FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___to ___. Commission file number: 0-28926 ePlus inc. (Exact name of registrant as specified in its charter) Delaware 54-1817218 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Herndon Parkway, Herndon, VA 20170 (Address, including zip code, of principal offices) Registrant's telephone number, including area code: (703) 834-5710 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of shares of Common Stock outstanding as of February 12, 2001, was 9,718,401
<TABLE> <CAPTION> TABLE OF CONTENTS ePlus inc. AND SUBSIDIARIES Part I. Financial Information: Item 1. Financial Statements - Unaudited: Condensed Consolidated Balance Sheets as of March 31, 2000 and <S> <C> December 31, 2000 2 Condensed Consolidated Statements of Earnings, Three Months Ended December 31, 1999 and 2000 3 Condensed Consolidated Statements of Earnings, Nine Months Ended December 31, 1999 and 2000 4 Condensed Consolidated Statements of Cash Flows, Nine Months Ended December 31, 1999 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II. Other Information: Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 </TABLE>
<TABLE> <CAPTION> ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of March 31, 2000 As of December 31, 2000 ------------------------------------------------------ ASSETS <S> <C> <C> Cash and cash equivalents $ 21,909,784 $ 26,036,569 Accounts receivable 60,166,596 55,951,053 Notes receivable 1,195,263 980,277 Employee advances 94,693 20,236 Inventories 2,445,425 2,862,127 Investment in direct financing and sales type leases - net 221,884,864 220,690,846 Investment in operating lease equipment - net 10,114,392 5,492,755 Property and equipment - net 2,895,711 4,430,536 Other assets 24,628,020 19,081,693 ----------------------------------------------- TOTAL ASSETS $ 345,334,748 $ 335,546,092 ==================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable - equipment $ 22,975,545 $ 14,426,469 Accounts payable - trade 29,451,907 19,805,065 Salaries and commissions payable 956,762 1,988,319 Accrued expenses and other liabilities 8,519,353 30,247,331 Income taxes payable 3,685,870 2,795,461 Recourse notes payable 39,017,168 4,544,908 Nonrecourse notes payable 182,845,152 171,020,715 Deferred taxes 762,139 762,139 ------------------------------------------------ Total Liabilities 288,213,896 245,590,407 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued or outstanding - - Common stock, $.01 par value; 25,000,000 and 50,000,000 authorized; 7,958,433 and 9,718,401 issued and outstanding at March 31, 2000 and December 31, 2000, respectively 79,584 97,190 Additional paid-in capital 29,926,168 56,506,475 Retained earnings 27,115,100 33,352,020 ---------------------------------------------------- Total Stockholders' Equity 57,120,852 89,955,685 ---------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 345,334,748 $ 335,546,092 ==================================================== See Notes to Condensed Consolidated Financial Statements. </TABLE> 2
<TABLE> <CAPTION> ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three months ended December 31, 1999 2000 -------------------------------------------- REVENUES <S> <C> <C> Sales of equipment $ 47,188,893 $ 53,735,856 Sales of leased equipment 16,360,757 5,615,123 -------------------------------------------- 63,549,650 59,350,979 Lease revenues 9,467,586 10,585,654 Fee and other income 2,925,506 1,978,577 ePlusSuite revenues 297,453 1,759,386 -------------------------------------------- 12,690,545 14,323,617 -------------------------------------------- TOTAL REVENUES 76,240,195 73,674,596 -------------------------------------------- COSTS AND EXPENSES Cost of sales, equipment 42,315,260 43,627,009 Cost of sales, leased equipment 15,309,659 5,537,042 -------------------------------------------- 57,624,919 49,164,051 Direct lease costs 3,116,460 4,734,039 Professional and other fees 566,365 726,790 Salaries and benefits 5,101,722 8,342,731 General and administrative expenses 1,841,111 3,653,835 Interest and financing costs 4,038,850 4,081,381 -------------------------------------------- 14,664,508 21,538,776 -------------------------------------------- TOTAL COSTS AND EXPENSES 72,289,427 70,702,827 -------------------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,950,768 2,971,769 -------------------------------------------- PROVISION FOR INCOME TAXES 1,580,340 1,242,907 -------------------------------------------- NET EARNINGS $ 2,370,428 $ 1,728,862 ============================================ NET EARNINGS PER COMMON SHARE - BASIC $ 0.30 $ 0.18 ============================================ NET EARNINGS PER COMMON SHARE - DILUTED $ 0.26 $ 0.18 ============================================ WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,885,729 9,707,436 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,092,317 9,866,573 See Notes to Condensed Consolidated Financial Statements. </TABLE> 3
<TABLE> <CAPTION> ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Nine months ended December 31, 1999 2000 ------------------------------------------------ REVENUES <S> <C> <C> Sales of equipment $ 118,850,359 $ 166,962,802 Sales of leased equipment 44,882,169 28,311,687 -------------------------------------------- 163,732,528 195,274,489 Lease revenues 21,816,694 29,475,790 Fee and other income 5,956,374 5,332,912 ePlusSuite revenues 297,453 4,435,811 -------------------------------------------- 28,070,521 39,244,513 -------------------------------------------- TOTAL REVENUES 191,803,049 234,519,002 -------------------------------------------- COSTS AND EXPENSES Cost of sales, equipment 106,363,250 141,484,589 Cost of sales, leased equipment 42,969,242 27,635,693 -------------------------------------------- 149,332,492 169,120,282 Direct lease costs 5,408,846 9,644,163 Professional and other fees 1,387,540 2,405,892 Salaries and benefits 13,688,322 22,821,477 General and administrative expenses 4,817,067 8,595,970 Interest and financing costs 7,231,746 11,413,166 -------------------------------------------- 32,533,521 54,880,668 -------------------------------------------- TOTAL COSTS AND EXPENSES 181,866,013 224,000,950 -------------------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 9,937,036 10,518,052 -------------------------------------------- PROVISION FOR INCOME TAXES 3,974,847 4,279,916 -------------------------------------------- NET EARNINGS $ 5,962,189 $ 6,238,136 ============================================ NET EARNINGS PER COMMON SHARE - BASIC $ 0.78 $ 0.65 ============================================ NET EARNINGS PER COMMON SHARE - DILUTED $ 0.70 $ 0.60 ============================================ WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,618,700 9,594,984 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 8,554,461 10,364,288 See Notes to Condensed Consolidated Financial Statements. </TABLE> 4
