# Eplus Inc: Form 10-Q for the period ended Dec 31, 2013

- Company: [Eplus Inc](/companies/plus.md) (CIK 1022408)
- Form: 10-Q
- Filed: 2014-02-06
- Accepted by EDGAR: Feb 5, 2014, 19:01 ET
- Period: 2013-12-31
- Accession: 0001022408-14-000004
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1022408/000102240814000004/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1022408/000102240814000004/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-10-01 to 2013-12-31 | $267.2m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2013-04-01 to 2013-12-31 | $797.6m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-10-01 to 2013-12-31 | $207.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2013-04-01 to 2013-12-31 | $625.6m | us-gaap:CostOfGoodsAndServicesSold |
| Income tax | 3 months, 2013-10-01 to 2013-12-31 | $7.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-04-01 to 2013-12-31 | $19.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-10-01 to 2013-12-31 | $10.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-04-01 to 2013-12-31 | $27.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-10-01 to 2013-12-31 | $1.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-04-01 to 2013-12-31 | $3.34 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-10-01 to 2013-12-31 | $1.33 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-04-01 to 2013-12-31 | $3.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-10-01 to 2013-12-31 | 7,982,418 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-04-01 to 2013-12-31 | 8,012,840 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-04-01 to 2013-12-31 | −$26.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2013-04-01 to 2013-12-31 | $107.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2013-04-01 to 2013-12-31 | $10.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-12-31 | $40.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2013-12-31 | $506.8m | us-gaap:Assets |
| Total liabilities | at 2013-12-31 | $247.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-12-31 | $259.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,548 characters.

This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended March 31, 2013. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 2013 Annual Report and subsequently filed Forms 10-Q.

### EXECUTIVE OVERVIEW

### Business Description

*e*Plus and its consolidated subsidiaries provide leading IT products and services, flexible leasing and financing solutions, and enterprise supply management software to enable our customers to optimize their IT infrastructure and supply chain processes. Our revenues are composed of sales of product and services, financing revenues and fee and other income. Our operations are conducted through two business segments: our technology segment and our financing segment.

### Financial Summary

In recent years, the United States experienced substantial uncertainty in the economic environment, including financial market disruption. In addition, the debt crisis in certain countries in the European Union as well as the United States federal budget and debt ceiling debates has contributed to continuing economic weakness and uncertainty in the United States. A reoccurrence of the economic downturn could cause our current and potential customers to once again delay or reduce technology purchases and result in longer sales cycles, slower adoption of new technologies and increased price competition. Credit risk associated with our customers and vendors may also be adversely impacted. In addition, although we do not anticipate the need for additional capital in the near term due to our current financial position, a reoccurrence of the economic downturn may adversely affect our access to additional capital.

In 2012, IT spending in the United States increased by 4.0% as compared to 2011, according to industry analysts. Some analysts have lowered their forecast for overall IT spending for calendar year 2013 to less than 3.0% on average, with higher variability depending on industry. We believe that customers are continuing to focus on cost savings initiatives by utilizing technologies such as virtualization and cloud computing, and we continue to provide these and other advanced technology solutions to meet these needs.

During the three months ended December 31, 2013, total revenue increased 10.4% to $267.2 million and total costs and expenses increased 10.0% to $249.1 million, as compared to the same period last fiscal year. During the nine months ended December 31, 2013, total revenue increased 6.8% to $797.6 million and total costs and expenses increased 7.2% to $751.5 million, as compared to the same period last fiscal year. We had open orders of $67.1 million as of December 31, 2013, compared to $73.3 million as of December 31, 2012. Open orders represent orders received from our customers that have not been invoiced. These orders are normal course of business transactions, which we expect to be processed within our customary time frame. To drive our growth and to expand our geographical footprint and solution offerings, we increased hiring in our technology segment. We expanded from 869 employees as of December 31, 2012 to 961 employees as of December 31, 2013.

Gross margin for product and services was 18.9% and 17.5% during the three months ended December 31, 2013 and 2012, respectively. The increase in our gross margin was impacted by increased sales of third party software assurance, maintenance and services, which are presented on a net basis as well as higher amount of vendor incentives earned. During the nine months ended December 31, 2013 and 2012, our gross margin for product and services was 18.1% and 17.5%, respectively. The increase was primarily due to higher sales of third party software assurance, maintenance and services, which are presented on a net basis and higher service margins. Our gross margin on sales of product and services increased sequentially from 17.8% for the three months ended September 30, 2013 to 18.9% for the three months ended December 31, 2013. Our gross margins on sales of product and services are subject to variability due to changes in the amount of vendor incentives earned, the pricing and product mix of sales to our customers, including the amount of third party software assurance, maintenance and services sold.

Net earnings for the three months ended December 31, 2013 increased 17.5% to $10.6 million, compared to the three months ended December 31, 2012. Net earnings for both the nine months ended December 31, 2013 and 2012 were $27.1 million. Cash and cash equivalents were $40.5 million at December 31, 2013, down from $52.7 million at March 31, 2013, in part due to the repurchase of $7.8 million in treasury stock, the acquisition of AdviStor for $2.8 million, and purchases of equipment or software that we finance for our customers.

### Business Segment Overview

#### Technology Segment

The technology segment sells IT equipment, software and related services primarily to corporate customers, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for information technology products. Our technology segment derives revenue from the sales of new equipment and service engagements. These revenues are reflected on our consolidated statements of operations under sales of product and services and fee and other income. Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with us, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with governments is based on public bids and our written bid responses.

A substantial portion of our sales of product and services are from sales of Cisco, Hewlett Packard, and NetApp products, which represented 48.8%, 10.2%, and 8.7%, respectively, of our sales of product and services for the nine months ended December 31, 2013, as compared to 48.7%, 10.9%, and 6.9%, respectively, of our sales of product and services for the nine months ended December 31, 2012.

