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, 2005
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.)
13595 Dulles Technology Drive, Herndon, VA 20171-3413
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 984-8400
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, 2004 was $44,912,525. The outstanding number of shares of
common stock of the Company as of June 21, 2005, was 8,584,692.
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
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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
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are not based on historical fact, but are based upon numerous
assumptions about future conditions that may not occur. Forward-looking
statements are generally identifiable by the use of forward-looking words such
as "may," "will," "should," "intend," "estimate," "believe," "expect,"
"anticipate," "project," and similar expressions. 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 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.
Although we have been in the business of financing since 1990 and selling
information technology equipment since 1999, the Company expects to attain
future revenue growth through its ePlus Enterprise Cost Management ("eECM")
service offering. As a result, the Company will continue to 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 portion of its growth 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 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 significant enhancement of the features and services of eECM services is
needed to achieve widespread commercial initial and continued acceptance of
the system;
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o operating resource management and procurement on the Internet is an
evolving market;
o the system's ability to support large numbers of buyers and suppliers is
unproven;
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 enterprise
resource planning (ERP) software or 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 and external development costs
are needed to support planned growth of the Company's eECM services.
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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.;
o ePlus Information Holdings, inc.; and
o ePlus Government Services, inc.
On March 31, 2003, the former entities ePlus Technology of PA, inc. and ePlus
Technology of NC, inc. were merged into ePlus Technology, inc. This combination
created one national entity through which our information technology ("IT")
reseller and technical support will conduct business. ePlus Systems, inc. and
ePlus Content Services, inc. were incorporated on May 15, 2001 and are the
entities that hold certain assets and liabilities originally acquired from
ProcureNet, Inc. ePlus Capital, inc. owns 100 percent of ePlus Canada Company
which was created on December 27, 2001 to transact business within Canada. ePlus
Government, inc. was incorporated on September 17, 1997 to handle business
servicing the Federal government marketplace, which includes financing
transactions that are generated through government contractors. ePlus 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. On April 2, 2004, ePlus Government Services,
inc. was incorported; 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.
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ACQUISITIONS
The Company has acquired the following material entities or assets since 2001.
The following is a summary of the acquisitions presented in chronological order.
Major
Date Business Accounting
Acquired Acquisition Locations Method Consideration
- ---------------- ----------------------------------------- ----------------- ---------- -----------------------------------------
May 28, 2004 Certain assets and liabilities from Metro New York, Purchase $5,000,000 in cash plus the assumption
Manchester Technologies, Inc. (merged South Florida of certain liabilities
into ePlus Technology, inc. upon and Baltimore
acquisition; subsequently moved the
consulting group to ePlus Systems, inc.)
October 10, 2003 Certain assets and liabilities from Herndon, VA Purchase $1,601,632 in cash plus the assumption
Digital Paper Corporation (merged into of certain liabilities
ePlus Document Systems, inc. upon
acquisition)
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 liabilities
fulfillment and professional service San Diego, CA and
business (merged into ePlus New York, NY
Technology, 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.)
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OUR BUSINESS
ePlus has developed its eECM model through development and acquisition of
software, product sales, technology services, 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 have been providing software for over
five years. We currently derive the majority of our revenues from IT product
sales and leasing. 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 has positioned eECM to provide its comprehensive offering of products
and services to our target market of middle-sized 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.
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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.
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.
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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 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 the preferred channel for many business-to-business transactions
for most organizations. In the intensely competitive business environment,
businesses have increasingly adopted Internet-based software applications and
related tools to streamline their business processes, lower costs, and make
their employees more productive.
Traditional Areas of Business Process Automation
Businesses have traditionally attempted to reduce costs through the automation
of internal processes. Similar efforts have been made to improve the procurement
process for operating resources in which we specialize, which include
information technology and telecommunications equipment, office equipment and
professional services. The purchase and sale of these goods comprise a large
portion of business-to-business transactions.
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.
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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
ePlus provides information technology product sales, professional services,
leasing and software in a solution it has branded as ePlus Enterprise Cost
Management. The solution is designed to provide a 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 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:
Convert current and future customers to our services
We have an existing client base of approximately 2,700 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.
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Expand our sales force and marketing activities
As of March 31, 2005, we had 211 employees in our sales and marketing function,
which represents an increase compared to the previous year of 178 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 technology or services that may enhance our Enterprise
Cost Management offerings.
Expand the functionality of our Internet-based solutions
We will continue to improve our Enterprise Cost Management offering to expand
its functionality to serve our customers' needs. We intend to use the
flexibility of our platform to offer additional products and services when
economically feasible. As part of this strategy, we may also acquire technology
companies to expand and enhance the platform of Enterprise Cost Management
services to provide additional functionality and value added services.
DESCRIPTION OF ENTERPRISE COST MANAGEMENT ("eECM")
eECM consists of six basic service products that have either been internally
developed or have been acquired and incorporated into our total business
process. The eECM framework consists of Procure+, Manage+, ePlus Leasing,
Content+, IT sales and service 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+ 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, to automate unnecessary manual processes, and to
improve leverage with suppliers. Procure+ is available as a stand-alone license
or as a remotely-hosted solution under a subscription fee arrangement.
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.
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o We design a customized procurement, management and service program to
fit the customer's organizational needs.
o We implement an Internet-based Enterprise Cost Management system which
can include: customer workflow processes and business rules using our
graphical route-builder, custom catalogs linking to chosen vendors,
including ePlus, custom reporting and querying, and data capture
parameters for the Manage+ asset repository.
o We beta test the site and train the customer's personnel.
o We provide help desk, technological assistance, and remote network
monitoring on a constant basis.
We provide Enterprise Cost Management as a service solution to our customers,
and the ongoing support of the customer and our commitment to the highest
possible customer satisfaction is fundamental to our strategy. We use a team
approach to providing customer care and assign each customer to a specific team
so that they are able to continue to interact with the same ePlus personnel who
have experience and expertise with the customer's specific business processes
and requirements.
TECHNOLOGY
General. Our Procure+ and Manage+ applications are fully standards-based,
designed for the Internet and built upon an underlying architecture that is
based on leading application frameworks. These frameworks provide access
security, load balancing, resource pooling, message queuing, distributed
transaction processing and reusable components and services.
Our applications are designed to be scalable, due to our multi-tiered
architecture employing thin client, multi-threaded application servers and
relational databases. Our applications are available to our customers over any
standard Internet browser without the need to download applets or executables.
We use a component-based application infrastructure composed of readily
configurable business rules, a workflow engine, advanced data management
capabilities and an electronic cataloging system. Each of these core elements
plays a crucial role in deploying enterprise-wide solutions that can capture a
customer's unique policies and processes and manage key business functions.
Business Rules. Our business rules engine allows Procure+ to be configured so
that our customers can effectively enforce their requisition approval policies
while providing flexibility so that the business rules can be edited and
modified as our customer's policies change. Users of the system are presented
with appropriate guidance to facilitate adherence to corporate policies. The
business rules dramatically reduce reworking of procedures, track and resolve
policy exceptions online and eliminate re-keying of data into back-end systems.
The business rules permit management by exception, in which items requiring
managerial attention are automatically routed.
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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.
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 that we
have obtained 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.
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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 primarily on 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, 2005 our sales organization included 211 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 three electronic sourcing systems patents and two document management
patents in the United States. We also have patents in nine European countries,
Mexico, and China. The three US patents for electronic sourcing systems have
been determined to be valid and enforceable by a jury. However, 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, Digital Paper, Intranetdocs, OneSource,
Content+, eECM, and ePlus Enterprise Cost Management. We also have over twenty
registered copyrights and additional common-law trademarks and copyrights.
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.
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SALES ACTIVITIES AND FINANCING
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.
Sales. We are an authorized reseller of, or have the right to resell products
and services from, over 400 manufacturers. Our largest manufacturer
relationships include HP, IBM, Cisco, and Microsoft Corporation. Tech Data and
Ingram Micro, Inc. are our largest distributors. We have multiple vendor
authorizations in various IT disciplines 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, which 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.
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.
15
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."
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.
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, 2005, we
provided for $1,131,412 in credit losses and incurred actual credit losses of
$496,975. During the fiscal year ended March 31, 2004 we provided for $46,663 in
credit losses and incurred actual credit losses of $2,058,035.
16
COMPETITION
The market for leasing, IT sales and services and software services is intensely
competitive, subject to economic conditions and rapid change, and is
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.
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, 2005, we employed 637 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 that we have a good relationship with our employees.
The functional areas of our employees are as follows:
Number of Employees
---------------------
Sales and Marketing 211
Technical Support 153
Administrative 176
Software and Implementations 91
Executive 6
U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and all amendments to those reports, filed with or
furnished to the U.S. Securities and Exchange Commission, are available free of
charge through the Company's internet website, www.eplus.com, as soon as
reasonably practical after the Company has electronically filed such material
with, or furnished it to, the SEC.
17
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 Compete Effectively
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 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.
Costs to Protect Our Patents May Affect Our Earnings
The legal and associated costs to protect our patents may have a material
adverse effect on our business, operating results and financial condition. We
may deem it necessary to protect the Company's intellectual property rights and
significant expenses could be incurred with no certainty of the results of these
potential actions. Costs relative to lawsuits are usually expensed in the
periods as they occur and there is no certainty of recouping any of the amounts
expended, regardless of the outcome of any action.
18
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.
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.
19
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 direct financing lease
cover approximately 90% of the underlying equipment's cost at the inception of
the lease. The duration of an operating lease, however, is shorter relative to
the equipment's useful life. We bear a slightly greater risk in operating leases
in that we may not be able to remarket the equipment on terms that will allow us
to fully recover our investment.
At the inception of each lease, we estimate the fair market value of the item as
a residual value for the leased equipment based on the terms of the lease
contract. A decrease in the market value of such equipment at a rate greater
than the rate we expected, whether due to rapid technological obsolescence or
other factors, would adversely affect the residual values of such equipment. Any
such loss, which is considered by management to be permanent in nature, would be
recognized in the period of impairment in accordance with Statement of Financial
Accounting Standard No. 13, "Accounting for Leases." Consequently, there can be
no assurance that our estimated residual values for equipment will be realized.
Our lease portfolio has recently expanded to new types of equipment under lease
of which we may not experience the same residual realization economics.
20
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 bad debt
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 sales. 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.