<TABLE> <CAPTION> ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended December 31, 1999 2000 --------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net earnings $ 5,962,189 $ 6,238,136 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization 4,979,393 7,917,332 Provision for credit losses 360,000 683,000 Gain on sale of operating lease equipment (402,036) (487,068) Adjustment of basis to fair market value of equipment and inventories 9,000 1,590,760 Payments from lessees directly to lenders (4,043,648) (5,960,322) Loss on disposal of property and equipment 45,798 17,864 Changes in: Accounts receivable (16,369,538) 5,210,965 Other receivables (3,998,476) (1,108,046) Employee advances (54,496) 69,366 Inventories 4,087,197 (385,462) Other assets 341,043 6,019,152 Accounts payable - equipment 466,121 (8,549,076) Accounts payable - trade 11,287,990 (3,488,887) Salaries and commissions payable, accrued expenses and other liabilities (3,413,888) 14,426,991 --------------------------------------- Net cash used (provided) by operating activities (743,351) 22,194,705 --------------------------------------- Cash Flows From Investing Activities: Proceeds from sale of operating equipment 781,599 922,549 Purchases of operating lease equipment (1,385,105) (1,966,060) Increase in investment in direct financing and sales-type leases (83,492,103) (20,745,428) Purchases of property and equipment (980,036) (3,065,948) Cash used in acquisitions, net of cash acquired (1,845,730) - Increase in other assets (135,718) (1,906,752) --------------------------------------- Net cash used in investing activities (87,057,093) (26,761,639) --------------------------------------- Cash Flows From Financing Activities: Borrowings: Nonrecourse 82,444,589 79,124,615 Recourse 4,905,701 975,485 Repayments: Nonrecourse (6,727,946) (63,224,284) Recourse (938,773) (186,448) Proceeds from issuance of capital stock, net of expenses 330,030 26,372,862 Issuance of common stock purchase warrants - 225,000 Net proceeds (repayment) from (of) lines of credit 11,582,522 (34,593,511) --------------------------------------- Net cash provided by financing activities 91,596,123 8,693,719 --------------------------------------- Net Increase in Cash and Cash Equivalents 3,795,679 4,126,785 Cash and Cash Equivalents, Beginning of Period 7,891,661 21,909,784 --------------------------------------- Cash and Cash Equivalents, End of Period $ 11,687,340 $ 26,036,569 ======================================= Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 2,797,802 $ 727,496 ======================================= Cash paid for income taxes $ 4,463,357 $ 2,532,091 ======================================= See Notes To Condensed Consolidated Financial Statements. 5 </TABLE>
ePlus inc. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated interim financial statements of ePlus inc. and subsidiaries (the "Company") included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. All adjustments made were normal, recurring accruals. Certain prior year amounts have been reclassified to conform to the current year's presentation. These interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K (No. 0-28926) for the year ended March 31, 2000 (the "Company's 2000 Form 10-K"). Operating results for the interim periods are not necessarily indicative of results for an entire year. 2. INVESTMENT IN DIRECT FINANCING AND SALES TYPE LEASES The Company's investment in direct financing and sales type leases consists of the following components: March 31, December 31, 2000 2000 (In Thousands) ------------------------- Minimum lease payments $ 213,284 $ 213,135 Estimated unguaranteed residual value 33,584 31,972 Initial direct costs, net of amortization (1) 2,958 3,449 Less: Unearned lease income (26,093) (26,049) Reserve for credit losses (1,848) (1,816) ----------- --------- Investment in direct financing and sales type leases, net $ 221,885 $ 220,691 ========== ========= (1) Initial direct costs are shown net of amortization of $3,686 and $4,608 at March 31, 2000 and December 31, 2000, respectively. 3. INVESTMENT IN OPERATING LEASE EQUIPMENT Investment in operating leases primarily represents equipment leased for two to three years and leases that are short-term renewals on month-to-month status. The components of the net investment in operating lease equipment are as follows: 6
March 31, December 31, 2000 2000 (In Thousands) ------------------------- Cost of equipment under operating leases $ 26,979 $ 22,026 Initial direct costs 19 15 Less: Accumulated depreciation and amortization (16,884) (16,548) ------------- ---------- Investment in operating lease equipment, net $ 10,114 $ 5,493 ============= ========== 4. BUSINESS COMBINATION On September 30, 1999, the Company purchased all of the stock of CLG, Inc., a technology equipment leasing business, from Centura Bank. This business acquisition has been accounted for as a purchase. The following pro forma financial information presents the combined results of operations of the Company and CLG, Inc. as if the acquisition had occurred as of the beginning of the nine months ended December 31, 1999, after giving effect to certain adjustments, including amortization of goodwill. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and CLG, Inc. constituted a single entity during such periods. Nine Months Ended December 31, 1999 (Unaudited) In Thousands (except per share data) ---------------------- Total Revenues $208,458 Net Earnings 5,652 Net Earnings per Common Share - Basic 0.72 Net Earnings per Common Share - Diluted 0.64 5. ISSUANCES OF COMMON STOCK AND WARRANTS On October 23, 1998, the Company sold 1,111,111 shares of common stock to TC Leasing LLC, a Delaware limited liability company, for a price of $9.00 per share. In addition, the Company granted to TC Leasing LLC, a stock purchase warrant granting the right to purchase an additional 1,090,909 shares of common stock at a price of $11.00 per share, subject to certain anti-dilution adjustments. The warrant was exercisable through December 31, 2001, unless extended pursuant to the terms of the warrant. On February 25, 2000, the Company entered into an agreement, which was amended April 11, 2000, which allowed TC Plus LLC (formerly TC Leasing LLC) to exercise the warrants on a cashless basis at an exercise price of $11.00 per share, contingent upon the Company's completion of a secondary offering which occurred on April 17, 2000. On April 11, 2000, TC Plus LLC exercised its options on a cashless basis and was issued 709,956 shares of common stock. Pursuant to the terms of this private placement, 7
the Company agreed to expand its Board of Directors to six persons, four of whom to be appointed, in whole or in part, by TC Plus LLC. Additionally, the terms of the private placement restricted the Company's ability to pay dividends until October 23, 1999 without the consent of TC Plus LLC. On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares of its common stock at a price of $28.50 per share. Net proceeds to the Company were $25,999,884. On May 25, 2000, the Company issued a common stock purchase warrant to a business partner which allows the holder to purchase up to 50,000 shares of the Company's common stock at a price of $18.75 per share over a two year period beginning July 1, 2000. 