SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event Reported): October 18, 1999
ePlus inc
(Exact name of registrant as specified in its charter)
Delaware 000-28926 54-1817218
(State or other Commission File Number)(IRS Employer
jurisdiction) Identification No.)
of incorporation)
400 Herndon Parkway, Herndon, Virginia 20176
(Address, including zip code, of principal executive office)
(703) 834-5710
(Registrant's telephone number, including area code)
Item 7. Financial Statements
ePlus inc. (the "Company") has prepared this current report on Form 8-K/A
to file updated financial information with respect to CLG, Inc., which the
Company acquired on September 30, 1999. The information filed today
includes the pro forma financial data for both the six months ended
September 30, 1999, and for the year ended March 31, 1999, which have not
previously been filed or incorporated by reference. Also included are the
financial statements of CLG, Inc.
(a)-(b)Financial Statements and Pro Forma Financial Information. See index to
Financial Statements at page F-1 for a list of financial statements
included in this report.
(c) Exhibits
23.1 Consent of KPMG LLP, Independent Auditors
-i-
Index to Financial Statements
Financial Statements:
Introduction to Pro Forma Financial Information F-1
Unaudited Pro Forma Combined Balance Sheet as
of June 30, 1999 F-2
Unaudited Pro Forma Combined Statement of
Earnings for the three months ended June 30, 1999 F-4
Unaudited Pro Forma Combined Statement of
Earnings for the fiscal year ended March 31, 1999 F-5
Report of KPMG, Independent Auditors F-6
Balance Sheet of CLG, Inc. as of December 31, 1998 and 1997 F-7
Statements of Income of CLG, Inc. for the fiscal years ended
December 31, 1998 and 1997, and for the eleven months ended
December 31, 1996 F-8
Statements of Stockholder's Equity for CLG, Inc. for the
years ended December 31, 1998 and 1997, and for the
eleven months ended December 31, 1996 F-9
Statements of Cash Flows for CLG, Inc. for the years
ended December 31, 1998 and 1997 and for the eleven
months ended December 31, 1996 F-10
Notes to Financial Statements F-11
-ii-
Introduction to Pro Forma Financial Information
The unaudited pro forma financial statements give effect to the acquisition of
CLG, Inc. on September 30, 1999. The accompanying notes provides the detail
regarding the purchase price, sources and uses of funds respective to the
acquisition, the adjustments to the CLG, Inc. stockholder's equity accounts,
data regarding the administrative assets and deferred taxes.
The unaudited pro forma combined statements of earnings for the three months
ended June 30, 1999, includes the financial information of ePlus inc. and CLG,
Inc. for the three month period, April 1 to June 30, 1999. The unaudited pro
forma combined statements of earnings for the fiscal year ended March 31, 1999,
includes the financial data for the ePlus inc. twelve month fiscal year ended
March 31, 1999, and the CLG, Inc. twelve month fiscal year ended December 31,
1998. The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management believes appropriate.
The unaudited pro forma combined financial data presented herein does not
purport to represent the results that the Company would have obtained had the
transactions, which are the subject of pro forma adjustments, been completed as
of the assumed dates and for the period presented, or which may be obtained in
the future. The pro forma adjustments are described in the accompanying notes
and are based upon available information and certain assumptions that the
Company believes are reasonable. A preliminary allocation of purchase price has
been made in the accompanying balance sheet based on available information. The
actual allocation of purchase price and the resulting effect on income from
operations may differ significantly from the pro forma amounts included herein.
Consequently, the amounts reflected in the Pro Forma Financial Statements are
subject to change and the final amounts may differ substantially.
F-1
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1999
Pro Forma Pro Forma
ePlus inc CLG Adjustments Combined
--------- --- ----------- --------
(A)
Assets
Cash and cash equivalents $ 5,946,043 $ 1,272,727 $ (1,758,000) (B) $ 5,460,770
Accounts receivable 67,868,089 3,298,785 1,080,365 (C) 72,247,239
Notes receivable 209,057 209,057
Employee advances 70,508 70,508
Inventories 1,531,330 4,697,535 6,228,865
Investment in DFL, net 100,716,270 74,767,161 (2,000,000) (E) 173,483,431
Investment in OLE, net 2,870,496 11,787,315 14,657,811
Property and equipment, net 2,039,141 1,057,865 (1,057,865) (C) 2,039,141
Deferred Tax Assets - -
Other assets 13,785,436 694,205 7,880,057 (A)) 22,359,698
Investment in Joint Venture 1,459,939 1,459,939
------------- ----------- --------- -------------
TOTAL ASSETS $ 196,496,309 $ 97,575,593 $ 4,144,557 $ 298,216,459
============= ============ ============ =============
Liabilities and Stockholders' Equity
Liabilities
Accounts payable - equipment $ 34,112,342 $ 615,982 $ 34,728,324
Accounts payable - trade 16,671,048 65,106 16,736,154
Salaries and commissions payable 503,469 540,930 6,524,405
Income taxes payable - -
Recourse notes payable 30,363,665 36,357,139 3,064,574 (B) 69,785,378
Non-recourse notes payable 61,378,468 27,627,836 27,799,49 (B) 116,805,803
Deferred taxes 3,292,210 3,166,207 (3,166,207)(D) 3,292,210
--------- --------- ----------- ---------
Total Liabilities 151,096,950 70,121,857 27,697,866 248,916,673
----------- ---------- ----------- -----------
Stockholders' Equity
Preferred stock -
Common stock 74,828 5,100 (1,178) 78,750
Additional paid in capital 25,082,344 1,092,489 2,804,016 (B) 28,978,849
Retained earnings 20,242,187 26,356,147 (26,356,147) 20,242,187
---------- ---------- ---------- ----------
Total Stockholders' Equity 45,399,359 27,453,736 (23,553,309) 49,299,786
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 196,496,309 $ 97,575,593 $4,144,557 $ 298,216,459
============= ============ ========== =============
See Notes to Pro Forma Balance Sheet of June 30, 1999.
