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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______.
Commission file number: 0-28926
ePlus inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by 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, 2003 was $73,149,632. The outstanding number of shares of
common stock of the Company as of June 7, 2004, was 8,915,058.
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, are based upon numerous assumptions about future conditions
that may not occur. 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. 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") service
offering. 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 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 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 and expansion 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 its eECM offering 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 an
emerging 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 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-
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.;
o ePlus Content Services, inc.;
o ePlus Document Systems, inc.; and
o ePlus Information Holdings, 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 conducts 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 Document
Systems inc. was incorporated on October 15, 2003 and is the entity that holds
certain assets and liabilities originally acquired from Digital Paper
Corporation. On January 6, 2004, ePlus Information Holdings, inc. was
incorporated; however, to date, the entity has conducted no business and has no
employees or business locations. 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.
ACQUISITIONS
The Company has acquired the following material entities or assets since 1999.
The following is a summary of the acquisitions presented in chronological order.
Major Business Accounting
Date Acquired Acquisition Locations Method Consideration
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May 28, 2004 Certain assets and liabilities from Metro New York, Purchase $5,000,000 in cash and assumption of
Manchester Technologies, Inc. (merged South Florida and certain liabilities
into ePlus Technology, inc. upon Baltimore, MD
acquisition)
October 10, 2003 Certain assets and liabilities from Herndon, VA Purchase $1,601,632 in cash plus the assumption
Digital Paper Corporation of certain liabilities
March 29, 2002 Certain assets and liabilities from Boston, MA, Purchase $2,150,000 in cash plus the assumption
Elcom International, Inc.'s IT Philadelphia, PA, of certain liabilites
fulfillment and professional services San Diego, CA and
business (merged into ePlus Technology, New York, NY
inc. upon acquisition)
October 4, 2001 SourceOne Computer Corporation (merged Campbell, CA Purchase 274,999 shares of common stock valued at
into ePlus Technology, inc. upon $2,007,500 and $800,006 in cash
acquisition)
May 15, 2001 Certain assets and liabilities from Avon, CT and Purchase 442,833 shares of common stock valued at
ProcureNet, Inc. (merged into newly Houston, TX $3,873,150 and $1,000,000 in cash plus
created entities ePlus Systems, inc. the assumption of certain liabilities
and ePlus Content Services, inc.)
October 1, 1999 CLG, Inc. (merged into ePlus Group, Raleigh, NC Purchase 392,990 shares of common stock valued at
inc. upon acquisition) $3,900,426, subordinated notes to seller
of $3,064,574 and $29,535,000 in cash
-4-
OUR BUSINESS
ePlus has developed its eECM model through development and acquisition of
software, products, and business process services over the past five years. Our
current offerings include IT sales and professional services, leasing and
financing services, asset management software, and services, procurement
software, document management and distribution 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 eECM is positioned to provide a comprehensive offering of products and
services to our target market 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 eECM solution are:
o IT Sales: We are an authorized reseller of leading IT hardware and
software products and have technical support personnel to support
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 500,000 pattern matching rules and 60,000
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,
data storage design, and intrusion detection 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.
o Document Technology: Our product, DigitalPaper XE (Extended
Enterprise), is a document management and distribution software
product that provides fast, secure web access to documents in a
collaborative environment. The software allows users to access large,
complex and unstructured documents such as engineering drawings,
facilities diagrams, blueprints and technical manuals across an
enterprise's supply chain.
-5-
The procurement software products and services, asset management, document
management software, 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 primary target customers are 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 target customers in this
market.
Our target customer has one or more of the following business characteristics
that we believe qualify 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, document management and
distribution software, 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.
On May 28, 2004, ePlus purchased certain assets and assumed certain liabilities
of Manchester Technologies, Inc. for total consideration of $5.2 million. The
purchase was made by ePlus Technology, inc., a wholly-owned subsidiary of ePlus
inc. The acquisition will add to our IT reseller and professional services
business. Approximately 125 former Manchester Technologies, Inc. personnel will
be hired by ePlus as part of the transaction and are located in 3 established
offices in metropolitan New York, South Florida and Baltimore.
BUSINESS SEGMENTS
See "Note 13 - 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 the 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.
-6-
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.
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, document
management and distribution, 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:
-7-
Convert current and future customers to our services
We have an existing client base of approximately 2,000 customers, the vast
majority of which are based in the United States. We believe our years of
experience in developing supply chain management solutions, including financing,
asset management and information technology sales and service, give us
significant advantages over our competitors. Consequently, we believe we are
well positioned to offer a comprehensive Enterprise Cost Management solution
tailored to meet our customers' specific needs. We offer our software-based
services through both a hosted version that can be obtained through a
subscription fee basis or as a stand-alone product that can be licensed by the
customer.
Expand our sales force and marketing activities
We currently have approximately 178 employees in our sales and marketing
function, which represents a decrease compared to the previous year of 190
employees. 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 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 subscription 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.
-8-
o Order Information-contains multiple data fields which can be easily
customized to provide complete information to the customer, such as
accounting codes, budget costs, cost center information, notes, and
shipping and billing information.
o Multiple Currency-contains the ability to handle multiple currency
issues.
The key benefits of Procure+ include:
o easy to use, either as an Internet-based interface that requires no
software to be installed at a customer's location and limited
training, or installed in-house and run on a customer's internal
systems;
o easy implementation without the assistance or expense of third-party
consultants as ePlus usually provides the configuration and
implementation services;
o integration of multiple vendor catalogs and advanced search, filtering
and viewing capabilities that allow the customer to control views by
user groups;
o an easily configured workflow module that automates and controls each
customer's existing business processes for requisition or order
routing, approval and preparation;
o order status reporting throughout the requisition process as well as
real-time connections to suppliers for pricing and availability and
other critical information; and
o controls unauthorized purchasing and enables usage of preferred
vendors for volume discounts.
Content+. Content+ provides functionality to extract, cleanse, update, and
syndicate electronic catalog content and related business information. The core
to Content+ is the program Common Language Generator ("CLG"), which incorporates
a knowledge base of over 500,000 pattern matching rules and 60,000 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+ provide 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
e-commerce 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.
-9-
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.
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 e-commerce 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;
-10-
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 cost 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 invoice presentment and payment. Our DigitalPaper XE
document management and distribution software is used by customers for
e-sourcing, engineering change notification, manufacturing, maintenance and
asset management. 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.
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.
-11-
We provide Enterprise Cost Management as a service solution to our customers,
and the ongoing support of the customer and our commitment to the highest
possible customer satisfaction is fundamental to our strategy. We use a team
approach to providing customer care and assign each customer to a specific team
so that they are able to continue to interact with the same ePlus personnel who
have experience and expertise with the customer's specific business processes
and requirements.
TECHNOLOGY
General. Our Procure+ and Manage+ applications are fully standards-based,
designed for the Internet and built upon an underlying architecture that is
based on leading application frameworks. These frameworks provide access
security, load balancing, resource pooling, message queuing, distributed
transaction processing and reusable components and services.
Our applications are designed to be scalable, due to our multi-tiered
architecture employing thin client, multi-threaded application servers and
relational databases. Our applications are available to our customers over any
standard Internet browser without the need to download applets or executables.
We use a component-based application infrastructure composed of readily
configurable business rules, a workflow engine, advanced data management
capabilities and an electronic cataloging system. Each of these core elements
plays a crucial role in deploying enterprise-wide solutions that can capture a
customer's unique policies and processes and manage key business functions.
Business Rules. Our business rules engine allows Procure+ to be configured so
that our customers can effectively enforce their requisition approval policies
while providing flexibility so that the business rules can be edited and
modified as our customer's policies change. Users of the system are presented
with appropriate guidance to facilitate adherence to corporate policies. The
business rules dramatically reduce reworking of procedures, track and resolve
policy exceptions online and eliminate re-keying of data into back-end systems.
The business rules permit management by exception, in which items requiring
managerial attention are automatically routed.
Workflow Engine. Our workflow engine allows information to flow through the
customer organization in a timely, secure and efficient manner. For example, in
addition to incorporating policy-based business rules, it incorporates
time-based standards to reroute purchase requisitions if the original recipient
does not respond within the allocated performance time frame. Our application
also provides e-mail notification to users of the status of a procedure or of
events requiring attention, alteration and action, such as notifying the creator
of a purchase requisition of its location in the purchasing cycle or notifying a
manager of a requisition requiring attention.
