# Eplus Inc: Form 10-Q for the period ended Dec 31, 2014

- Company: [Eplus Inc](/companies/plus.md) (CIK 1022408)
- Form: 10-Q
- Filed: 2015-02-06
- Accepted by EDGAR: Feb 5, 2015, 19:17 ET
- Period: 2014-12-31
- Accession: 0001022408-15-000003
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1022408/000102240815000003/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1022408/000102240815000003/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-10-01 to 2014-12-31 | $306.2m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2014-04-01 to 2014-12-31 | $876.0m | us-gaap:SalesRevenueNet |
| Operating income | 3 months, 2014-10-01 to 2014-12-31 | $20.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-04-01 to 2014-12-31 | $55.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-10-01 to 2014-12-31 | $11.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-04-01 to 2014-12-31 | $26.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-10-01 to 2014-12-31 | $15.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-04-01 to 2014-12-31 | $36.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-10-01 to 2014-12-31 | $2.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-04-01 to 2014-12-31 | $4.97 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-10-01 to 2014-12-31 | $2.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-04-01 to 2014-12-31 | $5.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-10-01 to 2014-12-31 | 7,279,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-04-01 to 2014-12-31 | 7,413,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-04-01 to 2014-12-31 | −$9.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Dividends paid | 9 months, 2014-04-01 to 2014-12-31 | $90.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2014-04-01 to 2014-12-31 | $37.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-12-31 | $51.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-12-31 | $446.2m | us-gaap:AssetsCurrent |
| Total assets | at 2014-12-31 | $591.4m | us-gaap:Assets |
| Current liabilities | at 2014-12-31 | $285.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-12-31 | $321.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-12-31 | $270.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,898 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, 2014 (“2014 Annual Report”). 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 may contain 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 2014 Annual Report.

### EXECUTIVE OVERVIEW

### Business Description

*e*Plus and its consolidated subsidiaries provide leading information technology (“IT”) products and services, flexible leasing and financing solutions, and enterprise supply management to enable our customers to optimize their IT infrastructure and supply chain processes.

We design, implement and provide IT solutions for our customers. We are focused primarily on specialized IT segments including data center infrastructure, networking, security, cloud and collaboration. Our solutions incorporate hardware and software products from multiple leading IT vendors, as well as third party services, maintenance and software assurance on the hardware and software products. As our customers’ IT requirements have grown increasingly complex, we have evolved our offerings by investing in our professional and managed services capabilities and by expanding our relationships with existing key vendors.

We continue to strengthen our relationships with vendors focused on emerging technologies, which have enabled us to provide our customers with new and evolving IT solutions. We are an authorized reseller of products and services from over 1,000 vendors including Check Point, Cisco Systems, EMC, Hewlett-Packard, McAfee, NetApp, Oracle, Palo Alto Networks and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer IT solutions that are optimized for each of our customers’ specific requirements. Our proprietary software solutions allow our customers to procure, control and automate their IT solutions environment.

We focus on middle market and large enterprises, and state and local government and educational institutions (“SLED”). The percentage of total sales of products and services revenue for the twelve months ended December 31, 2014 by customer end market include technology (20%), telecommunications, media and entertainment (20%), financial services (10%), healthcare (9%), and state and local government, and educational institutions (21%).

Our revenues are composed of sales of product and services, financing revenues and fee and other income. Our operations are conducted through two segments: technology and financing.

### Financial Summary

During the three months and nine months ended December 31, 2014, total revenue increased 14.6% to $306.2 million and 9.8% to $876.0 million, respectively, over the same periods in the prior fiscal year. We believe that our growth outpaced the overall industry due to a gains in market share through capturing additional customer spend, and focusing on faster growing segments within the market, such as virtualization, collaboration, and security. In addition, we added new customers as a result of our own organic sales and marketing efforts as well as through increased vendor referrals, and through acquisitions, the most recent being Evolve.

Consolidated gross margins were 21.4% for the three months ended December 31, 2014, compared to 21.2% for the three months ended December 31, 2013. Consolidated gross margins were 21.2% for the nine months ended December 31, 2014, compared to 20.3% for the same period for the prior fiscal year. Our gross margin for product and services was 19.4% and 19.2% during the three and nine months ended December 31, 2014, respectively, compared to 18.9% and 18.1% during the three and nine months ended December 31, 2013. The increase in gross margins was due to shifts in our product mix resulting from our continued focus on value added services for our customers, including the increase in sales of our professional and managed services, and the sale of third party maintenance agreements on core elements of our customers’ IT environment. Revenues on the sale of third party services, such as software assurances and maintenance, are recognized on a net basis.

