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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-28926
ePlus inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Herndon Parkway, Herndon, VA 20170
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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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ____ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_____] No [X]
The aggregate market value of the common stock held by non-affiliates of the
Company, computed by reference to the closing price at which the stock was sold
as of September 30, 2002 was $39,724,458. The number of shares of common stock
of the Company outstanding as of June 20, 2003, was 9,458,201.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the indicated parts
of this Form 10-K:
Document Part
- --------------------------------------------------------------------------------
Portions of the Company's definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120
days after the Company's fiscal year end. Part III
-2-
CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS
- ----------------------------------------------------
Certain statements contained in this Form 10-K, other periodic reports filed by
the Company under the Securities Exchange Act of 1934, as amended, and any other
written or oral statements made by or on behalf of the Company 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 a 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 ePlus Enterprise Cost Management ("eECM") 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 eECM 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 eECM 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 offerings 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 eECM 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 eECM 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
eECM, 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 eECM services.
-3-
The words "believe," "expect," "anticipate," "project," and similar expressions
signify forward-looking statements. Readers are cautioned not to place undue
reliance on any forward-looking statements made by or on behalf of the Company.
Any such statement speaks only as of the date the statement was made. The
Company undertakes no obligation to update or revise any forward-looking
statements.
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 inc. 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, inc.;
o ePlus Government, inc.;
o ePlus Canada Company;
o ePlus Capital, inc.;
o ePlus Systems, inc.; and
o ePlus Content Services, inc.
On March 31, 2003, the former entities ePlus Technology of PA, inc. and ePlus
Technology of NC, inc. were merged into ePlus Technology, inc. This combination
created one national entity through which our information technology ("IT")
reseller and technical support will conduct business. ePlus Systems, inc. and
ePlus Content Services, inc. were incorporated on May 15, 2001 and are the
entities that hold certain assets and liabilities originally 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. 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 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, 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.
-4-
ACQUISITIONS
The Company has acquired the following material entities or assets since 1997.
The following is a summary of the acquisitions presented in chronological order.
Major
Business Accounting
Date Acquired Acquisition Locations Method Consideration
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 San Diego, CA certain liabilities
IT fulfillment and and New York, NY
professional service
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
included in ePlus
Technology, inc.)
July 24, 1997 Compuventures of Pitt Wilmington, Pooling of 260,978 shares of common
County, Inc. (now Greenville, and Interests stock valued at $3,384,564
included in ePlus Raleigh, NC
Technology, inc.)
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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. Our current offerings 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 is positioned to provide a comprehensive
offering of products and services to our target of 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 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 44,000
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.
-6-
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 by providing a
comprehensive offering to customers. Our target customers are primarily
middle-market and larger companies in the United States of America and Canada,
with annual revenues between $25 million and $1 billion. 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.
BUSINESS SEGMENTS
See "Note 14 - 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
professional services. The purchase and sale of these goods comprise a large
portion of business-to-business transactions.
-7-
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 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'
businesses 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.
-8-
Expand our sales force and marketing activities
We currently have approximately 190 people in our sales and marketing function,
which represents a small increase compared to the previous year of 186. We have
expanded our presence in locations that have a high concentration of
fast-growing middle and large market companies. We will continue to seek
experienced sales 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 customers' needs. 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 ("eECM")
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 eECM 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.
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 fee arrangement.
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.
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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 250,000 pattern matching rules and 44,000 product
classifications 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-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
enterprise resource planning and accounting systems.
-10-
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 enterprise resource planning 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;
-11-
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 lease financing
of various types of products on terms previously negotiated by a customer while
automating the accumulation of product data to assist in the financing process.
ePlus Leasing allows customers to order products when desired and to aggregate a
substantial number of orders onto one or more lease financing transactions at
the end of a pre-determined order period (usually one to three months).
Transactions can then be invoiced by location, division, or business unit, as
desired by the customer.
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 enterprise resource
planning 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.
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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.
-13-
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 enterprise resource planning 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 earlier stages of our eECM development, 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.
-14-
SALES AND MARKETING
We focus our marketing efforts on achieving lead generation and converting our
existing customer base to our eECM solution. The target market for our customer
base is primarily middle and large market companies with annual revenues between
$25 million and $1 billion. We believe there are over 60,000 customers in our
target market. Our sales representatives are compensated based on primarily a
commission basis and 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.
Our sales force is organized regionally in 30 office locations throughout the
United States. See "Item 2. PROPERTIES" for additional office location
information. As of June 20, 2003 our sales organization included approximately
190 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 four patents, three in the United States and one in nine
countries in Europe, each regarding our electronic sourcing and catalog
searching. 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 registered trademarks: ePlus,
ePlusSuite, Procure+, Manage+, Service+, Finance+, ICN and International
Computer Networks. We have applied for the following trademarks: neSource,
Content+, eECM, ePlus Enterprise Cost Management and The Language of eCommerce.
We also have ten registered copyrights and have additional common law
trademarks.
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.
-15-
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 various 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 government
contracts. Substantially all of our lease transactions are net leases with a
specified non-cancelable lease term. These non-cancelable leases have a
provision which requires the lessee to make all lease payments 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. We lease primarily computers, associated accessories and
software, communication related equipment, medical equipment, industrial related
machinery and equipment, office furniture and general office equipment,
transportation equipment, and other various business related equipment.
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 Tech Data, HP, 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. Using the
distribution systems available, we usually sell products that are shipped from
the distributors or suppliers directly to our customer location that allows us
to keep our inventory of any product to a minimum. The products we sell
typically have payment account terms ranging from due upon delivery up to 60
days to pay depending on the customer's credit and payment 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 year ended March 31, 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 5% of the Company's revenues. No sales
transactions occurred in the years ended March 31, 2002 and 2003 with this
entity. See "ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS, FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES."
-16-
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 estimate that there are over 40
non-recourse financing sources available that we could use for supplying
non-recourse financing.
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, 2003, we
provided for $616,074 in credit losses and incurred actual credit losses of
$494,247. During the fiscal year ended March 31, 2002 we provided for $1,488,706
in credit losses and incurred actual credit losses of $183,618.
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 and bank leasing subsidiaries as well as captive
finance companies. 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.
The procurement software and electronic commerce market is in a constant state
of change due to overall market acceptance and economic conditions. 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 enterprise resource
planning system vendors and other major software vendors which are expected to
sell their procurement and asset management products along with their
application suites. These enterprise resource planning 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.
-17-
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 eECM that consists of
Procure+, Manage+, Content+, ePlus Leasing, strategic sourcing and business
process outsourcing.
EMPLOYEES
As of March 31, 2003 we employed 570 full-time and part-time employees who
operated through approximately 30 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 190
Technical Support 155
Contractual 59
Accounting and Finance 66
Administrative 52
Software and Implementations 39
Executive 9
U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS The Company's Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
all amendments to those reports, filed with or furnished to the U.S. Securities
and Exchange Commission, are available free of charge through the Company's
internet website, www.eplus.com, as soon as reasonably practical after the
Company has electronically filed such material with, or furnished it to, the
SEC.
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 has had a limited operating history. Although we have been in
the business of financing and selling information technology equipment since
1990, we will encounter some of the challenges, risks, difficulties and
uncertainties frequently encountered by early-stage companies using new business
models in evolving markets. Some of these challenges relate to our ability to:
o increase the total number of users of our 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.
-18-
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
evolving. 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 errors considered by us to be
minor may 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.
-19-
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 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 fluctuates
depending on market conditions and we might not be able to hire or 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 and
contractual provisions with our subcontractors 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.
-20-
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 a slightly 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. 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.
Our lease portfolio has recently expanded to new types of equipment under lease
of which we may not experience the same residual realization economics.
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.
-21-
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 lower sales of equipment, reductions in realized residual
values, and lower overall leasing activity. In the event our revenues or
earnings are less than the level expected by 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 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 30 office locations. Our total leased square footage
is approximately 108,000 square feet for which we pay rent of approximately
$157,101 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 number of current employees as of March 31, 2003, the square
footage and the general office functions.
-22-
Square
Location Company Employees Footage Function
- ---------------------- ---------------------- ---------------- --------------- -------------------------------------
Herndon, VA ePlus Group, inc. 231 35,149 Corporate and subsidiary
(2 locations) ePlus Technologs,inc. headquarters, sales office,
ePlus Government, inc. technical support and warehouse
Robbinsville, NJ ePlus Technology, inc. 32 9,563 Sales office and technical support
Pottstown, PA ePlus Technology, inc. 52 17,100 Sales office, technical support and
(2 locations) warehouse
Campbell, CA ePlus Technology inc. 36 5,974 Sales office, technical support and
warehouse
Wilmington, NC ePlus Technology, inc. 33 5,941 Sales office and technical support
Raleigh, NC ePlus Group, inc. 23 8,638 Sales office-shared and technical
ePlus Technology, inc. support
Avon, CT ePlus Systems, inc. 15 4,807 Subsidiary headquarters, sales
office and technical development
Houston, TX ePlus Content 18 4,000 Subsidiary headquarters, sales
Services, inc. office and e-commerce catalog
service center
Canton, MA ePlus Technology, inc. 27 6,358 Sales office and technical support
Other locations 103 9,981 Sales offices and technical support
The two largest locations, Herndon, VA and Pottstown, PA, have lease expiration
dates of November 30, 2004 and May 31, 2005, respectively.
