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 September 30, 2001 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 November 13, 2001, was 10,438,866.
TABLE OF CONTENTS ePlus inc. AND SUBSIDIARIES <TABLE> <CAPTION> Part I. Financial Information: Item 1. Financial Statements - Unaudited: Condensed Consolidated Balance Sheets as of March 31, 2001 and <S> <C> September 30, 2001 2 Condensed Consolidated Statements of Earnings, Three Months Ended September 30, 2000 and 2001 3 Condensed Consolidated Statements of Earnings, Six Months Ended September 30, 2000 and 2001 4 Condensed Consolidated Statements of Cash Flows, Six Months Ended September 30, 2000 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Part II. Other Information: Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 26 </TABLE>
ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> As of March 31, 2001 As of September 30, 2001 -------------------- ------------------------ ASSETS <S> <C> <C> Cash and cash equivalents $ 24,534,183 $ 33,254,082 Accounts receivable, net of allowance for doubtful accounts of $1,392,297 and $1,771,937 as of March 31, 2001 and September 30, 2001, respectively 57,627,231 44,464,413 Notes receivable 1,862,488 442,273 Employee advances 66,082 124,211 Inventories 2,651,087 747,461 Investment in direct financing and sales-type leases - net 198,563,222 186,469,493 Investment in operating lease equipment - net 4,282,985 3,493,205 Property and equipment - net 5,216,123 6,498,324 Deferred tax asset 310,476 310,476 Other assets 3,951,942 4,342,085 Goodwill - net 11,801,657 17,485,572 ---------- ---------- TOTAL ASSETS $ 310,867,476 $ 297,631,595 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable - equipment $ 9,226,813 $ 5,351,254 Accounts payable - trade 18,925,939 17,101,093 Salaries and commissions payable 1,292,722 655,974 Accrued expenses and other liabilities 21,351,575 17,883,593 Income taxes payable 1,327,591 -- Recourse notes payable 8,875,595 9,831,519 Nonrecourse notes payable 157,959,706 146,706,168 ----------- ----------- Total Liabilities 218,959,941 197,529,601 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued or outstanding -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 9,730,154 and 10,169,867 issued; 9,730,154 and 10,163,867 outstanding at March 31, 2001 and September 30, 2001, respectively 97,301 101,638 Additional paid-in capital 56,376,934 60,273,520 Treasury stock, at cost, -0- and 6,000 shares, respectively -- (42,865) Retained earnings 35,433,300 39,769,701 ---------- ---------- Total Stockholders' Equity 91,907,535 100,101,994 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,867,476 $ 297,631,595 ============= ============= </TABLE> See Notes to Condensed Consolidated Financial Statements. -2-
ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) <TABLE> <CAPTION> Three months ended September 30, 2000 2001 ----------------------------------- REVENUES <S> <C> <C> Sales of equipment $ 58,459,332 $ 30,666,864 Sales of leased equipment 6,274,502 - ----------------------------------- 64,733,834 30,666,864 Lease revenues 9,935,773 12,008,725 Fee and other income 1,522,023 2,362,798 ePlusSuite revenues 1,559,986 2,107,560 ----------------------------------- 13,017,782 16,479,083 ----------------------------------- TOTAL REVENUES 77,751,616 47,145,947 ----------------------------------- COSTS AND EXPENSES Cost of sales, equipment 50,676,051 25,845,889 Cost of sales, leased equipment 6,094,917 - ----------------------------------- 56,770,968 25,845,889 Direct lease costs 1,875,864 2,246,428 Professional and other fees 1,238,746 393,231 Salaries and benefits 7,671,528 7,930,886 General and administrative expenses 3,007,157 3,599,512 Interest and financing costs 3,783,785 3,464,795 ----------------------------------- 17,577,080 17,634,852 ----------------------------------- TOTAL COSTS AND EXPENSES 74,348,048 43,480,741 ----------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,403,568 3,665,206 ----------------------------------- PROVISION FOR INCOME TAXES 1,380,398 1,466,082 ----------------------------------- NET EARNINGS $ 2,023,170 $ 2,199,124 =================================== NET EARNINGS PER COMMON SHARE - BASIC $ 0.21 $ 0.22 =================================== NET EARNINGS PER COMMON SHARE - DILUTED $ 0.19 $ 0.22 =================================== WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,679,246 10,160,182 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,433,732 10,226,148 </TABLE> See Notes to Condensed Consolidated Financial Statements. -3-
ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) <TABLE> <CAPTION> Six months ended September 30, 2000 2001 ----------------------------------- REVENUES <S> <C> <C> Sales of equipment $ 113,226,778 $ 66,815,384 Sales of leased equipment 22,696,563 452,108 ----------------------------------- 135,923,341 67,267,492 Lease revenues 18,890,137 22,800,780 Fee and other income 3,354,336 7,063,949 ePlusSuite revenues 2,676,426 3,310,227 ----------------------------------- 24,920,899 33,174,956 ----------------------------------- TOTAL REVENUES 160,844,240 100,442,448 ----------------------------------- COSTS AND EXPENSES Cost of sales, equipment 97,857,411 57,196,879 Cost of sales, leased equipment 22,098,652 427,370 ----------------------------------- 119,956,063 57,624,249 Direct lease costs 4,910,124 5,534,816 Professional and other fees 1,679,103 1,123,338 Salaries and benefits 14,478,746 14,906,640 General and administrative expenses 4,942,136 7,184,514 Interest and financing costs 7,331,783 6,838,344 ----------------------------------- 33,341,892 35,587,652 ----------------------------------- TOTAL COSTS AND EXPENSES 153,297,955 93,211,901 ----------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 7,546,285 7,230,547 ----------------------------------- PROVISION FOR INCOME TAXES 3,037,009 2,892,059 ----------------------------------- NET EARNINGS $ 4,509,276 $ 4,338,488 =================================== NET EARNINGS PER COMMON SHARE - BASIC $ 0.47 $ 0.43 =================================== NET EARNINGS PER COMMON SHARE - DILUTED $ 0.44 $ 0.43 =================================== WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,538,973 10,056,233 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 10,365,396 10,112,357 </TABLE> See Notes to Condensed Consolidated Financial Statements. -4-
