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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to .
Commission file number: 0-28926
MLC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $0.01 par value
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 [ ]
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. [ X ]
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 17, 1999 was $22,665,431.
The number of shares of Common Stock outstanding as of June 17, 1999,
was 7,477,532.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the following parts
of this Form 10-K:
Document Part
- --------------------------------------------------------------------------------
Portions of the Company's definitive Proxy Statemen
to be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end. Part III
1
PART I
ITEM 1. BUSINESS
MLC HOLDINGS, INC. CORPORATE STRUCTURE
MLC Holdings, Inc. ("the Company", "MLC") was formed in 1996 and is a Delaware
corporation. On September 1, 1996, as a result of a reorganization, MLC Holdings
began serving as the holding company for MLC Group, Inc. a Virginia corporation
founded in 1990, and other subsidiaries. MLC Holdings, Inc. engages in no other
business other than serving as the parent holding company for the following:
o MLC Group Inc.("MLC Group");
o MLC Network Solutions, Inc. ("MLC Network Solutions");
o Educational Computer Concepts, Inc. which conducts business as MLC
Integrated, Inc. ("MLC Integrated");
o PC Plus, Inc. ("PC Plus");
o MLC Federal, Inc.;
o MLC Capital, Inc.; and
o MLC Leasing, S.A. de C.V., (a subsidiary wholly owned by MLC Group and
MLC Network Solutions,).
MLC Group also has a 5% membership interest in MLC/CLC LLC and serves as its
manager. MLC Group terminated its investment of 50% ownership of the MLC/GATX
Leasing Corporation which was the general partner of MLC/GATX Limited
Partnership I on December 31, 1998. MLC Group acquired all the assets of the
partnership through purchase from the partnership. MLC Federal, Inc. was
incorporated on September 17, 1997 to handle business servicing the Federal
government marketplace which includes financing transactions that are generated
through government contractors. MLC Capital has remained dormant for the entire
year and is not expected to transact business in the near future. To provide a
legal entity capable of conducting a leasing business in Mexico, the Company
formed MLC Leasing, S.A. de C.V., on October 22, 1997. MLC Leasing, S.A. de C.V.
is a wholly owned subsidiary of MLC Group and MLC Network Solutions and is based
in Mexico City, Mexico. To date, this entity has conducted no business and has
no employees or business locations.
Company Acquired Business Acquisition Consideration
Date Acquired Location Method Paid
- ------------------- -------------------- ------------- -------------------------
July 24, 1997 Compuventures of Wilmington Pooling of 260,978 shares
Pitt County, Inc. - and Interests of Common
Now doing business Greenville, Stock valued at
as MLC Network NC $3,384,564
Solutions, Inc.
September 29, 1997 Educational Pottstown, Pooling of 498,998 shares
Computer Concepts, PA Interests of Common
Inc. - Now doing Stock valued at
business as MLC $7,092,000
Integrated, Inc.
2
July 1, 1998 PC Plus, Inc. Herndon, Purchase 263,478 shares
VA of Common
Stock valued at
$3,622,823 and
$3,622,836 in
Cash
OUR BUSINESS
We specialize in a wide variety of technology-related businesses, including:
o leasing and financing information technology hardware, software and related
assets to corporations and government entities; o providing asset management
services for lease customers; o selling as a VAR (value added reseller)
information technology hardware, software and related assets; o providing
automated procurement through an internet access that incorporates catalog
search engines and order tracking
that increases customer ordering efficiency;
o selling professional services for project management, configuration
and installation, technology refresh, asset disposal, process
automation and technology inventories;
o providing strategic solutions for network design, custom
configurations, network load balancing and product procurement
services;
o providing technical services for computer repair, maintenance,
extended warranty plans, remote network operations and on-site
support contracts; and
o providing state of the art software training and continuing educational
courses on the latest networking and business software releases.
We sell using our internal sales force and through vendor relationships
primarily to commercial customers with annual sales revenue of between $10
million and $500 million, to which we refer as the middle market as well as
select Fortune 1000 firms and federal, state and local governments. We also
lease and finance equipment, software, and services directly and through
relationships with vendors, equipment manufacturers, and systems integrators.
The assets we lease or sell include:
o Desktop workstations, laptop computers, printers, operating and application
software, and peripheral equipment; o networking hardware, networking
application software and mass storage; and o mid-range computer equipment.
We also lease or finance the following:
o office furniture and equipment;
o warehousing equipment
o telecommunications equipment; and
o various other types of general equipment that our customers request.
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The Company's principal executive office was relocated to 400 Herndon Parkway,
Herndon, Va 20170 in October, 1998 and our main telephone number is (703)
834-5710. As of March 31, 1999 the Company has 246 employees.
GENERAL
MLC Network Solutions, MLC Integrated, and PC Plus were acquired to provide a
wide range of information technology ("IT") services and solutions to middle
market organizations. The Company can now offer its clients a single source for
a comprehensive range of services, including providing equipment leasing
contracts, asset management services, sales of personal computers, server
hardware and software, communication equipment, desktop systems maintenance and
support, strategic planning and management consulting, integration and
installation of IT systems, training and continuing education. The Company's
asset trading activity involves the purchase and resale of previously owned
information technology equipment. The asset trading capabilities provide the
knowledge of current market trends and values of used IT equipment and allows us
to predict, more accurately, residual values when pricing lease transactions.
