FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ [ X ] _____ No [ ____ ]
The number of shares of Common Stock outstanding as of February 12,
2002, was 10,385,614.
TABLE OF CONTENTS
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2001 2
Condensed Consolidated Statements of Earnings, Three Months
Ended December 31, 2000 and 2001 3
Condensed Consolidated Statements of Earnings, Nine Months Ended
December 31, 2000 and 2001 4
Condensed Consolidated Statements of Cash Flows, Nine Months
Ended December 31, 2000 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. Other Information:
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-1-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 2001 As of December 31, 2001
----------------------------------------------------------
ASSETS
Cash and cash equivalents $ 24,534,183 $ 42,677,033
Accounts receivable, net of allowance for doubtful
accounts of $1,392,297 and $1,666,269 as of
March 31, 2001 and December 31, 2001, respectively 57,627,231 39,683,480
Notes receivable 1,862,488 98,450
Employee advances 66,082 59,064
Inventories 2,651,087 1,006,647
Investment in direct financing and sales-type leases - net 198,563,222 181,931,915
Investment in operating lease equipment - net 4,282,985 2,585,650
Property and equipment - net 5,216,123 6,531,360
Deferred tax asset 310,476 6,721,892
Other assets 3,951,942 5,519,998
Goodwill - net 11,801,657 19,909,920
--------------------------------------------------------
TOTAL ASSETS $ 310,867,476 $ 306,725,409
========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 9,226,813 $ 4,764,031
Accounts payable - trade 18,925,939 17,715,212
Salaries and commissions payable 1,292,722 747,313
Accrued expenses and other liabilities 21,351,575 33,133,581
Income taxes payable 1,327,591 3,747,615
Recourse notes payable 8,875,595 3,811,951
Nonrecourse notes payable 157,959,706 138,585,807
--------------------------------------------------------
Total Liabilities 218,959,941 202,505,510
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 50,000,000 shares authorized;
9,730,154 and 10,455,511 issued; 9,730,154 and
10,439,411 outstanding at March 31, 2001 and
December 31, 2001, respectively 97,301 104,517
Additional paid-in capital 56,376,934 62,333,898
Treasury stock, at cost, -0- and 16,100 shares, respectively - (125,070)
Retained earnings 35,433,300 41,906,554
--------------------------------------------------------
Total Stockholders' Equity 91,907,535 104,219,899
--------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,867,476 $ 306,725,409
========================================================
See Notes to Condensed Consolidated Financial Statements.
-2-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
December 31,
2000 2001
------------------------------------------------------
REVENUES
Sales of equipment $ 53,735,856 $ 31,378,590
Sales of leased equipment 5,615,123 8,337,323
------------------------------------------------------
59,350,979 39,715,913
Lease revenues 10,585,654 11,537,725
Fee and other income 1,978,577 3,344,098
ePlusSuite revenues 1,759,386 1,214,706
------------------------------------------------------
14,323,617 16,096,529
------------------------------------------------------
TOTAL REVENUES 73,674,596 55,812,442
------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 43,627,009 27,535,908
Cost of sales, leased equipment 5,537,042 7,908,154
------------------------------------------------------
49,164,051 35,444,062
Direct lease costs 4,734,039 1,565,791
Professional and other fees 726,790 623,398
Salaries and benefits 8,342,731 9,235,834
General and administrative expenses 3,653,835 2,764,601
Interest and financing costs 4,081,381 2,617,346
------------------------------------------------------
21,538,776 16,806,970
------------------------------------------------------
TOTAL COSTS AND EXPENSES 70,702,827 52,251,032
------------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,971,769 3,561,410
------------------------------------------------------
PROVISION FOR INCOME TAXES 1,242,907 1,424,564
------------------------------------------------------
NET EARNINGS $ 1,728,862 $ 2,136,846
======================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.18 $ 0.20
======================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.18 $ 0.20
======================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,707,436 10,430,731
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,866,573 10,671,096
See Notes to Condensed Consolidated Financial Statements.
-3-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Nine months ended
December 31,
2000 2001
-----------------------------------------------------
REVENUES
Sales of equipment $ 166,962,802 $ 98,200,146
Sales of leased equipment 28,311,687 8,789,430
-----------------------------------------------------
195,274,489 106,989,576
Lease revenues 29,475,790 34,338,505
Fee and other income 5,332,912 10,401,877
ePlusSuite revenues 4,435,811 4,524,932
-----------------------------------------------------
39,244,513 49,265,314
-----------------------------------------------------
TOTAL REVENUES 234,519,002 156,254,890
-----------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 141,484,589 85,673,752
Cost of sales, leased equipment 27,635,693 8,335,524
-----------------------------------------------------
169,120,282 94,009,276
Direct lease costs 9,644,163 7,115,187
Professional and other fees 2,405,892 1,742,280
Salaries and benefits 22,821,477 24,142,473
General and administrative expenses 8,595,970 8,998,024
Interest and financing costs 11,413,166 9,455,691
-----------------------------------------------------
54,880,668 51,453,655
-----------------------------------------------------
TOTAL COSTS AND EXPENSES 224,000,950 145,462,931
-----------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 10,518,052 10,791,959
-----------------------------------------------------
PROVISION FOR INCOME TAXES 4,279,916 4,316,623
-----------------------------------------------------
NET EARNINGS $ 6,238,136 $ 6,475,336
=====================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.65 $ 0.64
=====================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.60 $ 0.61
=====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,594,984 10,182,336
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,364,288 10,578,852
See Notes to Condensed Consolidated Financial Statements.