21
Our Disclosure Controls and Procedures and our Internal Controls over Financial
Reporting may not be Effective to Detect all Errors or to Detect and Deter
Wrongdoing, Fraud or Improper Activities in all Instances
Our management, including our Chief Executive Officer and Chief Financial
Officer, cannnot ensure that our disclosure controls and procedures or our
internal controls over financial reporting will prevent all errors and fraud. In
designing our control systems, management recognizes that any control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives. Further, the
design of a control system must reflect the necessity of considering the
cost-benefit relationship of possible controls and procedures. Because of
inherent limitations in any control system, no evaluation of controls can
provide absolute assurance that all control issues and instances of wrongdoing,
if any, that may affect our operations have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, that breakdowns can occur because of simple error or mistakes and that
controls may be circumvented by individual acts by some person, by collusion of
two or more people or by management's override of the control. The design of any
control system also is based in part upon certain assumptions about the
likelihood of a potential future event, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in cost-effective control
systems, misstatements due to error or wrongdoing may occur and not be detected.
Over time, it is also possible that controls may become inadequate because of
changes in conditions that could not be, or were not, anticipated at inception
or at subsequent review of the control system.
Treating Stock Options and Employee Stock Purchase Plan Participation As a
Compensation Expense Could Significantly Impair Our Ability to Maintain
Profitability
The Financial Accounting Standards Board has begun requiring some companies to
record compensation expense regarding stock options and participation in
employee stock purchase plans. We grant stock options to our employees, officers
and directors and we administered an employee stock purchase plan (ESPP) which
ended December 31, 2002. Information on our stock option plan and ESPP,
including the shares reserved for issuance under those plans, the terms of
options granted, and the shares subject to outstanding stock options, is
included in Note 11 of the Notes to Consolidated Financial Statements. The
current Financial Accounting Standards Board guidance is that, effective for our
fiscal year starting April 1, 2006, we will have to begin expensing stock
options. When we are required to record an expense for our stock-based
compensation plans, we could incur a significant compensation expense, and any
such expense could significantly impair our ability to return to and maintain
profitability on a GAAP basis. That impact on our ability to maintain
profitability on a GAAP basis could have a material adverse effect on the market
price of the Company's common stock.
22
Our Assessment As to the Adequacy of Our Internal Controls Over Financial
Reporting as Required by Section 404 of the Sarbanes-Oxley Act of 2002 May Cause
Our Operating Expenses to Increase. If We Are Unable to Certify the Adequacy of
Our Internal Controls and Our Independent Auditors Are Unable to Attest Thereto,
Investors Could Lose Confidence in the Reliability of Our Financial Statements,
Which Could Result in a Decrease in the Value of the Company's Common Stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to include a report
of management on the company's internal control over financial reporting in
their annual reports on Form 10-K. We expect that these rules will first apply
to ePlus with respect to our fiscal year ending March 31, 2006. To comply with
the Sarbanes-Oxley Act and the SEC's new rules and regulations, we are
evaluating our internal control systems and taking remedial actions to allow
management to report on, and our independent auditors to attest to, our internal
control over financial reporting. As a result, we have incurred expenses, and
expect to incur additional expenses, and diversion of management's time and
attention, which may increase our operating expenses and impair our ability to
sustain profitability on a pro forma basis and achieve profitability on a GAAP
basis. While we are endeavoring to implement the requirements relating to
internal controls and all other aspects of Section 404 in a timely manner, there
can be no assurance that we will be able to maintain our schedule to complete
all assessment and testing in a timely manner and, if we do not, that we and our
independent auditors will have the resources available to complete necessary
assessment and reporting on internal controls on a timely basis. Further, we
cannot be certain that our testing of internal controls and resulting
remediation actions will yield adequate internal controls over financial
reporting as required by Section 404. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance,
there could be an adverse reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements, which could cause the
market price of the Company's common stock to decline.
23
ITEM 2. PROPERTIES
The Company operates from 33 office locations. Our total leased square footage
is approximately 166,277 square feet for which we incur rent of approximately
$206,000 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, 2005, the square footage and the general
office functions.
Square
Location Company Employees Footage Function
- -----------------------------------------------------------------------------------------------------------------------------
Herndon, VA ePlus Group, inc. 253 50,232 Corporate and subsidiary headquarters, sales office,
ePlus Technology, inc. technical support and warehouse
ePlus Government, inc.
ePlus Document Systems, inc.
Robbinsville, NJ ePlus Technology, inc. 25 9,563 Sales office and technical support
Pottstown, PA ePlus Technology, inc. 44 12,853 Sales office, technical support and warehouse
Sunnyvale, CA ePlus Technology, inc. 32 11,200 Sales office, technical support and warehouse
Wilmington, NC ePlus Technology, inc. 25 6,068 Sales office and technical support
Raleigh, NC ePlus Group, inc. 27 8,638 Sales office-shared and technical support
ePlus Technology, inc.
Avon, CT ePlus Systems, inc. 12 4,807 Subsidiary headquarters, sales office and technical
development
Houston, TX ePlus Content Services, inc. 21 4,000 Subsidiary headquarters, sales office and e-commerce
catalog service center
Canton, MA ePlus Technology, inc. 28 6,228 Sales office and technical support
New York, NY ePlus Technology, inc. 18 5,121 Sales office and technical support
Elkridge, MD ePlus Technology, inc. 19 5,092 Sales office and technical support
Boca Raton, FL ePlus Technology, inc. 6 3,214 Sales office and technical support
Hauppauge, NY ePlus Technology, inc. 42 23,700 Sales office and technical support
Pittsford, NY ePlus Systems, inc. 47 5,493 Sales office and technical development
Other locations 38 10,068 Sales offices and technical support
The largest location is Herndon, VA, which has a lease expiration date of
December 31, 2009.
24
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in three lawsuits arising from four separate leasing
schedules with a lessee named Cyberco Holdings, Inc. ("Cyberco"). The Cyberco
principals were allegedly perpetrating a scam. Cyberco, related affiliates, and
at least one principal are in Chapter 7 bankruptcy, and no future lease payments
are expected. The first two lawsuits, both in the U.S.D.C. for the Southern
District of New York, involve three of the schedules, which the Company had
assigned on a non-recourse basis to GMAC Commercial Finance, LLC ("GMAC"). GMAC
filed suit against the Company seeking repayment of the underlying non-recourse
promissory note, which is approximately $10,646,000. The same day, ePlus filed
suit against GMAC, Travelers Property Casualty Company of America ("Travelers")
and Banc of America Leasing and Capital, LLC ("BoA"), seeking a declaratory
judgment that any potential liability is covered by the Company's liability
policy with Travelers, and that the Company has no liability to GMAC or BoA. The
two cases have been administratively consolidated, and the Company subsequently
dismissed BoA from the suit. The suits are proceeding between the Company, GMAC
and Travelers, and are in the discovery phase. The Company continues to believe
that it has no liability to GMAC, and that Travelers is responsible for the
costs of defense and any potential judgment.
The third lawsuit, which stems from the remaining schedule between Cyberco and
the Company, is between BoA and the Company in the Circuit Court for Fairfax
County, Virginia. The Company sold the schedule to BoA under a Program
Agreement. BoA seeks to recover its loss of approximately $3,063,000. The
Company believes that it has no liability to BoA, and that Travelers is
responsible for the costs of defense and any potential judgment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
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 April 1, 2003 through
March 31, 2005, by quarter.
Quarter Ended High Low
- ---------------------- -------- --------
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
June 30, 2004 $12.98 $9.97
September 30, 2004 $11.58 $8.80
December 31, 2004 $12.80 $9.32
March 31, 2005 $17.14 $11.01
On June 14, 2005, the closing price of the common stock was $12.73 per share. On
June 22, 2005, there were 182 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 fiscal year ended March 31, 2005:
26
Total number
of shares
purchased Maximum number
Total number as part of of shares that may
of shares Average publicly yet be purchased
purchased price per announced plans under the plans
Period (1) share or programs or programs
- -------------------------------------------- -------------- ------------ ----------------- --------------------
April 1, 2004 through April 30, 2004 35,000 $12.62 35,000 - (2)
May 1, 2004 through May 31, 2004 4,000 $12.69 4,000 394,268 (3)
June 1, 2004 through June 30, 2004 - $ - - 392,281 (4)
July 1, 2004 through July 31, 2004 - $ - - 456,826 (5)
August 1, 2004 through August 31, 2004 - $ - - 434,459 (6)
September 1, 2004 through September 30, 2004 - $ - - 417,336 (7)
October 1, 2004 through October 31, 2004 - $ - - - (8)
November 1, 2004 through November 30, 2004 - $ - - 677,997 (9)
December 1, 2004 through December 31, 2004 19,032 $10.97 19,032 613,487 (10)
January 1, 2005 through January 31, 2005 101,224 $12.21 101,224 493,581 (11)
February 1, 2005 through February 28, 2005 6,000 $12.14 6,000 444,695 (12)
March 1, 2005 through March 31, 2005 283,360 $13.01 283,360 583,898 (13)
(1) All shares acquired were in open-market purchases.
(2) The share purchase authorization in place for the month ended April 30, 2004 had purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap ($7,500,000). As of April 30, 2004, the
remaining authorized dollar amount to purchase shares was $0.
(3) The share purchase authorization in place for the month ended May 31, 2004 had purchase limitations on both
the number of shares (3,000,000) as well as a total dollar cap ($12,000,000). As of May 31, 2004, the
remaining authorized dollar amount to purchase shares was $4,436,694 and, based on May's average price per
share of $11.253, 394,268 represents the maximum shares that may yet be purchased.
(4) The share purchase authorization in place for the month ended June 30, 2004 had purchase limitations on both
the number of shares (3,000,000) as well as a total dollar cap ($12,000,000). As of June 30, 2004, the
remaining authorized dollar amount to purchase shares was $4,436,694 and, based on June's average price per
share of $11.310, 392,281 represents the maximum shares that may yet be purchased.
(5) The share purchase authorization in place for the month ended July 31, 2004 had purchase limitations on both
the number of shares (3,000,000) as well as a total dollar cap ($12,000,000). As of July 31, 2004, the
remaining authorized dollar amount to purchase shares was $4,436,694 and, based on July's average price per
share of $9.712, 456,826 represents the maximum shares that may yet be purchased.