Asset management is our internal term to describe our service offering that
tracks assets under lease from purchase order to termination for certain leasing
customers. This online service is designed to allow lessees to have the ability
to track their IT assets and receive data or reports on a real time software
system.
The Company is focusing on marketing its comprehensive IT offerings to middle
market organizations, which typically spend from $250 thousand to $25 million
annually on their IT needs. We believe that a single-source IT service provider
will help middle market organizations reduce cost and management complexity and
increase the quality and compatibility of IT solutions. As part of its strategy,
the Company uses its high-level services to foster long-term relationships with
clients and to implement technology strategies in order to achieve their desired
IT solutions. We also believe we can increase revenues from existing clients by
cross-selling combined leasing, product and service offerings. Cross selling our
services expands our overall offerings to customers and is designed to provide
the platform for increased business with current and new customers.
We also rely heavily on our ability and willingness to personalize our business
relationships and to customize our services to meet the specific financial and
managerial needs of each customer. This approach has allowed us to be able to
compete effectively against larger value added resellers and equipment leasing
and finance companies. The Company operates its subsidiaries under a
decentralized structure with the emphasis on local management to provide focus
on superior client service. One of our goals is to acquire additional companies
to strengthen and add to our core competencies and to facilitate expansion of
our service into new regions. The acquisition of companies is predicated on the
ability to find quality companies at prices that are economically feasible.
4
For the fiscal year ended March 31, 1999, we had three significant
relationships. The loss of any of these three relationships could have a
material adverse effect to the future results of the Company.
o The first and most significant relationship is with First Union
National Bank, N.A. who is the lead bank in our $50,000,000
credit facility. This facility is for one year ending December
18, 1999. We rely on this facility for daily working capital and
liquidity for our leasing business.
o Our largest lease customer is Sprint, and 13 of its subsidiary
companies have separate stand-alone lease contracts with the
Company. The combined Sprint leases represented approximately
42% of the total lease volume generated for the year ended
March 31, 1999.
o The final significant relationship is with MLC/CLC, LLC, a joint
venture between Firstar Equipment Finance Corporation who owns
95% and MLC Group, Inc. owns the remaining 5% of the entity. The
Company sold approximately $81.1 million of commercial lease
volume to MLC/CLC LLC during the year ended March 31, 1999. Of
this amount sold to MLC/CLC, LLC, approximately $68.4 million was
lease volume generated from Sprint. The loss of Sprint as a
continuing lease customer would substantially decrease our
reported commercial lease volumes and decrease our sales to
MLC/CLC, LLC.
INDUSTRY OVERVIEW
The Company believes that both equipment leasing and financing and the value
added reseller market are both constantly changing and present significant
opportunities for growth.
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 $183 billion of
the $593 billion of business investment in equipment in 1998 was acquired
through leasing. The ELA estimates that 80% of all U.S. businesses use leasing
or financing to acquire capital assets. The sales of new technology from our
value added reseller businesses represents our customers continued investment in
newer technology due to business expansion and increased efficiency from later
generation equipment.
Leasing enables a company to obtain the equipment it needs, while preserving
cash flow and receiving favorable accounting and tax treatment. Leasing 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 customers become aware of the economic benefits of
leasing, they often turn to independent leasing companies. MLC Group is an
independent lessor which offers tailored financing and can structure deals with
mixed systems from different vendors. Management believes the fastest growing
market segment of the leasing industry is information technology leasing and has
specialized in this area. These assets include computers, telecommunication
equipment, software, integration services and client server equipment.
5
Customer End-Users -- Government. 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.
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:
o increasing our leased asset holdings by providing continuing superior
customer service and marketing to middle market and select Fortune
1000 end-users of information technology equipment and assets;
o purchasing companies or assets of companies in key regional markets
with pre-existing customer bases; and
o utilizing the internet for processing lease transactions, VAR sales
orders and for web-based auctioning of our used equipment.
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.
o 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. 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 strategy
o Acquisition of Related Companies. Our goal is to expand our
target customer base in key regional markets through the
acquisition of strategically selected companies in related lines
of business. 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. Our acquisition strategy will focus on acquiring
companies with customers that are in the top 50 regional markets
in the United States. We feel that we 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. There is, however, no assurance that the Company will
be able to successfully acquire such companies.
6
LEASING, FINANCING AND SALES ACTIVITIES
The Company is in the business of selling, leasing and financing IT equipment,
other assets and technical services. Leasing transactions can be direct
financing, sales type or operating leases. Direct and sales type leases include
true leases and installment sales or conditional sales contracts with
corporations, not-for-profit entities, and municipal and federal government
contracts.
Business Development. We conduct our sales efforts through our in-house sales
and marketing staff which includes 66 individuals. 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 sales
programs to meet its customers' specific objectives.
Sale Terms and Conditions. Our value added reseller product transactions have
varying sales on account terms from net 45 days to collect on delivery,
depending on the customer's credit and payment term requirements.
Lease Terms and Conditions. Substantially all of the Company's lease
transactions are net leases with a specified non-cancelable lease term. These
non-cancelable 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 on the remarketing effort by the
following manner:
o re-leasing it to the initial lessee for an additional extension
period;
o renting on a month-to-month basis;
o selling it to the initial lessee;
o selling or leasing the equipment to a different customer; or
o selling the equipment to equipment brokers or dealers.
