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, 1999
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 January 27,
2000, was 7,933,760.
<PAGE>
ePlus inc. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1999 2
Condensed Consolidated Statements of Earnings
Three Months Ended December 31, 1998 and 1999 3
Condensed Consolidated Statements of Earnings,
Nine Months Ended December 31, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows,
Nine Months Ended December 31, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
Part II. Other Information:
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
-1-
<PAGE>
<TABLE>
<CAPTION>
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
As of As of
March 31, 1999 December 31, 1999
------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,891,661 $ 11,687,340
Accounts receivable 44,090,101 63,387,971
Notes receivable 547,011 4,951,519
Employee advances 20,078 82,235
Inventories 658,355 1,837,161
Investment in direct financing
and sales type leases - net 83,370,950 204,280,675
Investment in operating lease
equipment - net 3,530,179 11,684,087
Property and equipment - net 2,018,133 2,533,112
Other assets 12,232,130 19,415,758
==================================
TOTAL ASSETS $ 154,358,598 $ 319,859,858
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 12,518,533 $ 18,515,180
Accounts payable - equipment 18,049,059 30,192,860
Salaries and commissions payable 535,876 960,781
Accrued expenses and other liabilities 4,638,708 3,080,799
Recourse notes payable 19,081,137 30,709,254
Nonrecourse notes payable 52,429,266 179,102,322
Deferred taxes 3,292,210 3,292,210
----------------------------------
Total Liabilities 110,544,789 265,853,406
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
authorized; 7,470,595 and 7,904,544 issued
and outstanding at March 31, 1999 and
December 31, 1999, respectively 74,706 79,045
Additional paid-in capital 24,999,371 29,225,488
Retained earnings 18,739,732 24,701,919
-----------------------------------
Total Stockholders' Equity 43,813,809 54,006,452
===================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,358,598 $ 319,859,858
===================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
Three months ended
December 31,
1998 1999
---- ----
REVENUES
<S> <C> <C>
Sales of equipment $ 25,635,591 $ 47,188,893
Sales of leased equipment 38,053,115 16,360,757
-------------------------------------
63,688,706 63,549,650
Lease revenues 4,745,035 9,467,586
Fee and other income 1,512,952 2,925,506
ePlusSuiteSM revenues - 297,453
-------------------------------------
6,257,987 12,690,545
-------------------------------------
TOTAL REVENUES 69,946,693 76,240,195
-------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 22,148,807 42,315,260
Cost of sales, leased equipment 37,476,294 15,309,659
-------------------------------------
59,625,101 57,624,919
Direct lease costs 1,550,955 3,116,460
Professional and other fees 375,094 566,365
Salaries and benefits 3,106,179 5,101,722
General and administrative expenses 1,318,912 1,841,111
Interest and financing costs 1,140,617 4,038,850
-------------------------------------
7,491,757 14,664,508
-------------------------------------
TOTAL COSTS AND EXPENSES 67,116,858 72,289,427
-------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,829,835 3,950,768
-------------------------------------
PROVISION FOR INCOME TAXES 1,131,934 1,580,340
-------------------------------------
NET EARNINGS $ 1,697,901 $ 2,370,428
=====================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.30
=====================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.24 $ 0.26
=====================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,189,324 7,885,729
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 7,220,060 9,092,317
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
Nine Months ended
December 31,
1998 1999
---- ----
REVENUES
<S> <C> <C>
Sales of equipment $ 55,740,476 $ 118,850,359
Sales of leased equipment 74,612,679 44,882,169
-------------------------------------
130,353,155 163,732,528
Lease revenues 14,994,505 21,816,694
Fee and other income 4,182,928 5,956,374
ePlusSuiteSM revenues - 297,453
-------------------------------------
19,177,433 28,070,521
-------------------------------------
TOTAL REVENUES 149,530,588 191,803,049
-------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 47,157,230 106,363,250
Cost of sales, leased equipment 73,630,008 42,969,242
-------------------------------------
120,787,238 149,332,492
Direct lease costs 5,221,414 5,408,846
Professional and other fees 894,587 1,387,540
Salaries and benefits 8,508,006 13,688,322
General and administrative expenses 3,618,588 4,817,067
Interest and financing costs 2,498,012 7,231,746
-------------------------------------
20,740,607 32,533,521
-------------------------------------
TOTAL COSTS AND EXPENSES 141,527,845 181,866,013
-------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 8,002,743 9,937,036