6. SEGMENT REPORTING The Company manages its business segments on the basis of the products and services offered. The Company's reportable segments consist of its traditional financing and technology business units (previously known as the lease financing and value added re-selling segments), as well as its newly created electronic commerce ("e-commerce") business unit. The financing business unit offers lease financing solutions to corporations and governmental entities nationwide. The technology business unit sells information technology equipment and related services primarily to corporate customers in the eastern United States. The e-commerce business unit provides Internet-based business-to-business supply chain management solutions for information technology and other operating resources. The Company evaluates segment performance on the basis of segment net earnings. Sales of equipment for the e-commerce business unit represent customer equipment purchases executed through Procure+, an element of the Company's e-commerce business solution. The amounts charged for using Procure+ are presented as ePlusSuite revenues in the statement of earnings. The e-commerce business unit's assets consist primarily of capitalized software costs. The accounting policies of the financing and technology business units are the same as those described in Note 1, "Organization and Summary of Significant Accounting Policies" in the Company's 2000 Form 10-K. Corporate overhead expenses are allocated to the three segments on the basis of revenue volume, estimates of actual time spent by corporate staff, and asset utilization, depending on the type of expense. <TABLE> <CAPTION> Financing Technology E-commerce Business Business Business Unit Unit Unit Total -------------------------------------------------------- Three months ended December 31, 1999 <S> <C> <C> <C> <C> Sales of equipment $ 16,608,129 $ 45,417,558 $ 1,523,963 $ 63,549,650 Lease revenues 9,467,586 - - 9,467,586 Fee and other income 531,043 2,394,463 - 2,925,506 ePlusSuite revenues - - 297,453 297,453 -------------------------------------------------------- Total Revenues 26,606,758 47,812,021 1,821,416 76,240,195 </TABLE> 8
<TABLE> Financing Technology E-commerce Business Business Business Unit Unit Unit Total -------------------------------------------------------- <S> <C> <C> <C> <C> Cost of sales 15,648,614 40,747,917 1,228,388 57,624,919 Direct lease costs 3,116,460 - - 3,116,460 Selling, general and administrative expenses 2,962,062 4,367,465 179,671 7,509,198 -------------------------------------------------------- Segment earnings 4,879,622 2,696,639 413,357 7,989,618 Interest expense 3,917,808 121,042 - 4,038,850 -------------------------------------------------------- Earnings before income taxes 961,814 2,575,597 413,357 3,950,768 ======================================================== Assets $ 271,330,332 47,967,618 $ 561,908 $ 319,859,858 Three months ended December 31, 2000 Sales of equipment $ 5,694,357 $ 40,431,490 $ 13,225,132 $ 59,350,979 Lease revenues 10,585,654 - - 10,585,654 Fee and other income 607,632 1,370,945 - 1,978,577 ePlusSuite revenues - - 1,759,386 1,759,386 -------------------------------------------------------- Total Revenues 16,887,643 41,802,435 14,984,518 73,674,596 Cost of sales 5,565,507 33,197,799 10,400,745 49,164,051 Direct lease costs 4,734,039 - - 4,734,039 Selling, general and administrative expenses 3,981,836 5,883,919 2,857,601 12,723,356 -------------------------------------------------------- Segment earnings 2,606,261 2,720,718 1,726,172 7,053,150 Interest expense 3,986,650 94,731 - 4,081,381 -------------------------------------------------------- Earnings before income taxes (1,380,389) 2,625,987 1,726,172 2,971,769 ======================================================== Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092 Nine months ended December 31, 1999 Sales of equipment $ 45,355,717 $116,852,848 $ 1,523,963 $ 163,732,528 Lease revenues 21,816,694 - - 21,816,694 Fee and other income 958,296 4,998,078 - 5,956,374 ePlusSuite revenues - - 297,453 297,453 -------------------------------------------------------- Total Revenues 68,130,707 121,850,926 1,821,416 191,803,049 Cost of sales 43,488,500 104,615,604 1,228,388 149,332,492 Direct lease costs 5,408,846 - - 5,408,846 Selling, general and administrative expenses 7,997,014 11,716,244 179,671 19,892,929 -------------------------------------------------------- Segment earnings 11,236,347 5,519,078 413,357 17,168,782 Interest expense 7,010,940 220,806 - 7,231,746 Earnings before income taxes 4,225,407 5,298,272 413,357 9,937,036 ======================================================== Assets $ 271,330,332 $ 47,967,618 $ 561,908 $ 319,859,858 Nine months ended December 31, 2000 Sales of equipment $ 28,735,761 $130,436,537 $ 36,102,191 $ 195,274,489 Lease revenues 29,475,790 - - 29,475,790 Fee and other income 1,424,884 3,908,028 - 5,332,912 ePlusSuite revenues - - 4,435,811 4,435,811 -------------------------------------------------------- Total Revenues 59,636,435 134,344,565 40,538,002 234,519,002 Cost of sales 28,077,667 110,556,982 30,485,633 169,120,282 Direct lease costs 9,644,163 - - 9,644,163 Selling, general and administrative expenses 12,232,518 14,811,035 6,779,788 33,823,339 -------------------------------------------------------- Segment earnings 9,682,087 8,976,548 3,272,581 21,931,218 Interest expense 11,159,701 253,465 - 11,413,166 -------------------------------------------------------- Earnings before income taxes (1,477,614) 8,723,083 3,272,581 10,518,052 ======================================================== Assets $ 276,439,545 $ 57,051,066 $ 2,055,481 $ 335,546,092 </TABLE> 9
7. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which, as amended by FASB Statement No. 138, establishes accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value and gains and losses depends on the intended use of the derivative and its resulting designation. The statement was originally effective for fiscal years beginning after June 15, 1999. In June 1999, FASB delayed implementation of this statement for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in the first quarter of fiscal year 2002 and is evaluating the impact that implementation of this statement will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The guidelines in SAB No. 101 must be adopted by the fourth quarter of 2000. We are in the process of evaluating the potential impact of this statement on our financial position and results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company does not anticipate the adoption of this Statement will have a material impact on its financial position or results of operations. Item 2. Management's Discussion and Analysis of RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of results of operations and financial condition of the Company should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes thereto included elsewhere in this report, and the Company's 2000 Form 10-K. Overview Certain statements contained herein are not based on historical fact, but are forward-looking statements that are based upon numerous assumptions about future conditions that may not occur. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the existence of demand for and acceptance of the Company's services, economic conditions, the impact of competition and pricing, results of financing efforts and other factors affecting the Company's business that are beyond our control. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release the result of any revisions to these forward-looking statements that may be made to reflect future events or circumstances. Our results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, interest rate fluctuations, our bad debt experience and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of the sale of equipment in our lease portfolio prior to the expiration of the lease term to the lessee or to a third party. Such sales of leased equipment prior to the expiration of the lease term may have the effect of increasing revenues and net earnings during the period in which the sale occurs, and reducing revenues and net earnings otherwise expected in subsequent periods. 10