F-2
Notes to the Pro Forma Balance Sheet of June 30, 1999.
The effects of the CLG, Inc. acquisition on balance sheet accounts are as
follows (in millions of dollars):
A. The estimated purchase price and preliminary adjustments to historical book
value as a result of the purchase acquisition, are as follows (dollars in
millions).
Purchase Price:
Estimated value of cash, stock and subordinated debt issued $36.5
Book Value of net assets acquired 28.6
Purchase Price in excess of net assets acquired allocated to
Estimated goodwill 7.9
B. Reflects the sources and uses of funds for CLG, Inc. as follows (dollars in
millions):
Sources of Funds:
Cash from financing leases in the CLG portfolio $27.8
Issuance of stock 3.9
Subordinated notes payable due October 10, 2006 @ 11% interest 3.1
Cash from general funds of ePlus inc. 1.7
---
Total Sources of Funds $36.5
=====
Uses of Funds
Cash consideration for CLG, Inc. acquisition $32.6
Equity consideration for CLG, Inc. acquisition 3.9
---
Total Uses of Funds $36.5
=====
The adjustments to paid in capital, retained earnings and other miscellaneous
items as the result of the CLG, Inc. acquisition are as follows (dollars in
millions):
Paid in Capital:
Elimination of CLG, Inc. pre-acquisition Paid in Capital $(1.1)
Addition as a result of issuing 392,200 shares of stock 3.9
of ePlus inc. ---
Total 2.8
===
Retained Earnings:
Elimination of CLG, Inc. pre-acquisition retained earnings $(26.4)
C. The Stock Purchase Agreement required the selling entity, Centura Banks,
Inc., to purchase from CLG, Inc. the office furniture, equipment, leasehold
improvements and off lease inventory at a price equaling the CLG, Inc. book
value. At June 30, 1999, this was estimated to be $1.1 million dollars.
D. The Stock Purchase Agreement required Centura Banks, Inc., to elect section
338(h)(10) adjustment. The effects will be to eliminate most temporary
differences between the tax basis and the financial book values and
negating the need for a deferred tax liability. At June 30, 1999, this was
estimated to be $3.2 million dollars.
E. Estimated adjustment to adjust lease portfolio to fair market value at June
30, 1999.
F-3
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
For the Three Months Ended June 30, 1999
ePlus inc. CLG, Inc. Pro Forma Pro Forma
Three Months Ended Three Months Ended Adjustments Combined
June 30, 1999 June 30, 1999 Company
--------------- ------------------ ----------- ------------
(1)
Sales of equipment $ 33,175,781 $ 872,220 $ 34,048,001
Sales of leased equipment 14,385,824 14,385,824
------------ ------------ ------------
Total sales 47,561,605 872,220 48,433,825
---------- ------- ----------
Lease revenues 5,537,740 6,310,803 11,848,543
Fee and other income 1,271,775 261,158 1,532,933
--------- ------- ---------
Total other revenue 6,809,515 6,571,961 13,381,476
--------- --------- ----------
TOTAL REVENUES 54,371,120 7,444,181 61,815,301
---------- --------- ----------
Cost of sales, equipment 29,804,248 706,637 30,510,885
Cost of sales, leased equipment 14,125,432 14,125,432
---------- ----------
Total cost of sales 43,929,680 706,637 44,636,317
---------- ------- ----------
Direct lease costs 949,010 2,700,403 3,649,413
Professional and other fees 422,883 -- 422,883
Salaries and benefits 4,001,070 1,383,350 5,384,420
General and administrative expenses 1,246,018 531,072 $ 129,167 (a) 1,906,257
Interest and financing costs 1,318,356 1,156,445 588,142 (b) 3,062,943
--------- --------- ------- ---------
Total expenses 7,937,337 5,771,270 717,309 14,425,916
--------- --------- ------- ----------
TOTAL COSTS AND EXPENSES 51,867,017 6,477,907 717,309 59,062,233
---------- --------- ------- ----------
EARNINGS BEFORE INCOME TAXES 2,504,103 966,274 (717,309) 2,753,068
Provision for income taxes 1,001,642 386,510 (286,923)(d) 1,101,229
--------- ------- -------- ---------
NET INCOME $ 1,502,461 $ 579,764 $ (430,386) $ 1,651,839
========= ======= ======== =========
EPS- Weighted Average Shares- Basic 7,477,532 392,900 (c) 7,870,432
EPS- Basic 0.20 0.21
EPS- Weighted Average Shares- Dilute 7,492,780 392,900 (c) 7,885,680
EPS- Diluted 0.20 0.21
Notes to the Pro Forma Statement of Income for the Three Months ended June 30,
1999.
