-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OgWX5YIfZaR0RnySUi2oZX+RETgaykhYIyJvI4dVQUHyy75MmPh7Qjsj30uIPatl AByxgxo44vlmfkjV1Zu3uw== 0000803016-98-000006.txt : 19980929 0000803016-98-000006.hdr.sgml : 19980929 ACCESSION NUMBER: 0000803016-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMPLICON INC CENTRAL INDEX KEY: 0000803016 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER RENTAL & LEASING [7377] IRS NUMBER: 953162444 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15641 FILM NUMBER: 98715751 BUSINESS ADDRESS: STREET 1: 5 HUTTON CENTRE DR STE 500 CITY: SANTA ANA STATE: CA ZIP: 92707 BUSINESS PHONE: 7147517551 MAIL ADDRESS: STREET 1: 5 HUTTON CENTER DRIVE STREET 2: SUITE 500 CITY: SANTA ANA STATE: CA ZIP: 92707 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File number 0-15641 AMPLICON, INC. (Exact name of registrant as specified in its charter) California 95-3162444 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5 Hutton Centre Drive, Suite 500 Santa Ana, CA 92707 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (714) 751-7551 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of each class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _______X________ No________________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _________________________ The aggregate market value of the Common Stock held by nonaffiliates of the Registrant as of September 11, 1998 was $54,747,134. Number of shares outstanding as of September 11, 1998: Common Stock 11,833,518 DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of the Registrant's fiscal year. AMPLICON, INC. TABLE OF CONTENTS PART I PAGE Item 1. Business 2 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Item 8. Financial Statements and Supplementary Data 10-25 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26 PART III Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 26 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 26 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26 Signatures 27 Schedule II 28 Exhibit Index 29-31 1 AMPLICON, INC. PART I ITEM 1. BUSINESS General Amplicon leases and sells mid-range computers, peripherals, workstations, personal computer networks, telecommunications equipment, computer automated design and manufacturing equipment, office automation equipment, computer software and other items of personal property to customers located throughout the United States. The Company was incorporated in California in 1977. Unless the context otherwise requires, the terms "Amplicon" and "Company" as used herein refer to Amplicon, Inc. Mid-Range Computers and Computer Networks. The Company concentrates on the market for mid-range computers and computer networks since this market is particularly receptive to leasing services. A growing portion of the Company's business consists of personal computers, workstations, printers, and software which are integrated into complete networks. Computer networks typically consist of a central server, which may be a mid-range computer or high-end microcomputer, multiple personal computers and workstations, network communications hardware and software, printers and associated products for microcomputer based networks. Computer networks generally range in cost from $100,000 to $3,000,000. Mid-range computers generally cost between $100,000 and $750,000 and are used primarily by subsidiaries and divisions of large companies to supplement mainframe computer systems, by middle-market companies for centralized data processing, and to upgrade personal computer networks. Mid-range computer systems typically consist of a central processing unit, multiple display terminals, printers, disk and tape drives, communications equipment and operating software. Mid-range systems and computer networks are modular and can be expanded to satisfy additional data processing requirements and perform additional functions by upgrading the central processing unit and/or server, and adding data storage devices and workstations to support additional users. Advances in microcomputer technology and enhancements to the capabilities of mid-range computer systems have led to the development of systems that better integrate data processing with word processing, file and retrieval systems, and electronic mail. The Company leases and sells mid-range computer systems manufactured primarily by International Business Machines Corporation ("IBM"), Digital Equipment Corporation ("DEC"), and Hewlett-Packard Co. ("HP"). Vendors of computer network products include IBM, DEC and HP, as well as Compaq Computer Corporation, Dell Computer Corporation and Gateway 2000, Inc., among many others, and software vendors such as Microsoft Corporation and Novell, Inc. Other Electronic Equipment. Advances in microcomputer technology have also expanded the scope of other electronic equipment utilized by Amplicon's existing and targeted customer base. Amplicon leases and sells telecommunications equipment, computer automated design and computer automated manufacturing ("CAD/CAM") equipment, and office automation equipment. The telecommunications equipment leased by the Company consists primarily of digital private branch equipment, switching equipment and voice mail systems manufactured by AT&T Corporation, Siemens Business Communications Systems, Inc. and ITT Corporation, and generally costs between $50,000 and $500,000. The CAD/CAM systems leased by the Company include those produced by IBM, HP, Intergraph Corporation and Sun Microsystems, Inc. and cost between $50,000 and $700,000 per system. The Company also leases imaging systems, testing equipment, copying equipment, retail point-of-sale systems and bank automatic teller machines. Production Equipment and Other Personal Property. The Company also leases technology related manufacturing and distribution management systems. These systems include complex computer controlled manufacturing and production systems, printing presses and warehouse distribution systems. In addition, the Company leases a wide variety of personal property in the "non-high technology" area, including machine tools, trucks and office furniture. 2 AMPLICON, INC. General (continued) Software. Amplicon leases operating system software products and specialized application software packages. These application software packages typically cost between $50,000 and $500,000. In addition to leasing stand-alone software packages, an increasing percentage of the cost of mid-range computer systems and networks consists of operating and application software. Marketing Strategy The Company has developed and refined a direct marketing system utilizing a centralized telemarketing program. The program includes a system which maintains a confidential database of current and potential users of business property, a comprehensive formal training program to introduce new marketing employees to Amplicon's telemarketing techniques, and an in-house computer and telecommunications system. The Company implemented its current marketing system after having determined that a centralized telemarketing program would be more cost effective than field sales representatives. The use of telemarketing techniques rather than field sales representatives has enabled the Company to limit selling, general and administrative expenses to seven percent (7%) or less of revenues during each of its last five fiscal years and, consequently, allows the Company to offer more competitive rates to its customers. Amplicon identifies potential customers through a variety of methods. The Company purchases lists of computer users from private sources, conducts direct mail and telephone campaigns to generate sales leads, and maintains proprietary records of contacts made with potential customers by its account executives. Amplicon utilizes prospect management software to further enhance the productivity of the sales force. Specific information about potential customers is entered into an on-line confidential database accessible to each account executive through the personal computer network. As potential customers are contacted by account executives, the database is updated and supplemented with information about what computer and other equipment they are using, related lease expiration dates and any future equipment needs or replacement plans. The database allows account executives to identify efficiently the most likely purchaser or lessee of capital assets and to concentrate efforts on these prospective customers. Amplicon's database, combined with the prospect management