-4-
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
2000 2001
----------------------------------
Cash Flows From Operating Activities:
Net earnings $ 6,238,136 $ 6,475,336
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 7,917,332 4,167,873
Provision (gain) for credit losses 683,000 (58,417)
(Gain) loss on sale of operating lease equipment (487,068) 101,833
Deferred taxes - (6,411,416)
Adjustment of basis to fair market value of equipment and inventories 1,590,760 1,001,169
Payments from lessees directly to lenders - operating leases (5,960,322) (347,028)
Loss on disposal of property and equipment 17,864 95,520
Changes in:
Accounts receivable 5,210,965 21,104,450
Other receivables (1,108,046) 1,831,068
Employee advances 69,366 17,768
Inventories (385,462) 1,764,995
Other assets 6,019,152 (2,097,098)
Accounts payable - equipment (8,549,076) (4,462,782)
Accounts payable - trade (3,488,887) (4,644,042)
Salaries and commissions payable, accrued
expenses and other liabilities 14,426,991 12,162,944
-------------------------------------
Net cash provided by operating activities 22,194,705 30,702,173
-------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 922,549 -
Purchases of operating lease equipment (1,966,060) (931,556)
Increase in investment in direct financing and sales-type leases (20,745,428) (20,448,421)
Proceeds from sale of property and equipment - 53,734
Purchases of property and equipment (3,065,948) (1,604,123)
Cash used in acquisitions, net of cash acquired - (1,820,084)
Increase in other assets (1,906,752) (373,959)
-------------------------------------
Net cash used in investing activities (26,761,639) (25,124,409)
-------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 79,124,615 58,794,763
Recourse 975,485 32,639
Repayments:
Nonrecourse (63,224,284) (40,738,319)
Recourse (186,448) (455,103)
Proceeds from issuance of capital stock, net of expenses 26,372,862 83,460
Issuance of common stock purchase warrants 225,000 -
Purchase of treasury stock - (125,070)
Net repayment of lines of credit (34,593,511) (5,027,284)
-------------------------------------
Net cash provided by financing activities 8,693,719 12,565,086
-------------------------------------
Net Increase in Cash and Cash Equivalents 4,126,785 18,142,850
Cash and Cash Equivalents, Beginning of Period 21,909,784 24,534,183
-------------------------------------
Cash and Cash Equivalents, End of Period $ 26,036,569 $ 42,677,033
=====================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 727,496 $ 841,406
=====================================
Cash paid for income taxes $ 2,532,091 $ 6,046,877
=====================================
-5-
ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements of ePlus inc. and
subsidiaries (the "Company") included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
All adjustments made were normal, recurring accruals. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K (No. 0-28926) for the year ended March 31, 2001 (the "Company's
2001 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of
the following components:
March 31, December 31,
2001 2001
(In Thousands)
------------------------------
Minimum lease payments $ 191,792 $ 171,750
Estimated unguaranteed residual value 29,231 29,991
Initial direct costs, net of amortization (1) 3,531 3,497
Less: Unearned lease income (23,104) (20,419)
Reserve for credit losses (2,887) (2,887)
-----------------------------
Investment in direct financing and sales-
type leases, net $ 198,563 $ 181,932
=============================
(1) Initial direct costs are shown net of amortization of $5,014 and $6,108 at
March 31, 2001 and December 31, 2001, respectively.
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases primarily represents equipment leased for two to
three years and leases that are short-term renewals on month-to-month status.
The components of the net investment in operating lease equipment are as
follows:
-6-
March 31, December 31,
2001 2001
(In Thousands)
------------------------------
Cost of equipment under operating leases $ 20,589 $ 16,109
Initial direct costs 15 15
Less: Accumulated depreciation and
amortization (16,321) (13,538)
------------------------------
Investment in operating lease equipment, net $ 4,283 $ 2,586
==============================
4. BUSINESS COMBINATIONS
On October 4, 2001, the Company purchased all the outstanding common shares of
SourceOne Computer Corporation, a technology and services company located in
Silicon Valley. The total consideration was approximately $2,875,000 which
consisted of $800,006 in cash and 274,999 shares of unregistered common stock
valued at $7.55 per share. The acquisition was accounted for as a purchase, and
the assets were placed in the existing ePlus Technology, inc. subsidiary.
On May 15, 2001, the Company purchased certain assets and assumed certain
liabilities of ProcureNet, Inc. The primary software assets acquired were
OneSource, a comprehensive e-procurement software solution, MarketBuilder, a
marketplace software solution, Common Language Generator software that is used
for electronic catalogue cleaning and enrichment, several registered and applied
for patents, trademarks and copyrights. The total consideration was
approximately $5.9 million, which included $1 million in cash, 422,833 shares of
unregistered common stock valued at $9.16 per share, and the remainder was the
assumption of certain liabilities. The acquisition was accounted for as a
purchase, and the assets were placed in two new wholly-owned subsidiaries: ePlus
Systems, inc. and ePlus Content Services, inc.