(1) The CLG, Inc. data represents the financial data for the months of
April to June, 1999. The pro forma annual results for CLG, Inc. (which had a
fiscal year ended December 31, 1998) was incorporated into ePlus' March 31, 1999
results. The ePlus results for the three month period from April 1, 1999 to June
30, 1999 also includes the CLG, Inc. results for the months of April to
June,1999. The CLG Inc. period from January 1, 1999 to March 31, 1999 is not
included in the pro forma financial statements. For these months, CLG, Inc.
reported revenues of $7,559,384, expenses of $ $7,500,511 and net income of $
58,873
(a) Represents the goodwill amortization related to the acquisition of CLG, Inc.
This intangible asset is estimated at a value of $7,750,000 and amortized over a
fifteen year period. Actual amortization may differ depending on the final
allocation of the total consideration. Represents three months of amortization.
(b) Represents the adjustment for the acquisition financing. The amount is
based on the estimated portfolio balance financed on a non-recourse basis
of approximately $27,799,500 at an interest rate of 7.25% and the
subordinated debt of $3,064,575 at an interest rate of 11%.
(c) The increase in shares represents the shares of stock issued to the seller
in the acquisition of CLG, Inc.
(d) Reflects adjustment necessary to reach an effective tax rate of 40%, and
represents the average rate for the prior two annual periods which are
appropriate for presentation.
F-4
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
For the Year Ended March 31, 1999
ePlus inc CLG, Inc. Pro Forma Pro Forma
Year Ended Year Ended Adjustments(1) Combined
March 31, 1999 12/31/1998 ----------- Company
-------------- -------------- -------
Sales of equipment $ 83,516,254 $ 1,524,071 $ 85,040,325
Sales of leased equipment 84,378,800 84,378,800
------------ ----------- ------------
Total sales 167,895,054 1,524,071 169,419,125
------------ ------------ ------------
Lease revenues 20,610,542 36,031,319 56,641,861
Fee and other income 5,464,242 819,538 6,283,780
------------ ----------- ------------
Total other revenue 26,074,784 36,850,857 62,925,641
------------ ----------- ------------
TOTAL REVENUES 193,969,838 38,374,928 232,344,766
------------- ------------ -------------
Cost of sales, equipment 71,367,090 1,232,064 72,599,154
Cost of sales, leased equipment 83,269,110 83,269,110
------------- ------------ -------------
Total cost of sales 154,636,200 1,232,064 155,868,264
------------- ------------ -------------
Direct lease costs 6,183,562 18,304,182 24,487,744
Professional and other fees 1,222,080 169,413 1,391,493
Salaries and benefits 11,880,062 6,580,602 18,460,664
General and administrative expenses 5,151,494 2,606,300 $ 516,666 (a) 8,274,460
Interest and financing costs 3,601,348 5,861,168 2,164,230 (b) 11,626,746
------------ ------------ ------------ ------------
Total expenses 28,038,546 33,521,665 2,680,896 64,241,107
------------- ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 182,674,746 34,753,729 2,680,896 220,109,371
------------- ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 11,295,092 3,621,199 (2,680,896) 12,235,395
Provision for income taxes 4,578,625 1,459,749 (1,072,359) 4,966,015
------------- ------------ ------------- -------------
NET INCOME $ 6,716,467 $ 2,161,450 $(1,608,537) $ 7,269,380
============= ============ ============= =============
EPS- Weighted Average Shares- Basic 6,769,732 392,900 (c) 7,162,632
EPS-Basic $ 0.99 $ 1.01
EPS-Weighted Average Shares-Diluted 6,827,528 392,900(c) 7,555,532
EPS-Diluted $ 0.99 $ 0.96
Notes to the Pro Forma Statement of Income for the Year Ended March 31, 1999
(1) Reflects adjustments for the year ended as if they had taken place on April
1, 1998
(a) Represents the goodwill amortization related to the acsquisition of CLG,
Inc. This intangible asset is estimated at a value of $7,750,000 and
amortized over a fifteen year period. Actual amortization may differ
depending on the final allocation of the total consideration.
(b) Represents the adjustment for the acquisition financing. The amount is
based on the estimated portfolio balance financed on a non-recourse basis
of approximately $25,200,000 at an interest rate of 7.25% and the
subordinated debt of $3,064,575 at an interest rate of 11%.
(c) The increase in shares represents the shares of stock issued to the seller
in the acquisition of CLG, Inc.
F-5
Independent Auditors' Report
The Board of Directors
CLG, Inc.:
We have audited the accompanying balance sheets of CLG, Inc. (the "Company") (a
wholly-owned subsidiary of Centura Bank) as of December 31, 1998 and 1997, and
the related statements of income, stockholder's equity and cash flows for each
of the years then ended and for the eleven months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CLG, Inc. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years then ended and for the eleven months ended December 31, 1996, in
conformity with generally accepted accounting principles.
