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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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
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(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
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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 21, 2002 was $49,684,987. The number of shares of Common Stock outstanding
as of June 21, 2002, was 10,384,220.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the following parts
of this Form 10-K:
Document Part
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Portions of the Company's definitive Proxy Statement Part III
to be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end.
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");
o ePlus Technology of NC, inc.;
o ePlus Technology of PA, inc.;
o ePlus Technology, inc.;
o ePlus Government, inc.;
o ePlus Capital, inc;
o ePlus Systems, inc.; and
o ePlus Content Services, inc.
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. ePlus Capital, inc. owns 100 percent of ePlus Canada
Company which was created on December 27, 2001 to transact business within
Canada. As of March 31, 2002, ePlus Canada Company had not yet initiated
business activity and had no business locations. 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, 2002 but is expected to transact
business in the near future. ePlus Group also has a 5% membership interest in
MLC/CLC LLC and serves as its manager. On October 22, 1997, the Company formed
MLC Leasing, S.A. de C.V., which is jointly 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.
ACQUISITIONS
The Company has acquired the following material entities or assets since 1997.
The following is a recap of the acquisitions presented in chronological order.
Major
Business Accounting
Date Acquired Acquisition Locations Method Consideration
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March 29, 2002 Certain assets and Boston, MA, Purchase $2,150,000 in cash
liabilities from Elcom Philadelphia, PA plus the assumption of
International Inc.'s IT San Diego, CA certain liabilities
fulfillment and and New York
professional service City, NY
business (merged into
ePlus Technology, inc.
upon acquisition)
October 4, 2001 SourceOne Computer Campbell, CA Purchase 274,999 shares of Common
Corporation (merged into Stock valued at $2,007,500
ePlus Technology, inc. and $800,006 in cash
upon acquisition)
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. (merged and $1,000,000 in cash
into newly created plus the assumption of
entities ePlus Systems, certain liabilities
inc. and ePlus Content
Services, inc.)
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
July 1, 1998 PC Plus, Inc. (now named Herndon, VA Purchase 263,478 shares of Common
ePlus Technology, inc.) Stock valued at $3,622,823
and $3,622,836 in cash
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 24, 1997 Compuventures of Pitt Wilmington, Pooling of 260,978 shares of Common
County, Inc. (now named Greenville, and Interests Stock valued at $3,384,564
ePlus Technology of NC, Raleigh, NC
inc.)
OUR BUSINESS
ePlus has developed its Enterprise Cost Management model through development and
acquisition of software, products, and business process services over the past
five years. Its current offering includes IT sales and professional services,
leasing and financing services, asset management software and services,
procurement software, and electronic catalog content management software and
services. 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
primarily by using our internal sales force and through vendor relationships to
commercial customers, federal, state and local governments, and higher education
institutions. We also lease and finance equipment and supply software and
services directly and through relationships with vendors, equipment
manufacturers, and systems integrators.
ePlus Enterprise Cost Management ("eECM") is positioned to provide a
comprehensive offering of products and services to the targeted middle market
and larger businesses, governments, and institutions. Enterprise Cost Management
is a multi-disciplinary approach for implementing, controlling, and maintaining
cost savings throughout an organization, including the costs of purchasing,
lifecycle management, and financing. It represents the continued evolution of
our original offering of ePlusSuite e-commerce products.
The key elements of our business and our Enterprise Cost Management solution
are:
o IT Sales: We are an authorized reseller of the leading IT hardware and
software products and have technical support personnel to support the sales
and implementations.
o Financial Services: ePlus Financial Services offers a wide range of
competitive and tailored financing options, including leases and financing
for a wide variety of fixed assets.
o eProcurement: Procure+, our e-procurement software package, has
sophisticated workflow, catalog management, and transaction management
capabilities that provide customers with the tools to search, request, and
acquire goods and services while instilling centralized control over
enterprise purchases and processes.
o Supplier Enablement: Content+ is the catalog and content management
software that contains over 250,000 pattern matching rules and 40,000
product classifications for content generation enabling customers to either
use or provide enriched, parametrically searchable catalogs.
o Asset Management: Manage+ is our asset management software, which
streamlines the tracking of a customer's assets and delivers valuable
business intelligence for compliance, reporting, budgeting and planning.
o Professional Services: We provide an array of network engineering
planning, data storage and system intrusion security management and
monitoring, implementation and network imaging and maintenance services to
support our customer base as part of our consolidated service offering.
o Business Process Outsourcing: We provide outsourced services to augment
the eECM solution for customers including payables processing, vendor
management, contract compliance, invoice reconciliation, and document
imaging.
The procurement software products and services, asset management and business
process outsourcing are key functions of supporting and retaining customers for
our sales and finance businesses. The Company has developed and acquired these
products and services to distinguish ePlus from its competition to provide a
comprehensive offering to customers. Our target customers are primarily
middle-market and larger companies, with revenues between $25 million and $1
billion per year. We believe there are over 60,000 customers in this target
market.
Our target customer has one or more of the following business characteristics
that we believe qualifies us as a preferred solution:
o seeks a lower cost alternative to licensing enterprise software solutions
while preserving the investment in legacy IT infrastructures;
o will benefit from the cost savings and efficiency gains that can be
obtained from a solution which integrates e-procurement, asset management,
catalog content functionality, electronic bill presentment and payment and
financing;
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 fixed assets by
re-designing business processes and proactively managing its fixed asset
base over the life of the asset; and
o seeks a comprehensive solution for its entire supply chain from
selection, requisition, purchase, settlement, ownership, financing and
disposal of assets.
See "Note 12 - SEGMENT REPORTING" in the attached consolidated financial
statements. ePlus has two basic business segments. Our first segment is the
financing business unit that consists of the equipment and financing business to
both commercial and government-related entities and the associated business
process outsourcing services. Our second segment is our technology sales
business unit that includes all the technology sales and related services
including procurement, asset management, and catalog software sales and
services.
INDUSTRY BACKGROUND
Growth of the Internet as a Communications Channel for Efficient
Business-to-Business Electronic Commerce
The Internet is now a preferred channel for many business-to-business
transactions for most organizations. In the intensely competitive business
environment, businesses have increasingly adopted Internet-based software
applications and related tools 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 in which we specialize, which include
information technology and telecommunications equipment, office equipment and
supplies and professional services. The purchase and sale of these goods
comprise a large portion of business-to-business transactions.
Many organizations continue to 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.
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 for use 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.
Opportunity for Business-to-Business Enterprise Cost Management Solutions
We believe that an opportunity exists to provide an Internet-based Enterprise
Cost Management solution 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 the customer's preferred vendors.
THE ePlus SOLUTION
Our Enterprise Cost Management framework is designed to 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. eECM provides customers visibility and control of
transactions and owned assets and, as a suite of integrated business
applications, reduces redundancies throughout their process. The ePlus offering
currently includes Internet-based applications for the catalog content
management, e-procurement, asset management, document imaging, electronic bill
presentment and payment, 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.
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 on a licensed basis or as 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
fewer programmers or developers than many competing solutions.
STRATEGY
Our goal is to become a leading provider of Enterprise Cost Management services.
The key elements of our strategy include the following:
Convert current and future customers to our services
We have an existing client base of approximately 2,000 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 Enterprise Cost 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 licensed by the
customer.
Expand our sales force and marketing activities
We currently have approximately 186 people in our sales and marketing function,
which represents a substantial increase compared to the previous year of 117. We
have expanded our presence in locations that have a high concentration of
fast-growing middle and large market companies. In addition, we plan to add
sales staff to certain key geographic areas. We will seek to hire experienced
personnel with established customer relationships and with backgrounds in
hardware and software 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 Enterprise Cost
Management offerings.
Expand the functionality of our Internet-based solutions
We will continue to improve our Enterprise Cost Management offering to expand
its functionality to serve our customer's needs. In addition, we intend to use
the flexibility of our platform to offer additional products and services when
economically feasible. As part of this strategy, we may also acquire technology
companies to expand and enhance the platform of Enterprise Cost Management
services to provide additional functionality and value added services.
DESCRIPTION OF ENTERPRISE COST MANAGEMENT ("ECM")
eECM consists of six basic service products that have either been internally
developed or have been acquired and incorporated into our total business
process. The ECM framework consists of Procure(+), Manage(+), ePlus Leasing,
Content(+), strategic sourcing and business process outsourcing. These combined
services and software offerings are integrated so that each component links with
and shares information. Procure(+), Manage(+) and Content(+) are the key parts
of our software solution offerings and ePlus Leasing, strategic sourcing and
business process outsourcing are the services provided by us. Pay(+) is our new
electronic payment and presentment software which is currently being offered to
several beta customers.
Procure(+). Procure(+) represents our software solutions that offer
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 under a subscription basis.
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. No coding or expensive programming is required at the
customer level. 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.
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;
o easy implementation without the assistance or expense of third-party
consultants as ePlus usually provides the configuration and
implementation services;
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.
Content(+). Content(+) provides functionality to extract, cleanse, update, and
syndicate electronic catalog content and related business information. The core
to Content(+) is the program Common Language Generator (CLG), which incorporates
a knowledge base of over 200,000 business rules and 44,000 commodity and class
codes to automatically cleanse and classify suppliers' product content into
categories that can be easily represented and searched in online catalogs.
Content(+) is utilized by purchasing organizations for supplier enablement and
by selling organizations for content syndication.
Content(+) is a software solution for clients that require in-house
functionality to aggregate, normalize, enrich and manage data.