Operating income for the quarter increased 13.9% to $20.6 million, as compared to the three months ended December 31, 2013 and for the current nine months increased 20.7% to $55.6 million, as compared to the nine months ended December 31, 2013. Net earnings for the quarter increased 46.1% to $15.5 million, as compared to the three months ended December 31, 2013 and for the current nine months increased 36.5% to $36.9 million, as compared to the nine months ended December 31, 2013. Net earnings included other non-operating income of $6.2 million for the three months ended December 31, 2014 from a class action suit which alleged that a group of companies conspired to fix, raise, maintain or stabilize prices of certain flat panels used in many flat screen televisions, monitors and notebook computers. Net earnings included other non-operating income of $7.6 million for the nine months ended December 31, 2014.

Diluted earnings per share increased 61.4% to $2.13 and 48.8% to $4.97 per share for the three and nine months ended December 31, 2014, respectively, as compared to $1.32 and $3.34 per share for the three and nine months ended December 31, 2013.

Cash and cash equivalents decreased $28.7 million or 35.7% to $51.5 million at December 31, 2014 compared to March 31, 2014. The decrease in our cash and cash equivalents was due, in part, to share repurchases during the nine months ended December 31, 2014 and the acquisition of Evolve. Share repurchases included 400,000 shares of our common stock for $19.0 million in connection with the public underwritten secondary offering by certain of our existing shareholders. During the nine months ended December 31, 2014, we repurchased 690,922 shares of our common stock for a total purchase price of $35.1 million. Our cash on hand, funds generated from operations, amounts available under our credit facility and the possible monetization of our investment portfolio provide sufficient liquidity for our business.

### Segment Overview

#### Technology Segment

The technology segment sells IT products, software, advance professional and managed services, and third party 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. Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with our company, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with state and local governments is based on public bids and our written bid responses.

Included in the sales of product and services are revenues derived from performing advanced professional and managed services that may be sold together with and integral to third-party products and software. Our advanced 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 services arrangements are for terms of one, two, or three year periods.

A substantial portion of our sales of product and services are from sales of Cisco Systems, Hewlett-Packard, and NetApp products, which represent approximately 45%, 7%, and 8%, and 50%, 8%, and 7% of sales of product and services, respectively, for the three and nine months ended December 31, 2014 as compared to 46%, 10%, and 11%, and 49%, 10%, and 9%, of total revenues, respectively, for the three and nine months ended December 31, 2013.

We endeavor to minimize the cost of sales in our technology segment through vendor incentive programs provided by vendors and other incentives provided by distributors. The programs we qualify for are generally set by our reseller authorization level with the vendor. 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 purchase 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 incentive programs. Certain of our sales qualify for incentives that are related to specific customers and products that they may purchase.

We currently maintain the following authorization levels with our primary vendors:

|  |  |
| --- | --- |
| Vendor | Vendor Authorization Level |
| Apple | Apple Authorized Corporate Reseller (National) |
| Cisco Systems | Cisco Gold DVAR (National) |
|  | Master Cloud Builder Specialization |
|  | Master Collaboration Specialization |
|  | Master Security Specialization |
|  | Master UC Specialization |
|  | Cloud and Managed Services Master Partner |
|  | Cloud Services Reseller |
|  | Flexpod Premium Partner |
|  | ATP Cisco Enterprise Mobility Services Platform Reseller |
|  | ATP Cisco Telepresence Video Master |
|  | ATP Telehealth Reseller |
|  | ATP Data Virtualization Reseller |
|  | ATP Identity Services Engine |
|  | ATP Physical Security |
|  | Advanced Data Center Storage Networking |
|  | Advanced Routing and Switching |
|  | Advanced Wireless LAN |
|  | Cisco Authorized SP Video Partner |
| Check Point Software Technologies Ltd. | Platinum Reseller |
| Citrix Systems, Inc. | Citrix Platinum Partner (National) |
| Dell | Premier Partner |
| EMC | EMC Velocity Gold Partner (National) |
| Hewlett Packard | Platinum - Converged Infrastructure Partner (National) |
|  | Gold Storage / Networking / Server / ServiceOne Specialists |
|  | Gold Cloud Builder Specialist |
|  | QSA - IT Management Ops and Apps |
|  | BCS Gold Specialist |
|  | Autonomy IM Solutions – Data Protector |
| IBM | Premier IBM Business Partner (National) |
| Lenovo | Lenovo Premium (National) |
| McAfee, Inc. | Elite Reseller |
| Microsoft | Microsoft Gold (National) |
| NetApp | NetApp STAR Partner (National) |
| Oracle Gold Partner | Sun SPA Executive Partner (National) |
|  | Sun National Strategic Data Center Authorized |
| Palo Alto Networks, Inc. | Platinum Reseller |
| NetApp | NetApp STAR Partner (National) |
| Oracle Gold Partner | Sun SPA Executive Partner (National) |
|  | Sun National Strategic Data Center Authorized |
| VMware | National Premier Partner |