The impact of pro-forma financial information as if the acquisitions had
occurred at the beginning of the periods presented is not material.
5. ISSUANCES OF COMMON STOCK AND WARRANTS
On October 23, 1998, the Company sold 1,111,111 shares of common stock to TC
Leasing LLC, a Delaware limited liability company, for a price of $9.00 per
share. In addition, the Company granted to TC Leasing LLC, a stock purchase
warrant granting the right to purchase an additional 1,090,909 shares of common
stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant was exercisable through December 31, 2001, unless
extended pursuant to the terms of the warrant. On February 25, 2000, the Company
entered into an agreement, which was amended April 11, 2000, which allowed TC
Plus LLC (formerly TC Leasing LLC) to exercise the warrants on a cashless basis
at an exercise price of $11.00 per share, contingent upon the Company's
completion of a secondary offering which occurred on April 17, 2000. On April
11, 2000, TC Plus LLC exercised its options on a cashless basis and was issued
709,956 shares of common stock. Pursuant to the terms of this private placement,
the Company agreed to expand its Board of Directors to six persons, four of whom
to be appointed, in whole or in part, by TC Plus LLC.
-7-
On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares
of its common stock at a price of $28.50 per share. Net proceeds to the Company
were $25,936,388.
On May 25, 2000, the Company issued a common stock purchase warrant to a
business partner which allowed the holder to purchase up to 50,000 shares of the
Company's common stock at a price of $18.75 per share over a two-year period
beginning July 1, 2000. The purchase warrant agreement was terminated on April
20, 2001, due to the insolvency of the business partner.
6. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its traditional
financing and technology business units and its electronic commerce
("e-commerce") business unit. The financing business unit offers lease financing
solutions to corporations and governmental entities nationwide. The technology
business unit sells information technology equipment and related services
primarily to corporate customers in the eastern United States. The e-commerce
business unit provides Internet-based business-to-business supply chain
management solutions, including e-procurement software licensing and hosted
services, electronic marketplaces, outsourced business services, fixed asset
management software and services, and electronic catalog and content processing.
The Company evaluates segment performance on the basis of segment net earnings.
Sales for the e-commerce business unit represent customer equipment purchases
executed through Procure+, an element of the Company's e-commerce business
solution. The amounts charged for using Procure+ are presented as e-commerce
revenues in the statement of earnings. The e-commerce business unit's assets
consist primarily of capitalized software costs, the e-commerce software assets
acquired from ProcureNet, Inc. (see Note 4) and goodwill.
The accounting policies of the financing and technology business units are the
same as those described in Note 1, "Organization and Summary of Significant
Accounting Policies" in the Company's 2001 Form 10-K. Corporate overhead
expenses are allocated to the three segments on the basis of revenue volume,
estimates of actual time spent by corporate staff, and asset utilization,
depending on the type of expense.
Financing Technology e-Commerce
Business Business Business
Unit Unit Unit Total
--------------------------------------------------------------------
Three months ended December 31, 2000
Sales $ 5,694,357 $ 40,431,490 $ 13,225,132 $ 59,350,979
Lease revenues 10,585,654 - - 10,585,654
ePlusSuite revenues - - 1,759,386 1,759,386
Fee and other income 607,632 1,370,945 - 1,978,577
-------------------------------------------------------------------
Total revenues 16,887,643 41,802,435 14,984,518 73,674,596
Cost of sales 5,565,507 33,197,799 10,400,745 49,164,051
Direct lease costs 4,734,039 - - 4,734,039
Selling, general and administrative
expenses 3,981,836 5,883,919 2,857,601 12,723,356
-------------------------------------------------------------------
Segment earnings 2,606,261 2,720,717 1,726,172 7,053,150
Interest expense 3,986,650 94,731 - 4,081,381
-------------------------------------------------------------------
-8-
(Loss) earnings before income taxes (1,380,389) 2,625,986 1,726,172 2,971,769
===================================================================
Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092
Three months ended December 31, 2001
Sales $ 8,484,387 $ 26,311,488 $ 4,920,038 $ 39,715,913
Lease revenues 11,537,725 - - 11,537,725
ePlusSuite revenues - - 1,214,706 1,214,706
Fee and other income 1,584,095 1,760,003 - 3,344,098
--------------------------------------------------------------------
Total revenues 21,606,207 28,071,491 6,134,744 55,812,442
Cost of sales 8,310,854 22,652,770 4,480,438 35,444,062
Direct lease costs 1,565,791 - - 1,565,791
Selling, general and administrative
expenses 4,932,108 4,630,637 3,061,088 12,623,833
-------------------------------------------------------------------
Segment earnings 6,797,454 788,084 (1,406,782) 6,178,756
Interest expense 2,577,982 39,014 350 2,617,346
--------------------------------------------------------------------
Earnings (loss) before income
taxes 4,219,472 749,070 (1,407,132) 3,561,410
====================================================================
Assets $ 251,071,538 $ 49,546,482 $ 6,107,389 $ 306,725,409
Nine months ended December 31, 2000
Sales $ 28,735,761 $ 130,436,537 $ 36,102,191 195,274,489
Lease revenues 29,475,790 - - 29,475,790
ePlusSuite revenues - - 4,435,811 4,435,811
Fee and other income 1,424,884 3,908,028 - 5,332,912