ITEM 3. LEGAL PROCEEDINGS
On November 22, 2002, an affiliate of one of ePlus' lenders filed a complaint
against ePlus inc., as successor in interest to CLG, Inc. in the Supreme Court
of the State of New York. ePlus acquired CLG in September 1999. In the
complaint, the lender alleges that CLG misrepresented that it had good title to
certain assets that it had leased to a customer and financed on a non-recourse
basis with the lender. The customer subsequently defaulted on its payments and
then filed for bankruptcy in Delaware. The bankruptcy court found that title to
the financed assets had passed to the customer and that CLG was simply a lien
holder. The lender is seeking approximately $2.6 million in damages, plus
interest, late charges and attorney fees. ePlus has removed the case to the
United States District Court for the Southern District of New York. Although,
the ultimate outcome and liability, if any, cannot be determined, the Company
believes that it has meritorious defenses in connection with the lawsuit and
intends to vigorously contest it. In the opinion of management, resolution of
this lawsuit is not expected to have a material adverse effect on the financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-23-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is quoted on the NASDAQ National Market System under the symbol
"PLUS." The following table sets forth the range of high and low sale prices for
our common stock as quoted for the period April 1, 2001 through March 31, 2003,
by quarter.
Quarter Ended High Low
- ------------- ---- ---
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
June 30, 2002 $10.35 $6.91
September 30, 2002 $ 8.00 $5.57
December 31, 2002 $ 7.90 $6.04
March 31, 2003 $ 7.70 $6.91
On June 20, 2003 the closing price of the common stock was $10.36 per share. On
June 20, 2003, there were 221 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 credit facility restricts
dividends to 50% of net income accumulated after September 30, 2000. Therefore,
the payment of cash dividends on our 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, 2001, 2002 AND
2003" AND "ITEM 1, BUSINESS."
-24-
ePlus, inc. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share
data)
Year Ended March 31,
------------------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Sales of equipment $ 83,516 $ 166,252 $ 216,183 $ 127,753 $ 219,209
Sales of leased equipment 84,379 57,360 34,031 9,353 6,096
Lease revenues 20,611 31,374 42,694 48,850 50,520
Fee and other income 5,464 9,747 13,678 19,029 23,821
------------------------------------------------------------------
Total revenues 193,970 264,733 306,586 204,985 299,646
------------------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 71,367 147,209 182,474 111,598 197,788
Cost of sales of leased equipment 83,269 55,454 33,329 9,044 5,892
Direct lease costs 6,184 8,025 16,535 9,579 6,582
Professional and other costs 1,222 2,126 3,363 2,718 3,188
Salaries and benefits 11,880 19,189 30,611 32,797 46,182
General and administrative expenses 5,152 7,090 10,766 12,517 15,234
Interest and financing costs 3,601 11,390 15,523 11,810 8,308
Total costs and expenses 182,675 250,483 292,601 190,063 283,174
------------------------------------------------------------------
Earnings before provision for income taxes 11,295 14,250 13,985 14,922 16,472
Provision for income taxes 4,579 5,875 5,667 6,010 6,760
------------------------------------------------------------------
Net earnings $ 6,716 $ 8,375 $ 8,318 $ 8,912 $ 9,712
==================================================================
Net earnings per common share - Basic $ 0.99 $ 1.09 $ 0.86 $ 0.87 $ 0.97
==================================================================
Weighted average shares outstanding - Basic 6,769,732 7,698,287 9,625,891 10,235,129 10,061,088
-25-
ePlus, inc. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share
data)
As of March 31,
----------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and cash equivalents $ 7,892 $ 21,910 $ 24,534 $ 28,224 $ 27,784
Accounts receivable 44,090 60,167 57,627 41,397 38,385
Notes receivable 547 1,195 1,862 228 53
Inventories 658 2,445 2,651 872 1,373
Investment in leases and leased
equipment, net 86,901 231,999 202,846 169,087 182,169
Other assets 12,357 24,628 15,754 27,503 23,928
All other assets 1,914 2,991 5,593 11,685 5,249
----------------------------------------------------------
Total assets $ 154,359 $ 345,335 $ 310,867 $ 278,996 $ 278,941
==========================================================
Liabilities:
Accounts payable - equipment $ 18,049 $ 22,976 $ 9,227 $ 3,899 $ 5,636
Accounts payable - trade 12,518 29,452 18,926 15,105 25,914
Salaries and commissions payable 536 957 1,293 492 620
Recourse notes payable 19,081 39,017 8,876 4,660 2,736
Nonrecourse notes payable 52,429 182,845 157,960 129,095 115,678
All other liabilities 7,932 12,967 22,678 19,456 18,740
----------------------------------------------------------
Total liabilities 110,545 288,214 218,960 172,707 169,324
Stockholders' equity 43,814 57,121 91,907 106,289 109,617
----------------------------------------------------------
Total liabilities and stockholders' equity $ 154,359 $ 345,335 $ 310,867 $ 278,996 $ 278,941
==========================================================
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, 2001, 2002 AND 2003
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.
-26-
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 our ePlus Enterprise Cost Management model which
represents the continued evolution of our original implementation of ePlus
e-commerce products entitled ePlusSuite. The expansion to our eECM model is a
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 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.
CRITICAL 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 critical to our business are discussed below.
We classify our lease transactions, as required by Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," as: (1) direct financing;
(2) sales-type; or (3) operating leases. Revenues and expenses between
accounting periods for each lease term will vary depending upon the lease
classification.
For financial statement purposes, we present revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
DIRECT FINANCING AND SALES-TYPE LEASES. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectability of lease payments are
reasonably certain and it meets one of the following criteria: (1) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (2) the lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (4) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at the inception of the
lease.
-27-
Direct financing leases are recorded as investment in direct financing leases
upon acceptance of the equipment by the customer. At the commencement 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 sales business unit subsidiaries, the dealer margin is
presented in equipment sales revenue and cost of equipment sales. Interest
earned on the present value of the lease payments and residual value is
recognized over the lease term using the interest method and is included in 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 lease equipment and is depreciated on
a straight-line basis over the lease term to our estimate of residual value.
Revenue, depreciation expense and the resulting profit for operating leases are
recorded on a straight-line basis over the life of the lease.
As a result of these three classifications of leases for accounting purposes,
the revenues resulting from the "mix" of lease classifications during an
accounting period will affect the profit margin percentage for such period and
such profit margin percentage generally increases as revenues from direct
financing and sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
RESIDUAL VALUES. Residual values represent our estimated value of the equipment
at the end of the initial lease term. The residual values for direct financing
and sales-type leases are reported as part of the 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
reported in the investment in operating lease equipment. The estimated residual
values will vary, both in amount and as a percentage of the original equipment
cost, and depend upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
We evaluate residual values on an ongoing basis and record any required changes
in accordance with SFAS No. 13. Residual values are affected by equipment supply
and demand and by new product announcements 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 on the secondary market; or (3) lease of the equipment to a new
customer. 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. For lease transactions subsequent to the
initial term, our policy is to recognize revenues upon the payment by the
lessee.
INITIAL DIRECT COSTS. Initial direct costs related to the origination of direct
financing 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.
-28-
SALES OF EQUIPMENT. Sales of equipment 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 off-lease equipment to the secondary market; and (3)
sales of procurement software. Sales of new or used equipment are recognized
upon shipment. Sales of off-lease equipment are recognized when constructive
title passes to the purchaser.
SOFTWARE SALES. Revenue from sales of procurement software is recognized in
accordance with the American Institute of Certified Public Accountants Statement
of Position (SOP) 97-2, "Software Revenue Recognition", as amended by SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2," and SOP 98-9,
"Modification of SOP 97-2 With Respect to Certain Transactions." 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 related 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.
SALES OF LEASED EQUIPMENT. Sales of leased equipment consists of sales of
equipment subject to an existing lease, under which we are lessor, including any
underlying financing related to the lease. Sales of equipment subject to an
existing lease are recognized when constructive title passes to the purchaser.
OTHER SOURCES OF REVENUE. Amounts charged for Procure+, our e-procurement
software package, are recognized as services are rendered. Amounts charged for
the Manage+, our asset management software 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.
RESERVE FOR CREDIT LOSSES. The reserve for credit losses 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. As of March 31, 2002
and 2003, the Company's reserve for credit losses was $6.8 and $6.8 million,
respectively. 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).
INVESTMENTS. The Company has 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 during the year ending March 31, 2001. The Company's
investment in MLC/CLC LLC was accounted for using the cost method. The Company
recorded an impairment of $628,218 during the year ended March 31, 2002 on this
investment. The Company also wrote off a $420,711 investment in a start-up
venture during the year ended March 31, 2001, as the underlying equity did not
support the carrying amount of the Company's investment.
-29-
CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE. The Company has
capitalized certain costs for the development of internal-use software under the
guidelines of SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." During the years ended March 31, 2003 and 2002,
respectively, $0.2 million and $1.1 million of costs for the development of
software for internal use were capitalized. As of March 31, 2003, the Company
had $1.7 million, net of amortization, of capitalized costs for the development
of internal-use software as compared to $1.8 million, net of amortization, at
March 31, 2002. These capitalized costs are included in the accompanying
condensed consolidated balance sheets as a component of property and equipment -
net.