software, and an integrated in-house telecommunications system, permit the Company's sales management to monitor account executive activity, daily prospect status and pricing information. The ability to monitor account activity and offer immediate assistance in negotiating or pricing a transaction makes it possible for Amplicon to be responsive to its customers and prospects. Leasing and Sales Activities The Company's leases are generally for terms ranging from two to five years. All of the Company's leases are noncancelable "net" leases which contain "hell-or-high-water" provisions under which the lessee must make all lease payments regardless of any defects in the property, and which require the lessee to maintain and service the property, insure the property against casualty loss and pay all property, sales and other taxes. The Company retains ownership of the property it leases, and in the event of default by the lessee, the Company or the lender to whom the lease had been assigned may declare the lessee in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the property. Upon the expiration of the leases, the lessee typically has an option, which is dependent upon each lease's defined end of term options, to either purchase the property at a mutually agreeable price, or in the case of a "conditional sales contract," at a predetermined minimum price, or to renew the lease. If the purchase option is not exercised by the original lessee, once the leased property is returned to the Company, the Company will endeavor to locate a new lessee; however, if a new lessee cannot be located, then the Company seeks to sell the leased property. The terms of the Company's software leases are substantially similar to its equipment leases. 3 AMPLICON, INC. Leasing and Sales Activities (Continued) The Company conducts its leasing business in a manner designed to conserve its working capital and minimize its credit exposure. The Company does not purchase property until it has received a noncancelable lease from its customer and, generally, has determined that the lease can be discounted with a bank or financial institution on a nonrecourse basis. Accordingly, a substantial portion of the Company's leases are discounted to banks or finance companies on a nonrecourse basis at fixed interest rates that reflect the customers' financial condition. Approximately 92.2% and 68.3% of the total dollar amount of new leases entered into by the Company during the fiscal years ended June 30, 1998 and 1997, respectively, were discounted to financial institutions. The lender to which a lease has been assigned has no recourse against the Company, unless the Company is in default of the terms under the agreement by which a lease was assigned to the lender. The lender to which a lease has been assigned may take title to the leased property in the event the lessee fails to make lease payments or initiates certain other defaults under the terms of the lease. If this occurs, the Company may not realize its residual investment in the leased property. From time to time, the Company retains in its own portfolio lease transactions that meet credit standards set by the Company. Some of these transactions are entered into when the value of the underlying property, or the credit profile of the lessee, would not be acceptable to a financial institution for purposes of making a nonrecourse loan to the Company. Each of these transactions must meet or exceed certain profitability requirements as established, on a case by case basis, by the Company's senior management. In addition, the Company invests in lease transactions which the Company believes could be placed at a later date with nonrecourse lenders on a lease-by-lease basis or in a portfolio debt placement or securitization. At June 30, 1998 and 1997, the discounted minimum lease payments receivable relative to leases maintained in the Company's portfolio amounted to $62,749,612 and $63,366,848, respectively. Customers The Company's customers are primarily subsidiaries and divisions of Fortune 1000 companies and middle-market companies with credit ratings acceptable to the lenders providing nonrecourse loans. The Company does not believe that the loss of any one customer would have a material adverse effect on its operations taken as a whole. Competition The Company competes in the distribution and lease financing of computer systems and networks, software, and other equipment with equipment brokers and dealers, other leasing companies, banks and other financial institutions and credit corporations which are affiliated with equipment manufacturers, such as, IBM, DEC and HP. The Company believes that there is increased competition for new business and that such competition is heightened during periods when key vendors introduce significant new products. Changes by the manufacturers of systems leased by the Company with respect to pricing, maintenance or marketing practices could materially affect the Company. In addition, if credit corporations affiliated with manufacturers become more aggressive with respect to the financing terms offered, the Company's operations could be adversely affected. Many of the Company's competitors have substantially greater resources, capital, and more extensive and diversified operations than Amplicon. The Company believes the principal competitive factors in the industry which it serves are price, responsiveness to customer needs, flexibility in structuring lease financing arrangements, financial technical proficiency and the offering of a broad range of lease financing options. Employees The Company, as of June 30, 1998, had 236 employees, including 153 sales managers and account executives and 13 professionals engaged in finance and credit. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are satisfactory. 4 AMPLICON, INC. ITEM 2. PROPERTIES At June 30, 1998, Amplicon occupied approximately 49,000 square feet of office space in Santa Ana, California leased from an unaffiliated party. The lease which covers this office space provides for monthly rental payments which average $77,224 from July 1998 through February 2003. ITEM 3. LEGAL PROCEEDINGS The Company is sometimes named as a defendant in litigation relating to its business operations. Management does not expect the outcome of any existing suit to have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Amplicon, Inc. trades on the NASDAQ National Market System under the symbol AMPI. The following high and low closing sale prices for the periods shown reflect interdealer prices without retail markup, markdown or commissions and may not necessarily reflect actual transactions (adjusted for the Company's 2-for-1 common stock split effective October 17, 1997). High Low Fiscal year ended June 30, 1998 First Quarter.........................................$16.25 $11.945 Second Quarter.........................................17.25 15.25 Third Quarter..........................................24.00 16.50 Fourth Quarter.........................................24.00 11.875 Fiscal year ended June 30, 1997 First Quarter.........................................$ 9.375 $ 8.00 Second Quarter.........................................10.5625 9.1875 Third Quarter..........................................11.625 10.25 Fourth Quarter.........................................12.00 11.125 The Company had approximately 40 stockholders of record and in excess of 500 beneficial owners as of September 11, 1998. In September 1994, after considering the Company's profitability, liquidity and future operating cash requirements, the Board of Directors authorized a regular quarterly cash dividend policy. During each of the fiscal years ended June 30, 1998, 1997 and 1996 the Company declared cash dividends totaling $.16, $.10 and $.10, respectively, per common share. 5 AMPLICON, INC. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data and operating information of the Company. Common share data has been adjusted for the Company's 2-for-1 common stock split effective October 17, 1997. The selected financial data should be read in conjunction with the Financial Statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition contained herein.