Content Management. Our electronic catalog allows multiple vendor information to
be linked to customized customer catalogs. Information can be updated when
required by the customer.
Asset Management. Manage+ is based upon an RDBMS (relational database management
system) that is designed to be scalable and can be easily customized to provide
customer-specific fields and data elements.
Our Enterprise Cost Management product can be integrated with external systems
such as 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.
-12-
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 and Digital Paper Corporation on October 10,
2003, 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 market both software that we own and software for which
we have obtained the perpetual license rights and source code from a third
party. Subject to certain exceptions, we generally retain the source code and
intellectual property rights of the customized software.
To successfully implement our business strategy, we are providing both a hosted
and stand-alone software functionality and related services that meet the
demands of our customers and prospective customers. We expect that competitive
factors will create a continuing need for us to improve and add to our
Enterprise Cost Management offering. The addition of new products and services
will also require that we continue to improve the technology underlying our
applications. We intend to maintain our competitive advantage by focusing our
current resources in maintaining our state-of-the-art programs.
SALES AND MARKETING
We focus our marketing efforts on achieving lead generation and converting our
existing customer base to our 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 potential 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 33 office locations throughout the
United States. See "Item 2. PROPERTIES" for additional office location
information. As of March 31, 2004 our sales organization included approximately
178 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, trademark, 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 have two US patents that cover different aspects of electronic sourcing. We
have a patent in nine European countries covering the same subject matter. We
also have a patent in the US and an allowed patent in China useful for the
presentation of documents in document management technology. 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 service/trademarks: ePlus, ePlusSuite, Procure+,
Manage+, Service+, Finance+, ePlus Leasing, International Computer Networks,
Docpak, Simply Faster, Viewmark, and Digital Paper. We have applied for the
following trademarks: OneSource, Content+, eECM, and ePlus Enterprise Cost
Management. We also have twenty-one registered copyrights and have additional
common law trademark and copyright rights.
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.
-13-
FINANCING AND SALES ACTIVITIES
We have been in the business of selling, leasing, financing, providing
procurement, document management 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 primarily lease 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 recorded residual assumption or the net book value.
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. See "Item 7, Management's Discussion and Analysis of Results of
Operations, Financial Condition, Liquidity and Capital Resources."
-14-
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 and financially prudent, 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 product knowledge, historical
re-marketing information and experience on the items that we lease, sell and
service. We rely on our experience or outside opinions in the process of setting
and adjusting our sale prices, lease rate factors and the residual values.
Default and Loss Experience. During the fiscal year ended March 31, 2004, we
provided for $46,663 in credit losses and incurred actual credit losses of
$14,012. During the fiscal year ended March 31, 2003 we provided for $616,074 in
credit losses and incurred actual credit losses of $494,247.
COMPETITION
The market for leasing, IT sales and services and 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 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.
-15-
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, document
management software and business process outsourcing.
EMPLOYEES
As of March 31, 2004, we employed 513 full-time and part-time employees who
operated through approximately 33 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 178
Technical Support 119
Administrative 143
Software and Implementations 66
Executive 7
U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC") 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 e-commerce 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.
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
-16-
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.
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.
-17-
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.
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: capital leases and operating leases. A capital 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 capital 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.
-18-
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.
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, increased direct marketing by
manufacturers rather than through distributors, reductions in realized residual
values, fluctuations in interest rates, 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.
-19-
ITEM 2. PROPERTIES
The Company operates from 33 office locations. Our total leased square footage
is approximately 110,674 square feet for which we pay rent of approximately
$151,000 per month. Some of our companies operate in shared office space to
improve sales, marketing and 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, 2004, the square footage and the general
office functions.
Location Company Employees Square Footage Function
- ---------------------------------------------------------------------------------------------------------------------
Herndon, VA ePlus Group, inc. 221 36,533 Corporate and subsidiary headquarters, sales
(2 locations) ePlus Technology, inc. office, technical support and warehouse
ePlus Government, inc.
ePlus Document Systems, inc.
Robbinsville, NJ ePlus Technology, inc. 30 9,563 Sales office and technical support
Pottstown, PA ePlus Technology, inc. 42 13,653 Sales office, technical support and warehouse
(2 locations)
Sunnyvale, CA ePlus Technology, inc. 31 11,200 Sales office, technical support and warehouse
Wilmington, NC ePlus Technology, inc. 27 6,068 Sales office and technical support
Raleigh, NC ePlus Group, inc. 22 8,638 Sales office-shared and technical support
ePlus Technology, inc.
Avon, CT ePlus Systems, inc. 16 4,807 Subsidiary headquarters, sales office and
technical development
Houston, TX ePlus Content Services, inc. 26 4,000 Subsidiary headquarters, sales office and
e-commerce catalog service center
Canton, MA ePlus Technology, inc. 25 6,228 Sales office and technical support
Other locations 73 9,984 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. The Pottstown
location has been extended at similar terms and conditions.
ITEM 3. LEGAL PROCEEDINGS
On May 26, 2004 the Company filed a complaint against Ariba, Inc. in the United
States District Court for the Eastern District of Virginia. The complaint
alleges that Ariba, Inc. used or sold products, methods, processes, services
and/or systems that infringe on certain of the Company's patents. The Company is
seeking injunctive relief and an unspecified amount of monetary damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-20-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER'S PURCHASES OF EQUITY SERCURITIES
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 on the NASDAQ for the period from April 1, 2002
through March 31, 2004, by quarter.
Quarter Ended High Low
- ------------- ---- ---
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
June 30, 2003 $10.99 $7.13
September 30, 2003 $16.06 $10.47
December 31, 2003 $16.17 $10.55
March 31, 2004 $15.49 $12.18
On June 7, 2004 the closing price of the common stock was $11.44 per share. On
June 7, 2004 there were 197 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.
PURCHASES OF OUR COMMON STOCK
The following table provides information regarding our purchases of ePlus inc.
Common Stock during the quarter ended March 31, 2004:
Total number of shares Maximum number of
purchased as part of shares that may yet
Total number of Average price publicly announced plans be purchased under
Period shares purchased (1) per share or programs the plans or programs
- ----------- -------------- -------- ------------------------- ---------------------
January 1, 2004 through January 31, 2004 187,500 $14.06 187,500 198,880 (2)
February 1, 2004 through February 29, 2004 83,500 $13.69 83,500 120,745 (3)
March 1, 2004 through March 31, 2004 90,500 $13.60 90,500 30,872 (4)
------- ------ ------- -------
Total 361,500 $13.86 361,500 30,872
======= ====== ======= =======
(1) All shares acquired were in open-market purchases.
(2) The share purchase authorization in place during the quarter ended March 31, 2004 has purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($7,500,000). As of January 31, 2004, the remaining
authorized dollar amount to purchase shares was $2,795,259 and, based on January's average price per share paid, 198,880
represents the maximum number of shares that may yet be purchased.
(3) The share purchase authorization in place during the quarter ended March 31, 2004 has purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($7,500,000). As of February 29, 2004, the remaining
authorized dollar amount to purchase shares was $1,652,004 and, based on February's average price per share paid,
120,745 represents the maximum number of shares that may yet be purchased.
(4) The share purchase authorization in place during the quarter ended March 31, 2004 has purchase limitations on both the
number of shares (3,000,000) as well as a total dollar cap ($7,500,000). As of March 31, 2004, the remaining authorized
dollar amount to purchase shares was $421,646 and, based on March's average price per share paid, 30,872 represents the
maximum number of shares that may yet be purchased.
-21-
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, 2004, 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.