ePlus inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended September 30, 2000 2001 -------------------- Cash Flows From Operating Activities: <S> <C> <C> Net earnings $ 4,509,276 $ 4,338,488 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 4,445,596 3,076,893 Provision for credit losses 483,000 (60,827) Gain on sale of operating lease equipment (464,679) (366,351) Adjustment of basis to fair market value of equipment and inventories 502,760 1,001,169 Payments from lessees directly to lenders - operating leases (5,773,718) (216,837) Loss on disposal of property and equipment 635 95,520 Changes in: Accounts receivable (14,651,691) 13,616,865 Other receivables 444,028 1,542,352 Employee advances 57,454 (44,488) Inventories (650,851) 1,951,385 Other assets 6,432,879 (3,333,933) Accounts payable - equipment (2,730,306) (3,875,559) Accounts payable - trade 2,089,943 (3,290,099) Salaries and commissions payable, accrued expenses and other liabilities (5,397,454) (4,447,046) ---------- ---------- Net cash (used) provided by operating activities (10,703,128) 9,987,532 ----------- --------- Cash Flows From Investing Activities: Proceeds from sale of operating equipment 922,549 -- Purchases of operating lease equipment (1,704,065) (887,976) Increase in investment in direct financing and sales-type leases (9,859,156) (11,075,163) Purchases of property and equipment (1,069,494) (987,462) Cash used in acquisitions, net of cash acquired -- (1,000,000) Increase in other assets (711,566) (373,959) -------- -------- Net cash used in investing activities (12,421,732) (14,324,560) ----------- ----------- Cash Flows From Financing Activities: Borrowings: Nonrecourse 42,403,117 38,150,598 Recourse 7,724,975 32,639 Repayments: Nonrecourse (40,111,986) (26,014,820) Recourse (186,378) (69,045) Proceeds from issuance of capital stock, net of expenses 26,292,957 27,704 Issuance of common stock purchase warrants 253,125 -- Purchase of treasury stock -- (42,865) Net(repayment)proceeds (of) from lines of credit (25,059,651) 972,716 ----------- ------- Net cash provided by financing activities 11,316,159 13,056,927 ---------- ---------- Net(Decrease)Increase in Cash and Cash Equivalents (11,808,701) 8,719,899 Cash and Cash Equivalents, Beginning of Period 21,909,784 24,534,183 ---------- ---------- Cash and Cash Equivalents, End of Period $ 10,101,083 $ 33,254,082 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 423,852 $ 257,276 ============ ============ Cash paid for income taxes $ 2,716,433 $ 3,969,504 ------------ ------------ </TABLE> See Notes To Condensed Consolidated Financial Statements. -5-
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, 2001 (the "Company's 2001 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, September 30, 2001 2001 (In Thousands) ----------------------------- Minimum lease payments $ 191,792 $ 178,000 Estimated unguaranteed residual value 29,231 28,572 Initial direct costs, net of amortization (1) 3,531 3,598 Less: Unearned lease income (23,104) (20,814) Reserve for credit losses (2,887) (2,887) ------------------------------ Investment in direct financing and sales- type leases, net $ 198,563 $ 186,469 ============ ================= (1) Initial direct costs are shown net of amortization of $5,014 and $5,906 at March 31, 2001 and September 30, 2001, 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, September 30, 2001 2001 (In Thousands) ----------------------------- Cost of equipment under operating leases $ 20,589 $19,011 Initial direct costs 15 15 Less: Accumulated depreciation and amortization (16,321) (15,533) ------------------------ Investment in operating lease equipment, net $ 4,283 $ 3,493 ======================== 4. BUSINESS COMBINATION On May 15, 2001, the Company purchased certain assets and assumed certain liabilities of ProcureNet, Inc. The primary software assets acquired were OneSource, a comprehensive e-procurement software solution, MarketBuilder, a marketplace software solution, Common Language Generator software that is used for electronic catalogue cleaning and enrichment, several registered and applied for patents, trademarks and copyrights. The total consideration was approximately $5.9 million, which included $1 million in cash, 422,833 shares of unregistered common stock valued at $9.16 per share, and the remainder was the assumption of certain liabilities. The acquisition was accounted for as a purchase, and the assets were placed in two new wholly-owned subsidiaries: ePlus Systems, inc. and ePlus Content Services, inc. The impact of pro-forma financial information as if the acquisition had occurred at the beginning of the periods presented is not material. 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, the Company agreed to expand its Board of Directors to six persons, four of whom to be appointed, in whole or in part, by TC Plus LLC. On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares of its common stock at a price of $28.50 per share. Net proceeds to the Company were $25,936,388. On May 25, 2000, the Company issued a common stock purchase warrant to a business partner which allowed the holder to purchase up to 50,000 shares of the -7-
Company's common stock at a price of $18.75 per share over a two year period beginning July 1, 2000. The purchase warrant agreement was terminated on April 20, 2001, due to the insolvency of the business partner. 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 and its 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, including e-procurement software licensing and hosted services, electronic marketplaces, outsourced business services, fixed asset management software and services, and electronic catalog and content processing. The Company evaluates segment performance on the basis of segment net earnings. Sales 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 e-commerce revenues in the statement of earnings. The e-commerce business unit's assets consist primarily of capitalized software costs, the e-commerce software assets acquired from ProcureNet, Inc. (see note 4) and goodwill. 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 2001 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 September 30, 2000 <S> <C> <C> <C> <C> Sales $ 5,959,580 $ 45,694,966 $ 13,079,288 $ 64,733,834 Lease revenues 9,935,773 -- -- 9,935,773 e-Commerce revenues -- -- 1,559,986 1,559,986 Fee and other income 370,824 1,151,199 -- 1,522,023 ------- --------- ---------- --------- Total revenues 16,266,177 46,846,165 14,639,274 77,751,616 Cost of sales 6,317,536 38,876,117 11,577,315 56,770,968 Direct lease costs 1,875,864 -- -- 1,875,864 Selling, general and administrative -- expenses 4,730,447 4,663,324 2,523,659 11,917,430 --------- --------- --------- ---------- Segment earnings 3,342,330 3,306,723 538,300 7,187,353 Interest expense 3,701,582 82,203 -- 3,783,785 --------- ------ --------- --------- (Loss) earnings before income taxes $ (359,252) $ 3,224,520 $ 538,300 $ 3,403,568 ======== ========= ======= ========= Assets $ 282,826,229 $ 58,249,685 $ 792,771 $ 341,868,685 </TABLE> -8-