YEARS ENDED JUNE 30, -------------------------------------------- INCOME STATEMENT DATA 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands, except per share amounts) Revenues: Sales of equipment $267,972 $261,082 $224,818 $178,413 $156,740 Interest and investment income 45,101 37,151 31,141 25,794 24,357 Rental income 716 1,657 1,280 2,313 263 -------- -------- -------- -------- -------- Total revenues 313,789 299,890 257,239 206,520 181,360 Gross profit 51,092 47,058 39,280 32,751 29,453 Earnings before income taxes 31,769 26,017 21,480 19,088 17,352 Net earnings $ 19,220 $ 15,740 $ 12,996 $ 11,548 $ 11,019 ======== ======== ======== ======== ======== COMMON SHARE DATA Basic earnings per share $ 1.63 $ 1.35 $ 1.11 $ .99 $ .95 ======== ======== ======== ======== ======== Diluted earnings per share $ 1.55 $ 1.31 $ 1.09 $ .96 $ .91 ======== ======== ======== ======== ======== Weighted average number of common shares outstanding 11,800 11,689 11,698 11,720 11,698 Diluted number of common shares outstanding 12,368 12,021 11,894 11,986 12,057 Cash dividends per share $ .16 $ .10 $ .10 $ .10 $ - ======== ======== ======== ======== ======== SELECTED ANNUAL GROWTH RATES Sales of equipment 3% 16% 26% 14% 12% Total revenues 5 17 25 14 11 Net interest and investment income 26 29 14 (4) 4 Gross profit 9 20 20 11 13 Net earnings 22 21 13 5 13 Basic earnings per share 21 21 13 4 13 AS OF JUNE 30, ------------------------------------------------ BALANCE SHEET DATA 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands, except per share data) Total assets $512,605 $488,915 $461,749 $402,100 $384,584 Note payable to bank - 10,000 - - 10,000 Nonrecourse debt 269,769 262,516 279,109 238,614 225,746 Stockholders' equity 135,945 117,754 102,665 91,364 80,875 Book value per common share $ 11.49 $ 10.02 $ 8.79 $ 7.79 $ 6.91
6 AMPLICON, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Fiscal Years Ended June 30, 1998 and 1997 REVENUES. Total revenues for the fiscal year ended June 30, 1998 were $313,789,037, an increase of $13,898,559 or 5% from the prior year. This change was primarily the result of increases in sales of equipment of $6,890,030 and interest income of $8,004,374. The increase in sales of equipment was primarily due to a 4% increase in sales from new lease transactions offset by a 6% decrease in sales revenue from residual investments. Interest income for the fiscal year ended June 30, 1998 increased to $44,519,284 as compared to $36,514,910 for the fiscal year ended June 30, 1997, and included interest income on discounted lease rentals assigned to lenders (which is offset by interest expense on nonrecourse debt) of $22,439,529 in the fiscal year ended June 30, 1998 versus $19,130,121 for the prior year. Investment income for fiscal year ended June 30, 1998 decreased by $55,200 to $581,524 as compared to $636,724 in the prior year primarily as a result of the Company maintaining lower investment balances throughout fiscal year 1998. While total revenues for the year ended June 30, 1998 were up, total revenues for the fourth quarter ended June 30, 1998 decreased 15%, or $12,574,091 to $69,735,625 compared to the fourth quarter ended June 30, 1997. This decrease was due to a $14,453,174 drop in sales of equipment offset by a $2,276,756 increase in interest income. This decline in sales of equipment reflected a 21% decrease in sales from new lease transactions and a 19% decrease in sales revenue from lease extensions and sales of leased property. Net interest income (interest and investment income less interest expense on discounted lease rentals assigned to lenders) for the fiscal year ended June 30, 1998 increased by $4,639,766, or 26%, to $22,661,279 as compared to $18,021,513 for fiscal year ended June 30, 1997. This net increase resulted primarily from higher recognition of net deferred income and higher interest income from Amplicon's portfolio of lease receivables and residuals. Rental income for the fiscal year ended June 30, 1998 of $716,153 decreased by $940,645 as compared to the fiscal year ended June 30, 1997, as a result of decreases in the volume of short-term lease renewals. GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1998 increased by $4,034,044, or 9%, to $51,091,701 compared to $47,057,657 for the fiscal year ended June 30, 1997. Gross profit as a percent of total revenues increased to 16.3% of total revenues for fiscal 1998 compared to 15.7% of total revenues for the prior year. The principal factor that contributed to the increase in gross profit was the 26% increase in net interest income described above offset by a 7% decline in gross profit from lease extensions and leased property sales during the fiscal year and lower profits from new lease transactions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of total revenues were 6.1% for the fiscal year ended June 30, 1998 as compared to 6.9% for the fiscal year ended June 30, 1997. Selling, general and administrative expenses for the fiscal year ended June 30, 1998 decreased by $1,587,492, or 7.6%, as compared to the prior year. This decrease is the result of lower legal, salary and benefit expenses. INTEREST EXPENSE-OTHER. Interest expense-other was $85,733 for the year ended June 30, 1998 as compared to $216,182 for the year ended June 30, 1997. The decrease of $130,449 was primarily the result of lower fiscal year 1998 interest assessments made as the result of regulatory audits with various federal, state and local agencies. TAXES. The Company's tax rate was 39.5% for each of the fiscal years ended June 30, 1998 and 1997 representing its estimated annual tax rates for each respective year. 7 AMPLICON, INC. Fiscal Years Ended June 30, 1997 and 1996 REVENUES. Total revenues for the fiscal year ended June 30, 1997 were $299,890,478, an increase of $42,651,438 or 17% from the prior year. This change was primarily the result of increases in sales of equipment of $36,263,935 and interest income of $6,242,365. The increase in sales of equipment was primarily due to sales from new lease transactions but benefited also from a 47% increase in sales from residual investments. Interest income for the fiscal year ended June 30, 1997 increased to $36,514,910 as compared to $30,272,545 for the fiscal year ended June 30, 1996, and included interest income on discounted lease rentals assigned to lenders (which is offset by interest expense on nonrecourse debt) of $19,130,121 in the fiscal year ended June 30, 1997 versus $17,162,307 for the prior year. Investment income for fiscal year ended June 30, 1997 decreased by $231,732 to $636,724 as compared to $868,456 in the prior year primarily as a result of the Company maintaining lower investment balances throughout fiscal year 1997. Net interest income (interest and investment income less interest expense on discounted lease rentals assigned to lenders) for the fiscal year ended June 30, 1997 increased by $4,042,819, or 29%, to $18,021,513 as compared to $13,978,694 for fiscal year ended June 30, 1996. This net increase resulted primarily from increases in the amortization of net deferred income, higher interest income from a larger investment in lease receivables and higher interest income earned on larger residual investments. Rental income for the fiscal year ended June 30, 1997 of $1,656,798 increased by $376,870 as compared to the fiscal year ended June 30, 1996, as a result of increases in the volume of short-term lease renewals. GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1997 increased by $7,777,723, or 20%, to $47,057,657 compared to $39,279,934 for the fiscal year ended June 30, 1996. Gross profit as a percent of total revenues increased to 15.7% of total revenues for fiscal 1997 compared to 15.3% of total revenues for the prior year. The principal factors which contributed to the increase in gross profit were strong increases in earnings from lease extensions, renewals and sales of property at the end of the lease term, and the 29% increase in net interest income described above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of total revenues were 6.9% for the fiscal year ended June 30, 1997 as compared to 6.8% for the fiscal year ended June 30, 1996. Selling, general and administrative expenses for the fiscal year ended June 30, 1997 increased by $3,271,119, or 18.6%, as compared to the prior year. This increase resulted primarily from higher employee salaries and benefit costs and higher legal expenses. INTEREST EXPENSE-OTHER. Interest expense-other was $216,182 for the year ended June 30, 1997 as compared to $246,590 for the year ended June 30, 1996. The decrease of $30,408 was primarily the result of lower fiscal year 1997 interest assessments made as the result of regulatory audits with various federal, state and local agencies. TAXES. The Company's tax rate was 39.5% for each of the fiscal years ended June 30, 1997 and 1996 representing its estimated annual tax rates for each respective year. Liquidity and Capital Resources The Company funds its operating activities through nonrecourse debt and internally generated funds. Capital expenditures for leased property purchases are primarily financed by assigning the lease payments to banks or other financial institutions. The lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. The Company does not purchase property until it has received a noncancelable lease from its customer and, generally, has determined that the lease can be discounted on a nonrecourse basis. At June 30, 1998, the Company had outstanding nonrecourse debt aggregating $269,769,090 relating to property under capital and operating leases. In the past, the Company has been able to obtain adequate nonrecourse funding commitments, and the Company believes it will be able to do so in the future. 