Number of securities to Weighted-average
be issued upon exercise exercise price of Number of securities remaining
of outstanding options, outstanding options, available for future issuance
Plan Category warrants and rights warrants and rights under equity compensation plans
- ------------- ------------------------- ---------------------- -------------------------------
Equity compensation plans
approved by security holders 1,786,232 $ 9.24 756,591
Equity compensation plans not
approved by security holders - - -
------------------------- ---------------------- -------------------------------
Total 1,786,232 $ 9.24 756,591
========================= ======================= ==============================
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, 2002, 2003 AND
2004" and "ITEM 1. BUSINESS."
ePLUS, INC. AND SUBSIDIARIES SELECTED
CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
Years Ended March 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------ ------------ ----------- ----------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Sales of product $ 170,149 $ 219,795 $ 133,008 $ 228,770 $ 267,899
Sales of leased equipment 57,360 34,031 9,353 6,096 -
Lease revenues 31,374 42,694 48,850 50,520 51,254
Fee and other income 5,850 10,066 13,774 14,260 11,405
----------- ----------- ---------- ---------- ----------
Total revenues 264,733 306,586 204,985 299,646 330,558
----------- ----------- ---------- ---------- ----------
Costs and Expenses:
Cost of sales, product 148,721 184,302 114,554 201,277 236,283
Cost of sales of leased equipment 55,454 33,329 9,044 5,892 -
Direct lease costs 8,025 16,535 9,579 6,582 10,561
Professional and other costs 2,126 3,363 2,718 3,188 3,701
Salaries and benefits 17,780 29,042 30,165 43,428 41,325
General and administrative expenses 6,987 10,507 12,193 14,499 14,631
Interest and financing costs 11,390 15,523 11,810 8,308 6,847
----------- ----------- ---------- ---------- ----------
Total costs and expenses 250,483 292,601 190,063 283,174 313,348
----------- ----------- ---------- ---------- ----------
Earnings before provision for income taxes 14,250 13,985 14,922 16,472 17,210
Provision for income taxes 5,875 5,667 6,010 6,760 7,056
----------- ----------- ---------- ---------- ----------
Net earnings $ 8,375 $ 8,318 $ 8,912 $ 9,712 $ 10,154
=========== =========== ========== ========== ==========
Net earnings per common share - Basic $ 1.09 $ 0.86 $ 0.87 $ 0.97 $ 1.09
=========== =========== ========== ========== ==========
Net earnings per common share - Diluted $ 0.91 $ 0.80 $ 0.85 $ 0.96 $ 1.02
=========== =========== ========== ========== ==========
Weighted average shares outstanding - Basic 7,698,287 9,625,891 10,235,129 10,061,088 9,332,324
Weighted average shares outstanding - Diluted 9,115,056 10,383,467 10,458,235 10,109,809 9,976,458
-22-
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands)
As of March 31,
------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ---------- ------------ ---------- ---------
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and cash equivalents $ 21,910 $ 24,534 $ 28,224 $ 27,784 $ 25,155
Accounts receivable 60,167 57,627 41,397 38,385 51,189
Notes receivable 1,195 1,862 228 53 52
Inventories 2,445 2,651 872 1,373 900
Investment in leases and leased equipment, net 231,999 202,846 169,087 182,169 186,667
Other assets 27,619 21,347 39,188 29,177 30,239
----------- --------- ---------- --------- ----------
Total assets $ 345,335 $ 310,867 $ 278,996 $ 278,941 $ 294,202
=========== ========= ========== ========= ==========
Liabilities:
Accounts payable - equipment $ 22,976 $ 9,227 $ 3,899 $ 5,636 $ 9,993
Accounts payable - trade 28,881 17,764 14,223 25,914 32,141
Salaries and commissions payable 957 1,293 492 620 584
Recourse notes payable 39,588 8,876 4,660 2,736 6
Nonrecourse notes payable 182,845 159,122 129,977 116,255 117,857
Other liabilities 12,967 22,678 19,456 18,163 22,037
---------- --------- ---------- --------- ----------
Total liabilities 288,214 218,960 172,707 169,324 182,618
Stockholders' equity 57,121 91,907 106,289 109,617 111,584
---------- --------- ---------- --------- ----------
Total liabilities and stockholders' equity $ 345,335 $ 310,867 $ 278,996 $ 278,941 $ 294,202
========== ========= ========== ========= ==========
-23-
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, 2002, 2003 AND 2004
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes included elsewhere in this report.
Our results of operations are susceptible to fluctuations for a number of
reasons, including, without limitation, customer demand for our products and
services, supplier costs, interest rate fluctuations and differences between
estimated residual values and actual amounts realized related to the equipment
we lease. Operating results could also fluctuate as a result of the sale of
equipment in our lease portfolio prior to the expiration of the lease term to
the lessee or to a third party. Such sales of leased equipment prior to the
expiration of the lease term may have the effect of increasing revenues and net
earnings during the period in which the sale occurs, and reducing revenues and
net earnings otherwise expected in subsequent periods.
We currently derive the majority of our revenue from sales and financing of
information technology and other assets. We have expanded our product and
service offerings under 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 (SFAS) No. 13, "Accounting for Leases," as: (1) direct
financing; (2) sales-type; or (3) operating leases. Revenues and expenses
between accounting periods for each lease term will vary depending upon the
lease classification.
For financial statement purposes, we present revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
DIRECT FINANCING AND SALES-TYPE LEASES. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the 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.
-24-
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 equipment subject to such leases may be
obtained in the secondary marketplace or is the result of re-leasing our own
portfolio. For equipment supplied from our technology sales business unit
subsidiaries, the dealer margin is presented in equipment sales revenue.
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 leased equipment and is depreciated on
a straight-line basis over the lease term to our estimate of residual value.
Revenue, depreciation expense and the resulting profit for operating leases are
recorded on a straight-line basis over the life of the lease.
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. For lease
periods subsequent to the initial term, revenue is recognized upon receipt of
payment by the lessees since collection of such amounts is not reasonably
assured. Such revenues recognized were $12,697,838, $10,773,157, and $6,904,763
for the years ended on March 31, 2002, 2003, and 2004, respectively.
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
accounting principles generally accepted in the United States of America,
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 lease term, our policy is to recognize revenues upon the payment by the
lessee, as collectibility is not reasonably assured.
-25-
INITIAL DIRECT COSTS. Initial direct costs related to the successful 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.
SALES OF PRODUCT. Sales of product include the following types of transactions:
(1) sales of new or used equipment which is not subject to any type of lease;
(2) service revenue in our technology sales business unit; (3) sales of
off-lease equipment to the secondary market; and (4) sales of third-party
software. Sales of new or used equipment are recognized upon shipment and sales
of off-lease equipment are recognized when constructive title passes to the
purchaser. Service revenue is recognized as the related services are rendered.
SOFTWARE SALES AND RELATED COSTS. 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 and related costs incurred 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. These revenues are
included in fee and other income on our consolidated statement of earnings.
SALES OF LEASED EQUIPMENT. Sales of leased equipment consist 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; (4) agent fees received from various
manufacturers in the reseller business; and (5) 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, 2003
and 2004, the Company's reserve for credit losses was $6.8 and $4.7 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 prior to the year ended 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,
representing the entire balance of this investment.
-26-
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, 2004 and 2003,
respectively, $0.4 million and $0.2 million of costs for the development of
software for internal use were capitalized. As of March 31, 2004, the Company
had $1.2 million, net of amortization, of capitalized costs for the development
of internal-use software as compared to $1.7 million, net of amortization, at
March 31, 2003. These capitalized costs are included in the accompanying
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, 2004 and 2003, $1.9 million and $0.3
million of costs for the development of software available to customers were
capitalized. The increase was due, in part, to the acquisition of software and
products from Digital Paper Corporation. As of March 31, 2004, the Company had
$1.0 million, net of amortization, of capitalized costs for the development of
software available to customers as compared to $0.3 million, net of
amortization, at March 31, 2003. These capitalized costs are included in the
accompanying consolidated balance sheets as a component of other assets.
RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted SFAS No. 149 and its adoption did not 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 adopted SFAS No. 150
and its adoption did not have a material impact on its financial statements.
RESULTS OF OPERATIONS
The Year Ended March 31, 2004 Compared to the Year Ended March 31, 2003
Total revenues generated by the Company during the year ended March 31, 2004
were $330.6 million compared to revenues of $299.6 million for the year ended
March 31, 2003, an increase of 10.3%. This increase is primarily attributable to
-27-
increased revenues from the sales of product from the IT reseller due, in part,
from increased demand from its customers. 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 product and sales of leased equipment,
increased 14.1% to $267.9 million during the year ended March 31, 2004, as
compared to $234.9 million in the prior fiscal year.
The majority of sales of product 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, 2004, 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, 2004, equipment
sales through the Company's technology business unit subsidiaries accounted for
98.8% of sales of product, compared to 99.1% for the prior fiscal year. For the
year ended March 31, 2004, sales of product increased 17.1% to $267.9 million, a
result of increased technology sales through the Company's subsidiaries.
The Company realized a gross margin on sales of product of 11.8% for the year
ended March 31, 2004, as compared to 12.0% during the year ended March 31, 2003.