CAPITALIZATION OF COSTS OF SOFTWARE TO BE MADE 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. During the years ended March 31, 2003 and 2002, $0.3 million and $0
of costs for the development of software available to customers were
capitalized. As of March 31, 2003, the Company had $0.3 million, net of
amortization, of capitalized costs for the development of software available to
customers as compared to $0, net of amortization, at March 31, 2002. These
capitalized costs are included in the accompanying condensed consolidated
balance sheets as a component of other assets.
RESULTS OF OPERATIONS
The Year Ended March 31, 2003 Compared to the Year Ended March 31, 2002
Total revenues generated by the Company during the year ended March 31, 2003
were $299.6 million compared to revenues of $205.0 million for the year ended
March 31, 2002, an increase of 46.2%. This increase is primarily attributable to
significantly increased revenues from the sales of equipment and smaller
increases in lease revenues and fee and other income, and offset somewhat by a
decrease in sales of leased equipment. 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,
increased 64.3% to $225.3 million during the year ended March 31, 2003, as
compared to $137.1 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, 2003, we experienced an increase in customer demand for
IT products despite an overall sluggish economy. The increase was a result of
increased sales within the Company's existing customer base and from customers
attained from recent acquisitions. For the year ended March 31, 2003, equipment
sales through the Company's technology business unit subsidiaries accounted for
97.3% of sales of equipment, compared to 99.2% for the prior fiscal year. For
the year ended March 31, 2003, sales of equipment increased 71.6% to $219.2
million, a result of increased technology sales through the Company's
subsidiaries.
The Company realized a gross margin on sales of equipment of 9.8% for the year
ended March 31, 2003, as compared to 12.6% during the year ended March 31, 2002.
This decrease in net margin percentage can be attributed to increased
competition in the marketplace and variations in the profitability on the mix
and volume of products sold.
-30-
The Company also recognizes revenue from the sale of leased equipment. During
the year ended March 31, 2003 compared to the prior fiscal year, sales of leased
equipment decreased 34.8% to $6.1 million. During the year ended March 31, 2003,
the Company recognized a gross margin of 3.3% on leased equipment sales as
compared to a gross margin of 3.3% during the prior fiscal year. The decrease in
sales of leased equipment for the year ended March 31, 2003 reflects the reduced
volume of lease equipment sold to outside investors. 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 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities-a replacement of FASB Statement No. 125." Prior to May 2000, the
majority of the Company's sales of leased equipment had historically been sold
to MLC/CLC LLC, a joint venture in which the Company owns a 5% interest. Firstar
Equipment Finance Corporation, which owns 95% of MLC/CLC LLC, discontinued their
investment in new lease acquisitions effective May 2000. The Company has
developed and will continue to develop relationships with additional lease
equity investors and financial intermediaries to diversify its sources of equity
financing.
The Company's lease revenues increased 3.4% to $50.5 million for the year ended
March 31, 2003, compared with $48.9 million for the prior fiscal year. This
increase reflects increased order period fees and lease sales, offset somewhat
by original term lease earnings on the Company's maturing lease portfolio. Our
net investment in leased assets was $182.2 million at March 31, 2003, a 7.7%
increase from $169.1 million at March 31, 2002.
For the year ended March 31, 2003, fee and other income was $23.8 million, an
increase of 25.2% over the prior fiscal year. Fee and other income includes eECM
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, 2003 is the result of
increased professional services fees and broker fee revenue, and includes an
approximate $2.5 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.
The Company's direct lease costs decreased 31.3% during the year ended March 31,
2003, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense of leased equipment.
Professional and other fees increased 17.3% for the year ended March 31, 2003
over the prior fiscal year, and was primarily the result of an increase in
broker fees and utilization of outside services.
Salaries and benefits expenses increased 40.8% during the year ended March 31,
2003, as compared to the prior fiscal year. The increase is the result of the
increased weighted average number of personnel employed by the Company,
particularly employees acquired in recent acquisitions, as well as increased
commission expenses in the Company's lease financing and technology sales units.
General and administrative expenses increased 21.7% over the prior fiscal year.
This increase is primarily related to the expense of additional personnel added
through recent acquisitions. In addition, the Company has experienced increased
expenses related to the development and deployment of its e-commerce strategy.
-31-
Interest and financing costs incurred by the Company for the year ended March
31, 2003 decreased 29.7%, 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 years ended March 31, 2003 and 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 $6.8 million for the year
ended March 31, 2003 from $6.0 million for the prior fiscal year, reflecting
effective income tax rates of 41.0% and 40.3%, respectively.
The foregoing resulted in a 9.0% increase in net earnings for the year ended
March 31, 2003, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $0.97 and $0.96,
respectively, for the year ended March 31, 2003, as compared to $0.87 and $0.85,
respectively, for the year ended March 31, 2002, based on weighted average
common shares outstanding of 10,061,088 and 10,109,809, respectively, for 2003
and 10,235,129 and 10,458,235, respectively, for 2002.
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.
-32-
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 2000. The Company has developed and will continue to
develop relationships with additional lease equity investors and financial
intermediaries to diversify its sources of equity financing.
The Company's lease revenues increased 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 eECM
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 eECM 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 eECM products and services. These revenues consist of
amounts charged for the arrangement of procurement transactions executed through
Procure+, and Manage+, components of eECM.
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 prior fiscal year, and was primarily the result of a material reduction
in the utilization of outside service providers.
-33-
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.
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,
respectively, for the year ended March 31, 2002, as compared to $0.86 and $0.80,
respectively, 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.
-34-
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2003, the Company generated cash flows from
operations of $35.8 million, and used cash flows from investing activities of
$31.8 million. Cash flows used by financing activities amounted to $4.5 million
during the same period. The net effect of these cash flows was a net decrease in
cash and cash equivalents of $0.4 million during the year. During the same
period, our total assets decreased $0.1 million, primarily the result of
decreases in the Company's deferred tax assets and increases in our net
investment in 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 increased $5.8 million, or 3.4%, and $7.3 million,
or 501.5%, respectively, during the period. The cash balance at March 31, 2003
was $27.8 million as compared to $28.2 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. Recently the Company has regularly
funded its leasing activities with Fleet Business Credit LLC, De Lage Landen
Financial Services, Inc., Bank of America Vendor Finance, Inc., Citizens Leasing
Corporation, and JP Morgan Leasing, Inc., 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, 2003, the Company's lease-related non-recourse
debt portfolio decreased 10.4% to $115.7 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.
-35-
Through MLC/CLC LLC, the Company has a joint venture agreement that had
historically provided the equity investment financing for certain of the
Company's transactions. Firstar Equipment Finance Company ("Firstar"), formerly
Cargill Leasing Corporation, is an unaffiliated investor which owns 95% of
MLC/CLC LLC. Firstar's parent company, US Bancorp, is 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"). Firstar 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, 2003, the Company had $5.6
million of unpaid equipment cost, as compared to $3.9 million at March 31, 2002.
Working capital for our leasing business is provided through a $35,000,000
credit facility that expires on April 17, 2004. Participating in this facility
are Branch Banking and Trust Company ($15,000,000) and National City Bank
($20,000,000), the agent. The ability to borrow under this facility is limited
to the amount of eligible collateral at any given time. The credit facility has
full recourse to the Company and is secured by a blanket lien against all of the
Company's assets including 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 on borrowings are the higher of the LIBOR interest rate plus 1.75% to
2.5% or the Federal Funds Rate plus 0.5% to 0.75%. As of March 31, 2003, the
Company had no outstanding balance on the facility. In general, we use the
National City Bank facility to pay the cost of equipment to be put on lease, and
we repay borrowings from the proceeds of: (1) long-term, non-recourse, fixed
rate financing which we obtain from lenders after the underlying lease
transaction is finalized or (2) sales of leases to third parties. The loss of
this credit facility could have a material adverse effect on our future results
as we may have to use this facility for daily working capital and liquidity for
our leasing business.
ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology,
inc., until they were merged on March 31, 2003, had separate credit facilities
to finance their working capital requirements for inventories and accounts
receivable. After the entities were merged into ePlus Technology, inc., the
credit facilities were effectively merged into one by GE Distribution Finance
Corporation. The floor planning line from IBM Credit Corporation was terminated
on March 31, 2003. The outstanding balances on the IBM Credit Corporation as of
March 31, 2003 were paid subsequent to year-end and further borrowings on this
line have ceased. Their traditional business as sellers of computer technology
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-five 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-five day
time-frame and represent an assigned accounts payable originally generated with
the supplier/distributor. If the thirty to forty-five day obligation is not paid
timely, interest is then assessed at stated contractual rates.
-36-
As of March 31, 2003, the respective floor planning inventory agreement maximum
credit limits and actual outstanding balances were as follows:
Entity Floor Plan Supplier Credit Limit at Balance as of Credit Limit at Balance as of
March 31, 2002 March 31, 2002 March 31, 2003 March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------
ePlus Technology of NC, GE Distribution Finance Corp. (a) $ 3,500,000 $ 1,493,106
inc.
IBM Credit Corporation $ 250,000 $ 199,731 $ - $ 22,857
ePlus Technology of PA, GE Distribution Finance Corp. (a) $ 9,000,000 $ 3,154,218
inc. IBM Credit Corporation $ 2,000,000 $ 172,976 $ - $ 3,471
ePlus Technology, inc. GE Distribution Finance Corp. (a) $ 13,500,000 $ 3,836,411 $ 26,000,000 $ 15,158,501
(a) Subsequent to March 31, 2002, GE Distribution Finance Corporation became the
successor to Deutsche Financial Services Corporation.