<TABLE> <CAPTION> Financing Technology e-Commerce Business Business Business Unit Unit Unit Total ----------------------------------------------------- Three months ended September 30, 2001 <S> <C> <C> <C> <C> Sales $ 318,173 $ 25,055,829 $ 5,292,862 $ 30,666,864 Lease revenues 12,008,725 -- -- 12,008,725 e-Commerce revenues -- -- 2,107,560 2,107,560 Fee and other income 856,440 1,506,358 -- 2,362,798 ------- --------- ---------- --------- Total revenues 13,183,338 26,562,187 7,400,422 47,145,947 Cost of sales 540,070 20,431,178 4,874,641 25,845,889 Direct lease costs 2,246,428 -- -- 2,246,428 Selling, general and administrative expenses 3,924,208 4,539,360 3,460,061 11,923,629 --------- --------- --------- ---------- Segment earnings (loss) 6,472,632 1,591,649 (934,280) 7,130,001 Interest expense 3,440,243 24,452 100 3,464,795 --------- ------ --- --------- Earnings (loss) before income taxes $ 3,032,389 $ 1,567,197 $ (934,380) $ 3,665,206 ========= ========= ======== ========= Assets $ 242,369,442 $ 47,862,332 $ 7,399,821 $ 297,631,595 Six months ended September 30, 2000 Sales $ 23,041,403 $ 90,004,880 $ 22,877,058 $ 135,923,341 Lease revenues 18,890,137 -- -- 18,890,137 e-Commerce revenues -- -- 2,676,426 2,676,426 Fee and other income 817,252 2,537,084 -- 3,354,336 ------- --------- ----------- --------- Total revenues 42,748,792 92,541,964 25,553,484 160,844,240 Cost of sales 22,512,161 77,359,015 20,084,887 119,956,063 Direct lease costs 4,910,124 -- -- 4,910,124 Selling, general and administrative -- expenses 8,250,682 8,927,116 3,922,187 21,099,985 --------- --------- --------- ---------- Segment earnings 7,075,825 6,255,833 1,546,410 14,878,068 Interest expense 7,173,050 158,733 -- 7,331,783 --------- ------- ---------- --------- (Loss) earnings before income taxes $ (97,225) $ 6,097,100 $ 1,546,410 $ 7,546,285 ======= ========= ========= ========= Assets $ 282,826,229 $ 58,249,685 $ 792,771 $ 341,868,685 Six months ended September 30, 2001 Sales $ 824,911 $ 52,314,659 $ 14,127,922 $ 67,267,492 Lease revenues 22,800,780 -- -- 22,800,780 e-Commerce revenues -- -- 3,310,227 3,310,227 Fee and other income 4,118,294 2,945,655 -- 7,063,949 --------- --------- ---------- --------- Total revenues 27,743,985 55,260,314 17,438,149 100,442,448 Cost of sales 1,478,437 43,760,502 12,385,310 57,624,249 Direct lease costs 5,534,816 -- -- 5,534,816 Selling, general and administrative expenses 7,174,335 8,886,739 7,153,418 23,214,492 --------- --------- --------- ---------- Segment earnings (loss) 13,556,397 2,613,073 (2,100,579) 14,068,891 Interest expense 6,771,569 66,675 100 6,838,344 --------- ------ --- --------- Earnings (loss) before income taxes $ 6,784,828 $ 2,546,398 $ (2,100,679) $ 7,230,547 ========= ========= ========== ========= Assets $ 242,369,442 $ 47,862,332 $ 7,399,821 $ 297,631,595 </TABLE> -9-
7. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts, and for hedging activities. The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value and gains and losses depends on the intended use of the derivative and its resulting designation. Effective April 1, 2001, the Company adopted SFAS No. 133, as amended. The adoption did not have a material impact on the Company's consolidated financial statements. Effective April 1, 2001, the Company adopted SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125," which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over the majority of SFAS No. 125's provisions without reconsideration. The Company's adoption of SFAS No. 140 did not have a material impact on its financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses the accounting and reporting for business combinations and broadens the criteria for recording intangible assets separate from goodwill. On July 1, 2001, the Company adopted SFAS No. 141 which requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. The Company does not believe that the adoption of SFAS No. 141 will have a significant impact on its financial statements. On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." The Company has adopted SFAS No. 142 retroactive to April 1, 2001, as permitted. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 requires the Company to perform a transitional assessment of whether there is an indication that the goodwill is impaired as of the date of adoption. The Company will then have a transition period from the date of adoption to determine the fair value of each reporting unit and if goodwill has been impaired. Any goodwill impairment loss will be recognized as the cumulative effect of a change in accounting principle no later than the end of the fiscal year of adoption. The Company will also be required to review its other intangible assets for impairment and to reassess the useful lives of such assets and make any necessary adjustments. As of September 30, 2001, the Company had goodwill, net of accumulated amortization, of $17,485,572 which would be subject to the transitional assessment provisions of SFAS No. 142. Amortization expense related to goodwill was $173,041 and $346,082, before income taxes, for the three and six-month periods ended September 30, 2000. No goodwill amortization expense was recognized during the three and six month periods ended September 30, 2001. The following pro forma information presents the Company's net income, as adjusted for the elimination of amortization of goodwill as set forth in SFAS No. 142: -10-
Three Months Six Months Ended Ended September 30, September 30, 2000 2000 ----------------- ------------------ Net income, as reported $ 2,023,170 $ 4,509,276 Amortization of goodwill, net 103,824 207,648 -------------- ----------------- Pro forma net income $ 2,126,994 $ 4,716,924 ============== ================= Pro forma net income per share, basic $ .22 $ .49 ============== ================= Pro forma net income per share, diluted $ .20 $ .46 =============== ================= 8. Subsequent event On October 4, 2001, the Company acquired as a purchase SourceOne Computer Corporation, a technology sales and service company located in San Jose, California. Total consideration for the acquisition was $2.9 million which consisted of $0.8 million in cash and 274,999 in shares of ePlus, inc. common stock. The impact of pro-forma financial information as if the acquisition had occurred at the beginning of the periods presented is not material. 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 2001 Form 10-K. -11-