Included in sales of product and services are revenues derived from performing advanced professional services that may be bundled with sales of equipment, as well as managed services. Our professional service engagements are generally governed by statements of work, and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials. Our managed service arrangements include network and infrastructure maintenance, monitoring and security contracts, which generally range between one to five years.

We endeavor to minimize the cost of sales in our technology segment through vendor consideration programs provided by manufacturers and other incentives provided by distributors. The programs we qualify for are generally set by our reseller authorization level with the manufacturer. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as pricing received, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through sales volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain and these programs continually change and, therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs. We currently maintain the following authorization levels with our primary manufacturers:

|  |  |
| --- | --- |
| Manufacturer | Manufacturer Authorization Level |
| Apple | Apple Authorized Corporate Reseller (National) |
| Cisco Systems | Cisco Gold DVAR (National) |
|  | Advanced Wireless LAN |
|  | Advanced Unified Communications |
|  | Advanced Data Center Storage Networking |
|  | Advanced Routing and Switching |
|  | Advanced Security |
|  | ATP Video Surveillance |
|  | ATP Cisco Telepresence Video Master Partner |
|  | ATP Rich Media Communications |
|  | Master Cloud Builder Specialization |
|  | Master Managed Services Partner |
|  | Master Security Specialization |
|  | Master UC Specialization |
| Citrix Systems, Inc. | Citrix Platinum Partner (National) |
| EMC | EMC Velocity Signature Partner (National) |
| Hewlett Packard | Platinum - Converged Infrastructure Partner (National) |
| IBM | Premier IBM Business Partner (National) |
| Lenovo | Lenovo Premium (National) |
| Microsoft | Microsoft Gold (National) |
| NetApp | NetApp STAR Partner (National) |
| Oracle Gold Partner | Sun SPA Executive Partner (National) |
|  | Sun National Strategic Data Center Authorized |
| VMware | National Premier Partner |

23

We also generate revenue in our technology segment through hosting arrangements and sales of our Internet-based business-to-business supply chain management software, agent fees received from various manufacturers, support fees, and warranty reimbursements. Our revenues include earnings from certain transactions that are infrequent, and there is no guarantee that future transactions of the same nature, size or profitability will occur. Our 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. These revenues are reflected on our unaudited condensed consolidated statements of operations under fee and other income.

#### Financing Segment

The financing segment offers financing solutions to domestic governmental entities and corporations nationwide and in certain other countries. The financing segment derives revenue primarily from leasing IT and medical equipment and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services through notes receivable. These revenues are included in financing revenues on our unaudited condensed consolidated statements of operations.

Financing revenues consists of interest income on notes receivable, direct financing and sales-type leases, revenue from operating leases, net gains or losses on the transfer of financial assets, or the sales of equipment at the end of a lease, as well as other financing revenue.

We classify investments in leases as a direct financing lease, sales-type lease, or operating lease, as appropriate.

- For direct financing and sales-type leases, we record the net investment in leases, which consists of the sum of the minimum lease payments, initial direct costs (direct financing leases only), and unguaranteed residual value (gross investment) less the unearned income. The unearned income is amortized over the life of the lease using the interest method. Under sales-type leases, the difference between the present value of minimum lease payments and the cost of the leased property plus initial direct costs (net margins) is recorded as profit at the inception of the lease.
- For operating leases, rental amounts are accrued on a straight-line basis over the lease term and are recognized as financing revenue.

Our financing segment enters into arrangements to assign the rights to contractual payments due from our customers to third party financial institutions. We account for the transfer of these financial assets as sales or secured borrowings in accordance with *Transfers and Servicing* in the Codification. For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. For transfers accounted for as sales, we recognize a net gain or loss on the sale, which is presented within the financing revenues in the unaudited condensed consolidated statement of operations.

Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales generally occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. The net gain or loss on these transactions is presented within financing revenue in our unaudited condensed consolidated statement of operations.

At times we sell the title to equipment under lease to a third-party and retain remarketing rights, which includes rights to a certain amount of the proceeds upon sale of the equipment. Remarketing fees earned are reflected in our unaudited condensed consolidated statements of operations under fee and other income.

Our financing revenues include earnings from certain transactions that are inconsistent, such as net gains on the transfer of financial assets, net gains from sales of the equipment underlying a lease and remarketing fees. There is no guarantee that future transactions of the same nature, size or profitability will occur. Our 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.

#### Fluctuations in Revenues

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, changes in vendor incentive programs, interest rate fluctuations, general economic conditions, 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 net gains from the transfer of financial assets, or a sale of the equipment on lease prior to the expiration of the lease term to the lessee or to a third-party or from other post-term events.

We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and desirable geographic areas. These investments may reduce our results from operations in the short term.

### RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

There were no new accounting standards issued during the three and nine months ended December 31, 2013 that materially impacted our condensed consolidated financial statements or are likely to materially impact our financial statements or related disclosures in a future period.

### CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that alternative accounting policies would have been applied, resulting in a change in financial results. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangibles, reserves for credit losses and income taxes specifically relating to uncertain tax positions. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment.

We consider the following accounting policies important in understanding the potential impact of our judgments and estimates on our operating results and financial condition. For additional information on these and other accounting policies, see Note 1, “Organization and Summary of Significant Accounting Policies” to the unaudited condensed consolidated financial statements included elsewhere in this report.

REVENUE RECOGNITION. The majority of our revenues are derived from the following sources: sales of third-party products, software, software assurance, maintenance and services; sales of our services and software, and financing revenues. The products and services we sell, and the manner in which they are bundled, are technologically complex and the characterization of these products and services require judgment in order to apply revenue recognition policies. For all these revenue sources, we determine whether we are the principal or agent in accordance with Codification Topic, *Revenue Recognition*, Subtopic *Principal Agent Considerations*. Our revenue recognition policies vary based upon these revenue sources and the mischaracterization of these products and services could result in misapplication of revenue recognition polices.