-------------------------------------
PROVISION FOR INCOME TAXES 3,201,099 3,974,847
-------------------------------------
NET EARNINGS $ 4,801,644 $ 5,962,189
=====================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.73 $ 0.78
=====================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.72 $ 0.70
=====================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,540,359 7,618,700
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,648,754 8,554,461
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended
December 31,
1998 1999
---- ----
Cash Flows From Operating Activities:
<S> <C> <C>
Net earnings $ 4,801,644 $ 5,962,189
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 3,850,449 4,979,393
Increase in provision for credit losses 500,000 360,000
Gain on sale of operating lease equipment (5,267) (402,036)
Loss on disposal of property and equipment 9,809 45,798
Adjustment of basis to fair market value of equipment and investments 268,506 9,000
Payments from lessees directly to lenders (771,465) (4,043,648)
Changes in assets and liabilities, net of effects of purchase acquisitions:
Accounts receivable (5,837,220) (16,369,538)
Other receivables (2,811,095) (3,998,476)
Employee advances 26,630 (54,496)
Inventories 1,036,507 4,087,197
Other assets (2,764,961) 341,043
Accounts payable - equipment (1,397,591) 466,121
Accounts payable - trade (2,032,538) 11,287,990
Salaries and commissions payable, accrued
expenses and other liabilities 2,195,466 (3,413,888)
-------------------------------------
Net cash used in operating activities (2,931,126) (743,351)
-------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating lease equipment 22,151 781,599
Purchase of operating lease equipment (1,824,989) (1,385,105)
Increase in investment in direct financing and sales-type leases (66,557,986) (83,492,103)
Purchases of property and equipment (915,346) (980,036)
Proceeds from sale of property and equipment 2,000 -
Cash used in acquisitions, net of cash acquired (3,485,279) (1,845,730)
Increase in other assets (709,216) (135,718)
-------------------------------------
Net cash used in investing activities (73,468,665) (87,057,093)
-------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 53,236,003 82,444,589
Recourse 319,586 4,905,701
Repayments:
Nonrecourse (3,640,341) (6,727,946)
Recourse (136,833) (938,773)
Proceeds from issuance of capital stock, net of expenses 177,931 330,030
Proceeds from sale of stock, net of underwriting costs 9,725,742 -
Proceeds from lines of credit 5,440,157 11,582,522
------------------------------------
Net cash provided by financing activities 65,122,245 91,596,123
------------------------------------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ePlus inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
UNAUDITED
Nine Months Ended
December 31,
1998 1999
---- ----
<S> <C> <C>
Net (Decrease) Increase in Cash and Cash Equivalents $(11,277,546) $ 3,795,679
Cash and Cash Equivalents, Beginning of Period 18,683,796 7,891,661
---------------------------------
Cash and Cash Equivalents, End of Period $ 7,406,250 $ 11,687,340
=================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 990,676 $ 2,797,802
Cash paid for income taxes $ 2,443,818 $ 4,463,357
See Notes To Condensed Consolidated Financial Statements.
</TABLE>
-6-
<PAGE>
ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1999 (the "Company's
1999 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,
1999 1999
----------- ------------
(In thousands)
Minimum lease payments $ 75,449 $ 197,366
Estimated unguaranteed residual value 17,777 31,471
Initial direct costs - net of amortization 1,606 2,419
Less: Unearned lease income (10,915) (25,429)
Reserve for credit losses (546) (1,546)
=========== ============
Investment in direct financing and sales
type leases - net $ 83,371 $ 204,281
=========== ============
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
March 31, December 31,
1999 1999
--------- -------------
(In thousands)
Cost of equipment under operating leases $ 8,742 $ 28,820
Initial direct costs 21 20
Less: Accumulated depreciation and amortization (5,233) (17,156)
---------- ------------
Investment in operating lease equipment - net $ 3,530 $ 11,684
========== ============
-7-
<PAGE>
4. BUSINESS COMBINATIONS
On July 12, 1999, the Company purchased certain assets and the sales operations
of Daghigh Software Company, Inc., which operated its technology sales business
as International Computer Networks and as ICN in the metropolitan Washington, DC
area. The total consideration of $751,452 consisted of $251,452 in cash and a
$500,000, 8% interest bearing, non-negotiable promissory note, payable monthly,
which matures on August 9, 2000. The assets and staff were merged into PC Plus,
Inc., a wholly-owned subsidiary of the Company. Goodwill in the amount of
$632,667 is being amortized on a straight-line basis over a fifteen year period.