8 AMPLICON, INC. From time to time, the Company retains leases in its own portfolio rather than assigning the leases to financial institutions. During the fiscal year 1998, the Company decreased its net investment in leases by $617,236. This decrease was primarily due to fewer new lease transactions being held in the Company's own lease portfolio. The Company generally funds its equity investments in leased property and interim purchases with internally generated funds and, if necessary, borrowings under a $20,000,000 general line of credit. At June 30, 1998, the Company did not have any borrowings on this line of credit. In November 1990, the Board of Directors authorized management, at its discretion, to repurchase up to 600,000 shares of the Company's Common Stock. During the year ended June 30, 1998, the Company did not repurchase any Common Stock. During the year ended June 30, 1997, the Company repurchased 10,000 shares at an aggregate cost of $81,875. As of September 11, 1998, 121,356 shares remain available under this authorization. The need for cash used for operating activities will continue to grow as the Company expands. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, available borrowings under its existing credit facility, and assignments (on a nonrecourse basis) of anticipated lease payments will be sufficient to meet its foreseeable financing needs. Inflation has not had a significant impact upon the operations of the Company. Year 2000 The Year 2000 issue ("Y2K") is a problem that relates to the way that computers store, manipulate, and interpret dates that define the year using only two digits. These systems may experience problems handling dates beyond 1999 and therefore, could cause computer or other systems to fail or provide erroneous results. Date information can exist at any level of hardware or software from micro code to application programs, in files and databases, and might be present on any operating platform. The Company has addressed this issue by implementing a program which will attempt to assess, remediate and mitigate the potential impact of the Y2K problem. The Company is in the process of systematically determining Y2K compliance of its computer related hardware, major application software programs, externally supplied software, and major debt source vendors and customer compliance. The Company has substantially completed its assessment of its internal hardware and major software application programs and determined that the Company is in material compliance with most of its internal systems. For those systems in noncompliance, the Company is in the process of either upgrading or replacing those systems to current Y2K compliance standards. The costs associated with this program are not anticipated to be material and should fall within normal operating costs of maintaining those systems. Management believes that the Company's internal systems will be in substantial compliance with the Y2K problems prior to the Year 2000 and that the Company should not have a material business risk as a result of this issue. The Company is in the process of monitoring its major suppliers, service providers, debt sources and customers, over which the Company has no control, to determine that they address their own Y2K issues. If appropriate modifications are not made by them on a timely basis, the Company's operations and financial results could be adversely affected. Forward-Looking Statements This document contains forward-looking statements which involve management assumptions, risks and uncertainties. Consequently, if such management assumptions prove to be incorrect or such risks or uncertainties materialize, the Company's actual results could differ materially from the results forecast in the forward-looking statements. 9 AMPLICON, INC. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary financial information are included herein at the pages indicated below: Page Number ----------- Report of Independent Public Accountants 11 Balance Sheets at June 30, 1998 and 1997 12 Statements of Earnings for the years ended June 30, 1998, 1997 and 1996 13 Statements of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 14 Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 15 Notes to Financial Statements 16-25 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Amplicon, Inc.: We have audited the accompanying balance sheets of Amplicon, Inc. (a California corporation) as of June 30, 1998 and 1997, and the related statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. 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 Amplicon, Inc. as of June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. As explained in Note 1 to the financial statements, effective January 1, 1997, the Company changed its method of accounting for transfers of financial assets. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Irvine, California July 31, 1998 11 AMPLICON, INC. BALANCE SHEETS
June 30, ----------------------------- ASSETS 1998 1997 ------------ ------------ Cash and cash equivalents (Note 1) $ 15,192,477 $ 5,779,960 Net receivables (Note 2) 87,228,472 87,743,287 Inventories, primarily customer deliveries in process 2,500,352 1,558,063 Net investment in capital leases (Note 3) 109,148,826 103,961,072 Equipment on operating leases, less accumulated depreciation of $29,708 (1998) and $117,262 (1997) - 1,512 Other assets 1,308,140 1,189,067 Discounted lease rentals assigned to lenders (Note 3) 297,226,530 288,682,289 ------------ ------------ $512,604,797 $488,915,250 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Note payable to bank (Note 4) $ - $ 10,000,000 Accounts payable 25,766,493 27,608,587 Accrued liabilities 8,037,617 5,928,825 Customer deposits 8,174,972 6,072,248 Nonrecourse debt (Note 3) 269,769,090 262,515,988 Deferred interest income (Note 5) 27,457,440 26,166,301 Net deferred income (Note 5) 7,436,294 5,819,424 Income taxes payable, including deferred taxes (Note 6) 30,018,030 27,049,601 ------------ ------------ 376,659,936 371,160,974 ------------ ------------ Commitments and contingencies (Note 8) Stockholders' equity (Notes 4 & 7): Preferred stock; 2,500,000 shares authorized; none issued - - Common stock; $.005 par value; 40,000,000 shares authorized; 11,830,618 (1998) and 11,752,518 (1997) issued and outstanding 59,153 58,763 Additional paid in capital 6,970,065 6,109,745 Retained earnings 128,915,643 111,585,768 ------------ ------------ 135,944,861 117,754,276 ------------ ------------ $512,604,797 $488,915,250 ============ ============
The accompanying notes are an integral part of these balance sheets. 12 AMPLICON, INC. STATEMENTS OF EARNINGS