(6) The share purchase authorization in place for the month ended August 31, 2004 had purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap ($12,000,000). As of August 31, 2004,
the remaining authorized dollar amount to purchase shares was $4,436,694 and, based on August's average
price per share of $10.212, 434,459 represents the maximum shares that may yet be purchased.
(7) The share purchase authorization in place for the month ended September 30, 2004 has purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap ($12,000,000). As of September 30,
2004, the remaining authorized dollar amount to purchase shares was $4,436,694 and, based on September's
average price per share of $10.631, 417,336 represents the maximum shares that may yet be purchased.
27
(8) No stock repurchase plan was in effect from October 1, 2004 through November 16, 2004.
(9) The share purchase authorization in place for the month ended November 30, 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 November 30, 2004,
the remaining authorized dollar amount to purchase shares was $7,500,000 and, based on November's average
price per share of $11.062, 677,997 represents the maximum shares that may yet be purchased.
(10)The share purchase authorization in place for the month ended December 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 December 31, 2004,
the remaining authorized dollar amount to purchase shares was $7,291,295 and, based on December's average
price per share of $11.885, 613,487 represents the maximum shares that may yet be purchased.
(11)The share purchase authorization in place for the month ended January 31, 2005 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, 2005,
the remaining authorized dollar amount to purchase shares was $6,055,747 and, based on January's average
price per share of $12.269, 493,581 represents the maximum shares that may yet be purchased.
(12)The share purchase authorization in place for the month ended February 28, 2005 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 28, 2005,
the remaining authorized dollar amount to purchase shares was $5,982,927 and, based on February's average
price per share of $13.454, 444,695 represents the maximum shares that may yet be purchased.
(13)The share purchase authorization in place for the month ended March 31, 2005 has purchase limitations on
both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of March 31, 2005,
the remaining authorized dollar amount to purchase shares was $7,297,558 and, based on March's average price
per share of $12.498, 583,898 represents the maximum shares that may yet be purchased.
The timing and expiration date of the stock repurchase authorizations are included in Note 1 to the Consolidated
Financial Statements.
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, 2005, 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 Weighted average
to be issued upon exercise price of Number of securities
exercise of outstanding remaining available for
outstanding options, options, warrants future issuance under
Plan Category warrants and rights and rights equity compensation plans
- ---------------------------------- ---------------------- ------------------- ---------------------------
Equity compensation plans
approved by security holders 2,166,182 $9.43 283,341
Equity compensation plans
not approved by security holders - - -
---------------------- ------------------- ---------------------------
Total 2,166,182 $9.43 283,341
====================== =================== ===========================
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, 2003, 2004 and
2005" and "Item 1. Business."
28
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
Year Ended March 31,
-------------------------------------------------------------
2001 2002 2003 2004 2005
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Sales of product $ 219,795 $ 133,008 $ 228,770 $ 267,899 $ 480,970
Sales of leased equipment 34,031 9,353 6,096 - -
Lease revenues 42,694 48,850 50,520 51,254 46,344
Fee and other income 10,066 13,774 14,260 11,405 48,484
-------------------------------------------------------------
Total revenues 306,586 204,985 299,646 330,558 575,798
-------------------------------------------------------------
Costs and Expenses:
Cost of sales of product 184,302 114,554 201,277 236,283 432,774
Cost of sales of leased equipment 33,329 9,044 5,892 - -
Direct lease costs 16,535 9,579 6,582 10,561 11,509
Professional and other costs 3,363 2,718 3,188 3,701 9,417
Salaries and benefits 29,042 30,165 43,428 41,325 54,858
General and administrative expenses 10,507 12,193 14,499 14,631 18,253
Interest and financing costs 15,523 11,810 8,308 6,847 5,981
-------------------------------------------------------------
Total costs and expenses 292,601 190,063 283,174 313,348 532,792
-------------------------------------------------------------
Earnings before provision for income taxes 13,985 14,922 16,472 17,210 43,006
Provision for income taxes 5,667 6,010 6,760 7,056 17,718
-------------------------------------------------------------
Net earnings $ 8,318 $ 8,912 $ 9,712 $ 10,154 $ 25,288
=============================================================
Net earnings per common share - Basic $ 0.86 $ 0.87 $ 0.97 $ 1.09 $ 2.84
Net earnings per common share - Diluted $ 0.80 $ 0.85 $ 0.96 $ 1.02 $ 2.68
=============================================================
Weighted average shares outstanding - Basic 9,625,891 10,235,129 10,061,088 9,332,324 8,898,112
Weighted average shares outstanding - Diluted 10,383,467 10,458,235 10,109,809 9,976,458 9,433,250
29
ePLUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
As of March 31,
--------------------------------------------------------------
2001 2002 2003 2004 2005
--------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and cash equivalents $ 24,534 $ 28,224 $ 27,784 $ 25,155 $ 38,852
Accounts receivable 57,627 41,397 38,385 51,189 93,555
Notes receivable 1,862 228 53 52 115
Inventories 2,651 872 1,373 900 2,117
Investment in leases and leased equipment - net 202,846 169,087 182,169 186,667 189,469
Other assets 21,347 39,188 29,177 30,239 36,632
--------------------------------------------------------------
Total assets $ 310,867 $ 278,996 $ 278,941 $ 294,202 $ 360,740
==============================================================
Liabilities:
Accounts payable - equipment $ 9,227 $ 3,899 $ 5,636 $ 9,993 $ 8,965
Accounts payable - trade 17,764 14,223 25,914 32,141 55,333
Salaries and commissions payable 1,293 492 620 584 771
Recourse notes payable 8,876 4,660 2,736 6 6,265
Non-recourse notes payable 159,122 129,977 116,255 117,857 114,839
Other liabilities 22,678 19,456 18,163 22,037 42,465
--------------------------------------------------------------
Total liabilities 218,960 172,707 169,324 182,618 228,638
Stockholders' equity 91,907 106,289 109,617 111,584 132,102
--------------------------------------------------------------
Total liabilities and stockholders' equity $ 310,867 $ 278,996 $ 278,941 $ 294,202 $ 360,740
==============================================================
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, 2003, 2004 AND 2005
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.
30
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.
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 collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (1) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (2) the lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (4) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at the inception of the
lease.
31
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. We accrue items
determined to be receivable at period end.
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.
32
We evaluate residual values on an quarterly basis and record any required
changes in accordance with SFAS No. 13, paragraph 17.d, in which impairments of
residual value, other than temporary, are recorded in the period in which the
impairment is determined. 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 term, our policy is to recognize revenues on an accrual basis based upon
historical experience.
INITIAL DIRECT COSTS. Initial direct costs related to the origination of direct
financing or operating leases are capitalized and recorded as part of the net
investment in direct financing leases, or net operating lease equipment, and are
amortized over the lease term.
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.
Revenue from hosting arrangements is recognized in accordance with Emerging
Issues Task Force ("EITF") 00-3, "Application of AICPA Statement of Position
97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware." Hosting arrangements that are not in the scope of SOP 97-2
require that allocation of the portion of the fee allocated to the hosting
elements be recognized as the service is provided.
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.
33
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. Current-year fee and other income includes amounts from the favorable
settlement of the Ariba lawsuit (see Note 15 to the Consolidated Financial
Statements). 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, 2004
and 2005, the Company's reserve for credit losses was $4.7 million and $5.0
million, respectively. The net decrease in the reserve during fiscal year 2004
was due to our decision to write off receivables that were fully reserved
relative to amounts that were part of long-term bankruptcy claims against
customers. The underlying receivables and respective allowances were not
extinguished in our ledger until all possible claims and potential chances of
recovery were exhausted. Currently, we have determined that this procedure of
maintaining receivables with little or no chance of collection on the ledger
with offsetting allowances has no material reporting benefit and we have
policies in place to write off the receivables in a more expedient manner.
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.
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, 2005 and 2004,
respectively, $0.3 million and $0.4 million of costs for the development of
software for internal use were capitalized. During the years ended March 31,
2005, and 2004, respectively, the Company had $1.2 million, net of amortization,
of capitalized costs for the development of internal-use software. 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 year ended March 31, 2004, $1.9 million of costs for the
development of software available to customers were capitalized. There were no
such costs capitalized during the year ended March 31, 2005. As of March 31,
2005, the Company had $0.6 million, net of amortization, of capitalized costs
for the development of software available to customers as compared to $1.0
million, net of amortization, at March 31, 2004. These capitalized costs are
included in the accompanying consolidated balance sheets as a component of other
assets.
34
SHARE-BASED PAYMENT. In December 2004, the FASB issued SFAS No. 123 (revised
2004), "Share-Based Payment," or SFAS No. 123R. SFAS No. 123R replaces SFAS No.
123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees," and subsequently issued stock
option related guidance. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. We are required
to apply SFAS No. 123R to all awards granted, modified or settled as of the
beginning of the fiscal reporting period that begins after June 15, 2005. We
have commenced our analysis of the impact of SFAS No. 123R, but have decided not
to early adopt. We will most likely use the modified-prospective and the
straight-line method. Accordingly, we have not determined the impact that the
adoption of SFAS No. 123R will have on our financial position or results of
operations.
RESULTS OF OPERATIONS
The Year Ended March 31, 2005 Compared to the Year Ended March 31, 2004
Total revenues generated by the Company during the year ended March 31, 2005
were $575.8 million compared to revenues of $330.6 million for the year ended
March 31, 2004, an increase of 74.2%. This increase is primarily attributable to
increased revenues from the sales of product from the IT reseller due, in part,
from increased demand from customers. The Company's revenues are composed of
sales, lease revenues, and fee and other income, and may vary considerably from
period to period.
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, 2005, we experienced an increase in customer demand for IT
products in a very competitive economy. The increase was a result of increased
sales within the Company's existing customer base and from customers obtained
through recent acquisitions. For the year ended March 31, 2005, equipment sales
through the Company's technology business unit subsidiaries accounted for 99.2%
of sales of product, compared to 98.8% for the prior fiscal year. For the year
ended March 31, 2005, sales of product increased 79.5% to $481.0 million, a
result of increased technology sales through the Company's subsidiaries.
The Company realized a gross margin on sales of product of 10.0% for the year
ended March 31, 2005, as compared to 11.8% during the year ended March 31, 2004.
The Company's lease revenues decreased 9.6% to $46.3 million for the year ended
March 31, 2005, compared with $51.3 million for the prior fiscal year. Our net
investment in leased assets was $189.5 million at March 31, 2005, a 1.5%
increase from $186.7 million at March 31, 2004.