On September 30, 1999, the Company purchased all of the stock of CLG, Inc., a
technology equipment leasing business, from Centura Bank. The acquisition added
approximately 400 customers and $93 million of assets to the Company's leasing
customer base in the Raleigh and Charlotte, North Carolina, Greenville, South
Carolina, and southern Virginia commercial markets. Total consideration for the
acquisition was $36.5 million, paid by the issuance of 392,990 shares of ePlus
inc. common stock valued at $3,900,425 (based on $9.925 per share), subordinated
debt of $3,064,574 and $29,535,001 in cash. The subordinated debt bears annual
interest at 11%, payable monthly, and the principal repayment is due on October
10, 2006. The note may be prepaid in whole at anytime at its par value. The cash
portion was partially financed by a non-recourse borrowing under an agreement
with Fleet Business Credit Corporation, which provided $27,799,499 of cash at
7.25% and is collateralized by certain CLG, Inc. leases. Initial goodwill of
$7,869,636 is being amortized on a straight line basis over a fifteen year
period. Concurrent with the acquisition, CLG, Inc. was merged into MLC Group,
Inc., a wholly-owned subsidiary of ePlus inc.
The following unaudited 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, 1998 and
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,
1998 1999
---- ----
(In Thousands)
Total revenues $ 187,470 $ 208,458
Net earnings 5,468 5,652
Net earnings per common share - basic 0.79 0.72
Net earnings per common share - diluted 0.78 0.64
5. 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
-8-
<PAGE>
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
ePlusSuiteSM 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 1999 Form 10-K. Amounts charged 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, though no
such amounts have been recognized to date. Selected Accounting Policies are
described in "Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition." 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
---- ---- ---- -----
(In Thousands)
Three months ended
December 31, 1998
<S> <C> <C> <C> <C>
Sales of equipment $ 541,800 $ 25,093,791 $ - $ 25,635,591
Sales of leased equipment 38,053,115 - - 38,053,115
Lease revenues 4,745,035 - - 4,745,035
Fee and other income 892,794 620,158 - 1,512,952
---------- ---------- ----------
Total Revenues 44,232,744 25,713,949 - 69,946,693
Cost of sales 37,986,717 21,638,384 - 59,625,101
Direct lease costs 1,550,955 -- - 1,550,955
Selling, general and
administrative expenses 1,813,571 2,986,614 - 4,800,185
----------- --------- ---------- ----------
Segment earnings 2,881,501 1,088,951 3,970,452
Interest expense 1,043,885 96,732 - 1,140,617
----------- --------- ---------- ----------
Earnings before income taxes 1,837,616 992,219 - 2,829,835
=====================================================
Assets $111,681,619 $26,038,574 $ - $137,720,193
Three months ended
December 31, 1999
Sales of equipment $ 247,372 $ 45,417,558 $ 1,523,963 $ 47,188,893
Sales of leased equipment 16,360,757 - - 16,360,757
Lease revenues 9,467,586 - - 9,467,586
Fee and other income 531,043 2,394,463 - 2,925,506
ePlusSuiteSM revenues - - 297,453 297,453
---------- ---------- ---------- ----------
Total Revenues 26,606,758 47,812,021 1,821,416 76,240,195
Cost of sales 15,648,614 40,747,917 1,228,388 57,624,919
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
5. SEGMENT REPORTING - CONTINUED
Financing Technology E-commerce
Business Business Business
Unit Unit Unit Total
---- ---- ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
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
Nine months ended
December 31, 1998
Sales of equipment $ 1,783,698 $ 53,956,778 $ - $ 55,740,476
Sales of leased equipment 74,612,679 -- - 74,612,679
Lease revenues 14,994,505 -- - 14,994,505
Fee and other income 2,420,331 1,762,597 - 4,182,928
--------- --------- ------- ---------
Total Revenues 93,811,213 55,719,375 - 149,530,588
Cost of sales 75,094,329 45,692,909 - 120,787,238
Direct lease costs 5,221,414 - - 5,221,414
Selling, general and
administrative expenses 5,418,955 7,602,226 - 13,021,181
--------- --------- ------- ----------
Segment earnings 8,076,515 2,424,240 - 10,500,755
Interest expense 2,305,514 192,498 - 2,498,012
--------- --------- ------- ----------
Earnings before
income taxes 5,771,001 2,231,742 - 8,002,743
========= ========= =========
Assets $ 111,681,619 $ 26,038,574 $ - $137,720,193
Nine Months ended December
31, 1999
Sales of equipment $ 473,548 $116,852,848 $1,523,963 $118,850,359
Sales of leased equipment 44,882,169 - - 44,882,169
Lease revenues 21,816,694 - - 21,816,694
Fee and other income 958,296 4,998,078 - 5,956,374
ePlusSuiteSM 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
</TABLE>
-10-
<PAGE>
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 1999 Form 10-K.