In November 1999, we introduced ePlusSuite, a comprehensive business-to-business electronic commerce supply chain management solution for information technology and other operating resources. We currently derive the majority of our revenue from sales and financing of information technology and other assets. The introduction of ePlusSuite reflects our transition to a business-to-business electronic commerce solutions provider from our historical sales and financing business. Our long term strategy, which is wholly dependent upon third party financing, is to significantly reduce our balance sheet risk over time by outsourcing lease and other financing to third-party financial institutions while charging a transaction fee. Our long term strategy also includes the arranging of sales of information technology and other assets for a transaction fee, rather than purchasing and reselling such assets ourselves. We expect our electronic commerce revenues to be derived primarily from (1) amounts charged or allocated to customers with respect to procurement activity executed through Procure(+); (2) fees from third-party financing sources that provide leasing and other financing for transactions that we arrange through Procure(+) on behalf of our customers; (3) fees from third-party vendors for sales in transactions that we arrange through Procure(+) on behalf of our customers; and (4) amounts charged to customers for the Manage(+) service. We expect to generate increased revenues in our electronic commerce business segment, while revenues from our leasing and sales business may decrease over time, if our long term strategy of generating fees is successful. Because revenues for the sale of leased and other equipment include the full purchase price of the item sold, total revenues may decline to the extent leasing and sales revenues become net revenues in our e-commerce business. However, in the near term, as we seek to implement our electronic commerce business strategy, we will continue to derive most of our revenues from our traditional businesses. We expect to incur substantial increases in the near term in our sales and marketing, research and development, and general and administrative expenses. In particular, we expect to significantly expand the marketing of our electronic commerce business solution and increase spending on advertising and marketing. To implement this strategy, we plan to hire additional sales personnel, open new sales locations and hire additional staff for advertising, marketing and public relations. We also plan to hire additional technical personnel and third parties to assist in the implementation and upgrade of ePlusSuite and to develop complementary electronic commerce business solutions. As a result of these increases in expenses, we expect to incur significant losses in our ePlusSuite business which may, in the near term, have a material adverse effect on operating results for the Company as a whole. To the extent the Company successfully implements these strategies, it expects the business to become less capital intensive over time and this may result in a future reduction of its receivables and lease assets along with the associated liabilities including debt and equipment payables. The Company has added new classifications to its financial statement presentation in order to reflect the changes in its business. A line item, ePlusSuite revenues, has been added to the statement of earnings which includes the revenues associated with the e-commerce business unit. A new business segment, e-commerce, has been added for segment reporting purposes to present separately e-commerce business unit revenues. 11
As a result of the foregoing, the Company's historical results of operations and financial position may not be indicative of its future performance over time. However, the Company's results of operations and financial position will continue to primarily reflect its traditional sales and financing businesses for at least the next twelve months. Selected Accounting Policies Amounts allocated for the e-commerce business unit's Procure+ service are recognized as services are rendered. Amounts charged for the Manage+ service will be recognized on a straight line basis over the period the services are to be provided. The manner in which lease finance transactions are characterized and reported for accounting purposes has a major impact upon reported revenue and net earnings. Lease accounting methods significant to our business are discussed below. We classify our lease transactions, as required by the Statement of Financial Accounting Standards No. 13, Accounting for Leases, or FASB No. 13, as: (1) direct financing; (2) sales- type; or (3) operating. Revenues and expenses between accounting periods for each lease term will vary depending upon the lease classification. For financial statement purposes, we present revenue from all three classifications in lease revenues, and costs related to these leases in direct lease costs. Direct Financing and Sales-Type Leases. Direct financing and sales-type leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing or sales-type lease if the creditworthiness of the customer and the collectability of lease payments are reasonably certain and it meets one of the following criteria: (1) the lease transfers ownership of the equipment to the customer by the end of the lease term; (2) the lease contains a bargain purchase option; (3) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (4) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at the inception of the lease. Direct financing leases are recorded as investment in direct financing leases upon acceptance of the equipment by the customer. At the inception of the lease, unearned lease income is recorded which represents the amount by which the gross lease payments receivable plus the estimated residual value of the equipment exceeds the equipment cost. Unearned lease income is recognized, using the interest method, as lease revenue over the lease term. Sales-type leases include a dealer profit or loss which is recorded by the lessor at the inception of the lease. The dealer's profit or loss represents the difference, at the inception of the lease, between the fair value of the leased property and its cost or carrying amount. When the Company supplies the equipment for lease through our technology sales business unit subsidiaries, the dealer margin is presented in equipment sales revenue and cost of equipment sales. Interest earned on the present value of the lease payments and residual value is recognized over the lease term using the interest method and is included as part of our lease revenues. Operating Leases. All leases that do not meet the criteria to be classified as direct financing or sales-type leases are accounted for as operating leases. Rental amounts are accrued on a straight-line basis over the lease term and are recognized as lease revenue. Our cost of the leased equipment is recorded on the 12