35
For the year ended March 31, 2005, fee and other income was $48.5 million, an
increase of 325.1% over the prior fiscal year. Fee and other income includes
eECM revenues, revenues from adjunct services and management fees, including
broker fees, support fees, warranty reimbursements, and learning center revenues
generated by the Company's technology business unit subsidiaries. The increase
in fee and other income in the year ended March 31, 2005 is primarily
attributable to a $37 million settlement of its patent-infringement litigation
against Ariba Inc. On February 12, 2005, the Company settled the
patent-infringement suit through a mutal settlement and license agreement. As of
March 31, 2005, the Company received a total of $37 million for the settlement.
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 9.0% during the year ended March 31,
2005, as compared to the prior fiscal year. The largest component of direct
lease costs is depreciation expense of leased equipment. The investment in
operating leases has increased 60.7% in the current year.
Professional and other fees increased 154.5% for the year ended March 31, 2005
over the prior fiscal year, and was primarily the result of $3.1 million in
legal fees related to the Ariba lawsuit and expenses that the Company incurred
related to Manchester Technologies, Inc. for professional services rendered by
65 people (prior Manchester Technologies, Inc. employees) that were to be hired
in a subsequent period and a transition team.
Salaries and benefit expenses increased 32.7% during the year ended March 31,
2005, as compared to the prior fiscal year. The increase is a combination of a
24% increase in employees, due in part to the acquisition of Manchester
Technologies, Inc., higher sales commissions attributed to higher sales volume,
performance bonuses related to the Ariba patent-infringement suit, and a normal
increase in payroll and benefit expenses.
General and administrative expenses increased 24.8% for the year ended March 31,
2005 over the prior fiscal year. The increase is largely due to higher sales
volume which in turn created a larger bad debt and inventory allowance, and an
increase in the number of offices and employees, due in part to the Manchester
Technologies, Inc. acquisition.
Interest and financing costs incurred by the Company for the year ended March
31, 2005 decreased 12.6%, and relate to interest costs on the Company's
indebtedness. This is attributed to a combination of our decreasing non-recourse
debt portfolio and a reduction in our weighted average interest rate on new
lease-related non-recourse debt. (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 $17.7 million for the year
ended March 31, 2005 from $7.1 million for the prior fiscal year, reflecting an
effective income tax rate of 41.0% and 41.2% respectively.
The foregoing resulted in a 149.0% increase in net earnings for the year ended
March 31, 2005, as compared to the prior fiscal year.
Basic and fully diluted earnings per common share were $2.84 and $2.68
respectively for the year ended March 31, 2005, as compared to $1.09 and $1.02
respectively for the year ended March 31, 2004, based on weighted average common
shares outstanding of 8,898,112 and 9,433,250 respectively for 2005 and
9,332,324 and 9,976,458 respectively for 2004.
36
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
increased revenues from the sales of product from the IT reseller due, in part,
from increased demand from 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
obtained through 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% 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."
37
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 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 an increase in 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 administative expenses remained similar to the prior
year.
Interest and financing costs incurred by the Company for the year ended March
31, 2004 decreased 17.6%, 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 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.
38
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2005, the Company generated cash flows from
operations of $41.6 million, and used cash flows from investing activities of
$30.5 million. Cash flows provided by financing activities amounted to $2.5
million during the same period. The effect of exchange rate changes during the
period provided cash flows of $82,098. The net effect of these cash flows was a
net increase in cash and cash equivalents of $13.7 million during the year.
During the same period, our total assets increased $66.5 million, primarily as
the result of increases in our cash and accounts receivable. The Company's net
investments in direct financing lease equipment decreased $9.3 million, or 5.6%
and operating lease equipment increased $12.1 million, or 60.7%, respectively,
during the period. The cash balance at March 31, 2005 was $38.9 million as
compared to $25.2 million the prior year.
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flow from its
operations, the sale of the equipment leased to third parties, or other internal
means. Although the Company expects that the credit quality of its leases and
its residual return history will continue to allow it to obtain such financing,
no assurances can be given that such financing will be available, at acceptable
terms, or at all. The financing necessary to support the Company's leasing
activities has principally been provided by non-recourse and recourse
borrowings. Historically, the Company has obtained recourse and non-recourse
borrowings from banks and finance companies. 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. Each transaction is specifically approved and
done solely at the lender's discretion.
During the year ended March 31, 2005, the Company's lease-related non-recourse
debt portfolio decreased 2.6% to $114.8 million.
39
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.
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, 2005, the Company had $9.0
million of unpaid equipment cost, as compared to $10.0 million at March 31,
2004.
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.
Borrowings under the credit facility bear interest at London Interbank Offered
Rates ("LIBOR") plus an applicable margin or, at our option, the Alternate Base
Rate ("ABR") plus an applicable margin. The ABR is the higher of the Agent
bank's prime rate or Federal Funds plus 0.5%. The applicable margin is
determined based on our recourse funded debt ratio and can range from 1.75% to
2.50% for LIBOR loans and from 0.0% to 0.25% for ABR loans. As of March 31,
2005, 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.
40
Floor Plan Credit Facility
The traditional business of ePlus Technology, inc. as a seller of computer
technology and related peripherals and software products is financed through an
agreement known as a floor plan credit facility in which interest expense for
the first thirty to forty-five days, in general, is not charged but is paid by
the supplier/distributor. The floor plan 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 respective floor plan facility credit limits and actual outstanding balances
were as follows:
Credit Limit at Balance as of Credit Limit at Balance as of
Floor Plan Supplier March 31, 2004 March 31, 2004 March 31, 2005 March 31, 2005
- -----------------------------------------------------------------------------------------------------------
GE Distribution Finance Corp. $ 26,000,000 $ 21,637,077 $ 75,000,000 $ 32,978,262
The limit is further defined as being $50,000,000 at all times other than during
the Seasonal Uplift Period. The Seasonal Uplift Period is defined as August 1st
through December 31st each calendar year. During the Seasonal Uplift Period, the
limit increases to $75,000,000.
Accounts Receivable Facility
In addition to the floor plan component, ePlus Technology, inc. has an accounts
receivable facility through GECDF. The accounts receivable facility was modified
on August 18, 2004 from a limit of $15,000,000 to include a Seasonal Uplift
Period as defined above to $20,000,000.
As of March 31, 2005 there was an outstanding balance of $6,263,471 on this
facility. As of March 31, 2004, the maximum available that could be borrowed
under the accounts receivable facility was $7,000,000 and there was no
outstanding balance. Availability under the lines of credit may be limited by
the asset value of equipment purchased by the Company and may be further limited
by certain covenants and terms and conditions of the facilities. The Company was
in compliance with said covenants as of March 31, 2005.
On June 28, 2004, the Company modified its credit facility agreement with GECDF
to increase the credit limit to $50,000,000 from $26,000,000. The modification
on August 18, 2004 also included a provision that during the Seasonal Uplift
Period, the floor plan credit facility and the accounts receivable facility, in
aggregate, could not exceed the $75,000,000 credit limit.
The facility provided by GECDF requires a guaranty of up to $10,500,000 by ePlus
inc. The loss of the GECDF credit facility could have a material adverse effect
on our future results as we currently rely on this facility and its components
for daily working capital and liquidity for our technology sales business and
operational accounts payable functions.
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.
41
CONTRACTUAL OBLIGATIONS
The impact that our contractual obligations as of March 31, 2005 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
--------------- -------------- --------------- -------------- -------------
Non-recourse notes payable (1) $ 114,838,994 $ 58,746,847 $ 49,593,331 $ 6,498,816 $ -
Recourse notes payable 6,264,897 6,264,897 _ _ -
Operating lease obligations (2) 6,760,124 1,866,923 2,859,829 2,033,372 -
Purchase Obligations (3) 192,667 192,667 _ _ -
--------------- -------------- --------------- -------------- -------------
Total $ 128,056,682 $ 67,071,334 $ 52,453,160 $ 8,532,188 $ -
=============== ============== =============== ============== =============
(1) Non-recourse 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, 2005, 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.
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, 2005,
the aggregate fair value of our recourse borrowings approximated their carrying
value.
42
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, 2005. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of March 31, 2005, 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.
However, in February 2005, the Company determined that there was a material
weakness in its internal control over financial reporting relating to a split
payment lease transaction that had been incorrectly recorded during the quarter
ended September 30, 2004. As a result, the Company restated its assets as of
September 30, 2004, and its earnings for the three- and six-month periods ended
September 30, 2004. Furthermore, the Company's management has determined not to
enter into any more split payment financing arrangements until the Company's
accounting processes can be revised to accurately record them.
43
PART III
Except as set forth below, the information required by Items 10, 11, 12, 13 and
14 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........................61 Director, Chairman of the Board, III
President and Chief Executive Officer
Bruce M. Bowen...........................53 Director and Executive Vice President III
Steven J. Mencarini......................49 Senior Vice President and
Chief Financial Officer
Kleyton L. Parkhurst.....................42 Senior Vice President and Treasurer
Terrence O'Donnell.......................61 Director II
Lawrence S. Herman.......................61 Director I
C. Thomas Faulders, III..................55 Director I
Milton E. Cooper.........................66 Director II
The Standard of Conduct and Ethics for Employees, Officers and Directors of
ePlus inc. is available on our website at www.eplus.com/ethics. We will disclose
on our website any amendments to or waivers from any provision of the Standard
of Conduct and Ethics that applies to any of our directors or officers.
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
See introductory paragraph of this Part III.
44
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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) Exhibit List
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 Asset Purchase Agreement between ePlus inc. and ProcureNet, Inc. dated as of May 4, 2001 (Incorporated
herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 18, 2001).
2.2 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 to the
Company's Current Report on Form 8-K filed on October 12, 2001).
2.3 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 to the Company's Current Report on Form 8-K filed on April 5, 2002).
2.4 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 to the Company's Current Report on Form 8-K filed on April 5, 2002).
2.5 Asset Purchase Agreement by and between ePlus Technology, inc. and Manchester Technologies, Inc., dated
May 28, 2004 (incorporated herein by reference from Exhibit 2.1 to the Company's Current Report on Form
8-K filed on May 28, 2004).
45
3.1 Certificate of Incorporation of the Company, filed on 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 on 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 on 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 on 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 on 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).
4 Specimen Certificate of Common Stock (Incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 333-11737) originally filed on September 11, 1996).