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. 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 is to provide an outsourced business solution for our customers for the requisition, fulfillment, financing and management of their indirect goods and services. We offer customers a choice of Internet products with either an in-house basis or 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. Our e-commerce service and software products, asset management services, technology sales and financing constitute the majority of our current offerings to our customer base. Concurrently, our financial strategy is to minimize the risk on our balance sheet by outsourcing lease and other financing to third-party financial institutions using non-recourse debt whenever possible. We intend to continue to improve our ePlusSuite offering to expand its functionality to serve customer needs. In addition, we intend to use the flexibility of our platform to offer additional products and services through ePlusSuite. As part of this strategy, we may also acquire technology companies to expand and enhance the platform of ePlusSuite to provide additional functionality and value added services. In the near term, as we implement our electronic commerce business strategy, we will continue to derive most of our revenues from our traditional businesses. Our electronic commerce revenues are derived primarily from amounts charged to customers with respect to procurement activity executed through Procure(+), amounts charged to customers for the Manage(+) service and fees from sales, subscriptions and fees of our e-commerce software or service products. With the -12-
acquisition of the technology assets from ProcureNet, Inc. in May, 2001, we broadened our software offerings to include licensed e-procurement and e-marketplace software, and content cleaning and enrichment services that are fee-based services. 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 expand the marketing of our electronic commerce business solution and increase spending on advertising and marketing. To implement this strategy, we have hired and plan to add top level sales personnel that are available due to the current market conditions and open new sales offices. 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 e-commerce business that 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 and expands its marketplace strategy, management currently expects total assets and total liabilities to increase in the near term as necessary to meet the requirements of our customers. 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 charged for Procure+ services are recognized as services are rendered. Amounts charged for the Manage+ service are recognized on a straight-line basis over the period the services are 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 SFAS No. 13, Accounting for Leases, as: (1) direct financing; (2) sales type; or (3) operating leases. Revenues and expenses between accounting periods for each lease term will vary depending upon the lease classification. For financial statement purposes, we present revenue from all three classifications in lease revenues, and costs related to these leases in direct lease costs. Direct Financing and Sales-Type Leases. Direct financing and sales-type leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing or sales-type lease if the creditworthiness of the customer and the collectability of lease payments are reasonably certain and it meets one of the following criteria: (1) the lease transfers ownership of the equipment to the customer by the end of the lease term; (2) the lease contains a bargain purchase option; (3) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (4) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at the inception of the lease. -13-
Direct finance leases are recorded as investment in direct financing leases upon acceptance of the equipment by the customer. At the inception of the lease, unearned lease income is recorded which represents the amount by which the gross lease payments receivable plus the estimated residual value of the equipment exceeds the equipment cost. Unearned lease income is recognized, using the interest method, as lease revenue over the lease term. Sales-type leases include a dealer profit or loss that is recorded by the lessor at the inception of the lease. The dealer's profit or loss represents the difference, at the inception of the lease, between the fair value of the leased property and its cost or carrying amount. The equipment subject to such leases may be obtained in the secondary marketplace, but most frequently is the result of re-leasing our own portfolio. This profit or loss that is recognized at lease inception is included in net margin on sales-type leases. For equipment sold through our technology business unit subsidiaries, the dealer margin is presented in equipment sales revenue and cost of equipment sales. Interest earned on the present value of the lease payments and residual value is recognized over the lease term using the interest method and is included as part of our lease revenues. Operating Leases. All leases that do not meet the criteria to be classified as direct financing or sales-type leases are accounted for as operating leases. Rental amounts are accrued on a straight-line basis over the lease term and are recognized as lease revenue. Our cost of the leased equipment is recorded on the balance sheet as investment in 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 SFAS 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 -14-
