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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-28926
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MLC Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1817218
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Rd., Suite 110, Reston, VA 20190-5321
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(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value Nasdaq National Market
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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 voting stock held by non-affiliates
of the Company, computed by reference to the price at which the stock was sold
as of June 18, 1997 was $14,689,530.
The number of shares of Common Stock outstanding as of June 18, 1997,
was 5,150,000.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the
following parts of this Form 10-K:
Document Part
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Portions of the Company's definitive Part III
Proxy Statement to be filed with the
Securities and Exchange Commission
within 120 days after the Company's
fiscal year end.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MLC Holdings, Inc. was formed in 1996 and is a Delaware corporation
which, pursuant to a reorganization effected September 1, 1996, serves as the
holding company for MLC Group, Inc. ("MLC Group") and other subsidiaries. All
references to the "Company" shall be deemed to include and refer to MLC
Holdings and its subsidiaries, including MLC Group. The Company holds no other
assets and engages in no other business other than serving as the parent
holding Company for MLC Group and MLC Capital, Inc. MLC/GATX Leasing
Corporation is a 50% owned subsidiary of MLC Group.
MLC Group, a Virginia corporation, founded in 1990 and originally
named Municipal Leasing Corporation, currently conducts all business activity
of the Company. MLC Capital, Inc., is an NASD-registered broker-dealer and as
of the date of this report has conducted no business transactions. The Company
does not have any plans at present to engage in business through MLC Capital,
Inc. MLC Group obtains a significant amount of equity financing for its
transactions through two joint venture arrangements: (i) MLC/GATX Limited
Partnership I (a joint venture with GATX Leasing Corporation); and(ii) MLC/CLC
LLC (a joint venture with Cargill Leasing Corporation). MLC Group has a 9.5%
limited partnership ownership interest in MLC/GATX Limited Partnership I and
owns 50% of the stock of MLC/ GATX Leasing Corporation, which serves as general
partner of MLC/GATX Limited Partnership I with a 1% general partnership
interest. MLC Group has a 5% membership interest in MLC/CLC LLC and serves as
its manager.
On November 20, 1996, the Company closed a public stock offering of
1,000,000 shares of its common stock (the "Offering"), and on December 13,
1996, the underwriter exercised its overallottment option of 150,000 additional
shares. The initial offering price was $8.75 per share. The Company received
net proceeds of $8,603,762. Expenses and underwriter's discount relating to the
offering were $1,458,738.
The Company's principal executive offices are located at 11150 Sunset
Hills Road, Suite 110, Reston, Virginia 20190-5321 and its telephone number at
such address is (703) 834-5710. The Company operates through ten offices,
including its principal executive offices and seven regional sales offices
which are located in the following metropolitan areas: Philadelphia,
Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento, California;
Raleigh, North Carolina; Atlanta, Georgia; and San Diego, California. The
Company also has arrangements with independent contractors who work primarily
for the Company in Columbus, Ohio.
The Company currently employs 47 full-time employees and seven
part-time employees, of which 37 of such employees work at the Company's
principal executive offices and the remaining 17 work at the various regional
offices of the Company.
GENERAL
The Company specializes in leasing and financing information
technology assets, provides asset management services, and trades computer
equipment. The Company's targeted customer base includes middle market
commercial customers on a regional basis, select Fortune 1000 firms, federal,
state and local governments, vendors of information technology equipment and
services, and network integrators and consultants. The assets leased by the
Company include personal computers, client server systems, networks, mid-range
and mainframe computer equipment, telecommunications equipment and software.
The ten largest commercial customers of the Company by purchase price
of the equipment leased by the Company, for fiscal year 1997 are, in
alphabetical order:
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BTG, Inc.; Cable & Wireless, Inc.; Checkfree Corporation; Corning Incorporated;
Interealty Corp.; Progressive Casualty Insurance Company; Sandia Corporation;
SCT Software and Resources Management Corporation; Sprint Communications
Company, L.P. and affiliates (collectively, "Sprint"); and Walt Disney
Attractions, Inc. The three largest government customers, based upon purchase
price of the equipment leased by the Company for fiscal year 1997, are, in
alphabetical order: the California Department of Justice; McHenry County,
Illinois; and the State of Missouri. None of the above customers constituted
more than 10% of the Company's revenues for fiscal year 1997.
The Company also leases and finances equipment, software and services
through relationships with vendors, equipment manufacturers, software
companies, and systems integrators and consultants. These vendor clients
represent a variety of high technology industries and include, among others, in
alphabetical order: Cisco Systems, Inc.; EMC Corporation; Sterling Software,
Inc.; and Systems & Computer Technology Corporation; The Company has also
provided financing for other vendors' customers for transactions ranging in
size from approximately $50,000 to $21.0 million based upon the purchase price
of the assets.
In fiscal year 1998 the Company signed two agreements with Cisco
Systems Capital Corporation and Cisco Systems, Inc. (together, "Cisco"), which
name the Company as Cisco's preferred financing provider in the governmental
and educational market segment, and in the domestic commercial market segment
(excluding the high-risk/venture leasing segment). The agreements set forth
certain obligations of the Company, including the obligation to hire and retain
salesman specifically to provide service to Cisco, and certain administrative
and remarketing obligations regarding transactions originated under the Cisco
program. The agreements grant Cisco the right to remarket the equipment at its
option, and the right to purchase all, but not less than all, of the Cisco
equipment portfolio at a certain return. The agreements are subject to
non-renewal and termination for several reasons, including non-performance by
the Company. During fiscal year 1997, the Company originated
a nominal amount of volume from the Cisco agreements.
In fiscal year 1998 the Company signed several exclusive teaming agreements
with various federal government resellers, in anticipation of the acceptance of
leasing terms and conditions by the General Services Administration on vendors
"GSA Schedules". Under the teaming agreements, the Company will provide its
leasing terms and conditions for inclusion on the vendor's GSA schedules in
exchange for the first right of refusal to finance any lease transactions.
During fiscal year 1997 the Company originated no volume from any of these
agreements.
The Company seeks to differentiate itself from its competitors by
offering its customers asset management services and asset trading
capabilities, which may be customized to meet the client's desires. The
Company believes that its ability and willingness to personalize its
relationships and customize its services to meet the specific financial and
managerial needs of each customer enable it to compete effectively against
larger equipment leasing and finance companies. The Company further believes
that, by providing asset management services and asset trading capabilities as
well as other services to its customers, it has a competitive advantage over
smaller competitors which lack the resources and expertise to provide such
services.
The Company's asset trading activity involves the purchase and resale
of previously owned information technology equipment. By offering asset
trading capabilities, the Company is able to develop and maintain knowledge of
current market trends and values which enables the Company to predict more
accurately residual values when pricing leasing transactions, dispose
efficiently of off-lease equipment and offer customers a way to dispose of or
acquire previously owned information technology equipment. Asset management
services, which are offered primarily to enhance customer service, is a general
term used to describe the provision of asset inventory and tracking services,
software and record keeping programs to customers. The asset management
services provided by the Company allow
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the customers to better track their information technology assets. The asset
management services include a software system maintained by the Company which
generates reports and allows customers to dial up and receive information on a
real time basis, thus better utilizing their assets.
The Company's management team is led by Phillip G. Norton, Chairman,
President, and Chief Executive Officer, Bruce M. Bowen, founder of the
Company, a director and Executive Vice President, Thomas B. Howard, Jr., Vice
President and Executive Vice President and Chief Operating Officer of MLC Group
(who joined the Company in January, 1997), Steven J. Mencarini, Senior Vice
President and Chief Financial Officer (who joined the Company in June, 1997),
and Kleyton L. Parkhurst, Director of Finance, Secretary and Treasurer, each of
whom has extensive experience in the leasing and finance industries.
INDUSTRY OVERVIEW
The Company believes that its market is undergoing rapid changes and
expansion which present significant opportunities for growth. The primary
structural changes in the market are the result of customer end-user,
technology and vendor marketing trends.
Customer End-Users -- Commercial. The equipment leasing industry in
the United States is a significant factor in financing capital expenditures of
businesses. According to research by the Equipment Leasing Association of
America ("ELA"), using United States Department of Commerce data, approximately
$151.4 billion of the $538.8 billion of business investment in equipment in
1995 was financed by means of leasing. The ELA estimates that 80% of all U.S.
businesses use leasing or financing to acquire capital assets.
Leasing enables a Company to obtain the equipment it needs, while
preserving cash flow and receiving favorable accounting and tax treatment.
Leasing, particularly through operating leases, also provides a lessee with
greater flexibility than ownership in the event it outgrows the equipment or
requires upgrades of its equipment to higher performance levels. As more
customers become aware of the economic benefits of leasing, they often turn to
independent leasing companies. Independent lessors, such as the Company, offer
tailored financing and can deliver financing for mixed systems from different
vendors.
Management believes the fastest growing market segment of the leasing
industry is information technology leasing. These assets include computers,
telecommunication equipment, software, integration services and client server
equipment. According to the ELA, computers and telecommunications equipment
accounted for 26% of the assets leased in 1995.
Customer End-Users -- Government. According to G2 Research, Inc., in
1994, of $328.6 billion in total information technology spending, $27.3 billion
was spent by the federal government and $34.5 billion was spent by state and
local governments, with the remainder spent by commercial customers. G2
Research, Inc. further estimated that this market segment will maintain a 10%
growth rate through the year 2000 as governments convert to client server
systems.
As reported by G2 Research, Inc., state and local governments spent
over $34 billion on information services and systems in 1994. The Company
believes that state and local governments have realized that information
technology can provide tremendous gains in productivity and a decrease in
overall costs. However, state and local governments are increasingly limited
by budgetary constraints in their efforts to acquire goods and services;
therefore, leasing is more favorable since it allows the immediate use of the
asset while the cost is incurred over the asset's useful life. Moreover,
leasing may facilitate the timely acquisition of equipment when compared to the
lengthy process and many levels of approval necessary for bond referendums. An
additional obstacle facing state and local governments in the
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upcoming years is the shift in program responsibility from the federal
government to the state and local governments. The Company believes that this
shift will require more information technology investment by state and local
governments.
Technology Trends. A major trend toward using client server networks
in corporate applications began in the late 1980s. This trend was driven by
the proliferation of personal computers as personal computers changed from
stand-alone units which accommodated one or two specialized functions to a
multi-application unit and the development of networking applications that
distribute computer power to the desktop. Client server computing provides an
alternative to the highly centralized, mainframe and mini-computer systems that
connect multiple terminals to a central processor and which were the mainstay
of the computing world until this decade. The transition from the mainframe to
the personal computer has enabled smaller corporations to utilize more
extensively information technology and telecommunications equipment in the
operation of their businesses. In addition, as technology increasingly
changes, companies are more frequently acquiring and upgrading information
technology and telecommunications equipment.
The transition from the mainframe to the more complicated client
server applications has also placed a premium on the efficient planning,
tracking, procurement and disposal of each unit. The Gartner Group estimates
that the average cost of a corporate customer acquiring, maintaining,
supporting and disposing of the desktop asset is approximately $41,000 over a
five-year period as compared to the average capital cost of each unit of
$2,500. The above changes have increased the need for the specialized asset
management services such as those provided by the Company because the
procurement and management functions of many end-users are oriented to the
acquisition of a high-priced, centralized unit and not to the management of
numerous small-ticket items in multiple locations.
Vendor Distribution and Marketing. As hardware manufacturers face
increasing competition, many manufacturers have sought greater control over
their installed equipment base, and have entered into joint ventures with
third-party financing sources to provide captive financing services. Under
these arrangements, the third party financing source (such as the Company)
provide various levels of origination, administrative, servicing, and
remarketing services, to complement or to replace a vendor's sales, marketing,
administrative, or financing capabilities. The Company believes it has
developed a vendor model which satisfies the new requirements of equipment
vendors while providing an opportunity to earn a satisfactory return on the
vendor's business. In addition, the Company can originate and control its own
portfolio of non-vendor equipment leases using the vendor-program origination
infrastructure, and such portfolio will remain the property of the Company and
outside the scope of the vendor model.
STRATEGY
Based on industry trends and the Company's historical results, the
Company will continue to implement and improve upon a three-pronged strategy
designed to increase its customer base by: (i) providing continuing superior
customer service while marketing to middle market and select Fortune 1000
end-users of information technology equipment and assets; (ii) purchasing
companies in key regional markets with pre-existing customer bases; and (iii)
further developing vendor leasing programs. Through its marketing strategy,
the Company emphasizes cross selling to the different groups of clients and
attempts to reach the maximum number of potential end-users.
While the Company is pursuing and intends to continue to pursue the
forgoing strategies, there can be no assurance that the Company will be able to
successfully implement such strategies. The Company's ability to implement
these strategies may be limited by a number of factors.
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End-User Marketing Focus. The Company's target customers include
middle market and select Fortune 1000 firms which are significant users of
information technology and telecommunications equipment and other assets, which
also may need other services provided by the Company, such as asset management.