Years ended June 30, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Revenues: Sales of equipment $267,972,076 $261,082,046 $224,818,111 Interest income (Notes 1, 3 & 5) 44,519,284 36,514,910 30,272,545 Investment income 581,524 636,724 868,456 Rental income 716,153 1,656,798 1,279,928 ------------ ------------ ------------ 313,789,037 299,890,478 257,239,040 ------------ ------------ ------------ Costs: Cost of equipment sold 240,229,320 233,591,971 200,531,313 Interest expense on nonrecourse debt (Notes 1, 3 & 5) 22,439,529 19,130,121 17,162,307 Depreciation of equipment on operating leases 28,487 110,729 265,486 ------------ ------------ ------------ 262,697,336 252,832,821 217,959,106 ------------ ------------ ------------ Gross profit 51,091,701 47,057,657 39,279,934 Selling, general and administrative expenses 19,237,342 20,824,834 17,553,715 Interest expense-other 85,733 216,182 246,590 ------------ ------------ ------------ Earnings before income taxes 31,768,626 26,016,641 21,479,629 Income taxes (Note 6) 12,549,000 10,277,000 8,484,000 ------------ ------------ ------------ Net earnings $ 19,219,626 $ 15,739,641 $ 12,995,629 ============ ============ ============ Basic earnings per common share $ 1.63 $ 1.35 $ 1.11 ============ ============ ============ Diluted earnings per common share $ 1.55 $ 1.31 $ 1.09 ============ ============ ============ Dividends declared per common share outstanding $ .16 $ .10 $ .10 ============ ============ ============ Weighted average number of common shares outstanding 11,800,206 11,688,980 11,697,694 ============ ============ ============ Diluted number of common shares outstanding 12,367,752 12,021,488 11,893,952 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 13 AMPLICON, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Investment Additional securities Common Stock paid in Retained valuation Shares Amount capital earnings adjustment Total ------------------ ---------- ----------- ---------- ------------ Balance, June 30, 1995 11,735,918 $58,680 $6,091,910 $ 85,191,545 $21,542 $ 91,363,677 Shares issued - Stock options exer- cised 12,000 60 41,940 - - 42,000 Shares re- purchased ( 70,000)( 350)( 546,563) - - ( 546,913) Dividends declared - - - ( 1,169,911) - ( 1,169,911) Invest- ment secu- rities valua- tion adjust- ment - - - - ( 19,946) (19,946) Net earnings - - - 12,995,629 - 12,995,629 ---------- ------- ---------- ------------ ------- ------------ Balance, June 30, 1996 11,677,918 58,390 5,587,287 97,017,263 1,596 102,664,536 Shares issued - Stock options exer- cised 84,600 423 604,283 - - 604,706 Shares re- purchased ( 10,000)( 50)( 81,825) - - ( 81,875) Dividends declared - - - ( 1,171,136) - ( 1,171,136) Invest- ment secu- rities valua- tion adjust- ment - - - - ( 1,596)( 1,596) Net earnings - - - 15,739,641 - 15,739,641 --------- ------- ---------- ------------ ------- ------------ Balance, June 30, 1997 11,752,518 58,763 6,109,745 111,585,768 - 117,754,276 Shares issued - Stock options exer- cised 78,100 390 652,875 - - 653,265 Income tax benefit from exercise of non- qualified stock options - - 207,445 - - 207,445 Dividends declared - - - ( 1,889,751) - ( 1,889,751) Net earnings - - - 19,219,626 - 19,219,626 ---------- ------- ---------- ------------ ------- ------------ Balance, June 30, 1998 11,830,618 $59,153 $6,970,065 $128,915,643 $ - $135,944,861 ========== ======= ========== ============ ======= ============
The accompanying notes are an integral part of these financial statements. 14 AMPLICON, INC. STATEMENTS OF CASH FLOWS
Years ended June 30, -------------------------------------------- 1998 1997 1996 CASH FLOWS FROM OPERATING ------------ ------------ ------------ ACTIVITIES: Net earnings $ 19,219,626 $ 15,739,641 $ 12,995,629 Adjustments to reconcile net earnings to cash flows used for operating activities: Depreciation 28,487 110,729 265,486 Sale or lease of equipment previously on operating leases, net - - 106,076 Interest accretion of estimated unguaranteed residual values ( 5,893,522) ( 4,634,756) ( 3,471,891) Estimated unguaranteed residual values recorded on leases ( 11,550,576) ( 12,439,845) ( 11,622,505) Interest accretion of net deferred income ( 4,233,252) ( 3,862,195) ( 2,351,292) Increase in net deferred income 5,850,122 5,402,116 6,065,845 Net increase (decrease) in income taxes payable, including deferred taxes 3,175,874 7,542,529 ( 862,378) Net decrease (increase) in net receivables 514,815 ( 28,965,862) ( 4,818,201) Net (increase) decrease in inventories ( 942,289) 898,130 3,195,017 Net increase (decrease) in accounts payable and accrued liabilities 266,698 19,253,668 ( 1,850,239) ------------ ------------ ------------ Net cash provided by (used for) operating activities 6,435,983 ( 955,845) ( 2,348,453) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities ( 180,997,695) ( 235,370,644) ( 221,323,828) Proceeds from sale of available-for-sale securities 180,997,695 236,551,015 229,365,713 Net decrease (increase) in minimum lease payments receivable 617,236 ( 22,190,647) ( 21,570,280) Purchase of equipment on operating leases ( 26,975) ( 77,674) ( 370,119) Net (increase) decrease in other assets ( 119,073) 247,470 ( 41,502) Decrease in estimated unguaranteed residual values 11,639,108 11,248,836 7,286,531 ------------ ------------ ------------ Net cash provided by (used for) investing activities 12,110,296 ( 9,591,644) ( 6,653,485) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Assignment of discounted lease rentals - - 12,120,298 (Payment) borrowing on note payable ( 10,000,000) 10,000,000 - Payments to repurchase common stock - ( 81,875) ( 546,913) Increase (decrease) in customer deposits 2,102,724 ( 1,638,603) 859,133 Dividends to stockholders ( 1,889,751) ( 1,171,136) ( 1,169,911) Proceeds from exercise of stock options 653,265 604,706 42,000 ------------ ------------ ------------ Net cash (used for) provided by financing activities ( 9,133,762) 7,713,092 11,304,607 ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 9,412,517 ( 2,834,397) 2,302,669 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,779,960 8,614,357 6,311,688 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,192,477 $ 5,779,960 $ 8,614,357 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Increase (decrease) in lease rentals assigned to lenders and related nonrecourse debt $ 7,253,102 ($ 20,531,979) $ 40,495,045 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 85,733 $ 216,182 $ 246,590 ============ ============ ============ Income taxes $ 9,373,126 $ 2,734,471 $ 9,346,378 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 15 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 1998 Note 1 - Summary of Significant Accounting Policies: Nature of Operations Amplicon leases and sells mid-range computers, peripherals, workstations, personal computer networks, telecommunications equipment, computer automated design and manufacturing equipment, office automation equipment, computer software and other items of business property to customers located throughout the United States. Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of these statements, cash and cash equivalents includes cash in banks and cash in demand deposit accounts. Fair Value of Financial Instruments The Company has estimated the fair value of its financial instruments in compliance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"). For cash, the book value is a reasonable estimate of fair value. For cash equivalents, the estimated fair value is based on respective market prices which was equal to book value for all periods presented. The fair value of the Company's net investment in capital leases is not a required disclosure under SFAS No. 107. Leases Capital Leases The Company engages in the lease and sale of computer hardware and software, and other equipment. The discounted value of the aggregate lease rentals is recorded as sales revenue. The property cost, less the discounted value of the residual, if any, is recorded as cost of sales. Except for capital lease transactions in which the Company no longer has a continuing interest in the leased property, the Company defers gross profit on capital leases through a reduction of sales revenue recognized at lease origination. Gross profit which is deferred together with the unearned interest income (and interest expense if assigned) is recognized as interest income (and expense) over the lease term based on an internal rate of return method. At the time of closing capital leases, the Company records on its balance sheet the present value of the lease receivable as minimum lease payments receivable and, if appropriate, the estimated residual value of the leased property. The Company typically assigns, on a nonrecourse basis, the noncancelable lease rentals to financial institutions at fixed interest rates. When leases are assigned to financial institutions, without recourse, the discounted value of the lease rentals is recorded on the balance sheet as discounted lease rentals assigned to lenders. The related obligation resulting from the discounting of the leases is recorded as nonrecourse debt. In the event of default by a lessee, the lender has a first lien against the underlying leased property with no further recourse against the Company. If this occurs, the Company may not realize its residual investment in the leased property. 