractors, key employees, and other employees of the Company to
participate in the ownership of the Company. The Master Stock Incentive Plan
provides for awards to eligible directors, employees, and independent
contractors of the Company, of a broad variety of stock-based compensation
alternatives under a series of component plans. These component plans include
tax advantaged incentive stock options for employees under the Incentive Stock
Option Plan, formula length of service based nonqualified options to
non-employee directors under the Outside Director Stock Plan, nonqualified stock
options under the Nonqualified Stock Option Plan, a program for employee
purchase of Common Stock of the Company at 85% of fair market value under a tax
advantaged Employee Stock Purchase Plan approved by the Board of Directors and
effective September 16, 1998, as well as other restrictive stock and performance
based stock awards and programs which may be established by the Board of
Directors. The aggregate number of shares reserved for grant under all plans
that are a part of the Master Stock Incentive Plan represent a floating number
equal to 20% of the issued and outstanding stock of the Company (after giving
effect to pro forma assumed exercise of all outstanding options and purchase
rights). The number that may be subject to options granted under the Incentive
Stock Option Plan is also further capped at a maximum of 4,000,000 shares to
comply with IRS requirements for a specified maximum. As of March 31, 2001 a
total of 2,266,564 shares of common stock have been reserved for issuance upon
exercise of options granted under the Plan, which encompasses the following
component plans:
a) the Incentive Stock Option Plan ("ISO Plan"), under which
1,486,830 options are outstanding or have been exercised as of
March 31, 2001;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under
which 265,000 options are outstanding as of March 31, 2001;
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 63,507 are outstanding or have been exercised as of
March 31, 2001;
d) the Employee Stock Purchase Plan ("ESPP") under which 72,069
shares have been issued as of March 31, 2001.
F-19
The exercise price of options granted under the Master Stock Incentive Plan is
equivalent to the fair market value of the Company's stock on the date of grant,
or, in the case of the ESPP, not less than 85% of the lowest fair market value
of the Company's stock during the purchase period, which is generally six
months. Options granted under the plan have various vesting schedules with
vesting periods ranging from one to five years. The weighted average fair value
of options granted during the years ended March 31, 1999, 2000 and 2001 was
$3.69, $5.50 and $9.86 per share, respectively.
A summary of stock option activity during the three years ended March 31, 2001
is as follows:
Weighted
Exercise Average
Number of Shares Price Range Exercise Price
---------------------- ------------------ ------------------
Outstanding, April 1, 1998 611,900 - -
Options granted 275,507 $7.25 - $13.63 $ 9.89
Options exercised (10,500) $8.75 $ 8.75
Options forfeited (97,000) $8.75 - $13.50 $12.57
----------------------
Outstanding, March 31, 1999 779,907
======================
Exercisable, March 31, 1999 326,566
======================
Outstanding, April 1, 1999 779,907 - -
Options granted 576,400 $7.75 - $21.25 $ 8.08
Options exercised (61,044) $7.25 - $12.25 $10.84
Options forfeited (29,318) $8.75 - $13.00 $ 9.28
----------------------
Outstanding, March 31, 2000 1,265,945
======================
Exercisable, March 31, 2000 448,513
======================
Outstanding, April 1, 2000 1,265,945 - -
Options granted 578,806 $7.75 - $17.38 $13.09
Options exercised (37,685) $7.25 - $13.00 $ 7.96
Options forfeited (90,781) $7.25 - $17.38 $12.69
----------------------
Outstanding, March 31, 2001 1,716,285
======================
Exercisable, March 31, 2001 1,000,765
======================
Additional information regarding options outstanding as of March 31, 2001 is as
follows:
Options Outstanding Options Exercisable
- -------------------------------------------------- ----------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------
1,716,285 8.0 years $10.00 1,000,765 $9.02
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of either
F-20
(1) continuing to account for stock-based employee compensation plans in
accordance with the guidelines established by Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees" while providing the
disclosures required under SFAS No. 123, or (2) adopting SFAS No. 123 accounting
for all employee and non-employee stock compensation arrangements. The Company
opted to continue to account for its stock-based awards using the intrinsic
value method in accordance with APB No. 25. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.