The Company also recognizes revenue from the sale of leased equipment. During
the year ended March 31, 2004 there were no sales of leased equipment with the
prior year having $6.1 million with a gross margin of 3.3%. 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."
The Company's lease revenues increased 1.5% to $51.3 million for the year ended
March 31, 2004, compared with $50.5 million for the prior fiscal year. Our net
investment in leased assets was $186.7 million at March 31, 2004, a 2.5%
increase from $182.2 million at March 31, 2003.
For the year ended March 31, 2004, fee and other income was $11.4 million, a
decrease of 20.0% 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 decrease
in fee and other income in the year ended March 31, 2004 is a reflection of a
$2.5 million settlement from one of the Company's equipment vendors received in
the prior year. 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 increased 60.4% during the year ended March 31,
2004, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense of leased equipment. The net investment in
operating leases has increased 126.5% in the current year.
Professional and other fees increased 16.1% for the year ended March 31, 2004
over the prior fiscal year, and was primarily the result of an increase in
broker fees from sales of products and utilization of outside professional
services.
Salaries and benefits expenses decreased 4.8% during the year ended March 31,
2004, as compared to the prior fiscal year. The decrease is the result of the
reduction in the total number of employees and the consolidation of the IT
resellers.
General and administrative expenses increased 0.9% over the prior fiscal year as
the Company's general and administrative expenses remained similar to the prior
year.
-28-
Interest and financing costs incurred by the Company for the year ended March
31, 2004 decreased 17.6%, and was related 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 increased
insignificantly, but our weighted average interest rate on new lease-related
non-recourse debt decreased during the years ended March 31, 2004 and 2003 (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 $7.1 million for the year
ended March 31, 2004 from $6.8 million for the prior fiscal year, reflecting an
effective income tax rate of 41.0% in each year.
The foregoing resulted in a 4.5% increase in net earnings for the year ended
March 31, 2004, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $1.09 and $1.02,
respectively, for the year ended March 31, 2004, as compared to $0.97 and $0.96,
respectively, for the year ended March 31, 2003, based on weighted average
common shares outstanding of 9,332,324 and 9,976,458, respectively, for 2004 and
10,061,088 and 10,109,809, respectively, for 2003.
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 product 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 product and sales of leased equipment,
increased 65.0% to $234.9 million during the year ended March 31, 2003, as
compared to $142.4 million in the prior fiscal year.
The majority of sales of product 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
99.1% of sales of product, compared to 99.2% for the prior fiscal year. For the
year ended March 31, 2003, sales of product increased 72.0% to $228.8 million, a
result of increased technology sales through the Company's subsidiaries.
The Company realized a gross margin on sales of product of 12.0% for the year
ended March 31, 2003, as compared to 13.9% 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.
-29-
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 years ended March 31, 2003
and March 31, 2004, the Company recognized a gross margin of 3.3% on leased
equipment sales. 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 $14.3 million, an
increase of 3.5% 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 settlement 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 44.0% 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 18.9% 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.
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.
-30-
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2004, the Company generated cash flows from
operations of $20.6 million, and used cash flows from investing activities of
$24.1 million. Cash flows provided by financing activities amounted to $0.8
million during the same period. The effect of exchange rate changes during the
period provided cash flows of $59,259. The net effect of these cash flows was a
net decrease in cash and cash equivalents of $2.6 million during the year.
During the same period, our total assets increased $15.3 million, primarily as
the result of increases in our net accounts receivable. The Company's net
investments in direct financing lease equipment decreased $6.6 million, or 3.8%,
and operating lease equipment increased $11.1 million, or 126.5%, respectively,
during the period. The cash balance at March 31, 2004 was $25.2 million as
compared to $27.8 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. 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. Recently, the Company has funded its leasing
activities with Bank of America Vendor Finance, Inc.(including Fleet Business
Credit LLC), De Lage Landen Financial Services, Inc., Citizens Leasing
Corporation, Fifth Third Bank, GE Capital Corporation, Hitachi Capital America
Corporation , JP Morgan Leasing, Inc. , Wells Fargo Equipment Finance, Inc. and
Key Corporate Capital Inc., among others. Each transaction is specifically
approved and done solely at the lender's discretion.
During the year ended March 31, 2004, the Company's lease-related non-recourse
debt portfolio increased 1.4% to $117.9 million.
Whenever desirable and possible, 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.
-31-
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, 2004, the Company had
$10.0 million of unpaid equipment cost, as compared to $5.6 million at March 31,
2003.
Working capital for our leasing business is provided through a $45,000,000
credit facility expiring on July 21, 2006. Participating in this facility are
Branch Banking and Trust Company ($15,000,000), Bank of America($15,000,000) and
National City Bank ($15,000,000), 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 such as chattel paper (including
leases), receivables, inventory, and equipment and 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 higher of the Federal Funds Rate plus 0.5% to 0.75%
or prime rate. As of March 31, 2004, 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. The availability of the
credit facility is subject to a borrowing base formula that consists of
inventory, receivables, purchased assets, and lease assets. Availability under
the credit facility may be limited by the asset value of the equipment purchased
by us or by terms and conditions in the credit facility agreement. If we are
unable to sell the equipment or unable to finance the equipment on a permanent
basis within a certain time period, the availability of credit under the
facility could be diminished or eliminated. The credit facility contains
covenants relating to minimum tangible net worth, cash flow coverage ratios,
maximum debt to equity ratio, maximum guarantees of subsidiary obligations,
mergers and acquisitions and asset sales.
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 ("GECDF"). 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. The traditional business of ePlus
Technology as a seller 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.
The floor planning inventory agreement with GECDF had a maximum credit limit of
$26,000,000 for each year and the outstanding balances were $21,637,077 and
$15,158,501 as of March 31, 2004 and 2003, respectively. In addition to the
floor planning financing, ePlus Technology, inc., has an accounts receivable
facility through GECDF with a maximum amount that can be borrowed of $7,000,000.
At March 31, 2004, there was no outstanding balance on this account receivable
facility and $2,726,347 was outstanding on this facility as of March 31, 2003.
Borrowing availability under the GECDF facilities is limited to specific
allowable collateral asset values and also must comply with contractual
covenants regarding tangible net worth, a debt to equity ratio, dividend
restrictions and limitations on asset sales.
-32-
The facilities provided by GECDF have a guaranty of up to $6,900,000 by ePlus
inc. Loss of the GECDF facility, which can occur with 90 days notice from GECDF,
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 and operational accounts payable functions.
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.
CONTRACTUAL OBLIGATIONS
The impact that our contractual obligations as of March 31, 2004 are expected to
have on our liquidity and cash flow in future periods is as follows:
Payments Due by Period
----------------------
Less than More than
Total 1 Year 1-3 years 3-5 years 5 years
------------- ------------- ------------- ------------- -------------
Nonrecourse notes payable (1) $117,857,208 $ 63,118,320 $ 47,647,123 $ 7,091,765 -
Recourse notes payable 5,863 5,863 - - -
Operating lease obligations (2) 1,623,386 1,362,141 261,245 - -
Purchase Obligations (3) 394,325 301,730 92,595
------------- ------------- ------------- ------------- -------------
Total $119,880,782 $ 64,788,054 $ 48,000,963 $ 7,091,765 -
============= ============= ============= ============= =============
(1) Nonrecourse notes payable obligations in which the specific lease receivable payments have been
assigned to the lender.
(2) Rent obligations
(3) Telecommunications-related contracts
OFF BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As of March 31, 2004, we are not involved in any unconsolidated
special purpose entity transactions.
ADEQUACY OF CAPITAL RESOURCES
The continued implementation of the Company's eECM business strategy will
require a significant investment in both resources 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.
-33-
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. 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, 2004,
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 WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of March 31, 2004. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of March 31, 2004, our disclosure
controls and procedures were effective to provide reasonable assurance that
information relating to the Company and its subsidiaries that we are required to
disclose in the reports that we file or submit to the SEC is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
During the last fiscal quarter covered by this annual report, there have been no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
-34-
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........................60 Director, Chairman of the Board, III
President and Chief Executive Officer
Bruce M. Bowen...........................52 Director and Executive Vice President III
Steven J. Mencarini......................48 Senior Vice President and
Chief Financial Officer
Kleyton L. Parkhurst.....................41 Senior Vice President and Treasurer
Terrence O'Donnell.......................60 Director II
Lawrence S. Herman.......................60 Director I
C. Thomas Faulders, III..................54 Director I
Milton E. Cooper.........................65 Director II
ITEM 11. EXECUTIVE COMPENSATION
See introductory paragraph of this Part III.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See introductory paragraph of this Part III.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See introductory paragraph of this Part III.