16 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Effective January 1, 1997, the Company has adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). Under the requirements set forth in SFAS No. 125, the Company has accounted for qualifying transfers of financial assets occurring on or after January 1, 1997 by derecognizing all assets sold. Qualifying transfers which occurred prior to January 1, 1997 were precluded from adoption of SFAS No. 125 and the discounted value of the lease rentals have been recognized as discounted lease rentals assigned to lenders. A portion of the Company's selling, general and administrative costs directly related to originating capital lease transactions during the period is deferred as an increase in revenues and amortized over the lease term utilizing the effective interest method. See Note 5. Operating Leases Lease contracts which do not meet the criteria of capital leases are accounted for as operating leases. Property on operating leases is recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value at the termination of the lease. Rental income is recorded monthly or quarterly when due. Selling costs directly associated with the operating leases are deferred and amortized over the lease term. Inventories Inventories, which primarily represent partial deliveries of property on in-process lease transactions where the lessee is legally obligated to accept, are stated at cost. Common Stock On September 12, 1997, the Company's Board of Directors announced a 2-for- 1 Common Stock split to be effected on October 17, 1997, to stockholders of record as of September 26, 1997. These financial statements have been adjusted to reflect this stock split. Earnings Per Share Effective December 31, 1997 the Company adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options using the treasury stock method. The table following reconciles the components of the basic net income per share calculation to diluted net income per share. 17 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS
Years ended June 30, -------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net earnings $19,219,626 $15,739,641 $12,995,629 =========== =========== =========== Weighted average number of common shares outstanding assuming no exercise of outstanding options 11,800,206 11,688,980 11,697,694 Dilutive stock options using the treasury stock method 567,546 332,508 196,258 ----------- ----------- ----------- 12,367,752 12,021,488 11,893,952 =========== =========== =========== Basic earnings per common share $ 1.63 $ 1.35 $ 1.11 =========== =========== =========== Diluted earnings per share $ 1.55 $ 1.31 $ 1.09 =========== =========== ===========
Reclassifications Certain reclassifications have been made to the fiscal 1997 financial statements to conform with the presentation of the fiscal 1998 financial statements. Note 2 - Receivables: The Company's net receivables consist of the following:
June 30, ---------------------------- 1998 1997 ----------- ----------- Financial institutions $ 4,955,428 $ 8,043,353 In-process lease receivables 69,451,152 68,250,717 Lessees 12,868,990 11,131,001 Other 791,759 1,157,073 ----------- ----------- 88,067,329 88,582,144 Less allowance for doubtful accounts ( 838,857) ( 838,857) ----------- ----------- Net receivables $87,228,472 $87,743,287 =========== ===========
18 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Note 3 - Capital Leases: The Company's net investment in capital leases consists of the following:
June 30, ------------------------------ 1998 1997 ------------ ------------- Minimum lease payments receivable, less allowance for doubtful accounts of $856,585 in each year $ 70,266,276 $ 70,992,751 Estimated unguaranteed residual value, less valuation allowance of $1,273,793 in 1998 and $1,394,274 in 1997 59,584,083 53,128,404 ------------ ------------ 129,850,359 124,121,155 Less unearned income ( 20,701,533) ( 20,160,083) ------------ ------------ Net investment in capital leases $109,148,826 $103,961,072 ============ ============
The interest rates used to discount lease payments reflect the underlying lease rates and range from 7.20% to 14.50%. The estimated unguaranteed residual value is discounted using the internal rate of return related to each specific capital lease. At June 30, 1998, a summary of the installments due on minimum lease payments receivable and the expected maturity of the Company's estimated unguaranteed residual value, net of allowances, is as follows:
Estimated Minimum unguaranteed Years ending lease payments residual June 30, receivable value Total ------------ -------------- ------------ ------------ 1999 $36,000,609 $17,670,433 $ 53,671,042 2000 18,064,772 19,024,909 37,089,681 2001 10,033,620 15,720,351 25,753,971 2002 3,663,364 4,677,977 8,341,341 2003 2,483,637 2,451,641 4,935,278 Thereafter 20,274 38,772 59,046 ----------- ----------- ------------ 70,266,276 59,584,083 129,850,359 Less unearned income ( 7,516,664) ( 13,184,869) ( 20,701,533) ----------- ----------- ------------ Net investment in capital leases $62,749,612 $46,399,214 $109,148,826 =========== =========== ============
19 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Nonrecourse debt, which relates to the discounting of capital lease receivables, bears interest at rates ranging from 5.87% to 18.5%. Maturities of such obligations at June 30, 1998 are as follows:
Years ending Capital June 30, leases ------------ ------------ 1999 $125,852,334 2000 88,105,252 2001 42,632,430 2002 10,645,315 2003 2,480,703 Thereafter 53,056 ------------ Total nonrecourse debt 269,769,090 Deferred interest income (Note 5) 27,457,440 ------------ Discounted lease rentals assigned to lenders $297,226,530 ============
Note 4 - Note Payable to Bank: In December 1997, the Company negotiated a $20,000,000 general business loan agreement (the "Agreement") with a Bank. The Agreement, which provides for borrowings at the Bank's reference rate or the Bank's Offshore rate plus 1.00%, allows for advances through December 31, 1999 with rollover provisions to a term note, provided certain conditions are met by the Company. The term note is to be secured by certain qualifying leases and is to bear interest at the Bank's reference rate plus .25% or the Bank's Offshore rate plus 1.75%. The term note requires repayment in three equal quarterly installments of one eighth of the outstanding balance at the expiration date, commencing April 1, 2000, and one final payment on December 31, 2000, for the remaining balance. The Agreement is unsecured and excludes any arrangements for compensating balances; however, the Bank requires a commitment fee on the daily average unused amount of the Bank's $20,000,000 commitment. Under the provisions of the Agreement, the Company must maintain certain net worth requirements, a defined debt to net worth ratio and a defined ratio of certain assets to defined debt. As of June 30, 1998, there was no borrowing outstanding on this Agreement. Note 5 - Deferred Interest Income and Net Deferred Income: At June 30, 1998, deferred interest income of $27,457,440 is offset by deferred interest expense related to the Company's discounted lease rentals assigned to lenders of $27,457,440. See Note 3. At June 30, 1998, the expected recognition of net deferred income (deferred gross margin of $17,314,989 less deferred selling expenses of $9,878,695) on the Company's future statements of earnings is as follows:
Years ending June 30, ------------ 1999 $4,676,306 2000 2,163,488 2001 275,550 2002 232,145 2003 88,805 ---------- $7,436,294 ==========
20 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Note 6 - Income Taxes: The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Among other provisions, this standard requires deferred tax balances to be determined using the enacted income tax rate for the years in which taxes will be paid or refunds received. From time to time, the Company is audited by various governmental taxing authorities. The Company believes that its accrual for income taxes is adequate for adjustments, if any, which may result from these examinations. The provision for income taxes is summarized as follows:
Years ended June 30, ---------------------------------------- 1998 1997 1996 ----------- ----------- ---------- Current tax expense: Federal $ 7,697,441 $ 5,407,310 $1,626,390 State 2,200,000 1,500,000 1,186,017 ----------- ----------- ---------- 9,897,441 6,907,310 2,812,407 ----------- ----------- ---------- Deferred tax expense: Federal 2,620,156 3,177,690 5,460,980 State 31,403 192,000 210,613 ----------- ----------- ---------- 2,651,559 3,369,690 5,671,593 ----------- ----------- ---------- $12,549,000 $10,277,000 $8,484,000 =========== =========== ==========