--------------------------------------------------------------------
Total revenues 59,636,435 134,344,565 40,538,002 234,519,002
Cost of sales 28,077,667 110,556,982 30,485,633 169,120,282
Direct lease costs 9,644,163 - - 9,644,163
Selling, general and administrative
expenses 12,232,518 14,811,033 6,779,788 33,823,339
--------------------------------------------------------------------
Segment earnings 9,682,087 8,976,550 3,272,581 21,931,218
Interest expense 11,159,701 253,465 - 11,413,166
--------------------------------------------------------------------
(Loss) earnings before income taxes (1,477,614) 8,723,085 3,272,581 10,518,052
=====================================================================
Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092
Nine months ended December 31, 2001
Sales $ 9,309,298 $ 78,632,318 $ 19,047,960 $ 106,989,576
Lease revenues 34,338,505 - - 34,338,505
ePlusSuite revenues - - 4,524,932 4,524,932
Fee and other income 5,702,389 4,699,488 - 10,401,877
---------------------------------------------------------------------
Total revenues 49,350,192 83,331,806 23,572,892 156,254,890
Cost of sales 9,789,291 67,354,237 16,865,748 94,009,276
Direct lease costs 7,115,187 - - 7,115,187
Selling, general and administrative
expenses 12,106,444 12,561,827 10,214,506 34,882,777
---------------------------------------------------------------------
Segment earnings 20,339,270 3,415,742 (3,507,362) 20,247,650
Interest expense 9,349,552 105,689 450 9,455,691
---------------------------------------------------------------------
Earnings (loss) before income taxes 10,989,718 3,310,053 (3,507,812) 10,791,959
=====================================================================
Assets $ 251,071,538 $ 49,546,482 $ 6,107,389 $ 306,725,409
-9-
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 addresses the accounting and reporting for business combinations and
broadens the criteria for recording intangible assets separate from goodwill. On
July 1, 2001, the Company adopted SFAS No. 141 which requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. The Company's adoption of SFAS No. 141 did not have a material impact
on its financial statements.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company has adopted SFAS No. 142 retroactive to April 1, 2001, as
permitted. SFAS No. 142 requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually.
SFAS No. 142 requires the Company to perform a transitional assessment of
whether there is an indication that the goodwill is impaired as of the date of
adoption. The Company will then have a transition period from the date of
adoption to determine the fair value of each reporting unit and if goodwill has
been impaired. Any goodwill impairment loss will be recognized as the cumulative
effect of a change in accounting principle no later than the end of the fiscal
year of adoption. We have completed this test and determined that no potential
impairment existed. The Company will also be required to review its other
intangible assets for impairment and to reassess the useful lives of such assets
and make any necessary adjustments.
As of December 31, 2001, the Company had goodwill, net of accumulated
amortization, of $19,909,920 which was subject to the transitional assessment
provisions of SFAS No. 142. Amortization expense related to goodwill was
$173,040 and $519,122, before income taxes, for the three and nine-month periods
ended December 31, 2000. No goodwill amortization expense was recognized during
the three and nine-month periods ended December 31, 2001.
The following pro forma information presents the Company's net income, as
adjusted for the elimination of amortization of goodwill as set forth in SFAS
No. 142:
-10-
Three Months Nine Months
Ended Ended
December 31, December 31,
2000 2000
---------------------------------
Net earnings, as reported $ 1,728,862 $ 6,238,136
Amortization of goodwill, net of taxes 103,824 311,472
------------- -------------
Pro forma net earnings $ 1,832,686 $ 6,549,608
============= ==============
Pro forma net earnings per share, basic $ 0.19 $ 0.68
============= ==============
Pro forma net earnings per share, diluted $ 0.19 $ 0.63
============= ==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this report, and the Company's 2001 Form 10-K.
Overview
Certain statements contained herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that may not occur. Actual events, transactions and results may
materially differ from the anticipated events, transactions, or results
described in such statements. Our ability to consummate such transactions and
achieve such events or results is subject to certain risks and uncertainties.
Such risks and uncertainties include, but are not limited to, the existence of
demand for and acceptance of the Company's services, economic conditions, the
impact of competition and pricing, results of financing efforts and other
factors affecting the Company's business that are beyond our control. The
Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
Our results of operations are susceptible to fluctuations for a number of
reasons, including, without limitation, customer demand for our products and
services, supplier costs, interest rate fluctuations, our bad debt experience
and differences between estimated residual values and actual amounts realized
related to the equipment we lease. Operating results could also fluctuate as a
result of the sale of equipment in our lease portfolio prior to the expiration
of the lease term to the lessee or to a third party. Such sales of leased
equipment prior to the expiration of the lease term may have the effect of
increasing revenues and net earnings during the period in which the sale occurs,
and reducing revenues and net earnings otherwise expected in subsequent periods.