ITEM 14. PRINCIPAL ACCOUNTANTS AND FEES
AUDIT FEES. The aggregate fees to be charged by Deloitte & Touche LLP for
professional services rendered for the audit of our annual financial statements
for the fiscal year ended March 31, 2004 and for the reviews of the financial
statements included in our Quarterly Reports on Form 10-Q for that fiscal year
are $350,000. The aggregate fees charged by Deloitte & Touche LLP for
professional services rendered for the audit of our annual financial statements
for the fiscal year ended March 31, 2003 and for the reviews of the financial
statements included in our Quarterly Reports on Form 10-Q for that fiscal year
were $255,000.
AUDIT-RELATED FEES. There were no fees billed by Deloitte & Touche LLP for
audit-related services rendered for the fiscal years ended March 31, 2004 or
2003.
TAX FEES. There were no fees billed by Deloitte & Touche LLP for tax-related
services rendered for the fiscal years ended March 31, 2004 or 2003.
ALL OTHER FEES. There were no other fees billed in the last two fiscal years for
professional services rendered by Deloitte & Touche LLP.
-35-
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
On February 13, 2004, The Company filed a Form 8-K with respect to a press
release reporting its financial results for the fiscal quarter ended December
31, 2003.
(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).
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 Certificate of Amendment of Certificate of Incorporation of the Company, filed October 1,
2003 (Incorporated herein by reference to Exhibit 3.5 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2003).
3.6 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)).
-36-
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 Current Report on Form
8-K filed on December 2, 2003).
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 Current Report on Form 8-K filed on
December 2, 2003).
10.6* MLC Master Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.7* Amended and Restated Incentive Stock Option 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 Outside Director 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 Nonqualified 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* 1997 Employee Stock Purchase 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 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).
10.12 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 Amended Credit Agreement dated July 21, 2003 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 July 25, 2003).
10.18 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).
10.19 Agreement for Wholesale Financing dated September 8, 2000 between Deutsche Financial
Services Corporation 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).
10.20 Paydown Addendum to Business Financing Agreement between Deutsche Financial Services
Corporation 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).
-37-
10.21 Limited Guaranty dated September 8, 2000 between Deutsche Financial Services Corporation 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).
10.22 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
5.1 to the Company's Current Report on Form 8-K filed on March 13, 2001).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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 5.7 to the Company's Current Report on Form 8-K filed on March 13,
2001).
10.29 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).
10.30 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).
10.31 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, 2003).
21 Subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
31.1 Rule 13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer of ePlus inc.
31.2 Rule 13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer of ePlus inc.
32 Section 1350 certification of the Chief Executive Officer and Chief Financial Officer of
ePlus inc.
* Indicates a management contract or compensatory plan or arrangement.
-38-
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 15, 2004
/s/ BRUCE M. BOWEN
------------------------------------------------
By: Bruce M. Bowen, Director and Executive Vice
President
Date: June 15, 2004
/s/ STEVEN J. MENCARINI
------------------------------------------------
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, Principal Accounting
Officer
Date: June 15, 2004
/s/ C. THOMAS FAULDERS, III
------------------------------------------------
By: C. Thomas Faulders, III, Director
Date: June 15, 2004
/s/ TERRENCE O'DONNELL
------------------------------------------------
By: Terrence O'Donnell, Director
Date: June 15, 2004
-39-
ePlus inc. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of March 31, 2003 and 2004 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 2002, 2003, and 2004 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2002, 2003, and 2004 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 2002, 2003, and 2004 F-7
Notes to Consolidated Financial Statements F-8
SCHEDULE
II-Valuation and Qualifying Accounts for the Years
Ended March 31, 2002, 2003, and 2004 S-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2003 and 2004, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years ended March 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2003 and 2004, and the results of their operations and their cash
flows for each of the three years ended March 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
McLean, Virginia
June 15, 2004
F-2
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 As of March 31, 2004
-------------------- --------------------
ASSETS
Cash and cash equivalents $ 27,784,090 $ 25,155,011
Accounts receivable, net of allowance for doubtful
accounts of $3,346,055 and $1,584,358 as of
March 31, 2003 and 2004, respectively 38,384,841 51,188,640
Notes receivable 53,098 51,986
Inventories 1,373,168 899,748
Investment in leases and leased equipment - net of allowance for
doubtful accounts of $3,407,376 and $3,145,655 as of March 31,
2003 and 2004, respectively 182,169,324 186,667,141
Property and equipment - net 5,249,087 5,230,473
Other assets 4,779,946 4,765,781
Goodwill 19,147,132 20,243,310
-------------------- ---------------------
TOTAL ASSETS $ 278,940,686 $ 294,202,090
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 5,635,776 $ 9,993,077
Accounts payable - trade 25,914,385 32,140,670
Salaries and commissions payable 619,860 583,934
Accrued expenses and other liabilities 13,402,101 11,983,798
Recourse notes payable 2,736,298 5,863
Nonrecourse notes payable 116,255,194 117,857,208
Deferred tax liability 4,760,029 10,053,226
-------------------- ---------------------
Total Liabilities 169,323,643 182,617,776
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,
10,540,135 issued and 9,451,651 outstanding at March 31, 2003;
and 25,000,000 authorized, 10,717,242 issued and 8,939,958
outstanding at March 31, 2004 105,400 107,172
Additional paid-in capital 62,905,727 64,339,988
Treasury stock, at cost, 1,088,484 and 1,777,284 shares, respectively (7,511,124) (17,192,886)
Retained earnings 54,057,732 64,211,473
Accumulated other comprehensive income-
Foreign currency translation adjustment 59,308 118,567
-------------------- ---------------------
Total Stockholders' Equity 109,617,043 111,584,314
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,940,686 $ 294,202,090
==================== =====================
See Notes to Consolidated Financial Statements.
F-3
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31,
---------------------------------------------
2002 2003 2004
---------------------------------------------
REVENUES
Sales of product $ 133,008,378 $ 228,769,966 $ 267,898,937
Sales of leased equipment 9,353,088 6,095,830 -
---------------------------------------------
142,361,466 234,865,796 267,898,937
Lease revenues 48,850,017 50,520,293 51,253,518
Fee and other income 13,773,863 14,260,057 11,405,033
---------------------------------------------
62,623,880 64,780,350 62,658,551
---------------------------------------------
TOTAL REVENUES (1) 204,985,346 299,646,146 330,557,488
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 114,554,147 201,277,000 236,283,350
Cost of sales, leased equipment 9,043,932 5,891,789 -
---------------------------------------------
123,598,079 207,168,789 236,283,350
Direct lease costs 9,578,631 6,582,409 10,560,586
Professional and other fees 2,717,618 3,188,046 3,700,795
Salaries and benefits 30,164,914 43,426,999 41,325,224
General and administrative expenses 12,194,169 14,499,261 14,630,731
Interest and financing costs 11,810,414 8,308,382 6,847,072
---------------------------------------------
66,465,746 76,005,097 77,064,408
---------------------------------------------
TOTAL COSTS AND EXPENSES (2) 190,063,825 283,173,886 313,347,758
---------------------------------------------
Earnings before provision for income taxes 14,921,521 16,472,260 17,209,730
---------------------------------------------
Provision for income taxes 6,009,798 6,759,551 7,055,989
---------------------------------------------
NET EARNINGS $ 8,911,723 $ 9,712,709 $ 10,153,741
=============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.87 $ 0.97 $ 1.09
=============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.85 $ 0.96 $ 1.02
=============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,235,129 10,061,088 9,332,324
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,458,235 10,109,809 9,976,458
(1) Includes amounts from related parties of $147,305, $145,962 and $302,968 for the fiscal years ended March
31, 2002, 2003 and 2004, respectively.
(2) Includes amounts to related parties of $902,818, $486,520 and $443,065 for the fiscal years ended March
31, 2002, 2003 and 2004, respectively.
See Notes to Consolidated Financial Statements.