The re-marketing process is intended to enable the Company to recover or exceed
the residual value of the leased equipment. Any amounts received over the
residual value less any commission expenses becomes profit margin to the Company
and can significantly impact the degree of profitability of a lease transaction.
Numerous factors, many of which are beyond our control, may have an impact on
the ability to re-lease or re-sell equipment on a timely basis. The major factor
is the market supply and technological demand for the specific item being
7
released or sold. The computer technology and telecommunications industries have
been characterized by significant and rapid technological advances which subject
the equipment we lease to rapid technological obsolescence. Decreases in the
manufacturer's pricing for the latest generation equipment may adversely affect
the market value of such equipment under lease. Changes in values 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 estimates the fair market value of
the item as a residual value for the leased equipment based on the terms of the
lease contract. Residual values are determined and approved by the Company's
investment committee. 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. Any such loss which is considered by management to be
permanent in nature would be recognized in the period of impairment in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 13,
"Accounting for Leases." Consequently, there can be no assurance that the
Company's estimated residual values for equipment will be realized.
PROCESS CONTROL AND ADMINISTRATIVE SYSTEMS
Our executive management and internal controls are in place to protect against
entering into lease transactions that may have undesirable economics or
unacceptable levels of risk. Our leases and sales contracts are approved by
senior management for both pricing and credit review. Due in part to our
strategy of focusing on a few equipment categories, we have extensive product
knowledge, historical re-marketing information and experience on the products we
lease, sell and service. We rely on our experience in setting and adjusting our
sale prices, lease rate factors and the residual values. 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 values for the equipment leased by the Company are
reviewed and approved by the Company's investment committee for each
transaction. The investment committee also must approve the pricing, including
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 Operating Officer, and the Treasurer of the Company, and each person has
various levels of authority.
Structure Review. Every transaction is reviewed by the Vice President 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
8
Company's home office documentation and review process. Every transaction into
which the Company enters is reviewed by the Vice President of Contracts and, if
necessary, the 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 which the Company enters is reviewed by our
Senior Credit Analyst, and Treasurer or Chief Operating Officer. We determine
whether the lessee meets our credit standards and if the lease payment stream
can be financed on a recourse or non-recourse basis.
FINANCING
The leasing business is capital intensive. Each lease usually requires an equity
investment which uses our cash with the return coming at the end of the lease
term. The typical lease transaction requires both non-recourse debt and an
equity investment by the Company at the time the equipment is purchased. The
Company's equity investment in the typical lease transaction generally ranges
between 5% and 20% of the equipment cost depending on the length of the lease
term and equipment type. The Company's equity investment must come from either
internally generated funds which originate from our stockholders' equity,
investments in leases from third parties (such as MLC/CLC LLC) or 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 non-recourse
debt and equity investment.
Information relating to the sources of financing for equipment acquisitions are
as follows:
Non-recourse Financing. The credit standing of the Company's customers must be
sufficient to allow the Company to finance most of its leasing or financing
transactions on a non-recourse basis. Under a non-recourse loan, the Company
borrows from a lender an amount based on the present value of the contractually
committed lease payments under the lease at a fixed rate of interest. The lender
is entitled to receive the payments under the financed lease in repayment of the
loan, and takes a first priority security interest in the related equipment,
however, has no recourse against the Company's general assets except for the
specific items financed under each agreement. Under this arrangement, the
Company retains ownership of such equipment, subject to the lender's security
interest. When the lender is fully repaid from the lease payment, their lien is
released and all further rental or sale proceeds are ours. We are not liable for
the repayment of non-recourse loans unless we breach certain limited
representations and warranties in the loan agreements. The lender assumes the
credit risk of each lease, and their only recourse, upon a default under a lease
by the lessee, is against the lessee and the specific equipment under lease.
Interest rates under non-recourse financing are negotiated on a
transaction-by-transaction basis and reflect the financial condition of the
lessee, the term of the lease and the loan amount. To date, all non-recourse
financings have been on a fixed interest rate set at the inception of the
transaction. Effective January 1, 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This Standard was 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
9
Company after December 31, 1996 meet the criteria for surrender of control set
forth by SFAS 125 and have been treated as sales for financial statement
purposes. Transactions which are direct financing leases, financed on a
non-recourse basis and which we cannot voluntarily prepay the loan are treated
under SFAS 125 as sales. The net proceeds less the book value of the asset sold
are recorded as a net gain in the income statement. As the new pronouncement was
not retroactive to transactions prior to this date, the current balance of
outstanding non-recourse borrowings represent transactions that did not qualify
for SFAS 125 accounting treatment or are financings of an operating lease. As of
March 31, 1999, the Company had aggregate outstanding non-recourse borrowings of
approximately $52.4 million.
The Company's objective is to enter into leasing or financing transactions on a
non-recourse basis. 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 this non-recourse basis or that the we will continue to attract
customers that meet the non-recourse credit standards. Our personnel in charge
of the financing function are responsible for maintaining a diversified list of
qualified non-recourse debt sources to maintain our ability to have
competitively priced non-recourse debt. We receive non-recourse financing from
regional commercial banks, money-center banks, finance companies, insurance
companies and financial intermediaries with varying terms and conditions.