By targeting a potential customer base that is broader than just the Fortune
1000 companies, the Company believes that there is less competition from the
larger equipment finance companies, as their marketing forces are typically
more focused on Fortune 1000 customers. The ability to identify and establish
customer relationships with such firms will be critical to the Company's
strategy. There can be no assurance that the Company will be able to
successfully locate such customers.
Acquisition of Related Companies. The Company believes that
significant opportunities to expand its target customer base in key regional
markets can be realized through the acquisition of strategically selected
companies in related lines of business. The Company's acquisition strategy
will focus on acquiring new customers in the top 50 regional markets in the
country. The Company believes that it can successfully acquire companies and
maintain and expand customer relationships by providing acquired companies with
a lower cost of capital, additional cross-selling opportunities and financial
structuring expertise. In addition, the Company can provide the owners of
privately-held companies with an opportunity to realize their Company's value.
The Company believes that decentralized marketing and centralized operations,
along with other operating synergies, will make it successful in lowering the
operational costs while expanding the customer base of each firm it acquires.
The ability to identify and acquire such firms on prices and terms that are
attractive to the Company and which avoid dilution of earnings for existing
stockholders is crucial to the successful implementation of this strategy. In
addition, after consummating any acquisition, the Company must be able to
successfully integrate the acquired business with the Company to achieve the
cost savings and marketing benefits sought by the Company. There is, however,
no assurance that the Company will be able to successfully acquire such
companies, or, if acquired, successfully implement the foregoing strategy.
The Company has entered into two non-binding proposal letters to
acquire two value-added resellers ("VARs"). The mergers are subject to due
diligence, acceptable documentation, and Company Board of Director approval.
Compuventures of Pitt County, Inc. (d.b.a. "MicroAge of Greenville" and
"MicroAge of Wilmington"), had revenues of approximately $15 million for the 12
months ended December 31, 1996. Compuventures has several locations in eastern
North Carolina and serves primarily commercial and institutional customers. The
second reseller had approximately $30 million in revenues for the 12 months
ending March 31, 1997. There can be no assurance that these contemplated
acquisitions, or any other acquisition opportunities which the Company may
pursue, will be completed successfully.
Vendor Focus. Over the last several years, major manufacturers of
information technology and telecommunications equipment have moved away from
providing financing to end-user customers through captive finance organizations
and have increasingly joint ventured their equipment financing function to
independent leasing companies and financing companies. From the perspective of
the large end-user of information technology and telecommunications equipment,
outsourcing equipment financing can simplify and centralize the financing of
multiple products from different vendors, particularly as most captive finance
organizations will service only their manufacturer's products. Through its
participation in vendor marketing programs, the Company leverages its marketing
efforts by utilizing the sales force of the vendor. The vendor's sales
organization provides the Company access to an extensive and diversified
end-user customer base while saving the Company the cost of establishing these
independent customer relationships. The Company uses its relationships with
these vendors and end-users to create new customer relationships to which other
products and services of the Company can be marketed directly. The ability to
successfully establish such vendor and end user relationships is essential to
the successful implementation of this strategy. In fiscal year 1998, the
Company entered into agreements with Cisco Systems Capital Corporation and
Cisco
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Systems, Inc. There can be, however, no assurance that the Company will be
able to successfully establish such relationships, or that the relationships
will produce anticipated volume, or that the Company will successfully establish
relationships with other vendors.
LEASING, FINANCING AND SALES ACTIVITIES
The Company is in the business of leasing and financing equipment and
assets. Although the majority of the transactions are leases, the use of the
phrase "lease," "leases," "leasing" or "financing" may refer to transactions
involving: equipment leases; conditional sales contracts; installments purchase
contracts; software and services contracts; municipal and federal government
contracts; notes; operating leases; customer agreements; direct financial
leases; receivables; factoring; tax exempt leases; true leases; leases with
option to purchase; leases to purchase; vendor agreements; sales-type leases;
leveraged leases; computer leases; capital leases; private label agreements;
financing agreements; or energy management contracts.
Business Development. The Company conducts its business development
efforts through its marketing staff of both employees and independent
representatives which includes 16 individuals located in nine regional offices
and the Company's principal executive offices. The Company believes that one
of its major strengths is its professional and dedicated sales organization and
back office organization which gives it the ability to customize its programs
to meet its customers' specific objectives.
Products and Services. The information technology and communications
equipment that the Company presently purchases for lease or re-sale
includes:(i) personal computers; (ii) laser printers; (iii) telecommunication
controllers; (iv) tape and disk products; (v) file servers; (vi) mainframe
computers; and (vii) mid-range computers. The software and services financed
by the Company include off-the-shelf products and applications, database
products, utilities and specific application products.
The manufacturers and vendors of the above assets include IBM, EMC
Corporation, Hewlett-Packard Company, Toshiba, Cisco Systems, Inc., Digital
Equipment Corporation, Gateway 2000, Inc., Compaq Computer Corporation,
Microsoft Corporation, Amdahl Corporation, Dell Computer Corporation,
HitachiData Systems Corporation, Sterling Software, Inc. and Systems & Computer
Technology Corporation.
The services and support provided by the Company include: (i) custom
lease and financing payment streams and structures; (ii) asset sales and
trade-ins; (iii) upgrade and add-on leasing and financing; (iv) renewal and
re-marketing; (v) personalized invoicing; and (vi) asset management and
reporting.
Lease Terms and Conditions. Substantially all of the Company's lease
transactions are net leases with a specified non-cancelable lease term. These
noncancelable leases have a "hell-or-high-water" provision which requires the
lessee to make all lease payments regardless of any lessee dissatisfaction with
its equipment. A net lease requires the lessee to make the full lease payment
and pay any other expenses associated with the use of equipment, such as
maintenance, casualty and liability insurance, sales or use taxes and personal
property taxes.
Re-marketing. In anticipation of the expiration of the initial term
of a lease, the Company initiates the re-marketing process for the related
equipment. The Company's goal is to maximize revenues by: (i) re-marketing the
equipment in place either by (a) re-leasing it to the initial lessee, (b)
renting on a month-to-month basis or (c) selling it to the initial lessee; (ii)
selling or leasing the equipment to a different customer; or (iii) selling the
equipment to equipment brokers or dealers. The results of the re-marketing
process significantly impact the degree of profitability of a lease
transaction. Procedures and
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obligations of the Company and its vendors with respect to re-marketing are
defined through the Company's equipment purchase and re-marketing agreements
with vendors. To assist the Company in its re-marketing efforts, the Company
sometimes provides incentives to vendors and their sales personnel through
payment of a re-marketing fee and a sharing of residual profits where
appropriate.
The re-marketing process is intended to enable the Company to recover
its equity investment in the re-marketed equipment (i.e., the purchase price of
the equipment, less the debt obtained to finance the purchase of such
equipment) and enables the Company to receive additional proceeds.
Numerous factors, many of which are beyond the control of the Company,
may have an impact on the Company's ability to re-lease or re-sell equipment on
a timely basis. Among the factors are general market conditions, regulatory
changes, variations in the supply or cost of comparable equipment and
technological improvements that lead to the risk of technological obsolescence.
In particular, the computer and telecommunications industries have been
characterized by significant and rapid technological advances. The equipment
owned and leased by the Company is subject to rapid technological obsolescence,
which is typical of information technology and telecommunications equipment.
Furthermore, decreases in the manufacturer's pricing for equipment may
adversely affect the market value of such equipment under lease. Changes in
values or systems and components may require the Company to liquidate its
inventory of certain products at significant markdowns and write down the
residual value of its leased assets, which may result in substantial losses.
Further, the value of a particular used piece of equipment may vary greatly
depending upon its condition and the degree to which any custom configuration
of the equipment must be altered before reuse.
At the inception of each lease, the Company has historically estimated
a residual value for the leased equipment based on the terms of the related
lease and which will permit the transaction to be financed or sold by means of
external, generally nonrecourse, sources. This estimate is approved by the
Company's investment committee, which acts by a signature process instead of
conducting formal meetings. A decrease in the market value of such equipment
at a rate greater than the rate expected by the Company, whether due to rapid
technological obsolescence or other factors, would adversely affect the
residual values of such equipment. Consequently, there can be no assurance
that the Company's estimated residual value for equipment will be realized.
PROCESS CONTROL AND ADMINISTRATIVE SYSTEMS
The Company has developed and maintains an administration system and
controls, featuring a series of checks and balances. The Company's system
helps protect against entering into lease transactions that may have
undesirable economics or unacceptable levels of risk, without impeding the flow
of business activity or preventing its sales organization from being creative
and responsive to the needs of vendors and customers.
Due in part to the Company's strategy of focusing on a few equipment
categories, the Company generally has extensive product knowledge, historical
re-marketing information and experience. This knowledge assists the Company in
setting and adjusting, on a timely basis, the residual values it assumes on
each lease financing. Prior to the Company entering into any lease agreement,
each transaction is evaluated based on the Company's pre-determined standards
in each of the following areas:
Residual Value. Residual value guidelines for the equipment leased by
the Company are established and reviewed by the Company's investment committee,
which also approves the residual value recorded for specific transactions. The
investment committee typically acts by a signature process instead of
conducting formal meetings. The investment committee also must approve the
pricing, including
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residual values, for all transactions involving $100,000 or more in product
value. The investment committee is composed of the Chief Executive Officer,
the Chief Financial Officer, the Chief Operating Officer, and the Treasurer of
the Company, and each person has various levels of signing and co-signing
authorities.
Structure Review. Every transaction is reviewed by the Director of
Contracts, and if necessary, one or more of the following persons: the Chief
Operating Officer, the Chief Executive Officer, the Executive Vice President,
and/or the Treasurer. The reviews are made to ensure that the transaction meets
the minimum profit expectations of the Company and that the risks associated
with any unusual aspects of the lease have been determined and factored into
the economic analysis.
Documentation Review. Once the Company commits to a lease
transaction, its contract administrators initiate a process of systematically
preparing and gathering relevant lease information and lease documentation.
The contract administrators are also responsible for monitoring the
documentation through the Company's home office documentation and review
process. Every transaction into which the Company enters is reviewed by the
Director of Contracts of the Company and, if necessary, the Company's outside
attorneys to identify any proposed lease modifications or other contractual
provisions that may introduce risks in a transaction which the Company has not
anticipated.
Credit Review. Every transaction into which the Company enters is
reviewed by the Treasurer and Chief Operating Officer of the Company to
determine whether the lease payment stream can be financed on a nonrecourse
basis, or must be financed through partial or total recourse borrowing, and
that the financial condition of the lessee meets the Company's credit
standards.
FINANCING
The business in which the Company is engaged is a capital intensive
business. The Company's business involves both the leasing and the financing of
assets. The leasing business is characterized by ownership of the assets
residing with the Company or its assigns. The financing business is
characterized by the beneficial ownership of assets residing with the asset
user or customer. Several different types of financing, each of which is
described below, are important to the conduct of the Company's leasing and
financing business.
The typical lease transaction requires both nonrecourse debt and an
equity investment by the Company at the time the equipment is purchased. The
typical financing transaction is dependent upon the nonrecourse financing
described below. The Company's equity investment in the typical lease
transaction generally ranges between 5% and 20% of the equipment cost (but
sometimes ranges as high as 35%). The balance of the equipment cost, or the
nonrecourse debt portion, is typically financed with a lender on a nonrecourse
basis to the Company. The Company's equity investment must come from: (i)
equity investments from third parties (including MLC/GATX Limited Partnership I
and MLC/CLC LLC); (ii) internally generated funds; (iii) the net proceeds of
the sale of its securities; or (iv) recourse borrowings. Accordingly, the
Company's ability to successfully execute its business strategy and to sustain
its growth is dependent, in part, on its ability to obtain each of the
foregoing types of financing for both senior debt and equity investment.
Information relating to the sources of each of such sources of
financing for equipment acquisitions are as follows:
Nonrecourse Financing. The credit standing of the Company's customers
must be of such a quality as to allow the Company to finance most of its
leasing or financing transactions on a nonrecourse basis. Under a nonrecourse
loan, the Company borrows an amount equal to the committed lease payments under
the financed lease, discounted at a fixed interest rate. The lender is
entitled to receive the payments under the financed lease in repayment of the
loan, and takes a security
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interest in the related equipment but has no recourse against the Company. The
Company retains ownership of such equipment, subject to the lender's security
interest. Interest rates under this type of financing are negotiated on a
transaction-by-transaction basis and reflect the financial condition of the
lessee, the term of the lease and the amount of the loan. As of March 31,
1997, the Company had aggregate outstanding nonrecourse borrowings of
approximately $19.7 million.