Components of Content+ provides the following information and services to the
customer:
o Common Language Generator (CLG)- transforms unstructured and raw
supplier data into a structured, enriched, and organized state for an
eCommerce platform.
o Content+ Maintenance- the Content+ Maintenance Utility provides users
with the ability to perform in-house catalog maintenance through a
user-friendly interface that provides the ability to create, add,
delete, modify data and track changes throughout a catalog.
o Content+ Load- imports supplier catalog files into the client's own
internal catalog structure, simplifying content updates and the
creation of catalogs.
o Content Services and Management- Content+ Services are designed to
quickly augment the customer's content capabilities to meet their
business requirements for building, loading, aggregating, publishing
and syndicating data and achieve better search results with
standardized, reusable product data, accurate data classifications,
and highly enriched output. Most customers are provided an end-to-end
content solution that is customized to fit their business
requirements.
o Catalog Hosting Services- we also provide 24/7 operations and support
with maintenance services for both content and catalogs. In addition,
we can syndicate content to all formats, including XML, CSV,
procurement applications, printed catalogs, and to widely used ERP and
Accounting Systems.
o Aggregation Services- our services include contacting manufacturers
and suppliers to retrieve and capture all relevant product
information, including descriptions, images, and drawings. We also
create data sources for future updates and maintenance of product
descriptions.
o Ready-to-Go Content- ePlus has developed "ready-to-go" content which
consists of one million items of product content that is enriched,
classified, and eCommerce enabled. The content items span 44,000
categories encompassing most everything the average business needs to
buy. ePlus Content currently offers its services and software
solutions for both the buy and sell-side electronic commerce
marketplace.
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
including other e-procurement or ERP systems can populate the Manage(+) database
to provide a seamless link. Manage(+) is a remotely-hosted solution. 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;
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 assistance with application rollouts and the
annual budgeting process.
ePlus Leasing. ePlus Leasing is our 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.
ePlus Leasing allows customers to order equipment when desired and to 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 be invoiced by location, division, or business unit, if so desired by the
customer. ePlus Leasing can help a customer simplify the process, lower costs
and increase productivity.
We 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.
Other eECM Services. Our Business Process Outsourcing, network engineering,
monitoring and maintenance and implementation service allows customers to obtain
high-quality services that can be linked and consolidated with other components
of our eECM solution. Certain types of assets that are procured through
Procure(+) can be configured, imaged, staged, and installed by us on the
customer site. Our services assist our customers in managing their existing
information technology asset base, including maintenance, network engineering,
information security management, project management, training and other
technology services. Our Pay(+) service provides electronic presentment and
payment. Having an extensive services offering provides a material distinction
between ePlus and its competition.
IMPLEMENTATION AND CUSTOMER SERVICE
We use a project management approach to the implementation of eECM solution with
each new customer. Our team consists of 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 engineering staff members to provide technology services, if
required, to the customer.
Our implementation of our solution is a multi-step process that requires, on
average, approximately four to nine weeks and involves the following steps:
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 Enterprise Cost 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.
o We provide help desk, technological assistance, and remote network
monitoring on a constant basis.
We provide Enterprise Cost Management 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 leading 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 available 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.
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.
Our Enterprise Cost Management product 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 systems. These
integration processes can be scheduled according to the needs of our customers'
information services and finance departments.
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
Our software has been acquired from third-party vendors or has been developed by
us. In the past, we relied heavily on licensed software and outsourced
development, but 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 our current software development is handled within the company. We have
also outsourced certain programming tasks to a highly specialized offshore
development company. We 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
Enterprise Cost Management offering. 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 focusing our
current resources in maintaining our state-of-the-art programs.
SALES AND MARKETING
We focus our marketing efforts on achieving lead generation and converting our
existing customer base to our ECM solution. The target market for our customer
base is primarily middle and large 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 customer relationships 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 regionally in 36 office locations throughout the
country. See "Item 2. PROPERTIES" for additional office location information. As
of June 17, 2002 our sales organization included approximately 186 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 our Enterprise Cost Management offering. 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 two patents that originated from the assets acquired from
ProcureNet, Inc. regarding our electronic sourcing and catalog systems. We
cannot provide any assurance that any patents, as issued, will prevent the
development of competitive products or that our patents will not be successfully
challenged by others or invalidated through administrative process or
litigation. We also have the following trademarks: ePlus, ePlusSuite,
Procure(+), Manage(+), Finance(+), Service(+), EPLUS LEASING, EPLUS ONLINE and
EPLUS ADVANTAGE.
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, providing
procurement and asset management software and managing information technology
and other assets for over ten years and currently derive the majority of our
revenues from such activities. 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 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, non-profit entities and municipal and federal governments.
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 without offset or counterclaim. 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 or the net book value. The
majority of these gains are attributable to early termination fees as a direct
result of our remarketing strategy.
Sales. We have been providing technology sales and services since 1997. We are
an authorized reseller or have the right to resell products and services from
over 150 manufacturers and distributors. Our largest vendor relationships
include Compaq, Tech Data, Hewlett Packard, Dell Computer Corporation, Microsoft
Corporation, Ingram Micro, Inc., and IBM. We have in excess of 150 vendor
authorizations to market specific 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 commercial banks and finance companies with varying terms
and conditions. During the years ended March 31, 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 11% and 5% of the Company's revenues,
respectively. No transactions occurred in the year ended March 31, 2002 with
this entity. 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 the financial
risks of our balance sheet assets. 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 (which is limited to the
underlying equipment and the specific lessee and not the Company's general
assets) for our leasing transactions and we try to obtain lender commitments
before acquiring the related assets. We have over 40 non-recourse financing
sources that we use, including Citizens Banking Corporation, De Lage Landen
Financial Services, Fifth Third Bank, Fleet Business Credit Corporation, GE
Capital Corporation, J.P. Morgan Leasing, and Key Corporate Capital, Inc.
When desirable, we manage our risk in assets by selling leased assets, including
the residual portion of leases, to third parties rather than owning them. We try
to obtain commitments for these asset sales before asset origination in a
financing transaction. 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 lease and sale
contracts are reviewed by senior management for pricing, structure,
documentation, and credit quality. Due in part to our strategy of focusing on a
few types of 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, 2002, we
reserved for $1,488,706 in credit losses and incurred actual credit losses of
$183,618. 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.
COMPETITION
The market for leasing, IT sales and services and procurement software services
is intensely competitive, subject to economic conditions, rapid change and
significantly affected by new product introductions and other market activities
of industry participants. We expect to continue to compete in all three areas of
business against local, regional and national firms. 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.
Our current and potential competitors in the procurement software and 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. Other competitors are also attempting to migrate their technologies to
an Internet-enabled platform. Some of these competitors and potential
competitors include ERP vendors, Oracle, SAP and Peoplesoft, which are expected
to sell their procurement and asset management 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 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.
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 can compete favorably with our
competitors in these areas within our framework of ECM that consists of
Procure(+), Manage(+), ePlus Leasing, Content(+), strategic sourcing and
business process outsourcing.
EMPLOYEES
As of March 31, 2002 we employed 582 full-time and part-time employees who
operated through approximately 36 office locations, including our principal
executive offices and regional sales offices. 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 186
Technical Support 166
Contractual 59
Accounting and Finance 62
Administrative 60
Software and Development 35
Executive 14
RISK FACTORS
The Limited Operating History Of Our eCommerce Related Products and Services
Makes It Difficult To Evaluate Our Business And Our Prospects
Our eECM solution introduced in May, 2002 and our ePlusSuite solution introduced
in November, 1999, have had limited operating histories. 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 Enterprise Cost Management
services;
o adapt to meet changes in our markets and competitive developments;
o hire sufficient personnel to accommodate the expected growth in our
customer base; 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 That We Will Be Able To Effectively Compete
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.
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. 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 may need to
substantially expand our sales operations and marketing efforts in the future.
Our products and services require a sophisticated sales effort and significant
technical support. Competition for qualified sales, marketing and technical
personnel can be intense, and we might not be able to hire and retain sufficient
numbers of such personnel to grow our business.
If We Are Unable To Protect Our Intellectual Property, Our Business Will Suffer
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 Enterprise Cost
Management services 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.
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 and Kleyton L. Parkhurst, Senior Vice President, Secretary and
Treasurer. The loss of any of these key management officers or personnel could
have a material adverse effect on our business, operating results and financial
condition. Each of these officers has an employment agreement with us. We also
maintain key-man life insurance on Mr. Norton.
ITEM 2. PROPERTIES
The Company operates from 36 office locations. Our total leased square footage
is approximately 129,468 square feet for which we pay rent of approximately
$195,732 per month. Some of our companies operate in shared office space to
improve sales, marketing and improve cost efficiency. We do not own any real
estate. Some sales and technical service personnel operate from either
residential offices or space that is provided for by another entity or are
located on a customer site. The following table identifies our largest
locations, the approximate number of current employees as of June 21, 2002, the
approximate square footage and the general office functions.
Number of Approximate
Location Company Employees Square Footage Function
- ---------------------- ----------------------- --------------- --------------- -------------------------------------
Herndon, VA ePlus Group, inc. 217 33,000 Corporate and subsidiary
(2 locations) ePlus Technology, headquarters, sales, technical
inc., support and warehouse
ePlus Government, inc.
Bristol, PA ePlus Technology, inc. 50 23,605 Sales and technical support
Pottstown, PA ePlus Technology of 59 18,300 Subsidiary headquarters, sales,
(2 locations) PA, inc. technical support and warehouse
Campbell, CA ePlus Technology, inc. 41 7,040 Sales, technical support and
warehouse
Wilmington, NC ePlus Technology of 38 6,068 Subsidiary headquarters, sales and
NC, inc. technical support
Raleigh, NC ePlus Group, inc. 21 8,000 Sales-shared and technical support
ePlus Technology of NC, inc.