10.1 Form of Indemnification Agreement entered into between the Company and its directors and officers
(Incorporated herein by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1
(File No. 333-11737) originally filed on September 11, 1996).
10.2* Form of Employment Agreement between the Company and Phillip G. Norton (Incorporated herein by reference
to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-11737) originally
filed on September 11, 1996).
10.3* Form of Employment Agreement between the Company and Bruce M. Bowen (Incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-11737) originally filed
on September 11, 1996).
10.4* Form of Employment Agreement between the Company 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 Company 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).
46
10.6* MLC Master Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.21 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 10.22 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
10.23 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 10.24
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 10.25 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.11 Amended and Restated 1998 Long-Term Incentive 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, 2003).
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).
10.13 Form of Irrevocable Proxy and Stock Rights Agreement (Incorporated herein by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File No. 333-11737) originally filed on September
11, 1996).
10.14 Amended and Restated Credit Agreement dated July 21, 2003 between ePlus inc. and its subsidiaries named
therein and National City Bank, Inc., as Administrative Agent (Incorporated herein by reference to
Exhibit 5.1 to the Company's Current Report on Form 8-K filed on July 25, 2003).
10.15 Business Financing Agreement dated September 8, 2000 between GE Commercial Distribution Finance
Corporation (as successor to 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).
10.16 Agreement for Wholesale Financing dated September 8, 2000 between GE Commercial Distribution Finance
Corporation (as successor to 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).
10.17 Paydown Addendum to Business Financing Agreement between GE Commercial Distribution Finance Corporation
(as successor to 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 August 18,
2004).
47
10.18 Amendment to Business Financing Agreement and Agreement for Wholesale Financing, dated March 31, 2004
between GE Commercial Distribution Finance Corporation and ePlus Technology, inc. (Incorporated herein
by reference to Exhibit 5.1A to the Company's Current Report on Form 8-K filed on August 18, 2004).
10.19 Amendment to Business Financing Agreement and Agreement for Wholesale Financing, dated June 24, 2004
between GE Commercial Distribution Finance Corporation and ePlus Technology, inc. (Incorporated herein
by reference to Exhibit 5.1B to the Company's Current Report on Form 8-K filed on August 18, 2004).
10.20 Amendment to Business Financing Agreement and Agreement for Wholesale Financing dated August 17, 2004
between GE Commercial Distribution Finance Corporation and ePlus Technology, inc. (Incorporated herein
by reference to Exhibit 5.1C to the Company's Current Report on Form 8-K filed on August 18, 2004).
10.21 Limited Guaranty dated June 4, 2004 between GE Commercial Distribution Finance Corporation and ePlus
inc. (Incorporated herein by reference to Exhibit 5.4 to the Company's Current Report on Form 8-K filed
on August 18, 2004).
10.22 Collateral Guaranty dated March 31, 2004 between GE Commercial Distribution Finance Corporation and
ePlus Group, inc. (Incorporated herein by reference to Exhibit 5.5 to the Company's Current Report on
Form 8-K filed on August 18, 2004).
10.23 Agreement Regarding Collateral Rights and Waiver between GE Commercial Distribution Finance Corporation
and National City Bank, as Administrative Agent, dated March 24, 2004 (Incorporated herein by reference
to Exhibit 5.6 to the Company's Current Report on Form 8-K filed on August 18, 2004).
10.24 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).
10.25 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).
10.26 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).
48
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 Deed of Lease between CALEAST INDUSTRIAL INVESTORS, LLC (Landlord) and ePlus inc. (Tenant) (Incorporated
herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended
March 31, 2002).
10.34 Deed of Lease by and between ePlus inc. and Norton Building I, LLC dated as of December 23, 2004
(Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
December 27, 2004).
10.35 ePlus inc. Supplemental Benefit Plan for Bruce M. Bowen (Incorporated herein by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on March 2, 2005).
10.36 ePlus inc. Supplemental Benefit Plan for Steven J. Mencarini (Incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 2, 2005).
49
10.37 ePlus inc. Supplemental Benefit Plan for Kleyton L. Parkhurst (Incorporated herein by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 2, 2005).
10.38 ePlus inc. Form of Supplemental Benefit Plan Participation Election Form (Incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on March 2, 2005).
10.39 Incentive Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive Plan by
and between the Company and Phillip G. Norton (Incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on February 10, 2005).
10.40 Incentive Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive Plan by
and between the Company and Bruce M. Bowen (Incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on February 10, 2005).
10.41 Incentive Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive Plan by
and between the Company and Kleyton L. Parkhurst (Incorporated herein by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on February 10, 2005).
10.42 Incentive Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive Plan by
and between the Company and Steven J. Mencarini (Incorporated herein by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on February 10, 2005).
10.43 Non-Qualified Stock Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive
Plan by and between the Company and Phillip G. Norton (Incorporated herein by reference to Exhibit 10.5
to the Company's Current Report on Form 8-K filed on February 10, 2005).
10.44 Form of Incentive Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term Incentive
Plan (Incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed
on February 10, 2005).
10.45 Form of Non-Qualified Stock Option Agreement under the ePlus inc. Amended and Restated 1998 Long-Term
Incentive Plan (Incorporated herein by reference to Exhibit 10.7 to the Company's Current Report on Form
8-K filed on February 10, 2005).
21 Subsidiaries of the Company
50
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.
51
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 29, 2005
/s/ BRUCE M. BOWEN
-------------------------------------------------
By: Bruce M. Bowen, Director and Executive Vice
President
Date: June 29, 2005
/s/ STEVEN J. MENCARINI
-------------------------------------------------
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, Principal Accounting
Officer
Date: June 29, 2005
/s/ C. THOMAS FAULDERS, III
-------------------------------------------------
By: C. Thomas Faulders, III, Director
Date: June 29, 2005
/s/ TERRENCE O'DONNELL
-------------------------------------------------
By: Terrence O'Donnell, Director
Date: June 29, 2005
/s/ LAWRENCE S. HERMAN
-------------------------------------------------
By: Lawrence S. Herman, Director
Date: June 29, 2005
/s/ MILTON E. COOPER, JR.
-------------------------------------------------
By: Milton E. Cooper, Jr., Director
Date: June 29, 2005
52
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, 2004 and 2005 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 2003, 2004, and 2005 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2003, 2004, and 2005 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 2003, 2004, and 2005 F-7
Notes to Consolidated Financial Statements F-8
SCHEDULE
II-Valuation and Qualifying Accounts for the Years
Ended March 31, 2003, 2004, and 2005 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 ("the Company") as of March 31, 2004 and 2005, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2005. 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. The Company has determined it is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2005, 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 29, 2005
F-2
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004 As of March 31, 2005
---------------------------------------------
ASSETS
Cash and cash equivalents $ 25,155,011 $ 38,851,714
Accounts receivable, net of allowance for doubtful
accounts of $1,584,358 and $1,959,049 as of
March 31, 2004 and 2005 respectively 51,188,640 93,555,462
Notes receivable 51,986 114,708
Inventories 899,748 2,116,855
Investment in leases and leased equipment - net 186,667,141 189,468,926
Property and equipment - net 5,230,473 6,647,781
Other assets 4,765,782 3,859,791
Goodwill 20,243,310 26,125,212
---------------------------------------------
TOTAL ASSETS $ 294,202,091 $ 360,740,449
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - equipment $ 9,993,077 $ 8,965,022
Accounts payable - trade 32,140,670 55,332,993
Salaries and commissions payable 583,934 771,487
Accrued expenses and other liabilities 11,983,798 32,945,931
Recourse notes payable 5,863 6,264,897
Non-recourse notes payable 117,857,208 114,838,994
Deferred tax liability 10,053,226 9,519,309
---------------------------------------------
Total Liabilities 182,617,776 228,638,633
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; 25,000,000 authorized, 10,717,242
issued and 8,939,958 outstanding at March 31, 2004;
and 25,000,000 authorized, 10,807,392 issued and 8,581,492
outstanding at March 31, 2005 $ 107,172 $ 108,074
Additional paid-in capital 64,339,988 65,181,862
Treasury stock, at cost, 1,777,284 and 2,225,900 shares
respectively (17,192,886) (22,887,881)
Retained earnings 64,211,474 89,499,096
Accumulated other comprehensive income -
Foreign currency translation adjustment 118,567 200,665
---------------------------------------------
Total Stockholders' Equity 111,584,315 132,101,816
---------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,202,091 $ 360,740,449
=============================================
See Notes to Consolidated Financial Statements.
F-3
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
---------------------------------------------------------
2003 2004 2005
---------------------------------------------------------
REVENUES
Sales of product $ 228,769,966 $ 267,898,937 $ 480,970,082
Sales of leased equipment 6,095,830 - -
---------------------------------------------------------
234,865,796 267,898,937 480,970,082
Lease revenues 50,520,293 51,253,518 46,343,797
Fee and other income 14,260,057 11,405,033 48,484,643
---------------------------------------------------------
64,780,350 62,658,551 94,828,440
---------------------------------------------------------
TOTAL REVENUES (1) 299,646,146 330,557,488 575,798,522
---------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, product 201,277,000 236,283,350 432,774,189
Cost of sales, leased equipment 5,891,789 - -
---------------------------------------------------------
207,168,789 236,283,350 432,774,189
Direct lease costs 6,582,409 10,560,586 11,508,820
Professional and other fees 3,188,046 3,700,795 9,417,010
Salaries and benefits 43,426,999 41,325,224 54,858,181
General and administrative expenses 14,499,261 14,630,731 18,253,106
Interest and financing costs 8,308,382 6,847,072 5,981,054
---------------------------------------------------------
76,005,097 77,064,408 100,018,171
---------------------------------------------------------
TOTAL COSTS AND EXPENSES (2) 283,173,886 313,347,758 532,792,360
---------------------------------------------------------
Earnings before provision for income taxes 16,472,260 17,209,730 43,006,162
---------------------------------------------------------
Provision for income taxes 6,759,551 7,055,989 17,718,539
---------------------------------------------------------
NET EARNINGS $ 9,712,709 $ 10,153,741 25,287,623
=========================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.97 $ 1.09 $ 2.84
=========================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.96 $ 1.02 $ 2.68
=========================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 10,061,088 9,332,324 8,898,112
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,109,809 9,976,458 9,433,250
(1) Includes amounts from related parties of $145,926, $302,968 and $37,990 for the fiscal years ended
March 31, 2003, 2004 and 2005, respectively.