balance sheet as investment in operating lease equipment and is depreciated on a straight-line basis over the lease term to our estimate of residual value. Revenue, depreciation expense and the resulting profit for operating leases are recorded on a straight-line basis over the life of the lease. As a result of these three classifications of leases for accounting purposes, the revenues resulting from the "mix" of lease classifications during an accounting period will affect the profit margin percentage for such period and such profit margin percentage generally increases as revenues from direct financing and sales-type leases increase. Should a lease be financed, the interest expense declines over the term of the financing as the principal is reduced. Residual Values. Residual values represent our estimated value of the equipment at the end of the initial lease term. The residual values for direct financing and sales-type leases are recorded in investment in direct financing and sales-type leases, on a net present value basis. The residual values for operating leases are included in the leased equipment's net book value and are recorded in investment in operating lease equipment. The estimated residual values will vary, both in amount and as a percentage of the original equipment cost, and depend upon several factors, including the equipment type, manufacturer's discount, market conditions and the term of the lease. We evaluate residual values on an ongoing basis and record any required changes in accordance with FASB No. 13. Residual values are affected by equipment supply and demand and by new product announcements and price changes by manufacturers. In accordance with generally accepted accounting principles, residual value estimates are adjusted downward when such assets are impaired. We seek to realize the estimated residual value at lease termination through: (1) renewal or extension of the original lease; (2) sale of the equipment either to the lessee or the secondary market; or (3) lease of the equipment to a new user. The difference between the proceeds of a sale and the remaining estimated residual value is recorded as a gain or loss in lease revenues when title is transferred to the lessee, or, if the equipment is sold on the secondary market, in equipment sales revenues and cost of equipment sales when title is transferred to the buyer. Initial Direct Costs. Initial direct costs related to the origination of direct financing, sales-type or operating leases are capitalized and recorded as part of the net investment in direct financing leases, or net operating lease equipment, and are amortized over the lease term. Sales. Sales revenue includes the following types of transactions: (1) sales of new equipment (including some commercial software) and used equipment which is not subject to any type of lease; (2) sales of equipment and commercial software, subject to an existing lease, under which we are lessor, including any underlying financing related to the lease; and (3) sales of off-lease equipment to the secondary market. Other Sources of Revenue. Amounts charged or allocated for the electronic commerce business unit's Procure(+) service are recognized as services are rendered. Amounts charged for the Manage(+) service will be recognized on a straight line basis over the period the services are provided. These revenues are included in our ePlusSuite revenues in our statement of earnings. Fee and other income results from: (1) revenue from various technology related services; (2) income from events that occur after the initial sale of a financial asset such as escrow/prepayment income; (3) re-marketing fees; (4) 13
brokerage fees earned for the placement of financing transactions; and (5) interest and other miscellaneous income. These revenues are included in fee and other income in our statements of earnings. RESULTS OF OPERATIONS - Three and Nine Months Ended December 31, 2000 Compared to Three and Nine Months Ended December 31, 1999 Total revenues generated by the Company during the three-month period ended December 31, 2000 were $73,674,596 compared to revenues of $76,240,195 during the comparable period in the prior fiscal year, a decrease of 3.4%. During the nine month period ended December 31, 2000, revenues were $234,519,002 compared to revenues of $191,803,049 during the comparable period in the prior fiscal year, an increase of 22.3%. These increases are primarily the result of increased revenues from the sales of equipment, which increased 13.9% and 40.5% during the three and nine months ended December 31, 2000. The Company's acquisition of CLG, Inc. on September 30, 1999 also contributed to the increase in revenues, primarily lease revenues. The Company's revenues are composed of sales and other revenue, and may vary considerably from period to period (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS"). Sales revenue, which includes sales of equipment and sales of leased equipment, decreased 6.6% to $59,350,979 during the three-month period ended December 31, 2000, as compared to $63,549,650 the corresponding period in the prior fiscal year. For the nine-month period ended December, 2000, sales increased 19.3% to $195,274,489 over the corresponding period in the prior year. The majority of sales of equipment are generated through the Company's technology business unit subsidiaries and represented 90.4% and 85.3% of total sales revenue for the three and nine-months ended December 31, 2000. For the three and nine-month periods ended December 31, 2000, equipment sales through the Company's technology business unit subsidiaries accounted for 99.9% and 99.8% respectively, of sales of equipment, with the remainder being sales from brokerage and re-marketing activities in the lease financing business segment. Sales of equipment increased significantly during the three and nine-month periods ended December 31, 2000, as compared to the prior fiscal year as a result of increased customer purchase volume in the Company's technology business unit subsidiaries. The acquisition of CLG, Inc. in September, 1999, did not materially contribute to the increase in sales of equipment for the periods presented. The Company realized a gross margin on sales of equipment of 18.8% and 15.3% for the three and nine-month periods ended December 31, 2000, as compared to a gross margin of 10.3% and 10.5%, realized on sales of equipment during the comparable periods in the prior fiscal year. This increase in net margin percentage can be primarily attributed to the Company's technology business unit subsidiaries' acquisition of higher profit margin customers and focus on selling higher margin equipment and services. The Company's gross margin on sales of equipment is affected by the mix and volume of products sold. The Company also recognizes revenue from the sale of leased equipment. During the three months ended December 31, 2000, sales of leased equipment decreased 65.7% to $5,615,123. During the nine months ended December 31, 2000, sales of lease equipment decreased 36.9% to $28,311,687. 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 14
recognized in accordance with SFAS No. 125. Prior to May 2000, the majority of the Company's sales of leased equipment has historically been sold to MLC/CLC, LLC, a joint venture in which the Company owns a 5% interest. During the three and nine months ended December 31, 2000, sales to MLC/CLC, LLC, accounted for 0.0% and 57.9% of sales of leased equipment, respectively. During the comparable three and nine month periods in the prior fiscal year, sales to MLC/CLC, LLC accounted for 70.9% and 45.1% of leased equipment sales. Sales to the joint venture require the consent of the joint venture partner. Firstar Equipment Finance Corporation, which owns 95% of MLC/CLC, LLC, has discontinued their investment in new lease acquisitions effective May 2000. The Company has developed and will continue to develop relationships with additional lease equity investors and financial intermediaries to diversify its sources of equity financing. During the three and nine months ended December, 2000, the Company recognized a gross margin of 1.4% and 2.4% on leased equipment sales of $5,615,123 and $28,311,687. During the three and nine-month periods in