Generally, sales of third-party products and software are recognized when the title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Using these tests, the vast majority of our sales are recognized upon delivery due to our sales terms with our customers. For proper cutoff, we estimate the product delivered to our customers at the end of each quarter based upon an analysis of current quarter and historical delivery dates.

We sell software assurance, maintenance and service contracts where the services are performed by a third party. Software assurance is a service that allows customers to upgrade at no additional cost to the latest technology, if new applications are introduced during the period for which the software assurance is in effect. As we enter into contracts with third-party service providers, we evaluate whether we are acting as a principal or agent in the transaction. We conclude that we are acting as an agent and recognize revenue on a net basis at the date of sale when we are not responsible for the day-to-day provision of services in these arrangements and our customers are aware that the third-party service provider will provide the services to them.

We also sell services that are performed by us in conjunction with product sales. We allocate the total arrangement consideration to the deliverables based on an estimated selling price of our products and services. We determine the estimated selling price using cost plus a reasonable margin for each deliverable, which is based on our established policies and procedures for providing customers with quotes, as well as historical gross margins for our products and services. Revenue from the sales of products is generally recognized upon delivery to the customers and revenue for the services performed by us is generally recognized when the services are complete, which normally occurs within 90 days after the products are delivered to the customer.

Financing revenues include income earned from investments in leases, leased equipment, and financed third-party software and services. We classify our investments in leases and leased equipment as either direct financing lease, sales-type lease, or operating lease, as appropriate. Revenue on direct financing and sales-type leases is deferred at the inception of the leases and is recognized over the term of the lease using the interest method. Revenue on operating leases is recorded on a straight line basis over the lease term. We classify third-party software, maintenances, and services that we finance for our customers as notes receivable and recognize interest income over the term of the arrangement using the effective interest method.

We account for the transfer of financial assets as sales or secured borrowings in accordance with *Transfers and Servicing* in the Codification. For transfers that qualify for sale treatment, we recognize a net gain on the effective date of the transfer, which is presented within financing revenues in our unaudited condensed consolidated statements of operations.

RESIDUAL VALUES. Residual values represent our estimated value of the equipment at the end of the initial lease term. Our 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, lease term, equipment supply and demand, and new product announcements by manufacturers.

We evaluate residual values on a quarterly basis and record any required impairments of residual value, in the period in which the impairment is determined. No upward adjustment to residual values is made subsequent to lease inception.

GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the premium paid over the fair value of net tangible and intangible assets we have acquired in business combinations. We review our goodwill for impairment annually, or more frequently if indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rates, among others.

We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances, after tax cash flows and market capitalization. If the qualitative factors indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform the two step process to assess our goodwill for impairment. First, we compare the fair value of each of our reporting units with its carrying value. We estimate the fair value of the reporting unit using various valuation methodologies, including discounted expected future cash flows. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further testing is necessary. If the net book value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the fair value of goodwill in the same manner as if our reporting unit were being acquired in a business combination. Specifically, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the estimated fair value of goodwill. If the estimated fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.

VENDOR CONSIDERATION. We receive payments and credits from vendors and distributers, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Many of these programs extend over one or more quarters’ sales activities and are primarily formula-based. Different programs have different vendor/program specific goals to achieve. We estimate the amount of vendor consideration earned when it is probable and reasonably estimable using the best information available, including historical data.

Vendor consideration received pursuant to volume sales incentive programs is recognized as a reduction to cost of sales of product and services on our unaudited condensed consolidated statements of operations. Vendor consideration received pursuant to volume purchase incentive programs is allocated to inventories based on the applicable incentives from each vendor and is recorded in cost of sales of product and services, as the inventory is sold. Vendor consideration received pursuant to shared marketing expense programs is recorded as a reduction of the related selling and administrative expenses in the period the program takes place only if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of cost of sales, product and services on our unaudited condensed consolidated statements of operations.

RESERVES FOR CREDIT LOSSES. We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.

Management’s determination of the adequacy of the reserve for credit losses for minimum lease payments associated with investments in direct financing and sales-type leases may be based on the following factors: an internally assigned credit quality rating, historical credit loss experience, current economic conditions, volume, growth, the composition of the lease portfolio, the fair value of the underlying collateral, and the funding status (i.e. not funded, funded on a recourse or partial recourse basis, or funded on non-recourse basis), and other relevant factors.

The reserve for credit losses as of December 31, 2013 and March 31, 2013 included a specific reserve of $2.8 million, due to one specific customer, which filed for bankruptcy in May 2012.

RESERVES FOR SALES RETURNS. Sales are reported net of returns and allowances, which are maintained at a level believed by management to be adequate to absorb potential returns of sales of product and services. Management’s determination of the adequacy of the reserve is based on an evaluation of historical sales returns and other relevant factors. These determinations require considerable judgment in assessing the ultimate potential for sales returns and include consideration of the type and volume of product sold.

INCOME TAXES. We make certain estimates and judgments in determining income tax expense for financial statement reporting purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which principally arise from differences in the timing of recognition of revenue and expense for tax and financial statement reporting purposes. We also must analyze income tax reserves, as well as determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly.

Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. The calculation of our tax liabilities also involves considering uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain income tax positions based on our estimate of whether, and the extent to which, additional taxes will be required.

BUSINESS COMBINATIONS. We account for business combinations using the acquisition method, which requires that the total purchase price of each of the acquired entities be allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The purchase price of the acquired entities may include an estimate of the fair value of contingent consideration. The allocation process requires an analysis of intangible assets, customer relationships, trade names, acquired contractual rights and assumed contractual commitments and legal contingencies to identify and record all assets acquired and liabilities assumed at their fair value.

Any premium over the fair value of assets acquired less the liabilities assumed is recorded as goodwill. To the extent the purchase price is less than the fair value of assets acquired and liabilities assumed we recognize a gain in our statements of operations. The results of operations for an acquired company are included in our financial statements from the date of acquisition.