The Company's objective is to enter into leasing or financing
transactions with creditworthy customers whose credit standing will permit the
Company to finance such leases with banks or other financial institutions on a
nonrecourse basis to the Company. The Company's customers which do not have a
credit rating of Baa or better generally are creditworthy non-rated companies
that may be publicly or privately owned. The Company has had success in
meeting this objective in the past, but there is no assurance that banks or
other financial institutions will be willing or able to continue to finance the
Company's lease transactions on a nonrecourse basis, that the Company will
continue to be able to attract customers that meet the credit standards for
nonrecourse financing required by the Company's financing sources or that those
standards will not change in the future.
The Company is not liable for the repayment of nonrecourse loans
unless the Company breaches certain limited representations and warranties in
the loan agreements. The lender assumes the credit risk of each such lease,
and its only recourse, upon a default under a lease, is against the lessee and
the equipment which is being leased thereunder.
The Company's personnel in charge of the financing function are
responsible for maintaining a diversified list of qualified nonrecourse debt
sources so that the financing of transactions is not impaired by a lack of
competitively-priced nonrecourse debt. The Company receives nonrecourse
financing from many different sources, offering various terms and conditions.
These debt sources include regional commercial banks, money-center banks,
finance companies, insurance companies and financial intermediaries.
Government Financing. The Company also originates tax-exempt state
and local lease transactions in which the interest income is exempted from
federal income taxes, and to some degree, certain state income taxes. The
Company assigns its tax-exempt leases to institutional investors, banks and
investment banks which can utilize tax-free income, and has a number of such
entities which regularly purchase the transactions.
Leasing Assignment Financing. Access to nonrecourse financing is also
important to the Company's lease sales revenue and fee income. The Company
enters into many transactions involving government leases which it immediately
assigns, syndicates or sells, on a nonrecourse basis to third parties and books
any gain from the transaction as sales or fee income.
The Company may utilize the public debt securities market in the
future to provide a portion of the nonrecourse debt it requires. The Company
believes that its utilization of the public debt securities markets is likely
to reduce the Company's effective interest cost for its nonrecourse debt and to
provide for a more efficient financing arrangement, than is presently provided
by its existing financing arrangements, to fund its nonrecourse borrowing
requirements. See "Item 7, Management's Discussion and Analysis of Results of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
Equity Joint Ventures. Through MLC/GATX Limited Partnership I and
MLC/CLC LLC, the Company has formal joint venture arrangements with two
institutional investors which provide the equity investment financing for
certain of the Company's transactions. GATX, an unaffiliated Company which
beneficially owns 90% of MLC/GATX Limited Partnership I, is a publicly listed
Company with stockholders' equity in excess of $344 million, as of December 31,
1996. Cargill Leasing Corporation, an
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unaffiliated investor which owns 95% of MLC/CLC LLC, is affiliated with
Cargill, Inc., a privately held business that was reported by Forbes Magazine
to have 1995 earnings in excess of $900 million. These joint venture
arrangements enable the Company to invest in a significantly greater portfolio
of business than the Company's limited capital base would otherwise allow.
MLC/GATX Limited Partnership I and MLC/CLC LLC provide the majority of
the Company's equity investment from third parties as referenced above. During
fiscal year 1995, the Company's investment in MLC/GATX Limited Partnership I
increased due to the Company's capital contributions for its share of the
partnership's equity investment in leased equipment and partnership expenses.
For the year ending March 31, 1997, out of leased equipment sales of $21.6
million, MLC/GATX Limited Partnership I represented $3.5 million or 16.2% and
MLC/CLC LLC represented $16.9 million or 78.2%. MLC/GATX Limited Partnership I
and MLC/CLC LLC only purchase transactions from the Company.
For fiscal year 1997, of the Company's total revenue, approximately
6.1% was attributable to sales of lease transactions to MLC/GATX Limited
Partnership I, and approximately 30.1% was attributable to sales of lease
transactions to MLC/CLC LLC. Transactions involving the use or placement of
equity from these joint ventures require the consent of the relevant joint
venture partner, and if financing from those sources were to be withheld or
were to become unavailable, it would limit the amount of equity available to
the Company and may have a material adverse effect upon the Company's business,
financial condition and results of operations.
Equity Capital and Internal Financing. Occasionally the Company
finances leases and related equipment internally, rather than with financing
provided by lenders. These internal lease financing typically occur in cases
where the financed amounts, terms, collateral, or structures are not attractive
to lenders, or where the credit rating of the lessee is not acceptable to
lenders. The Company also temporarily finances selected leases internally,
generally for less than 90 days, until permanent outside nonrecourse financing
is obtained.
Recourse Financing. Bank Lines of Credit. The Company relies on
recourse borrowing in the form of revolving lines of credit for working capital
to acquire equipment to be resold in its trading operation and to acquire
equipment for leases and, to a lesser extent, the Company uses recourse
financing for long term financing of leases. As of March 31, 1997, the
Company's available credit under its short-term, recourse facility with First
Union National Bank of Virginia, N.A. (the "First Union Facility") totaled
$5,000,000, and no amounts were outstanding as of March 31, 1997. Borrowing
under the First Union Facility was available through July 30, 1997, with
repayments due 90 days after borrowing, however, on June 10, 1997, the Company
terminated the First Union Facility. Borrowings under the First Union Facility
bore interest at LIBOR plus 275 basis points.
As of March 31, 1997, the Company had aggregate outstanding long-term
recourse borrowings of $268,744 from various lenders, primarily for the long
term financing of leases.
The Company previously had a $2,000,000 facility with NationsBank,
N.A. which it allowed to expire on December 1, 1996.
On June 5, 1997, the Company entered into a $15,000,000 committed
recourse line of credit with CoreStates Bank, N.A. (the "CoreStates Facility")
Borrowings under the CoreStates Facility, which is available through June 5,
1998, bear interest at LIBOR + 110 basis points, or, at the Company's option,
Prime minus one percent. On June 10, 1997, the Company terminated its First
Union Facility, repaid all amounts outstanding, and made its first borrowing
under the CoreStates Facility in the amount of $7,500,000. The CoreStates
Facility is made to MLC Group, Inc. and guaranteed by MLC Holdings, Inc. The
CoreStates Facility is secured by certain of the Company's assets such as
chattel paper (including leases), receivables, inventory, and equipment.
The availability of the line is subject to
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a borrowing base which consists of inventory, receivables, purchased assets,
and leases.
Availability under the revolving lines of credit may be limited by the
asset value of equipment purchased by the Company and may be further limited by
certain covenants and terms and conditions of the facilities. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
finalized and executed documents establishing a $10,000,000 credit facility
agreement (the "Heller Facility"), with Heller Financial, Inc. ("Heller"), a
Delaware corporation. Under the terms of the Heller Facility, a maximum amount
of Ten Million Dollars ($10,000,000) is available to the Company, provided,
that each draw is subject to the approval of Heller. The Heller Facility is
evidenced by a Loan and Security Agreement dated as of January 31, 1997 (the
"Loan Agreement") and a First Amendment to Loan and Security Agreement (the
"Amendment") dated as of March 12, 1997 (although the Loan Agreement is dated
effective January 31, 1997, all documents were executed concurrently in March,
1997). The primary purpose of the Heller Facility is for the permanent
fixed-rate discounting of rents for commercial leases of information technology
assets with the Company's middle-market customers. As of March 31, 1997, no
advances under the Heller Facility had been made, however, on April 25, 1997,
a loan of $943,642 was advanced to the Company. No other advances have been
made through June 23, 1997. Each advance under the facility will bear interest
at an annual rate equal to the sum of the weekly average U.S. Treasury Constant
Maturities for a Treasury Note having approximately an equal term as the
weighted average term of the contracts subject to the advance, plus an index
ranging from 1.75% to 3.00%, depending on the amount of the advance and the
credit rating (if any) of the lessee. The Heller Facility contains a number of
covenants binding on the Company and is a limited recourse facility, secured
by a first-priority lien in the contracts and chattel paper relating to each
advance, the equipment subject to such contracts, a 10% cross-collateralized
first loss guarantee, and all books, records and proceeds pertaining thereto.
The Heller Facility is made to MLC Group, Inc. and guaranteed by MLC Holdings,
Inc. As compared to a committed line of credit, lending under the Heller
Facility is in Heller's sole discretion, and is further subject to MLC Group's
compliance with certain conditions and procedures. Under the Heller Facility,
upon not less than sixty (60) days' prior notice, either Heller or the Company
may notify the other of its intention not to seek/provide any further financing
thereunder.
DEFAULT AND LOSS EXPERIENCE
From the organization of the Company in 1990 through March 31, 1997,
the Company has not taken any write-offs due to credit losses with respect to
lease transactions financed by the Company though no assurance can be given
about what the Company's future credit loss experience will be. The Company
implemented a credit rating system during the quarter ended March 31, 1997, and
created a reserve for credit losses in the amount of $66,000 relating to its
lease and accounts receivables.
COMPETITION
The Company competes in the information technology and
telecommunications equipment leasing and financing market with bank-affiliated
lessors, captive lessors and other independent leasing or financing companies.
The Company's product and market focus often limits direct competition with
many of these types of companies. Bank affiliated lessors typically do not
directly compete in the operating lease segment of the leasing industry.
Captive leasing companies, such as IBM Credit Corporation, typically finance
only their parent Company's products. The Company competes directly with
various independent leasing companies, such as El Camino Resources, Ltd.,
Comdisco, Inc., and Leasing Solutions, Inc. Many of the Company's
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competitors have substantially greater resources and capital and longer
operating histories.
The Company believes it competes on the basis of price, responsiveness
to customer needs, flexibility in structuring lease transactions, relationships
with its vendors and knowledge of its vendors' products. The Company has found
it most effective to compete on the basis of providing a high level of customer
service and by structuring custom relationships with vendors and lease
transactions that meet the needs of its vendors and customers. Other important
elements that affect the Company's competitiveness are the high degree of
knowledge and competence of its key employees, specifically relating to
information technology and telecommunications equipment and operating lease
financing. Many of the Company's competitors are well established and have
substantially greater financial, marketing, technical and sales support than
the Company.
EMPLOYEES
As of March 31, 1997, the Company had 47 full time employees and seven
part time employees. Of these, 37 worked in the Company's principal executive
offices and the remaining 17 worked in the various regional offices of the
Company. Regional offices are generally staffed with one or more account
representatives who have daily contact with lessees and vendors.
The Company has assigned its employees to the following functional
areas, with the number of employees in each area indicated in parentheses:
administrative (1); sales and marketing (16); asset management (9); buy/sell
(7); accounting (8); executive (3); finance (3); and operations (7).
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price
of its stock may fluctuate. In the event the Company's revenues or earnings
for any quarter are less than the level expected by securities analysts or the
market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a
result of sales by the Company of equipment it leases to its customers. Such
sales of leased equipment, which are an ordinary but not predictable part of
the Company's business, will have the effect of increasing revenues, and, to
the extent sales proceeds exceed net book value, net income, during the quarter
in which the sale occurs. Furthermore, any such sale may result in the
reduction of revenue, and net income, otherwise expected in subsequent
quarters, as the Company will not receive lease revenue from the sold equipment
in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased space
of 4,517 square feet at 11150 Sunset Hills Road, Suite 110, Reston, Virginia
20190-5321. The Company also leases office space for its regional offices in
Philadelphia, Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento,
California; Raleigh, North Carolina; Atlanta, Georgia; and San Diego,
California. As of March 31, 1997,
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the aggregate monthly rent under all of the Company's office leases was
approximately $12,000. The Company has an aggregate of approximately 9,147
square feet of office space under lease with an average remaining lease term of
two years. During June 1997, the Company expanded its principal executive
offices to include an additional 1,228 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings, and is not aware
of any pending or threatened legal proceedings that would have a material
adverse effect upon the Company's business, financial condition or results of
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock has traded on the Nasdaq National Market
since November 20, 1996 under the symbol "MLCH." The following table sets
forth the range of high and low closing sale prices for the Common Stock for
the period November 20, 1996 through March 31, 1997, by quarter.
High Low
----------------
December 31, 1996* $10.25 $8.75
March 31, 1997 14.50 9.38
* For the period November 20, 1996 through December 31, 1996.
On June 12, 1997 the last sale price of the Common Stock was $13.00
per share. On June 12, 1997, there were 19 shareholders of record of the
Company's Common Stock.
DIVIDENDS
The Company has never paid a cash dividend to stockholders and the
current policy of the Company's Board of Directors is to retain the earnings of
the Company for use in the business. In addition, the CoreStates Facility
prohibits the Company from paying any dividends. Therefore, the payment of
cash dividends on the Common Stock is unlikely in the foreseeable future. Any
future determination concerning the payment of dividends will depend upon the
elimination of these restrictions and the absence of similar restrictions in
other agreements to which the Company is a party, the Company's financial
condition, the Company's results of operations and any other factors deemed
relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements of the Company
and related Notes thereto and the information included under "Item 7,
Management's Discussion and Analysis of Results of Financial Condition and
Results of Operation" and "Item 1, Business."