(2) Includes amounts to related parties of $486,520, $443,065 and $520,711 for the fiscal years ended
March 31, 2003, 2004 and 2005, respectively.
See Notes to Consolidated Financial Statements.
F-4
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-------------------------------------------------------
2003 2004 2005
-------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 9,712,709 $ 10,153,741 $ 25,287,623
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,510,705 10,487,439 12,784,225
Provision for credit losses 616,074 1,731,325 (515,843)
Tax benefit of stock options exercised - - 156,972
Deferred taxes 10,231,687 5,293,197 (533,917)
Loss (Gain) on sale of operating lease equipment 20,796 2,122,180 (159,477)
Payments from lessees directly to lenders (291,281) (2,645,589) (4,275,789)
Loss (Gain) on disposal of property and equipment (47,562) 904,579 350,866
Changes in:
Accounts receivable 2,465,447 (14,261,777) (41,052,707)
Notes receivable 174,816 1,112 (62,722)
Inventories (501,311) 473,420 (1,217,107)
Investment in leases and leased equipment-net (19,761,290) (2,653,444) 8,351,695
Other assets 609,853 59,987 1,009,820
Accounts payable - equipment 1,736,777 4,357,301 (1,028,055)
Accounts payable - trade 10,809,400 6,226,285 23,140,604
Salaries and commissions payable, accrued
expenses and other liabilities (5,348,826) (2,187,332) 19,326,204
-------------------------------------------------------
Net cash provided by operating activities 14,937,994 20,062,424 41,562,392
-------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 2,271,386 452,127 1,202,550
Purchase of operating lease equipment (11,627,961) (19,592,804) (22,036,259)
Proceeds from sale of property and equipment - - 19,825
Purchases of property and equipment (1,549,190) (2,801,030) (4,641,325)
Cash used in acquisitions - net of cash acquired - (1,601,632) (5,000,000)
-------------------------------------------------------
Net cash used in investing activities (10,905,765) (23,543,339) (30,455,209)
-------------------------------------------------------
F-5
ePlus inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
-----------------------------------------------------
2003 2004 2005
-----------------------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Non-recourse $ 80,997,406 $ 77,904,696 $ 64,630,667
Repayments:
Non-recourse (78,130,384) (66,143,136) (63,090,176)
Pay-off of recourse debt due to settlement (98,660) - -
Write-off of non-recourse debt due to bankruptcy (1,996,596) 7,181 (91,393)
Write-off of non-recourse debt due to settlement - - (191,519)
Purchase of treasury stock (6,936,324) (9,681,762) (5,694,995)
Proceeds from issuance of capital stock - net of expenses 492,718 1,436,033 685,804
Repayments of lines of credit 1,140,890 (2,730,435) 6,259,034
-----------------------------------------------------
Net cash provided by (used in) financing activities (4,530,950) 792,577 2,507,422
-----------------------------------------------------
Effect of Exchange Rate Changes on Cash 59,308 59,259 82,098
-----------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (439,413) (2,629,079) 13,696,703
Cash and Cash Equivalents, Beginning of Period 28,223,503 27,784,090 25,155,011
-----------------------------------------------------
Cash and Cash Equivalents, End of Year $ 27,784,090 $ 25,155,011 $ 38,851,714
=====================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 4,991,426 $ 3,794,273 $ 2,490,376
=====================================================
Cash paid for income taxes $ 4,459,405 $ 1,067,972 $ 16,262,145
=====================================================
Schedule of Noncash Investing and Financing Activities:
Liabilities assumed in purchase transactions $ - $ 811,657 $ 1,875,202
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, 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)
---------------------------------------------------------------------------------------
Subtotal (944,219) 781 491,660 (6,936,324) - - (6,443,883)
---------------------------------------------------------------------------------------
Net earnings - - - - 9,712,709 - 9,712,709
Foreign currency translation adjustment - - - - - 59,308 59,308
---------------------------------------------------------------------------------------
Total comprehensive income - - - - 9,712,709 59,308 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)
---------------------------------------------------------------------------------------
Subtotal (511,693) 1,772 1,434,261 (9,681,762) - - (8,245,729)
---------------------------------------------------------------------------------------
Net earnings - - - - 10,153,741 - 10,153,741
Foreign currency translation adjustment - - - - - 59,259 59,259
---------------------------------------------------------------------------------------
Total comprehensive income - - - - 10,153,741 59,259 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
===================== =========== ============ ============ ============= =============
Issuance of shares for option exercise 90,150 902 684,902 - - - 685,804
Tax benefit of exercised stock options - - 156,972 - - - 156,972
Purchase of treasury stock (448,616) - - (5,694,995) - - (5,694,995)
---------------------------------------------------------------------------------------
Subtotal (358,466) 902 841,874 (5,694,995) - - (4,852,219)
---------------------------------------------------------------------------------------
Net earnings - - - - 25,287,623 - 25,287,623
Foreign currency translation adjustment - - - - - 82,098 82,098
---------------------------------------------------------------------------------------
Total comprehensive income - - - - 25,287,623 82,098 25,369,721
--------------------- ----------- ------------ ------------ ------------- -------------
Balance, March 31, 2005 8,581,492 $108,074 $65,181,862 $(22,887,881)$89,499,096 $ 200,665 $132,101,816
=======================================================================================
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, 2003, 2004, and 2005
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.
ASSET PURCHASES - 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
On May 28, 2004, ePlus purchased certain assets and assumed certain liabilities
of Manchester Technologies, Inc. for total consideration of $7.0 million. The
purchase was made by ePlus Technology, inc., a wholly-owned subsidiary of ePlus
inc. The purchase price included $5.0 million in cash and the assumption of
certain liabilities of approximately $2.0 million. The acquisition has enhanced
the Company's IT reseller and professional services business. Approximately 125
former Manchester Technologies, Inc. personnel were hired by ePlus as part of
the transaction and are located in three established offices in metropolitan New
York, South Florida and Baltimore.
REVENUE RECOGNITION - The Company sells information technology equipment to its
customers and recognizes revenue from equipment sales at the time equipment is
shipped to 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. SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," 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 meet the criteria for surrender of control set
forth by SFAS No. 140 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.
F-9
Lease revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to the Company's estimate of residual value.
The Company assigns all rights, title, and interests in a number of its leases
to third-party financial institutions without recourse. These assignments are
accounted for as sales since the Company has completed its obligations at the
assignment date, and the Company retains no ownership interest in the equipment
under lease.
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.
Revenue from hosting arrangements is recognized in accordance with Emerging
Issues Task Force ("EITF") 00-3, "Application of AICPA Statement of Position
97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware." Hosting arrangements that are not in the scope of SOP 97-2
require that allocation of the portion of the fee allocated to the hosting
elements be recognized as the service is provided.
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 for which 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.
STATEMENT OF CASH FLOWS - In February 2005, the Securities and Exchange
Commission published a letter clarifying that cash flows for finance receivables
related to sales of the Company's products and services should be considered
operating activities on the statement of cash flows. The Company historically
reported cash flows from the financing of equipment related to direct financing
and sales-type lease transactions as investing activities in the statement of
cash flows. The Company revised its consolidated statements of cash flows to
comply with the new SEC guidance. All intercompany transactions have been
eliminated and, therefore, there are no intercompany cash flows reflected on the
consolidated statements of cash flows. This reclassification did not change the
total cash flow.
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.
F-10
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 ten years.
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 $0.3 million and $0.4 million of
internal use software was capitalized during the years ended March 31, 2005 and
2004 respectively, which is included in the accompanying consolidated balance
sheets as a component of property and equipment.
F-11
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 year ended March 31, 2004, $1.9 million of development costs
have been capitalized. No such costs were capitalized during the year ended
March 31, 2005.
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, 2003
and 2004 financial statements to conform to the March 31, 2005 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. For the years ended March 31,
2005 and 2004, accumulated other comprehensive income decreased $82,098 and
$59,259 respectively, resulting in total comprehensive income of $25,369,721 and
$10,213,000 respectively.
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
10,061,088 in fiscal 2003, 9,332,324 in 2004, and 8,898,112 in 2005. Diluted EPS
amounts were calculated based on weighted average shares outstanding and common
stock equivalents of 10,109,809 in fiscal 2003, 9,976,458 in 2004, and 9,433,250
in 2005. 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, 2005, 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:
F-12
Year Ended March 31,
2003 2004 2005
-----------------------------------------------
Net earnings, as reported $ 9,712,709 $ 10,153,741 $ 25,287,623
Stock-based compensation expense (3,665,698) (2,593,793) (1,145,665)
-----------------------------------------------
Net earnings, pro forma $ 6,047,011 $ 7,559,948 $ 24,141,958
===============================================
Basic earnings per share, as reported $0.97 $1.09 $2.84
Basic earnings per share, pro forma $0.60 $0.81 $2.71
Diluted earnings per share, as reported $0.96 $1.02 $2.68
Diluted earnings per share, pro forma $0.60 $0.76 $2.56
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 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 September 30, 2004 and is limited to a cumulative purchase amount of
$7,500,000. On May 6, 2004, the Company's Board of Directors approved an
increase, from $7,500,000 to $12,000,000, for the maximum total cost of shares
that could be purchased, which expired September 30, 2004. From October 1, 2004
to November 16, 2004, there was no stock repurchase authorization. On November
17, 2004, another stock purchase program was authorized by the Company's Board
of Directors. 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 November 17, 2005 and is limited to a cumulative purchase amount of
$7,500,000. On March 2, 2005, the Company's Board of Directors approved an
increase, from $7,500,000 to $12,500,000, for the maximum total cost of shares
that could be purchased.
During the years ended March 31, 2003, 2004, and 2005, the Company repurchased
1,022,384, 688,800, and 448,616 shares of its outstanding common stock for a
total of $6,936,324, $9,681,763, and $5,694,994. Since the inception of the
Company's initial repurchase program on September 20, 2001, as of March 31,
2005, the Company had repurchased 2,225,900 shares of its outstanding common
stock at an average cost of $10.28 per share for a total of $22,887,881.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued SFAS No.