Government Tax Exempt Financing. The Company also originates tax-exempt state
and local lease transactions in which 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 non-recourse 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 non-recourse basis to third parties and records any
gain from the transaction as sales or fee income.
Equity Joint Ventures. Through MLC/CLC LLC, we have a formal joint venture
arrangement with an institutional investor which provides the necessary cash
required to finance the equity portion of selected leases. Firstar Equipment
Finance ("Firstar"), a subsidiary of Firstar Corporation, a bank holding company
publicly traded on the New York Stock Exchange under the symbol "FSR", is an
unaffiliated investor who owns 95% of MLC/CLC LLC. Firstar acquired their
ownership interest in a purchase from Cargill Leasing Corporation. MLC/CLC LLC
represented approximately $81.1 million of the Company's leased equipment sales
of $84.4 million or 95.4% for the year ended March 31, 1999. For the year ended
March 31, 1998, out of leased equipment sales of $50.4 million, MLC/CLC LLC
represented $44.8 million or 88.9%. For the fiscal year 1999, approximately
41.5% of the Company's total revenue was attributable to sales of lease
transactions to MLC/CLC LLC as compared to the prior year when such sales
represented 37.8% of total revenue. MLC/CLC LLC represents the historical source
of a majority of lease equity for the Company. Each transaction MLC/CLC LLC
acquires requires the consent of Firstar, and if financing from this source was
to become unavailable, it would limit the amount of equity available to the
Company and may have a material adverse effect upon our business, financial
condition and results of operations.
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Equity Capital and Internal Financing. Occasionally the Company finances leases
and related equipment internally, rather than with financing provided by
lenders. This internal lease financing typically occurs 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.
We temporarily finance selected leases internally, generally for less than 90
days, until non-recourse financing is obtained. The amount of equity capital
available is a major element in the amount of lease asset portfolio which we can
retain ownership on our balance sheet. The Company would prefer to expand its
retained portfolio through generating the necessary financial resources to
support the required lease equity investment. Currently our options are through
the equity joint ventures, alternative recourse and non-recourse debt or a
secondary stock and/or debt offering. The Company has no commitments for such
financing sources and there is no assurance that the additional lease equity
funds will be either available or realized.
Recourse Financing and 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 value added reseller businesses, to
acquire equipment for leases and, to a lesser extent, we use recourse financing
for long term financing of leases.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities through First Union
National Bank, N.A. MLC Holdings, Inc., with its two wholly-owned subsidiaries,
MLC Group, Inc., and MLC Federal, Inc., as co-borrowers, has established a
$50,000,000 committed recourse line of credit which is subject to the
availability of sufficient collateral in the borrowing base.
The First Union Credit Facility, which was effective as of December 18, 1998 has
the following terms:
o interest at LIBOR + 150 basis points, or at our option prime
minus one-half percent; and
o each draw is subject to the availability of sufficient collateral
as provided in the borrowing base.
The First Union Credit Facility is secured by certain of the company's assets
such as chattel paper (including leases), receivables, inventory, and equipment.
In addition, MLC Holdings, Inc. has entered into pledge agreements to pledge the
common stock of each of its subsidiaries. The availability of the line is
subject to 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 MLC and may be further
limited by certain covenants and terms and conditions of the facilities. In the
event that MLC is unable to sell the equipment or unable to finance the
equipment on a permanent basis within a certain period of time, the availability
of credit under the lines could be diminished or eliminated. Furthermore, in the
event that receivables collateralizing the line are uncollectible, MLC would be
responsible for repayment of the lines of credit.
The First Union Credit Facility contains a number of covenants binding on MLC
requiring, among other things, minimum tangible net worth, cash flow coverage
ratios, maximum debt to equity ratio, maximum amount of guarantees of subsidiary
obligations, mergers, acquisitions, and asset sales. This facility is fully
11
recourse, secured by first-priority blanket liens on all of MLC's assets.
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. The latest First
Union Credit Facility expires on December 18, 1999. First Union National Bank,
N.A. has syndicated this facility to other participants each for $7,000,000. The
other participants are Riggs Bank, N.A., Key Bank, N.A., Summit Bank, N.A., Bank
Leumi USA, and Wachovia Bank., N.A. As of March 31, 1999, the Company had an
outstanding balance of $18.0 million on the First Union Credit Facility.
Our First Union Credit Facility has been increased as our credit needs have
expanded as follows:
Maximum Line
Of Credit
-------------------------
December 18, 1998 $50,000,000
June 30, 1998 $35,000,000
September 5, 1997 $25,000,000
June 5, 1997 $15,000,000
MLC Network Solutions, MLC Integrated and the recently acquired PC Plus have
separate credit sources to finance their working capital requirements for
inventories and accounts receivable. Their traditional business as value-added
resellers of PC's and related network equipment and software products is
financed through agreements known as "floor planning" financing where interest
expense for the first thirty to forty days is not charged to us but is paid for
by the supplier/distributor. These floor plan liabilities are recorded in our
financial records under accounts payable as they are normally repaid within the
thirty to forty day time frame and represent an assigned accounts payable
originally generated with the supplier/distributor. If the thirty to forty day
obligation is not paid timely, interest is then assessed at stated contractual
rates.