Overview
In November 1999, the Company introduced ePlusSuiteSM, a comprehensive
business-to-business electronic commerce supply chain management solution for
information technology and other operating resources. Currently, the Company
derives most of its revenue from sales and financing of information technology
and other assets. The introduction of ePlusSuiteSM reflects the Company's
transition to a business-to-business e-commerce solution provider from its
historical sales and financing business. The Company's strategy is to reduce or
eliminate balance sheet risk over time by outsourcing lease and other financing
to third-party financial institutions, while charging a transaction fee, and
arranging the sales of technology and other assets for a transaction fee, rather
than purchasing and reselling such equipment.
The Company expects its electronic commerce revenues to be derived primarily
from (i) amounts charged to customers with respect to procurement activity
executed through Procure+, (ii) fees from third-party financing sources that
provide leasing and other financing for transactions the Company arranges
through Procure+ on behalf of its customers, (iii) fees from third-party vendors
for sales arranged through Procure+ on behalf of the Company's customers and
(iv) amounts charged to customers for the Manage+ service. The Company expects
to generate increased revenues from its e-commerce business unit, while revenues
from its leasing and sales business may decrease over time. 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
begin to represent a smaller portion of the Company's total revenues. However,
in the near term, as the Company seeks to implement its electronic commerce
business strategy, it will continue to derive most of its revenues from its
traditional businesses.
The Company expects to incur substantial increases in the near term in its sales
and marketing, research and development, and general and administrative
expenses. In particular, the Company expects to significantly expand the
marketing of its electronic commerce business solution and increase spending on
advertising and marketing. To implement this strategy, the Company plans to hire
additional sales personnel, open new sales locations and retain an outside
advertising, marketing and public relations firm. The Company also plans to hire
additional technical personnel and third parties to assist in the implementation
and upgrade of ePlusSuiteSM and to develop complementary electronic commerce
business solutions. As a result of these increases in expenses, the Company
expects to incur significant losses in its ePlusSuiteSM business which may, in
the near term, have a material adverse effect on future operating results for
the Company as a whole.
To the extent the Company successfully implements this strategy, it expects the
business to become less capital intensive over time. As a result, management
expects total assets and total liabilities will decrease. The Company expects to
significantly reduce its receivables and lease assets along with the associated
liabilities including debt and equipment payables.
-11-
<PAGE>
The Company has added new classifications to its financial statement
presentation in order to reflect the changes in its business. A line item,
ePlusSuiteSM 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.
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 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 the Company's business are
discussed below.
The Company classifies lease transactions, as required by the Statement of
Financial Accounting Standards No. 13, Accounting for Leases as: (i) direct
financing; (ii) sales type; or (iii) operating leases. Revenues and expenses
between accounting periods for each lease term will vary depending upon the
lease classification.
For financial statement purposes, revenue from all three classifications is
presented in lease revenues, and costs related to these leases is presented in
direct lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term,
at inception, is at least 75% of the estimated economic life of the leased
equipment; or (iv) 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 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) 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
-12-
<PAGE>
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 the Company's own portfolio. This profit (or loss) which is
recognized at lease inception, is included in net margin on sales-type leases.
For equipment sold through the Company's technology business unit subsidiaries,
the dealer margin is presented in equipment sales revenue and cost of equipment
sales. 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 the Company's 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. The Company's 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 the Company's
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 the Company's 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.
The Company evaluates residual values on an ongoing basis and records 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.
The Company seeks to realize the estimated residual value at lease termination
through: (i) renewal or extension of the original lease; (ii) sale of the
equipment either to the lessee or the secondary market; or (iii) 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. 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.
-13-
<PAGE>
Sales. Sales revenue includes the following types of transactions: (i) sales of
new and/or used equipment which is not subject to any type of lease; (ii) sales
of equipment subject to an existing lease, under which the Company is lessor,
including any underlying financing related to the lease; and (iii) sales of
off-lease equipment to the secondary market.
Other Sources of Revenue. Fee and other income results from (i) income from
events that occur after the initial sale of a financial asset such as
escrow/prepayment income; (ii) re-marketing fees; (iii) brokerage fees earned
for the placement of financing transactions; and (iv) interest and other
miscellaneous income. These revenues are included in fee and other income in the
Company's statement of earnings.