F-4
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
------------------------------------------
2002 2003 2004
------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 8,911,723 $ 9,712,709 $ 10,153,741
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,644,713 4,510,705 10,487,439
Provision for credit losses 1,488,706 616,074 1,731,325
Deferred taxes (5,161,182) 10,231,687 5,293,197
Loss on sale of operating lease equipment 240,137 1,112,697
Adjustment of basis to fair market value of
operating lease equipment and investments 1,001,169 - -
Payments from lessees directly to lenders (489,962) (291,281) (2,645,589)
Loss (Gain) on disposal of property and equipment 96,148 (47,562) 904,579
Changes in:
Accounts receivable 18,079,347 2,465,447 (14,261,777)
Notes receivable 1,634,574 174,816 1,112
Inventories 1,899,869 (501,311) 473,420
Other assets (1) (3,747,399) 609,853 59,987
Accounts payable - equipment (5,327,815) 1,736,777 4,357,301
Accounts payable - trade (7,513,939) 10,809,400 6,226,285
Salaries and commissions payable, accrued
expenses and other liabilities (4,405,675) (5,348,826) (2,187,332)
------------------------------------------
Net cash provided by operating activities 12,350,414 35,791,185 20,593,688
------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment - 1,179,485 2,574,307
Purchase of operating lease equipment (931,556) (11,627,961) (19,592,804)
Increase in investment in direct financing and
sales-type leases (27,457,697) (19,761,290) (2,653,444)
Proceeds from sale of property and equipment 3,907 - -
Purchases of property and equipment (1,644,879) (1,549,190) (2,801,030)
Cash used in acquisitions, net of cash acquired (3,268,334) - (1,601,632)
Increase in other assets (2) (373,959) - -
------------------------------------------
Net cash used in investing activities (33,672,518) (31,758,956) (24,074,603)
------------------------------------------
F-5
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
------------------------------------------
2002 2003 2004
------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 81,520,753 $ 80,997,406 $ 77,904,696
Recourse 30,381 10,230,115 607,500
Repayments:
Nonrecourse (51,498,928) (78,130,384) (66,143,136)
Recourse (604,515) (8,089,225) (3,337,935)
Pay-off of recourse debt due to settlement - (98,660) -
Write-off of non-recourse debt due to bankruptcy - (1,996,596) 7,181
Purchase of treasury stock (574,800) (6,936,324) (9,681,762)
Proceeds from issuance of capital stock, net of
expenses 165,816 492,718 1,436,033
Repayments of lines of credit (4,027,283) (1,000,000) -
------------------------------------------
Net cash provided by (used in) financing
activities 25,011,424 (4,530,950) 792,577
------------------------------------------
Effect of Exchange Rate Changes on Cash - 59,308 59,259
------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,689,320 (439,413) (2,629,079)
Cash and Cash Equivalents, Beginning of Period 24,534,183 28,223,503 27,784,090
------------------------------------------
Cash and Cash Equivalents, End of Year $ 28,223,503 $ 27,784,090 $ 25,155,011
==========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 1,952,352 $ 4,991,426 $ 6,388,066
==========================================
Cash paid for income taxes $ 7,164,082 $ 4,459,405 $ 1,067,972
==========================================
Schedule of Noncash Investing and Financing Activities:
Common stock issued for acquisitions 5,880,650 - -
Liabilities assumed in purchase transactions $ 4,029,331 $ - $ 811,657
(1) Includes amounts provided by related parties of $98,202, $853 and $0 for the fiscal years ended March 31,
2002, 2003 and 2004.
(2) Includes amounts used by related parties of $(628,218), $0 and $0 for the fiscal years ended March 31,
2002, 2003 and 2004.
See Notes To Consolidated Financial Statements.
F-6
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------------- Paid-in Treasury Retained Comprehensive
Shares Par Value Capital Stock Earnings Income TOTAL
---------- -------- ----------- ---------- ----------- -------- ------------
Balance, April 1, 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
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
Issuance of shares for option exercise 177,107 1,772 1,434,261 - - - 1,436,033
Purchase of treasury stock (688,800) - (9,681,762) - - (9,681,762)
Net earnings - - - - 10,153,741 10,153,741
Foreign currency translation adjustment - - - - - 59,259 59,259
Total comprehensive income - - - - - - 10,213,000
---------- -------- ----------- ------------ ----------- -------- ------------
Balance, March 31, 2004 8,939,958 $107,172 $64,339,988 $(17,192,886) $64,211,473 $118,567 $111,584,314
========== ======== =========== ============ =========== ======== ============
See Notes to Consolidated Financial Statements.
F-7
ePlus inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years Ended March 31, 2002, 2003, and 2004
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.
On October 10, 2003, the Company purchased certain assets and liabilities from
Digital Paper Corporation. In the transaction, the Company acquired all of
Digital Paper's intellectual property, including its DigitalPaper XE, ViewMark,
DocPak, docQuest, DirectSight, DigitalPaper Wireless and Idocs software, rights
to several Digital Paper patents and trademarks, including the Digital Paper
name, and several of Digital Paper's customers and key personnel. The purchase
price included $1.6 million in cash and the assumption of certain liabilities of
approximately $0.8 million.
F-8
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.
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.
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. For lease
periods subsequent to the initial term, revenue is recognized upon receipt of
payment by the lessee because collection of such amounts is not reasonably
assured. Such revenues recognized were $12,697,838, $10,773,157, and $6,904,763
for the years ended on March 31, 2002, 2003, and 2004, respectively.
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
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.
F-9
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.
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. 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. 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 accounting principles generally
accepted in the United States of America, no upward revision of residual values
is made subsequent to lease inception.
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).
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 prior to the year ended March 31, 2001. The Company
recorded an impairment of $628,218 during the year ended March 31, 2002 on this
investment which reduced its carrying value to zero. 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 $0.4 million and $0.2 million of
internal use software was capitalized during the years ended March 31, 2004 and
2003, respectively, which is included in the accompanying consolidated balance
sheets as a component of property and equipment.
F-10
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. For the years ended March 31, 2004 and 2003, respectively, $1.9
million and $0.3 million of development costs have been capitalized.
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, 2002
and 2003 financial statements to conform to the March 31, 2004 presentation.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the accompanying
consolidated statements of stockholders' equity.
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
10,235,129 in fiscal 2002, 10,061,088 in 2003, and 9,332,324 in 2004. Diluted
EPS amounts were calculated based on weighted average shares outstanding and
common stock equivalents of 10,485,235 in fiscal 2002, 10,109,809 in 2003, and
9,976,458 in 2004. 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, 2004, 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:
Years Ended March 31,
2002 2003 2004
-------------------------------------------------------
Net earnings, as reported $8,911,723 $9,712,709 $10,153,741
Stock based compensation expense (3,125,488) (3,653,928) (2,454,303)
-------------------------------------------------------
Net earnings, pro forma $5,786,235 $6,058,781 $ 7,699,438
=======================================================
Basic earnings per share, as reported $0.87 $0.97 $1.09
Basic earnings per share, pro forma $0.56 $0.60 $0.83
Diluted earnings per share, as reported $0.85 $0.96 $1.02
Diluted earnings per share, pro forma $0.55 $0.60 $0.77
F-11
STOCK REPURCHASE - 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 authorized 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. On October 1,
2003, another stock purchase program was authorized by the Company's Board of
Directors. 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 September 30, 2004 and is limited to a cumulative purchase amount of
$7,500,000.
During the years ended March 31, 2002, 2003, and 2004, the Company repurchased
66,100, 1,022,384, and 688,800 shares of its outstanding common stock for a
total of $574,800, $6,936,324, and $9,681,763. Since the inception of the
Company's initial repurchase program on September 20, 2001, as of March 31,
2004, the Company had repurchased 1,777,284 shares of its outstanding common
stock at an average cost of $9.67 per share for a total of $17,192,886. 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 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 adopted SFAS No. 149 and its adoption did not 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 adopted SFAS No. 150
and its adoption did not have a material impact on its financial statements.