Avon, CT ePlus Systems, inc. 15 5,030 Subsidiary headquarters, sales and
technical development
Houston, TX ePlus Content 10 4,000 Subsidiary headquarters, sales and
Services, inc. e-commerce catalog service center
Canton, MA ePlus Technology, 33 9,000 Sales and technical support
inc.
Other locations 83 15,425 Sales and technical support
The two largest locations, Herndon, VA and Pottstown, PA, have lease expiration
dates of November 30, 2004 and June 30, 2005, respectively. The Bristol, PA and
Canton, MA offices arose from the acquisition of Elcom International, Inc.'s IT
fulfillment and professional service business. Both spaces are contracted from
Elcom International, Inc. under a Master Service Agreement that is on a monthly
basis.
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.
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, 2000 through
March 31, 2002, by quarter.
Quarter Ended High Low
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
June 30, 2001 $ 10.88 $ 6.17
September 30, 2001 $ 11.40 $ 6.75
December 31, 2001 $ 10.25 $ 7.15
March 31, 2002 $ 9.79 $ 8.62
On June 21, 2002 the closing price of the Common Stock was $7.75 per share. On
June 21, 2002, there were 213 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 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.
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, 2000, 2001 and
2002" and "Item 1, Business."
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
Year Ended March 31,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
----------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Sales of equipment $ 47,419 $ 83,516 166,252 $ 216,183 $ 127,753
Sales of leased equipment 50,362 84,379 57,360 34,031 9,353
Lease revenues 14,882 20,611 31,374 42,694 48,850
Fee and other income 5,779 5,464 9,747 13,678 19,029
----------------------------------------------------------------------
Total revenues 118,442 193,970 264,733 306,586 204,985
----------------------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 37,423 71,367 147,209 182,474 111,598
Cost of sales of leased equipment 49,669 83,269 55,454 33,329 9,044
Direct lease costs 5,409 6,184 8,025 16,535 9,579
Professional and other costs 1,073 1,222 2,126 3,363 2,718
Salaries and benefits 10,357 11,880 19,189 30,611 32,797
General and administrative expenses 3,694 5,152 7,090 10,766 12,517
Interest and financing costs 1,837 3,601 11,390 15,523 11,810
Nonrecurring acquisition costs 250 - - - -
----------------------------------------------------------------------
Total costs and expenses 109,712 182,675 250,483 292,601 190,063
----------------------------------------------------------------------
Earnings before provision for income taxes 8,730 11,295 14,250 13,985 14,922
Provision for income taxes 2,691 4,579 5,875 5,667 6,010
----------------------------------------------------------------------
Net earnings $ 6,039 $ 6,716 $ 8,375 $ 8,318 $ 8,912
=====================================================================
Net earnings per common share - Basic $ 1.00 $ 0.99 $ 1.09 $ 0.86 $ 0.87
======================================================================
Pro forma net earnings (1) $ 5,426
==============
Pro forma net earnings per common share - Basic $ 0.90
==============
Weighted average shares outstanding - Basic 6,031,085 6,769,732 7,698,287 9,625,891 10,235,129
(1) Pro forma net earnings for the year ended March 31, 1998 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 in fiscal 1998, had been subject to federal income tax throughout
the periods presented.
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
As of March 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and cash equivalents $ 18,684 $ 7,892 $ 21,910 $ 24,534 $ 28,224
Accounts receivable 16,383 44,090 60,167 57,627 41,397
Notes receivable 3,802 547 1,195 1,862 228
Inventories 1,214 658 2,445 2,651 872
Investment in leases and leased equipment, net 39,792 86,901 231,999 202,846 169,087
Other assets 2,137 12,357 24,628 15,754 27,503
All other assets 1,184 1,914 2,991 5,593 11,685
-------------------------------------------------------------------
Total assets $ 83,196 $ 154,359 $ 345,335 $ 310,867 $ 278,996
===================================================================
Liabilities:
Accounts payable - equipment $ 21,284 $ 18,049 $ 22,976 $ 9,227 $ 3,899
Accounts payable - trade 6,865 12,518 29,452 18,926 15,105
Salaries and commissions payable 390 536 957 1,293 492
Recourse notes payable 13,037 19,081 39,017 8,876 4,660
Nonrecourse notes payable 13,028 52,429 182,845 157,960 129,095
All other liabilities 5,048 7,932 12,967 22,678 19,456
-------------------------------------------------------------------
Total liabilities 59,652 110,545 288,214 218,960 172,707
Stockholders' equity 23,544 43,814 57,121 91,907 106,289
-------------------------------------------------------------------
Total liabilities and stockholders' equity $ 83,196 $ 154,359 $ 345,335 $ 310,867 $ 278,996
===================================================================
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, 2000, 2001 AND 2002
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.
We currently derive the majority of our revenue from sales and financing of
information technology and other assets. We have expanded our product and
service offerings under the Enterprise Cost Management model which represents
the continued evolution of our original implementation of ePlus e-commerce
products entitled ePlusSuite. The expansion to our ECM model is framework that
combines our IT sales and professional services, leasing and financing services,
asset management software and services, procurement software, and electronic
catalog content management software and services.
We have expanded our sales and marketing personnel from 117 to 186 from both
hiring personnel and from the acquisitions of SourceOne Computer Corporation and
Elcom International, Inc. These two acquisitions and our hiring of other sales
persons has expanded our current locations to 36, all of which are in the United
States. We expect to expand or open new sales locations and hire additional
staff for specific targeted market areas in the near future whenever we can find
both experienced personnel and qualified geographic areas.
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 have substantially increased
our expenses and the ability to sell these services and products is expected to
fluctuate depending on the customer demand for these products and services,
which to date is still unproven. These products and services are included in our
Technology Sales Unit business segment combined with our other sales of IT
products and services. Our leasing and financing activities are included in our
Financing Business Unit segment in our financial statements.
As a result of our acquisitions and expansion of sales locations, the Company's
historical results of operations and financial position may not be indicative of
its future performance over time.
SELECTED ACCOUNTING POLICIES
The manner in which lease finance transactions are characterized and reported
for accounting purposes has a major impact upon reported revenue and net
earnings. Lease accounting methods 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 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 supplied
from 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 leases and leased 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; (3) sales of off-lease equipment to
the secondary market; and (4) sales of procurement software. Sales of new or
used equipment are recognized upon shipment. Sales of equipment subject to an
existing lease and off-lease equipment are recognized when constructive title
passes to the purchaser. Revenue from sales of procurement software is
recognized in accordance with the Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. We recognize revenue
when all the following criteria exist: when there is persuasive evidence that an
arrangement exists, delivery has occurred, no significant obligations by the
Company with regard to implementation remain, the sales price is determinable
and it is probable that collection will occur. Our accounting policy requires
that revenue earned on software arrangements involving multiple elements be
allocated to each element on the relative fair values of the elements and
recognized when earned. Revenue relative to maintenance and support is
recognized ratably over the maintenance term (usually one year) and revenue
allocated to training, implementation or other services is recognized as the
services are performed.
Other Sources of Revenue. Amounts charged for Procure(+) 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. Fee and
other income results from: (1) income from events that occur after the initial
sale of a financial asset; (2) re-marketing fees; (3) brokerage fees earned for
the placement of financing transactions; and (4) interest and other
miscellaneous income. These revenues are included in fee and other income in our
consolidated statements of earnings.
Capitalization of Software Costs for Internal Use. The Company has capitalized
certain costs for the development of internal use software under the guidelines
of Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Approximately, $1.1 million and
$0.7 million of internal use software was capitalized during the years ended
March 31, 2002 and 2001, respectively which is included in the accompanying
consolidated balance sheet as a component of property and equipment.
Capitalization of Software Costs Available to Customers. In accordance with SFAS
No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, software development costs are expensed as incurred until
technological feasibility has been established, at such time such costs are
capitalized until the product is made available for release to customers. No
development costs have been capitalized for the years ended March 31, 2002 or
2001 relative to software costs available to customers.
RESULTS OF OPERATIONS
The Year Ended March 31, 2002 Compared to the Year Ended March 31, 2001
Total revenues generated by the Company during the year ended March 31, 2002
were $205.0 million compared to revenues of $306.6 million for the year ended
March 31, 2001, a decrease of 33.1%. This decrease is primarily attributable to
decreased revenues from the sales of equipment and leased equipment, offset
slightly by an increase in lease revenues and fee and other income. The
Company's revenues are composed of sales, lease revenues, and fee and other
income, and may vary considerably from period to period.
Sales revenue, which includes sales of equipment and sales of leased equipment,
decreased 45.2% to $137.1 million during the year ended March 31, 2002, as
compared to $250.2 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, 2002, we experienced a marked decrease in customer
demand for IT products due to an overall economic slowdown. The decrease was a
result of generally slower sales within the Company's existing customer base and
the reduction in sales to customers in the communications industry. For the year
ended March 31, 2002, equipment sales through the Company's technology business
unit subsidiaries accounted for 99.2% of sales of equipment. For the year ended
March 31, 2002, sales of equipment decreased 40.9% to $127.8 million, a result
of decreased technology sales through the Company's subsidiaries.
The Company realized a gross margin on sales of equipment of 12.6% for the year
ended March 31, 2002, as compared to 15.6% during the year ended March 31, 2001.
This decrease in net margin percentage can be attributed to increased
competition in a slower marketplace, lower overall demand in the marketplace,
and variations in the profitability on the mix and volume of products sold.