Year Ended March 31,
-----------------------------------------------------------------------
Statements of Earnings 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
Revenue:
Sales of equipment $ 24,357 $ 18,737 $ 26,940 $ 18,524 $ 21,683
Sales of leased equipment -- 5,940 9,958 16,318 21,634
Leased revenues 1,219 1,577 2,968 6,009 10,345
Net margin on sales-type
leases 193 380 277 86 --
Fee and other income 694 979 676 1,863 2,485
------ ------ ------- ------- -------
Total revenues 26,463 27,613 40,819 42,800 56,147
------ ------ ------- ------- -------
Costs and Expenses:
Cost of sales 22,750 23,155 34,353 31,202 40,104
Direct lease costs 140 344 841 2,863 5,198
Professional and other fees 770 595 633 687 534
Salaries and benefits 1,403 1,734 2,631 2,962 3,653
General and administrative expenses 526 994 759 1,018 1,236
Interest and financing costs 251 411 990 1,577 1,581
------ ------ ------- ------- -------
Total costs and expenses 25,840 27,233 40,207 40,309 52,306
------ ------ ------- ------- -------
Earnings Before Provision for
Income Taxes 623 380 612 2,491 3,841
Provision for Income Taxes 185 59 198 881 1,360
------ ------ ------- ------- -------
Net Earnings $ 438 $ 321 $ 414 $ 1,610 $ 2,481
====== ====== ======= ======= =======
Net Earnings per Common Share $ 0.11 $ 0.08 $ 0.10 $ 0.40 $ 0.56
====== ====== ======= ======= =======
Shares Used in Computing per
Share Amounts 4,000,000 4,000,000 4,000,000 4,000,000 4,406,427
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As of March 31,
--------------------------------------------------------------------------
Balance Sheets 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Assets:
Cash and cash equivalents $ 106 $ 929 $ 253 $ 358 $ 6,048
Accounts receivable 465 964 2,138 1,273 5,184
Notes receivable 34 87 37 92 2,154
Inventories 456 231 138 86 184
Refundable income taxes -- 13 49 -- --
Investment in direct financing and
sales-type leases -- net 2,577 10,146 12,124 16,273 17,473
Investment in operating lease
equipment -- net 2,104 164 1,874 10,220 11,065
Other Assets 40 334 548 1,178 605
All other assets 82 370 320 356 346
------- -------- -------- -------- --------
Total Assets $ 5,864 $ 13,238 $ 17,481 $ 29,836 $ 43,059
======= ======== ======== ======== ========
Liabilities:
Accounts payable - equipment $ 2,107 $ 1,091 $ 3,014 $ 4,973 $ 4,947
Accounts payable - trade 113 466 395 605 561
Salaries and commissions payable 122 131 118 62 472
Recourse notes payable 634 2,144 1,815 1,285 269
Nonrecourse notes payable 1,917 8,116 10,162 18,351 19,705
All other liabilities 441 439 713 1,685 3,136
------- -------- -------- -------- --------
Total Liabilities 5,334 12,387 16,217 26,961 29,090
------- -------- -------- -------- --------
Total Stockholders' Equity 530 851 1,264 2,875 13,969
------- -------- -------- -------- --------
Total Liabilities &
Stockholders' Equity $ 5,864 $ 13,238 $ 17,481 $ 29,836 $ 43,059
======= ======== ======== ======== ========
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report.
Certain statements contained herein are not based on historical fact, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that may not occur. Actual events, transactions and results
may materially differ from the anticipated events, transactions, or results
described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to,
the existence of demand for and acceptance of the Company's services, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the
Company's control. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
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REVENUE RECOGNITION AND LEASE ACCOUNTING
The Company's principal line of business is the leasing, financing and
sale of equipment. The manner in which these lease finance transactions are
characterized and reported for accounting purposes has a major impact upon the
Company's reported revenue, net earnings and the resulting financial measures.
Lease accounting methods significant to the Company's business are discussed
below.
The Company classifies its lease transactions, as required by the
Statement of Financial Accounting Standards No. 13, Accounting for Leases
("FASB No. 13") as: (i) direct financing; (ii) sales-type; or (iii) operating
leases. Revenues and expenses between accounting periods for each lease term
will vary depending upon the lease classification.
For financial statement purposes, the Company includes revenue from all
three classifications in lease revenues, and costs related to these leases in
direct lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type
leases transfer substantially all benefits and risks of equipment ownership to
the customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at inception of the lease.
Direct finance leases are recorded as investment in direct finance
leases upon acceptance of the equipment by the customer. At the inception of
the lease, unearned lease income is recorded which represents the amount by
which the gross lease payments receivable plus the estimated residual value of
the equipment exceeds the equipment cost. Unearned lease income is recognized,
using the interest method, as lease revenue over the lease term.
Sales-type leases include a dealer profit (or loss) which is recorded by
the lessor at the inception of the lease. The dealer's profit (or loss)
represents the difference, at the inception of the lease, between the fair value
of the leased property and its cost or carrying amount. The equipment subject
to such leases may be obtained in the secondary marketplace, but most frequently
is the result of releasing the Company's own portfolio. This profit (or loss)
which is recognized at lease inception, is included in net margin on sales-type
leases. Interest earned on the present value of the lease payments and residual
value is recognized over the lease term using the interest method and is
included as part of the Company's lease revenue.
Operating Leases. All leases that do not meet the criteria to be
classified as direct financing or sales-type leases are accounted for as
operating leases. Rental amounts are accrued evenly over the lease term and are
recognized as lease revenue. The Company's cost of the leased equipment is
recorded on the balance sheet as investment in operating lease equipment and is
depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue, depreciation expense and resultant profit
for operating leases are recorded evenly over the life of the lease.
As a result of these three classifications of lease for accounting
purposes, the revenues resulting from the "mix" of lease classifications during
an accounting period will affect the profit margin percentage for such period
with such profit margin percentage generally increasing as revenues from direct
financing and
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sales-type leases increase. Should a lease be financed, the interest expense
declines over the term of the financing as the principal is reduced.
Residual Values. Residual values represent the Company's estimated
value of the equipment at the end of the initial lease term. The residual
values for direct financing and sales-type leases are recorded in investment in
direct financing and sales-type leases, on a net present value basis. The
residual values for operating leases are included in the leased equipment's net
book value and are recorded in investment in operating lease equipment. The
estimated residual values will vary, both in amount and as a percentage of the
original equipment cost, and are recorded in investment in operating lease
equipment, depending upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
The Company evaluates residual values on an ongoing basis and records
any required changes in accordance with FASB No. 13. Residual values are
affected by equipment supply and demand and by new product announcements and
price changes by manufacturers. In accordance with generally accepted
accounting principles, residual values can only be adjusted downward.
The Company seeks to realize the estimated residual value at lease
termination through: (i) renewal or extension of the original lease; (ii) sale
of the equipment either to the lessee or the secondary market; or (iii) lease of
the equipment to a new user. The difference between the proceeds of a sale and
the remaining estimated residual value is recorded as a gain or loss in lease
revenues when title is transferred to the lessee, or, if the equipment is sold
on the secondary market, in sales revenues and cost of sales when title is
transferred to the buyer. The proceeds from any subsequent lease are accounted
for as lease revenues at the time such transaction is entered into.
Initial Direct Costs. Initial direct costs related to the origination
of sales-type, direct finance or operating leases, are capitalized and recorded
as part of the investment in direct financing and sales-type leases, net or as
operating lease equipment, net and are amortized over the lease term.
Sales. Sales revenue includes the following types of transactions:
(i)equipment sales to customers involve the sale to customers of new and/or used
equipment that is not subject to any type of lease; (ii) leased equipment sales
to investors relate to equipment being leased for which the Company is the
lessor, and the transfer of any financing related to the specific lease or
equipment; and (iii) sales of equipment which was previously leased involve
sales of equipment which the Company was the lessor whether to the original
lessee or to a new user.
Other Sources of Revenue. Fee and other income results from (i) income
events that occur after the initial sale of a financial asset such as
escrow/prepayment income, (ii) remarketing fees, (iii) brokerage fees earned for
the placement of financing transactions and (iv) interest and other
miscellaneous income. These revenues are included in fee and other income on
the Company's statement of earnings.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED MARCH 31, 1997
REVENUES
In fiscal year 1995, total revenues increased $13.2 million or 47.8%,
from $27.6 million in fiscal year 1994 to $40.8 million. In fiscal year 1996,
total revenues increased $2 million, or 4.9% from fiscal year 1995, to $42.8
million. In fiscal year 1997, total revenues increased $13.3 million or 31.2%
from fiscal year 1996, to $56.1 million.
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In fiscal year 1995, lease revenue increased $1.4 million, or 88.2%,
from $1.6 million in fiscal year 1994 to $3 million. In fiscal year 1996, lease
revenue increased $3 million, or 102.5%, to $6 million. In fiscal year
1997, lease revenue increased $4.3 million, or 72.2 %, to $10.3 million. The
increases are attributable to the increase of operating leases and direct
financing leases originated or acquired by the Company during the periods, and
the increases should continue to correspond with the level of lease activity
originated or acquired by the Company.
Sales revenue increased 49.5% from $24.7 million in fiscal year 1994 to
$36.9 million in fiscal year 1995 as a result of a 43.1% increase in equipment
sales from $18.8 million to $26.9 million and a 69.5% increase in leased
equipment sales from $5.9 million to $10 million. Sales revenues declined 5.6%
in fiscal year 1996 to $34.8 million as a result of a 31.2% decline in equipment
sales to $18.5 million partially offset by a 63.9% increase in leased equipment
sales to $16.3 million, leased equipment sales to MLC/GATX Limited Partnership I
was $13.1 million of the total $16.3 million. The decline in sales revenues in
fiscal year 1996 is attributable to the Company's focus on higher margin
transactions rather than on volume. Sales revenue increased 24.3%, or $8.5
million, in fiscal year 1997, to $43.3 million as a result of a 17.1% increase
in sales of equipment from $18.5 to $21.7 million and a 32.6% increase in the
sale of leased equipment from $16.3 to $21.6 million. Of the $21.6 million in
sale of leased equipment, $16.9 million was sale of leased equipment to MLC/CLC
LLC. As leasing volume grows, leased equipment sales are expected to grow as
well.
Net margin on sales-type lease revenue decreased $103,758, or 27.3%,
from $380,446 in fiscal year 1994 to $276,688 in fiscal year 1995, and $191,098,
or 69.1%, to $85,590 in fiscal year 1996 as a result of a decrease in the
origination of leases qualifying as sales-type leases. In fiscal year 1997, no
revenues were recorded as sales-type lease revenues due to no leases qualifying
as sales-type leases, and the Company expects this to continue.
Fee and Other Income. Fee and other income totaled $979,451 in fiscal
year 1994 which consisted of several significant transactions including $298,500
from a fee relating to the brokerage of a municipal lease transaction and
$155,000 from the settlement of a dispute. Fee and other income decreased
$302,714, or 30.9%, from $979,451 in fiscal year 1994 to $676,737 in fiscal year
1995 and increased $1.2 million, or 175.6% to $1.9 million in fiscal year 1996.
Fees earned in fiscal year 1996 included $440,570 from the financing of federal
lease transactions and $327,627 from the brokerage of various municipal leases
of lottery equipment. Fees and other income increased $620,638, or 33.3% to
$2.5 million in fiscal year 1997. Fees earned in fiscal year 1997 included a
one time fee of $250,000 for providing advisory services to a company which is
in part owned by one of the Company's outside directors. The increase in fee
and other income is attributable to higher levels of interest income,
remarketing fees, earnings from a prepay escrow fee, and higher levels of
management fee income earned from the equity joint ventures with Cargill and
GATX, as compared to the same periods of 1996. The Company expects that fee
and other income will vary considerably due to the uncertainty of completion
and the timing of specific transactions. See "Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Fluctuations in
Quarterly Operating Results."
EXPENSES
Cost of Sales. Cost of sales increased $11.2 million or 48.4% from
$23.2 million in fiscal year 1994 to $34.4 million in fiscal year 1995,
decreased $3.2 million or 9.2% to $31.2 million in fiscal year 1996, and
increased $8.9 million, or 28.5% to $40.1 million in fiscal year 1997. The
increases in fiscal years 1995 and 1997 and the decrease in fiscal year 1996
relate directly to the volume of sales in each of those years.
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Depreciation and Operating Leases. Depreciation increased $398,576, or
295.4%, from $134,943 in fiscal year 1994 to $533,519 in fiscal year 1995,
increased $1.5 million, or 286%, to $2.1 million in fiscal year 1996, and
increased $1.4 million, or 67% to $3.5 million for fiscal year 1997. The
increase in depreciation for all years is due to the increased level of
operating leases originated and acquired by the Company and increases in the
Company's operating lease assets over the three-year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $698,764, or 21.1%, from $3.3 million in
fiscal year 1994 to $4 million in fiscal year 1995, and increased $645,295, or
16%, to $4.7 million in fiscal year 1996. Selling, general, and administrative
expenses increased $756,401, or 16.2% to $5.4 million in fiscal year 1997. The
increases during the three-year period are due primarily to increased level of
business and selling activity.