The following table summarizes the pro forma disclosures required by SFAS No.
123 assuming the Company had adopted the fair value method for stock-based
awards to employees as of the beginning of fiscal year 1999:
Year Ended March 31,
1999 2000 2001
---- ---- ----
Net earnings, as reported $ 6,716,467 $ 8,375,368 $ 8,318,200
Net earnings, pro forma $ 5,687,667 $ 6,861,442 $ 5,877,713
Basic earnings per share,
as reported $ 0.99 $ 1.09 $ 0.86
Basic earnings per share,
pro forma $ 0.84 $ 0.89 $ 0.61
Diluted earnings per share,
as reported $ 0.98 $ 0.91 $ 0.80
Diluted earnings per share,
pro forma $ 0.83 $ 0.75 $ 0.57
Under SFAS No. 123, the fair value of stock-based awards to employees is derived
through the use of option pricing models that require a number of subjective
assumptions. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:
For the Year Ended March 31,
1999 2000 2001
---- ---- ----
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 37.02% 80.67% 97.867%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.46% 5.95% 5.52%
Options granted under the Nonqualified
Stock Option Plan:
Expected life of option 5 years - -
Expected stock price volatility 37.02% - -
Expected dividend yield 0% - -
Risk-free interest rate - - -
Options granted under the Outside Director
Stock Option Plan:
Expected life of option 8 years - -
Expected stock price volatility 37.02% - -
Expected dividend yield 0% - -
Risk-free interest rate 4.95% - -
F-21
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's financial
instruments is in accordance with the provisions of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments." The valuation methods used by the
Company are set forth below.
The accuracy and usefulness of the fair value information disclosed herein is
limited by the following factors:
- These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
- These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holding
of a particular financial asset.
- SFAS No. 107 excludes from its disclosure requirements lease contracts
and various significant assets and liabilities that are not considered
to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
As of March 31, 2000 As of March 31, 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands)
-------------------------------------------
Assets:
Cash and cash equivalents $21,910 $21,910 $24,534 $24,534
Liabilities:
Non-recourse notes payable 182,845 177,954 157,960 157,756
Recourse notes payable 39,017 39,024 8,876 8,876
12. BUSINESS COMBINATIONS
During the year ended March 31, 1999, the Company acquired PC Plus, Inc., a
value-added reseller of personal computers, related network equipment and
software products and provider of various support services. This business
combination has been accounted for as a purchase.
During the year ended March 31, 2000, 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.
F-22
The following pro forma financial information presents the combined results of
operations of PC Plus, Inc. and CLG, Inc. as if the acquisitions had occurred as
of the beginning of the twelve months ended March 31, 1999 and 2000, 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, PC Plus, Inc. and CLG, Inc.
constituted a single entity during such periods.
(Unaudited)
For the Year Ended March 31,
1999 2000
(In thousands, except per share data)
-----------------------------------
Total Revenues $244,319 $280,732
Net Earnings 7,509 7,977
Net Earnings per Common Share - Basic 1.05 1.04
Net Earnings per Common Share - Diluted 1.04 0.87
13. PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANT
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. On April 11, 2000, TC Plus LLC exercised
their options on a cashless basis and were issued 709,956 shares of common
stock. Pursuant to the terms of this private placement, the Company agreed to
expand its Board of Directors to six persons, four of whom shall 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 December 10, 1999 the Company issued a purchase warrant to an outside
business partner. The warrant allows the holder to purchase 7,500 shares of the
Company's common stock at a price of $23.00 per share and expires December 10,
2009.
On May 25, 2000 the Company issued a purchase warrant to an outside business
partner. The warrant allowed the holder to purchase 50,000 shares of the
Company's common stock at a price of $18.75 per share. The purchase warrant
agreement was terminated on April 20, 2001 due to insolvency of the business
partner.
14. 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
F-23
and value added re-selling segments), as well as its electronic commerce
("e-commerce") business unit (created in fiscal year 2000). 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 represents 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 consolidated statements of earnings. The
e-commerce business unit's assets consist primarily of capitalized software
costs.