### RESULTS OF OPERATIONS

### The Three and Nine months Ended December 31, 2013 Compared to the Three and Nine months Ended December 31, 2012

#### Technology Segment

The results of operations for our technology segment for the three and nine months ended December 31, 2013 and 2012 were as follows (dollars in thousands):

|  | Three Months Ended December 31, 2013 | 2012 | Change |  | Nine Months Ended December 31, 2013 | 2012 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales of product and services | $255,747 | $228,053 | $27,694 | 12.1% | $764,067 | $712,513 | $51,554 | 7.2% |
| Fee and other income | 2,193 | 1,360 | 833 | 61.3% | 5,478 | 4,953 | 525 | 10.6% |
| Total revenues | 257,940 | 229,413 | 28,527 | 12.4% | 769,545 | 717,466 | 52,079 | 7.3% |
| Cost of sales, product and services | 207,378 | 188,103 | 19,275 | 10.2% | 625,562 | 587,693 | 37,869 | 6.4% |
| Professional and other fees | 1,770 | 2,041 | (271) | (13.3%) | 6,214 | 6,804 | (590) | (8.7%) |
| Salaries and benefits | 28,460 | 24,330 | 4,130 | 17.0% | 83,603 | 72,826 | 10,777 | 14.8% |
| General and administrative | 5,082 | 4,733 | 349 | 7.4% | 15,596 | 14,183 | 1,413 | 10.0% |
| Interest and financing costs | 19 | 19 | - | 0.0% | 64 | 70 | (6) | (8.6%) |
| Total costs and expenses | 242,709 | 219,226 | 23,483 | 10.7% | 731,039 | 681,576 | 49,463 | 7.3% |
| Segment earnings | $15,231 | $10,187 | $5,044 | 49.5% | $38,506 | $35,890 | $2,616 | 7.3% |

*Total revenues*. Total revenues during the three months ended December 31, 2013 were $257.9 million compared to $229.4 million during the three months ended December 31, 2012, an increase of 12.4%, which was due to increases in demand for our products and services. Total revenues increased 7.3% during the nine months ended December 31, 2013 to $769.5 million compared to $717.5 million during the nine months ended December 31, 2012. The increase in revenues for both the quarter and year-to-date periods was primarily from our Fortune 100 customers, as well as increases in revenues from the sale of *e*Plus professional services. We experienced year over year increases in the sales of product and services for all the quarters ended from December 31, 2012 through December 31, 2013. The sequential and year over year change in sales of product and services is summarized below:

| Quarter Ended | Sequential | Year over Year |
| --- | ---: | ---: |
| December 31, 2013 | (2.1%) | 12.1% |
| September 30, 2013 | 5.8% | 4.4% |
| June 30, 2013 | 10.4% | 5.4% |
| March 31, 2013 | (1.9%) | 6.6% |
| December 31, 2012 | (8.8%) | 7.4% |

*Total costs and expenses.* Total costs and expenses for the three months ended December 31, 2013 increased $23.5 million, or 10.7%, to $242.7 million due to increases in cost of sales of product and services, salaries and benefits and general and administrative expenses. Total costs and expenses for the nine months ended December 31, 2013 increased $49.5 million, or 7.3%, to $731.0 million due to increases in cost of sales of product and services, salaries and benefits and general and administrative expenses. The increase in cost of sales for the quarter and year to date was primarily due to the increase in sales in these periods.

Our gross margin for product and services was 18.9% and 17.5% during the three months ended December 31, 2013 and 2012, respectively. The increase in our gross margin was impacted by an increase in sales of third party software assurance, maintenance and services, which are presented on a net basis, as well as improvements in product margins. During the nine months ended December 31, 2013 and 2012, our gross margin for product and services was 18.1% and 17.5%, respectively. The increase was due to growth in sales of *e*Plus professional service revenues, as well as sales of third party software assurance, maintenance and services. Our gross margin on sales of product and services increased sequentially from 17.8% for the three months ended September 30, 2013 to 18.9% for the three months ended December 31, 2013. This increase was due to an increase in sales of third party software assurance, maintenance and services which are presented on a net basis, and higher product margins. The change in the amount of vendor incentives earned during the three and nine months ended December 31, 2013 resulted in a 0.2% and 0.1% decrease, respectively, in gross margins from the prior year. There are ongoing changes to the incentives programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of manufacturer incentives we are currently receiving, gross margins may decrease.

Professional and other fees decreased $0.3 million, or 13.3%, to $1.8 million for the three months ended December 31, 2013, compared to $2.0 million during the three months ended December 31, 2012. This decrease was primarily due to a decrease of $0.2 million in fees related to the patent infringement litigation. Professional and other fees decreased $0.6 million, or 8.7%, to $6.2 million for the nine months ended December 31, 2013, compared to $6.8 million during the nine months ended December 31, 2012. This decrease was primarily due to fees of $0.8 million related to the restatement of our financial statements incurred in the same period of the prior year.

Salaries and benefits expense increased $4.1 million, or 17.0%, to $28.5 million during the three months ended December 31, 2013, compared to $24.3 million during the three months ended December 31, 2012. For the nine months ended December 31, 2013, salaries and benefits expense increased $10.8 million, or 14.8%, to $83.6 million, compared to $72.8 million during the nine months ended December 31, 2012. These increases were driven by increases in the number of employees and related benefits as well as commission expenses. Our technology segment had 903 employees as of December 31, 2013, an increase of 93 from 810 at December 31, 2012, of which 18 employees were added from the acquisition of AdviStor, Inc. Most of the increase in personnel relates to sales and engineering positions. We continue to invest in sales and engineering talent in order to expand our geographical presence in the continental U.S. as well as extend our advanced technology solutions offerings. In addition, commission expense increased for the three and nine months ended December 31, 2013 due to the increase in gross profits.