Interest Expense. Interest and other financing expenses increased
$578,921, or 140.7%, from $411,392 in fiscal year 1994 to $990,313 in fiscal
year 1995, increased $586,049 or 59.2%, to $1.6 million in fiscal year 1996, and
increased $4,668, or 0.3% to $1.6 million in fiscal year 1997. The increase in
interest expense during the periods resulted from the Company's increased level
of leasing and business activity, including an increase in recourse and
nonrecourse debt from $10.3 million in fiscal year 1994 to $12 million in fiscal
year 1995 to $19.6 million in fiscal year 1996 to $20 million in fiscal year
1997. The proceeds of the initial public offering in November and December,
1996 reduced the short-term borrowings of the Company and resulted in a smaller
increase in interest expense. The weighted average interest rate for the
Company's nonrecourse debt outstanding as of March 31, 1996 and March 31, 1997
was 7.8%.
Income Taxes. The provision for taxes was 15.6% and 32.4% of earnings
before income taxes for the fiscal years 1994 and 1995 respectively. The
provision for taxes for fiscal years 1996 and 1997 was 35.4%. The lower rate in
fiscal year 1994 is attributable to a higher percentage of nontaxable items and
lower percentage of nondeductible items in relation to earnings before taxes for
that year.
Net Earnings. On a consolidated basis, net earnings and net earnings
per share increased in each of the fiscal years 1995, 1996, and 1997. Net
earnings increased $93,022, or 29%, from $320,533 in fiscal year 1994 to
$413,555 in fiscal year 1995. From fiscal year 1995 to fiscal year 1996, net
earnings increased $1.2 million, or 288.9%, to $1.6 million, from fiscal year
1996 to fiscal year 1997 net earnings increased $870,177, or 54% to $2.5
million. The increases result from the fluctuation in revenues and expenses
discussed in the above paragraphs.
Management of Interest Rate Expense. The Company manages interest rate
expense by pricing its transactions based upon the market rates at the time of
the transaction. Most transactions are funded with matching term debt thereby
locking in the interest costs to match the cash flows from the lease over its
term.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, differences
between estimated residual values and actual amounts realized related to the
equipment the Company leases. Quarterly operating results could also fluctuate
as a result of the sale by the Company of equipment in its lease portfolio prior
to the expiration of the lease term to the lessee or to a third party. Such
sales of leased equipment prior to the expiration of the lease term may have the
effect of increasing revenues and net earnings during the quarter in which the
sale occurs, and reducing revenues and net earnings otherwise expected in
subsequent quarters.
FINANCIAL CONDITION
22
23
During fiscal year 1995, the Company obtained an additional $3 million
line of credit facility which gave the Company total lines of credit facilities
of $5 million. As a result of fiscal year 1995 net earnings of $414,000
stockholders' equity increased to $1.3 million at March 31, 1995.
During fiscal year 1996, the Company replaced its $3 million bank
facility with the First Union Facility, a $5 million line of credit facility.
In fiscal year 1996, the Company also entered into an equity joint venture with
Cargill Leasing Corporation, a transaction which positioned the Company to
compete more effectively in the growing area of personal computer and network
leasing. See "Item 1, Business -- Financing." As a result of fiscal year 1996
net earnings of $1.6 million, stockholders' equity increased to $2.9 million at
March 31, 1996.
During fiscal year 1997, the Company entered into a $10 million
partial-recourse lease warehouse facility with Heller. In fiscal year 1997, the
Company also completed its initial public offering of 1,150,000 shares of common
stock at a price of $8.75 per share. Net of expenses and underwriter's
discount, the initial public offering increased the Company's paid-in capital
by $8.6 million, which combined with fiscal year 1997 net earnings of $2.5
million increased stockholders' equity to $14 million at March 31, 1997.
During the three year period ended March 31, 1997, the Company improved
its financial condition and available financial resources in the following
ways:(i) available lines of credit increased from $2 million to $5 million;
(ii)stockholders' equity increased from $850,744 to $14 million; and (iii) the
Company entered into one equity joint venture which substantially increased its
ability to finance its lease transactions, and iv) an available partial-recourse
credit facility increased from $0 to $10 million. All of the above factors have
allowed the Company to be able to support the higher levels of sales and leasing
activity reflected in its financial statements.
As part of its ongoing business activity, the Company generates new
equipment leases and also engages in leased equipment sales. From fiscal year
1995 to fiscal year 1996 the minimum lease payments for direct financing and
sales type leases increased from $13.7 million to $18.2 million, or 33.2%. From
fiscal year 1996 to fiscal year 1997 the minimum lease payments for direct
financing and sales type leases increased from $18.2 million to $18.7 million,
or 3.0%. The future minimum lease payments fluctuate, depending on sales and
new lease activity from year to year and quarter to quarter, making it
impractical to accurately trend the minimum lease payments. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. The Company generated cash flow from operations of $1.2
million during the twelve month period ended March 31, 1997, which was lower
than same-period net income of $2.5 million as a result of increases in accounts
receivable of $3.9 million (mostly due to increases in lease receivables for
equipment which has been paid for but not yet booked as a lease), notes
receivable of $2.1 million, (due to amounts owed by MLC/CLC LLC for unfunded
equity sales made at year-end), and Payments from Lessees Directly to Lenders of
$1.6 million, and other non-cash items of $78,849. Non-cash expenses which
increased cash flow included Depreciation and Amortization of $3.6 million (due
to an increase in the amount of operating lease assets held during the year and
amortization of indirect costs), increases in Income Taxes Payable of $924,255,
Salaries & Commissions Payable of $410,348, increases in accrued expenses and
other liabilities of $680,583 (primarily due to an increase in cash held for
others), the net loss on sale of off-lease operating lease equipment of
$83,754, ($299,000 of the losses included in this net figure was a result of
the early termination of a number of operating leases with one customer where
the Company received a termination fee which was in excess of the non-cash
23
24
adjustment, resulting in positive net fee income for the transaction as a
whole) and increases in other assets and liabilities of $724,136.
Investing activities, which are primarily related to investments in
equipment under lease, used $26.5 million during the twelve month period.
Financing activities in the twelve month period generated $30.9 million which
included $26.8 million from the Company's new borrowings of non-recourse debt,
$221 thousand from new recourse borrowings, and $8.6 million cash proceeds from
the Company's initial public offering and the proceeds from the
fully-subscribed overallottment. The cash raised was offset by repayment of
recourse and non-recourse borrowings aggregating $3.3 million), repayment of
$1.1 million to its lines of credit, and the termination and repayment of loans
from stockholders of $275 thousand. The net result of the above activity for
the twelve month period was an increase in cash and cash equivalents of $5.7
million.
Cash Flow from Borrowings. To date, the financing necessary to support
the Company's leasing and financing activities has been provided principally
from nonrecourse borrowings, and to a lesser extent, recourse borrowings. The
Company anticipates that future leasing and financing activities will be
financed in a similar manner, as well as cash flow from operations.
Historically, the Company has obtained recourse and nonrecourse
borrowings from money center banks, regional banks, insurance companies, finance
companies and financial intermediaries.
In order to take advantage of the most favorable long-term financing
arrangements available to it, the Company often finances equipment purchases and
the related leases on an interim basis with short-term, recourse debt, and
accumulates such leases until it has a sufficient transaction size (either with
a single lessee or a portfolio of lessees) to warrant obtaining long-term
financing for such leases either through nonrecourse borrowings or a sale
transaction. Such interim financing is usually obtained through the Company's
revolving line of credit (such as the CoreStates Facility) or partial-recourse
warehouse lines (such as the Heller Facility) The Company's maximum available
credit under such lines of credit totaled $15 million as of March 31, 1997. As
of June 5, 1997, the Company's available credit under such lines was increased
to $25 million with the replacement of the First Union Facility by the
CoreStates Facility. See "Item 1, Business -- Financing".
Borrowings under the lines of credit are generally secured by lease
receivables and the underlying equipment financed under the facility. At March
31, 1997, there were no balances outstanding under the Company's lines of
credit, however, as of June 23, 1997, there was $7,500,000 outstanding under the
CoreStates Facility and $890,814 outstanding under the Heller Facility. The
agreements for the lines of credit contain covenants regarding leverage (a
maximum debt to net worth ratio of 6.5 to 1.0 and a minimum consolidated
tangible net worth of $9,000,000 as well as interest coverage, minimum net worth
and profitability and a limitation on the payment of dividends). At March 31,
1997, the Company had a recourse liabilities to equity ratio of 0.67 to 1.0.
In July, 1996, the Company entered into the NationsBanc Leasing
Facility, under which NationsBanc Leasing Corporation may lend up to $2 million
in various notes of terms of up to 60 months. The facility expired January 31,
1997, and the Company made no borrowings under the facility.
On June 5, 1997, the Company entered into the CoreStates Facility, a $15
million committed recourse line of credit with CoreStates Bank, N.A. Borrowings
under the CoreStates Facility, which is available through June 5, 1998, bear
interest at LIBOR + 110 basis points, or, at the Company's option, Prime minus
one percent. On June 10, 1997, the Company terminated its First Union Facility
24
25
and drew down $7.5 million on the CoreState Facility. The line of credit is
made to MLC Group, Inc. and guaranteed by MLC Holdings, Inc.
Availability under the revolving lines of credit may be limited by the
asset value of equipment purchased by the Company and may be further limited by
certain covenants and terms and conditions of the facilities.
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
established the Heller Facility, a $10,000,000 credit facility agreement, with
Heller. Under the terms of the Heller Facility, a maximum amount of $10 million
is available to the Company, provided, that each draw is subject to the
approval of Heller. As of March 31, 1997, no advances under the Heller
Facility have been made, however, on April 28, 1997, a loan of $943,642 was
advanced to the Company. No other advances have been made through June 23,
1997(See "Item 1 - Business --- Financing --- Partial Recourse Borrowing
Facilities")
The Company repaid loans to two stockholders in the amount of $275,000
from the proceeds of the initial public offering.
Payments under the Company's borrowings and the maturities of its
long-term borrowings are typically structured to match the payments due under
the leases securing the borrowings.
Non Recourse Borrowing. The Company's nonrecourse debt financing
activities typically provide a significant portion of the purchase price of the
equipment purchased by the Company for lease to its customers. The balance of
the purchase price (the Company's equity investment in equipment), is financed
from a variety of sources. See "Item 1, Business -- Financing." Although the
Company believes that the credit quality of its lessees will continue to allow
it to obtain such debt financing, no assurances can be given that such financing
will be available at acceptable terms or at all.
ADEQUACY OF CAPITAL RESOURCES
The Company's current lines of credit, if maintained, and its expected
access to the public and private debt securities markets (including financings
for its equity investment in leases) and its estimated cash flow from
operations are anticipated to provide adequate capital to fund the Company's
operations, including acquisitions and financings under its relationships with
vendors, for at least the next 12 months. Although no assurances can be given,
the Company expects to be able to maintain, renew, or replace its existing
short-term lines of credit and to continue to have access to the public and
private securities markets, both for debt and for equity financings.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued FASB No. 128, "Earnings
Per Share" in February 1997. This standard will be effective for the Company
beginning in fiscal year 1998. The pro forma effect of adopting this standard
has no impact on the earnings per share calculation for the years ended March
31, 1995, 1996 and 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying Table of Contents to Financial Statements and Schedule
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
26
PART III
Except as set forth below, the information required by Items 10, 11, 12
and 13 is incorporated by reference from the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the Company's fiscal
year.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The following table sets forth the name, age and position with the
Company of each person who is an executive officer, director or significant
employee.
Name Age* Position Class
- ---- ---- -------- -----
Phillip G. Norton........ 53 Chairman of the Board,
President, and Chief
Executive Officer III
Thomas B. Howard..........50 Vice President; Executive Vice President,
and Chief Operating Officer of MLC Group
Bruce M. Bowen .......... 45 Director and Executive Vice
President III
Steven J. Mencarini 41 Senior Vice President,
and Chief Financial Officer
Jonathan J. Ledecky...... 39 Director I
Terrence O'Donnell....... 52 Director II
Carl J. Rickertsen....... 36 Director II
Kleyton L. Parkhurst......34 Secretary and Treasurer
Barbara J. Simmonds...... 37 Vice President and Controller
Kevin M. Norton.......... 41 Vice President of Brokerage
Operations
William J. Slaton........ 49 Vice President of Marketing
Thomas K. McNamara....... 52 Vice President
*Age as of June 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
(a)(2) Financial Statement Schedule
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the last quarter of the
period covered by this report. This Form 8-K was filed with the Securities and
Exchange Commission on March 28, 1997, and reported the Heller Facility
(discussed herein) under Item 5 ("Other Business"). No financial statements
were filed with this Form 8-K.