We also generate revenue in our technology segment through hosting arrangements, sales of our Internet-based business-to-business supply chain management software and related maintenance, and agent fees received from various vendors.

Our revenues include 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 revenues from these types of transactions in a particular period may not be indicative of the revenues that can be expected in future periods.

#### 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 from leasing IT equipment, furniture, 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. Financing revenue generally falls into three categories: portfolio income, transactional gains and post-contract earnings.

- Portfolio income consists of interest income from financing receivables and rents due under operating leases;
- Transactional gains consist of net gains or losses on the sale of financial assets; and
- Post-contract earnings include month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and net gains on the sale of off-lease (used) equipment.

The types of revenue and costs recognized for investments in leases are determined by each lease’s classification. Each lease is classified as either 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.

We enter into arrangements to transfer the contractual payments due under financing arrangements, which are accounted for as sales or secured borrowings in accordance with ASC Topic 860, *Transfers and Servicing.* For transfers accounted for as sales, we derecognize the carrying value of the asset transferred and recognize a net gain or loss on the sale, which is presented within financing revenues in the unaudited condensed consolidated statement of operations. For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. We classify the interest and financing costs associated with these borrowings as an operating expense, consistent with industry practice.

Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from certain residual value investments.

#### 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 a sale prior to the expiration of the lease term to the lessee or to a third-party or from other post-term events.

### 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 incentives, 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.

Our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Annual Report.

### RESULTS OF OPERATIONS

### The Three and Nine months ended December 31, 2014 Compared to the Three and Nine months ended December 31, 2013

#### Technology Segment

The results of operations for our technology segment for the three and nine months ended December 31, 2014 and 2013 were as follows (dollars in thousands):

|  | Three Months Ended December 31, 2014 | 2013 | Change |  | Nine Months Ended December 31, 2014 | 2013 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales of product and services | $295,679 | $255,747 | $39,932 | 15.6% | $843,619 | $764,067 | $79,552 | 10.4% |
| Fee and other income | 2,140 | 2,193 | (53) | (2.4%) | 5,969 | 5,478 | 491 | 9.0% |
| Total revenues | 297,819 | 257,940 | 39,879 | 15.5% | 849,588 | 769,545 | 80,043 | 10.4% |
| Cost of sales, product and services | 238,202 | 207,378 | 30,824 | 14.9% | 681,852 | 625,562 | 56,290 | 9.0% |
| Professional and other fees | 1,158 | 1,770 | (612) | (34.6%) | 4,065 | 6,214 | (2,149) | (34.6%) |
| Salaries and benefits | 33,507 | 28,460 | 5,047 | 17.7% | 96,140 | 83,603 | 12,537 | 15.0% |
| General and administrative | 6,918 | 5,082 | 1,836 | 36.1% | 19,379 | 15,596 | 3,783 | 24.3% |
| Interest and financing costs | 19 | 19 | - | 0.0% | 77 | 64 | 13 | 20.3% |
| Operating expenses | 41,602 | 35,331 | 6,271 | 17.7% | 119,661 | 105,477 | 14,184 | 13.4% |
| Segment earnings | $18,015 | $15,231 | $2,784 | 18.3% | $48,075 | $38,506 | $9,569 | 24.9% |

*Total revenues*: Total revenues during the three months ended December 31, 2014 were $297.8 million compared to $257.9 million during the three months ended December 31, 2013, an increase of 15.5%, which was due to increases in demand for our products and services. Total revenues increased 10.4% during the nine months ended December 31, 2014 to $849.6 million compared to $769.5 million during the nine months ended December 31, 2013. The increase in revenues for the current quarter and nine month period was primarily from our large and middle market commercial customers.