General and administrative expenses increased $0.3 million, or 7.4%, and $1.4 million, or 10.0%, during the three months and nine months ended December 31, 2013, respectively, over the same periods for prior year. These increases were primarily due to increases in office locations and our sales force and engineering team as a result of our continued expansion efforts, which resulted in higher rent and travel expenses. In addition, we recorded an adjustment for contingent consideration related to a previous acquisition, which was settled and paid during the current fiscal year.

*Segment earnings.* As a result of the foregoing, segment earnings were $15.2 million for the quarter ended December 31, 2013, an increase of $5.0 million, or 49.5%, and $38.5 million for the nine months ended December 31, 2013, an increase of $2.6 million, or 7.3%, over the prior year periods.

#### Financing Segment

The results of operations for our financing segment for the three and nine months ended December 31, 2013 and 2012 were as follows (dollars in thousands):

|  | Three Months Ended December 31, 2013 | 2012 | Change |  | Nine Months Ended December 31, 2013 | 2012 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Financing revenue | $9,228 | $12,510 | $(3,282) | (26.2%) | $27,989 | $27,823 | $166 | 0.6% |
| Fee and other income | 14 | 102 | (88) | (86.3%) | 94 | 1,511 | (1,417) | (93.8%) |
| Total revenues | 9,242 | 12,612 | (3,370) | (26.7%) | 28,083 | 29,334 | (1,251) | (4.3%) |
| Direct lease costs | 3,055 | 2,934 | 121 | 4.1% | 9,803 | 7,638 | 2,165 | 28.3% |
| Professional and other fees | 238 | 457 | (219) | (47.9%) | 940 | 1,514 | (574) | (37.9%) |
| Salaries and benefits | 2,335 | 3,205 | (870) | (27.1%) | 7,559 | 7,982 | (423) | (5.3%) |
| General and administrative | 315 | 176 | 139 | 79.0% | 861 | 792 | 69 | 8.7% |
| Interest and financing costs | 477 | 498 | (21) | (4.2%) | 1,325 | 1,298 | 27 | 2.1% |
| Total costs and expenses | 6,420 | 7,270 | (850) | (11.7%) | 20,488 | 19,224 | 1,264 | 6.6% |
| Segment earnings | $2,822 | $5,342 | $(2,520) | (47.2%) | $7,595 | $10,110 | $(2,515) | (24.9%) |

*Total revenues*. Total revenues decreased by $3.4 million, or 26.7%, to $9.2 million for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012. Financing revenues decreased $3.3 million, or 26.2% for the three months ended December 31, 2013, as compared to the prior year primarily due to net gains recognized during the quarter ended December 31, 2012 from the early termination of certain lease agreements and the buyout of the related equipment. During the quarters ended December 31, 2013 and 2012, we recognized net gains on sales of financial assets of $2.3 million and $2.7 million, respectively, and total proceeds from these sales were $45.7 million and $48.1 million, respectively.

Total revenues decreased by $1.3 million, or 4.3%, to $28.1 million for the nine months ended December 31, 2013, as compared to the prior year. Financing revenues increased $0.2 million, or 0.6%, for the nine months ended December 31, 2013, as compared to the prior year. For the nine months ended December 31, 2013 and 2012, we recognized net gains on sales of financial assets of $7.9 million and $4.4 million, respectively, and total proceeds from these sales were $168.1 million and $91.5 million, respectively. Offsetting this were lower gains from sales of leased equipment, due to the early termination of certain lease agreements and buyout of the related equipment in the prior year. At December 31, 2013, we had $140.1 million of investment in notes and leases, compared to $123.1 million at December 31, 2012, an increase of $17.0 million, or 13.8%.

Fee and other income decreased $0.1 million and $1.4 million for the three months and nine months ended December 31, 2013, respectively, over prior year due to decreases in remarketing income and broker fee income.

*Total costs and expenses.* For the three months ended December 31, 2013, total costs and expenses decreased $0.9 million, or 11.7%. Direct lease costs increased $0.1 million, or 4.1%, to $3.1 million due to depreciation expense related to increases in operating leases. Salary and benefits expense decreased $0.9 million, or 27.1% to $2.3 million due to lower commissions and bonuses as a result of the decrease in revenues during the period. Professional and other fees decreased $0.2 million, or 47.9% due to lower broker and outside service fees.

Compared to the nine months ended December 31, 2012, total costs and expenses for the nine months ended December 31, 2013 increased $1.3 million, or 6.6%. Direct lease costs increased $2.2 million, or 28.3%, to $9.8 million due to depreciation expense related to increases in operating leases. Professional and other fees decreased $0.6 million, or 37.9% due to lower broker and legal fees. Salaries and benefits expenses decreased $0.4 million, or 5.3%, to $7.6 million due to lower commissions and bonuses as a result of the decrease in revenues during the period. As December 31, 2013 we had 58 employees, down from 59 employed as of December 31, 2012.

Interest and financing costs were consistent with prior periods. Non-recourse and recourse notes payable was $53.4 million at December 31, 2013, as compared to $36.2 million at December 31, 2012. Our weighted average interest rate for notes payable was 3.49% and 4.83%, as of December 31, 2013 and December 31, 2012, respectively.

*Segment earnings*. As a result of the foregoing, segment earnings were $2.8 million and $7.6 million for the three and nine months ended December 31, 2013, respectively, compared to $5.3 million and $7.6 million for the three and nine months ended December 31, 2012, respectively.

#### Consolidated

*Income taxes.* Our provision for income tax expense was $7.4 million and $19.0 million for the three months and nine months ended December 31, 2013, respectively, as compared to $6.5 million and $18.9 million for the same periods last year. Our effective income tax rates for the three months and nine months ended December 31, 2013 were 41.2% and 41.3%, respectively, as compared to 41.8% and 41.0% for the three months and nine months ended December 31, 2012. The change in our effective income tax rate was due primarily to an increase in non-deductible compensation.