The Company also recognizes revenue from the sale of leased equipment. During
the year ended March 31, 2002 compared to the prior fiscal year, sales of leased
equipment decreased 72.5% to $9.4 million. During the year ended March 31, 2002,
the Company recognized a gross margin of 3.3% on leased equipment sales as
compared to a gross margin of 2.1% during the prior fiscal year. The decrease in
sales of leased equipment for the year ended March 31, 2002 reflects the reduced
volume of lease equipment 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 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, as amended by SFAS No. 140. Prior to May 2000, the majority
of the Company's sales of lease equipment had historically been sold to MLC/CLC,
LLC, a joint venture in which the Company owns a 5% interest. During the years
ended March 31, 2002 and 2001, sales to MLC/CLC, LLC, accounted for 0% and 43.1%
of sales of leased equipment, respectively. Sales to the joint venture required
the consent of the joint venture partner. Firstar Equipment Finance Corporation,
which owns 95% of MLC/CLC, LLC, discontinued their investment in new lease
acquisitions effective May 2001. 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 14.4% to $48.9 million for the year ended
March 31, 2002, compared with the prior fiscal year. This increase reflects
increased remarketing revenues on the Company's maturing lease portfolio. Our
net investment in leased assets was $169.1 million at March 31, 2002, a 16.6%
decrease from $202.8 million at March 31, 2001.
For the year ended March 31, 2002, fee and other income was $19.0 million, an
increase of 39.1% over the prior fiscal year. Fee and other income includes
ePlusSuite revenues, 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 year ended March 31,
2002 includes an approximate $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 year ended March 31, 2002, included in Fee and other income were $5.4
million in ePlusSuite revenues, as compared to $5.7 million in the year ended
March 31, 2001. This represents a decrease of 5.8% and reflects a reduction of
transactions utilizing our ePlusSuite products and services. 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 decreased 42.1% during the year ended March 31,
2002, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense on operating lease equipment.
Professional and other fees decreased 19.2% for the year ended March 31, 2002
over the the prior fiscal year, and was primarily the result of a material
reduction in the utilization of outside service providers.
Salaries and benefits expenses increased 7.1% during the year ended March 31,
2002, as compared to the prior fiscal year. The increase is the result of the
increased number of personnel employed by the Company, particularly employees
acquired in the SourceOne acquisition, which is offset by reduced commission
expenses in the Company's lease financing and technology sales units.
General and administrative expenses increased 16.3% over the prior fiscal year.
The increase reflects the additional expense related to the Company's recently
formed subsidiaries, ePlus Systems, inc. and ePlus Content Services, inc. A
portion of the increase 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, as the Company determined that the investment net book
value would not be realized. 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 year ended March
31, 2002 decreased 23.9%, and relate to interest costs on the Company's
indebtedness. In addition to decreased borrowing under the Company's lines of
credit, the Company's lease-related non-recourse debt portfolio decreased
significantly, and our weighted average interest rate on new lease-related
non-recourse debt decreased during the year ended March 31, 2002 (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 $6.0 million for the year
ended March 31, 2002 from $5.7 million for the prior fiscal year, reflecting
effective income tax rates of 40.3% and 40.5%, respectively.
The foregoing resulted in a 7.1% increase in net earnings for the year ended
March 31, 2002, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $0.87 and $0.85 for the
year ended March 31, 2002, as compared to $0.86 and $0.80 for the year ended
March 31, 2001, based on weighted average common shares outstanding of
10,235,129 and 10,458,235, respectively, for 2002 and 9,625,891 and 10,383,467,
respectively, for 2001.
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
income, 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, as amended by SFAS No. 140. 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.
For the year ended March 31, 2001, fee and other income increased 40.3% over the
prior fiscal year. Included in the Company's fee and other income are ePlusSuite
revenues and earnings from certain transactions which are in the Company's
normal course of business but there is no guarantee that future transactions of
the same nature, size or profitability will occur. The Company's ability to
consummate such transactions, and the timing thereof, may depend largely upon
factors outside the direct control of management. The earnings from these types
of transactions in a particular period may not be indicative of the earnings
that can be expected in future periods. The increase is attributable to the
increase in ePlusSuite revenues during 2001.
For the year ended March 31, 2001, included in fee and other income were $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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2002, the Company generated cash flows from
operations of $12.4 million, and used cash flows from investing activities of
$33.7 million. Cash flows generated by financing activities amounted to $25.0
million during the same period. The net effect of these cash flows was a net
increase in cash and cash equivalents of $3.7 million during the year. During
the same period, our total assets decreased $31.9 million, or 10.3%, primarily
the result of decreases in the Company's net investmentin leases and leased
equipment. 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 $30.9 million, or 15.6%, and $2.8 million, or 65.9%, respectively,
during the period. The cash balance at March 31, 2002 was $28.2 million as
compared to $24.5 million the prior year.
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, and Fifth
Third Bank, among others. These programs require that each transaction is
specifically approved and done solely at the lender's discretion.
During the year ended March 31, 2002, the Company's lease-related non-recourse
debt portfolio decreased 18.3% to $129.1 million. 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
obligations. Under a non-recourse loan, we borrow from a lender an amount based
on the present value of the contractually committed lease payments under the
lease at a fixed rate of interest, and the lender secures a lien on the financed
assets. When the lender is fully repaid from the lease payment, the lien is
released and all further rental or sale proceeds are ours. We are not liable for
the repayment of non-recourse loans unless we breach our representations and
warranties in the loan agreements. The lender assumes the credit risk of each
lease, and their only recourse, upon default by the lessee, is against the
lessee and the specific equipment under lease.
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, US Bancorp, a bank holding company that is
publicly traded on the New York Stock Exchange under the symbol "USB". 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 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 March 31, 2002, the Company had $3.9
million of unpaid equipment cost, as compared to $9.2 million at March 31, 2001.
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
0.25%. 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, 2002, the Company had an outstanding balance of $1.0 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, 2001, the outstanding balance on the National City
Facility amounted to $5.0 million, and represented 56.3% of the outstanding
recourse debt. As of March 31, 2002, the outstanding balance on the National
City Facility amounted to $1.0 million, and represented 21.5% 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
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, 2002 the balance of
these account receivable facilities, which is included in recourse notes
payable, were $0 and $0 respectively. As of March 31, 2002 the respective floor
planning inventory agreement maximum credit limits and actual outstanding
balances are as follows:
Balance at March
Entity Floor Plan Supplier Credit Limit 31, 2002
------------------------------- -------------------------------- ---------------- -------------------
ePlus Technology of NC, inc. Deutsche Financial Services, $3,500,000 $1,493,106
Inc.
IBM Credit Corporation $ 250,000 $ 199,731
ePlus Technology of PA, inc. Deutsche Financial Services, $9,000,000 $3,154,218
Inc.
IBM Credit Corporation $2,000,000 $ 172,976
ePlus Technology, inc. Deutsche Financial Services, $13,500,000 $3,836,411
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.
As of March 31, 2002, 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 $19.0 million, as
compared to $28.2 million at March 31, 2001.
As of March 31, 2002 and 2001, the Company had $0.2 and $1.9 million in notes
receivable, respectively. As of March 31, 2000, we had an outstanding note
receivable of $0.8 million from a corporation in which we also had warrants to
acquire a major equity share. During the year-ended March 31, 2002, 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.
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 March 31, 2002, the Company had
repurchased 66,100 shares of its outstanding common stock at an average cost of
$8.70 per share for a total of $574,800. Subsequent to year-end and as of June
21, 2002, we repurchased an additional 40,000 shares at an average price of
$8.68 for a total of $347,000.
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
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 and updated
to eECM in 2002. 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.
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, 2002, the aggregate fair value of our
recourse borrowings approximated their carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Schedule listed in the
accompanying Index to Financial Statements.
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........................58 Director, Chairman of the Board, III
President and Chief
Executive Officer
Bruce M. Bowen...........................50 Director and Executive Vice III
President
Steven J. Mencarini......................46 Senior Vice President and
Chief Financial Officer
Kleyton L. Parkhurst.....................39 Senior Vice President, Secretary,
and Treasurer
Terrence O'Donnell.......................58 Director II
Lawrence S. Herman.......................58 Director I
C. Thomas Faulders, III..................52 Director I
Thomas L. Hewitt.........................63 Director II
Mr. Lawrence S. Herman was elected to the Board of Directors on March 30, 2001.
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 did not file any Form 8-K's during the last quarter of the period
covered by this report.
(c) Exhibits
Exhibit
Number Description
-------------- ---------------------------------------------------------
2.1(6) Stock Purchase Agreement, dated as of October 23, 1998 by
and between MLC Holdings,Inc. and TC Leasing, LLC
2.2(7) 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(8) 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
2.4(12) Agreement and Plan of Reorganization by and amoung SourceOne
Computer Corporation, Robert Nash, Donna Nash, R. Wesley
Jones, the shareholders of SourceOne Computer Corporation,
ePlus inc. and ePlus Technology, inc., dated as of October
2, 2001.
2.5(13) Asset Purchase and Sale Agreement by and between ePlus
Technology, inc., Elcom Services Group, Inc., Elcom, Inc.,
and Elcom International, Inc., dated March 25, 2002.
2.6(14) Amendment to Asset Purchase and Sale Agreement by and
between ePlus Technology, inc., Elcom Services Group, Inc.,
Elcom, Inc., and Elcom International, Inc., dated March 29,
2002.