Deferred taxes result principally from the method of recording lease income on capital leases and depreciation methods for tax reporting, which differ from financial statement reporting. Deferred income tax liabilities (assets) are comprised of the following:
June 30, ---------------------------- 1998 1997 ----------- ----------- Deferred income tax liabilities: Tax operating leases $33,353,407 $32,337,212 Deferred selling expenses 4,050,265 3,794,585 Payments due 1,315,834 710,524 ----------- ----------- Total liabilities 38,719,506 36,842,321 ----------- ----------- Deferred income tax assets: Allowances and reserves ( 3,968,978) ( 3,093,965) Minimum tax credits/carryforwards ( 3,537,117) ( 5,673,009) Depreciation other than on operating leases ( 425,381) ( 433,546) State income taxes ( 770,000) ( 592,200) ----------- ----------- Total assets ( 8,701,476) ( 9,792,720) ----------- ----------- Net deferred income tax liabilities $30,018,030 $27,049,601 =========== ===========
The sources of differences between the federal statutory income tax rate and the Company's effective tax rate are as follows:
Years ended June 30, ------------------------ 1998 1997 1996 ------ ------ ------ Federal statutory rate 35.0% 35.0% 35.0% State tax, net of federal benefit 4.6 4.8 4.8 Other ( .1) ( .3) ( .3) ---- ---- ---- Effective rate 39.5% 39.5% 39.5% ==== ==== ====
21 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Note 7 - Capital Structure: In September 1986, the Board of Directors and stockholders approved an increase in the number of authorized shares of Common Stock to 40,000,000. The Board of Directors and stockholders further authorized the issuance of 2,500,000 shares of preferred stock, from time to time, in one or more series and to fix the voting powers, designations, preferences and the relative participating, optional or other rights, if any, of any wholly unissued series of preferred stock. In August 1985, the Company's stockholders approved a Stock Option Plan (the "1985 Plan"), which, as amended, provided that stock options would be granted to officers, employees, consultants and other persons who had made major contributions toward the growth and development of the Company. Stock options that were granted entitled the recipient to purchase shares of the Company's common stock at prices greater than, equal to or less than the estimated fair market value at the date of the grant. Under the 1985 Plan, stock options become exercisable over a three or five year period, commencing with the first anniversary of the date of the grant, and expire ten years from the date of the grant. The Company had reserved 1,300,000 shares of common stock for issuance under the 1985 Plan. No further grants will be made under the 1985 Plan. In November 1995, the Company's stockholders approved the 1995 Equity Participation Plan (the "1995 Plan") which succeeds the 1985 Plan. The 1995 Plan provides for the granting of options, restricted stock and stock appreciation rights ("SARs") to key employees, directors and consultants of the Company. Under the 1995 Plan, the maximum number of shares of Common Stock that may be issued upon the exercise of options or SARs, or upon the vesting of restricted stock awards, is 1,000,000. The maximum number of available shares of Common Stock will increase by an amount equal to 1% of the total number of issued and outstanding shares of Common Stock as of June 30 of the fiscal year immediately preceding such fiscal year. Each grant or issuance under the 1995 Plan will be set forth in a separate agreement and will indicate, as determined by the stock option committee, the type, terms, vesting period and conditions of the award. The following table summarizes the activity in the 1985 and 1995 Plans for the periods indicated:
For the year ended June 30, ------------------------------------------------------- 1998 1997 1996 ----------------- ---------------- ------------------ Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------ ------- ------- ------- ------- -------- Options outstanding at the beginning of the year 993,900 $ 6.97 969,700 $6.61 1,024,100 $6.68 Granted 64,750 17.18 182,000 9.61 - N/A Exercised ( 78,100) 8.36 ( 84,600) 7.14 ( 12,000) 3.50 Canceled ( 42,200) 8.26 ( 73,200) 8.57 ( 42,400) 9.27 ------- ------ ------- ----- --------- ----- Options outstanding at the end of the year 938,350 $ 7.49 993,900 $6.97 969,700 $6.61 ======= ====== ======= ===== ======= ===== Options exercisable 656,466 631,832 601,766 ======= ======= ======= Weighted average fair value of options granted $ 6.07 $ 3.41 ======= =======
22 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS
Options outstanding Options exercisable --------------------------------- ---------------------- Weighted average remaining Weighted Weighted contractual average average Range of Number life exercise Number exercise exercise prices outstanding (in years) price exercisable price ----------------- ----------- ---------- -------- ----------- -------- $ 3.50 - $ 4.125 317,000 2.21 $ 3.50 317,000 $ 3.50 5.875 - 7.875 287,366 5.46 7.44 190,899 7.22 8.00 - 10.50 202,634 6.03 9.44 135,567 9.59 11.375 - 22.75 131,350 9.17 14.24 13,000 11.38 ---------------- ------- ---- ------ ------- ------ $ 3.50 - $22.75 938,350 5.00 $ 7.49 656,466 $ 6.00 ================ ======= ==== ====== ======= ======
The Company accounts for these Plans under APB Opinion No. 25, "Accounting for Stocks Issued to Employees," under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company's net income and earnings per share would have been reduced to the following proforma amounts:
For the year ended June 30, 1998 1997 ------------------------------- Net earnings $19,219,626 $15,739,641 Proforma compensation cost ( 48,266) ( 27,392) ----------- ----------- Proforma net earnings $19,171,360 $15,712,249 =========== =========== Proforma Basic EPS $ 1.62 $ 1.34 =========== =========== Proforma Diluted EPS $ 1.55 $ 1.31 =========== ===========
Since the FASB No. 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting proforma compensation cost may not be indicative of that to be expected in future periods. The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1997.
For the year ended June 30, 1998 1997 --------------------------- Risk free interest rate 5.47% 6.40% Option life (in years) 5 5 Dividend yield 1.00% 1.00% Volatility 33.29% 29.60%
23 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS Note 8 - Commitments and Contingencies: Leases The Company leases its corporate offices under an operating lease which expires in fiscal 2003. Rent expense was $774,165 (1998), $604,559 (1997) and $577,416 (1996). Future minimum lease payments under the operating lease are as follows:
Years ending Future minimum June 30, lease payments ------------ -------------- 1999 $ 819,386 2000 860,843 2001 883,604 2002 1,082,761 2003 691,764 ---------- $4,338,358 ==========
Litigation The Company is party to various legal actions and administrative proceedings and subject to various claims arising out of the Company's normal business activities. Management does not expect the outcome of any of these matters, individually and in the aggregate, to have a material adverse effect on the financial condition and results of operations of the Company. 401(k) Plan Employees of the Company may participate in a voluntary defined contribution plan (the "401K Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986. Under the 401K Plan, employees who have met certain age and service requirements may contribute up to a certain percentage of their compensation. Beginning in calendar year 1996, the Company increased their contribution to the 401K Plan on behalf of eligible participants. The Company has made contributions during the years ended June 30, 1998, 1997, and 1996 of $107,172, $131,573, and $16,036, respectively. Note 9- Selected Quarterly Financial Data (Unaudited): Summarized quarterly financial data for the fiscal years ended June 30, 1998 and 1997 is as follows:
Three months ended ----------------------------------------------- September 30, December 31, March 31, June 30, ------------- ------------ --------- -------- (In thousands, except per share amounts) 1998 ---- Total revenues $80,038 $82,186 $81,829 $69,736 Gross profit 11,153 13,109 13,010 13,820 Net earnings $ 3,965 $ 5,001 $ 4,809 $ 5,445 Basic earnings per common share $ .34 $ .42 $ .41 $ .46 Diluted earnings per common share $ .32 $ .40 $ .39 $ .44 Dividends declared per common share $ .04 $ .04 $ .04 $ .04