Total sales of product and services before the adjustment to present third party services on a net basis, or gross revenues, for the three months ended December 31, 2014 were $377.3 million compared to $327.6 million during the three months ended December 31, 2013, an increase of 15.2% or $49.7 million. Total sales of product and services presented on a gross basis increased 15.0% or $143.0 million during the nine months ended December 31, 2014 to $1,095.0 million compared to $952.0 million during the nine months ended December 31, 2013.

We experienced year over year increases in the sales of product and services for all the quarters ended from December 31, 2013 through December 31, 2014, as summarized below:

| Quarter Ended | Sequential | Year over Year |
| --- | ---: | ---: |
| December 31, 2014 | 3.2% | 15.6% |
| September 30, 2014 | 9.7% | 9.7% |
| June 30, 2014 | 4.8% | 5.8% |
| March 31, 2014 | (2.5%) | 11.4% |
| December 31, 2013 | (2.1%) | 12.1% |

We rely on our vendors to fulfill a large majority of shipments to our customers. As of December 31, 2014, we had open orders of $92.1 million and deferred revenue of $28.5 million. As of December 31, 2013, we had open orders of $67.1 million and deferred revenues of $22.7 million.

*Cost of sales, product and services:* Our gross margin for product and services increased to 19.4% from 18.9% during the three months ended December 31, 2014 and 2013, respectively, due to an increase in the sales of our advanced professional and managed services. Our gross margin for product and services increased to 19.2% from 18.1% during the nine months ended December 31, 2014 and 2013, respectively, due to an increase in the sales of third party maintenances and services, which are recognized on a net basis.

The change in the amount of vendor incentives earned during the three and nine months ended December 31, 2014 resulted in a 0.4% decrease and 0.1% decrease in gross margins from the prior year, respectively. 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.

*Operating expenses:* Operating expenses were $41.6 million for the current quarter or 17.7% higher than the three months ended December 31, 2013. Operating expenses were $119.7 million, or 13.4%, higher than the nine months ended December 31, 2013. These increases were due to increases in personnel, commissions, and general and administrative expenses.

Professional and other fees decreased $0.6 million, or 34.6%, to $1.2 million for the three months ended December 31, 2014, compared to $1.8 million during the three months ended December 31, 2013. This decrease was primarily due to a decrease of $0.6 million in legal and other fees related to the Lawson litigation. During the nine months ended December 31, 2014, professional and other fees decreased $2.1 million, or 34.6%, to $4.1 million, compared to $6.2 million during the nine months ended December 31, 2013. This decrease was primarily due to lower legal and other fees related to the Lawson litigation, which decreased $1.8 million for the nine months ended December 31, 2014.

Salaries and benefits increased $5.0 million, or 17.7%, to $33.5 million during the three months ended December 31, 2014, compared to $28.5 million during the three months ended December 31, 2013, of which 51% of the increase was due to variable compensation as a result of the increase in gross profit. For the nine months ended December 31, 2014, salaries and benefits increased $12.5 million, or 15.0%, to $96.1 million, compared to $83.6 million during the nine months ended December 31, 2013, of which 49% of the increase was due to variable compensation as a result of the increase in gross profit. The remainder of the increase was driven by increases in the number of employees and related benefits. Our technology segment had 927 employees as of December 31, 2014, an increase of 24 from 903 at December 31, 2013. Most of the increase in personnel relates to sales and engineering positions from the acquisition of Evolve. 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.

General and administrative expenses increased $1.8 million, or 36.1% during the three months ended December 31, 2014 over the same period for the prior year. For the nine months ended December 31, 2014, general and administrative expenses increased $3.8 million, or 24.3% over the same period for the prior year. This increase was primarily due to incremental costs associated with the acquisition of Evolve, higher depreciation due to the refresh of our data center equipment, and other costs related to the ongoing expansion of our business.

*Segment earnings:* As a result of the foregoing, segment earnings were $18.0 million, an increase of $2.8 million, or 18.3% for the three months ended December 31, 2014, and segment earnings were $48.1 million, an increase of $9.6 million, or 24.9% for the nine months ended December 31, 2014 as compared to the same period for the prior year.