The accounting policies of the segments are the same as those described in Note
1, "Organization and Summary of Significant Accounting Policies." Corporate
overhead expenses are allocated on the basis of revenue volume, estimates of
actual time spent by corporate staff, and asset utilization, depending on the
type of expense.
Financing Technology e-commerce
Business Business Business
Unit Unit Unit Total
-----------------------------------------------------------
(In Thousands)
Twelve months ended March 31, 1999
Sales of equipment $ 2,427,196 $ 81,089,058 $ - $ 83,516,254
Sales of leased equipment 84,378,800 - - 84,378,800
Lease revenues 20,610,542 - - 20,610,542
Fee and other income 2,945,225 2,519,017 - 5,464,242
-----------------------------------------------------------
Total Revenues 110,361,763 83,608,075 - 193,969,838
Cost of sales 85,124,386 69,511,814 - 154,636,200
Direct lease costs 6,183,562 - - 6,183,562
Selling, general and administrative
expenses 7,038,094 11,215,542 - 18,253,636
-----------------------------------------------------------
Segment earnings 12,015,721 2,880,719 - 14,896,440
Interest expense 3,367,149 234,199 - 3,601,348
-----------------------------------------------------------
Earnings before income taxes 8,648,572 2,646,520 - 11,295,092
===========================================================
Assets $ 127,784,876 $ 26,573,722 $ - $ 154,358,598
F-24
Financing Technology e-commerce
Business Business Business
Unit Unit Unit Total
-----------------------------------------------------------
(In Thousands)
Twelve months ended March 31, 2000
Sales of equipment $ 2,103,603 $156,735,622 $ 7,412,953 $ 166,252,178
Sales of leased equipment 57,360,366 - - 57,360,366
Lease revenues 31,374,244 - - 31,374,244
Fee and other income 1,365,675 7,005,440 - 8,371,115
ePlusSuiteSM revenues - - 1,375,901 1,375,901
-----------------------------------------------------------
Total Revenues 92,203,888 163,741,062 8,788,854 264,733,804
Cost of sales 56,796,063 139,431,514 6,435,776 202,663,353
Direct lease costs 8,025,343 - - 8,025,343
Selling, general and administrative
expenses 11,643,013 16,052,509 709,342 28,404,864
-----------------------------------------------------------
Segment earnings 15,739,469 8,257,039 1,643,736 25,640,244
Interest expense 11,016,120 373,562 - 11,389,682
-----------------------------------------------------------
Earnings before income taxes 4,723,349 7,883,477 1,643,736 14,250,562
===========================================================
Assets $ 295,161,280 $ 49,644,139 $ 529,329 $ 345,334,748
Twelve months ended March 31, 2001
Sales of equipment $ 777,780 $161,655,436 $53,749,965 $ 216,183,181
Sales of leased equipment 34,031,381 - - 34,031,381
Lease revenues 42,693,839 - - 42,693,839
Fee and other income 2,617,872 5,374,880 - 7,992,752
ePlusSuite revenues - - 5,684,743 5,684,743
-----------------------------------------------------------
Total Revenues 80,120,872 167,030,316 59,434,708 306,585,896
Cost of sales 34,411,304 135,680,709 45,711,075 215,803,088
Direct lease costs 16,534,992 - - 16,534,992
Selling, general and administrative
expenses 15,962,177 18,436,961 10,340,956 44,740,094
-----------------------------------------------------------
Segment earnings 13,212,399 12,912,646 3,382,677 29,507,722
Interest expense 15,242,395 280,502 - 15,522,897
-----------------------------------------------------------
(Loss) earnings before income taxes (2,029,996) 12,632,144 3,382,677 13,984,825
===========================================================
Assets $ 256,206,592 $ 52,746,069 $ 1,914,815 $ 310,867,476
15. SUBSEQUENT EVENT
On May 15, 2001, we purchased the assets of ProcureNet, Inc. for approximately
$5.9 million, consisting of $1 million that was paid in cash, the issuance of
422,833 shares of unregistered common stock, and the assumption of certain
liabilities. Two new subsidiaries, ePlus Systems, inc. and ePlus Content
Services, inc. were created as part of the acquisition.