residual value is recorded as a gain or loss in lease revenues when title is transferred to the lessee, or, if the equipment is sold on the secondary market, in equipment sales revenues and cost of equipment sales when title is transferred to the buyer. The proceeds from any subsequent lease are accounted for as lease revenues at the time such transaction is entered into. Initial Direct Costs. Initial direct costs related to the origination of direct financing, sales-type or operating leases are capitalized and recorded as part of the net investment in direct financing leases, or net operating lease equipment, and are amortized over the lease term. Sales. Sales revenue includes the following types of transactions: (1) sales of new or used equipment which is not subject to any type of lease; (2) sales of equipment subject to an existing lease, under which we are lessor, including any underlying financing related to the lease; and (3) sales of off-lease equipment to the secondary market. Other Sources of Revenue. Amounts recorded as e-commerce revenues in the electronic commerce business unit include: (1) fees charged for the Procure(+) service which are recognized ratably over the life of the contract, and may be charged to the customer as a software license fee, a transaction fee based on the value of goods or services processed by the system, or a period subscription fee for a fixed term; (2) amounts charged for the Manage(+) service, which are recognized on a straight-line basis over the period the services are provided; and (3) charges for content processing, which are recognized when charged. These revenues are included in e-commerce revenues in our consolidated statement of earnings. Fee and other income results from: (1) income from events that occur after the initial sale of a financial asset such as escrow/prepayment income; (2) re-marketing fees; (3) brokerage fees earned for the placement of financing transactions; (4) interest and other miscellaneous income; and (5) fees for services provided by the technology services group. These revenues are included in fee and other income in our consolidated statements of earnings. RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 2001 Compared to Three and Six Months Ended September 30, 2000 Total revenues generated by the Company during the three-month period ended September 30, 2001 were $47,145,947 compared to revenues of $77,751,616 during the comparable period in the prior fiscal year, a decrease of 39.4%. During the six-month period ended September 30, 2001, revenues were $100,442,448 compared to revenues of $160,844,240 during the comparable period in the prior fiscal year, a decrease of 37.6%. These decreases are primarily the result of decreased revenues from the sales of equipment, which decreased 52.6% and 50.5% during the three and six months ended September 30, 2001, slightly offset by increases in lease revenues and fee and other income. 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 52.6% to $30,666,864 during the three-month period ended September 30, 2001, as compared to $64,733,834 generated during the corresponding period in the prior fiscal year. For the six-month period ended September 30, 2001, sales decreased 50.5% to $67,267,492 over the corresponding period in the prior year. -15-
Sales of equipment represented 100.0% and 99.3% of sales revenue in the three and six-month periods ended September 30, 2001, as compared to 90.8% and 83.0% in the three and six-month periods of the prior fiscal year. The vast majority of these equipment sales are generated through the Company's technology business unit subsidiaries. Sales of equipment during the three months ended September 30, 2001 decreased 47.5% to $30,666,864 compared to $58,459,332 generated during the comparable period in the prior fiscal year. Sales of equipment during the six months ended September 30, 2001 decreased 41.0% to $66,815,384 compared to $113,226,778 generated during the comparable period in the prior fiscal year. The decrease was a result of generally lower sales within the Company's existing customer base, and the reduction in sales to customers in the communcations industry. The Company's management believes the decrease to be a result of a general economic slowdown affecting its customer base. The Company realized a gross margin on sales of equipment of 15.7% and 14.4% for the three-month and six-month periods ended September 30, 2001, respectively, as compared to a gross margin of 13.3% and 13.6% realized on sales of equipment during the comparable periods in the prior fiscal year. 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 September 30, 2001, the Company did not recognize any revenue from the sale of leased equipment. During the six months ended September 30, 2001, sales of leased equipment decreased 98.0% to $452,108 from $22,696,563 in the same period in the prior fiscal year. During the six months ended September 30, 2001, the Company recognized a gross margin of 5.5% on leased equipment sales, compared to a gross margin of 2.9% and 2.6% on leased equipment sales in the three and six-month periods in the prior fiscal year. The significant decrease in leased equipment sales reflects the reduced volume of lease equity that the Company sold to outside investors. Leases that are not equity sold to investors remain on the Company's books and lease earnings are recognized accordingly. In addition, the revenue and gross margin recognized on sales of leased equipment can vary significantly depending on the nature and timing of the sale, as well as the timing of any debt funding. Prior to May 2000, the majority of the Company's sales of leased equipment had historically been sold to MLC/CLC, LLC, a joint venture in which the Company owns a 5% interest. During the six months ended September 30, 2001 and 2000, sales to MLC/CLC, LLC, accounted for 0.0% and 66.2% of sales of leased equipment, respectively. 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. The Company's lease revenues increased 20.9% to $12,008,725 for the three months ended September 30, 2001 compared with the corresponding period in the prior fiscal year. For the six-month period ending September 30, 2001, lease revenues increased 20.7% to $22,800,780 compared with the corresponding period in the prior fiscal year. The increase is primarily the result of increased renewal rents on the Company's maturing lease portfolio. For the three months ended September 30, 2001, fee and other income recognized was $2,362,798, an increase of 55.2% over the comparable period in the prior fiscal year. For the six-month period ending September 30, 2001, fee and other income recognized was $7,063,949, an increase of 110.6% over the comparable period in the prior fiscal year. Fee and other income includes revenues from adjunct services and management fees, including broker fees, support fees, warranty reimbursements, and learning center revenues generated by the Company's -16-