#### Financing Segment

The results of operations for our financing segment for the three and nine months ended December 31, 2014 and 2013 were as follows (dollars in thousands):

|  | Three Months Ended December 31, 2014 | 2013 | Change |  | Nine Months Ended December 31, 2014 | 2013 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Financing revenue | $8,406 | $9,228 | $(822) | (8.9%) | $26,339 | $27,989 | $(1,650) | (5.9%) |
| Fee and other income | 16 | 14 | 2 | 14.3% | 90 | 94 | (4) | (4.3%) |
| Total revenues | 8,422 | 9,242 | (820) | (8.9%) | 26,429 | 28,083 | (1,654) | (5.9%) |
| Direct lease costs | 2,601 | 3,055 | (454) | (14.9%) | 8,364 | 9,803 | (1,439) | (14.7%) |
| Professional and other fees | 278 | 238 | 40 | 16.8% | 781 | 940 | (159) | (16.9%) |
| Salaries and benefits | 2,125 | 2,335 | (210) | (9.0%) | 6,691 | 7,559 | (868) | (11.5%) |
| General and administrative | 315 | 315 | - | 0.0% | 1,285 | 861 | 424 | 49.2% |
| Interest and financing costs | 556 | 477 | 79 | 16.6% | 1,753 | 1,325 | 428 | 32.3% |
| Operating expenses | 3,274 | 3,365 | (91) | (2.7%) | 10,510 | 10,685 | (175) | (1.6%) |
| Operating income | 2,547 | 2,822 | (275) | (9.7%) | 7,555 | 7,595 | (40) | (0.5%) |
| Other income | 6,169 | - | 6,169 | n/a | 7,603 | - | 7,603 | n/a |
| Segment earnings | $8,716 | $2,822 | $5,894 | 208.9% | $15,158 | $7,595 | $7,563 | 99.6% |

*Total revenues*: Total revenues decreased by $0.8 million, or 8.9%, to $8.4 million for the three months ended December 31, 2014, as compared to the three months ended December 31, 2013 predominately due to lower transactional gains. During the quarters ended December 31, 2014 and 2013, we recognized net gains on sales of financial assets of $1.5 million and $2.3 million, respectively, and the fair value of assets received from these sales were $44.8 million and $45.7 million, respectively. Post contract earnings were $2.3 million for both the three months ended December 31, 2014 and 2013.

For the nine months ended December 31, 2014, total revenues decreased by $1.7 million, or 5.9%, to $26.4 million, as compared to the nine months ended December 31, 2013 due to lower transactional gains; partially offset by higher post contract earnings due to an increase in customer renewal rents. During the nine months ended December 31, 2014 and 2013, we recognized net gains on sales of financial assets of $4.6 million and $7.9 million, respectively, and the fair value of assets obtained from these sales were $138.6 million and $168.1 million, respectively. Post contract earnings increased $1.7 million to $7.8 million for the nine months ended December 31, 2014.

At December 31, 2014, we had $165.1 million in financing receivables and operating leases, compared to $140.1 million as of December 31, 2013, an increase of $25.1 million or 17.9%.

*Direct lease costs:* Direct lease costs decreased $0.5 million, or 14.9%, to $2.6 million and decreased $1.4 million, or 14.7%, to $8.4 million for the three and nine months ended December 31, 2014, respectively, mostly due to decreases in depreciation expense for equipment under operating leases as compared to the same periods for the prior year.

*Operating expenses:* For the three months ended December 31, 2014, operating expenses decreased $0.1 million, or 2.7%, which was a result of decrease of $0.2 million in salaries and benefits due to a decrease in personnel. General and administrative expenses were $0.3 for both the three months ended December 31, 2014 and 2013.

For the nine months ended December 31, 2014, operating expenses decreased $0.2 million, or 1.6%. Salaries and benefits decreased $0.9 million or 11.5% to $6.7 million due to a decrease in personnel within this segment. Our financing segment had 54 employees as of December 31, 2014, a decrease of 4 from 58 employees as of December 31, 2013. General and administrative expenses increased $0.4 million, due primarily to an increase in our reserve for credit losses for the nine months ended December 31, 2014 over the prior year period.

Interest and financing costs increased $0.1 million and $0.4 million, respectively, for the three month and nine months over prior year periods due to an increase in total notes payable to $72.5 million as of December 31, 2014, an increase of $19.1 million or 35.9% compared to $53.4 million as of December 31, 2013. Our weighted average interest rate for non-recourse notes payable was 3.35% and 3.46%, as of December 31, 2014 and December 31, 2013, respectively.