123 (revised 2004), "Share-Based Payment," or SFAS No. 123R. SFAS No. 123R
replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and subsequently
issued stock option related guidance. This statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
Entities will be required to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant date fair value
F-13
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award (usually the vesting period). The grant-date fair value of employee
share options and similar instruments will be estimated using option-pricing
models. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. We are required to apply SFAS No. 123R to
all awards granted, modified or settled as of the beginning of the fiscal
reporting period that begins after June 15, 2005. We are also required to use
either the modified-prospective method or modified-retrospective method. Under
the modified-prospective method, we must recognize compensation cost for all
awards subsequent to adopting the standard and for the unvested portion of
previously granted awards outstanding upon adoption. Under the
modified-retrospective method, we must restate our previously issued financial
statements to recognize the amounts we previously calculated and reported on a
pro forma basis, as if the prior standard had been adopted. Under both methods,
we are permitted to use either the straight-line or an accelerated method to
amortize the cost as an expense for awards with graded vesting. The standard
permits and encourages early adoption. We have commenced our analysis of the
impact of SFAS No. 123R, but have decided not to early adopt. We will most
likely use the modified-prospective and the straight-line method. Accordingly,
we have not determined the impact that the adoption of SFAS No. 123R will have
on our financial position or results of operations.
2. INVESTMENTS IN LEASES AND LEASED EQUIPMENT - NET
Investments in leases and leased equipment - net consists of the following:
As of March 31,
2004 2005
(In Thousands)
--------------------
Investment in direct financing and sales-type leases - net $ 166,790 $ 157,519
Investment in operating lease equipment - net 19,877 31,950
--------------------
$ 186,667 $ 189,469
====================
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,
2004 2005
(In Thousands)
----------------------
Minimum lease payments $ 161,008 $ 151,139
Estimated unguaranteed residual value (1) 25,025 23,794
Initial direct costs - net of amortization (2) 2,342 1,850
Less: Unearned lease income (18,439) (16,208)
Reserve for credit losses (3,146) (3,056)
----------------------
Investment in direct finance and sales-type leases - net $ 166,790 $ 157,519
======================
F-14
(1) Includes estimated unguaranteed residual values of $605,970 and $801,025 as
of March 31, 2004 and 2005, respectively, of direct financing leases that were
sold under SFAS 140.
(2) Initial direct costs are shown net of amortization of $2,184 and $2,387 at
March 31, 2004 and March 31, 2005, respectively.
Future scheduled minimum lease rental payments as of March 31, 2005 are as
follows:
(In Thousands)
----------------
Year ending March 31, 2006 $ 76,733
2007 47,192
2008 19,903
2009 3,704
2010 1,953
2011 and after 1,654
----------------
Total $ 151,139
================
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
four 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,
2004 2005
(In Thousands)
------------------------
Cost of equipment under operating leases $ 27,985 $ 45,453
Less: Accumulated depreciation and amortization (8,108) (13,503)
------------------------
Investment in operating lease equipment - net $ 19,877 $ 31,950
========================
Future scheduled minimum lease rental payments as of March 31, 2005 are as
follows:
(In Thousands)
----------------
Year ending March 31, 2006 $ 11,617
2007 9,609
2008 6,422
2009 4,055
2010 743
2011 and after 671
----------------
Total $ 33,117
================
3. RESERVES FOR CREDIT LOSSES
As of March 31, 2004 and 2005, the Company's reserve for credit losses was
$4,730,015 and $5,014,905, 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):
F-15
Accounts Investment in Direct
Receivable Financing Leases Total
---------------- ---------------------- ---------
Balance April 1, 2003 $ 3,346 $ 3,407 $ 6,753
Bad Debts Expense 23 24 47
Recoveries (12) - (12)
Write-offs and other (1,773) (285) (2,058)
---------------- ---------------------- ---------
Balance March 31, 2004 1,584 3,146 4,730
---------------- ---------------------- ---------
Bad Debts Expense 1,131 - 1,131
Recoveries (350) - (350)
Write-offs and other (406) (90) (496)
---------------- ---------------------- ---------
Balance March 31, 2005 $ 1,959 $ 3,056 $ 5,015
================ ====================== =========
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,
2004 2005
(In Thousands)
------------------------------
Furniture, fixtures and equipment $ 5,437 $ 7,364
Vehicles 117 155
Capitalized software 6,119 6,411
Leasehold improvements 256 1,894
Less: Accumulated depreciation and amortization (6,699) (9,176)
------------------------------
Property and equipment - net $ 5,230 $ 6,648
==============================
Certain property and equipment assets for the year ended March 31, 2004 are
shown in different categories above than as previously reported.
5. GOODWILL
As of March 31, 2005, the Company had goodwill, net of accumulated amortization,
of $26.1 million, an increase of $5.9 million from March 31, 2004 as a result of
the purchase of certain assets and liabilities of Manchester Technologies, Inc.
As of March 31, 2004, the Company had goodwill, net of accumulated amortization,
of $20.2 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, 2003, 2004 and 2005.
As of March 31, 2004 and 2005, the Company has determined goodwill had not been
impaired and that no potential impairment existed, based on testing performed as
of September 30, 2003 and 2004.
F-16
Changes in the carrying amount of goodwill for the years ended March 31, 2004
and 2005 are as follows:
Financing Technology Sales
Business Unit Business Unit Total
--------------- ------------------ -------------
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
Other Adjustments during the period - 6,906 6,906
--------------- ------------------ -------------
Goodwill (net), March 31, 2004 4,028,764 16,214,546 20,243,310
Goodwill acquired during the period - 5,881,902 5,881,902
--------------- ------------------ -------------
Goodwill(net), March 31,2005 $ 4,028,764 $ 22,096,448 $ 26,125,212
=============== ================== =============
6. RECOURSE AND NON-RECOURSE NOTES PAYABLE
Recourse and non-recourse obligations consist of the following:
As of March 31,
2004 2005
(In Thousands)
---------------------
Recourse line of credit bearing interest at prime (5.75% at
March 31, 2005) less 0.5% with a maximum balance of
$50,000,000, except during the seasonal uplift period in
which the maximum balance increases to $75,000,000 $ - $ 6,263
Recourse line of credit of $45,000,000 expiring on July 21,
2006. Carrying interest at the Company's option, either the
LIBOR rate plus 175-250 basis points, or the alternate base
rate of the higher of prime or federal funds rate plus 50
basis points plus 0-25 basis points. - -
Recourse vehicle note with variable interest rate 6 2
---------------------
Total recourse obligations $ 6 $ 6,265
=====================
Non-recourse equipment notes secured by related investments
in leases with interest rates ranging from 2.39% to 11.0% in
fiscal years 2004 and 2005 $ 117,857 $ 114,839
=====================
F-17
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 and in
compliance with 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, 2005, mature as follows:
Recourse Non-recourse
Notes Payable Notes Payable
(In Thousands)
----------------------------
Year ending March 31, 2006 $ 6,265 $ 58,747
2007 - 36,218
2008 - 13,376
2009 - 4,609
2010 - 1,720
2011 and after - 169
----------------------------
Total $ 6,265 $ 114,839
============================
7. RELATED PARTY TRANSACTIONS
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 $145,962, $302,968, and $37,990 for the years ended March 31, 2003,
2004 and 2005 for accounting and administrative services provided to MLC/CLC
LLC.
The Company leases certain office space from an entity controlled by an
individual, director, stockholder and officer of the Company. During the years
ended March 31, 2003, 2004, and 2005, rent expense paid to these related parties
was $486,520, $443,065, and $520,711 respectively.
F-18
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 $2,435,972,
$2,048,201, and $2,649,483 for the years ended March 31, 2003, 2004, and 2005
respectively. As of March 31, 2005, the future minimum lease payments are due as
follows:
(In Thousands)
--------------------
Year Ending March 31, 2006 $ 1,867
2007 1,530
2008 1,329
2009 1,162
2010 872
--------------------
$ 6,760
====================
9. INCOME TAXES
A reconciliation of income taxes computed at the statutory federal income tax
rate of 35% to the provision for income taxes included in the consolidated
statements of earnings is as follows:
For the Year Ended March 31,
2003 2004 2005
(In Thousands)
----------------------------------
Statutory federal income tax rate 35% 35% 35%
Income tax expense computed at the U.S. statutory federal rate $ 5,765 $ 6,023 $ 15,067
State income tax expense - net of federal benefit 876 975 2,012
Non-taxable interest income (11) (11) (13)
Non-deductible expenses 130 69 194
Other - - 458
----------------------------------
Provision for income taxes $ 6,760 $ 7,056 $ 17,718
==================================
Effective income tax rate 41.0% 41.0% 41.2%
==================================
F-19
The components of the provision for income taxes are as follows:
For the Year Ended March 31,
2003 2004 2005
(In Thousands)
-----------------------------------
Current:
Federal $ (3,008) $ 22 $ 15,041
State (464) 1,741 3,211
-----------------------------------
Total current expense (benefit) (3,472) 1,763 18,252
-----------------------------------
Deferred:
Federal 8,421 5,535 (519)
State 1,811 (242) (15)
-----------------------------------
Total deferred expense (benefit) 10,232 5,293 (534)
-----------------------------------
Provision for Income Taxes $ 6,760 $ 7,056 $ 17,718
===================================
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. Significant components of
the Company's deferred tax assets and liabilities as of March 31 were as
follows:
For the Year Ended March 31,
2003 2004 2005
(In Thousands)
---------------------------------
Lease revenue recognition $ (8,232) $ (14,292) $ (13,144)
Allowance for doubtful accounts and credit reserves 3,322 3,565 2,794
Other 150 674 831
---------------------------------
Net Deferred Tax Liability $ (4,760) $ (10,053) $ (9,519)
=================================
On October 22, 2004, the President of the United States signed into law the
American Jobs Creation Act of 2004. The Company is currently evaluating the
impact of this new law on its operations and effective tax rate. In particular,
the Company is evaluating the law's provisions relating to the phased-in
deduction associated with pre-tax income from domestic production activities.
This special deduction is 3% of qualifying income for years 2004 and 2005, 6% in
years 2006 through 2009, and 9% thereafter.
F-20
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
$14,287,124, $30,067,365 and $23,748,131 for the years ended March 31, 2003,
2004, and 2005, 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 $12,453,541, $4,218,748 and $1,668,369 for the
years ended March 31, 2003, 2004, and 2005 respectively.
11. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with contributory 401(k) profit sharing
plans. To be eligible to participate in the plan, employees must be at least 21
years of age and have completed a minimum service requirement. Full vesting in
the plans vary from after the fourth to the sixth consecutive year of plan
participation. Employer contribution percentages are determined by the Company
and are discretionary each year. The Company's expense for the plans was
$235,394, $247,040 and $212,310 for the years ended March 31, 2003, 2004 and
2005, 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 the 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 Incentive Stock Option Plan is capped at a maximum of
3,000,000 shares. As of March 31, 2005, a total of 2,716,659 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 2,259,154
options are outstanding or have been exercised as of March 31, 2005;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under which
260,000 options are outstanding as of March 31, 2005;
F-21
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 53,707 are outstanding or have been exercised as of March
31, 2005;
d) the Employee Stock Purchase Plan ("ESPP") under which 143,798 shares
have been issued as of March 31, 2005.
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, 2003, 2004 and 2005 was
$3.11, $5.26 and $5.82 per share respectively.
A summary of stock option activity during the three years ended March 31, 2005
is as follows:
Weighted Average
Number of Shares Exercise Price Range Exercise Price
------------------ ---------------------- ------------------
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
==================
Outstanding, April 1, 2004 1,786,232
Options granted 490,000 $10.75 - $11.96 $ 10.95
Options exercised (89,300) $6.24 - $13.00 $ 7.32
Options forfeited (20,750) $6.86 - $17.38 $ 12.26
------------------
Outstanding, March 31, 2005 2,166,182
==================
Exercisable, March 31, 2005 1,648,382
==================
F-22
Additional information regarding options outstanding as of March 31, 2005 is as
follows:
Options Outstanding Options Exercisable
- ---------------------------------------------------------- ----------------------------------------
Weighted Average
Number Remaining Weighted Average Weighted Average
Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
- ---------------------------------------------------------- ----------------------------------------
2,166,182 5.2 years $11.70 1,648,382 $9.34
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.
Year Ended March 31,
2003 2004 2005
-------------- -------------- --------------
Net earnings, as reported $ 9,712,709 $ 10,153,741 $ 25,287,623
Stock-based compensation expense (3,665,698) (2,593,793) (1,145,665)
-------------- -------------- --------------
Net earnings, pro forma $ 6,047,011 $ 7,559,948 $ 24,141,958
============== ============== ==============
Basic earnings per share, as reported $0.97 $1.09 $2.84
Basic earnings per share, pro forma $0.60 $0.81 $2.71
Diluted earnings per share, as reported $0.96 $1.02 $2.68
Diluted earnings per share, pro forma $0.60 $0.76 $2.56
Under SFAS No. 123, the fair value of stock-based awards to employees is derived
through the use of option pricing models that require a number of subjective
assumptions. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:
For the Year Ended March 31,
2003 2004 2005
---------- ---------- ----------
Options granted under the Incentive Stock Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 46.02% 39.76% 59.49%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.96% 3.02% 3.55%
During the years ended March 31, 2003, 2004 and 2005, no options were granted
under the Nonqualified Stock Option Plan or the Outside Director Stock Option
Plan.
F-23
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, 2004 As of March 31, 2005
Carrying Amount Fair Value Carrying Amount Fair Value
(In Thousands)
----------------- ------------ ----------------- ------------
Assets:
Cash and cash equivalents $ 25,155 $ 25,155 $ 38,852 $ 38,852
Liabilities:
Non-recourse notes payable 117,857 117,818 114,839 114,760
Recourse notes payable 6 6 6,265 6,265
F-24
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.
F-25
Financing Technology Sales
Business Unit Business Unit Total
---------------- ----------------- --------------
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 68,814,258 230,831,888 299,646,146
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 25,991,594 (1,210,953) 24,780,641
Interest expense 7,832,220 476,162 8,308,382
---------------- ----------------- --------------
Earnings (loss) before income taxes $ 18,159,374 $ (1,687,114) $ 16,472,260
================ ================= ==============
Assets $ 226,238,171 $ 52,702,515 $ 278,940,686
================ ================= ==============
Twelve months ended March 31, 2004
Sales of product $ 3,321,050 $ 264,577,887 $ 267,898,937
Sales of leased equipment - - -
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 (loss) before income taxes $ 16,214,133 $ 995,597 $ 17,209,730
================ ================= ==============
Assets $ 238,631,864 $ 55,570,227 $ 294,202,091
================ ================= ==============
Twelve months ended March 31, 2005
Sales of product $ 3,738,045 $ 477,232,037 $ 480,970,082
Sales of leased equipment - - -
Lease revenues 46,343,797 - 46,343,797
Fee and other income 2,471,872 46,012,771 48,484,643
---------------- ----------------- --------------
Total Revenues 52,553,714 523,244,808 575,798,522
Cost of sales 3,569,825 429,204,364 432,774,189
Direct lease costs 11,508,820 - 11,508,820
Selling, general and administrative expenses 21,983,667 60,544,630 82,528,297
---------------- ----------------- --------------
Segment earnings 15,491,402 33,495,814 48,987,216
Interest expense 5,450,537 530,517 5,981,054
---------------- ----------------- --------------
Earnings before income taxes $ 10,040,865 $ 32,965,297 $ 43,006,162
================ ================= ==============
Assets $ 255,776,519 $ 104,963,930 $ 360,740,449
================ ================= ==============
F-26
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, 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 $ 0.24 $ 0.27 $ 0.27
========= ============= ========= ========= ============== =========
Year Ended March 31, 2005
Sales $ 91,969 $ - $ 91,969 $138,065 $ - $138,065
Total Revenues 106,699 - 106,699 153,186 - 153,186
Cost of Sales 82,161 - 82,161 123,343 - 123,343
Total Costs and Expenses 103,012 - 103,012 149,702 - 149,702
Earnings before provision for income
taxes 3,686 - 3,686 3,484 - 3,484
Provision for income taxes 1,511 - 1,511 1,428 - 1,428
Net earnings 2,175 - 2,175 2,055 - 2,055
========= ============= ========= ========= ============== =========
Net earnings per common share-Basic (1) $ 0.24 $ 0.24 $ 0.23 $ 0.23
========= ============= ========= ========= ============== =========
Net earnings per common share-Diluted (1) $ 0.23 $ 0.23 $ 0.22 $ 0.22
========= ============= ========= ========= ============== =========
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
--------- ------------- --------- --------- -------------- ---------
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 $ 0.26 $ 0.26
========= ============= ========= ========= ============== =========
Year Ended March 31, 2005
Sales $133,729 $ - $133,729 $117,208 $ - $117,208
Total Revenues 147,650 - 147,650 168,264 - 168,264
Cost of Sales 120,893 - 120,893 106,378 - 106,378
Total Costs and Expenses 144,912 - 144,912 135,166 - 135,166
Earnings before provision for income
taxes 2,738 - 2,738 33,098 - 33,098
Provision for income taxes 1,123 - 1,123 13,656 - 13,656
Net earnings 1,616 - 1,616 19,442 - 19,442
========= ============= ========= ========= ============== =========
Net earnings per common share-Basic (1) $ 0.18 $ 0.18 $ 2.21 $ 2.21
========= ============= ========= ========= ============== =========
Net earnings per common share-Diluted (1) $ 0.17 $ 0.17 $ 2.06 $ 2.06
========= ============= ========= ========= ============== =========
(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-27
15. LEGAL SETTLEMENT
On February 7, 2005 Ariba, Inc. was found liable by a jury for willfully
infringing three U.S. patents held by the Company. On February 12, 2005, the
Company settled the patent-infringement suit through a mutual settlement and
license agreement ("the Agreement"). The Agreement provided that the Company
receive, by March 31, 2005, a total of $37 million for the license of its
patents. The following table shows the line items on the Statement of Earnings
that were impacted by the settlement in the quarter ended March 31, 2005.
Fee and other income $ 37,000,000
Professional and other fees (3,060,792)
Salaries and benefits (908,000)
--------------
Net amount realized before income taxes $ 33,031,208
==============
The increase in salaries and benefits was due to performance bonuses awarded to
employees as a result of the settlement proceedings.
16. ACQUISITION
On May 28, 2004, ePlus purchased certain assets and assumed certain liabilities
of Manchester Technologies, Inc. for total consideration of $7.0 million. The
purchase was made by ePlus Technology, inc., a wholly-owned subsidiary of ePlus
inc. The purchase price included $5.0 million in cash and the assumption of
certain liabilities of approximately $2.0 million. Approximately 125 former
Manchester Technologies, Inc. personnel were hired by ePlus as part of the
transaction and are located in three established offices in metropolitan New
York, South Florida and Baltimore.
The acquisition is being accounted for using the purchase method of accounting
in accordance with the Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), whereby the total cost of the acquisition
has been allocated to tangible and intangible assets acquired and the
liabilities assumed based upon their fair values at the effective date of the
acquisition. During the quarter ended March 31, 2005, the allocation was
completed. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition:
Accounts receivable $ 939
Property and equipment 91
Other assets 41
Other assets - intangible 94
Goodwill 5,882
Accrued expenses and other liabilities (2,047)
-------
Cash paid $5,000
=======
The following table reflects the results of the Company's operations on a
pro-forma basis (unaudited) as if the acquisition had been completed on April 1,
2003 (in thousands, except for per-share data):
Pro Forma (Unaudited)
Year Ended March 31,
2004 2005
----------- -----------
Operating revenue $ 449,466 $ 601,605
Net income 12,069 25,010
Net earnings per share - Basic $1.29 $2.81
Net earnings per share - Diluted $1.21 $2.65
Weighted average shares outstanding - Basic 9,332,324 8,898,112
Weighted average shares outstanding - Diluted 9,976,458 9,433,250
The pro-forma financial information (unaudited) is not necessarily indicative of
the operating results that would have occurred had the acquisition been
consummated as of the date indicated, nor are they indicative of future results.
F-28
SCHEDULE II
ePlus inc. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2003, 2004, and 2005
(In Thousands)
Additions Deductions
------------------------------------------------
Balance at (1) Charged to Charged Balance at
beginning of costs and to other end of
Description period expenses accounts Write-offs period
2005 Allowance for
doubtful accounts
and credit loss $ 4,730 $ 1,131 ($ 350) ($ 496) $ 5,015
2004 Allowance for
doubtful accounts
and credit loss $ 6,753 $ 47 ($ 12) ($2,058) $ 4,730
2003 Allowance for
doubtful accounts
and credit loss $ 6,771 $ 616 ($ 494) ($ 140) $ 6,753
S-1