3.1(3) 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(2)* Form of Employment Agreement between the Registrant and
Steven J. Mencarini
10.6(4)* Form of Employment Agreement between the Registrant and
Nadim Achi
10.7(3)* MLC Master Stock Incentive Plan
10.8(3)* Amended and Restated Incentive Stock Option Plan
10.9(3)* Amended and Restated Outside Director Stock Option Plan
10.10(3)* Amended and Restated Nonqualified Stock Option Plan
10.11(3)* 1997 Employee Stock Purchase Plan
10.12(5) 1998 Long Term Incentive Plan
10.15(1) Form of Irrevocable Proxy and Stock Rights Agreement
10.16(9) 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(10) Business Financing Agreement dated September 8, 2000 between
Deutsche Financial Services Corporation and ePlus
Technology, inc.
10.18(10) Agreement for Wholesale Financing dated September 8, 2000
between Deutsche Financial Services and ePlus Technology,
inc.
10.19(10) Paydown Addendum to Business Financing Agreement between
Deutsche Financial Services and ePlus Technology, inc.
10.20(10) Limited Guaranty dated September 8, 2000 between Deutsche
Financial Services and ePlus inc.
10.21(11) Agreement for Wholesale Financing between Deutsche Financial
Services and ePlus Technology of PA, inc., dated February
12, 2001
10.22(11) Business Financing Agreement between Deutsche Financial
Services Corporation and ePlus Technology of PA, inc., dated
February 12, 2001
10.23(11) 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(11) Limited Guaranty for ePlus Technology of PA, Inc. to
Deutsche Financial Services Corporation by ePlus inc., dated
February 12, 2001
10.25(11) Intercreditor Subordination Agreement between Deutsche
Financial Services Corporation and IBM Credit Corporation
and ePlus Technology of PA, inc., dated February 26, 2001
10.26(11) Agreement for Wholesale Financing between Deutsche Financial
Services Corporation and ePlus Technology of NC, inc., dated
February 12, 2001
10.27(11) Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc.and Deutsche Financial Services
Corporation, dated February 12, 2001
10.28(11) Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc. and Deutsche Financial Services
Corporation, dated February 12, 2001
10.29(11) 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
10.3 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 the indicated exhibit
filed as part of the Registrant's Form 10-K filed on June
30, 1997
(3) Incorporated herein by reference to the indicated exhibit
filed as part of the Registrant's Form 10-Q filed on
November 14, 1997
(4) Incorporated herein by reference to the indicated exhibit
filed as a part of the Registrant's Form 8-K filed on July
31, 1998
(5) Incorporated herein by reference to Exhibit 1.1 filed as a
part of the Registrant's Form 10-Q filed on November 12,
1998
(6) Incorporated herein by reference to the indicated exhibit
filed as a part of the Registrant's Form 8-K filed on
November 13, 1988.
(7) Incorporated herein by reference to Exhibit 99.3 filed as
part of the Registrant's Form 8-K filed on March 9, 2000
(8) Incorporated herein by reference to Exhibit 99.2 filed as
part of the Registrant's Form 8-K filed on May 12, 2000
(9) Incorporated herein by reference to Exhibit 5.1 filed as
part of the Registrant's Form 8-K filed on February 2, 2001
(10) 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
(11) 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
(12) Incorporated herein by reference to Exhibit 2 filed as part
of the Registrant's Form 8-K dated October 12, 2001
(13) Incorporated herein by reference to Exhibit 2 filed as part
of the Registrant's Form 8-K dated April 5, 2002
(14) Incorporated herein by reference to Exhibit 2.1 filed as
part of the Registrant's Form 8-K dated April 5, 2002
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, 2002
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, 2002
/s/ BRUCE M. BOWEN
----------------------------------------------------
By: Bruce M. Bowen, Director and Executive
Vice President
Date: June 27, 2002
/s/ STEVEN J. MENCARINI
--------------------------------------------
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, Principal Accounting Officer
Date: June 27, 2002
C. THOMAS FAULDERS, III
----------------------------------------------------
By: C. Thomas Faulders, III, Director
Date: June 27, 2002
/s/ LAWRENCE S. HERMAN
-----------------------------------------------------
By: Lawrence S. Herman, Director
Date: June 27, 2002
/s/ THOMAS L. HEWITT
-----------------------------------------------------
By: Thomas L. Hewitt, Director
Date: June 27, 2002
/s/ TERRENCE O'DONNELL
--------------------------------------------
By: Terrence O'Donnell, Director
Date: June 27, 2002
ePlus inc. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 2001 and 2002 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 2000, 2001, and 2002 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 2000, 2001, and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 2001, and 2002 F-6
Notes to Consolidated Financial Statements F-8
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years
Ended March 31, 2000, 2001, and 2002. S-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, 2002 and 2001, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years ended March 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years ended March 31, 2002 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.
DELOITTE & TOUCHE LLP
McLean, Virginia
June 21, 2002
F-2
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2001 As of March 31, 2002
---------------------------------------------------
ASSETS
Cash and cash equivalents $ 24,534,183 $ 28,223,503
Accounts receivable, net of allowance for doubtful
accounts of $1,392,297 and $3,719,207 as of
March 31, 2001 and 2002, respectively 57,627,231 41,397,320
Notes receivable 1,862,488 227,914
Employee advances 66,082 69,042
Inventories 2,651,087 871,857
Investment in leases and leased equipment - net 202,846,207 169,087,078
Property and equipment - net 5,216,123 6,144,061
Deferred tax asset 310,476 5,471,658
Other assets (1) 15,753,599 27,503,121
---------------------------------------------------
TOTAL ASSETS $ 310,867,476 $ 278,995,554
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 9,226,813 $ 3,898,999
Accounts payable - trade 18,925,939 15,104,985
Salaries and commissions payable 1,292,722 491,716
Accrued expenses and other liabilities 21,351,575 19,091,729
Income taxes payable 1,327,591 364,183
Recourse notes payable 8,875,595 4,659,982
Nonrecourse notes payable 157,959,706 129,095,051
---------------------------------------------------
Total Liabilities $ 218,959,941 $ 172,706,645
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; 50,000,000 authorized
9,730,154 and 10,395,870 issued and outstanding
at March 31, 2001 and 2002, respectively $ 97,301 104,619
Additional paid-in capital 56,376,934 62,414,067
Treasury stock, at cost, -0- and 66,100 shares, respectively - (574,800)
Retained earnings 35,433,300 44,345,023
--------------------------------------------------
Total Stockholders' Equity 91,907,535 106,288,909
--------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,867,476 $ 278,995,554
===================================================
(1) Includes amounts due from related parties of $1,020,633 and $853 as of March
31, 2001 and 2002, respectively.
See Notes to Consolidated Financial Statements.
F-3
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
---------------------------------------------
2000 2001 2002
REVENUES
Sales of equipment $166,252,178 $ 216,183,181 $127,753,315
Sales of leased equipment 57,360,366 34,031,381 9,353,088
-------------------------------------------
223,612,544 250,214,562 137,106,403
Lease revenues 31,374,244 42,693,839 48,850,017
Fee and other income 9,747,016 13,677,495 19,028,926
-----------------------------------------
41,121,260 56,371,334 67,878,943
-------------------------------------------
TOTAL REVENUES (1) 264,733,804 306,585,896 204,985,346
-------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 147,209,320 182,473,685 111,598,231
Cost of sales, leased equipment 55,454,033 33,329,403 9,043,932
-------------------------------------------
202,663,353 215,803,088 120,642,163
Direct lease costs 8,025,343 16,534,992 9,578,631
Professional and other fees 2,125,523 3,363,324 2,717,618
Salaries and benefits 19,189,271 30,610,437 32,797,303
General and administrative expenses 7,090,070 10,766,333 12,517,696
Interest and financing costs 11,389,682 15,522,897 11,810,414
-----------------------------------------
47,819,889 76,797,983 69,421,662
------------------------------------------
TOTAL COSTS AND EXPENSES (2) 250,483,242 292,601,071 190,063,825
-------------------------------------------
Earnings before provision for income taxes 14,250,562 13,984,825 14,921,521
-------------------------------------------
Provision for income taxes 5,875,194 5,666,625 6,009,798
------------------------------------------
NET EARNINGS $ 8,375,368 $ 8,318,200 $ 8,911,723
==============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 1.09 $ 0.86 $ 0.87
==============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.91 $ 0.80 $ 0.85
==============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,698,287 9,625,891 10,235,129
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,155,056 10,383,467 10,458,235
(1) Includes amounts from related parties of $28,976,999, $14,923,606 and
$147,305 for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively.
(2) Includes amounts from related parties of $28,261,282, $15,588,046 and
$902,818 for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively.
See Notes to Consolidated Financial Statements.
F-4
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
----------------------- Paid-in Treasury Retained
Shares Par Value Capital Stock Earnings TOTAL
------------------------ ------------- ------------ --------- -------
<<
Balance, April 1, 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
=========== ======== ============= ========= ============ ============
Issuance of shares for option exercise 570 6 (89,668) -- -- (89,662)
Issuance of shares to employees 33,414 334 253,129 -- -- 253,463
Issuance of shares in business combination 697,832 6,978 5,873,672 -- -- 5,880,650
Purchase of Treasury Stock (66,100) -- -- (574,800) -- (574,800)
Net earnings -- -- -- -- 8,911,723 8,911,723
----------- --------- ----------- ---------- ----------- --------------
Balance, March 31, 2002 10,395,870 $104,619 $62,414,067 $(574,800) $44,345,023 $106,288,909
=========== ========= ============ ========== ============ =============
See Notes to Consolidated Financial Statements.