24 AMPLICON, INC. NOTES TO FINANCIAL STATEMENTS
Three months ended ----------------------------------------------- September 30, December 31, March 31, June 30, ------------- ------------ --------- -------- (In thousands, except per share amounts) 1997 ---- Total revenues $66,457 $74,432 $76,692 $82,309 Gross profit 10,172 11,720 12,629 12,537 Net earnings $ 3,172 $ 3,837 $ 4,156 $ 4,575 Basic earnings per common share $ .27 $ .33 $ .36 $ .39 Diluted earnings per common share $ .26 $ .32 $ .35 $ .38 Dividends declared per common share $ .025 $ .025 $ .025 $ .025
25 AMPLICON, INC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 1998, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this Report (1) Financial Statements All financial statements of the Registrant as set forth under Part II Item 8 of this report on Form 10-K (2) Financial Statement Schedules: Schedule Number Description Page Number --------------- ----------- ----------- II. Valuation and Qualifying Accounts 28 All other schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the financial statements and notes thereto. (3) Exhibits: See Index to Exhibits filed as part of this Form 10-K 29-31 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of fiscal 1998. 26 AMPLICON, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMPLICON, INC. By S. Leslie Jewett/s/ Date: September 21, 1998 ------------------ S. Leslie Jewett POWER OF ATTORNEY Each person whose signature appears below hereby authorizes each of Patrick E. Paddon, S. Leslie Jewett and Glen T. Tsuma as attorney-in-fact to sign on his behalf, individually in each capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date - -------------------- -------------------------- ------------------ Patrick E. Paddon/s/ September 22, 1998 - -------------------- President, Chief Executive Patrick E. Paddon Officer and Director Glen T. Tsuma/s/ September 22, 1998 - ---------------- Vice President, Treasurer, Chief Glen T. Tsuma Operating Officer and Director S. Leslie Jewett/s/ September 21, 1998 - ------------------- Chief Financial Officer S. Leslie Jewett Michael H. Lowry/s/ September 22, 1998 - ------------------- Director Michael H. Lowry Harris Ravine/s/ September 24, 1998 - ---------------- Director Harris Ravine 27 AMPLICON, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance charged to Accounts Balance beginning costs and written at end of Classifications of period expense off period - --------------- ---------- -------- -------- ---------- Year ended June 30, 1996: - --------------- Allowance for doubtful accounts $1,695,442 $ - $ - $1,695,442 Allowance for valuation of unguaranteed residual value $ 542,274 $ - $ - $ 542,274 Year ended June 30, 1997: - --------------- Allowance for doubtful accounts $1,695,442 $ - $ - $1,695,442 Allowance for valuation of unguaranteed residual value $ 542,274 $852,000 $ - $1,394,274 Year ended June 30, 1998: - --------------- Allowance for doubtful accounts $1,695,442 $ - $ - $1,695,442 Allowance for valuation of unguaranteed residual value $1,394,274 $ - $120,481 $1,273,793
Note: The allowance for doubtful accounts includes balances related to receivables and capital leases described in Notes 2 and 3 of the Notes to Financial Statements. 28 AMPLICON, INC. INDEX TO EXHIBITS Exhibit No. Description of Exhibit Page No. - ----------------------------------------------------------------------------- 3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-1 File No. 33-9094 (the "Registration Statement on Form S-1")) 3.2 Certificate of Amendment of Articles of Incorporation of the Company, filed April 15, 1988 (incorporated by reference to Exhibit 3.2 to Registrant's 1988 Form 10-K) 3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1) 3.4 Amendment and Restatement of Article VI of the Bylaws of the Company (incorporated by reference to Exhibit 3.4 to Registrant's 1988 Form 10-K) 10.1 1984 Stock Option Plan, as amended to date (incorporated by reference to Exhibit 10.1 to Registrant's Statement on Form S-8 File No. 33-27283) 10.2 Master Agreement for Lease Arrangement Transactions, dated as of October 14, 1985, between the Company and Chrysler Financial Corporation (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1) 10.3 Master Loan Agreement, dated as of July 18, 1986, between the Company and General Electric Credit Corporation (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1) 10.4 Master Agreement for Rental Payment Purchase Transactions, dated as of July 8, 1982, between the Company and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1) 10.5 Form of Assignment of Lease - Without Recourse between the Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1) 10.6 Form of Assignment of Lease - Without Recourse between the Company and Circle Business Credit, Inc. (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1) 29 AMPLICON, INC. INDEX TO EXHIBITS Exhibit No. Description of Exhibit Page No. - ----------------------------------------------------------------------------- 10.7 Master Agreement for Rental Payment Purchase Transactions, dated as of February 27, 1990, between the Company and Security Pacific Credit Corporation (incorporated by reference to Exhibit 10.7 to the Registrant's 1990 Form 10-K) 10.8 Credit Agreement, dated as of April 13, 1990 (the "Credit Agreement"), between the Company and Security Pacific National Bank (now Bank of America National Trust and Savings Association, and together with Security Pacific National Bank, "Bank of America") (incorporated by reference to Exhibit 10.8 to the Registrant's 1990 Form 10-K) 10.9 First Amendment to the Credit Agreement, dated November 19, 1990, between the Company and Bank of America (incorporated by reference to Exhibit 10.9 to the Registrant's 1991 Form 10-K) 10.10 Second Amendment to the Credit Agreement, dated December 17, 1991, between the Company and Bank of America (incorporated by reference to Exhibit 10.10 to the Registrant's 1992 Form 10-K) 10.11 Third Amendment to the Credit Agreement, dated February 25, 1992, between the Company and Bank of America (incorporated by reference to Exhibit 10.11 to the Registrant's 1992 Form 10-K) 10.12 Fourth Amendment to the Credit Agreement, dated April 27, 1992, between the Company and Bank of America (incorporated by reference to Exhibit 10.12 to the Registrant's 1992 Form 10-K) 10.13 Sublease Agreement and Amendment No. 1, dated October 31, 1990 and November 28, 1990, respectively, between the Company and Griffin Financial Services (incorporated by reference to Exhibit 10.13 to the Registrant's 1992 Form 10-K) 10.14 Fifth Amendment to the Credit Agreement, dated June 28, 1993, between the Company and Bank of America (incorporated by reference to Exhibit 10.14 to the Registrant's 1993 Form 10-K) 10.15 Business Loan Agreement, dated as of August 12, 1993, between the Company and Bank of America (incorporated by reference to Exhibit 10.15 to the Registrant's 1993 Form 10-K) 30 AMPLICON, INC. INDEX TO EXHIBITS Exhibit No. Description of Exhibit Page No. - ----------------------------------------------------------------------------- 10.16 Security Agreement dated as of December 23, 1993 and all amendments C, D, & E, dated April 19, 1994, July 18, 1994 and August 30, 1994, respectively between the Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.16 to the Registrant's 1994 Form 10-K) 10.17 Amendment One to Business Loan Agreement, dated as of December 16, 1994, between the Company and Bank of America (incorporated by reference to Exhibit 10.17 to the Registrant's 1995 Form 10-K) 10.18 Amendment Two to Business Loan Agreement, dated as of January 23, 1996, between the Company and Bank of America (incorporated by reference to Exhibit 10.18 to the Registrant's December 31, 1995 Form 10-Q) 10.19 Business Loan Agreement dated as of December 23, 1997 between the Company and Bank of America (incorporated by reference to Exhibit 10.19 to the Registrant's December 31, 1997 Form 10-Q) 10.20 Office Lease dated September 17, 1997, between the Company and GT Partners (incorporated by reference to Exhibit 10.20 to the Registrant's March 31, 1998 Form 10-Q) 22 List of Subsidiaries (incorporated by reference to Exhibit 22 to the Registrant's 1988 Form 10-K) 31 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000803016 AMPLICON, INC. 1,000 YEAR JUN-30-1998 JUN-30-1998 15,192 0 151,674 1,695 2,500 0 2,715 1,503 512,605 79,433 0 0 0 59 135,886 512,605 267,972 313,789 240,229 262,697 19,237 0 86 31,769 12,549 19,220 0 0 0 19,220 1.63 1.55
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