October 13, 1999
Releigh, North Carolina
F-6
CLG, INC
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------ ---- ----
Cash and cash equivalents $ 4,303,414 $ 1,510,373
Receivables:
Customers 2,020,145 2,156,736
Net investment in sales-type and direct financing
leases (note 2) 82,434,003 92,923,040
Miscellaneous receivables -- 5,178
Less: Allowance for doubtful accounts ( 1,156,997) ( 457,637)
------------- -------------
Net Receivables 83,297,151 94,627,317
Inventory held for lease or sale 4,563,346 4,856,742
Equipment on operating leases, net (note 2) 11,605,987 14,771,247
Equipment and leasehold improvements, net (note 3) 1,011,520 1,143,847
Recoverable income taxes 1,331,785 298,191
Prepaid expenses and other 195,054 241,583
------------- -------------
Total assets $ 106,308,257 $ 117,449,300
============= =============
Liabilities and Stockholder's Equity
Liabilities:
Accounts payable $ 3,922,264 $ 1,213,849
Accrued expenses 1,713,137 1,419,295
Discounted lease rentals (note 4):
Nonrecourse 35,440,479 53,806,976
Recourse 34,741,317 29,997,155
Deferred income taxes (note 6) 3,604,829 7,000,576
Other liabilities 1,523,471 1,861,523
------------- -------------
Total liabilities $ 80,945,497 $ 95,299,374
------------- -------------
Commitments and contingent liabilities (note 7)
Stockholder's equity:
Common stock, $1 par value; 50,000,000
shares authorized; 5,100 shares issued
and outstanding $ 5,100 $ 5,100
Additional paid-in-capital 1,092,489 41,105
Retained earnings 24,265,171 22,103,721
------------ -------------
Total stockholder's equity 25,362,760 22,149,926
------------- -------------
Total liabilities and stockholder's equity $ 106,308,257 $ 117,449,300
============= =============
See accompanying notes to financial statements
F-7
Statements of Income
Years ended December 31, 1998 and 1997
and the eleven months ended December 31, 1996
1998 1997 1996
Revenues:
Leasing:
Sales-type revenue $8,977,046 $19,797,968 $13,453,956
Financing lease income 7,693,136 9,456,107 9,696,396
Operating lease income 16,317,354 16,445,110 13,917,959
Sublease income $26,324 84,764 284,903
Direct sales of equipment 1,524,071 2,528,685 3,670,261
Gain on sales of assets and residuals 3,017,459 1,573,183 729,874
Loss on inventory write-down -- -- (348,550)
Other interest income 175,798 139,300 180,243
Other 643,740 850,427 337,077
-------- -------- --------
Total revenues $38,374,928 $50,875,544 $41,922,119
=========== =========== ===========
Expenses
Leasing:
Cost of sales-type lease $6,791,461 $16,243,079 $11,272,949
Sublease expenses - 113,600 367,612
Miscellaneous expenses 169,413 89,597 277,652
Cost of equipment on direct sales 1,232,064 2,248,088 3,548,381
Depreciation and amortization 11,512,721 12,535,156 9,289,065
Interest 5,861,168 7,274,977 6,703,370
Selling, general, and administrative 9,186,902 7,814,561 6,697,377
--------- ---------- ----------
Total expenses $34,753,729 $46,319,058 $38,156,406
=========== =========== ===========
Net income before income taxes 3,621,199 4,556,486 3,765,713
Income taxes (note 6) 1,459,749 1,831,465 1,534,648
--------- ---------- ----------
Net income $2,161,450 $2,725,021 $2,231,065
============ ========== ==========
See accompanying notes to financial statements.
F-8
Statements of Stockholder's Equity
Years ended December 31, 1998 and 1997
and the eleven months ended December 31, 1996
Additional Total
Common paid-in- Retained stockholder's
Stock capital earnings equity
----- ------- -------- ------
Balance at January 31, 1996 $ 5,000 -- $17,147,635 $17,152,635
Net income -- -- 2,231,065 2,231,065
Issuance of common stock 100 -- -- 100
----- ------- ----------- ----------
Balance at December 31, 1996 5,100 -- 19,378,700 19,383,800
Stock-based compensation -- 41,105 -- 41,105
Net income -- -- 2,725,021 2,725,021
----- ------ ---------- ----------
Balance at December 31, 1997 5,100 41,105 22,103,721 22,149,926
Stock-based compensation -- 950,408 -- 950,408
Tax benefit-exercise of stock options -- 100,976 -- 100,976
Net income -- -- 2,161,450 2,161,450
----- --------- --------- ---------
Balance at December 31, 1998 $ 5,100 $ 1,092,489 $24,265,171 $25,362,760
=========== =========== =========== ===========
See accompanying notes to financial statements.