F-5
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-------------------------------------------------
2000 2001 2002
-------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 8,375,368 $ 8,318,200 $ 8,911,723
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,574,165 11,248,760 5,644,713
Provision for credit losses 374,580 1,772,768 1,488,706
Deferred taxes (2,530,071) (1,072,615) (5,161,182)
Loss (Gain) on sale of operating lease equipment (753,787) (333,299) 240,137
Adjustment of basis to fair market value of operating lease
equipment and investments 12,000 1,593,760 1,001,169
Payments from lessees directly to lenders (7,523,540) (6,112,406) (489,962)
Expense related to issuance of warrants 52,500 225,000
Loss on disposal of property and equipment 47,492 14,765 96,148
Changes in:
Accounts receivable (17,839,402) 3,191,633 18,073,079
Notes receivable (1) (494,622) (1,971,904) 1,634,574
Employee advances (48,736) 22,929 6,268
Inventories 6,791,464 (177,422) 1,899,869
Other assets (2) (3,939,783) 8,375,710 (3,747,399)
Accounts payable - equipment 4,926,486 (13,748,732) (5,327,815)
Accounts payable - trade 16,175,112 (9,559,862) (7,513,939)
Salaries and commissions payable, accrued
expenses and other liabilities 7,279,067 8,679,370 (4,405,675)
---------------------------------------------------
Net cash provided by (used in) operating activities 18,478,293 10,466,655 12,350,414
---------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 820,015 922,549
Purchase of operating lease equipment (1,904,985) (2,568,445) (931,556)
Increase in investment in direct financing and sales-type leases (3) (120,118,484) (10,197,101) (27,457,697)
Proceeds from sale of property and equipment - - 3,907
Purchases of property and equipment (1,608,190) (3,840,655) (1,644,879)
Cash used in acquisitions, net of cash acquired (1,845,730) - (3,268,334)
Increase in other assets (4) (219,603) (2,942,046) (373,959)
---------------------------------------------------
Net cash used in investing activities (124,876,977) (18,625,698) (33,672,518)
---------------------------------------------------
F-6
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
----------------------------------------------------------
2000 2001 2002
----------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 126,758,387 $ 90,908,400 $ 81,520,753
Recourse 732,276 325,446 30,381
Repayments:
Nonrecourse (22,234,446) (76,961,083) (51,498,928)
Recourse (1,408,934) (183,515) (604,515)
Purchase of treasury stock - - (574,800)
Proceeds from issuance of capital stock, net of expenses 978,749 307,095 165,816
Proceeds from sale of stock, net of underwriting - 25,936,388 -
Proceeds from (repayments of) lines of credit 15,590,775 (29,549,289) (4,027,283)
-----------------------------------------------------------
Net cash provided by financing activities 120,416,807 10,783,442 25,011,424
-----------------------------------------------------------
Net Increase in Cash and Cash Equivalents 14,018,123 2,624,399 3,689,320
Cash and Cash Equivalents, Beginning of Period 7,891,661 21,909,784 24,534,183
-----------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 21,909,784 $ 24,534,183 $ 28,223,503
===========================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 3,591,943 $ 849,598 $ 1,952,352
===========================================================
Cash paid for income taxes $ 6,473,357 $ 4,559,378 $ 7,164,082
===========================================================
Schedule of Noncash Investing and Financing Activities:
Common stock issued for acquisitions 3,900,426 - 5,880,650
Liabilities assumed in purchase transactions $ 5,295,847 - $ 4,029,331
(1) Includes amounts provided (used by) by related parties of $(466,812),$0 and
$0 for the fiscal years ended March 31, 2000, 2001 and 2002.
(2) Includes amounts provided by (used by) related parties of $(1,383),
$(27,510) and $98,202 for the fiscal years ended March 31, 2000, 2001 and
2002.
(3) Includes amounts provided by related parties of $28,033,282, $14,254,197
and $0 for the fiscal years ended March 31, 2000, 2001 and 2002.
(4) Includes amounts provided by (used by) related parties of $(219,603),
$1,376,246 and $(628,218) for the fiscal years ended March 31, 2000, 2001
and 2002.
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, 2000, 2001, and 2002
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 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, Charlotte, and 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 with Fleet Business Credit Corporation, which provided $27,799,499
of cash at 7.25% and is collateralized by certain CLG, Inc. leases. Concurrent
with the acquisition, CLG, Inc. was merged into MLC Group, Inc., a wholly-owned
subsidiary of ePlus inc.
F-8
On October 4, 2001, the Company purchased all the outstanding stock of SourceOne
Computer Corporation, a technology and services company located in Silicon
Valley. Total consideration paid of $2,807,500 included $800,006 in cash and
274,999 shares of unregistered common stock, valued at $7.30 per share. 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.
Asset Purchases - 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.
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.
On March 29, 2002, the Company purchased certain fixed assets, customer lists,
and contracts, and assumed certain liabilities, relating to Elcom International,
Inc.'s IT fulfillment and IT professional services business. The Elcom purchase
added offices in Boston, San Diego, New Jersey, and New York City. The purchase
price included $2.2 million in cash and the assumption of certain liabilities of
approximately $0.1 million. The Company also obtained in the transaction 300,000
warrants for Elcom (NASD NM: ELCO) common stock for $1.03 per share.
F-9
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, as amended by SFAS No. 140. 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-10
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.
Revenue from sales of procurement software is recognized in accordance with the
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9. We recognize revenue when all the following criteria
exist: when there is persuasive evidence that an arrangement exists, delivery
has occurred, no significant obligations by the Company with regard to
implementation remain, the sales price is determinable and it is probable that
collection will occur. Our accounting policy requires that revenue earned on
software arrangements involving multiple elements be allocated to each element
on the relative fair values of the elements and recognized when earned. Revenue
relative to maintenance and support is recognized ratably over the maintenance
term (usually one year) and revenue allocated to training, implementation or
other services is recognized as the services are performed.
Amounts charged for the Company'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. Fee
and other income results from: (1) income from events that occur after the
initial sale of a financial asset; (2) re-marketing fees; (3) brokerage fees
earned for the placement of financing transactions; and (4) interest and other
miscellaneous income. These revenues are included in fee and other income in our
consolidated statements of earnings.
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 financial statements. There was no effect of implementing SAB 101 on
the consolidated financial statements.
F-11
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 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 applicable, 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-12
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, 2001 and 2002, the Company's reserve for credit losses was $4,279,479
and $6,771,339, respectively.
The Company's reserves for credit losses are segregated between our accounts
receivable and our investment in direct financing leases as follows (in
thousands):
Investment in
Direct
Accounts Financing
Receivable Leases Total
---------- ---------- --------
Balance April 1, 2000 $ 811 $ 1,848 $ 2,659
Bad Debts Expense 950 1,039 1,989
Recoveries (369) - (369)
Assumed in Acquisitions - - -
Other - - -
--------------------------------------
Balance March 31, 2001 $ 1,392 $ 2,887 $ 4,279
=====================================
Bad Debts Expense 1,324 165 1,489
Recoveries (184) - (184)
Assumed in Acquistions 73 - 73
Other 1,114 - 1,114
--------------------------------------
Balance March 31, 2002 $ 3,719 $ 3,052 $ 6,771
Cash and Cash Equivalents - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less. Cash
and cash equivalents includes $1,945,837 of restricted cash that is held as
collateral for the Deutsche Financial Services Corporation floor planning
facility.
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.
F-13
Investments - The Company had a 5% membership interest in MLC/CLC LLC, a joint
venture to which the Company sold leased equipment. MLC/CLC LLC stopped
purchasing leased equipment prior to the year ending March 31, 2002. Other
assets reflects the Company's investment in MLC/CLC LLC of $628,218 and $0 as of
March 31, 2001 and 2002, respectively, accounted for using the cost method. The
Company recorded an impairment of $1,085,000 and $628,218 recognized during the
years ended March 31, 2001 and 2002 on this investment. Also included in other
assets was an investment of $420,711 and $0 as of March 31, 2001 and 2002,
respectively. The Company wrote off this investment in 2002 as the underlying
equity in the start-up venture did not support the carrying amount of the
Company's investment.
Capitalization of Software Costs for Internal Use - The Company has capitalized
certain costs for the development of internal use software under the guidelines
of Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Approximately, $1.1 million and
$0.7 million of internal use software was capitalized during the years ended
March 31, 2002 and 2001, respectively which is included in the accompanying
consolidated balance sheet as a component of property and equipment.
Capitalization of Software Costs Available to Customers - In accordance with
SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, software development costs are expensed as incurred until
technological feasibility has been established, at such time such costs are
capitalized until the product is made available for release to customers. No
development costs have been capitalized for the years ended March 31, 2002 or
2001 relative to software costs available to customers.
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
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.
F-14
Reclassifications - Certain items have been reclassified in the March 31, 2000
and 2001 financial statements to conform to the March 31, 2002 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
7,698,287 in fiscal 2000, 9,625,891 in 2001, and 10,235,129 in 2002. Diluted EPS
amounts were calculated based on weighted average shares outstanding and common
stock equivalents of 9,155,056 in fiscal 2000, 10,383,467 in 2001, and
10,485,235 in 2002. 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 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.
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.
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 March 31, 2002, the Company had
repurchased 66,100 shares of its outstanding common stock at an average cost of
$8.70 per share for a total of $574,800. Subsequent to year-end and as of June
21, 2002, we repurchased an additional 40,000 shares at an average price of
$8.68 for total of $347,000.
F-15
Recent 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.
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.