F-12
2. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of March 31,
2003 2004
(In Thousands)
---------------------------------
Investment in direct financing and sales-type leases-net $ 173,394 $ 166,790
investment in operating lease equipment-net 8,775 19,877
---------------------------------
$ 182,169 $ 186,667
=================================
INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of the following:
As of March 31,
2003 2004
(In Thousands)
---------------------------------
Minimum lease payments $ 168,385 $ 161,008
Estimated unguaranteed residual value 26,631 25,025
Initial direct costs, net of amortization (1) 3,072 2,342
Less: Unearned lease income (21,287) (18,439)
Reserve for credit losses (3,407) (3,146)
---------------------------------
Investment in direct finance and sales-type leases, net $ 173,394 $ 166,790
=================================
Future scheduled minimum lease rental payments as of March 31, 2004 are as follows:
(In Thousands)
------------------------
Year ending March 31, 2005 $ 78,835
2006 49,700
2007 23,798
2008 5,229
2009 and after 3,446
------------------------
Total $ 161,008
========================
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,
2003 2004
(In Thousands)
---------------------------------
Cost of equipment under operating leases $ 12,824 $ 27,985
Less: Accumulated depreciation and amortization (4,049) (8,108)
---------------------------------
Investment in operating lease equipment, net $ 8,775 $ 19,877
=================================
Future scheduled minimum lease rental payments as of March 31, 2004 are as
follows:
(In Thousands)
--------------
Year ending March 31, 2005 $ 7,060
2006 4,657
2007 3,860
2008 1,760
2009 and after 479
--------------
Total $ 17,816
==============
F-13
3. RESERVES FOR CREDIT LOSSES
As of March 31, 2003 and 2004, the Company's reserve for credit losses was
$6,753,431 and $4,730,015, 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):
Accounts Investment in Direct
Receivable Financing Leases Total
------------------------------------------------------------------------
Balance April 1, 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
Provision for bad debts 23 24 47
Recoveries - - -
Write-offs and other (1,784) (286) (2,070)
------------------------------------------------------------------------
Balance March 31, 2004 $ 1,585 $ 3,145 $ 4,730
========================================================================
Balances in "Write-offs and other" include actual write-offs and
reclassifications from prior years.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of March 31,
2003 2004
(In Thousands)
---------------------------
Furniture, fixtures and equipment $ 6,118 $ 4,714
Vehicles 88 117
Capitalized software 5,924 6,842
Leasehold improvements 335 256
Less: Accumulated depreciation and amortization (7,216) (6,699)
---------------------------
Property and equipment, net $ 5,249 $ 5,230
===========================
F-14
5. GOODWILL
As of March 31, 2004, the Company had goodwill, net of accumulated amortization,
of $20.2 million, an increase of $1.1 million from March 31, 2003 as a result of
the purchase of certain assets and liabilities of Digital Paper Corporation. As
of March 31, 2003, the Company had goodwill, net of accumulated amortization, of
$19.1 million which was subject to the transitional assessment provisions of
SFAS No. 142. No goodwill amortization expense was recognized during the years
ended March 31, 2002, 2003 and 2004.
As of March 31, 2003 and 2004, the Company has determined goodwill has not been
impaired and that no potential impairment existed, based on testing performed on
September 30, 2002 and 2003.
Changes in the carrying amount of goodwill for the years ended March 31, 2003
and 2004 are as follows:
Financing Technology Sales
Business Unit Business Unit Total
----------------------------------------------------
Goodwill (net), April 1, 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 (1) (2,965,915) 6,755 (2,959,160)
----------------------------------------------------
Goodwill (net), March 31, 2003 4,028,764 15,118,368 19,147,132
Goodwill acquired during the period - 1,089,272 1,089,272
Impairment losses during the period - - -
Other adjustments during the period - 6,906 6,906
----------------------------------------------------
Goodwill (net), March 31, 2004 $ 4,028,764 $ 16,214,546 $ 20,243,310
====================================================
(1) In the year ended March 31, 2003, Goodwill was reduced $2,965,915, which represented the results of a settlement
between the Company and the seller of CLG, Inc., which was acquired on October 1, 1999.
F-15
6. RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse and non-recourse obligations consist of the following:
As of March 31,
2003 2004
(In Thousands)
-----------------------
Recourse line of credit with a maximum balance of
$33,000,000 bearing interest at prime less .5% $ 2,726 $ -
Recourse line of credit of $45,000,000 carrying interest
at LIBOR rate plus 175 basis ponts or, at the Company's
option, the higher of prime rate or the federal funds
rate plus 50 to 75 basis points expiring on July 21,
2006 - -
Recourse equipment notes with varying interest rates
ranging from 7.13% to 8.25%, secured by related
investment in equipment 10 -
Recourse vehicle note with variable interest rate 6
-----------------------
Total recourse obligations $ 2,736 $ 6
=======================
Non-recourse equipment notes secured by related
investments in leases with interest rates ranging from
2.39% to 8.75% in fiscal years 2003 and 2004 $116,255 $117,857
=======================
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 $45 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 $45 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, 2004, mature as follows:
Recourse Notes Non-recourse
Payable Notes Payable
(In Thousands)
-------------------------------------------
Year ending March 31, 2005 $ 6 $ 63,118
2006 - 33,031
2007 - 14,617
2008 - 5,289
2009 and after - 1,802
-------------------------------------------
Total $ 6 $117,857
===========================================
F-16
7. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees, the balances of which
amounted to $61,722 and $19,315 as of March 31, 2003 and 2004, 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.
Prior to April 1, 2001, the Company sold leased equipment to MLC/CLC LLC, a
joint venture in which the Company has a 5% ownership interest. The Company
recognized $147,305, $145,962, and $302,968 for the years ended March 31, 2002,
2003 and 2004 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. During the years ended March 31, 2002, 2003, and
2004, rent expense paid to these related parties was $274,600, $486,520, and
$443,065, 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 $1,984,833,
$2,435,972, and $2,048,201 for the years ended March 31, 2002, 2003, and 2004,
respectively. As of March 31, 2004, the future minimum lease payments are due as
follows:
(In Thousands)
-------------------------
Year Ending March 31, 2005 $ 1,362
2006 255
2007 6
2008 -
-------------------------
$ 1,623
=========================
F-17
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 Years Ended March 31,
2002 2003 2004
(In Thousands)
------------------------------------
Statutory federal income tax rate 34% 35% 35%
Income tax expense computed at the statutory
federal rate $ 5,073 $ 5,765 $ 6,023
State income tax expense, net of federal tax 939 876 975
Non-taxable interest income (9) (11) (11)
Non-deductible expenses 7 130 69
------------------------------------
Provision for income taxes $ 6,010 $ 6,760 $ 7,056
====================================
Effective income tax rate 40.3% 41.0% 41.0%
====================================
The components of the provision for income taxes are as follows:
For the Years Ended March 31,
2002 2003 2004
(In Thousands)
------------------------------------
Current:
Federal $ 8,836 $ (3,008) $ 22
State 2,335 (464) 1,741
------------------------------------
11,171 (3,472) 1,763
------------------------------------
Deferred:
Federal (4,249) 8,421 5,535
State (912) 1,811 (242)
------------------------------------
(5,161) 10,232 5,293
------------------------------------
Provision for income taxes $ 6,010 $ 6,760 $ 7,056
====================================
The components of the deferred tax (benefit) expense resulting from net temporary differences are as follows:
For the Years Ended March 31,
2002 2003 2004
(In Thousands)
-----------------------------------------
Lease revenue recognition $ (3,639) $ 6,649 $ 6,060
Other (1,522) 3,583 (767)
-----------------------------------------
$ (5,161) $ 10,232 $ 5,293
=========================================
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) consist of the following:
For the Years Ended March 31,
2002 2003 2004
(In Thousands)
------------------------------------------
Lease revenue recognition $ 798 $ (8,232) $(14,292)
Allowance for doubtful accounts and credit reserves 3,890 3,322 3,565
Other 784 150 674
------------------------------------------
$ 5,472 $ (4,760) $(10,053)
==========================================
F-18
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
$13,431,543, $14,287,124 and $30,067,365 for the years ended March 31, 2002,
2003, and 2004, 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 $6,255,282, $12,453,541 and $4,218,748 for the
years ended March 31, 2002, 2003, and 2004, 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 expenses for the plans were
$(242,877), $235,394 and $247,040 for the years ended March 31, 2002, 2003 and
2004, 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 number that may be subject to options
granted under the Inccentive Stock Option Plan is capped at a maximum of
3,000,000 shares. As of March 31, 2004, a total of 2,243,409 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 1,785,904
options are outstanding or have been exercised as of March 31, 2004;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under which
260,000 options are outstanding as of March 31, 2004;
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 53,707 are outstanding or have been exercised as of March
31, 2004;
d) the Employee Stock Purchase Plan ("ESPP") under which 143,798 shares
have been issued as of March 31, 2004.
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, 2002, 2003 and 2004 was
$5.14, $3.11 and $4.83 per share, respectively.