The facilities provided by GE Distribution Finance Corporation prior to the
merger for ePlus Technology of PA, inc. and ePlus Technology, inc. required a
separate guaranty of up to $4,900,000 and $2,000,000, respectively, by ePlus
inc. The post-merger combined program under ePlus Technology, inc. also has a
guaranty of up to $6,900,000 by ePlus inc. The floor planning facility formerly
provided by IBM Credit Corporation to ePlus Technology of PA, inc. also required
a guaranty by ePlus inc. for the total balance outstanding. The loss of the GE
Distribution Finance Corporation floor planning facilities 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.
In addition to the floor planning financing, ePlus Technology, inc., effective
as of the merger date of March 31, 2003, has an accounts receivable facility
through GE Distribution Finance Corporation with a maximum amount of $7,000,000
and an outstanding balance of $2,726,347 on this facility as of March 31, 2003.
As of March 31, 2002, the maximum available under the accounts receivable
facilities for ePlus Technology, inc. and ePlus Technology of PA, inc. was
$5,000,000 and $2,000,000, respectively, and as of March 31, 2002, there was no
outstanding balance on these facilities. Availability under the 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.
The Company had two subordinated recourse notes payable with a total principal
amount due of $3.1 million to Centura Bank resulting from the acquisition of
CLG, Inc. in September 1999. These notes were originally due in October 2006,
but could be repaid at any earlier date, and had an 11% interest rate payable
monthly. These notes were paid off on August 30, 2002 in connection with a
settlement.
In the normal course of business, the Company may provide certain customers with
performance guarantees, which are generally backed by surety bonds. In general,
the Company would only be liable for the amount of these guarantees in the event
of default in the performance of our obligations, the probability of which is
remote in management's opinion. The Company is in compliance with the
performance obligations under all service contracts for which there is a
performance guarantee, and any liability incurred in connection with these
guarantees would not have a material adverse effect on the Company's
consolidated results of operations or financial position. In addition, the
Company has other guarantees that represent parent guarantees in support of the
ePlus Technology, inc. floor planning and accounts receivable financing up to
$6.9 million.
-37-
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 eECM 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.
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 GE Distribution Finance Corporation (formerly Deutsche
Financial Services Corporation) 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 GE Distribution Finance Corporation 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, 2003,
the aggregate fair value of our recourse borrowings approximated their carrying
value.
During the year ended March 31, 2003, the company began transacting business in
Canada. As such, the Company has entered into lease contracts and non-recourse,
fixed interest rate financing denominated in Canadian Dollars. To date, Canadian
operations have been insignificant and the Company believes that potential
fluctuations in currency exchange rates will not have a material effect on its
financial position.
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.
-38-
PART III
Except as set forth below, the information required by Items 10, 11, 12, 13, and
15 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...........59 Director, Chairman of the Board, III
President and Chief
Executive Officer
Bruce M. Bowen..............51 Director and Executive Vice III
President
Steven J. Mencarini.........47 Senior Vice President and
Chief Financial Officer
Kleyton L. Parkhurst........40 Senior Vice President and
Treasurer
Terrence O'Donnell..........59 Director II
Lawrence S. Herman..........59 Director I
C. Thomas Faulders, III.....53 Director I
Thomas L. Hewitt (1)........64 Director II
(1) Thomas L. Hewitt resigned his Director position effective June 13, 2003.
There were no disagreements between Mr. Hewitt and the Company.
ITEM 11. EXECUTIVE COMPENSATION
See introductory paragraph of this Part III.
-39-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See introductory paragraph of this Part III.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about ePlus' common stock that may be
issued upon the exercise of options, warrants, and rights under all of ePlus'
existing equity compensation plans as of March 31, 2003, including ePlus' 1998
Long Term Incentive Plan, Amended and Restated Incentive Stock Option Plan,
Amended and Restated Outside Director Stock Option Plan, Amended and Restated
Nonqualified Stock Option Plan, and the Employee Stock Purchase Plan.
March 31, 2003
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options options, warrants (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
Equity compensation plans
approved by security
holders 2,001,188 $ 9.14 -
Equity compensation plans
not approved by security
holders - $ - -
---------------------------------------------------------------------------
Total 2,001,188 $ 9.14 -
===========================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND SELECTED TRANSACTIONS
See introductory paragraph of this Part III.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their last evaluation.
-40-
PART IV
ITEM 15. 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 Schedule 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) Exhibit List
Exhibit No. Exhibit Description
----------- --------------------
2.4 Agreement and Plan of Reorganization by and among 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 (Incorporated herein by reference to Exhibit 2 filed
as part of the Registrant's Form 8-K dated October 12,
2001).
2.5 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
(Incorporated herein by reference to Exhibit 2 filed as part
of the Registrant's Form 8-K dated April 5, 2002).
2.6 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 (Incorporated herein by reference to Exhibit 2.1 filed
as part of the Registrant's Form 8-K dated April 5, 2002).
3.1 Certificate of Incorporation of the Company, filed August
27, 1996 (Incorporated herein by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 2002).
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company, filed September 30, 1997 (Incorporated herein
by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 2002).
3.3 Certificate of Amendment of Certificate of Incorporation of
the Company, filed October 19, 1999 (Incorporated herein by
reference to Exhibit 3.3 to the Company's Quarterly Report
on Form 10-Q for the period ended December 31, 2002).
-41-
3.4 Certificate of Amendment of Certificate of Incorporation of
the Company, filed May 23, 2002 (Incorporated herein by
reference to Exhibit 3.4 to the Company's Quarterly Report
on Form 10-Q for the period ended December 31, 2002).
3.5 Bylaws of the Company, as amended to date (Incorporated
herein by reference to Exhibit 3.5 to the Company's
Quarterly Report on Form 10-Q for the period ended December
31, 2002).
10.1 Form of Indemnification Agreement entered into between the
Company and its directors and officers (Incorporated herein
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-11737)).
10.2* Form of Employment Agreement between the Registrant and
Phillip G. Norton (Incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 (File No. 333-11737)).
10.3* Form of Employment Agreement between the Registrant and
Bruce M. Bowen (Incorporated herein by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1
(File No. 333-11737)).
10.4* Form of Employment Agreement between the Registrant and
Kleyton L. Parkhurst (Incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (File No. 333-11737)).
10.5* Form of Employment Agreement between the Registrant and
Steven J. Mencarini (Incorporated herein by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended March 31, 1997).
10.6* Form of Employment Agreement between the Registrant and
Nadim Achi (Incorporated herein by reference to Exhibit
10.6 to the Company's Current Report on Form 8-K filed on
July 31, 1998).
10.7* MLC Master Stock Incentive Plan (Incorporated herein by
reference to Exhibit 10.7 to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1997).
10.8* Amended and Restated Incentive Stock Option Plan
(Incorporated herein by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
10.9* Amended and Restated Outside Director Stock Option Plan
(Incorporated herein by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
10.10* Amended and Restated Nonqualified Stock Option Plan
(Incorporated herein by reference to Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
10.11* 1997 Employee Stock Purchase Plan (Incorporated herein by
reference to Exhibit 10.11 to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1997).
-42-
10.12 1998 Long Term Incentive Plan (Incorporated herein by
reference to Exhibit 1.1 to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1998).
10.13 First Amendment to Loan and Security Agreement dated March
12, 1997 between MLC Group, Inc. and Heller Financial, Inc.
(Incorporated herein by reference to Exhibit 5.2 to the
Company's Current Report on Form 8-K filed on March 28,
1997).
10.15 Form of Irrevocable Proxy and Stock Rights Agreement
(Incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No.
333-11737)).
10.16 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
(Incorporated herein by reference to Exhibit 5.1 to the
Company's Current Report on Form 8-K filed on February 2,
2001).
10.17 Business Financing Agreement dated September 8, 2000 between
Deutsche Financial Services Corporation and ePlus
Technology, inc. (Incorporated herein by reference to
Exhibit 5.1 to the Company's Current Report on Form 8-K
filed on September 22, 2000).
10.18 Agreement for Wholesale Financing dated September 8, 2000
between Deutsche Financial Services and ePlus Technology,
inc. (Incorporated herein by reference to Exhibit 5.2 to the
Company's Current Report on Form 8-K filed on September 22,
2000).
10.19 Paydown Addendum to Business Financing Agreement between
Deutsche Financial Services and ePlus Technology, inc.
(Incorporated herein by reference to Exhibit 5.3 to the
Company's Current Report on Form 8-K filed on September 22,
2000).
10.20 Limited Guaranty dated September 8, 2000 between Deutsche
Financial Services and ePlus, inc. (Incorporated herein by
reference to Exhibit 5.3 to the Company's Current Report on
Form 8-K filed on September 22, 2000).
10.21 Agreement for Wholesale Financing between Deutsche
Financial Services and ePlus Technology of PA, inc., dated
February 12, 2001 (Incorporated herein by reference to
Exhibit 5.1 to the Company's Current Report on Form 8-K
filed on March 13, 2001).
10.22 Business Financing Agreement between Deutsche Financial
Services Corporation and ePlus Technology of PA, inc., dated
February 12, 2001 (Incorporated herein by reference to
Exhibit 5.2 to the Company's Current Report on Form 8-K
filed on March 13, 2001).