RESULTS OF OPERATIONS - Three and Nine Months Ended December 31, 1999, Compared
to Three and Nine Months Ended December 31, 1998
Total revenues generated by the Company during the three-month period ended
December 31, 1999 were $76,240,195 compared to revenues of $69,946,693 during
the comparable period in the prior fiscal year, an increase of 9.0%. During the
nine-month period ended December 31, total revenues were $191,803,049 and
$149,530,588 in 1999 and 1998, respectively, an increase of 28.3%. During the
three-month period, the increase in equipment sales was largely offset by a
decrease in sales of leased equipment, thereby yielding a lower overall increase
in total revenues of 9.0%. In comparison, the increase in equipment sales for
the nine-month period significantly outpaced the decrease in sales of leased
equipment, which contributed to the 28.3% increase in total revenues. The
increase in total revenues for the three and nine-month periods, without the
inclusion of the operations of CLG, Inc., would have been 8.3% and 24.9%,
respectively. 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 .2% to $63,549,650 during the three-month period ended December 31,
1999, as compared to $63,688,706 in the corresponding period in the prior fiscal
year. For the nine-month period ended December 31, 1999, sales increased 25.6%
to $163,732,528 over the corresponding period in the prior year.
The majority of sales of equipment are generated through the Company's
technology business unit subsidiaries. Sales of used and/or off-lease equipment
are also generated from the Company's brokerage and re-marketing activities. For
both the three and nine-month periods ended December 31, 1999, equipment sales
through the Company's technology business unit subsidiaries accounted for 99.7%
of sales of equipment, with the remainder being sales from brokerage and
re-marketing activities. Sales of equipment increased significantly during both
the three and nine-month periods, primarily a result of increased technology
sales through the Company's subsidiaries. For the three-month period, sales of
equipment increased 84.1% to $47,188,893. For the fiscal year to date through
December 31, equipment sales increased 113.2% to $118,850,359. 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 10.3% and 10.5% for
the three and nine-month periods ended December 31, 1999, respectively, as
compared to a gross margin of 13.6% and 15.4% realized on sales of equipment
-14-
<PAGE>
generated during the three and nine-month periods, respectively, in the prior
fiscal year. This decrease in net margin percentage can be primarily attributed
to the Company's July 1, 1998 acquisition of PC Plus, Inc., which has a
concentration of higher volume customers with lower gross margin percentages.
The Company's gross margin on sales of equipment may be affected by the mix and
volume of products sold.
The Company also recognizes revenue from the sale of leased equipment. During
the three and nine-month periods, sales of leased equipment decreased 57.0% and
39.8% to $16,360,757 and $44,882,169, respectively. The revenue and gross margin
recognized on sales of leased equipment can vary significantly depending on the
nature and timing of the sale, as well as the timing of any debt funding
recognized in accordance with SFAS No. 125. The decrease in sales of leased
equipment can be primarily attributed to the decline in the volume of leases
sold to MLC/CLC, LLC, a joint venture in which the Company owns a 5% interest.
During the three months ended December 31, 1999 and 1998, sales to MLC/CLC, LLC,
accounted for 70.9% and 100.0% of sales of leased equipment, respectively.
During the nine-month periods ended December 31, sales to MLC/CLC, LLC accounted
for 45.1% and 100.0% of 1999 and 1998 sales of leased equipment, respectively.
Sales to the joint venture require the consent of the joint venture partner. The
Company has received notice that Firstar Equipment Finance Corporation, which
owns 95% of MLC/CLC, LLC, intends to discontinue their continued 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-month period ended December 31, 1999, the Company recognized a
gross margin of 6.4% on leased equipment sales of $16,360,757 as compared to a
gross margin of 1.5% on leased equipment sales of $38,053,115 during the same
period in the prior fiscal year. For the fiscal year to date through December
31, 1999, the Company recognized a gross margin of 4.3% on leased equipment
sales of $44,882,169, as compared to a gross margin of 1.3% on leased equipment
sales of $74,612,679 during the same period in the prior fiscal year. The
increase in gross margin is due primarily to increased origination fees charged
to the equity purchasers of leased equipment.
The Company's lease revenues increased 99.5% to $9,467,586 for the three-month
period ended December 31, 1999, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through December 31, lease
revenues increased 45.5% to $21,816,694 for the 1999 period compared to the same
period in 1998. This 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 March 31, 1999 were $204,280,675 and $83,370,950,
respectively. The December 31, 1999 balance represents an increase of
$120,909,725 or 145.0% over the balance as of March 31, 1999. The increase in
the net investment in direct financing and sales type leases, as well as the
corresponding lease revenues, was due in large part to the acquisition of CLG,
Inc. The increases in lease revenues for the three and nine-month periods,
without the operations of CLG, Inc., would have been 10.0% and 17.2%,
respectively.
For the three and nine months ended December 31, 1999, fee and other income
increased 93.4% and 42.4%, respectively, over the comparable periods in the
prior fiscal year. This increase is attributable to increases in revenues from
-15-
<PAGE>
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
consumate 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 acquisition of CLG, Inc. did not
materially affect the increases for the periods presented.