*Net earnings*. The foregoing resulted in net earnings of $10.6 million for the three months ended December 31, 2013, an increase of 17.5%, as compared to $9.0 million during the three months ended December 31, 2012. For the nine months ended December 31, 2013, net earnings were $27.1 million, a decrease of 0.3%, or $77 thousand compared to the nine months ended December 31, 2012.

Basic and fully diluted earnings per common share were $1.33 and $1.32, respectively, for the three months ended December 31, 2013, as compared to $1.11 and $1.11, respectively, for the three months ended December 31, 2012. Basic and fully diluted earnings per common share were $3.37 and $3.34, respectively, for the nine months ended December 31, 2013, as compared to $3.42 and $3.38, respectively, for the nine months ended December 31, 2012.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended December 31, 2013 were 7,950,354 and 7,982,418, respectively. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended December 31, 2012 were 7,843,153 and 7,843,153, respectively.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the nine months ended December 31, 2013 were 7,946,746 and 8,012,840, respectively. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the nine months ended December 31, 2012 were 7,778,174 and 7,867,982, respectively.

### LIQUIDITY AND CAPITAL RESOURCES

#### Liquidity Overview

Our primary sources of liquidity have historically been cash and cash equivalents, internally generated funds from operations, and borrowings, both non-recourse and recourse. We have used those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment or software that are financed for our customers, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock.

Our subsidiary *e*Plus Technology, inc., part of our technology segment, finances its operations with funds generated from operations, and with a credit facility with GE Commercial Distribution Finance, or GECDF, which is described in more detail below. There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. After a customer places a purchase order with us and we have completed our credit check, we place an order for the equipment with one of our vendors. Generally, most purchase orders from us to our vendors are first financed under the floor plan component and reflected in “accounts payable—floor plan” in our unaudited condensed consolidated balance sheets. Payments on the floor plan component are due on three specified dates each month, generally 30-60 days from the invoice date. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our unaudited condensed consolidated balance sheets. There was no outstanding balance at December 31, 2013 or March 31, 2013, while the maximum credit limit was $30.0 million for both periods. The borrowings and repayments under the floor plan component are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our unaudited condensed consolidated statements of cash flows.

Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis. On the due dates of the floor plan component, we make cash payments to GECDF. These payments from the accounts receivable component to the floor plan component and repayments from our cash are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our unaudited condensed consolidated statements of cash flows. We engage in this payment structure in order to minimize our interest expense and bank fees in connection with financing the operations of our technology segment.

We believe that cash on hand, and funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures and other requirements for at least the next 12 calendar months.

Our working capital generally fluctuates as a result of changes in demand for our products and services; however, specific changes in certain elements of working capital may not coincide with changes in other elements of our financial statements. The increase in accounts receivable—other is due to non-interest bearing advances made by our financing segment to third parties, which are generally due within 90 days. In our technology segment, amounts included in accounts receivable-other include vendor consideration earned but not received, which are generally recorded as reductions to inventory or cost of goods sold.

Our accounts receivable—trade increased by $40.7 million, or 23.5%, from March 31, 2013 due to higher gross sales volume as well as the timing of purchases from our customers. Our gross revenues for the third quarter of fiscal 2014 were 13.9% higher than the fourth quarter of fiscal 2013. In addition, a higher proportion of sales during our third quarter tend to occur in the latter half of the quarter, as many of our customers approach their fiscal year end. We experienced increases in both accounts payable—trade and accounts payable—floor plan for the same reasons. Amounts in inventory increased $9.5 million from March 31, 2013 due to the timing of deliveries to our customers. Our accounts payable—floor plan consists of purchases through the GECDF credit facility, which are generally paid within 30-60 days from the invoice date. Changes in accounts payable—equipment is due to the timing of payments for equipment or software that is financed for our customers.

Our ability to continue to fund our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, our cash flows from operations may be substantially affected.

#### Cash Flows

The following table summarizes our sources and uses of cash over the periods indicated (in thousands):

|  | Nine Months Ended December 31, 2013 | 2012 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(26,766) | $13,784 |
| Net cash (used in) investing activities | (21,228) | (933) |
| Net cash provided by (used in) financing activities | 35,766 | (4,477) |
| Effect of exchange rate changes on cash | 6 | 1 |
| Net (decrease) increase in cash and cash equivalents | $(12,222) | $8,375 |

*Net cash (used in) provided by operating activities.* Cash used in operating activities totaled $26.8 million during the nine months ended December 31, 2013, compared to cash provided by operations of $13.8 million during the same period last year. Cash used in operating activities during the nine months ended December 31, 2013 related to increases in accounts receivable—trade of $43.2 million, and increases in investment in direct financing and sale-type leases-net of $20.4 million; these increases are partially offset by increases in accounts payable—equipment and accounts payable—trade of $13.3 million and salaries and commission payable, accrued expenses and other liabilities and deferred revenue of $5.5 million.

Cash provided by operations during the nine months ended December 31, 2012 resulted primarily from increases accounts payable—equipment and accounts payable—trade of $18.5 million, and salaries and commissions payable in accounts receivable—trade and other of $35.4 million, reductions in direct financing and sale type leases of $11.2 million and depreciation and amortization expenses of $8.7 million, partially offset by increases in and accounts receivable—trade and other of $47.1 million, deferred costs and other assets of $34.0 million, and notes receivable of $1.0 million.

*Net cash used in investing activities.* Cash used in investing activities was $21.2 million during the nine months ended December 31, 2013, compared to cash used in investing activities of $0.9 million during the same period last year. Cash used in investing activities during the nine months ended December 31, 2013 was primarily driven by issuance of notes receivable (net of issuance, proceeds from the sale on notes, and repayments) of $6.3 million, purchase of assets to be leased of $8.3 million, and purchases of property, equipment and operating lease equipment of $7.9 million. Cash used by investing activities during the nine months ended December 31, 2012 was primarily driven by a net increase in notes receivable of $8.7 million, offset by a decrease in short-term investments of $6.2 million, and by the sale of property, equipment and operating lease equipment of $1.6 million.