26
27
(c) Exhibits.
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- -----------------------------------------------------------------------------------------------------------------
3.1(1) Certificate of Incorporation of Registrant,
as currently in effect
3.2(1) Bylaws of Registrant
4.1(1) Specimen Certificate of Common Stock of the Company
*10.1(1) 1996 Stock Incentive Plan
*10.2(1) 1996 Outside Director Stock Option Plan
*10.3(1) 1996 Nonqualified Stock Option Plan and form of agreement
thereunder
*10.4(1) 1996 Incentive Stock Option Plan and form of agreement
thereunder
10.5(1) Form of Indemnification Agreement entered into between
Registrant and its directors and officers
10.6(1) Lease dated July 14, 1993 for principal executive office
located in Reston, Virginia, together with amendment
thereto dated March 18, 1996
*10.7(1) Form of Employment Agreement between the Registrant and
Phillip G. Norton
*10.8(1) Form of Employment Agreement between the Registrant and
Bruce M. Bowen
*10.9(1) Form of Employment Agreement between the Registrant and
William J. Slaton
*10.10(1) Form of Employment Agreement between the Registrant and Kleyton L.
Parkhurst
27
28
10.11(1) Form of Irrevocable Proxy and Stock Rights Agreement
10.12(1) Commitment and Loan Agreement by and Between the Company and
NationsBank, N.A.
10.13(1) First Amended and Restated Business Loan and Security
Agreement by and Between the Company and First Union Bank
of Virginia
10.14(1) Credit Agreement by and Between the Company and NationsBanc
Leasing Corporation
10.15(1) Loan Modification and Extension Agreement
10.16(2) Text of Loan and Security Agreement dated January 31, 1997 between
MLC Group, Inc. and Heller Financial, Inc.
10.17(2) Text of First Amendment to Loan and Security Agreement dated March 12, 1997 between
MLC Group, Inc. and Heller Financial, Inc.
10.18 Credit Agreement dated as of June 5, 1997, 1997, by and
between MLC Group, Inc. and CoreStates Bank, N.A.
10.19 Form of Employment Agreement between the Registrant and
Thomas B. Howard, Jr.
10.20 Form of Employment Agreement between the Registrant and
Steven J. Mencarini
21.1(1) Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP, independent auditors
27.1 Financial Data Schedule
* Indicates a management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to the indicated exhibit filed as part of
the Registrant's Registration Statement on Form S-1 (No. 333-11737).
(2) Incorporated herein by reference to the indicated exhibit filed as part of
the registrant's Form 8-K filed March 28, 1997.
28
29
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.
MLC Holdings, Inc.
By: /s/ PHILLIP G. NORTON
------------------------------------
Phillip G. Norton, Chief Executive Officer
Date: June 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ PHILLIP G. NORTON
------------------------------------
Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 30, 1997
By: /s/ STEVEN J. MENCARINI
------------------------------------
Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
By: /s/ BRUCE M. BOWEN
------------------------------------
Bruce M. Bowen, Director and
Executive Vice-President
Date: June 30, 1997
By:
------------------------------------
Jonathan J. Ledecky, Director
Date: June 30, 1997
By: /s/ TERRENCE O'DONNELL
------------------------------------
Terrence O'Donnell, Director
Date: June 30, 1997
By: /s/ CARL J. RICKERSTEIN
------------------------------------
Carl J. Rickerstein, Director
Date: June 30, 1997
By: /s/ KLEYTON L. PARKHURST
------------------------------------
Kleyton L. Parkhurst, Secretary and Treasurer
Date: June 30, 1997
By: /s/ BARBARA J. SIMMONDS
------------------------------------
Barbara J. Simmonds, Vice President
and Controller, Chief Accounting Officer
Date: June 30, 1997
29
30
MLC HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1995, 1996, and 1997 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1996 and 1997 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-21
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years S-1
Ended March 31, 1995, 1996 and 1997.
F-1
31
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
MLC Holdings, Inc.
Reston, Virginia
We have audited the accompanying consolidated balance sheets of MLC
Holdings, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audit also included the
financial statement schedule listed in the foregoing table of contents. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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, such consolidated financial statements present
fairly, in all material respects, the financial position of MLC Holdings, Inc.
and subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information as set forth therein.
/s/ Deloitte & Touche LLP
McLean, VA
June 5, 1997
F-2
32
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1996 1997
ASSETS:
Cash and cash equivalents $357,881 $6,048,008
Accounts receivable 1,272,707 5,184,214
Notes receivable (1) 91,857 2,154,250
Employee advances 76,349 47,812
Inventories 86,280 184,085
Investment in direct financing and sales-type
leases - net 16,273,218 17,473,069
Investment in operating lease equipment - net 10,219,826 11,065,159
Property and equipment - net 280,468 297,617
Other assets (2) 1,177,629 604,792
----------- -----------
Total Assets $29,836,215 $43,059,006
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable - equipment $4,972,979 $4,946,422
Accounts payable - trade 604,650 561,482
Salaries and commissions payable 61,910 472,258
Accrued expenses and other liabilities 935,315 1,615,898
Income taxes payable 6,332 930,587
Recourse notes payable 1,284,742 268,744
Nonrecourse notes payable 18,351,579 19,705,059
Loans from stockholders 275,000 -
Deferred taxes 469,000 590,000
----------- -----------
Total liabilities 26,961,507 29,090,450
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000
shares authorized; none issued or outstanding - -
Common stock, $.01 par value -10,000,000 shares
authorized; 4,000,000 and 5,150,000 shares
issued and outstanding, respectively 40,000 51,500
Additional paid-in capital 9,592 8,611,354
Retained earnings 2,825,116 5,305,702
----------- -----------
Total stockholders' equity 2,874,708 13,968,556
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,836,215 $43,059,006
=========== ===========
(1) Includes amounts with a related party of $1,812,414 as of March 31,
1997.
(2) Includes amounts with related parties of $678,393 and $319,113 as of
March 31, 1996 and 1997.
See notes to consolidated financial statements.
F-3
33
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
1995 1996 1997
REVENUES:
Sales $36,897,774 $34,841,823 $43,317,666
Lease revenues 2,967,450 6,008,826 10,345,110
Net margin on sales-type leases 276,688 85,590 -
Fee and other income 676,737 1,863,962 2,484,600
---------- ---------- ----------
Total revenues (1) 40,818,649 42,800,201 56,147,376
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 34,353,344 31,202,228 40,104,104
Direct lease costs 841,345 2,862,815 5,197,868
Professional and other fees 632,369 687,276 534,822
Salaries and benefits 2,630,660 2,962,177 3,652,988
General and administrative expenses 759,063 1,017,934 1,235,978
Interest and financing costs 990,313 1,576,362 1,581,030
---------- ---------- ----------
Total costs and expenses (2) 40,207,094 40,308,792 52,306,790
---------- ---------- ----------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES 611,555 2,491,409 3,840,586
PROVISION FOR INCOME TAXES 198,000 881,000 1,360,000
---------- ---------- ----------
NET EARNINGS $413,555 $1,610,409 $2,480,586
========== ========== ==========
NET EARNINGS PER COMMON SHARE $0.10 $0.40 $0.56
========== ========== ==========
(1) Includes amounts from related parties of $1,901,192, $15,758,510, and
$21,051,450 for the fiscal years ended March 31, 1995, 1996, and 1997.
(2) Includes amounts to related parties of $1,619,830, $15,001,141, and
$20,512,923 for the fiscal years ended March 31, 1995, 1996, and 1997
See notes to consolidated financial statements.
F-4
34
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995 1996, AND 1997
- --------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Earnings Total
BALANCE, APRIL 1, 1994 -- -- 4,000,000 $40,000 $9,592 $801,152 $850,744
Net earnings -- -- -- -- -- 413,555 413,555
---------- ----------- ------------ ---------- ---------- -------- -------
BALANCE, MARCH 31, 1995 -- -- 4,000,000 40,000 9,592 1,214,707 1,264,299
Net earnings -- -- -- -- -- 1,610,409 1,610,409
---------- ----------- ------------ ---------- ---------- --------- ---------
BALANCE, MARCH 31, 1996 -- -- 4,000,000 40,000 9,592 2,825,116 2,874,708
Proceeds from public -- -- 1,150,000 11,500 8,592,262 -- 8,603,762
offering, net of expenses
Compensation to outside -- -- -- -- 9,500 -- 9,500
directors - stock options
Net earnings -- -- -- -- -- 2,480,586 2,480,586
---------- ----------- ------------ ---------- ---------- ---------- -----------
BALANCE, MARCH 31, 1997 -- $ -- 5,150,000 $51,500 $8,611,354 $5,305,702 $13,968,556
========== =========== ============ ========== ========== ========== ===========
See notes to consolidated financial statements.
F-5
35
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $413,555 $1,610,409 $2,480,586
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 580,088 2,136,217 3,578,915
Provision for credit losses - - 66,000
(Gain) loss on sale of operating lease equipment (1) (48,235) (323,422) 83,754
Impairment of operating lease residual values - - 153,434
Payments from lessees directly to lenders-operating
lease equipment (217,375) (884,389) (1,590,061)
Loss (gain) on disposal of property and equipment 974 4,489 (9,124)
Deferred taxes 26,000 623,000 121,000
Compensation to outside directors - stock options - - 9,500
Changes in:
Accounts receivable (1,173,898) 865,122 (3,911,507)
Notes receivable (2) 50,150 (55,088) (2,062,393)
Employee advances 18,922 (61,996) 28,537
Inventories 93,140 51,485 15,038
Other assets (3) (50,335) (299,866) 330,627
Accounts payable - equipment 1,922,938 1,958,532 (26,557)
Accounts payable - trade (71,001) 209,265 (43,168)
Salaries and commissions payable (12,845) (55,796) 410,348
Accrued expenses and other liabilities 198,766 547,093 680,583
Income taxes (refundable) payable (35,742) 55,278 924,255
-------- ------ -------
Net cash provided by
operating activities 1,695,102 6,380,333 1,239,767
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating lease
equipment (4) 73,072 1,383,677 4,992,050
Purchase of operating lease equipment (2,268,792) (13,919,193) (24,800,360)
Increase in investment in direct financing and
sales-type leases (5) (9,766,564) (17,169,201) (6,825,873)
Proceeds from sale of property and equipment 1,588 9,049 9,124
Purchases of property and equipment (43,451) (207,150) (105,048)
(Increase) decrease in investment in joint ventures (6) (164,020) (329,571) 242,211
--------- --------- -------
Net cash used in investing activities (12,168,167) (30,232,389) (26,487,896)
------------ ------------ -----------
(Continued)
F-6
36
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM FINANCING ACTIVITIES: 1
Borrowings:
Nonrecourse 10,217,530 25,678,168 26,825,118
Recourse 184,359 67,103 220,768
Repayments:
Nonrecourse (348,373) (1,144,023) (3,199,626)
Recourse (44,972) (62,688) (93,396)
Proceeds of loans from stockholders 75,000 - -
Repayments of loans from stockholder - (50,000) (275,000)
Repayments on lines of credit (285,532) (532,098) (1,143,370)
Proceeds from public offering - - 9,358,125
Payments of expenses related to public offering - - (754,363)
--------- ----------- ---------
Net cash provided by financing
activities 9,798,012 23,956,462 30,938,256
--------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (675,053) 104,406 5,690,127
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 928,528 253,475 357,881
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $253,475 $357,881 $6,048,008
======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $161,667 $183,220 $87,161
======== ======== =======
Income taxes paid $219,573 $202,864 $315,137
======== ======== ========
(Concluded)
(1) Includes amounts provided by (used by) related parties of ($172,956)
and $3,930 for the fiscal years ended March 31, 1996 and 1997.
(2) Includes amounts used by related parties of ($1,812,414) for the
fiscal year ended March 31, 1997.
(3) Includes amounts provided by (used by) related parties of $234,090,
($398,034), and $285,943 for the fiscal years ended March 31, 1995,
1996 and 1997.
(4) Includes amounts provided by related parties of $1,073,427 and
$2,707,213 for the fiscal years ended March 31, 1996 and 1997.
(5) Includes amounts provided by (used by) related parties of ($235,180),
$259,857 and ($23,417) for the fiscal years ended March 31, 1995,
1996 and 1997.
(6) Includes amounts provided by (used by) related parties of ($153,826),
($270,860), and $73,338 for the fiscal years ended March 31, 1995,
1996 and 1997.
See notes to consolidated financial statements.
F-7
37
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective September 1, 1996, MLC Holdings, Inc.,
(incorporated August 27, 1996) became the holding company for MLC Group,
Inc., and MLC Capital, Inc. (MLC Holdings, Inc., together with its
subsidiaries collectively, "MLC" or "the Company"). The accompanying
consolidated financial statements include the accounts of the wholly owned
subsidiary companies at historical amounts as if the combination had
occurred on March 31, 1994, in a manner similar to a pooling of interests.