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
-11-
business. Our long-term strategy is to provide an outsourced business solution
for our customers for the requisition, fulfillment, financing and management of
their indirect goods and services. 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. Our e-commerce
service and software products, asset management services, technology sales and
financing constitute the majority of our current offerings to our customer base.
Concurrently, our financial strategy is to minimize the risk on our balance
sheet by outsourcing lease and other financing to third-party financial
institutions using non-recourse debt whenever possible.
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.
In the near term, as we implement our electronic commerce business strategy, we
will continue to derive most of our revenues from our traditional businesses.
Our electronic commerce revenues are derived primarily from amounts charged to
customers with respect to procurement activity executed through Procure(+),
amounts charged to customers for the Manage(+) service and fees from sales,
subscriptions and fees from our e-commerce software and service products. With
the acquisition of the technology assets from ProcureNet, Inc. in May 2001, we
broadened our software offerings to include licensed e-procurement and
e-marketplace software, and content cleaning and enrichment services that are
fee-based services.
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 expand the marketing of our electronic commerce
business solution and increase spending on advertising and marketing. To
implement this strategy, we have hired and plan to add top-level sales personnel
that are available due to the current market conditions and open new sales
offices. 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 e-commerce
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 and expands its marketplace
strategy, management currently expects total assets and total liabilities to
increase in the near term as necessary to meet the requirements of our
customers.
As a result of the foregoing, the Company's historical results of operations and
financial position may not be indicative of its future performance over time.
However, the Company's results of operations and financial position will
continue to primarily reflect its traditional sales and financing businesses for
at least the next twelve months.
Selected Accounting Policies
Amounts charged for Procure+ services 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.
-12-
The manner in which lease finance transactions are characterized and reported
for accounting purposes has a major impact upon reported revenue and net
earnings. Lease accounting methods significant to our business are discussed
below.
We classify our lease transactions, as required by SFAS No. 13, Accounting for
Leases, as: (1) direct financing; (2) sales type; or (3) operating leases.
Revenues and expenses between accounting periods for each lease term will vary
depending upon the lease classification.
For financial statement purposes, we present revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility 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.
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.
-13-
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 SFAS 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 recorded as e-commerce revenues in the
electronic commerce business unit include: (1) fees charged for the Procure(+)
service which are recognized ratably over the life of the contract, and may be
charged to the customer as a software license fee, a transaction fee based on
the value of goods or services processed by the system, or a period subscription
fee for a fixed term; (2) amounts charged for the Manage(+) service, which are
recognized on a straight-line basis over the period the services are provided;
and (3) charges for content processing, which are recognized when charged. These
revenues are included in 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; (4) interest and other miscellaneous income; and (5) fees for
services provided by the technology business unit. These revenues are included
in fee and other income in our consolidated statements of earnings.
-14-
RESULTS OF OPERATIONS - Three and Nine Months Ended December 31, 2001 Compared
to Three and Nine Months Ended December 31, 2000
Total revenues generated by the Company during the three-month period ended
December 31, 2001 were $55,812,442 compared to revenues of $73,674,596 during
the comparable period in the prior fiscal year, a decrease of 24.2%. During the
nine-month period ended December 31, 2001, revenues were $156,254,890 compared
to revenues of $234,519,002 during the comparable period in the prior fiscal
year, a decrease of 33.4%. These decreases are primarily the result of decreased
revenues from the sales of equipment and leased equipment, which decreased 33.1%
and 45.2% during the three and nine months ended December 31, 2001, offset
slightly by increases in lease revenues and fee and other income. The Company's
revenues are composed of sales and other revenue, and may vary considerably from
period to period (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Sales revenue, which includes sales of equipment and sales of leased equipment,
decreased 33.1% to $39,715,913 during the three-month period ended December 31,
2001, as compared to $59,350,979 generated during the corresponding period in
the prior fiscal year. For the nine-month period ended December 31, 2001, sales
decreased 45.2% to $106,989,576 over the corresponding period in the prior year.
Sales of equipment represented 79.0% and 91.8% of sales revenue in the three and
nine-month periods ended December 31, 2001, as compared to 90.5% and 85.5% in
the three and nine-month periods of the prior fiscal year. The vast majority of
these equipment sales are generated through the Company's technology business
unit subsidiaries. Sales of equipment during the three months ended December 31,
2001 decreased 41.6% to $31,378,590 compared to $53,735,856 generated during the
comparable period in the prior fiscal year. Sales of equipment during the nine
months ended December 31, 2001 decreased 41.2% to $98,200,146 compared to
$166,962,802 generated during the comparable period in the prior fiscal year.
The decrease was a result of generally lower sales within the Company's existing
customer base, and the reduction in sales to customers in the communications
industry. The Company's management believes the decrease to be a result of a
general economic slowdown affecting its customer base. The Company realized a
gross margin on sales of equipment of 12.2% and 12.8% for the three-month and
nine-month periods ended December 31, 2001, respectively, as compared to a gross
margin of 18.8% and 15.3% realized on sales of equipment during the comparable
periods in the prior fiscal year. The Company's gross margin on sales of
equipment is affected by the mix and volume of products sold.