F-19
A summary of stock option activity during the three years ended March 31, 2004
is as follows:
Weighted
Number of Shares Exercise Price Range Average Exercise Price
--------------------- ---------------------- ----------------------
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
=====================
Outstanding, April 1, 2003 2,001,188
Options granted 78,000 $7.14 - $15.25 $10.10
Options exercised (177,957) $6.24 - $12.25 $ 8.06
Options forfeited (114,999) $6.86 - $17.38 $ 9.19
---------------------
Outstanding, March 31, 2004 1,786,232
=====================
Exercisable, March 31, 2004 1,514,557
=====================
Additional information regarding options outstanding as of March 31, 2004 is as follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ----------------------------------------
Number Weighted Average
Outstanding Remaining Weighted Average Weighted Average
Contractual Life Exercise Price Number Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------
1,786,232 5.6 years $9.24 1,514,557 $9.43
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.
Years Ended March 31,
2002 2003 2004
---------------------------------------------------------
Net earnings, as reported $8,911,723 $9,712,709 $10,153,741
Stock based compensation expense (3,125,488) (3,653,928) (2,454,303)
---------------------------------------------------------
Net earnings, pro forma $5,786,235 $6,058,781 $ 7,699,438
=========================================================
Basic earnings per share, as reported $0.87 $0.97 $1.09
Basic earnings per share, pro forma $0.56 $0.60 $0.83
Diluted earnings per share, as reported $0.85 $0.96 $1.02
Diluted earnings per share, pro forma $0.55 $0.60 $0.77
F-20
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:
Years Ended March 31,
2002 2003 2004
------------------------------------------------------
Options granted under the Incentive Stock Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 92.44% 46.02% 39.76%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 4.13% 3.96% 2.96%
During the years ended March 31, 2002, 2003 and 2004, 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:
As of March 31, 2003 As of March 31, 2004
Carrying Fair Value Carrying Fair Value
Amount Amount
(In Thousands)
----------------------------------------------------
Assets:
Cash and cash equivalents $ 27,784 $ 27,784 $ 25,155 $ 25,155
Liabilities:
Non-recourse notes payable 116,255 117,065 117,857 117,818
Recourse notes payable 2,736 2,736 6 6
F-21
13. 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.
Financing Technology Sales
Business Unit Business Unit Total
---------------- ---------------- -----------------
Twelve months ended March 31, 2002
Sales of product $ 1,057,862 $ 131,950,516 $ 133,008,378
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 3,688,415 13,773,863
---------------- ---------------- -----------------
Total Revenues 69,346,415 135,638,931 204,985,346
Cost of sales 11,872,337 111,725,742 123,598,079
Direct lease costs 9,578,631 - 9,578,631
Selling, general and administrative expenses 22,500,221 22,576,480 45,076,701
---------------- ---------------- -----------------
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 $ 638,016 $ 14,921,521
================ ================ =================
Assets $ 228,505,936 $ 50,489,618 $ 278,995,554
Twelve months ended March 31, 2003
Sales of product $ 2,007,743 $ 226,762,223 $ 228,769,966
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 4,069,665 14,260,057
---------------- ---------------- -----------------
Total Revenues 68,814,259 230,831,887 299,646,146
Cost of sales 9,391,356 197,777,433 207,168,789
Direct lease costs 6,582,409 - 6,582,409
Selling, general and administrative expenses 26,848,899 34,265,407 61,114,306
---------------- ---------------- -----------------
Segment earnings 25,991,595 (1,210,953) 24,780,642
Interest expense 7,832,220 476,162 8,308,382
---------------- ---------------- -----------------
Earnings before income taxes $ 18,159,375 $ (1,687,115) $ 16,472,260
================ ================ =================
Assets $ 226,238,171 $ 52,702,516 $ 278,940,686
Twelve months ended March 31, 2004
Sales of product $ 3,321,050 $ 264,577,887 $ 267,898,937
Lease revenues 51,253,518 - 51,253,518
Fee and other income 4,589,846 6,815,187 11,405,033
---------------- ---------------- -----------------
Total Revenues 59,164,414 271,393,074 330,557,488
Cost of sales 2,822,985 233,460,365 236,283,350
Direct lease costs 10,560,586 - 10,560,586
Selling, general and administrative expenses 22,874,439 36,782,311 59,656,750
---------------- ---------------- -----------------
Segment earnings 22,906,404 1,150,398 24,056,802
Interest expense 6,692,271 154,801 6,847,072
---------------- ---------------- -----------------
Earnings before income taxes $ 16,214,133 $ 995,597 $ 17,209,730
================ ================ =================
Assets $ 238,631,864 $ 55,570,226 $ 294,202,090
================ ================ =================
F-22
14. 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, 2003
Sales $55,243 $ (2,356) $52,887 $64,296 $ 1,810 $66,106
Total Revenues 72,175 - 72,175 82,329 - 82,329
Cost of Sales 49,924 (3,741) 46,183 57,002 593 57,595
Total Costs and Expenses 68,826 - 68,826 78,018 - 78,018
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
================================= ================================
Net earnings per common share-
Diluted (1) $ 0.19 $ 0.25
================================= ================================
Year Ended March 31, 2004
Sales $65,296 $ (3) $65,293 $70,380 $ - $70,380
Total Revenues 79,868 (34) 79,834 85,637 - 85,637
Cost of Sales 57,512 (4) 57,508 62,364 - 62,364
Total Costs and Expenses 76,086 (33) 76,053 81,071 - 81,071
Earnings before provision for income
taxes 3,781 - 3,781 4,566 - 4,566
Provision for income taxes 1,478 - 1,478 1,861 - 1,861
Net earnings 2,303 - 2,303 2,705 - 2,705
================================= ================================
Net earnings per common share-Basic (1) $ 0.24 $ 0.24 $ 0.29 $ 0.29
================================= ================================
Net earnings per common share-
Diluted (1) $ 0.24 $ 0.27
================================= ================================
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
--------------------------------- --------------------------------
Year Ended March 31, 2003
Sales $53,785 $ 1,674 $55,459 $51,981 $ 2,337 $54,318
Total Revenues 73,264 - 73,264 72,547 (669) 71,878
Cost of Sales 48,934 85 49,019 48,488 (8) 48,480
Total Costs and Expenses 68,868 - 68,868 68,131 (669) 67,462
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
================================== ================================
Net earnings per common share-
Diluted (1) $ 0.26 $ 0.27
================================= ================================
Year Ended March 31, 2004
Sales $63,325 $ - $63,325 $68,901 $ - $68,901
Total Revenues 79,800 - 79,800 85,286 - 85,286
Cost of Sales 55,763 - 55,763 60,648 - 60,648
Total Costs and Expenses 75,478 - 75,478 80,746 - 80,746
Earnings before provision for income
taxes 4,323 - 4,323 4,540 - 4,540
Provision for income taxes 1,729 - 1,729 1,988 - 1,988
Net earnings 2,594 - 2,594 2,552 - 2,552
================================= ================================
Net earnings per common share-Basic (1) $ 0.28 $ 0.28 $ 0.28 $ 0.28
================================= ================================
Net earnings per common share-
Diluted (1) $ 0.26 $ 0.26
================================= ================================
(1) The sum of quarterly amounts may not equal the annual amount due to quarterly calculations being based on
varying weighted average shares outstanding.
F-23
15. SUBSEQUENT EVENT
On May 28, 2004, ePlus purchased certain assets and assumed certain liabilities
of Manchester Technologies, Inc. for total consideration of $5.2 million. The
purchase was made by ePlus Technology, inc., a wholly-owned subsidiary of ePlus
inc. The acquisition will add to our IT reseller and professional services
business. Approximately 125 former Manchester Technologies, Inc. personnel will
be hired by ePlus as part of the transaction and are located in 3 established
offices in metropolitan New York, South Florida and Baltimore.
F-24
SCHEDULE II
ePlus inc. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2002, 2003, and 2004
(In Thousands)
Additions Deductions
--------------------------- -----------
Balance at (1) Charged (2) Charged Balance at
beginning of to costs and to other end of
period expenses accounts Write-offs period
Description
2004 Allowance for doubtful
accounts and credit loss $6,753 $ 47 $ 14 ($2,084) $4,730
2003 Allowance for doubtful
accounts and credit loss $6,771 $ 616 ($ 494) ($ 140) $6,753
2002 Allowance for doubtful
accounts and credit loss $4,279 $1,489 $1,187 ($ 184) $6,771
S-1