MLC Group, Inc. was formed on November 8, 1990, and is a dealer of
information technology equipment and a finance and leasing company serving
federal, state, and local governments, as well as commercial customers. The
Company specializes in financing information technology, equipment,
software, and services. The Company also maintains an active presence in
the secondary market for computer hardware.
All significant intercompany balances and transactions have been eliminated.
Revenue Recognition - The Company sells information technology equipment to
its customers and recognizes revenue from equipment sales at the time
equipment is accepted by the customer. The Company is the lessor in a
number of its transactions and these are accounted for in accordance with
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases."
Each lease is classified as either a direct financing lease, sales-type
lease, or operating lease, as appropriate. Under the direct financing and
sales-type lease methods, the Company records the net investment in leases,
which consists of the sum of the minimum lease term payments, initial direct
costs, and unguaranteed residual value (gross investment) less the unearned
income. The difference between the gross investment and the cost of the
leased equipment for direct finance leases is recorded as unearned income at
the inception of the lease. The unearned income is amortized over the life
of the lease using the interest method. Under sales-type leases, the
difference between the fair value and cost of the leased property (net
margins) is recorded as revenue at the inception of the lease.
Lease revenues consist of rentals due under operating leases and
amortization of unearned income on direct financing and sales-type leases.
Equipment under operating leases is recorded at cost and depreciated on a
straight-line basis over the lease term to the Company's estimate of
residual value.
The Company assigns all rights, title, and interests in a number of its
leases to third-party financial institutions without recourse. These
assignments are accounted for as sales since the Company has completed its
obligations at the assignment date, and the Company retains no ownership
interest in the equipment under lease.
Residuals - Residual values, representing the estimated value of equipment
at the termination of the lease, are recorded in the financial statements at
the inception of each sales-type or direct financing lease as amounts
estimated by management based upon its experience and judgment. The
residual values for operating leases are included in the leased equipment's
net book value.
The Company evaluates residual values on an ongoing basis and records any
required adjustments. In accordance with generally accepted accounting
principles, no upward revision of residual values is made subsequent to the
F-8
38
period of the inception of the lease. Residual values for sales-type and
direct financing leases are recorded at their net present value and the
unearned interest is amortized over the life of the lease using the interest
method.
Reserve for Credit Losses - The reserve for credit losses ("the reserve") is
maintained at a level believed by management to be adequate to absorb
potential losses inherent in the Company's lease portfolio. Management's
determination of the adequacy of the reserve is based on an evaluation of
historical credit loss experience, current economic conditions, volume,
growth, the composition of the lease portfolio, and other relevant factors.
The reserve is increased by provisions for potential credit losses charged
against income. Accounts are either written off or written down when the
loss is both probable and determinable, after giving consideration to the
lessee's financial condition, the value of the underlying collateral and
funding status (i.e., discounted on a nonrecourse or recourse basis).
Cash and Cash Equivalents - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less.
Inventories - Inventories are stated at the lower of cost (specific
identification basis) or market.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the related assets, which range from three to five years.
Income Taxes - Deferred income taxes are provided for in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred
income tax liabilities and assets are based on the difference between
financial statement and tax bases of assets and liabilities, using tax rates
currently in effect.
Estimates - 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.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - Effective January 1, 1997, the Company
adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This Standard is effective for
transactions occurring after December 31, 1996, and establishes new criteria
for determining whether a transfer of financial assets in exchange for cash
or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. Certain assignments of direct finance
leases made on a nonrecourse basis by the Company after December 31, 1996
meet the criteria for surrender of control set forth by SFAS 125 and have
therefore been treated as sales for financial statement purposes. The net
revenues earned under such transactions are reflected in the accompanying
statement of earnings for the year ended March 31, 1997.
Reclassifications - Certain items have been reclassified in the March 31,
1995 and 1996 financial statements to conform to the March 31, 1997
presentation.
Initial Public Offering - During November and December 1996, MLC Holdings,
Inc., consummated an initial public offering ("the Offering") of 1,150,000
shares of its common stock including the over allotment. The Company
received proceeds of
F-9
39
$9.4 million (gross proceeds of $10.1 million less underwriters expense of
$0.7 million) from the Offering of MLC Holdings, Inc., and incurred $0.8
million in expenses. Of the net proceeds of approximately $8.6 million,
$0.3 million was used to repay outstanding stockholder loans and the related
accrued interest and the balance of $8.3 million was used for general
corporate purposes.
Earnings Per Share - Earnings per share are based on a weighted average
number of shares outstanding of 4,000,000 in 1995, 4,000,000 in 1996 and
4,406,427 in 1997. The dilutive effect of stock options is not material for
any of the three years.
New Accounting Pronouncement - The Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" in February 1997. This Standard
will be effective for the Company beginning in fiscal year 1998. The pro
forma effect of adopting this Standard has no impact on the earnings per
share calculation for the years ended March 31, 1995, 1996 and 1997.
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists
of the following components:
MARCH 31,
---------------------------------
1996 1997
Minimum lease payments $ 18,212,328 $ 18,752,170
Estimated unguaranteed residual value 347,811 1,271,232
Initial direct costs, net of amortization of
$590,058 and $1,299,476 at March 31, 1996
and 1997 1,538,756 1,236,442
Less: Unearned lease income (3,825,677) (3,720,775)
Less: Reserve for credit losses - (66,000)
------------ -------------
Investment in direct financing and sales-type leases - net $ 16,273,218 $ 17,473,069
============ =============
Future scheduled minimum lease rental payments as of March 31, 1997, are as
follows:
YEAR ENDING MARCH 31,
1998 $ 7,798,931
1999 6,195,191
2000 3,658,044
2001 890,716
2002 and thereafter 209,288
------------
Total $ 18,752,170
============
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes (see Note 6).
F-10
40
3. SALES-TYPE LEASES
The detail for the sales-type leases consists of the following:
YEAR ENDED MARCH 31,
---------------------------------------------------------
1995 1996 1997
Gross minimum lease payments $ 3,451,993 $ 559,256 $ -
Estimated unguaranteed
residual value 3,296 - -
Gross cost of sales (2,628,983) (375,287) -
Unearned lease income (549,618) (98,379) -
------------- ----------- -------------
Net margin $ 276,688 $ 85,590 $ -
============= =========== =============
4. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases represents primarily equipment leased for two
to three years. The components of the net investment in operating lease
equipment are as follows:
MARCH 31,
--------------------------------
1996 1997
Cost of equipment under operating lease $11,411,105 $14,518,704
Initial direct costs 54,217 41,829
Accumulated depreciation and amortization (1,245,496) (3,495,374)
----------- -----------
Investment in operating lease equipment - net $10,219,826 $11,065,159
=========== ===========
As of March 31, 1997, future scheduled minimum lease rental payments are
as follows:
YEAR ENDING MARCH 31,
1998 $ 5,279,226
1999 3,429,305
2000 1,468,144
2001 31,302
2002 and thereafter 5,217
-----------
$10,213,194
===========
Based on management's evaluation of estimated residual values included
within the Company's operating lease portfolio, certain recorded
residuals were written down to reflect revised market conditions. In
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," an
impairment loss of $153,434 was recognized during the year
F-11
41
ended March 31, 1997. The loss is included in direct lease costs in the
accompanying consolidated statements of earnings.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
MARCH 31,
------------------------------
1996 1997
Furniture and equipment $ 241,859 $ 316,436
Capitalized software 158,666 185,620
Leasehold improvements 14,613 14,613
--------- ----------
415,138 516,669
Accumulated depreciation (134,670) (219,052)
--------- ----------
Property and equipment - net $280,468 $ 297,617
======== ==========
6. RECOURSE AND NONRECOURSE NOTES PAYABLE
MARCH 31,
-------------------------------------
1996 1997
Revolving line of credit with a maximum
balance of $250,000, bearing interest at the
prime rate plus 1.5% payable on demand,
secured by equipment purchases $ 175,000 $ -
Revolving line of credit with a maximum balance of
$2,000,000, bearing interest at the prime rate
plus 1%, and personally guaranteed by
an employee/stockholder 592,000 -
Revolving line of credit with a maximum balance of
$5,000,000, bearing interest at the LIBOR rate
plus 2.75%, secured by the Company's assets
and personal guarantees from
employees/stockholders 360,000 -
Partial recourse revolving line of credit with a
maximum balance of $10,000,000
bearing interest at a rate indexed to the
prevailing U.S. Treasury yield plus 1.75% - 3.00%,
secured by related investments in leases - -
Recourse equipment notes with varying interest rates
ranging from 8.17% to 8.53%, and 8.53% to
8.75%, respectively, secured by related
investments in leases 141,373 268,744
Noncollateralized recourse note bearing
interest at 8.05% 16,369 -
------------- -----------
F-12
42
$ 1,284,742 $ 268,744
============= ============
Nonrecourse equipment notes with varying interest
rates ranging from 5.85% to 14.39%, and
6.30% to 9.90%, respectively, secured by related
investments in leases $ 18,351,579 $ 19,705,059
============= =============
Principal and interest payments on the recourse and nonrecourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral,
and the borrower. Under nonrecourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the borrower.
Borrowings under the $2,000,000 line of credit (which expired on December 1,
1996) and the $5,000,000 line of credit above contain covenants regarding
maximum recourse debt to worth ratio, minimum consolidated tangible net worth,
fixed charge coverage ratio, and prohibit the payment of dividends.
Recourse and nonrecourse notes payable as of March 31, 1997, mature as follows:
YEAR ENDING NONRECOURSE RECOURSE
MARCH 31, NOTES PAYABLE NOTES PAYABLE
1998 $ 12,724,992 $ 122,959
1999 4,517,030 123,032
2000 1,921,041 16,427
2001 459,452 6,326
2002 and thereafter 82,544 -
------------ ----------
$ 19,705,059 $ 268,744
============ ==========
F-13
43
7. RELATED PARTY TRANSACTIONS
Loans from stockholders/officers consist of the following:
MARCH 31,
-----------------------------------
1996 1997
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 $ 175,000 $ --
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 100,000 --
------------- -------------
$ 275,000 $ -
============= =============
Other - The Company provided loans and advances to employees/stockholders
aggregating a total of $61,583, $139,500, and $12,193, for the years ended
March 31, 1995, 1996, and 1997, respectively. Such balances are to be
repaid from commissions earned by the employees/stockholders on successful
sales or financing arrangements obtained on behalf of the Company.
Repayments on these loans and advances have been made as follows:
- Loans and advances of $80,505, $82,612, and $53,941 were repaid for the
years ended March 31, 1995, 1996, and 1997, respectively. No interest was
charged on advances.
- During the year ended March 31, 1996, an employee/stockholder repaid the
entire amount due the Company under a promissory note with a maximum
amount of $40,000 (loaned in 1994) bearing interest at a rate of 8%. In
addition, the Company loaned a stockholder $54,000 pursuant to a
promissory note bearing interest at a rate of 8%. Under the terms of the
note, interest of $1,608 and $3,193 and principal of $8,392 and $14,507,
respectively, were paid to the Company during the years ended March 31,
1996 and 1997.
The Company sold leased equipment to a company in which an
employee/stockholder has a 45% ownership interest. During the years ended
March 31, 1995 and 1996 revenue recognized from the sale was $1,855,010 and
$1,300,448 and the basis of the equipment sold was $1,619,830 and
$1,271,729, respectively. At March 31, 1996, accrued expenses and other
liabilities include $26,575 due to the related company, notes receivable
include $17,511 due from the company, and other assets include $73,421,
which represents the Company's investment in lease deals with the company.
During the year ended March 31, 1997, the Company received remarketing fees
from the company amounting to $224,126.
During the years ended March 31, 1996 and 1997, the Company paid a
stockholder $120,000 and $90,000, respectively, in exchange for the pledge
of personal assets made to secure one of the Company's revolving
line-of-credit agreements.
During the years ended March 31, 1996 and 1997, the Company sold leased
equipment to MLC/GATX Limited Partnership I (the Partnership), that amounted
to 31% and 6% of the Company's revenues, respectively. The Company has a
9.5% limited partnership interest in the Partnership and owns a 50% interest
in the corporation that owns a 1% general partnership interest in the
Partnership. Revenue recognized from the sales was $13,079,433 and
$3,452,902, and the basis of the equipment sold was $12,273,527 and
$3,309,186, respectively, during the years ended March 31, 1996 and 1997.
Other assets include $209,691 due from, and $75,981 due to the Partnership
as of March 31, 1996 and 1997, respectively. The Company's investment
balance in the Partnership, accounted for using the
F-14
44
cost method, included in other assets, is $380,757 and $226,835 as of
March 31, 1996 and 1997, respectively. In addition, the Company received
$46,182, $122,111, and $148,590 for the years ended March 31, 1995, 1996,
and 1997, respectively, for accounting and administrative services
provided to the Partnership.