The Company also recognizes revenue from the sale of leased equipment. During
the three months ended December 31, 2001, the Company recognized $8,337,323 of
revenue from the sale of leased equipment, an increase of 48.5% as compared to
$5,615,123 in the corresponding period in the prior year. During the nine months
ended December 31, 2001, sales of leased equipment decreased 69.0% to $8,789,430
from $28,311,687 in the same period in the prior fiscal year. The Company
realized a gross margin on leased equipment sales of 5.1% and 5.2% for the
three-month and nine-month periods ended December 31, 2001, respectively, as
compared to a gross margin of 1.4% and 2.4% realized on leased equipment sales
during the comparable periods in the prior fiscal year. The decrease in leased
equipment sales for the nine months ended December 31, 2001 reflects the reduced
volume of lease equity that the Company sold to outside investors, although the
transactions which were sold reflected a higher gross margin. Leases that are
not equity sold to investors remain on the Company's books and lease earnings
are recognized accordingly. In addition, the revenue and gross margin recognized
-15-
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. Prior to May
2000, the majority of the Company's sales of leased equipment had historically
been sold to MLC/CLC, LLC, a joint venture in which the Company owns a 5%
interest. During the nine months ended December 31, 2001 and 2000, sales to
MLC/CLC, LLC, accounted for 0.0% and 57.9% of sales of leased equipment,
respectively. Firstar Equipment Finance Corporation, which owns 95% of MLC/CLC,
LLC, has discontinued their investment in new lease acquisitions effective May
2000. The Company has developed and will continue to develop relationships with
additional lease equity investors and financial intermediaries to diversify its
sources of equity financing.
The Company's lease revenues increased 9.0% to $11,537,725 for the three months
ended December 31, 2001 compared with the corresponding period in the prior
fiscal year. For the nine-month period ending December 31, 2001, lease revenues
increased 16.5% to $34,338,505 compared with the corresponding period in the
prior fiscal year. The increase is primarily the result of increased renewal
rents on the Company's maturing lease portfolio.
For the three months ended December 31, 2001, fee and other income recognized
was $3,344,098, an increase of 69.0% over the comparable period in the prior
fiscal year. For the nine-month period ending December 31, 2001, fee and other
income recognized was $10,401,877, an increase of 95.1% over the comparable
period in the prior fiscal year. Fee and other income includes revenues from
adjunct services and management fees, including broker fees, support fees,
warranty reimbursements, and learning center revenues generated by the Company's
technology business unit subsidiaries. The increase in fee and other income in
the nine-month period ended December 31, 2001 is attributable to an
approximately $3.5 million rebate from one of the Company's equipment vendors.
The Company's fee and other income contains earnings from certain transactions
which are in the Company's normal course of business but there is no guarantee
that future transactions of the same nature, size or profitability will occur.
The Company's ability to consummate such transactions, and the timing thereof,
may depend largely upon factors outside the direct control of management. The
earnings from these types of transactions in a particular period may not be
indicative of the earnings that can be expected in future periods.
For the three months ended December 31, 2001, ePlusSuite revenue recognized was
$1,214,706, a decrease of 31.0% from the comparable period in the prior fiscal
year. For the nine-month period ending December 31, 2001, ePlusSuite revenue
recognized was $4,524,932, an increase of 2.0% over the comparable period in the
prior fiscal year. The decrease in ePlusSuite revenue in the three-month period
ended December 31, 2001 is attributable to the reduction of transactions
utilizing our ePlusSuite products and services.
The Company's direct lease costs decreased 66.9% and 26.2% during the three and
nine-month periods ended December 31, 2001 as compared to the same periods in
the prior fiscal year. The decrease is primarily the result of a non-recurring,
one-time write-off of the Company's remaining joint venture investment with
MLC/CLC, LLC and increased lease depreciation, specifically renewal depreciation
on the Company's matured lease portfolio.
Professional and other fees decreased 14.2%, or $103,392, and 27.6%, or
$663,612, for the three and nine-month periods over the comparable periods in
the prior fiscal year, and was primarily the result of a material reduction in
the utilization of outside service providers.
-16-
Salaries and benefits expenses increased 10.7% and 5.8% during the three and
nine-month periods ended December 31, 2001 over the same periods in the prior
year. The increase is the result of additional expense related to the Company's
recently formed subsidiaries, ePlus Systems, inc. and ePlus Content Services,
inc., and employees acquired in the SourceOne acquisition, which is offset by
reduced commission expenses in the Company's lease financing and technology
sales units.
The Company's general and administrative expenses decreased 24.3% to $2,764,601
during the three months ended December 31, 2001, as compared to the same period
in the prior fiscal year. The Company's general and administrative expenses
increased 4.7% to $8,998,024 during the nine months ended December 31, 2001, as
compared to the same period in the prior fiscal year. A portion of these
increases for the nine-month period is attributable to the non-recurring,
one-time write-off of certain software assets and an equity investment held in a
former business partner of the Company. In addition, the Company has experienced
increased expenses related to the development and deployment of its e-commerce
strategy. These increases have been offset by the elimination of goodwill
amortization for the current fiscal year.