-43-
10.23 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 (Incorporated herein by reference to Exhibit 5.3 to
the Company's Current Report on Form 8-K filed on March 13,
2001).
10.24 Limited Guaranty for ePlus Technology of PA, Inc. to
Deutsche Financial Services Corporation by ePlus, inc.,
dated February 12, 2001 (Incorporated herein by reference to
Exhibit 5.4 to the Company's Current Report on Form 8-K
filed on March 13, 2001).
10.25 Intercreditor Subordination Agreement between Deutsche
Financial Services Corporation and IBM Credit Corporation
and ePlus Technology of PA, inc., dated February 26, 2001
(Incorporated herein by reference to Exhibit 5.5 to the
Company's Current Report on Form 8-K filed on March 13,
2001).
10.26 Agreement for Wholesale Financing between Deutsche
Financial Services Corporation and ePlus Technology of NC,
inc., dated February 12, 2001 (Incorporated herein by
reference to Exhibit 5.6 to the Company's Current Report on
Form 8-K filed on March 13, 2001).
10.27 Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc. and Deutsche Financial Services
Corporation, dated February 12, 2001 (Incorporated herein by
reference to Exhibit 5.7 to the Company's Current Report on
Form 8-K filed on March 13, 2001).
10.28 Addendum to Agreement for Wholesale Financing between ePlus
Technology of NC, inc. and Deutsche Financial Services
Corporation, dated February 12, 2001 (Incorporated herein by
reference to Exhibit 5.8 to the Company's Current Report on
Form 8-K filed on March 13, 2001).
10.29 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 August 31, 2000
(Incorporated herein by reference to Exhibit 5.9 to the
Company's Current Report on Form 8-K filed on March 13,
2001).
10.30 Deed of Lease between CALEAST INDUSTRIAL INVESTORS, LLC
(Landlord) and ePlus inc. (Tenant) (Incorporated herein by
reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the year ended March 31, 2002).
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
99.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C.
Sec. 1350.
99.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C.
Sec. 1350.
* Indicates a management contract or compensatory plan or arrangement
-44-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ PHILLIP G. NORTON
-----------------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 26, 2003
/s/ BRUCE M. BOWEN
----------------------------------------------------
By: Bruce M. Bowen, Director and Executive
Vice President
Date: June 26, 2003
/s/ STEVEN J. MENCARINI
-----------------------------------------------------
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, Principal Accounting
Officer
Date: June 26, 2003
/s/ C. THOMAS FAULDERS, III
----------------------------------------------------
By: C. Thomas Faulders, III, Director
Date: June 26, 2003
/s/ LAWRENCE S. HERMAN
-----------------------------------------------------
By: Lawrence S. Herman, Director
Date: June 26, 2003
/s/ TERRENCE O'DONNELL
-----------------------------------------------------
By: Terrence O'Donnell, Director
Date: June 26, 2003
-45-
CERTIFICATION
I, Phillip G. Norton, Chairman of the Board, President and Chief Executive
Officer of ePlus inc., certify that:
1. I have reviewed this annual report on Form 10-K of ePlus inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report ("Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 26, 2003 /s/ PHILLIP G. NORTON
--------------------------------------------
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
-46-
CERTIFICATION
I, Steven J. Mencarini, Senior Vice President and Chief Financial Officer of
ePlus inc., certify that:
1. I have reviewed this annual report on Form 10-K of ePlus inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report ("Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003 /s/ STEVEN J. MENCARINI
-------------------------------------------------
By: Steven J. Mencarini
Senior Vice President and Chief Financial Officer
-47-
ePlus inc. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 2002 and 2003 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 2001, 2002, and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2001, 2002, and 2003 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 2001, 2002, and 2003 F-7
Notes to Consolidated Financial Statements F-8
SCHEDULE
II-Valuation and Qualifying Accounts for the Years
Ended March 31, 2001, 2002, and 2003 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 2003, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years ended March 31, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15(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 2003, and the results of their operations and their cash
flows for each of the three years ended March 31, 2003 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 16, 2003
-F2-
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2002 As of March 31, 2003
-----------------------------------------------
ASSETS
Cash and cash equivalents $ 28,223,503 $ 27,784,090
Accounts receivable, net of allowance for doubtful
accounts of $3,719,207 and $3,346,055 as of
March 31, 2002 and 2003, respectively 41,466,362 38,384,841
Notes receivable 227,914 53,098
Inventories 871,857 1,373,168
Investment in leases and leased equipment - net 169,087,078 182,169,324
Property and equipment - net 6,144,061 5,249,087
Deferred tax asset 5,471,658 -
Other assets 5,419,813 4,779,946
Goodwill 22,083,308 19,147,132
-----------------------------------------------
TOTAL ASSETS $ 278,995,554 $ 278,940,686
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 3,898,999 $ 5,635,776
Accounts payable - trade 15,104,985 25,914,385
Salaries and commissions payable 491,716 619,860
Accrued expenses and other liabilities 19,091,729 13,978,942
Income taxes payable 364,183 -
Recourse notes payable 4,659,982 2,736,298
Nonrecourse notes payable 129,095,051 115,678,353
Deferred tax liability - 4,760,029
-----------------------------------------------
Total Liabilities 172,706,645 169,323,643
COMMITMENTS AND CONTINGENCIES (Note 8) - -
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;
10,461,970 issued and 10,395,870 outstanding at
March 31, 2002 and 10,540,135 issued and 9,451,651
outstanding at March 31, 2003 $ 104,619 $ 105,400
Additional paid-in capital
62,414,067 62,905,727
Treasury stock, at cost, 66,100 and 1,088,484 shares,
respectively (574,800) (7,511,124)
Retained earnings 44,345,023 54,057,732
Accumulated other comprehensive income -
Foreign currency translation adjustment - 59,308
-----------------------------------------------
Total Stockholders' Equity 106,288,909 109,617,043
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,995,554 $ 278,940,686
===============================================
See Notes to Consolidated Financial Statements.
-F3-
Plus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
-----------------------------------------------
2001 2002 2003
-----------------------------------------------
REVENUES
Sales of equipment $ 216,183,181 $ 127,753,315 $ 219,208,998
Sales of leased equipment 34,031,381 9,353,088 6,095,830
-----------------------------------------------
250,214,562 137,106,403 225,304,828
Lease revenues 42,693,839 48,850,017 50,520,293
Fee and other income 13,677,495 19,028,926 23,821,025
-----------------------------------------------
56,371,334 67,878,943 74,341,318
-----------------------------------------------
TOTAL REVENUES (1) 306,585,896 204,985,346 299,646,146
-----------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 182,473,685 111,598,231 197,787,657
Cost of sales, leased equipment 33,329,403 9,043,932 5,891,789
-----------------------------------------------
215,803,088 120,642,163 203,679,446
Direct lease costs 16,534,992 9,578,631 6,582,409
Professional and other fees 3,363,324 2,717,618 3,188,046
Salaries and benefits 30,610,437 32,797,303 46,181,745
General and administrative expenses 10,766,333 12,517,696 15,233,858
Interest and financing costs 15,522,897 11,810,414 8,308,382
-----------------------------------------------
76,797,983 69,421,662 79,494,440
-----------------------------------------------
TOTAL COSTS AND EXPENSES (2) 292,601,071 190,063,825 283,173,886
-----------------------------------------------
Earnings before provision for income taxes 13,984,825 14,921,521 16,472,260
-----------------------------------------------
Provision for income taxes 5,666,625 6,009,798 6,759,551
-----------------------------------------------
NET EARNINGS $ 8,318,200 $ 8,911,723 $ 9,712,709
===============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.86 0.87 0.97
===============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.80 0.85 0.96
===============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,625,891 10,235,129 10,061,088
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,383,467 10,458,235 10,109,809
(1) Includes amounts from related parties of $14,923,606, $147,305 and $145,962
for the fiscal years ended March 31, 2001, 2002 and 2003, respectively.
(2) Includes amounts from related parties of $15,588,046, $902,818 and $486,520
for the fiscal years ended March 31, 2001, 2002 and 2003, respectively.
See Notes to Consolidated Financial Statements.