As of March 31, 1999, the floor planning agreements are as follows:
Credit Balance at March
Entity Floor Plan Supplier Limit 31, 1999
- ------------------------ ---------------------------- --------------------------
MLC Network Solutions Deutsche Financial, Inc. $2,600,000 $1,102,577
MLC Integrated Finova Capital Corporation $5,000,000 $3,399,018
IBM Credit Corporation $ 750,000 $ 400,831
PC Plus NationsCredit Corporation $8,000,000 $ 487,155
All of the above credit facility limits have been increased during the year to
provide the credit capacity to increase our sales on account. MLC Integrated,
Inc. also has a line of credit in place with PNC Bank, N.A. which expires on
July 31, 1999. This asset based line has a maximum credit limit of $2,500,000
and interest charges are set at the bank's prime rate. The outstanding balance
was $ 175,000 as of March 31, 1999. The credit facilities provided by Finova
Capital Corporation and PNC Banks, N.A., are required to be guaranteed by MLC
Holdings, Inc.
12
Non-recourse debt and debt that is partially recourse is provided by various
lending institutions. The Company has formal programs with Heller Financial,
Inc., Key Corporate Capital, Inc., and Sanwa Business Credit Corporation. These
programs require that each transaction is specifically approved and done solely
at the lender's discretion.
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 Results of Operations, Financial
Condition, Liquidity and Capital Resources - Financial Condition, Liquidity and
Capital Resources."
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
established a $10,000,000 credit facility agreement with Heller Financial, Inc.
("Heller"). Under the terms of the Heller Facility, a maximum amount of
$10,000,000 was available to borrow provided that each draw was subject to the
approval of Heller. On March 12, 1998, the formal commitment from Heller to fund
additional advances under the line was allowed to expire, however, we are still
transacting business as if the formal agreement terms are in place. The primary
purpose of the Heller Facility was 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, 1999, the balance on this account was
$3,930,325. Each advance under the facility bears 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 contractual covenants and is a
limited recourse facility, secured by a first-priority lien in the lease
contracts and chattel paper relating to each loan advance, the equipment under
the lease contracts, a 10% cross-collateralized first loss guarantee, and all
books, records and proceeds. The Heller Facility was made to MLC Group and is
guaranteed by MLC Holdings. The Heller Facility is subject to their sole
discretion, and is further subject to MLC Group's compliance with certain
conditions and procedures.
DEFAULT AND LOSS EXPERIENCE
During the fiscal year ended March 31, 1999, two major customers filed for
voluntary bankruptcy protection. The largest is Allegheny Health, Education &
Research Foundation ("AHERF") which is a Pittsburgh based not-for-profit
hospital entity. The Company had sold equipment on account through our VAR and
had leased equipment to this account. The bankruptcy court for AHERF held an
auction and Tenet Healthcare, Inc. acquired their assets. As of March 31, 1999,
our net book value of leases to AHERF is approximately $473,000 and receivable
balance is approximately $478,000. Depending on the decisions by the Bankruptcy
Trustee and the creditor status and ultimate repayment schedule of other claims,
upon disposal of the equipment and disposition of its claims, we will probably
sustain a loss, and have accordingly provided for such loss in the statement of
earnings for the year ended March 31, 1999. The undetermined status of our
claims in the bankruptcy court and amount and timing of such loss cannot be
accurately estimated at this time due to the recent filing. The Company has
received a deposit on the purchase of the leased equipment from Tenet
Healthcare, Inc. which represents the total cash consideration for the future
transfer of title of the equipment once the bankruptcy court makes the equipment
13
available for liquidation. During the quarter ending December 31, 1998, PHP
Healthcare, Inc. a lessee of the Company, was placed in receivership by the New
Jersey Insurance Commission which led to them filing for voluntary bankruptcy
protection. The Company has a net book value of assets totaling approximately
$464,000 at risk with this lessee. The remainder of the lease risk is the
financial responsibility of the non-recourse lenders. The Company is vigorously
pursuing all available remedies in bankruptcy court for all prior claims against
these bankrupt lessees. The Company believes that as of March 31, 1999, its
reserves are adequate to provide for the potential losses resulting from these
customers. Until the fiscal year ended March 31, 1998, when the Company incurred
a $17,350 credit loss, the Company had not taken any write-offs due to credit
losses with respect to lease transactions since inception.
COMPETITION
We compete in the sales and leasing of information technology and communications
equipment with bank-affiliated lessors, captive lessors, other independent
leasing or financing companies and a multitude of value added resellers. Our
product and market focus in equipment leasing is designed to minimize direct
competition with many of these types of companies. Bank affiliated lessors
typically do not compete directly in the operating lease segment of the leasing
industry. Captive leasing companies, such as IBM Credit Corporation, typically
focus their financing on their parent company's products. We compete directly
with various independent leasing companies, such as El Camino Resources, Ltd. or
Comdisco, Inc. These competitors have had longer operating histories and
substantially greater resources and capital. We also face substantial
competition in connection with the sale of computer and other products in our
value added reseller area. Among our competitors are numerous national and
regional companies selling, leasing and financing the same or equivalent
products. Many of these competitors are well established, have substantially
greater financial, marketing, technical and sales support than us and have
established successful and long term relationships.