Interest and financing costs incurred by the Company for the three months and
nine months ended December 31, 2001 decreased 35.9% and 17.2% as compared to
corresponding periods in the prior fiscal year and relates to lower recourse and
non-recourse debt and the effects of reduced interest rates. Payments for
interest costs on a significant portion of the Company's non-recourse and
certain recourse notes are typically remitted directly to the lender by the
lessee.
The Company's provision for income taxes increased to $1,424,564 for the three
months ended December 31, 2001 from $1,242,907 for the three months ended
December 31, 2000, and increased to $4,316,623 for the nine months ended
December 31, 2001 from $4,279,916 for the nine months ended December 31, 2000,
reflecting effective income tax rates of approximately 40% for each period.
The foregoing resulted in a 23.6% increase in net earnings for the three-month
period ended December 31, 2001 as compared to the same period in the prior
fiscal year, and a 3.8% increase for the nine-month period ended December 31,
2001 as compared to the same period in the prior fiscal year. Basic and fully
diluted earnings per common share were $0.20 and $0.20 for the three months
ended December 31, 2001, as compared to $0.18 for basic and $0.18 for fully
diluted earnings for the three months ended December 31, 2000. Basic and diluted
weighted average common shares outstanding for the three months ended December
31, 2001 were 10,430,731 and 10,671,096, respectively. For the three months
ended December 31, 2000, the basic and diluted weighted average shares
outstanding were 9,707,436 and 9,866,573, respectively. Basic and fully diluted
earnings per common share were $0.64 and $0.61 for the nine months ended
December 31, 2001, as compared to $0.65 for basic and $0.60 for fully diluted
earnings for the nine months ended December 31, 2000. Basic and diluted weighted
average common shares outstanding for the nine months ended December 31, 2001
were 10,182,336 and 10,578,852, respectively. For the nine months ended December
31, 2000, the basic and diluted weighted average shares outstanding were
9,594,984 and 10,364,288, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended December 31, 2001, the Company generated cash
flows from operations of $30,702,173 and used cash flows in investing activities
of $25,124,409. Cash flows generated by financing activities amounted to
-17-
$12,565,086 during the same period. The net effect of these cash flows was a net
increase in cash and cash equivalents of $18,142,850, or 73.9%, during the
nine-month period. During the same period, the Company's total assets decreased
$4,142,067, or 1.3%. On April 17, 2000 the Company completed a secondary
offering of 1,000,000 shares of its common stock at a price of $28.50 per share.
Net proceeds to the Company were $25,936,388. The cash balance at December 31,
2001 was $42,677,033 as compared to $24,534,183 at March 31, 2001.
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flow from its
operations, the sale of the equipment leased to third parties, or other internal
means. Although the Company expects that the credit quality of its leases and
its residual return history will continue to allow it to obtain such financing,
no assurances can be given that such financing will be available, at acceptable
terms, or at all. The financing necessary to support the Company's leasing
activities has principally been provided by non-recourse and recourse
borrowings. Historically, the Company has obtained recourse and non-recourse
borrowings from banks and finance companies. The Company has formal programs
with Key Corporate Capital, Inc. and Fleet Business Credit Corporation. In
addition to these programs, recently the Company has regularly funded its
leasing activities with Wachovia Bank and Trust, Citizens Leasing Corporation,
GE Capital Corporation, National City Bank, Hitachi Leasing America, Fifth Third
Bank and Heller Financial, Inc., among others. These programs require that each
transaction is specifically approved and done solely at the lender's discretion.
During the three-month period ending December 31, 2001, the Company's lease
related non-recourse debt portfolio decreased 5.5% to $138,585,807.
Whenever possible and desirable, the Company arranges for equity investment
financing which includes selling assets including the residual portions to third
parties and financing the equity investment on a non-recourse basis. The Company
generally retains customer control and operational services, and has minimal
residual risk. The Company usually preserves the right to share in remarketing
proceeds of the equipment on a subordinated basis after the investor has
received an agreed-to return on its investment.
Through MLC/CLC, LLC, the Company had a joint venture agreement that had
historically provided the equity investment financing for certain of the
Company's transactions. Firstar Equipment Finance Company ("FEFCO"), formerly
Cargill Leasing Corporation, is an unaffiliated investor which owns 95% of
MLC/CLC, LLC. FEFCO's parent company, Firstar Corporation, is a $20 billion bank
holding company that is publicly traded on the New York Stock Exchange under the
symbol "FSR". This joint venture arrangement enabled the Company to invest in a
significantly greater portfolio of business than its limited capital base would
otherwise allow. A significant portion of the Company's revenue generated by the
sale of leased equipment has historically been attributable to sales to MLC/CLC,
LLC. (See "RESULTS OF OPERATIONS"). FEFCO has discontinued new lease acquisition
transactions effective May 2000. We actively sell or finance our equity
investment with Heller Financial, Inc., Fleet Business Credit Corporation and GE
Capital Corporation, among others.