technology business unit subsidiaries. The increase in fee and other income in the six-month period ended September 30, 2001 is attributable to an approximately $2.4 million rebate from one of the Company's equipment vendors. The Company's fee and other income contains earnings from certain transactions which are in the Company's normal course of business but there is no guarantee that future transactions of the same nature, size or profitability will occur. The Company's ability to consummate such transactions, and the timing thereof, may depend largely upon factors outside the direct control of management. The earnings from these types of transactions in a particular period may not be indicative of the earnings that can be expected in future periods. The Company's direct lease costs increased 19.8% and 12.7% during the three and six-month periods ended September 30, 2001 as compared to the same periods in the prior fiscal year. The increase is primarily the result of a non-recurring, one-time write-off of the Company's remaining joint venture investment with MLC/CLC, LLC and increased lease depreciation, specifically renewal depreciation on the Company's matured lease portfolio. Professional and other fees decreased 68.3%, or $845,515, and 33.1%, or $555,765, for the three and six-month periods over the comparable periods in the prior fiscal year, and was primarily the result of a material reduction in the utilization of outside service providers. Salaries and benefits expenses increased 3.4% and 3.0% during the three and six-month periods ended September 30, 2001 over the same periods in the prior year. The small increase is the result of additional expense related to the Company's recently formed subsidiaries, ePlus Systems, inc. and ePlus Content Services, inc., which is offset by reduced commission expenses in the Company's lease financing and technology sales units. The Company's general and administrative expenses increased 19.7% to $3,599,512 during the three months ended September 30, 2001, as compared to the same period in the prior fiscal year. The Company's general and administrative expenses increased 45.4% to $7,184,514 during the six months ended September 30, 2001, as compared to the same period in the prior fiscal year. A portion of these increases is attributable to the non-recurring, one-time write-off of certain software assets and an equity investment held in a former business partner of the Company. In addition, the Company has experienced increased expenses related to the development and deployment of its e-commerce strategy. Interest and financing costs incurred by the Company for the three months and six months ended September 30, 2001 decreased 8.4% and 6.7% as compared to corresponding periods in the prior fiscal year and relates to lower recourse and non-recourse debt and the effects of reduced interest rates. Payments for interest costs on the majority of the Company's 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 $1,466,082 for the three months ended September 30, 2001 from $1,380,398 for the three months ended September 30, 2000, and decreased to $2,892,059 for the six months ended September 30, 2001 from $3,037,009 for the six months ended September 30, 2000, reflecting effective income tax rates of 40% for each period. The foregoing resulted in an 8.7% increase in net earnings for the three-month period ended September 30, 2001 as compared to the same period in the prior fiscal year, and a 3.8% decrease for the six-month period ended September 30, 2001 as compared to the same period in the prior fiscal year. Basic and fully diluted earnings per common share were $.22 and $.22 for the three months ended September 30, 2001, as compared to $.21 for basic and $.19 for fully diluted -17-
earnings for the three months ended September 30, 2000. Basic and diluted weighted average common shares outstanding for the three months ended September 30, 2001 were 10,160,182 and 10,226,148, respectively. For the three months ended September 30, 2000, the basic and diluted weighted average shares outstanding were 9,679,246 and 10,433,732, respectively. Basic and fully diluted earnings per common share were $.43 and $.43 for the six months ended September 30, 2001, as compared to $.47 for basic and $.44 for fully diluted earnings for the six months ended September 30, 2000. Basic and diluted weighted average common shares outstanding for the six months ended September 30, 2001 were 10,056,233 and 10,112,357, respectively. For the six months ended September 30, 2000, the basic and diluted weighted average shares outstanding were 9,538,973 and 10,365,396, respectively. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended September 30, 2001, the Company generated cash flows from operations of $9,987,532 and used cash flows in investing activities of $14,324,560. Cash flows generated by financing activities amounted to $13,056,927 during the same period. The net effect of these cash flows was a net increase in cash and cash equivalents of $8,719,899 during the six-month period. During the same period, the Company's total assets decreased $13,235,881, or 4.3%. On April 17, 2000 the Company completed a secondary offering of 1,000,000 shares of its common stock at a price of $28.50 per share. Net proceeds to the Company were $25,936,388. The cash balance at September 30, 2001 was $33,254,082 as compared to $24,534,183 at March 31, 2001. 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 three-month period ending September 30, 2001, the Company's lease related non-recourse debt portfolio decreased 5.3% to $146,706,168. Whenever possible and desirable, the Company arranges for equity investment financing which includes selling assets including the residual portions to third parties and financing the equity investment on a non-recourse basis. The Company generally retains customer control and operational services, and has minimal residual risk. The Company usually preserves the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed to return on its investment. Through MLC/CLC, LLC, the Company had a joint venture agreement that had historically provided the equity investment financing for certain of the Company's transactions. Firstar Equipment Finance Company ("FEFCO"), formerly -18-