We have found it most effective to compete on the basis of providing a high
level of customer service and technical expertise and by establishing long term
relationships with vendors and our purchase and lease customers. We compete on
the basis of price, being responsive to our customer needs, flexibility in
structuring lease transactions, and knowing our vendors' products. We also feel
that our competitiveness is based on the high degree of knowledge and competence
of our key employees, specifically relating to information technology and
telecommunications equipment and operating lease financing.
EMPLOYEES
As of March 31, 1999, the Company had 246 employees in the following functional
areas:
Number of Employees
-------------------------
Sales and Marketing 66
Technical Support 74
Contractual and Administrative 38
Accounting and Finance 31
Administrative 26
Executive 11
14
No employees are represented by a labor union and the Company believes that its
relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and its subsidiaries as of March 31, 1999
are as follows:
Name Age Position
------------------------- --------------------------------------------------
Phillip G. Norton 55 Chairman of the Board, President and
Chief Executive Officer
Bruce M. Bowen 47 Director, Executive Vice President
Thomas B. Howard, Jr. 52 Vice President and Chief Operating Officer
Steven J. Mencarini 43 Senior Vice President and Chief Financial
Officer
Kleyton L. Parkhurst 36 Senior Vice President, Secretary and Treasurer
Vincent Marino 41 President, MLC Integrated
David Rose 38 President, MLC Network Solutions
Nadim Acho 36 President, PC Plus
ITEM 2. PROPERTIES
The Company has fourteen offices and one storage site with approximately 53,595
square feet under lease at a monthly rental of $59,214. We do not own any real
estate.
Number of Approximate
Location Company Employees Square Footage Function
- ---------------- ------------------------------------------ --------------------
Herndon, VA MLC Group 78 11,453 Corporate headquarters
and sales
Richmond, VA MLC Group 1 150 Sales
Sacramento, CA MLC Group 4 954 Sales
San Diego, CA MLC Group 4 800 Sales
Atlanta, GA MLC Group 2 * Sales
Golden, CO MLC Group 1 150 Sales
15
Baltimore, MD MLC Group 1 * Sales
Raleigh, NC MLC Group 4 1,000 Sales
Pittsburgh, PA MLC Group 1 155 Sales
West Chester, PA MLC Group 3 635 Sales
Dallas, TX MLC Group 1 1,023 Sales
Wilmington, NC MLC Network 32 4,460 Subsidiary headquarters,
Solutions sales office and
warehouse
Greenville, NC MLC Network 25 6,119 Sales office and
Solutions warehouse
Pottstown, PA MLC Integrated 52 17,000 Subsidiary headquarters,
sales office and
warehouse
Herndon, VA PC Plus 37 8,080 Subsidiary headquarters
and warehouse
Herndon, VA PC Plus 0 1,616 Storage warehouse
* Home-based sales office
MLC Group headquarters and PC Plus's only office location share space in the
same building. All the above locations are leased facilities. The two largest
locations are Herndon, VA and Pottstown, PA which have lease expiration dates of
March 31, 2001 and June 30, 2005 respectively.
The Company also has an arrangement with an independent contractor who works
primarily for the Company from Minneapolis, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings that
would have a material adverse effect upon the Company's business, financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER 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
March 31, 1997 through March 31, 1999, by quarter.
Quarter Ended High Low
June 30, 1997 $14.00 $10.75
September 30, 1997 $14.75 $12.75
December 31, 1997 $14.75 $11.75
March 31, 1998 $13.75 $11.75
June 30, 1998 $15.75 $12.75
September 30, 1998 $14.50 $7.25
December 31, 1998 $10.25 $6.23
March 31, 1999 $ 9.25 $8.25
On June 17, 1999 the closing price of the Common Stock was $7.875 per share. On
June 17, 1999, there were 104 shareholders of record of the Company's Common
Stock. Management believes there are over 400 beneficial holders of the
Company's Common Stock.
DIVIDENDS
The Company has never paid a cash dividend to stockholders. We have retained our
earnings for use in the business. There are also two contractual restrictions in
our ability to be able to pay dividends. Our First Union Facility restricts
dividends to 50% of net income accumulated after September 30, 1998.
Additionally, our private placement of common stock on October 23, 1998 with TC
Leasing, LLC prohibits us from paying any dividends until October 23, 1999
without their permission. 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, our financial
condition, results of operations and any other factors deemed relevant by our
Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On October 23, 1998, TC Leasing, LLC, a Delaware limited liability company,
purchased 1,111,111 shares of common stock of MLC Holdings, Inc. for a price of
$9.00 per share or $10,000,000 in aggregate. In addition to the common stock
acquired, we also provided to the purchaser stock purchase warrants also dated
as of October 23, 1998, granting the right to purchase an additional 1,090,909
17
shares of MLC common stock at a price of $11.00 per share, subject to certain
anti-dilution adjustments. The warrant is exercisable through December 31, 2001,
unless it is extended pursuant to the terms of the warrant.
The shares issued to TC Leasing, LLC were not registered under the Securities
Act of 1933 and were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933.
The managing member of TC Leasing, LLC is Thayer Equity Investors III, L.P., a
Delaware limited partnership. The general partner of Thayer Equity Investors
III, L.P., is TC Equity Partners, L.L.C., a Delaware limited liability company.