The Company's "Accounts payable - equipment" represents equipment costs that
have been placed on a lease schedule, but for which the Company has not yet
paid. The balance of unpaid equipment cost can vary depending on vendor terms
and the timing of lease originations. As of December 31, 2001, the Company had
$4,764,031 of unpaid equipment cost, as compared to $9,226,813 at March 31,
2001.
-18-
Working capital financing in our leasing business was, through December 16, 2000
when it expired, provided by a $65 million committed credit facility which was a
short-term, secured, recourse facility provided through First Union National
Bank, N.A. and which had syndicated the facility to the following participants
and in the following amounts: National City Bank ($15 million); Summit Bank ($10
million); Bank Leumi USA ($10 million); and Key Bank ($10 million). This credit
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 2.5%.
As of March 31, 2001, the Company had an outstanding balance of $5 million on
the National City Credit Facility. At December 31, 2001, the Company had no
outstanding debt on the 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 the National City facility to pay the cost of equipment to be
put on lease, and we repay borrowings from the proceeds of: (1) long-term,
non-recourse, fixed rate financing which we obtain from lenders after the
underlying lease transaction is finalized or (2) sales of leases to third
parties. The 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
-19-
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
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 December 31, 2001 there was an
outstanding balance of $195,040 on these account receivable facilities. As of
December 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 December 31, 2001
-----------------------------------------------------------------------------------------------------
ePlus Technology of NC, inc. Deutsche Financial Services, $ 3,500,000 $ 2,032,214
Inc.
IBM Credit Corporation $ 250,000 $ 226,197
ePlus Technology of PA, inc. Deutsche Financial Services, $ 9,000,000 $ 2,803,191
Inc.
IBM Credit Corporation $ 2,000,000 $ 88,005
ePlus Technology, inc. Deutsche Financial Services, $13,500,000 $ 5,448,404
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.
-20-
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.
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.
On September 20,2001, the Company's Board of Directors authorized the repurchase
from time to time of up to 750,000 shares of its outstanding common stock to a
maximum of $5,000,000. As of December 31, 2001, the Company had repurchased
16,100 shares of its outstanding common stock. On February 6, 2002, the Company
repurchased an additional 50,000 shares at $9.00 per share.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the time of any material decrease in
any widely followed stock index or in the market price of the stock of one or
more public equipment leasing and financing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, its entry into the
e-commerce market, any reduction of expected residual values related to the
equipment under the Company's leases, timing of specific transactions and other
factors (See "Factors That May Affect Future Operating Results"). Quarterly
operating results could also fluctuate as a result of the sale by the Company of
equipment in its lease portfolio, at the expiration of a lease term or prior to
such expiration, to a lessee or to a third party. Such sales of equipment may
have the effect of increasing revenues and net income during the quarter in
which the sale occurs, and reducing revenues and net earnings otherwise expected
in subsequent quarters.
The Company believes that comparisons of quarterly results of its operations are
not necessarily meaningful and that results for one quarter should not be relied
upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the third quarter of the fiscal year.
-21-
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain statements contained herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that may not occur. Actual events, transactions and results may
materially differ from the anticipated events, transactions, or results
described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to the
matters set forth below.
The Company's e-commerce business has an extremely limited operating history.
Although it has been in the business of financing and selling information
technology equipment since 1990, the Company expects to derive a significant
portion of its future revenues from its ePlusSuite services. As a result, the
Company will encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by early stage companies using new and
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;
-22-
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the Company's liabilities are non-recourse,
fixed interest rate instruments, the Company is reliant upon lines of credit and
other financing facilities which are subject to fluctuations in interest rates.
These instruments were entered into for other than trading purposes, are
denominated in U.S. Dollars, and, with the exception of amounts drawn under the
National City Bank and 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.
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 December 31, 2001, the aggregate fair value of
our recourse borrowings approximated their carrying value.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 4, 2001, the Company issued to the shareholders of SourceOne Computer
Corporation 274,999 shares of common stock, valued at $7.55 per share, in
connection with the purchase of all the outstanding shares of SourceOne. The
issuance of these securities was made in reliance on an exemption from
registration provided by Section 4(2) or Regulation D of the Securities Act, as
amended, as a transaction by an issuer not involving any public offering. The
shareholders of SourceOne represented their intention to acquire the securities
for investment only and not with a view to or for distribution in connection
with such transaction, and an appropriate legend was affixed to the share
certificates issued in the transaction. The shareholders of SourceOne had
adequate access to information about ePlus through information made available to
the shareholders of SourceOne. The shareholders of SourceOne were granted
certain registration rights in connection with the transaction.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
-23-
Item 5. OTHER INFORMATION
Not Applicable
Item 6(a) Exhibits
None
Item 6(b) Reports on Form 8-K
Form 8-K dated October 9, 2001, and filed with the SEC on October 12, 2001, to
report that the Company had entered into, and subsequently consummated, a stock
purchase agreement to purchase all of the outstanding common shares of SourceOne
Computer Corporation. Total consideration for the acquisition was $2,875,000
which consisted of $800,006 in cash and 274,999 in unregistered shares of ePlus
inc. common stock.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
ePlus inc.
/s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: February 14, 2002
/s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: February 14, 2002
-25-