For the three and nine months ended December 31, 1999, the Company recorded
$297,453 in ePlusSuiteSM revenues. These revenues consisted of amounts charged
for the arrangement of procurement transactions executed through Procure+, a
component of ePlusSuiteSM. There were no ePlusSuiteSM revenues recorded prior to
this quarter, as ePlusSuiteSM was introduced on November 2, 1999. During the
three months ended December 31, 1999, the selling, general and administrative
expenses allocated to the e-commerce business unit consisted primarily of a
corporate overhead allocation.
The Company's direct lease costs increased 3.6% during the nine-month period
ended December 31, 1999 as compared to the same period in the prior fiscal year.
There was an increase of 100.9%, in direct lease costs for the three-month
period ended December 31, 1999 as compared to December 31, 1998. The largest
component of direct lease costs is depreciation expense on operating lease
equipment. The increase for the three-month period is attributable to the
acquisition of CLG, Inc., which has a higher percentage of operating leases, and
as a result, added $1.9 million in direct lease costs. For the nine months ended
December 31, 1999, the increase attributable to CLG, Inc. was offset by a $1.2
million reduction in depreciation on the Company's operating lease equipment
prior to the CLG, Inc. acquisition.
Salaries and benefits expenses increased 64.2% during the three-month period
ended December 31, 1999 over the same period in the prior year. For the fiscal
year to date through December 31, 1999, salaries and benefits increased 60.9%
over the prior year. These increases reflect the increased number of personnel
employed by the Company, higher commission expenses in the technology business
unit, and the acquisition of CLG, Inc.
Interest and financing costs incurred by the Company for the three and nine
months ended December 31, 1999 increased 254.1% and 189.5%, respectively, and
relate to interest costs on the Company's indebtedness. In addition to increased
borrowing under the Company's lines of credit, the Company's lease related
non-recourse debt portfolio increased significantly (See "LIQUIDITY AND CAPITAL
RESOURCES"). Payment for interest costs on the majority of non-recourse and
certain recourse notes are typically remitted directly to the lender by the
lessee.
The Company's provision for income taxes increased to $1,580,340 for the three
months ended December 31, 1999 from $1,131,934 for the three months ended
December 31, 1998, reflecting effective income tax rates of 40% for both
periods. For the nine months ended December 31, 1999, the Company's provision
for income taxes was $3,974,847 as compared to $3,201,099 during the comparable
prior year period, reflecting effective income tax rates of 40% for both
periods.
The foregoing resulted in a 39.6% and 24.2% increase in net earnings for the
three and nine-month periods ended December 31, 1999, respectively, as compared
to the same periods in the prior fiscal year. The increases in net earnings for
the three and nine-month periods, exclusive of the operations of CLG, Inc.,
would have been 10.4% and 13.8%.
-16-
<PAGE>
Basic and fully diluted earnings per common share were $.30 and $.26 for the
three months ended December 31, 1999, as compared to $.24 for both methods for
the three months ended December 31, 1998, based on weighted average common
shares outstanding of 7,885,729 and 9,092,317, respectively, for 1999, and
7,189,324 and 7,220,060, respectively, for 1998. For the fiscal year to date
through December 31, 1999, the Company's basic and fully diluted earnings per
common share were $.78 and $.70, respectively, as compared to $.73 and $.72,
respectively, for the same period in 1998, based on weighted average common
shares outstanding of 7,618,700 and 8,554,461, respectively, for 1999, and
6,540,359 and 6,648,754 respectively, for 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended December 31, 1999, the Company used cash
flows in operations of $743,351, and used cash flows from investing activities
of $87,057,093. Cash flows generated by financing activities amounted to
$91,596,123 during the same period. The net effect of these cash flows was a net
increase in cash and cash equivalents of $3,795,679 during the nine-month
period. During the same period, the Company's total assets increased
$165,501,260, or 107.2%, primarily the result of increases in direct financing
leases and the acquisition of CLG, Inc. on September 30, 1999. The Company's net
investment in operating lease equipment increased during the period, primarily
due to the acquisition of operating lease assets from CLG, Inc.
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 lease to third parties, or other internal
means of financing. 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 from non-recourse and recourse
borrowings. Historically, the Company has obtained recourse and non-recourse
borrowings from money centers and regional banks, insurance companies, finance
companies and financial intermediaries. The Company has formal programs with Key
Corporate Capital, Inc., Fleet Business Credit Corporation, Centura Bank,
Wachovia Bank & Trust, Norwest Equipment Finance, Inc., and Synovus Leasing
Company. These programs require that each transaction is specifically approved
and done solely at the lender's discretion.