Three individuals, Frederic V. Malek, Carl J. Rickertsen, and Paul G. Stern, are
the only founding members of TC Equity Partners III, L.L.C. and, accordingly,
control TC Leasing, LLC, which purchased the shares of MLC common stock. Mr.
Rickertsen has served as a Director of the Company since November 1996.
Under the terms of the common Stock Purchase Agreement, MLC has agreed to
certain continuing obligations. In particular, MLC is required to:
o deliver to TC Leasing, LLC certain financial statements,
operating budgets, press releases and regulatory filings relating
to MLC;
o provide prompt notice to TC Leasing, LLC of any defaults under
any agreements of the company or any of its subsidiaries which
are likely to have a material adverse effect on the Company;
o refrain from engaging in any transaction with any officer,
director, employee or affiliate of MLC (or certain family members
thereof) unless such transaction was negotiated at arms length in
good faith and has a value of less than $150,000 or is approved
by TC Leasing, LLC;
o not pay any dividends or make any other distributions on MLC
common stock until October 23, 1999, without the prior written
consent of TC Leasing, LLC.
As a condition to entering into the Common Stock Purchase Agreement, TC Leasing,
LLC entered into a Stockholders Agreement, dated as of October 23, 1998, with
the Company, Phillip G. Norton, the Chairman of the Board and Chief Executive
Officer of the Company, Bruce M. Bowen, a Director and the Executive Vice
President of the Company, J.A.P. Investment Group, L.P., a Delaware limited
partnership, Kevin M. Norton, and Patrick J. Norton, Jr., (its "Management
Stockholders"). MLC agreed to expand the Board of Directors to six persons. The
Stockholders Agreement gave TC Leasing, LLC, the right to name two of the
directors. One of such directors, Mr. Rickertsen, already serves on the Board of
Directors of MLC. TC Leasing, LLC has named and the Board of Directors has
elected Dr. Paul Stern to serve as the other director. The Management
Stockholders are permitted to name two of the remaining four directors. Mr.
Phillip Norton and Mr. Bowen, both of whom are already serving on the Board of
Directors of MLC, will serve as their representatives. Under the terms of the
Stockholders Agreement, the last two positions, the independent directors, are
to be chosen by a nominating committee consisting of one representative of TC
Leasing, LLC and one representative of the Management Stockholders. To satisfy
this last provision, TC Leasing, LLC and the Management Stockholders have agreed
that C. Thomas Faulders, III and Terrence O'Donnell, both of whom currently
serve on the Board of Directors of MLC will continue to serve as directors of
MLC.
18
The Stockholders Agreement also grants TC Leasing, LLC preemptive rights which
restricts the ability of the Management Stockholders and TC Leasing, LLC to
transfer their shares of MLC common stock and permits TC Leasing, LLC to force
the sale of the entire Company under certain limited circumstances. Until April
23, 1999, the Company could not issue, without the prior written consent of TC
Leasing, LLC, any shares of MLC common stock, any convertible debt securities,
any security which is a combination of a debt and equity security or any option
warrant or other right to subscribe for such a security. Until October 23, 1999,
the Company may not issue any such securities without first offering to sell
them to TC Leasing, LLC. Finally, until October 23, 2000, the Company may not
sell any such securities without first giving TC Leasing, LLC the opportunity to
purchase enough of such securities to maintain their percentage ownership
position in the Company. However, except for a few instances set forth in the
Stockholders Agreement, regardless of the other rights set forth in the
Stockholders Agreement, without the prior written consent of holders of a
majority of the shares held by the Management Stockholders, TC Leasing, LLC may
not beneficially own more than 33.3% of the issued and outstanding shares of MLC
common stock on a fully diluted basis.
TC Leasing, LLC and the Management Stockholders may transfer their shares of MLC
common stock to their respective affiliates subject to certain restrictions. In
particular, such transferee must join in the Stockholders Agreement. The
limitations on transferability also prevent TC Leasing, LLC from controlling
more than 33.3 percent of the shares of MLC common stock outstanding on a fully
diluted basis without the prior consent of the Management Stockholders, except
for a few instances set forth in the Stockholders Agreement. The limitations
also prevent TC Leasing, LLC and the Management Stockholders from transferring
shares if such transfer would result in TC Leasing, LLC and the Management
Stockholders controlling less than 51 percent of the outstanding shares of MLC
common stock. The Management Stockholders may in certain circumstances sell
their shares for value to the public subject to TC Leasing, LLC having a right
of first refusal and "tag-along" rights in certain circumstances. TC Leasing,
LLC may only sell a block of shares, i.e., shares constituting more than 5
percent of the total outstanding shares of MLC common stock, if TC Leasing, LLC
first offers the shares to the Management Stockholders. Certain other
restrictions on the transfer of MLC common stock by the parties to the
Stockholders Agreement are set forth in the agreement.
Under the Stockholders Agreement, TC Leasing, LLC can force a sale of the
Company unless the Management Stockholders agree to purchase TC Leasing, LLC's
shares for the same value as would be paid in the sale transaction. Such a
forced sale may only occur if the consideration to be paid to stockholders of
the Company in the transaction meets certain threshold levels set forth in the
Stockholders Agreement. The Stockholders Agreement also gives TC Leasing, LLC
certain demand, shelf and piggy-back registration rights in connection with the
shares TC Leasing, LLC purchased or has the option to purchase pursuant to the
Stock Purchase Warrant.