*Other income:* On October 31, 2014, we received payment in the amount of $6.2 million, relate to a claim in a class action suit which alleged that a group of companies conspired to fix, raise, maintain or stabilize prices of certain flat panels used in many flat screen televisions, monitors and notebook computers.

In April 2014, we entered into an arrangement to repurchase the rights, title, and interest to payments due under a financing arrangement. This financing arrangement was previously assigned to a third party financial institution and accounted for as a secured borrowing. In conjunction with the repurchase agreement, we recognized a gain of $1.4 million.

*Segment earnings*: As a result of the foregoing, earnings increased $5.9 million and $7.6 million for the three and nine months ended December 31, 2014, respectively, over the prior year periods.

#### Consolidated

*Income taxes:* Our provision for income tax expense increased $3.8 million to $11.2 million for the three months ended December 31, 2014, and increased $7.3 million to $26.3 million for the nine months ended December 31, 2014 as compared to the same period for the prior fiscal year. Our effective income tax rates for the three and nine months ended December 31, 2014 was 42.0% and 41.6%, respectively, as compared to 41.2% and 41.3% for the three and nine months ended December 31, 2013.

*Net earnings*: The foregoing resulted in net earnings of $15.5 million for the three months ended December 31, 2014, an increase of 46.1%, as compared to $10.6 million during the three months ended December 31, 2013. For the nine months ended December 31, 2014, net earnings was $36.9 million, an increase of 36.5%, as compared to $27.1 million for the nine months ended December 31, 2013.

Basic and fully diluted earnings per common share were $2.14 and $2.13, for the three months ended December 31, 2014, as compared to $1.33 and $1.32, respectively, for the three months ended December 31, 2013. Basic and fully diluted earnings per common share were $5.02 and $4.97, respectively, for the nine months ended December 31, 2014, as compared to $3.37 and $3.34, respectively, for the nine months ended December 31, 2013.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended December 31, 2014 were 7.2 million and 7.3 million, 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, 2013 were 8.0 million.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the nine months ended December 31, 2014 were both 7.4 million. 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 7.9 million and 8.0 million, 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 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, with an aggregate credit limit of $225 million. 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, 2014 or March 31, 2014, 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 twelve 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. For example, accounts receivable-trade may change by more or less than the change in our revenues, as there are variables impacting accounts receivable that may not impact revenues, such as the amount of third-party software assurance, maintenance and services invoiced, for which revenues are presented on a net basis, or significant changes in our deferred revenues.

We experience fluctuations in certain working capital accounts, which are primarily due to changes in the timing of purchases of equipment by our customers throughout the comparative periods. Our accounts receivable—trade increased by $35.7 million, or 16.9% which is consistent with the increase in revenues from the quarter ended March 31, 2014. We also experienced a decrease in accounts payable—trade of $14.9 million, which was more than offset by an increase in accounts payable—floor plan of $17.2 million. 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. We experience fluctuations in accounts payable—equipment due to timing of purchases of assets that will be leased or financed for our customers and accounts payable – equipment increased $12.0 million from March 31, 2014.

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, 2014 | 2013 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(9,930) | $(26,766) |
| Net cash used in investing activities | (31,705) | (21,228) |
| Net cash provided by financing activities | 13,002 | 35,766 |
| Effect of exchange rate changes on cash | (24) | 6 |
| Net decrease in cash and cash equivalents | $(28,657) | $(12,222) |

*Net cash used in operating activities.* Cash used in operating activities totaled $9.9 million during the nine months ended December 31, 2014. Net earnings adjusted for the impact of non-cash items was $36.9 million. Net changes in assets and liabilities resulted in a decrease of cash and cash equivalents of $46.8 million, primarily due to increases in accounts receivable—trade $27.4 million, financing receivables of $14.9 million, and cash used for accounts payable—trade of $15.5 million, partially offset by changes in salaries and commissions payable of $13.7 million.

Cash used in operating activities totaled $26.8 million during the nine months ended December 31, 2013. Net earnings adjusted for the impact of non-cash items was $27.4 million. Net changes in assets and liabilities resulted in a decrease of $54.1 million due to decreases in accounts receivable—trade of $39.6 million, inventories of $9.2 million and investment in financing receivables of $20.1 million, offset by increases in accounts payable—trade of $10.8 million, and accounts payable—equipment of $2.5 million, and salaries and commission payable of $5.5 million.