During the year ended March 31, 1997, the recoverability of certain
capital contributions made by the Company to the Partnership was
determined to be impaired. As a result, the Company recognized a
write-down of its recorded investment balance of $195,897 to reflect the
revised net realizable value. The write-down is included in cost of
sales in the accompanying consolidated statements of earnings.
During the years ended March 31, 1996 and 1997, the Company sold leased
equipment to MLC/CLC LLC, in which the Company has a 5% ownership
interest, that amounted to 3% and 30% of the Company's revenues,
respectively. Revenue recognized from the sales was $1,256,518 and
$16,923,090, and the basis of the equipment sold was $1,335,885 and
$16,917,840, respectively, during the years ended March 31, 1996 and
1997. Notes receivable includes $1,812,414 due from the partnership as
of March 31, 1997. Other assets includes an investment of $14,254 and
$168,259, as of March 31, 1996 and 197, respectively, accounted for using
the cost method. In addition, the Company received $52,742 for the year
ended March 31, 1997 for accounting and administrative services provided
to MLC/CLC LLC.
During the year ended March 31, 1997, the Company recognized $250,000 in
broker fees for providing advisory services to a company which is owned
in part by one of the Company's outside directors.
As of March 31, 1996 and 1997, $152,606 and $72,000 was receivable from
MLC Federal, which is owned in part by an individual related to a Company
executive. As of March 31, 1997, the Company fully reserved for the
receivable from MLC Federal.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and a telephone system for the conduct of
its business. Rent expense relating to operating leases was $151,513,
$156,676 and $153,111 for the years ended March 31, 1995, 1996, and 1997,
respectively. As of March 31, 1997, the future minimum lease payments
are due as follows:
YEAR ENDING MARCH 31,
1998 $ 92,254
1999 45,056
---------
$ 137,310
=========
As of March 31, 1997, the Company has guaranteed $172,565 of the residual
value for equipment owned by the MLC/GATX Limited Partnership I.
9. INCOME TAXES
A reconciliation of income tax computed at the statutory Federal rate to
the provision for income tax included in the consolidated statements of
earnings is as follows:
F-15
45
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
1995 1996 1997
Statutory Federal income tax rate 34 % 34 % 34 %
===== ===== ======
Income tax expense computed at the
statutory Federal rate $ 207,929 $ 847,079 $ 1,305,799
State income tax expense, net of Federal
tax expense 6,115 24,643 48,641
Nontaxable interest income (95,000) (79,342) (33,023)
Nondeductible expenses 78,956 88,620 38,583
---------- --------- -----------
Provision for income taxes $ 198,000 $ 881,000 $ 1,360,000
========== ========= ===========
Effective tax rate 32.4% 35.4% 35.4%
========== ========= ===========
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
----------------------------------------------------
1995 1996 1997
Current:
Federal $154,000 $231,000 $1,152,000
State 18,000 27,000 87,000
--------- --------- -----------
172,000 258,000 1,239,000
Deferred:
Federal 17,000 557,000 113,000
State 9,000 66,000 8,000
--------- --------- -----------
26,000 623,000 121,000
--------- --------- -----------
$ 198,000 $ 881,000 $ 1,360,000
========= ========= ===========
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
YEAR ENDED MARCH 31,
-------------------------------------------------------
1995 1996 1997
Alternative minimum tax $ (158,000) $ (200,000) $ 369,000
Lease revenue recognition 184,000 823,000 (248,000)
----------- ------------ ----------
Total $ 26,000 $ 623,000 $ 121,000
=========== ============ ==========
F-16
46
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of items comprising the Company's deferred
taxes consist of the following:
MARCH 31,
-------------------------------------
1996 1997
Alternative minimum tax $ 619,000 $ 250,000
Lease revenue recognition (1,088,000) (840,000)
---------- ---------
Net deferred liability $ (469,000) $ (590,000)
============ ============
10. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and nonrecourse notes
payable (Note 6) associated with its direct finance and operating lease
activities from payments made directly by customers to the third-party
lenders amounting to $6,150,983, $4,796,306, and $4,214,444 for the years
ended March 31, 1995, 1996, and 1997, respectively. In addition, the
Company realized a reduction in recourse and nonrecourse notes payable
from the sale of the associated assets and liabilities amounting to
$1,855,010, $11,550,446, and $18,057,569, for the years ended March 31,
1995, 1996, and 1997, respectively.
11. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with a contributory 401(k) profit
sharing plan which was adopted during the year ended March 31, 1995. All
employees age 21 and older become eligible to participate in the plan as
of the first day of the month after which a minimum of 20 hours of service
per week, during a consecutive six-month period has been completed. Full
vesting occurs after the fourth consecutive year of plan participation.
Employer contribution percentages are to be determined by the Company and
are discretionary each year. The Company's expense for the plan was
$46,307, and $26,011, for the years ended March 31, 1996 and 1997,
respectively.
Effective September 1, 1996, the Company established a stock incentive
program ("the Plan") to provide an opportunity for directors, executive
officers, independent contractors, key employees, and other employees to
participate in the ownership of the Company. A total of 400,000 shares of
common stock has been reserved for issuance upon exercise of options
granted under the Plan, which encompasses the following agreements:
- compensation agreements and employment arrangements with certain
executives ("Executive Compensation Agreements"), under which 245,000
options have been granted;
- the 1996 Incentive Stock Option Plan ("Employee Plan"), under which
75,000 options have been reserved, and of this amount 73,800 options
granted, to Company employees;
- the 1996 Outside Director Stock Plan ("Outside Director Plan"), under
which 75,000 options have been reserved, and of this amount 30,000
granted; and
F-17
47
- the 1996 Nonqualified Stock Option Plan ("Nonqualified Plan"), under
which 5,000 options have been granted.
All stock option grants to date were made effective with or subsequent to
the completion of the Company's initial public offering ("IPO") on
November 19, 1996. As of March 31, 1997, no options have been exercised.
The exercise price of options granted under the Executive Compensation
Agreements is equivalent to the fair market value of the Company's common
stock on the date of grant. These options have a ten year term, and vest
in equal increments over three years with 25 % being exercisable and
vested upon completion of the IPO, subject to acceleration upon certain
conditions.
The exercise price of options granted under the Employee Plan is
equivalent to the fair market value of the Company's common stock on the
date of grant. These options have a ten year term, and vest in equal
increments over five years beginning on the first anniversary of the
completion of the IPO, subject to continued employment and acceleration
upon certain conditions.
The exercise price of options granted under the Outside Director Plan is
equivalent to the fair market value of the Company's common stock on the
date of grant. These options have a ten year term, and vest in equal
increments over two years beginning on the first anniversary of the
completion of the IPO, subject to continued service. The Outside Director
Plan also provides for additional option grants on the second, third and
fourth anniversary of service at a price equivalent to the fair market
value of the Company's common stock on the date of grant. Such additional
options vest in equal increments over two years beginning on the first
anniversary of the date of grant.
Any Options issued under the Nonqualified Plan have exercise prices not
less than 80% of the market value of the common stock on the date of grant
and are exercisable over a period not to exceed ten years.
A summary of stock option activity during the year ended March 31, 1997 is
as follows:
Exercise
Number of Price
Shares Range
-------------------- ----------------------
Outstanding, April 1 - -
Granted 353,800 $6.40 - $8.75
Exercised - -
Forfeited - -
-------------------- ----------------------
Outstanding, March 31 353,800 $6.40 - $8.75
==================== ======================
Exercisable options 66,250 $6.40 - $8.75
==================== ======================
F-18
48
Additional information regarding options outstanding as of March 31, 1997
is as follows:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ---- ----- ----------- -----
353,800 9.6 yrs $8.05 66,250 $7.79
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of
either (1) continuing to account for stock-based employee compensation
plans in accordance with the guidelines established by Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees" while providing the disclosures required under SFAS No. 123, or
(2) adopting SFAS No. 123 accounting for all employee and non-employee
stock compensation arrangements. The Company opted to continue to account
for its stock-based awards using the intrinsic value method in accordance
with APB No. 25. Accordingly, no compensation expense has been recognized
in the financial statements for employee stock arrangements. Option
grants made to non-employees, including outside directors, have been
accounted for using the fair value method, which resulted in $9,500 in
compensation expense during the year ended March 31, 1997. The following
table summarizes the pro forma disclosures required by SFAS No. 123
assuming the Company had adopted the fair value method for stock-based
awards to employees as of the beginning of fiscal year 1997:
Net Income
As reported $2,480,586
Pro forma $2,399,684
Earnings per common share
As reported $ 0.56
Pro forma $ 0.54
Under SFAS No. 123, the fair value of stock-based awards to employees is
derived through the use of option pricing models which require a number of
subjective assumptions. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Expected dividend yield: 0 %
Expected stock price volatility: 44 %
Expected option term: 8 years (options granted under Executive
Compensation Agreements) and
5 years (all other option grants)
Risk-free interest rate: 6.05 % (options granted under Executive
Compensation Agreements) and
5.81 % (all other option grants)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is in accordance with the provisions of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
valuation methods used by the Company are set forth below.
F-19
49
The accuracy and usefulness of the fair value information disclosed
herein is limited by the following factors:
- These estimates are subjective in nature and involved uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
- These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire
holding of a particular financial asset.
- SFAS No. 107 excludes from its disclosure requirements lease
contracts and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
the Company.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
MARCH 31, 1997
------------------------------------------
CARRYING FAIR
AMOUNT VALUE
Assets:
Cash and cash equivalents $ 6,048,008 $ 6,048,008
Liabilities:
Nonrecourse notes payable 19,705,059 19,752,330
Recourse notes payable 268,744 271,949
The following methods and assumptions were used by the Company in
computing the estimated fair value in the above table:
Cash and cash equivalents - The carrying amounts of these financial
instruments approximated their fair value.
Recourse and Nonrecourse Notes Payable - The fair value of recourse and
nonrecourse debt is based on the borrowing rates currently available to
the Company for debt with similar terms and average maturities.
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50
13. QUARTERLY DATA (Unaudited)
Summarized quarterly financial information is as follows (amount in
thousands except per share information):
YEAR ENDED FIRST SECOND THIRD FOURTH
MARCH 31, 1997 QUARTER QUARTER QUARTER QUARTER
Sales $ 10,412 $ 8,635 $ 8,435 $ 15,836
Total revenues 12,896 11,705 11,800 19,746
Cost of sales 9,894 8,250 7,676 14,284
Total costs and expenses 12,097 10,803 10,810 18,597
Earnings before provision for income taxes 799 902 990 1,150
Provision for income taxes 284 322 349 405
Net earnings 515 580 641 745
Net earnings per common share 0.13 0.15 0.14 0.14
YEAR ENDED
MARCH 31, 1996
Sales $ 2,091 $ 13,031 $ 8,083 $ 11,637
Total revenues 3,775 14,785 10,483 13,757
Cost of sales 1,454 12,115 7,479 10,154
Total costs and expenses 3,134 14,067 10,057 13,051
Earnings before provision for income taxes 641 717 426 707
Provision for income taxes 227 253 153 248
Net earnings 414 464 273 459
Net earnings per common share 0.10 0.12 0.06 0.12
14. SUBSEQUENT EVENT
During June 1997, MLC Group entered into a Credit Agreement (the
"Agreement") with CoreStates Bank, N.A. (the "CoreStates Facility").
Under terms of the Agreement, MLC Group may borrow up to $15,000,000
through June 5, 1998. All borrowings under the CoreStates Facility bear
interest at the LIBOR rate plus 1.10% or, at MLC Group's option, the prime
rate less 1.00%. Such amounts are secured by MLC Group's business assets,
including accounts receivable, inventory and fixed assets, as well as the
related investments in leases, and are guaranteed by the Company.
* * * * * *
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51
SCHEDULE II
MLC HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 1995, 1996 and 1997
- ----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Year Expenses Accounts Deductions of Year
- ----------------------------------------------------------------------------------------------------------------------
1997 Allowances for doubtful accounts: $ -- $138 $ -- $ -- $138
Customers' accounts receivable ========= ========= ========= ========= =========
1996 Allowances for doubtful accounts: $ -- $ -- $ -- $ -- $ --
Customers' accounts receivable ========= ========= ========= ========= =========
1995 Allowances for doubtful accounts: $ -- $ -- $ -- $ -- $ --
Customers' accounts receivable ========= ========= ========= ========= =========
S-1
52
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ----------------------------------------------------------------------------------------------------------
10.18 Credit Agreement dated as of June 5, 1997, 1997, by and
between MLC Group, Inc. and CoreStates Bank, N.A.
10.19 Form of Employment Agreement between the Registrant and
Thomas B. Howard, Jr.
10.20 Form of Employment Agreement between the Registrant and
Steven J. Mencarini
23.1 Consent of Deloitte & Touche LLP, independent auditors
27.1 Financial Data Schedule