F-9
CLG, INC
Statements of Cash Flows
Years ended December 31, 1998, 1997
and the eleven months ended December 31, 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $2,161,450 $2,725,021 $2,231,065
Adjustments to reconcile net income to net cash
flow from operating activities:
Provision for doubtful accounts 870,174 1,005,142 403,000
Net charge-offs (170,814) (643,850) (406,655)
Depreciation and amortization 11,512,721 12,535,156 9,289,065
Stock-based compensation 950,408 41,105 -
Deferred income taxes (3,395,747) (394,023) 726,634
Gain on sale of equipment and inventory (5,606,750) (5,403,606) (3,032,760)
Loss on write down of inventory 55,850 - 348,550
Decrease in miscellaneous receivables 141,769 4,345 136,791
(Increase) decrease in recoverable income taxes (1,033,594) 166,034 (581,607)
Decrease in prepaid expenses and other 46,529 126,396 254,326
Increase (decrease) in accounts payable 2,708,415 (3,698,003) 1,852,707
Increase (decrease) in accrued expenses 293,842 368,557 (1,178,193)
Decrease in accrued taxes - - (1,313,707)
(Decrease) increase in other liabilities (551,490) 727,580 (290,400)
--------- -------- ---------
Net cash provided by operating activities 7,982,763 7,559,854 8,438,816
Cash flows from investing activities:
Purchase of inventory and equipment for lease (52,615,955) (44,666,520) (65,602,827)
Proceeds from sales of inventory and equipment 20,336,921 8,651,001 4,652,938
Purchase of equipment and leasehold improvements (265,482) (526,933) 220,935)
Proceeds from sale of equipment and leasehold improvements 48,908 53,808 81,604
Principal payments received from finance leases 40,928,221 41,935,399 37,158,613
----------- ----------- -----------
Net cash provided (used) by investing activities 8,432,613 5,446,755 (23,930,607)
Cash flows from financing activities:
Net proceeds (repayment) on line of credit - (13,603,000) 13,603,000
Proceeds from discounted lease rentals 38,652,819 65,180,590 66,525,838
Repayment of discounted lease rentals (52,275,154) (63,761,468) (65,174,391)
Issuance of common stock - - 100
Accrued dividends paid - - (150,000)
------------ ------------ -----------
Net cash (used) provided by financing activiites (13,622,335) (12,183,878) 14,804,547
------------ ------------ -----------
Net increase (decrease) in cash 2,793,041 822,731 (687,244)
Cash and cash equivalents at beginning of year 1,510,373 687,642 1,374,886
---------- -------- ----------
Cash and cash equivalents at end of year $4,303,414 $1,510,373 $687,642
================== =================== ==================
Supplemental disclosures:
Cash paid during the period for:
Interest expense $5,861,168 $7,274,977 $6,053,387
================== =================== ==================
Income taxes $5,817,887 $1,960,975 $2,212,027
================== =================== ==================
See accompanying notes to financial statements.
F-10
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Organization
CLG, Inc. ("CLG" or the "Company") was incorporated in March 1980 under the
laws of the State of North Carolina. CLG is engaged in the business of
buying, leasing, refurbishing and selling computer and technology equipment
to various companies located throughout the United States. On November 1,
1996, CLG became a wholly-owned subsidiary of Centura Bank ("Centura"), a
wholly-owned subsidiary of Centura Banks, Inc., in a transaction accounted
for as a pooling of interests. Subsequent to its acquisition by Centura,
the Company changed its fiscal year end from January 31 to a calendar year
end.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
use assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and interest-bearing balances due
from banks.
Description of Leasing Arrangements
CLG purchases computer and technology equipment which it then leases to
end-users under various noncancellable agreements with terms ranging
generally from six months to five years. CLG classifies these leases as
either sales-type, direct financing, or operating leases in accordance with
provisions of Statement of Financial Accounting Standards ("SFAS") No. 13,
"Accounting for Leases." Sales-type and direct financing leases are those
leases which transfer substantially all of the benefits and risks inherent
in the ownership of property to the lessee. Other leases are accounted for
as operating leases.
F-11
Notes to Financial Statements
Lease Accounting
The lease accounting methods used by CLG are as follows:
Sales-type leases - At lease inception, the present value of the minimum lease
payments is recorded as revenue. The cost of the leased equipment plus any
initial direct costs less the present value of the estimated residual value is
recorded as the cost of the sales-type lease and a dealer profit is recognized
representing the difference between the lease revenue at lease inception and the
cost of the leased equipment. The minimum lease payments plus the residual value
are recorded as the gross investment in the lease. The excess of the gross
investment in the lease over its present value is recorded as unearned income
and amortized to financing lease income over the lease term to produce a
constant percentage return on the investment in the lease.
Direct financing leases - At lease inception, the total lease payments
receivable plus the estimated residual value are recorded as the gross
investment in the lease. The difference between the gross investment in the
lease and the cost or carrying amount of the leased property is recorded as
unearned income. Unearned income is amortized to financing lease income over the
lease term to produce a constant percentage return on the investment.
Operating leases - The monthly rentals are recorded as operating lease income.
The cost of the equipment is recorded as equipment on operating leases, net of
accumulated depreciation. The equipment on operating leases is depreciated over
the lease term to an estimated residual value.
Residual values - The estimated residual values used in sales-type, direct
financing and operating leases are reviewed annually and reduced if necessary.
All residual values are unguaranteed.
Initial direct costs - Direct costs incurred to originate direct financing and
operating leases are deferred and amortized over the applicable lease term.
Concentration of Credit Risk
Concentrations of credit risk with respect to direct financing leases and trade
receivables are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different industries and
geographic areas.
F-12
Notes to Financial Statements
Allowance for Doubtful Accounts
The allowance for doubtful accounts is maintained at a level believed by
management to be adequate to absorb potential losses inherent in the Company's
receivables portfolio. In determining the allowance for doubtful accounts,
management relies on historical experience, adjusted for any known trends,
including industry trends, current economic, conditions and other factors. This
estimate is inherently subjective as it requires material estimates that may be
subject to change. Thus, future additions to the allowance may be necessary
based on the impact of changes in economic conditions on the Company's
customers.
Discounted Lease Rentals
CLG often assigns the rentals under leases to financial institutions either on a
nonrecourse or recourse basis. In the event of default by a lessee, the
financial institution has a security interest in the underlying equipment. If
the financing terms are on a nonrecourse basis, the institution has no recourse
against CLG, whereas with a recourse note, CLG is liable for amounts due in
excess of the equipment value.