-F4-
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
------------------------------------------
2001 2002 2003
------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 8,318,200 $ 8,911,723 $ 9,712,709
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 11,248,760 5,644,713 4,510,705
Provision for credit losses 1,772,768 1,488,706 616,074
Deferred taxes (1,072,615) (5,161,182) 10,231,687
(Gain) Loss on sale of operating lease equipment (333,299) 240,137 1,112,697
Adjustment of basis to fair market value of operating lease
equipment and investments 1,593,760 1,001,169 -
Payments from lessees directly to lenders (6,112,406) (489,962) (291,281)
Expense related to issuance of warrants 225,000 - -
Loss (Gain) on disposal of property and equipment 14,765 96,148 (47,562)
Changes in:
Accounts receivable 3,214,562 18,079,347 2,465,447
Notes receivable (1,971,904) 1,634,574 174,816
Inventories (177,422) 1,899,869 (501,311)
Other assets (1) 8,375,710 (3,747,399) 609,853
Accounts payable - equipment (13,748,732) (5,327,815) 1,736,777
Accounts payable - trade (9,559,862) (7,513,939) 10,809,400
Salaries and commissions payable, accrued
expenses and other liabilities 8,679,370 (4,405,675) (5,348,826)
------------------------------------------
Net cash provided by operating activities 10,466,655 12,350,414 35,791,185
------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 922,549 - 1,179,485
Purchase of operating lease equipment (2,568,445) (931,556) (11,627,961)
Increase in investment in direct financing and sales-type
leases (2) (10,197,101) (27,457,697) (19,761,290)
Proceeds from sale of property and equipment - 3,907 -
Purchases of property and equipment (3,840,655) (1,644,879) (1,549,190)
Cash used in acquisitions, net of cash acquired - (3,268,334) -
Increase in other assets (3) (2,942,046) (373,959) -
------------------------------------------
Net cash used in investing activities (18,625,698) (33,672,518) (31,758,956)
------------------------------------------
-F5-
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
------------------------------------------
2001 2002 2003
------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 90,908,400 $ 81,520,753 $ 80,997,406
Recourse 325,446 30,381 10,230,115
Repayments:
Nonrecourse (76,961,083) (51,498,928) (78,130,384)
Recourse (183,515) (604,515) (8,089,225)
Pay-off of recourse debt due to settlement - - (98,660)
Write-off of non-recourse debt due to bankruptcy - - (1,996,596)
Purchase of treasury stock - (574,800) (6,936,324)
Proceeds from issuance of capital stock, net of expenses 307,095 165,816 492,718
Proceeds from sale of stock, net of underwriting 25,936,388 - -
Repayments of lines of credit (29,549,289) (4,027,283) (1,000,000)
------------------------------------------
Net cash provided by (used in) financing activities 10,783,442 25,011,424 (4,530,950)
------------------------------------------
Effect of exchange rate changes on cash - - 59,308
Net Increase (Decrease) in Cash and Cash Equivalents 2,624,399 3,689,320 (439,413)
Cash and Cash Equivalents, Beginning of Period 21,909,784 24,534,183 28,223,503
------------------------------------------
Cash and Cash Equivalents, End of Year $ 24,534,183 $ 28,223,503 $ 27,784,090
==========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 849,598 $ 1,952,352 $ 4,991,426
==========================================
Cash paid for income taxes $ 4,559,378 $ 7,164,082 $ 4,459,405
==========================================
Schedule of Noncash Investing and Financing
Activities:
Common stock issued for acquisitions - 5,880,650 -
Liabilities assumed in purchase transactions $ - $ 4,029,331 $ -
(1) Includes amounts provided by (used by) related parties of $(27,510),
$98,202 and $853 for the fiscal years ended March 31, 2001, 2002 and 2003.
(2) Includes amounts provided by related parties of $14,254,197, $0 and $0 for
the fiscal years ended March 31, 2001, 2002 and 2003.
(3) Includes amounts provided by (used by) related parties of $1,376,246,
$(628,218) and $0 for fiscal years ended the March 31, 2001, 2002 and 2003.
See Notes To Consolidated Financial Statements.
-F6-
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accumulated
Common Stock Paid-in Treasury Retained Other
------------------------- Comprehensive
Shares Par Value Capital Stock Earnings Income TOTAL
------------------------- ------------- ------------ ------------- -------- -------------
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
========================= ============= ============ ============= ======== =============
Issuance of shares for option exercise 39,850 398 271,487 - - - 271,885
Issuance of shares to employees 38,315 383 220,173 - - - 220,556
Issuance of shares in business
combination - - - - - - -
Purchase of treasury stock (1,022,384) - - (6,936,324) - - (6,936,324)
Net earnings - - - - 9,712,709 - 9,712,709
Foreign currency translation adjustment - - - - - 59,308 59,308
----------
Total comprehensive income 9,772,017
------------------------- ------------- ------------ ------------- -------- -------------
Balance, March 31, 2003 9,451,651 $105,400 $ 62,905,727 $(7,511,124) $ 54,057,732 $59,308 $109,617,043
========================= ============= ============ ============= ======== =============
See Notes to Consolidated Financial
Statements.
-F7-
ePlus inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years Ended March 31, 2001, 2002, and 2003
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. Effective March 31,
2003, ePlus Technology of NC, inc. and ePlus Technology of PA, inc. were merged
into ePlus Technology, inc.
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 4, 2001, the Company purchased all the
outstanding stock of SourceOne Computer Corporation ("SourceOne"), 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 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 ("Elcom") IT fulfillment and IT professional services business. The Elcom
purchase added offices in Boston, San Diego, New Jersey, and New York, NY. 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.
-F8-
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.
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 "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition" and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". 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
-F9-
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.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
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 EITF reached a consensus on 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.
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).
-F10-
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less.
INVENTORIES - Inventories are stated at the lower of cost (weighted average
basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets, which range from three to seven years.
INVESTMENTS - The Company has 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 during the year ending March 31, 2001. The Company
recorded an impairment of $628,218 during the year ended March 31, 2002 on this
investment. The Company wrote off $420,711 related to an investment in the
equity of a start-up venture in 2002 as the underlying value did not support the
carrying amount of the Company's investment.
CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE - The Company has
capitalized certain costs for the development of internal use software under the
guidelines of SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Approximately $0.2 million and $1.1 million of
internal use software was capitalized during the years ended March 31, 2003 and
2002, respectively, which is included in the accompanying consolidated balance
sheet as a component of property and equipment.
CAPITALIZATION OF COSTS OF SOFTWARE TO BE MADE 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. $0.3 million of development costs have been capitalized for the year
ended March 31, 2003. No development costs were capitalized for the year ended
March 31, 2002.
INCOME TAXES - Deferred income taxes are accounted for in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under this method, deferred income tax
assets and liabilities 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.
RECLASSIFICATIONS - Certain items have been reclassified in the March 31, 2001
and 2002 financial statements to conform to the March 31, 2003 presentation.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statement
of Stockholders' Equity.
-F11-
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
9,625,891 in fiscal 2001, 10,235,129 in 2002, and 10,061,088 in 2003. Diluted
EPS amounts were calculated based on weighted average shares outstanding and
common stock equivalents of 10,383,467 in fiscal 2001, 10,485,235 in 2002, and
10,109,809 in 2003. 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.
STOCK BASED COMPENSATION - As of March 31, 2003, the company has four
stock-based employee compensation plans, which are described more fully in Note
11. The company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related Interpretations issued by the Financial Accounting Standards Board.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure," to stock-based employee
compensation:
Year Ended March 31,
2001 2002 2003
----------------------------------------
Net earnings, as reported $ 8,318,200 $ 8,911,723 $ 9,712,709
Stock Based Compensation Expense (2,440,487) (3,125,488) (3,653,928)
------------- ------------- -----------
Net earnings, pro forma $ 5,877,713 $ 5,786,235 $ 6,058,781
============= ============ ===========
Basic earnings per share, as reported $0.86 $0.87 $0.97
Basic earnings per share, pro forma $0.61 $0.57 $0.60
Diluted earnings per share, as reported $0.80 $0.85 $0.96
Diluted earnings per share, pro forma $0.57 $0.55 $0.60
CAPITAL STRUCTURE - 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 of up to 750,000 shares of its outstanding common stock for a maximum
of $5,000,000 over a period of time ending no later than September 20, 2002. On
October 4, 2002, another stock repurchase program previously authorized by the
Company's Board of Directors became effective. This program authorizes the
repurchase of up to 3,000,000 shares of the Company's outstanding common stock
over a period of time ending no later than October 3, 2003 and is limited to a
cumulative purchase amount of $7,500,000.
-F12-
During the years ended March 31, 2002 and 2003, the Company repurchased 66,100
and 1,022,384 shares of its outstanding common stock for a total of $574,800 and
$6,936,323. Since the inception of the Company's initial repurchase program on
September 20, 2001, as of March 31, 2003, the Company had repurchased 1,088,484
shares of its outstanding common stock at an average cost of $6.90 per share for
a total of $7,511,123. Of the shares repurchased, 331,551 shares were
repurchased as a result of a settlement that occurred during the quarter ended
September 30, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4 and 64,
which address the accounting for gains and losses of the extinguishment of debt.
SFAS No. 145 also rescinds SFAS No. 44 which addressed the accounting for
intangible assets of motor carriers. Finally, SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases." The amendment to SFAS No. 13 eliminates inconsistencies
between the accounting for sale-leaseback transactions and the accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions. On May 15, 2002, the Company adopted SFAS No. 145. The Company's
adoption of SFAS No. 145 did not have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies EITF No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs incurred in a Restructuring)." EITF
No. 94-3 required that costs associated with an exit or disposal activity be
recorded as liabilities as of the date the exit or disposal plan is approved by
management. SFAS No. 146 requires a liability for a cost associated with an exit
or disposal activity be recognized at fair value on the date the liability is
incurred. The Company's adoption of SFAS No. 146 did not have a material impact
on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information in
its interim and annual financial statements. The initial recognition and initial
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002 and the Company does not expect that adoption
of the recognition and measurement provisions will have a material impact on its
financial statements. The Company adopted Interpretation No. 45 effective
December 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company adopted SFAS No. 148 in the
-F13-
fourth quarter of the current fiscal year and its adoption did not have a
material impact on its financial statements.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities." In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company adopted Interpretation No. 46 in
the fourth quarter of the current fiscal year and its adoption did not have a
material impact on its financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting of derivative instruments and for hedging
activities under SFAS No. 133. This statement is effective for contracts entered
into or modified and for hedging relationships designated after June 30, 2003.