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 has historically been attributable to sales to MLC/CLC, LLC. (See "RESULTS OF OPERATIONS"). FEFCO has discontinued new lease acquisition transactions effective May 2000. We actively sell or finance our equity investment with 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 September 30, 2001, the Company had $5,351,254 of unpaid equipment cost, as compared to $9,226,813 at March 31, 2001. Working capital financing in our leasing business was, through December 16, 2000 when it expired, provided by a $65 million committed credit facility which was a short-term, secured, recourse facility provided through First Union National Bank, N.A. and which had syndicated the facility to the following participants and in the following amounts: National City Bank ($15 million); Summit Bank ($10 million); Bank Leumi USA ($10 million); and Key Bank ($10 million). This credit facility had been in place since December 1998, was previously renewed for a one-year period on December 19, 1999, had full recourse to the Company, and was secured by a blanket lien against all of the Company's assets. In addition, the Company had entered into pledge agreements to pledge the common stock of all wholly-owned subsidiaries. The interest rates charged under the facility were LIBOR plus 1.5% or Prime minus .5%, depending on the term of the borrowing. The facility expired on December 16, 2000. Effective December 15, 2000, the Company entered into a $20 million 364 day, committed, secured recourse facility through National City Bank. It had full recourse to the Company, and was secured by a blanket lien against all of the Company's assets. In addition, the Company entered into pledge agreements to pledge the common stock of all wholly-owned subsidiaries. The credit facility contains certain financial covenants and certain restrictions on, among other things, the Company's ability to make certain investments, and sell assets or merge with another company. The interest rates charged under the facility are LIBOR plus a margin ranging from 1.50% to 2.25% or Prime plus a margin ranging from 0% to .25%. The margin was determined by a matrix that was based on a ratio of the Company's total recourse funded debt to EBITDA (earnings before interest, tax, depreciation, and amortization) as determined under the facility. Subsequently, on January 19, 2001, the $20 million National City credit facility was amended and increased to $35 million and the term was lengthened to 3 1/4 years. The new facility expires on April 17, 2004. In addition, Branch Banking and Trust Company ($10 million) and PNC Bank, N.A. ($5 million) were added to the facility and National City was appointed agent. The margin related to the LIBOR interest rate option was increased from 1.50% to 2.25% to 1.75% to 2.5%. As of March 31, 2001, the Company had an outstanding balance of $5 million on the National City Credit Facility. At September 30, 2001, the Company had $6.0 million outstanding on the facility. The loss of this relationship could have a material adverse effect on our future results as we rely on this facility for daily working capital and liquidity for our leasing business. -19-
In general, we use the National City 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 Company has a $3.1 million subordinated recourse note payable due to Centura Bank resulting from the acquisition of CLG, Inc. This note comes due in October 2006 and has an 11% interest rate payable monthly. ePlus Technology of NC, inc., ePlus Technology of PA, inc. and ePlus Technology, inc. have separate credit facilities to finance their working capital requirements for inventories and accounts receivable. Their traditional business as sellers of personal computers and related network equipment and software products is financed through agreements known as "floor planning" financing in which interest expense for the first thirty to forty days is not charged but is paid by the supplier/distributor. The floor planning liabilities are recorded as accounts payable-trade, as they are normally repaid within the thirty to forty day time frame and represent an assigned accounts payable originally generated with the supplier/distributor. If the thirty to forty day obligation is not paid timely, interest is then assessed at stated contractual rates. In addition to the floor planning financing, ePlus Technology, inc. and ePlus Technology of NC, inc. have accounts receivable facilities through Deutsche Financial Services Corporation. Of the total $33 million dollar facility provided by Deutsche Financial Services Corporation, $26 million is for traditional inventory floor planning and $7 million is available for accounts receivable financing. The maximum available under the accounts receivable facilities for ePlus Technology, inc. and ePlus Technology of PA, inc. are $5 million and $2 million, respectively, and as of September 30, 2001 there was an outstanding balance of $174,632 on these account receivable facilities. As of September 30, 2001 the respective floor planning inventory agreement maximum credit limits and actual outstanding balances are as follows: <TABLE> <CAPTION> Balance at Entity Floor Plan Supplier Credit Limit September 30, 2001 ------------------------------- -------------------------------- ---------------- ------------------- <S> <C> <C> ePlus Technology of NC, inc. Deutsche Financial Services, $ 3,500,000 $ 1,897,220 Inc. IBM Credit Corporation $ 250,000 $ 95,641 ePlus Technology of PA, inc. Deutsche Financial Services, $ 9,000,000 $ 3,297,966 Inc. IBM Credit Corporation $ 2,000,000 $ 104,744 ePlus Technology, inc. Deutsche Financial Services, $13,500,000 $ 4,805,552 Inc. </TABLE> Until it was terminated on February 15, 2001, ePlus Technology of PA, inc. had a line of credit in place with PNC Bank, N.A. with a maximum loan limit of $2,500,000 and it was guaranteed by ePlus, inc. The facilities provided by Deutsche Financial Services Corporation for ePlus Technology of PA, inc. and ePlus Technology, inc. requires a separate guaranty of up to $4,900,000 and $2,000,000 respectively, by ePlus inc. The floor planning facility provided by IBM Credit Corporation to ePlus Technology of PA, inc. also requires a guaranty by ePlus inc. for the total balance outstanding. -20-
Availability under the revolving lines of credit may be limited by the asset value of equipment purchased by the Company and may be further limited by certain covenants and terms and conditions of the facilities. ePlus Technology, inc. was previously supplied a floor planning facility by BankAmerica Credit who terminated the agreement, effective August 16, 2000. ePlus Technology, inc. contracted with Deutsche Financial Services Corporation on August 30, 2000, to replace the previous supplier. Both ePlus Technology of NC, inc. and ePlus Technology of PA, inc. agreements with Finova Capital Corp. were terminated on February 25, 2001. Both ePlus Technology of PA, inc. and ePlus Technology of NC, inc. replaced these facilities under agreements with Deutsche Financial Services Corporation. The loss of the Deutsche Financial Services Corporation relationship could have a material adverse effect on our future results as we rely on these facilities for daily working capital and liquidity for our technology sales business. 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 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. -21-