the prior fiscal year, the Company realized a gross margin of 6.4% and 4.3% on leased equipment sales of $16,360,757 and $44,882,169. This decrease in both volume of equipment sales and margin is the result of decreased sales to the Company's equity joint venture partner. The Company's lease revenues increased 11.8% to $10,585,654 for the three months ended December 31, 2000 compared with the corresponding period in the prior fiscal year. For the nine-month period, lease revenues increased 35.1% to $29,475,790. The increase consists of increased lease earnings and rental revenues reflecting a higher average investment in direct financing and sales type leases. The investment in direct financing and sales type leases at December 31, 1999 and 2000 was $204,280,675 and $220,690,846, respectively. The December 31, 2000 balance represents an increase of $16,410,171 or 8.0% over the balance as of December 31, 1999. The increase in lease revenues for the nine month period was due in large part to the acquisition of CLG, Inc which was reflected on the Company's balance sheet as of September 30, 1999. For the three and nine months ended December 31, 2000, fee and other income decreased 32.4% and 10.5%, respectively, over the comparable periods in the prior fiscal year. Fee and other income includes revenues from adjunct services and fees, including broker fees, support fees, warranty reimbursements, and learning center revenues generated by the Company's technology business unit subsidiaries. Included in the Company's fee and other income are earnings from certain transactions which are in the Company's normal course of business but there is no guarantee that future transactions of the same nature, size or profitability will occur. The Company's ability to consummate such transactions, and the timing thereof, may depend largely upon factors outside the direct control of management. The earnings from these types of transactions in a particular period may not be indicative of the earnings that can be expected in future periods. For the three and nine months ended December 31, 2000, the Company recorded $1,759,386 and $4,435,811 in ePlusSuite revenues, as compared to $297,453 for the three and nine months ended December 31, 1999. These revenues consisted primarily of amounts charged for the arrangement of procurement transactions executed through Procure+, a component of ePlusSuite. During the three and nine months ended December 31, 1999 and 2000, the selling, general and administrative expenses allocated to the e-commerce business unit consisted primarily of direct expenses and allocated corporate overhead. 15
The Company's direct lease costs increased 51.9% and 78.3%, respectively, during the three and nine-month periods ended December 31, 2000 as compared to the same periods in the prior fiscal year. These increases are partially attributable to increases in the Company's default and bankruptcy allowance. Additionally, the increase for the nine-month period is partially attributable to the acquisition of CLG, Inc., which significantly increased the Company's operating lease portfolio and therefore its depreciation expense. Salaries and benefits expenses increased 63.5% during the three-month period ended December 31, 2000 over the same period in the prior year. For the fiscal year to date through December 31, 2000, salaries and benefits increased 66.7% over the prior year. This increase reflects the increased number of personnel employed by the Company, higher commission expenses in the technology business unit, and, for the nine-month period, the acquisition of CLG, Inc. Interest and financing costs incurred by the Company for the three and nine months ended December 31, 2000 increased 1% and 57.8%, respectively, and relate to interest costs on the Company's indebtedness. The significant increase for the nine month period is attributable to the acquisition of CLG, Inc. Payments for interest costs on the majority of non-recourse and certain recourse notes are typically remitted directly to the lender by the lessee. The Company's provision for income taxes decreased to $1,242,907 for the three months ended December 31, 2000 from $1,580,340 for the three months ended December 31, 1999, reflecting effective income tax rates of 40% for both periods. For the nine months ended December 31, 2000, the Company's provision for income taxes was $4,279,916 as compared to $3,974,847 during the comparable prior year period, reflecting effective income tax rates of 40% for both periods. The foregoing resulted in a 27.1% decrease and 4.6% increase in net earnings for the three and nine-month periods ended December 31, 2000, respectively, as compared to the same periods in the prior fiscal year. Basic and fully diluted earnings per common share were $.18 for both methods for the three months ended December 31, 2000, as compared to $.30 for basic and $.26 for fully diluted earnings for the three months ended December 31, 1999. Basic and diluted weighted average common shares outstanding for the three months ended December 31, 2000 were 9,707,436 and 9,866,573, respectively. For the three months ended December 31, 1999, the basic and diluted weighted average shares outstanding were 7,885,729 and 9,092,317, respectively. For the fiscal year to date through December 31, 2000, the Company's basic and fully diluted earnings per common share were $.65 and $.60, respectively, as compared to basic and diluted earnings per common share of $.78 and $.70, respectively, for the same period in 1999, based on weighted average common shares outstanding of 9,594,984 and 10,364,288, respectively, for 2000, and 7,618,700 and 8,554,461, respectively, for 1999. LIQUIDITY AND CAPITAL RESOURCES During the nine-month period ended December 31, 2000, the Company generated cash flows in operations of $22,194,705 and used cash flows from investing activities of $26,761,639. A significant contributing factor to the cash flows from operations was an approximately $12.5 million assigned customer payment which was received by the Company prior to December 31, 2000 and remitted to the lender in January 2001. Cash flows generated by financing activities amounted to $8,693,719 during the same period. The net effect of these cash flows was a net increase in cash and cash equivalents of $4,126,785 during the nine-month period. During the same period, the Company's total assets decreased $9,788,656, or 2.8%. On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares of its common stock at a price of $28.50 per share. Net proceeds to the Company were $25,999,884. 16