The Company does not expect that the adoption of SFAS No. 149 will have a
material impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, except for mandatorily redeemable financial instruments.
Mandatorily redeemable financial instruments are subject to the provisions of
this statement beginning on January 1, 2004. The Company does not expect that
the adoption of SFAS No. 150 will have a material impact on its financial
statements.
2. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of March 31,
2002 2003
(In Thousands)
---------------------------
Investment in direct financing and sales-type
leases - net $ 167,628 $ 173,394
Investment in operating lease equipment - net 1,459 8,775
------------ --------------
$ 169,087 $ 182,169
============ ==============
INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of
the following:
-F14-
As of March 31,
2002 2003
(In Thousands)
-----------------------------
Minimum lease payments $ 161,788 $ 168,385
Estimated unguaranteed residual value 25,880 26,631
Initial direct costs, net of amortization (1) 3,424 3,072
Less: Unearned lease income (20,412) (21,287)
Reserve for credit losses (3,052) (3,407)
------------ ----------------
Investment in direct finance and sales-
type leases, net $ 167,628 $ 173,394
============ ================
(1) Initial direct costs are shown net of amortization of $5,486 and
$3,691 at March 31, 2002 and 2003, respectively.
Future scheduled minimum lease rental payments as of March 31, 2003 are as
follows:
(In Thousands)
-----------------------
Year ending March 31, 2004 $ 91,068
2005 48,025
2006 20,135
2007 5,258
2008 and thereafter 3,899
----------------------
$ 168,385
======================
The Company's net investment in direct financing and sales-type leases is
collateral for non-recourse and recourse equipment notes. See Note 6.
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,
2002 2003
(In Thousands)
------------------------------
Cost of equipment under operating leases $ 13,916 $ 12,824
Initial direct costs 14 0
Less: Accumulated depreciation and
amortization (12,471) (4,049)
------------- ----------------
Investment in operating lease equipment, net $ 1,459 $ 8,775
============= ================
-F15-
Future scheduled minimum lease rental payments as of March 31, 2003 are as
follows:
(In Thousands)
-------------------
Year Ending March 31, 2004 $5,082
2005 3,175
2006 1,116
2007 758
2008 and thereafter 1,283
-------------------
$ 11,414
===================
3. RESERVES FOR CREDIT LOSSES
As of March 31, 2002 and 2003, the Company's reserve for credit losses was
$6,771,339 and $6,753,431, 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
Accounts in Direct
Receivable Financing Leases Total
--------------------------------------------------
Balance April 1, 2001 $ 1,392 $ 2,887 $ 4,279
Provision for bad debts 1,324 165 1,489
Recoveries (184) - (184)
Assumed in acquisitions 73 - 73
Write-offs and other 1,114 - 1,114
------------------------------------------------
Balance March 31, 2002 $ 3,719 $ 3,052 $ 6,771
================================================
Provision for bad debts 176 440 616
Recoveries (140) - (140)
Write-offs and other (409) (85) (494)
------------------------------------------------
Balance March 31, 2003 $ 3,346 $ 3,407 $ 6,753
================================================
Balances in "Write-offs and other" include actual write-offs and
reclassifications from prior years. The Company assumed $72,631 in reserve for
credit losses in the acquisition of SourceOne Computer Corporation.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
-F16-
As of March 31,
2002 2003
(In Thousands)
-------------------------------
Furniture, fixtures and equipment $ 5,315 $ 6,118
Vehicles 121 88
Capitalized software 5,638 5,924
Leasehold improvements 288 335
Less: Accumulated depreciation and
amortization (5,218) (7,216)
-------------------------------
Property and equipment, net $ 6,144 $ 5,249
===============================
5. GOODWILL
As of March 31, 2003, the Company had goodwill, net of accumulated amortization,
of $19.1 million, a decrease of $2.9 million from March 31, 2002 as a result of
a settlement which occurred during the year. 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, before income taxes, for the year
ended March 31, 2001. No goodwill amortization expense was recognized during the
years ended March 31, 2002 and 2003.
As of March 31, 2002 and 2003, the Company has determined goodwill has not been
impaired and that no potential impairment existed, based on testing performed on
September 30, 2001 and 2002.
Changes in the carrying amount of goodwill for the years ended March 31, 2002
and 2003 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
------------------------------------------
Goodwill acquired during the period - 22,984 22,984
Impairment losses during the period - - -
Other Adjustments during the period ( 2,965,915) 6,755 (2,959,160)
------------------------------------------
Goodwill (net), March 31, 2003 $ 4,028,764 $ 15,118,368 $ 19,147,132
==========================================
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 "Goodwill
and Other Intangible Assets":
-F17-
For the years ended
March 31,
2001 2002 2003
----------------------------------------
Net income, as reported $8,318,200 $8,911,723 $9,712,709
Amortization of goodwill, net of taxes 415,297 - -
----------------------------------------
Pro forma net income $8,733,497 $8,911,723 $9,712,709
========================================
Pro forma net income per share, basic $ 0.91 $ 0.87 $ 0.97
========================================
Pro forma net income per share, diluted $ 0.84 $ 0.85 $ 0.96
========================================
6. RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse and non-recourse obligations consist of the following:
As of March 31,
2002 2003
(In Thousands)
--------------------------
Recourse equipment notes secured by related
investments in leases with varying interest
rates ranging from 6.9% to 7.9% in fiscal year
2002 $ 498 $ -
Recourse line of credit with a maximum balance
of $35,000,000 bearing interest at the LIBOR
rate plus 150 basis points for 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 1,000 -
Recourse line of credit with a maximum balance
of $7,000,000 bearing interest at prime less .5% - 2,726
Recourse equipment notes with varying interest
rates ranging from 7.13% to 8.25%, secured by
related investment in equipment 98 10
Recourse note payable secured by investment in
leases with 11% interest payable monthly,
principal balance due October, 2006,
and paid August 30, 2002 3,064 -
--------------------------------------
Total recourse obligations $4,660 $2,736
======================================
-F18-
Non-recourse equipment notes secured by
related investments in leases with
interest rates ranging from 2.55%
to 13.50% in fiscal years 2002 and 2003 $129,095 $115,678
======================================
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, 2003, mature as follows:
Recourse Notes Non-recourse
Payable Notes Payable
(In Thousands)
----------------------------------
Year ending March 31, 2004 $ 2,736 $ 64,805
2005 - 36,138
2006 - 10,977
2007 - 2,544
2008 and thereafter - 1,214
----------------------------------
$ 2,736 $ 115,678
==================================
7. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees, the balances of which
amounted to $69,042 and $61,722 as of March 31, 2002 and 2003, 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.
-F19-
During the year ended March 31, 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 5% of the Company's revenues. MLC/CLC LLC stopped purchasing
leased equipment prior to the year ending March 31, 2001. Revenue recognized
from the sales for the year ended March 31, 2001 was $14,654,844. The basis for
the equipment sold was $14,254,197. The Company received an origination fee on
leased equipment sold to the joint venture. During the years ended March 31,
2001 and 2002, the Company recorded impairment of the investment in the
partnership of $1,850,000 and $628,218, respectively. In addition, the Company
recognized $268,762, $147,305, and $145,962 for the years ended March 31, 2001,
2002 and 2003 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 of the Company and of subsidiaries of the Company. During the
years ended March 31, 2001, 2002, and 2003, rent expense paid to these related
parties was $248,849, $274,600, and $486,520, respectively.
8. 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 $1,222,389,
$1,984,833, and $2,435,972 for the years ended March 31, 2001, 2002, and 2003,
respectively. As of March 31, 2003, the future minimum lease payments are due as
follows:
(In Thousands)
-------------------------
Year Ending March 31, 2004 $ 1,701
2005 753
2006 94
2007 -
-------------------------
$ 2,548
=========================
9. 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,
2001 2002 2003
(In Thousands)
---------------------------------------
Statutory federal income tax rate 34% 34% 35%
Income tax expense computed at the
statutory federal rate $ 4,755 $ 5,073 $ 5,765
State income tax expense, net of
federal tax 678 939 876
Non-taxable interest income (15) (9) (11)
Non-deductible expenses 249 7 130
----------- -------------- ------------
Provision for income taxes $ 5,667 $ 6,010 $ 6,760
=========== ============== ============
Effective income tax rate 40.5% 40.3% 41.0%
=========== ============== ============
The components of the provision for income taxes are as follows:
-F20-
For the Year Ended March 31,
2001 2002 2003
(In Thousands)
----------------------------------------------
Current:
Federal $ 5,237 $ 8,836 $ (3,008)
State 1,502 2,335 (464)
--------------- -------------- ---------------
6,739 11,171 (3,472)
--------------- -------------- ---------------
Deferred:
Federal $ (762) $ (4,249) $ 8,421
State (310) (912) 1,811
--------------- -------------- ---------------
(1,072) (5,161) 10,232
--------------- -------------- ---------------
$ 5,667 $ 6,010 $ 6,760
=============== ============== ===============
The components of the deferred tax (benefit) expense resulting from net
temporary differences are as follows:
For the Year Ended March 31,
2001 2002 2003
(In Thousands)
---------------------------------------------
Alternative minimum tax $ 1,701 $ - $ -
Lease revenue recognition (198) (3,639) 6,649
Other (2,575) (1,522) 3,583
-------------- -------------- ---------------
$ (1,072) $ (5,161) $ 10,232
============== ============== ===============
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,
2001 2002 2003
(In Thousands)
------------------------------------------
Alternative minimum tax $ - $ - $ -
Lease revenue recognition (2,841) 798 (8,232)
Allowance for doubtful
accounts and credit reserves 2,377 3,890 3,322
Other 774 784 150
----------- -------------- ---------------
$ 310 $ 5,472 $ (4,760)
=========== ============== ===============
-F21-
10. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and non-recourse notes payable
(Note 6) associated with its direct finance and operating lease activities from
payments made directly by customers to third-party lenders amounting to
$33,004,241, $13,431,543 and $14,287,124 for the years ended March 31, 2001,
2002, and 2003, 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 $5,828,340, $6,255,282 and $12,453,541 for the
years ended March 31, 2001, 2002, and 2003, respectively.