F-25
16. QUARTERLY DATA - UNAUDITED
Condensed quarterly financial information is as follows (amounts in thousands,
except per share amounts). Adjustments reflect the results of operations of
business combinations accounted for under the pooling of interests method and
the reclassification of certain prior period amounts to conform to current
period presentation.
First Quarter Second Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
------------------------------------ ------------------------------------
Year Ended March 31, 2000
Sales $ 47,562 $ (408) $ 47,154 $ 52,621 $ (1,143) $ 51,478
Total Revenues 54,363 (408) 53,955 61,192 (1,143) 60,049
Cost of Sales 43,925 (408) 43,517 47,778 (1,143) 46,635
Total Costs and Expenses 51,859 (408) 51,451 57,710 (1,143) 56,567
Earnings before provision for
income taxes 2,504 - 2,504 3,482 - 3,482
Provision for income taxes 1,002 - 1,002 1,393 - 1,393
Net earnings 1,502 - 1,502 2,089 - 2,089
================================= ====================================
Net earnings per common share-Basic(1) $ $ 0.20 $ 0.20 $ 0.28 $ 0.28
================================== ====================================
Year Ended March 31, 2001
Sales $ 72,112 $ - $ 72,112 $ 64,734 $ - $ 64,734
Total Revenues 83,613 - 83,613 77,752 - 77,752
Cost of Sales 63,738 - 63,738 56,771 - 56,771
Total Costs and Expenses 79,472 - 79,472 74,348 - 74,348
Earnings before provision for income
taxes 4,141 - 4,141 3,404 - 3,404
Provision for income taxes 1,657 - 1,657 1,381 - 1,381
Net earnings 2,484 - 2,484 2,023 - 2,023
================================= ====================================
Net earnings per common share-Basic (1) $ 0.26 $ 0.26 $ 0.21 $ 0.21
================================= ====================================
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
--------------------------------- -----------------------------------
Year Ended March 31, 2000
Sales $ 63,549 $ (1,977) $ 61,572 $ 63,409 $ - $ 63,409
Total Revenues 76,240 (1,977) 74,263 76,460 - 76,460
Cost of Sales 57,625 (1,977) 55,648 56,860 - 56,860
Total Costs and Expenses 72,289 (1,977) 70,312 72,146 - 72,146
Earnings before provision for income
taxes 3,951 - 3,951 4,314 - 4,314
Provision for income taxes 1,580 - 1,580 1,901 - 1,901
Net earnings 2,371 - 2,371 2,413 - 2,413
================================= ====================================
Net earnings per common share-Basic (1) $ 0.30 $ 0.30 $ 0.30 $ 0.30
================================= ====================================
Year Ended March 31, 2001
Sales $ 59,351 $ - $ 59,351 $ 54,018 $ - $ 54,018
Total Revenues 73,675 - 73,675 71,546 - 71,546
Cost of Sales 49,164 - 49,164 46,130 - 46,130
Total Costs and Expenses 70,703 - 70,703 68,078 - 68,078
Earnings before provision for income
taxes 2,972 - 2,972 3,468 - 3,468
Provision for income taxes 1,243 - 1,243 1,387 - 1,387
Net earnings 1,729 - 1,729 2,081 - 2,081
================================== ====================================
Net earnings per common share-Basic (1) $ 0.18 $ 0.18 $ 0.21 $ 0.21
================================== ====================================
(1) The sum of quarterly amounts does not equal the annual amount due to
quarterly calculations being based on varying weighted average shares
outstanding.
F-26
SCHEDULE II
ePlus inc. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 1999, 2000 and 2001
(In Thousands)
Column C - Additions
Column B (1) (2) Column E
Balance at Charged Charged Balance at
beginning to costs to other Column D end of
Column A - Description of period and expenses accounts Deductions period
---------------------- --------- ------------ -------- ---------- ----------
2001 Allowance for doubtful accounts
and credit losses $ 2,659 $ 1,989 $ 0 $ 369 $ 4,279
2000 Allowance for doubtful accounts
and credit losses $ 728 $ 733 $ 1,731 $ 533 $ 2,659
1999 Allowance for doubtful accounts
and credit losses $ 142 $ 811 $ 75 $ 300 $ 728
S-1