*Net cash used in investing activities.* Cash used in investing activities was $31.7 million during the nine months ended December 31, 2014. Cash used in investing activities during the nine months ended December 31, 2014 was primarily driven by an issuance of financing receivables of $93.2 million, purchase of assets to be leased and property and equipment of $15.2 million, and cash used in acquisitions of $8.0 million, which was partially offset by cash proceeds from the sale of financing receivable of $24.2 million, the repayment of financing receivables of $50.6 million, and proceeds from sale of property, equipment and operating lease assets of $7.4 million.

Cash used in investing activities was $21.2 million during the nine months ended December 31, 2013, which was primarily driven by issuance of financing receivables (net of issuance, proceeds from the sale, 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, which were partially offset by proceeds from the sales of property, equipment and operating lease equipment of $3.3 million.

*Net cash provided by financing activities*. Cash provided by financing activities of $13.0 million during the nine months ended December 31, 2014 was due to net borrowings of non-recourse and recourse notes payable of $38.7 million and net borrowings on the floor plan facility of $10.7 million, partially offset by the repurchase of common stock of $37.1 million. In the prior year, cash provided by financing activities was $35.8 million during the nine month period, which was due to net borrowings of non-recourse and recourse notes payable of $26.8 million, net borrowings on the floor plan facility of $18.5 million and, partially offset by the purchase of treasury stock of $10.3 million.

#### Non-Cash Activities

We transfer financial assets to third-party financial institutions, some of which are accounted for as secured borrowings. 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 is as follows (in thousands):

|  | Nine Months Ended December 31, 2014 | 2013 |
| --- | ---: | ---: |
| GAAP: net cash used in operating activities | $(9,930) | $(26,766) |
| Principal payments from customers directly to lenders | 9,777 | 14,516 |
| Non-GAAP: adjusted net cash used in operating activities | $(153) | $(12,250) |

The non-GAAP financial measure for our cash flows from investing activities is as follows (in thousands):

|  | Nine Months Ended December 31, 2014 | 2013 |
| --- | ---: | ---: |
| GAAP: net cash used in investing activities | $(31,705) | $(21,228) |
| Principal payments from customer directly to lenders | 16,692 | 631 |
| Non-GAAP: adjusted net cash used in investing activities | $(15,013) | $(20,597) |

The non-GAAP financial measure for our cash flows from financing activities is as follows (in thousands):

|  | Nine Months Ended December 31, 2014 | 2013 |
| --- | ---: | ---: |
| GAAP: net cash provided by financing activities | $13,002 | $35,766 |
| Principal payments from customers directly to lenders | (26,469) | (15,147) |
| Non-GAAP: adjusted net cash (used in) provided by financing activities | $(13,467) | $20,619 |

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 assets 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 financing arrangements 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 lease and financing 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 third party 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, 2014, our non-recourse notes payable increased 5.2% to $68.7 million, as compared to $65.3 million at March 31, 2014. Recourse notes payable increased 6.1% to $3.8 million as of December 31, 2014 compared to $3.6 million as of March 31, 2014.

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, 2014, the facility had an aggregate limit of the two components of $225.0 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 of *e*Plus Technology, inc. We were in compliance with these covenants as of December 31, 2014. 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, 2014, 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, 2014 | Balance as of December 31, 2014 | Maximum Credit Limit at March 31,2014 | Balance as of March 31, 2014 |
| ---: | ---: | ---: | ---: |
| $225,000 | $110,625 | $175,000 | $93,416 |

#### 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, 2014 or March 31, 2014, while the maximum credit limit was $30.0 million for both periods.

#### Credit Facility — General

First Virginia Community Bank provides us with a $0.5 million credit facility, which will mature on October 26, 2015. 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, 2014, 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, 2014, 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 2014 Annual Report.

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, 1,495 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, 2014, 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. We also transact business in other foreign currencies which are subject to fluctuations, however, the dollar volume of these transactions is immaterial.

## Controls and procedures

As filed, 2,781 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, 2014.

### Changes in Internal Controls

There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2014, 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, 127 characters.

There have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our 2014 Annual Report.

Filed Feb 6, 2015.
Source: SEC EDGAR, the filing index for accession 0001022408-15-000003. Last ingested by Listed: Nov 6, 2026, 17:13 ET. No prices; not investment advice.