During the three and nine-month periods ending December 31, 1998 and 1999, the
Company's lease related non-recourse debt portfolio increased 241.6% to
$179,102,322. This increase is due to the acquisition of CLG, Inc., as well as
increased on balance sheet debt fundings on the Company's existing lease
portfolio.
On March 12, 1997, the Company established a $10,000,000 credit facility
agreement with Heller Financial, Inc. ("Heller"). Under the terms of the Heller
facility, a maximum amount of $10,000,000 was available to borrow provided that
each draw was subject to the approval of Heller. On March 12, 1998, the formal
commitment from Heller to fund additional advances under the line was allowed to
-17-
<PAGE>
expire, however, we are still transacting business as if the formal agreement
terms are in place. The primary purpose of the Heller facility was for the
permanent fixed-rate discounting of rents for commercial leases of information
technology assets with the Company's middle-market customers. As of December 31,
1999, the balance on this account was $3,148,520. Originally, each advance under
the facility bore an annual interest rate equal to the sum of the weekly average
U.S. Treasury Constant Maturities for a Treasury Note having approximately an
equal term as the weighted average term of the contracts subject to the advance,
plus an index ranging from 1.75% to 3.00%, depending on the amount of the
advance and the credit rating (if any) of the lessee. Thereafter, the annual
interest rate was fixed by Heller each month and adjusted each subsequent month.
The Heller facility contains a number of contractual covenants and is a limited
recourse facility, secured by a first-priority lien in the lease contracts and
chattel paper relating to each loan advance, the equipment under the lease
contracts, a 10% cross-collateralized first loss guarantee, and all books,
records and proceeds. The Heller facility was made to MLC Group and is
guaranteed by ePlus inc. The Heller facility is subject to their sole
discretion, and is further subject to ePlus inc.'s compliance with certain
conditions and procedures.
Through MLC/CLC, LLC, the Company has a joint venture agreement that has
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 enables 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"). The Company has received notification of FEFCO's intent to
discontinue their investment in new lease transactions effective May, 2000.
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, 1999, the Company had
$30,192,860 of unpaid equipment cost, as compared to $18,049,059 at March 31,
1999.
Working capital financing in our leasing business is provided by a $65 million
committed line of credit which is a short-term, secured, recourse facility
provided through First Union National Bank, N.A. and which has syndicated the
facility to the following participants and in the following amounts: City
National Bank ($15 million); Summit Bank ($10 million); Bank Leumi USA ($10
million); and Key Bank ($10 million). This line of credit has been in place
since December 1998, was renewed for another one-year period on December 19,
1999, has full recourse to the Company, and is secured by a blanket lien against
all of the Company's assets. In addition, the Company has entered into pledge
agreements to pledge the common stock of all wholly-owned subsidiaries. The
interest rates charged under the facility are LIBOR plus 1.5% or Prime minus
.5%, depending on the term of the borrowing. The facility expires on December
19, 2000. As of December 31, 1999, the Company had an outstanding balance of
$29.5 million on the First Union Credit Facility.
MLC Network Solutions of North Carolina, Inc. ("MLC Network Solutions"),
Educational Computer Concepts, Inc. ("ECC, Inc.") and PC Plus, Inc. have
separate credit sources to finance their working capital requirements for
-18-
<PAGE>
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 where interest expense for the
first thirty to forty days is not charged, but is paid for by the
supplier/distributor. These floor plan 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.
As of December 31, 1999, the floor planning agreements are as follows:
Balance at
Credit December 31,
Entity Floor Plan Supplier Limit 1999
------ ------------------- ----- ----
MLC Network Solutions Finova Capital Corporation $ 4,000,000 $ 1,992,631
IBM Credit Corporation $ 250,000 $ -
ECC, Inc. Finova Capital Corporation $ 7,000,000 $ 4,579,513
IBM Credit Corporation $ 750,000 $ 48,199
PC Plus, Inc. BankAmerica Credit $15,000,000 $ 5,401,064
All of the above credit facility limits have been increased during the year to
provide the credit capacity to increase sales on account. ECC, Inc. also has a
line of credit in place with PNC Bank, N.A. that expires on July 31, 2000. This
asset based line has a maximum credit limit of $2,500,000 and interest charges
are set at the bank's prime rate. There was no outstanding balance on this line
of credit at December 31, 1999. The credit facilities provided by Finova Capital
Corporation and PNC Banks, N.A., are required to be guaranteed 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. See "ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION."
The implementation of the Company's e-commerce business strategy will require a
significant amount of cash beyond what the Company currently has available or is
likely to generate from its current operations. 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 ePlusSuiteSM to provide additional
functionality and value added services. As a result, the Company expects to
require additional financing to fund its strategy implementation and potential
future acquisitions, which may include additional debt and equity financing.