11. 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
$370,082, $(242,877) and $235,394 for the years ended March 31, 2001, 2002 and
2003, respectively.
The Company has established a stock incentive program (the "Master Stock
Incentive Plan") to provide an opportunity for directors, executive officers,
independent contractors, key employees, and other employees of the Company to
participate in the ownership of the Company. The Master Stock Incentive Plan
provides for awards to eligible directors, employees, and independent
contractors of the Company, of a broad variety of stock-based compensation
alternatives under a series of component plans. These component plans include
tax advantaged incentive stock options for employees under the Incentive Stock
Option Plan, formula length of service based nonqualified options to
non-employee directors under the Outside Director Stock Plan, nonqualified stock
options under the Nonqualified Stock Option Plan, a program for employee
purchase of Common Stock of the Company at 85% of fair market value under a tax
advantaged Employee Stock Purchase Plan approved by the Board of Directors and
effective September 16, 1998 and which ended December 31, 2002, 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, 2003, a total of 2,317,106 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 1,849,601
options are outstanding or have been exercised as of March 31, 2003;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under which
260,000 options are outstanding as of March 31, 2003;
-F22-
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 63,707 are outstanding or have been exercised as of March
31, 2003;
d) the Employee Stock Purchase Plan ("ESPP") under which 143,798 shares
have been issued as of March 31, 2003.
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, 2001, 2002 and 2003 was
$9.86, $5.14 and $3.11 per share, respectively.
A summary of stock option activity during the three years ended March 31, 2003
is as follows:
Weighted
Exercise Price Average Exercise
Number of Shares Range Price
---------------------- ----------------------- ---------------------
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
======================
Outstanding, April 1, 2002 2,180,585 - -
Options granted 77,000 $6.23 - $6.97 $6.91
Options exercised (39,850) $6.24 - $9.00 $6.85
Options forfeited (216,547) $6.24 - $17.38 $10.35
----------------------
Outstanding, March 31, 2003 2,001,188
======================
Exercisable, March 31, 2003 1,450,718
======================
-F23-
Additional information regarding options outstanding as of March 31, 2003 is as
follows:
Options Outstanding Options Exercisable
- ------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------
2,001,188 6.6 years $9.14 1,450,718 $9.24
Effective April 1, 1996, the Company adopted SFAS No. 123, as amended by SFAS
No. 148. The Company has the option of either (1) continuing to account for
stock-based employee compensation plans in accordance with the guidelines
established by APB Opinion 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 Opinion 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 2001:
Year Ended March 31,
2001 2002 2003
----------------------------------------
Net earnings, as reported $ 8,318,200 $ 8,911,723 $ 9,712,709
Stock based compensation expense (2,440,487) (3,125,488) (3,653,928)
----------- ----------- -----------
Net earnings, pro forma $ 5,877,713 $ 5,786,235 $ 6,058,781
============ ============ ===========
Basic earnings per share, as reported $0.86 $0.87 $0.97
Basic earnings per share, pro forma $0.61 $0.57 $0.60
Diluted earnings per share, as reported $0.80 $0.85 $0.96
Diluted earnings per share, pro forma $0.57 $0.55 $0.60
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:
-F24-
For the Year Ended March 31,
2001 2002 2003
----------------------------
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 97.87% 92.44% 46.02%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.52% 4.13% 3.96%
During the years ended March 31, 2001, 2002 and 2003, no options were granted
under the Nonqualified Stock Option Plan or the Outside Director Stock Option
Plan.
12. 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 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:
-F25-
As of March 31, 2002 As of March 31, 2003
Carrying Fair Value Carrying Fair Value
Amount Amount
(In Thousands)
----------------------------------------------
Assets:
Cash and cash equivalents $28,224 $28,224 $27,784 $27,784
Liabilities:
Non-recourse notes payable 129,095 128,181 115,678 116,489
Recourse notes payable 4,660 4,660 2,736 2,736
13. PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANT
On December 10, 1999 the Company issued a purchase warrant to an outside
business partner. The warrant allows the holder to purchase 7,500 shares of the
Company's common stock at a price of $23.00 per share and expires December 10,
2009.
On May 25, 2000 the Company issued a purchase warrant to an outside business
partner. The warrant allowed the holder to purchase 50,000 shares of the
Company's common stock at a price of $18.75 per share. The purchase warrant
agreement was terminated on April 20, 2001 due to insolvency of the business
partner.
14. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its traditional
financing 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. 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.
-F26-
Technology
Financing Sales
Business Business
Unit Unit Total
--------------------------------------------------------
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
--------------------------------------------------------
Earnings before income taxes 14,238,505 683,016 14,921,521
========================================================
Assets $ 228,505,936 $ 50,489,618 $ 278,995,554
-F27-
Technology
Financing Sales
Business Business
Unit Unit Total
--------------------------------------------------------
Twelve months ended March 31, 2003
Sales of equipment $ 2,007,743 $ 217,201,255 $ 219,208,998
Sales of leased equipment 6,095,830 - 6,095,830
Lease revenues 50,520,293 - 50,520,293
Fee and other income 10,190,392 13,630,633 23,821,025
--------------------------------------------------------
Total Revenues 68,814,258 230,831,888 299,646,146
Cost of sales 9,391,356 194,288,090 203,679,446
Direct lease costs 6,582,409 - 6,582,409
Selling, general and administrative
expenses 26,848,899 37,754,750 64,603,649
--------------------------------------------------------
Segment earnings 25,991,594 (1,210,952) 24,780,642
Interest expense 7,832,220 476,162 8,308,382
--------------------------------------------------------
Earnings (loss) before income taxes 18,159,374 (1,687,114) 16,472,260
========================================================
Assets $ 226,238,171 $ 52,702,515 $ 278,940,686
15. QUARTERLY DATA - UNAUDITED
Condensed quarterly financial information is as follows (amounts in thousands,
except per share amounts). Adjustments reflect 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, 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
=====================================================================
-F28-
First Quarter Second Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
---------------------------------------------------------------------
Year Ended March 31, 2003
Sales $ 55,243 $ - $ 55,243 $ 64,296 $ - $ 64,296
Total Revenues 72,175 - 72,175 82,329 (385) 81,944
Cost of Sales 49,924 - 49,924 57,002 (385) 56,617
Total Costs and Expenses 68,826 - 68,826 78,018 (385) 77,633
Earnings before provision for income taxes 3,349 - 3,349 4,311 - 4,311
Provision for income taxes 1,373 - 1,373 1,766 - 1,766
Net earnings 1,976 - 1,976 2,545 - 2,545
=====================================================================
Net earnings per common share-Basic (1) $ 0.19 $ 0.19 $ 0.25 $ 0.25
=====================================================================
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
---------------------------------------------------------------------
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
=====================================================================
Year Ended March 31, 2003
Sales $ 53,785 $ - $ 53,785 $ 51,981 $ - $ 51,981
Total Revenues 73,264 (284) 72,980 72,547 - 72,547
Cost of Sales 48,934 (284) 48,650 48,488 - 48,488
Total Costs and Expenses 68,868 (284) 68,584 68,131 - 68,131
Earnings before provision for income taxes 4,396 - 4,396 4,416 - 4,416
Provision for income taxes 1,802 - 1,802 1,818 - 1,818
Net earnings 2,594 - 2,594 2,598 - 2,598
=====================================================================
Net earnings per common share-Basic (1) $ 0.26 $ 0.26 $ 0.27 $ 0.27
=====================================================================
(1) The sum of quarterly amounts may not equal the annual amount due to
quarterly calculations being based on varying weighted average shares
outstanding.
-F29-
SCHEDULE II
ePlus inc. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2001, 2002, and 2003
(In Thousands)
Additions
(1) (2)
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses accounts Deductions period
Description
2003 Allowance for doubtful
accounts and credit losses $6,771 $ 616 $ (494) $140 $6,753
2002 Allowance for doubtful
accounts and credit losses $4,279 $1,489 $1,187 $184 $6,771
2001 Allowance for doubtful
accounts and credit losses $2,659 $1,989 $ - $369 $4,279
-S1-
Exhibit 21.1
Subsidiaries of the Company
- ---------------------------
ePlus Group, inc., a Commonwealth of Virginia 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 Commonwealth of Virginia corporation, a wholly-
owned subsidiary
ePlus Systems, inc., a Commonwealth of 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 wholly-owned subsidiary of
ePlus Group, inc. and ePlus Technology, inc.
-S2-