F-16
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 March 31, 2002, the Company had goodwill, net of accumulated amortization,
of $22.1 million which was subject to the transitional assessment provisions of
SFAS No. 142. Amortization expense related to goodwill was $692,161 and 268,385,
before income taxes, for the years ended March 31, 2001 and March 31, 2000,
respectively. No goodwill amortization expense was recognized during the year
ended March 31, 2002.
Changes in the carrying amount of goodwill for the year ended March 31, 2002 are
as follows:
Financing Technology
Business Sales Business
Unit Unit Total
Goodwill (net), April 1, 2001 $ 6,994,679 $ 6,002,164 $12,996,843
Goodwill acquired during the period -- 9,086,465 9,086,465
Impairment losses during the period -- -- --
____________________________________________
Goodwill (net), March 31, 2002 $ 6,994,679 $15,088,629 $22,083,308
============================================
F-17
The following pro forma information presents the Company's net income, as
adjusted for the elimination of goodwill as set forth in SFAS No. 142:
For the Year Ended March 31,
2000 2001 2002
----------- ---------- ----------
Net income, as reported $ 8,375,368 $ 8,318,200 $ 8,911,723
Amortization of goodwill, net of taxes 161,031 415,297 --
____________________________________________
Pro forma net income $ 8,536,399 $ 8,733,497 $ 8,911,723
============================================
Pro forma net income per share, basis $ 1.11 $ .91 $ .87
============================================
Pro forma net income per share, diluted $ .93 $ .84 $ .85
============================================
2. INVESTMENT IN LEASES AND LEASED EQUIPMENT - NET
Investment in leases and leased equipment - net consists of the following:
As of March 31,
2001 2002
(In Thousands)
-------------------------
Investment in direct financing and sales-type leases - net $ 198,563 $ 167,628
Investment in operating lease equipment - net 4,283 1,459
-------------------------
$ 202,846 $ 169,087
=========================
F-18
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,
2001 2002
(In Thousands)
--------------------------------
Minimum lease payments $ 191,792 161,788
Estimated unguaranteed residual value 29,231 25,880
Initial direct costs, net of amortization (1) 3,531 3,424
Less: Unearned lease income (23,104) (20,412)
Reserve for credit losses (2,887) (3,052)
---------------- ---------------
---------------- ---------------
Investment in direct finance and sales
type leases, net $ 198,563 $ 167,628
================ ===============
(1) Initial direct costs are shown net of amortization of $5,014 and
$5,486 at March 31, 2001 and 2002, respectively.
Future scheduled minimum lease rental payments as of March 31, 2002 are as
follows:
(In Thousands)
Year ending March 31, 2003 $ 96,309
2004 $ 47,628
2005 $ 12,401
2006 $ 2,885
2007 and thereafter $ 2,565
----------------------
$ 161,788
======================
The Company's net investment in direct financing and sales-type leases is
collateral for non-recourse and recourse equipment notes. See Note 4.
F-19
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,
2001 2002
(In Thousands)
---------------------------------
Cost of equipment under operating leases $ 20,589 $ 13,916
Initial direct costs 15 14
Less: Accumulated depreciation and
Amortization (16,321) (12,471)
---------------- ----------------
---------------- ----------------
Investment in operating lease equipment, net $ 4,283 $ 1,459
================ ================
Future scheduled minimum lease rental payments as of March 31, 2002 are as
follows:
(In Thousands)
---------------------------
Year Ending March 31, 2003 $ 1,298
2004 247
2005 2
---------------------------
$ 1,547
==========================
F-20
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of March 31,
2001 2002
(In Thousands)
----------------------------------
Furniture, fixtures and equipment $ 4,580 $ 5,315
Vehicles 139 121
Capitalized software 3,603 5,638
Leasehold improvements 228 288
Less: Accumulated depreciation and
amortization (3,334) (5,218)
Property and equipment, net $ 5,216 $ 6,144
================= ================
4. RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse and non-recourse obligations consist of the following:
As of March 31,
2001 2002
(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 2001 and 2002 $479 $498
Recourse line of credit with a maximum
balance of $35,000,000 bearing interest
at the LIBOR rate plus 150 basis points
or thirty day draws, or, at the Company's
option, prime for overnight draws expiring
April, 2004; 4.75% interest rate effective
on balance as of March 31, 2002 5,000 1,000
Recourse line of credit with a maximum
balance of $33,000,000 bearing interest
at prime less .5% 113 0
Recourse equipment notes with varying
interest rates ranging from 7.13% to
8.25%, secured by related investment
in equipment 220 98
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 $8,876 $4,660
======================================
F-21
Non-recourse equipment notes secured
by related investments in leases with
interest rates ranging from 5.14% to
14.00% in fiscal year 2001 and from
3.04% to 13.5% in fisal year 2002 $157,960 $129,095
======================================
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, 2002, mature as follows:
Recourse Notes Non-recourse Notes
Payable Payable
(In Thousands)
----------------------------------
Year ending March 31,2003 $1,332 $56,294
2004 264 50,595
2005 - 16,477
2006 - 3,388
2007 and thereafter 3,064 2,341
-----------------------------------
$4,660 $129,095
===================================
F-22
5. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees, the balances of which
amounted to $66,082 and $69,042 as of March 31, 2001 and 2002, 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, 2001 and 2002, the Company's other assets includes $97,349
payable to and $853 receivable from United Federal Leasing, respectively, which
is owned in part by an individual related to a Company executive.
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, 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 11% and 5% of the Company's revenues,
respectively. MLC/CLC LLC stopped purchasing leased equipment prior to the year
ending March 31, 2002. Revenue recognized from the sales for the years ended
March 31, 2000 and 2001 was $28,666,120 and $14,654,844, respectively. The basis
for the equipment sold was $28,033,282 and $14,254,197, respectively. Notes
receivable as of March 31, 2000 included $169,261 due from the joint venture.
Other assets reflects the investment in the joint venture of $1,608,669,
$628,218 and $0 as of March 31, 2000, 2001, and 2002 respectively, accounted for
using the cost method, and reflects an impairment of $1,085,000 and $628,218
recognized during the years ended March 31, 2001 and 2002. The Company received
an origination fee on leased equipment sold to the joint venture. In addition,
the Company recognized $310,879, $268,762, and $147,305 for the years ended
March 31, 2000, 2001 and 2002 for accounting and administrative services
provided to MLC/CLC LLC.
The Company leases certain office space from entities that are owned, in part,
by executives the Company and of subsidiaries of the Company. During the years
ended March 31, 2000, 2001, and 2002, rent expense paid to these related parties
was $228,000, $248,849, and $274,600, respectively.
F-23
6. 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 $799,384,
$1,222,389, and $1,984,833 for the years ended March 31, 2000, 2001, and 2002,
respectively. As of March 31, 2002, the future minimum lease payments are due as
follows:
(In Thousands)
-------------------------
Year Ending March 31, 2003 $ 1,507
2004 1,041
2005 501
2006 51
-------------------------
$ 3,100
=========================
7. 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,
2000 2001 2002
(In Thousands)
--------------------------------
Statutory federal income tax rate 34% 34% 34%
Income tax expense computed at the statutory
federal rate $ 4,845 $ 4,755 $ 5,073
State income tax expense, net of federal tax 547 678 939
Non-taxable interest income (21) (15) (9)
Non-deductible expenses 504 249 7
--------------------------------
Provision for income taxes $ 5,875 $ 5,667 6,010
================================
Effective income tax rate 41.23% 40.52% 40.28%
================================
F-24
The components of the provision for income taxes are as follows:
For the Year Ended March 31,
2000 2001 2002
(In Thousands)
----------------------------------------------
Current:
Federal $ 7,126 $ 5,237 $ 8,836
State 1,278 1,502 2,335
--------------- -------------- ---------------
8,404 6,739 11,171
--------------- -------------- ---------------
Deferred:
Federal $ (2,080) $ (762) $ (4,249)
State (449) (310) (912)
--------------- -------------- ---------------
(2,529) (1,072) (5,161)
--------------- -------------- ---------------
$ 5,875 $ 5,667 $ 6,010
=============== ============== ===============
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
For the Year Ended March 31,
2000 2001 2002
(In Thousands)
-------------------------------------------
Alternative minimum tax $ (161) $ 1,701 $ -
Lease revenue recognition (1,681) (198) (3,639)
Other (687) (2,575) (1,522)
------------ -------------- ---------------
$ (2,529) $ (1,072) $ (5,161)
============ ============== ===============
F-25
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,
2000 2001 2002
(In Thousands)
----------------------------------
Alternative minimum tax $ 1,701 $ 0 $ -
Lease revenue recognition (3,039) (2,841) 798
Allowance for doubtful accounts
and credit reserves 314 2,377 3,890
Other 262 774 784
---------- ------------ -------------
---------- ------------ -------------
$ (762) $ 310 $ 5,472
========== ============ ==============
8. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and non-recourse notes payable
(Note 4) associated with its direct finance and operating lease activities from
payments made directly by customers to third-party lenders amounting to
$28,739,422, $33,004,241 and $13,431,543 for the years ended March 31, 2000,
2001, and 2002, 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 $22,727,174, $5,828,340 and $6,255,282 for the
years ended March 31, 2000, 2001, and 2002, respectively.
9. 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
$88,500, $370,082 and $(241,017) for the years ended March 31, 2000, 2001 and
2002, respectively. The negative expense in the current fiscal year represents
the reduction in current and prior year accruals for discretionary employer
contributions.