-19-
<PAGE>
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.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first three quarters of fiscal 2000.
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 ePlusSuiteSM 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 ePlusSuiteSM 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.
-20-
<PAGE>
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 ePlusSuiteSM 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
for the Company as a whole.
The Company began operating its ePlusSuiteSM services in November 1999. Broad
and timely acceptance of the ePlusSuiteSM 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 ePlusSuiteSM
services is needed to achieve widespread commercial initial and continued
widespread 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
ePlusSuiteSM, 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 ePlusSuiteSM services.
YEAR 2000 ISSUE
In the Company's Form 10-Q for the quarter ended September 30, 1999, filed with
the Securities and Exchange Commission, the Company reported that it had
substantially completed the Year 2000 compliance modification to its IT and
non-IT based applications. To date, the Company has not experienced any
disruptions in any aspect of its operations. The Company continues to monitor
its infrastructure, its products offered, and its critical business partners to
ensure continued success. The Company has not incurred any material expenditures
in addition to those already reported in its prior filing and does not
anticipate any significant future costs related to maintaining its Year 2000
compliance.
-21-
<PAGE>
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
Not Applicable
Item 3. Defaults Under Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
-22-
<PAGE>
Item 6(a) Exhibits
Exhibit
Number Description Page
-------------- -------------------------------------------------------
27.1 Financial Data Schedule X
Item 6(b) Reports on Form 8-K
During the third fiscal quarter covered by this report, the Company
filed the following Current Reports on Form 8-K:
Form 8-K dated October 1, 1999, and filed with the Commission on
October 18, 1999, reporting the completion of the acquisition of all
of the stock of CLG, Inc. from Centura Bank, a wholly owned subsidiary
of Centura Banks, Inc.; no financial statements were included.
Form 8-K dated November 3, 1999, and filed with the Commission on
November 4, 1999, announcing that MLC Holdings, Inc. had changed its
name to ePlus inc. and would be operating under the name ePlus inc.
effective 11/1/99; no financial statements were included.
Form 8-K dated December 3, 1999, and filed with the Commission on
December 10, 1999, reporting that ePlus inc., along with its two
wholly owned subsidiaries, MLC Group, Inc. and MLC Federal, Inc., had
renewed its $51.5 million credit agreement for twelve months
commencing December 18, 1999; no financial statements were included.
Form 8-K/A dated October 18, 1999, and filed with the Commission
on December 17, 1999, to report updated financial information with
respect to the acquisition of CLG, Inc. on September 30, 1999;
pro-forma financial statements for ePlus inc. for the six months ended
September 30, 1999 and the year ended March 31, 1999 were included.
Financial statements for CLG, Inc. were also included.
Form 8-K/A dated October 18, 1999, and filed with the Commission
on December 20, 1999, to report additional updated financial
information with respect to the acquisition of CLG, Inc. on September
30, 1999; pro-forma financial statements for ePlus inc. for the six
months ended September 30, 1999 and the year ended March 31, 1999 were
included. Financial statements for CLG, Inc. were also included.
-23-
<PAGE>
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: Feburary 14, 2000
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: February 14, 2000
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000 MAR-31-1999 MAR-31-1999
<PERIOD-START> OCT-01-1999 APR-01-1999 OCT-01-1998 APR-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1999 DEC-31-1998 DEC-31-1998
<CASH> 11,687 11,687 7,406 7,406
<SECURITIES> 0 0 0 0
<RECEIVABLES> 68,422 68,422 35,153 35,153
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,837 1,837 1,020 1,020
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 2,533 2,533 1,880 1,880
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 319,860 319,860 137,720 137,720
<CURRENT-LIABILITIES> 0 0 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 79 79 75 75
<OTHER-SE> 53,927 53,927 41,798 41,798
<TOTAL-LIABILITY-AND-EQUITY> 319,860 319,860 137,720 137,720
<SALES> 63,550 163,733 63,689 130,353
<TOTAL-REVENUES> 76,240 191,803 69,947 149,531
<CGS> 57,625 149,332 59,625 120,787
<TOTAL-COSTS> 72,289 181,866 67,117 141,528
<OTHER-EXPENSES> 14,665 32,534 7,492 20,741
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 4,039 7,232 1,141 2,498
<INCOME-PRETAX> 3,951 9,937 2,830 8,003
<INCOME-TAX> 1,580 3,975 1,132 3,201
<INCOME-CONTINUING> 2,370 5,962 1,698 4,802
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,370 5,962 1,698 4,802
<EPS-BASIC> .30 .78 0.24 0.73
<EPS-DILUTED> .26 .70 0.24 0.72
</TABLE>