Proceeds from the funding of leases are recorded on the balance sheet as
discounted lease rentals. Under sales-type and direct financing leases,
discounted lease rentals and the gross investments in leases are reduced as
lessees make payments under the leases. Under operating leases, lease revenue is
recorded monthly as lessees are billed.
Inventory
Inventory consists of equipment held pending lease or sale. Inventory is valued
at the lower of cost or market, on a specific unit identification basis.
Depreciation and Amortization
Equipment, including equipment on operating leases, and leasehold improvements
used by CLG are stated at cost and are depreciated on a straight-line basis over
the estimated useful lives of the assets. Equipment has useful lives up to ten
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the terms of the leases.
These assets have depreciable lives ranging between five and forty years.
Income Taxes
The income of CLG is included in the consolidated federal income tax return of
Centura Banks, Inc. CLG's tax sharing arrangement with Centura Banks, Inc.
provides that current income tax expense (benefit) is provided on a separate
company basis at Centura Banks, Inc.'s federal and state statutory rates.
F-13
Notes to Financial Statements
CLG uses the asset and liability method for recognizing the tax effects of
temporary differences between financial reporting and tax purposes at enacted
tax rates expected to be in effect when such amounts are recovered or settled.
Segment Disclosure
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Statement requires management to report selected quantitative and
qualitative information about its reportable operating segments, including
profit or loss, certain revenue and expense items, and segment assets.
Generally, segments are reportable if their operating results are regularly
reviewed by an enterprise's chief operating decision maker. CLG has determined
that it has no reportable operating segments based on the criteria set forth in
SFAS 131.
Reclassifications and Restatement
Certain amounts in the 1996 financial statements have been reclassified to
conform to the current year presentation. Previously reported stockholder's
equity and net income for 1996 has been increased by approximately $200,000.
Previously reported stockholder's equity as of January 31, 1996 has been reduced
by approximately $925,000.
Current Accounting Matters
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The Statement addresses accounting and
reporting requirements for derivative instruments and for hedging activities.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities in the consolidated balance sheet and that those instruments be
measured at fair value. If certain conditions are met, a derivative may be
designated as a hedge of exposure to changes in fair value of an asset or
liability, exposure to variable cash flows of a forecasted transaction or
exposure to foreign currency denominated forecasted transactions. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivatives and its resulting designation. In June 1999, the FASB issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB 133." This Statement defers the effective date of
SFAS 133 for one year. SFAS 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management has not
quantified the impact of adopting SFAS 133 nor has the timing of the adoption
been determined.
F-14
Notes to Financial Statements
(2) Leasing Activities
The components of net investment in leases under sales-type and direct
financing leases are as follows:
December 31, December 31,
1998 1997
---- ----
Minimum lease payments receivable $87,444,388 100,104,477
Estimated residual values of leased 4,790,615 5,055,240
equipment
Unamortized initial direct costs 290,889 346,591
Less unearned income (10,091,889) (12,583,268)
------------ ------------
Net investment in sales-type and
direct financing leases $82,434,003 92,923,040
----------- ----------
Equipment leased under operating leases consist of the following:
December 31, December 31,
1998 1997
---- ----
Equipment at cost $29,851,715 29,569,823
Less accumulated depreciation (18,245,728) (14,798,576)
------------ ------------
Net equipment on operating leases $11,605,987 14,771,247
----------- ----------
Future minimum lease payments to be received on sales-type and direct
financing, noncancellable operating leases and subleases are due as
follows for the years ended December 31:
Sales-Type and
Direct Financing Operating Sublease Total
---------------- --------- -------- -----
1999 $41,245,482 8,007,459 11,964 49,264,905
2000 27,497,722 2,580,840 3,988 30,082,550
2001 12,620,574 1,013,322 -- 13,633,896
2002 4,320,991 112,930 -- 4,433,921
2003 1,379,382 90,096 -- 1,469,478
Thereafter 380,237 15,016 -- 395,253
------------ ------ --------- -------
$87,444,388 11,819,663 15,952 99,280,003
------------ ---------- --------- ----------
F-15
Notes to Financial Statements
(3) Equipment and Leasehold Improvements
December 31, December 31,
1998 1998
---- ----
Software $482,044 396,974
Computer equipment 1,208,671 1,078,557
Furniture and fixtures 525,595 565,040
Automobiles 9,142 9,142
Leasehold improvements 171,119 171,119
------- -------
2,396,571 2,220,832
Less accumulated depreciation (1,385,051) (1,076,985)
----------- -----------
Equipment and leasehold $1,011,520 1,143,847
improvements, net ----------- -----------
(4) Discounted Lease Rentals
Equipment under leases is partially funded through the use of fixed rate
nonrecourse debt secured by future lease rentals to be received under
certain lease contracts and first liens on the related equipment.
Generally, the terms of these obligations are equal to the terms of the
underlying lease contracts.
Nonrecourse discounted lease rentals represent the installment
obligations for which CLG is not liable (except for surrender of
equipment pledged as collateral in the event of nonpayment of rentals by
the lessee) due to the assignment of the noncancellable rentals of the
related lease contracts, while the discounted lease rentals with
recourse are those under which CLG is liable for any default by the
lessee. All recourse obligations are payable to Centura Bank.