F-26
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,
2002 a total of 2,475,770 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
1,966,500 options are outstanding or have been exercised as of
March 31, 2002;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under
which 260,000 options are outstanding as of March 31, 2002;
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 53,707 are outstanding or have been exercised as of
March 31, 2002;
d) the Employee Stock Purchase Plan ("ESPP") under which 105,483
shares have been issued as of March 31, 2002.
F-27
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, 2000, 2001 and 2002 was
$5.50, $9.86 and $5.14 per share, respectively.
A summary of stock option activity during the three years ended March 31, 2002
is as follows:
Number of Exercise Price Weighted Average
Shares Range Exercise Price
------------- ------------------- ----------------
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
==============
Outstanding, April 1, 2001 1,716,285 - -
Options granted 728,150 $6.24 - $8.65 $ 6.83
Options exercised (570) $9.00 $ 9.00
Options forfeited (263,280) $6.24 - $17.38 $ 8.43
-----------
Outstanding, March 31, 2002 2,180,585
=============
Exercisable, March 31, 2002 1,249,245
=============
F-28
Additional information regarding options outstanding as of March 31, 2002 is as
follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ----------------------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Number Contractual Life Exercise Price Number Exercisable Exercise Price
Outstanding
- ----------------------- --------------------- -------------------- --------------------- --------------------
2,180,585 7.6 years $9.20 1,249,245 $9.20
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of either
(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 2000:
F-29
Year Ended March 31,
2000 2001 2002
Net earnings, as reported $ 8,375,368 $ 8,318,200 $ 8,911,722
Net earnings, pro forma $ 6,861,442 $ 5,877,713 $ 5,786,235
Basic earnings per share, as reported $ 1.09 $ 0.86 $ 0.87
Basic earnings per share, pro forma $ 0.89 $ 0.61 $ 0.57
Diluted earnings per share, as reported $ 0.91 $ 0.80 $ 0.85
Diluted earnings per share, pro forma $ 0.75 $ 0.57 $ 0.55
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,
2000 2001 2002
----------------------------------------
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 80.67% 97.87% 92.44%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.95% 5.52% 4.13%
F-30
10. 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 Company determines the fair value of notes payable by applying an
average portfolio debt rate and applying such rate to the future cash flows of
the respective financial instruments. The fair value of cash and cash
equivalents is determined to equal the book value.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
As of March 31, 2001 As of March 31, 2002
Carrying Fair Value Carrying Fair Value
Amount Amount
(In Thousands)
--------------------------------------------------------
Assets:
Cash and cash equivalents $24,534 $24,534 $28,224 $28,224
Liabilities:
Non-recourse notes payable 157,960 157,756 129,095 128,181
Recourse notes payable 8,876 8,876 4,660 4,660
F-31
11. 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.
F-32
12. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its traditional
financing business unit and technology sales business unit. The financing
business unit offers lease-financing solutions to corporations and governmental
entities nationwide. The technology sales business unit sells information
technology equipment and software and related services primarily to corporate
customers on a nationwide basis. The technology sales business unit also
provides Internet-based business-to-business supply chain management solutions
for information technology and other operating resources. The Company evaluates
segment performance on the basis of segment net earnings.
Both segments utilize the Company's proprietary software and services throughout
the organization. Sales and services and related costs of e-procurement software
are included in the technology sales business unit. Fees and other income
relative to services generated by our proprietary software and services are
included in the financing business unit.
The accounting policies of the 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.
The Company changed reporting segments during the year ended March 31, 2002. All
prior year balances have been reclassified to conform to the new reporting
segments.
F-33
Technology
Financing Sales
Business Business
Unit Unit Total
--------------------------------------------------------------------------------
(In Thousands)
Twelve months ended March 31, 2000
Sales of equipment $ 2,103,603 $ 164,148,575 $ 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 2,731,689 7,015,329 9,747,018
--------------------------------------------------------------------------------
Total Revenues 93,569,902 171,163,904 264,733,806
Cost of sales 56,796,063 145,867,290 202,663,353
Direct lease costs 8,025,342 - 8,025,342
Selling, general and administrative
expenses 11,795,632 16,609,231 28,404,863
--------------------------------------------------------------------------------
Segment earnings 16,952,865 8,687,383 25,640,248
Interest expense 11,016,120 373,562 11,389,682
--------------------------------------------------------------------------------
Earnings before income taxes 5,936,745 8,313,821 14,250,566
================================================================================
Assets $ 295,690,609 $ 49,644,139 $ 345,334,748
Twelve months ended March 31, 2001
Sales of equipment $ 777,780 $ 215,405,401 $ 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 7,196,836 6,480,659 13,677,495
--------------------------------------------------------------------------------
Total Revenues 84,699,836 221,886,060 306,585,896
Cost of sales 34,411,304 181,391,784 215,803,088
Direct lease costs 16,534,992 - 16,534,992
Selling, general and administrative
expenses 20,772,486 23,967,608 44,740,094
--------------------------------------------------------------------------------
Segment earnings 12,981,054 16,526,668 29,507,722
Interest expense 15,242,395 280,502 15,522,897
--------------------------------------------------------------------------------
(Loss) earnings before income taxes (2,261,341) 16,246,166 13,984,825
================================================================================
Assets $ 258,119,292 $ 52,746,068 $ 310,865,360
Twelve months ended March 31, 2002
Sales of equipment $ 1,057,862 $ 126,695,453 $ 127,753,315
Sales of leased equipment 9,353,088 - 9,353,088
Lease revenues 48,850,017 - 48,850,017
Fee and other income 10,085,448 8,943,478 19,028,926
--------------------------------------------------------------------------------
Total Revenues 69,346,415 135,638,931 204,985,346
Cost of sales 11,872,337 108,769,826 120,642,163
Direct lease costs 9,578,631 - 9,578,631
Selling, general and administrative
expenses 22,500,221 25,532,396 48,032,617
--------------------------------------------------------------------------------
Segment earnings 25,395,226 1,336,709 26,731,935
Interest expense 11,156,721 653,693 11,810,414
--------------------------------------------------------------------------------
(Loss) earnings before income taxes 14,238,505 683,016 14,921,521
================================================================================
Assets $ 228,505,936 $ 50,489,618 $ 278,995,554
F-34
13. 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, 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
=========================================== ========================================
Year Ended March 31, 2002
Sales $ 36,906 $ - $ 36,906 $ 30,667 $ - $ 30,667
Total Revenues 53,293 - 53,293 47,146 - 47,146
Cost of Sales 31,779 - 31,779 25,846 - 25,846
Total Costs and Expenses 49,728 - 49,728 43,481 - 43,481
Earnings before provision for income taxes 3,565 - 3,565 3,665 - 3,665
Provision for income taxes 1,426 - 1,426 1,466 - 1,466
Net earnings 2,139 - 2,139 2,199 - 2,199
=========================================== ========================================
Net earnings per common share-Basic (1) $ 0.22 $ 0.22 $ 0.22 $ 0.22
=========================================== ========================================
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
------------------------------------------------ ------------------------------------
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 1,386 - 1,386
Net earnings 1,729 - 1,729 2,082 - 2,082
========================================= ==========================================
Net earnings per common share-Basic (1) $ 0.18 $ 0.18 $ 0.21 $ 0.21
========================================= ==========================================
Year Ended March 31, 2002
Sales $ 39,716 $ - $ 39,716 $ 29,644 $ - $ 29,644
Total Revenues 55,812 - 55,812 48,734 - 48,734
Cost of Sales 35,444 - 35,444 26,633 - 26,633
Total Costs and Expenses 52,251 - 52,251 44,604 - 44,604
Earnings before provision for income taxes 3,561 - 3,561 4,130 - 4,130
Provision for income taxes 1,424 - 1,424 1,693 - 1,693
Net earnings 2,137 - 2,137 2,437 - 2,437
========================================= ==========================================
Net earnings per common share-Basic (1) $ 0.20 $ 0.20 $ 0.23 $ 0.23
========================================= ==========================================
(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-35
SCHEDULE II
ePlus inc. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 2000, 2001, and 2002
(In Thousands)
Column C -
Additions
Column B (1) (2) Column E
Balance at Charged Charged Balance at
beginning to costs to other end of
of period and accounts Column D period
expenses Deductions
Column A - Description
2002 Allowance for doubtful
accounts and credit loss $4,279 $1,489 $1,187 $184 $6,771
2001 Allowance for doubtful
accounts and credit loss $2,659 $1,989 $0 $369 $4,279
2000 Allowance for doubtful
accounts and credit losses $728 $733 $1,731 $533 $2,659
S-1
Exhibit 21.1
Subsidiaries of the Company
- - ---------------------------
ePlus Group, inc., a Commonwealth of Virginia corporation, a wholly owned
subsidiary
ePlus Technology of NC, inc., a State of Delaware corporation, a wholly owned
subsidiary
ePlus Technology of PA, inc., a Commonwealth of Pennsylvania corporation, a
wholly owned subsidiary
ePlus Technology, inc., a Commonwealth of Virginia corporation, a wholly owned
subsidiary
ePlus Government, inc., a Commonwealth of Virginia corporation, a wholly owned
subsidiary
ePlus Capital, inc., a State of Delaware corporation, a wholly owned subsidiary
ePlus Content Services, inc., a Virginia corporation, a wholly owned subsidiary
ePlus Systems, inc., a Virginia corporation, a wholly owned subsidiary
ePlus Canada Company, registered in Canada, a wholly-owned subsidiary of ePlus
Capital, inc.
MLC Leasing, SA. de CV., registered in Mexico, a subsidiary wholly owned by
ePlus Group, inc. and ePlus Technology of NC, inc.
S-2