INFLATION The Company does not believe that inflation has had a material impact on its results of operations during the first quarter 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 unproven business models in new and rapidly evolving markets. Some of these challenges relate to the Company's ability to: o increase the total number of users of ePlusSuite services; o adapt to meet changes in its markets and competitive developments; and o continue to update its technology to enhance the features and functionality of its suite of products. The Company cannot be certain that its business strategy will be successful or that it will successfully address these and other challenges, risks and uncertainties. Over the longer term, the Company expects to derive a significant portion of its revenues from ePlusSuite services, which is based on an unproven business model. The Company expects to incur increased expenses that may negatively impact profitability. The Company also expects to incur significant sales and marketing, research and development, and general and administrative expenses in connection with the development of this business. As a result, the Company may incur significant losses in its e-commerce business unit in the foreseeable future, which may have a material adverse effect on the future operating results of the Company as a whole. The Company began operating its ePlusSuite services in November, 1999. Broad and timely acceptance of the ePlusSuite services, which is critical to the Company's future success, is subject to a number of significant risks. These risks include: o operating resource management and procurement on the Internet is a new market; o the system's ability to support large numbers of buyers and suppliers is unproven; o significant enhancement of the features and services of ePlusSuite services is needed to achieve widespread commercial initial and continued acceptance of the system; o the pricing model may not be acceptable to customers; o if the Company is unable to develop and increase transaction volume on ePlusSuite, it is unlikely that it will ever achieve or maintain profitability in this business; o businesses that have made substantial up-front payments for e-commerce solutions may be reluctant to replace their current solution and adopt the Company's solution; -22-
o the Company's ability to adapt to a new market that is characterized by rapidly changing technology, evolving industry standards, frequent new product announcements and established competition; o significant expansion of internal resources is needed to support planned growth of the Company's ePlusSuite services. Item 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. 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 Duetsche facilities, bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. Borrowings under the National City and Deutsche facilities bear interest at a market-based variable rate, based on a rate selected by the Company and determined at the time of borrowing. 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 September 30, 2001, the aggregate fair value of our recourse borrowings approximated their carrying value. -23-
PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On October 4, 2001, the Company issued to the shareholders of SourceOne Computer Corporation 274,999 shares of common stock, valued at $7.55 per share, in connection with the purchase of all the outstanding shares of SourceOne. The issuance of these securities was made in reliance on an exemption from registration provided by Section 4(2) or Regulation D of the Securities Act, as amended, as a transaction by an issuer not involving any public offering. The shareholders of SourceOne represented their intention to acquire the securities for investment only and not with a view to or for distribution in connection with such transaction, and an appropriate legend was affixed to the share certificates issued in the transaction. The shareholders of SourceOne had adequate access to information about ePlus through information made available to the shareholders of SourceOne. Pursuant to the Company's previously-announced stock repurchase plan, the Company repurchased 6,000 shares of its common stock at an average price of $7.15 per share. Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 20, 2001, the Company held its Annual Meeting of Stockholders. 1. At the Annual Meeting, Terrence O'Donnell and Thomas Hewitt were elected to the Board of Directors as Class II Directors to hold office for three years until a successor has been duly elected and shall qualify. The votes were cast as follows: For Abstained -------------------------------- Terrence O'Donnell 8,852,849 547 Thomas Hewitt 8,852,849 547 2. To ratify the appointment of Deloitte and Touche LLP as the Company's independent auditors for the Company's fiscal year ending March 31, 2002. For Against Abstained ----------------------------------------------------- 8,853,158 100 138 -24-
Item 5. OTHER INFORMATION Not Applicable Item 6(a) EXHIBITS None Item 6(b) REPORTS ON FORM 8-K Form 8-K dated September 20, 2001, and filed with the SEC on September 26, 2001, to report that the Company had issued a press release to report that the Company's Board of Directors authorized the repurchase from time to time of up to 750,000 shares of its outstanding common stock to a maximum of $5,000,000. Form 8-K dated October 9, 2001, and filed with the SEC on October 12, 2001, to report that the Company had entered into, and subsequently consummated, a stock purchase agreement to purchase all of the outstanding common shares of SourceOne Computer Corporation. Total consideration for the acquisition was $2,875,000 which consisted to $800,006 in cash and 274,999 in unregistered shares of ePlus, inc. common stock. -25-
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: November 14, 2001 /s/ STEVEN J. MENCARINI -------------------------------------------- By: Steven J. Mencarini, Senior Vice President and Chief Financial Officer Date: November 14, 2001 -26-