The weighted average interest rate of the installment obligations at
December 31, 1998 was 7.31%. Principal maturities of these obligations
for the periods subsequent to December 31, 1998 are as follows:
Year ending
December 31, Nonrecourse Recourse Total
------------ ----------- -------- -----
1999 $18,444,760 13,382,529 31,827,289
2000 11,822,648 10,241,307 22,063,955
2001 3,680,197 8,301,561 11,981,758
2002 1,259,691 2,687,893 3,947,584
2003 233,183 108,889 342,072
Thereafter -- 19,138 19,138
----------- ------ ------
Total $35,440,479 34,741,317 70,181,796
----------- ---------- ----------
F-16
Notes to Financial Statements
Interest expense on discounted lease rentals was $5,840,040, $7,266,420 and
$6,692,313 for the years ended December 31, 1998 and 1997 and the eleven
months ended December 31, 1996, respectively.
(5) Line of Credit
CLG has a $20,000,000 unsecured line of credit with Centura at December
31, 1998. Advances on the credit line are payable on demand and carry
an interest rate that fluctuates with Centura's 30-day LIBOR. CLG had
no obligations under this line of credit at December 31, 1998 and 1997.
(6) Income Taxes
The provision (benefit) for income taxes for the years ended December 31,
1998 and 1997 and the eleven months ended December 31, 1996 are as follows:
1998 1997 1996
---- ---- ----
Current:
Federal $3,969,067 1,686,007 727,837
State 886,429 539,481 80,177
------- ------- ------
4,855,496 2,225,488 808,014
--------- --------- -------
Deferred:
Federal (2,775,813) (198,978) 586,103
State (619,934) (195,045) 140,531
--------- --------- -------
(3,395,747) (394,023) 726,634
----------- --------- -------
$1,459,749 1,831,465 1,534,648
The components of deferred income taxes are as follows:
December 31, December 31,
1998 1997
---- ----
Deferred tax assets:
Accrued commissions $ 92,859 57,551
Deferred compensation 281,183 117,101
Other 610,166 294,108
------- -------
Total gross deferred tax assets 984,208 468,760
------- -------
Deferred tax liabilities:
Basis difference for leases and 4,589,037 7,469,336
fixed assets --------- ---------
Total gross deferred tax liabilities 4,589,037 7,469,336
--------- ---------
Net deferred tax liability $3,604,829 7,000,576
---------- ---------
No valuation allowance for deferred tax assets was required at December 31,
1998 and 1997 as management believes it is more likely than not that the
deferred tax assets can be recovered.
F-17
Notes to Financial Statements
A reconciliation of income tax computed at the statutory Federal rate to
the provision for income tax for the years ended December 31, 1998 and 1997
and the eleven months ended December 31, 1996.
1998 1997 1996
---- ---- ----
Tax expense at statutory rate 35.00% 35.00% 35.00%
State taxes, net of Federal benefit 4.78 4.91 3.81
Other 0.53 0.28 1.94
---- ---- ----
Effective tax rate 40.31% 40.19% 40.75%
------ ------ ------
(7) Commitments and Contingencies
CLG conducts its operations from offices that are leased under
noncancellable operating leases, some of which are with a related party
(see note 10) and expire at various dates through September, 2001. Other
facilities and equipment are rented on a month-to-month basis. Rent expense
for the years ended December 31, 1998 and 1997 and the eleven months ended
December 31, 1996 was $153,399, $183,754 and $299,727, respectively.
The following is a schedule of future minimum rental payments for the
office space:
December 31
1999 $140,700
2000 140,700
2001 105,525
2002 and thereafter --
--------
Total $386,925
CLG also leases certain computer equipment (as a lessee) and subleases
this equipment to third parties (as a lessor) under agreements classified
as operating leases. Rent expense under these lease was $-0-, $113,600
and $367,612 for the years ended December 31, 1998 and 1997 and the
eleven months ended December 31, 1996, respectively. Sublease income was
$26,324, $84,764 and $284,903 for the years ended December 31, 1998 and
1997 and the eleven months ended December 31, 1996, respectively.
Various legal proceedings against CLG have arisen from time to time in
the normal course of business. Management believes liabilities arising
from these proceedings, if any, will have no material adverse effect on
the financial position or results of operations of CLG.
F-18
Notes to Financial Statements
(8) Stock-Based Employee Compensation
Certain employees of CLG participate in the Omnibus Equity Compensation
Plan ("the Omnibus Plan") sponsored by Centura Banks, Inc. This plan allows
for the grant of a number of different types of equity-based compensation
vehicles under a single plan. CLG employees participate in either the
Deferred Compensation Plan or the Non-qualified Stock Option Plan, both of
which allow the participant to purchase Centura Banks, Inc. common stock.
Options granted under the Non-Qualified Stock Option Plan vest at various
rates ranging from immediate vesting to vesting at a rate of twenty percent
per year from the date of grant and have maximum terms ranging from 63
months to ten years. No options were granted under this plan prior to 1997.
Compensation expense relating to stock options recognized for 1998 and 1997
was $950,408 and $41,105, respectively.