The Company's debt financing activities typically provide approximately 80% to 100% of the purchase price of the equipment purchased by the Company for lease to its customers. Any balance of the purchase price (the Company's equity investment in the equipment) must generally be financed by cash flow from its operations, the sale of the equipment leased to third parties, or other internal means. Although the Company expects that the credit quality of its leases and its residual return history will continue to allow it to obtain such financing, no assurances can be given that such financing will be available, at acceptable terms, or at all. The financing necessary to support the Company's leasing activities has principally been provided by non-recourse and recourse borrowings. Historically, the Company has obtained recourse and non-recourse borrowings from banks and finance companies. The Company has formal programs with Key Corporate Capital, Inc. and Fleet Business Credit Corporation. In addition to these programs, recently the Company has regularly funded its leasing activities with Wachovia Bank and Trust, Citizens Leasing Corporation, GE Capital Corporation, National City Bank, Hitachi Leasing America, Fifth Third Bank and Heller Financial, Inc., among others. These programs require that each transaction is specifically approved and done solely at the lender's discretion. During the nine-month period ending December 31, 2000, the Company's lease related non-recourse debt portfolio decreased 6.5% to $171,020,715. Whenever possible and desirable, the Company arranges for equity investment financing which includes selling assets including the residual portions to third parties and financing the equity investment on a non-recourse basis. The Company generally retain customer control and operational services, and have minimal residual risk. The Company usually preserve the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed to return on its investment. Through MLC/CLC, LLC, the Company had a joint venture agreement that had historically provided the equity investment financing for certain of the Company's transactions. Firstar Equipment Finance Company ("FEFCO"), formerly Cargill Leasing Corporation, is an unaffiliated investor which owns 95% of MLC/CLC, LLC. FEFCO's parent company, Firstar Corporation, is a $20 billion bank holding company that is publicly traded on the New York Stock Exchange under the symbol "FSR". This joint venture arrangement enabled the Company to invest in a significantly greater portfolio of business than its limited capital base would otherwise allow. A significant portion of the Company's revenue generated by the sale of leased equipment is attributable to sales to MLC/CLC, LLC. (See "RESULTS OF OPERATIONS"). FEFCO has discontinued new lease acquisition transactions effective May 2000. We actively sell or finance our equity investment with Heller Financial, Inc., Fleet Business Credit Corporation and GE Capital Corporation, among others. The Company's "Accounts payable - equipment" represents equipment costs that have been placed on a lease schedule, but for which the Company has not yet paid. The balance of unpaid equipment cost can vary depending on vendor terms and the timing of lease originations. As of December 31, 2000, the Company had $14,426,469 of unpaid equipment cost, as compared to $22,975,545 at March 31, 2000. Working capital financing in our leasing business was, through December 16, 2000 when it expired, provided by a $65 million committed credit facility which was a short-term, secured, recourse facility provided through First Union National Bank, N.A. and which had syndicated the facility to the following participants and in the following amounts: National City Bank ($15 million); Summit Bank ($10 million); Bank Leumi USA ($10 million); and Key Bank ($10 million). This credit 17
facility had been in place since December 1998, was renewed for a one-year period on December 19, 1999, had full recourse to the Company, and was secured by a blanket lien against all of the Company's assets. In addition, the Company had entered into pledge agreements to pledge the common stock of all wholly owned subsidiaries. The interest rates charged under the facility were LIBOR plus 1.5% or Prime minus .5%, depending on the term of the borrowing. The facility expired on December 16, 2000. Effective December 15, 2000, the Company entered into a $20 million 364 day, committed, secured recourse facility through National City Bank. It has full recourse to the Company, and is secured by a blanket lien against all of the Company's assets. In addition, the Company entered into pledge agreements to pledge the common stock of all wholly owned subsidiaries. The credit facility contains certain financial covenants and certain restrictions on, among other things, the Company's ability to make certain investments, and sell assets or merge with another company. As of December 31, 2000, the Company was in compliance with all of the covenants and restrictions. The interest rates charged under the facility are LIBOR plus a margin ranging from 1.50% to 2.25% or Prime plus a margin ranging from 0% to .25%. The margin is determined by a matrix which is based on a ratio of the Company's total recourse funded debt to EBITDA (earnings before interest, tax, depreciation, and amortization) as determined under the facility. Subsequently, on January 19, 2001, the $20 million National City credit facility was amended and increased to $35 million and the term was lengthened to 3 1/4 years. The new facility expires on April 17, 2004. In addition, Branch Banking and Trust Company ($10 million) and PCN Bank, N.A. ($5 million) have been added to the facility and National City has been appointed agent. The margin related to the LIBOR interest rate option was increased from 1.50% to 2.25% to 1.75% to 2.50%. As of December 31, 2000, the Company had no outstanding balance on the National City Credit Facility. ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology, inc. have separate credit facilities to finance their working capital requirements for inventories and accounts receivable. Their traditional business as sellers of PC's and related network equipment and software products is financed through agreements known as "floor planning" financing in which interest expense for the first thirty to forty days is not charged but is paid by the supplier/distributor. These floor planning liabilities are recorded as accounts payable-trade, as they are normally repaid within the thirty to forty day time frame and represent an assigned accounts payable originally generated with the supplier/distributor. If the thirty to forty day obligation is not paid timely, interest is then assessed at stated contractual rates. In addition to the floor planning financing, ePlus Technology, inc. has an accounts receivable facility through Deutsche Financial Services Corporation. As of December 31, 2000 the balance of this facility was $725,610 and is included in recourse notes payable. As of December 31, 2000 the floor planning agreements are as follows: Balance at December 31, Entity Floor Plan Supplier Credit Limit 2000 - --------------------- ----------------------------------------- ---------------- ePlus Technology of Finova Capital Corp. $ 4,000,000 $ 1,945,667 NC, inc. 18
IBM Credit Corp. 250,000 26,968 ePlus Technology of Finova Capital Corp. 7,000,000 5,622,495 PA, inc. IBM Credit Corp. 750,000 209,778 ePlus Technology, Deutsche Financial inc Services Corp. 19,000,000 8,663,724 ePlus Technology of PA, inc. also has a line of credit in place with PNC Bank, N.A. with a maximum loan limit of $2,500,000 that expires on November 30, 2001 and is guaranteed by ePlus, inc. As of December 31, 2000, there was no outstanding balance on the credit facility. The credit facility provided by Finova Capital Corporation is required to be guaranteed by ePlus inc. for the greater of one half the outstanding balance or $5,500,000. The facility provided by Deutsche Financial Services Corporation, requires a guaranty of up to $2,000,000 of the outstanding balance by ePlus inc. Availability under the revolving lines of credit may be limited by the asset value of equipment purchased by the Company and may be further limited by certain covenants and terms and conditions of the facilities. ePlus Technology, inc. was previously supplied a floor planning facility by BankAmerica Credit who terminated the agreement, effective August 16, 2000. ePlus Technology, inc. contracted with Deutsche Financial Services Corporation on August 30, 2000, to replace the previous supplier. Both ePlus Technology of NC, inc. and ePlus Technology of PA, inc. were notified on December 26, 2000 that Finova Capital Corp. was terminating the floor planning agreements as of February 25, 2001, as provided within their contractual notice period for terminating the agreements. Both entities are expected to obtain alternative financing sources prior to this expiration date. The continued implementation of the Company's e-commerce business strategy will require a significant investment in both cash and managerial focus. In addition, the Company may selectively acquire other companies that have attractive customer relationships and skilled sales forces. The Company may also acquire technology companies to expand and enhance the platform of ePlusSuite to provide additional functionality and value added services. As a result, the Company may require additional financing to fund its strategy implementation and potential future acquisitions, which may include additional debt and equity financing. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's future quarterly operating results and the market price of its stock may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be 19
greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies or major customers or vendors of the Company. The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, its entry into the e-commerce market, any reduction of expected residual values related to the equipment under the Company's leases, timing of specific transactions and other factors (See "Factors That May Affect Future Operating Results"). Quarterly operating results could also fluctuate as a result of the sale by the Company of equipment in its lease portfolio, at the expiration of a lease term or prior to such expiration, to a lessee or to a third party. Such sales of equipment may have the effect of increasing revenues and net income during the quarter in which the sale occurs, and reducing revenues and net income otherwise expected in subsequent quarters. The Company believes that comparisons of quarterly results of its operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance. INFLATION The Company does not believe that inflation has had a material impact on its results of operations during the first three quarters of the fiscal year. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Certain statements contained herein are not based on historical fact, but are forward-looking statements that are based upon numerous assumptions about future conditions that may not occur. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. The Company's ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to the matters set forth below. The Company's e-commerce business has an extremely limited operating history. Although it has been in the business of financing and selling information technology equipment since 1990, the Company expects to derive a significant portion of its future revenues from its ePlusSuite services. As a result, the Company will encounter some of the challenges, risks, difficulties and uncertainties frequently encountered by early stage companies using new and web-enabled business models in new and rapidly evolving markets. Some of these challenges relate to the Company's ability to: o increase the total number of users of ePlusSuite services; o adapt to meet changes in its markets and competitive developments; and o continue to update its technology to enhance the features and functionality of its suite of products. The Company cannot be certain that its business strategy will be successful or that it will successfully address these and other challenges, risks and uncertainties. Over the longer term, the Company expects to derive a significant portion of its revenues from ePlusSuite services. The Company expects to incur increased 20
expenses that may negatively impact profitability. The Company also expects to incur significant sales and marketing, research and development, and general and administrative expenses in connection with the development of this business. As a result, the Company may incur significant losses in its e-commerce business unit in the foreseeable future, which may have a material adverse effect on the future operating results of the Company as a whole. The Company began operating its ePlusSuite services in November 1999. Broad and timely acceptance of the ePlusSuite services, which is critical to the Company's future success, is subject to a number of significant risks. These risks include: o operating resource management and procurement on the Internet is a new market; o the system's ability to support larger numbers of buyers and suppliers is unproven; o significant enhancement of the features and services of ePlusSuite services is needed to achieve widespread commercial initial and continued widespread acceptance of the system; o the pricing models may not be acceptable to customers; o if the Company is unable to develop and increase transaction volume on ePlusSuite, it is unlikely that it will ever achieve or maintain profitability in this business; o businesses that have made substantial up-front payments for e-commerce solutions may be reluctant to replace their current solution and adopt the Company's solution; o the Company's ability to adapt to a new market that is characterized by rapidly changing technology, evolving industry standards and frequent new product announcements; o significant expansion of internal resources is needed to support planned growth of the Company's ePlusSuite services. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Although a substantial portion of the Company's liabilities are non-recourse, fixed interest rate instruments, the Company is reliant upon lines of credit and other financing facilities which are subject to fluctuations in interest rates. Should interest rates significantly increase, the Company would incur increased interest expense, which could potentially lower earnings. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities and Use of Proceeds On April 11, 2000, the Company issued 709,956 shares of common stock to TC Plus LLC pursuant to a cashless exercise of a warrant, based on an exercise price of $11.00 per share. Due to the sophisticated nature of the investor, the Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, in the issuance of the shares pursuant to the exercise. On May 25, 2000, the Company issued a common stock purchase warrant to a business partner which allows the holder to purchase up to 50,000 shares of the Company's common stock at a price of $18.75 per share over a two year period beginning July 1, 2000. Due to the institutional and sophisticated nature of the investor, the Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, in the issuance of the warrant. 21
Item 3. Defaults UPON Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6(a) Exhibits None Item 6(b) Reports on Form 8-K Form 8-K dated December 19, 2000, and filed with the SEC on December 28, 2000, to report the National City Bank Amended Credit Agreement to provide a 364 day credit facility with a $20 million dollar limit. 22
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. ePlus inc. /s/ PHILLIP G. NORTON By: Phillip G. Norton, Chairman of the Board, President and Chief Executive Officer Date: February 14, 2001 /s/ STEVEN J. MENCARINI By: Steven J. Mencarini, Senior Vice President and Chief Financial Officer Date: February 14, 2001