*Net cash provided by (used in) financing activities*. Cash provided by financing activities was $35.8 million during the nine months ended December 31, 2013, which was due to net borrowings on the floor plan facility of $18.5 million and net borrowings of non-recourse and recourse notes payable of $26.8 million, partially offset by the purchase of treasury stock of $10.3 million. In the prior year, we had net cash used by financing activities of $4.5 million primarily due to dividends paid of $20.1 million, and net borrowings on floor plan facility of $4.2 million, offset by net repayments on notes payable of $20.2 million and repurchase of common stock of $1.9 million.

#### Non-Cash Activities

We transfer financial assets to third-party financial institutions, some of which are accounted for as non-recourse notes payable financing activities. As a condition to the agreement, certain financial institutions may request the customer remit their payments to a trustee rather than to us, and the trustee pays the financial institution. Alternatively, if the structure of the agreement does not require a trustee, the customer will continue to make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender to pay down the corresponding non-recourse notes payable. However, these structures are classified differently within our unaudited condensed consolidated statement of cash flows. More specifically, we are required to exclude non-cash transactions from our unaudited condensed consolidated statement of cash flows, so payments made by our customer to the trustee are excluded from our operating or investing cash receipts and the corresponding re-payment of the non-recourse notes payable from the trustee to the third party financial institution are excluded from our cash flows from financing activities. Given that the transfer of these payments is economically the same regardless of the structure of the payments, we evaluate our cash flows from operating, investing and financing activities as if the transfer had been structured without an intermediary.

The non-GAAP financial measure for our cash flows from operating activities for the nine months ended December 31, 2013 and 2012 is as follows (in thousands):

|  | Nine Months Ended December 31, 2013 | 2012 |
| --- | ---: | ---: |
| GAAP: net cash provided by (used in) operating activities | $(26,766) | $13,784 |
| Principal payments from customers directly to lenders | 14,516 | 11,374 |
| Non-GAAP: adjusted net cash provided by (used in) operating activities | $(12,250) | $25,158 |

The non-GAAP financial measure for our cash flows from investing activities for the nine months ended December 31, 2013 and 2012 is as follows (in thousands):

|  | Nine Months Ended December 31, 2013 | 2012 |
| --- | ---: | ---: |
| GAAP: net cash (used in) investing activities | $(21,228) | $(933) |
| Principal payments from customers directly to lenders | 631 | - |
| Non-GAAP: adjusted net cash (used in) investing activities | $(20,597) | $(933) |

The non-GAAP financial measure for our cash flows from financing activities for the nine months ended December 31, 2013 and 2012 is as follows (in thousands):

|  | Nine Months Ended December 31, 2013 | 2012 |
| --- | ---: | ---: |
| GAAP: net cash provided by (used in) financing activities | $35,766 | $(4,477) |
| Principal payments from customers directly to lenders | (15,147) | (11,374) |
| Non-GAAP: adjusted net cash provided by (used in) financing activities | $20,619 | $(15,851) |

A “non-GAAP financial measure” is a numerical measure of a company’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the statement of income, balance sheet or statement of cash flows of the company; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. We use the financial measures in our internal evaluation and management of our business. We believe that these measures and the information they provide are useful to investors because they permit investors to view our performance using the same tools that we use and to better evaluate our ongoing business performance. These measures should not be considered an alternative to measurements required by U.S. GAAP, such as cash provided by (used in) operating activities, cash provided by (used in) investing activities and cash provided by (used in) financing activities. These non-GAAP measures are unlikely to be comparable to non-GAAP information provided by other companies.

#### Liquidity and Capital Resources

We may utilize non-recourse notes payable to finance approximately 80% to 100% of the purchase price of the products being leased by our customers. Any balance of the purchase price remaining after non-recourse funding and any upfront payments received from the lessee (our equity investment in the equipment) must generally be financed by cash flows from our operations, the sale of the equipment leased to third parties, or other internal means. Although we expect that the credit quality of our leases and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all.

The financing necessary to support our leasing activities has been provided by our cash and non-recourse borrowings. We monitor our exposure closely. Historically, we have obtained mostly non-recourse borrowings from banks and finance companies. We continue to be able to obtain financing through our traditional lending sources. Non-recourse financings are loans whose repayment is the responsibility of a specific customer, although we may make representations and warranties to the lender regarding the specific contract or have ongoing loan servicing obligations. Under a non-recourse loan, we borrow from a lender an amount based on the present value of the contractually committed lease payments under the lease at a fixed rate of interest, and the lender secures a lien on the financed assets. When the lender is fully repaid from the lease payments, the lien is released and all further rental or sale proceeds are ours. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk of each lease, and the lender’s only recourse, upon default by the lessee, is against the lessee and the specific equipment under lease. At December 31, 2013, our non-recourse notes payable increased 25.3% to $50.5 million, as compared to $40.3 million at March 31, 2013. Recourse notes payable increased 96.4% to $2.9 million from March 31, 2013 to December 31, 2013.

Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, including the residual portions, to third parties and financing the equity investment on a non-recourse basis. We generally retain customer control and operational services, and have minimal residual risk. We usually reserve 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.

#### Credit Facility — ePlus Technology, inc.

Our subsidiary, *e*Plus Technology, inc., has a financing facility from GECDF to finance its working capital requirements for inventories and accounts receivable. There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component. This facility has full recourse to *e*Plus Technology, inc. and is secured by a blanket lien against all its assets, such as chattel paper, receivables, and inventory. As of December 31, 2013, the facility had an aggregate limit of the two components of $175.0 million with an accounts receivable sub-limit of $30.0 million.

Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable, and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and minimum earnings before interest, taxes, depreciation and amortization (EBITDA) of *e*Plus Technology, inc. We were in compliance with these covenants as of December 31, 2013. In addition, the facility restricts the ability of *e*Plus Technology, inc. to transfer funds to its affiliates in the form of dividends, loans, or advances with certain exceptions for dividends to *e*Plus inc. Interest on the facility is assessed at a rate of the One Month LIBOR plus two and one half percent if the payments are not made on the three specified dates each month. The facility also requires that financial statements of *e*Plus Technology, inc. be provided within 45 days of each quarter and 90 days of each fiscal year end and also requires other operational reports be provided on a regular basis. Either party may terminate the facility with 90 days advance written notice.

We are not, and do not believe that we are reasonably likely to be, in breach of the GECDF credit facility. In addition, we do not believe that the covenants of the GECDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, *e*Plus Technology, inc. This credit facility is secured by the assets of only *e*Plus Technology, inc. and the guaranty as described below.

The facility provided by GECDF requires a guaranty of $10.5 million by *e*Plus inc. The guaranty requires *e*Plus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2013, as required. The loss of the GECDF credit facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process.

#### Floor Plan Component

The traditional business of *e*Plus Technology, inc. as a seller of computer technology, related peripherals and software products, is in part financed through a floor plan component in which interest expense for the first thirty to sixty days, in general, is not charged. The floor plan liabilities are recorded as accounts payable—floor plan on our unaudited condensed consolidated balance sheets, as they are normally repaid within the fifteen to sixty-day time frame and represent assigned accounts payable originally generated with the manufacturer/distributor. In some cases we are able to pay invoices early and receive a discount, but if the fifteen to sixty-day obligation is not paid timely, interest is then assessed at stated contractual rates.

The respective floor plan component credit limits and actual outstanding balances for the dates indicated were as follows (in thousands):

| Maximum Credit Limit at December 31, 2013 | Balance as of December 31, 2013 | Maximum Credit Limit at March 31, 2013 | Balance as of March 31, 2013 |
| ---: | ---: | ---: | ---: |
| $175,000 | $84,761 | $175,000 | $66,251 |

#### Accounts Receivable Component

Included within the credit facility, *e*Plus Technology, inc. has an accounts receivable component from GECDF, which has a revolving line of credit. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our unaudited condensed consolidated balance sheets. There was no outstanding balance at December 31, 2013 or March 31, 2013, while the maximum credit limit was $30.0 million for both periods.

#### Credit Facility — General

First Virginia Community Bank (formerly 1st Commonwealth Bank of Virginia) provides us with a $0.5 million credit facility, which matured on October 26, 2012. This credit facility was renewed for two years effective October 27, 2012. The credit facility is available for use by us and our affiliates and is full recourse to us. Borrowings under this facility bear interest at Wall Street Journal U.S. Prime rate plus 1%. The primary purpose of the facility is to provide letters of credit for landlords, taxing authorities and bids. As of December 31, 2013, we had no outstanding balance on this credit facility.

#### Performance Guarantees

In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with the material performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our financial condition or results of operations.

### Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K or other contractually narrow or limited purposes. As of December 31, 2013, we were not involved in any unconsolidated special purpose entity transactions.

### Adequacy of Capital Resources

The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also start offices in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance the platform of bundled solutions to provide additional functionality and value-added services. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivables due from our customers. As a result, we may require additional financing to fund our strategy, implementation and potential future acquisitions, which may include additional debt and equity financing.

### Inflation

For the periods presented herein, inflation has been relatively low and we believe that inflation has not had a material effect on our results of operations.

### Potential Fluctuations in Quarterly Operating Results

Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our 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 our common 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, IT resellers, software competitors, major customers or vendors of ours.

Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to, reduction in IT spending, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio at the expiration of a lease term or prior to such expiration, to a lessee or to a third party and the transfer of financial assets. Sales of equipment and transfers of financial assets 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. See Part I, Item 1A, “Risk Factors,” in our 2013 Annual Report and in subsequently filed Forms 10-Q.

We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.

## Market risk

As filed, 1,342 characters.

Although a portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize our line of credit and other financing facilities which are subject to fluctuations in short-term interest rates. These instruments, which are denominated in U.S. dollars, were entered into for other than trading purposes and, with the exception of amounts drawn under the GECDF facility, 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. Changes in interest rates may affect our ability to fund or transfer our financing arrangements if the rate rises above the fixed rate of the instrument. Borrowings under the GECDF facility bear interest at a market-based variable rate. As of December 31, 2013, the aggregate fair value of our non-recourse notes payable approximated their carrying value.

We have financed certain customer leases for equipment which is located in Canada and Iceland. As such, we have entered into lease contracts and non-recourse, fixed-interest-rate financing denominated in Canadian dollars and Icelandic krona. To date, our Canadian and Icelandic operations have been insignificant and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.

## Controls and procedures

As filed, 3,309 characters.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2013.

### Changes in Internal Controls

Internal controls over financial reporting continue to be updated as necessary to accommodate modifications to our business process and accounting procedures. During the quarter ended September 30, 2013, we identified a material weakness related to the accounting for agreements under Codification Topic, *Transfers and Servicing*. During the quarter ended December 31, 2013, we remediated this material weakness by implementing additional reviews of the accounting for these arrangements.

Other than as described above, there have not been any other changes in our internal control over financial reporting during the quarter ended December 31, 2013, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

## Risk factors

As filed, 183 characters.

There have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our 2013 Annual Report, except as updated in our subsequently files Forms 10-Q.

Filed Feb 6, 2014.
Source: SEC EDGAR, the filing index for accession 0001022408-14-000004. Last ingested by Listed: Nov 6, 2026, 17:13 ET. No prices; not investment advice.