A summary of stock option transactions under the Non-Qualified Stock Option
Plan follows:
1998 1997
---- ----
Weighted Weighted
Average average
Exercise exercise
Shares Price Shares price
------ ----- ------ -------
Outstanding at January 1 77,756 $35.50 -- $ --
Granted 42,259 35.50 77,756 35.50
Exercised (14,464) 35.50 -- --
Forfeited (900) 35.50 -- --
------- ------ ------ ------
104,651 $35.50 77,756 $35.50
------- ------ ------ ------
The following table summarizes information related to stock options outstanding
and exercisable on December 31, 1998 under the Non-Qualified Stock Option Plan:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number average Weighted Number Weighted
Of options remaining average of option average
Range of shares contractual exercise shares exercise
Exercise prices outstanding life price exercisable price
- --------------- ----------- ---- ----- ----------- -----
$ 35.50 104,651 8.37 $ 35.50 12,645 $ 35.50
F-19
Notes to Financial Statements
Under the Deferred Compensation Plan, participants may elect to defer
portions of their salaries and/or bonuses in the form of non-qualified
stock options. The exercise price for each share is twenty-five percent of
the fair market value of Centura Banks, Inc. common stock on the date of
grant. The remaining seventy-five percent of the purchase price is "paid"
from a participant's previously deferred compensation. Shares outstanding
under this plan and the liability relating to deferred compensation
amounted to 1,724 shares and $72,630, respectively, at December 31, 1998
and 246 shares and $43,475, respectively, at December 31, 1997.
Had CLG elected to recognize compensation cost for its stock-based
compensation plans in accordance with the fair value based accounting
method of SFAS 123, net income would have been reduced by approximately
$215,000 and $137,000 for 1998 and 1997, respectively.
The weighted-average fair value of options granted during 1998 and 1997
were $42.44 and $10.93 per share, respectively. In determining the pro
forma disclosures of net income, the fair value of options granted was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997
---- ----
Risk-free interest rates 5.03% 6.14%
Dividend yield 1.70 2
Volatility 23.98 24.16
Expected lives (in years) 3 3.30
(9) Employee Benefit Plans
CLG's discretionary profit sharing plan was amended to cease acceptance of
any new contributions effective January 1, 1997 pending a merger of that
plan with a 401 (k) defined contribution plan (the "401(k) Plan") sponsored
by Centura Banks, Inc. The 401(k) Plan permits eligible employees to make
contributions, with CLG matching 50% of contributions up to 6% of
employees' compensation. The 401 (k) Plan is available for full-time
employees after completion of six months consecutive service or for
part-time employees after completion of 1,000 hours of service during a
consecutive 12-month period. During the years ended December 31, 1998 and
1997, 401(k) Plan expense for matching contributions of CLG totaled $66,303
and $54,971, respectively. CLG incurred $305,000 of expense under the
discretionary profit sharing plan for the eleven months ended December 31,
1996.
F-20
Notes to Financial Statements
CLG employees, beginning in 1997, also participate in a noncontributory,
qualified defined benefit pension plan (the "Pension Plan") sponsored by
Centura Banks, Inc. The Pension Plan covers substantially all full-time
employees. Benefits are determined by applying a benefit ratio to the
employees' average compensation for each year of participation. The Pension
Plan is funded using the Projected Unit Credit method. Annual contributions
consist of a normal service cost amount and an amortization amount of prior
service costs. Net periodic pension expense related to the Pension Plan is
determined by an independent actuary, and is allocated to CLG based on the
relative cost of providing the benefits to its employees. Pension expense
for the years ended December 31, 1998 and 1997 relating to the Pension Plan
was $96,503 and $101,252, respectively.
(10) Related Party Transactions
CLG leases office space from a director of CLG and Centura under
noncancellable operating leases. Rent expense was $130,800, $130,800 and
$180,950 for the years ended December 31, 1998 and 1997 and the eleven
months ended December 31, 1996, respectively.
As of and for the years ended December 31, 1998 and 1997, the following
related party transactions existed between CLG and Centura:
1998 1997
---- ----
Cash balances maintained at Centura $1,608,594 1,203,736
Operating lease receivable from Centura 3,857,270 8,709,686
Notes payable to Centura (discounted 34,741,317 29,997,155
lease payments)
Lease income from Centura 4,785,512 5,351,054
Depreciation expense on equipment 4,785,512 5,188,185
leased to Centura
Interest expense on debt to Centura 2,146,216 1,658,605
Interest income on cash balances at Centura 119,133 53,482
Management fee paid to Centura 120,000 319,000
Handling fees received from Centura 460,047 630,081
Income and expense amounts between CLG and Centura from the acquisition
date to December 31, 1996 were not significant.
(11) Fair Value of Financial Instruments
CLG's on-balance sheet financial instruments are cash, lease contracts,
discounted lease rentals, and various receivables and payables. Disclosures
about fair value of financial instruments are not required for lease
contracts. The carrying values of other on-balance sheet financial
instruments approximate fair value.
F-21
Notes to Financial Statements
(12) Subsequent Event
On August 31, 1999, Centura entered into a definitive agreement with MLC
Holdings, Inc. ("MLC") whereby MLC will acquire all of the outstanding
shares of common stock of CLG. The acquisition closed on September 30,
1999.
(13) Year 2000 (Unaudited)
Management has assessed the impact of Year 2000 issues on the Company's
computer systems and applications and developed a remediation plan for
all systems considered mission critical. The remediation plan includes
the Company's lease accounting system which, if not remediated, will not
accept new lease bookings subsequent to December 31, 1999. Existing
leases are not expected to be affected. Management anticipates timely
completion of its Year 2000 project plan.
F-22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
December 16, 1999
By: /s/ Phillip G. Norton
-------------------------
Phillip G. Norton
Chairman and Chief Executive Officer