19
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 Operations, Financial Condition, Liquidity
and Capital Resources - As of and For the Years Ended March 31, 1997, 1998 and
1999" and "Item 1, Business."
MLC HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
Year Ended March 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------------------------------------------------------------
STATEMENTS OF EARNINGS
Revenue:
Sales of equipment $ 50,471 $ 47,591 $ 52,167 $ 47,419 83,516
Sales of leased equipment 9,958 16,318 21,634 50,362 84,379
Lease revenues 3,245 5,928 9,909 14,882 20,611
Fee and other income 690 1,877 2,503 5,779 5,464
--------------------------------------------------------------------
Total revenues 64,364 71,714 86,213 118,442 193,970
--------------------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 44,157 38,782 42,180 37,423 71,367
Cost of sales of leased equipment 9,463 15,522 21,667 49,669 83,269
Direct lease costs 841 2,697 4,761 5,409 6,184
Professional and other costs 657 709 577 1,073 1,222
Salaries and benefits 5,679 6,682 8,241 10,357 11,880
General and administrative expenses 1,673 2,040 2,286 3,694 5,152
Interest and financing costs 1,111 1,702 1,649 1,837 3,601
Nonrecurring acquisition costs - - - 250 -
--------------------------------------------------------------------
Total costs and expenses 63,581 68,134 81,361 109,712 182,675
---------------------------------------------------------------------
Earnings before provision for income taxes
and extraordinary item 783 3,580 4,852 8,730 11,295
Provision for income taxes 198 881 1,360 2,691 4,579
---------------------------------------------------------------------
Net earnings before extrardinary item 585 2,699 3,492 6,039 6,716
Extraordinary gain (1)
- 117 - - -
---------------------------------------------------------------------
Net earnings $ 585 $ 2,816 $ 3,492 $ 6,039 $ 6,716
=====================================================================
Net earnings per common share, before
extraordinary item 0.13 0.59 0.67 1.00 0.99
Extraordinary gain per common share - 0.03 - - -
---------------------------------------------------------------------
Net earnings per common share - Basic $ 0.13 $ 0.62 $ 0.67 $ 1.00 $ 0.99
=====================================================================
Pro forma net earnings (2) $ 529 $ 2,389 $ 3,133 $ 5,426 $ 6,716
=====================================================================
Pro forma net earnings per common share - Basic $ 0.12 $ 0.52 $ 0.60 $ 0.90 0.99
=====================================================================
Weighted average shares outstanding - Basic 4,383,490 4,572,635 5,184,261 6,031,088 6,769,732
(1) The extraordinary gain in fiscal 1996 was the result of an insurance
settlement for a fire at a subsidiary of the Company.
(2) Pro forma net earnings as if companies which were subchapter S
corporations prior to their business combination with the Company,
which were accounted for under the pooling of interests method, had
been subject to federal income tax throughout the periods presented.
20
ITEM 6. SELECTED FINANCIAL DATA - Continued
MLC HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per
share data)
As of March 31,
---------------
1995 1996 1997 1998 1999
--------------------------------------------
BALANCE SHEETS
Assets:
Cash and cash equivalents $ 276 $ 651 $ 6,654 $ 18,684 $ 7,892
Accounts receivable 4,852 4,526 8,846 16,383 44,090
Notes receivable 37 92 2,154 3,802 547
Inventories 1,294 965 1,278 1,214 658
Investment in direct financing and sales
type leases, net 12,124 16,273 17,473 32,496 83,371
Investment in operating lease
equipment, net 1,874 10,220 11,065 7,296 3,530
Other assets 587 1,935 741 2,137 12,357
All other assets 672 522 813 1,184 1,914
--- --- --- ----- -----
Total assets $21,716 $ 35,184 $ 49,024 $83,196 $ 154,359
======= ======== ======== ======== =========
Liabilities:
Accounts payable - equipment $3,014 $ 4,973 $ 4,946 $ 21,284 $ 18,049
Accounts payable - trade 1,890 2,215 3,007 6,865 12,518
Salaries and commissions payable 316 153 672 390 536
Recourse notes payable 2,597 2,106 439 13,037 19,081
Nonrecourse notes payable 10,162 18,352 19,705 13,028 52,429
All other liabilities 936 2,153 3,778 5,048 7,932
--- ----- ----- ----- -----
Total liabilities 18,915 29,952 32,547 59,652 110,545
Stockholder's Equity 2,801 5,232 16,477 23,544 43,814
----- ----- ------ ------ ------
Total liabilities and stockholders' equity $21,716 $ 35,184 $ 49,024 $83,196 $ 154,359
======= ======== ========= ======== =========
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES - AS OF AND FOR THE YEARS ENDED MARCH
31, 1997, 1998 AND 1999
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.
The Company's 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. 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 period in which the sale occurs, and reducing revenues
and net earnings otherwise expected in subsequent periods.
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
22
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.
For equipment sold through the Company's value added re-seller subsidiaries, the
dealer margin is presented in equipment sales revenue and cost of equipment
sales. 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 on a straight line basis 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 the resulting
profit for operating leases are recorded evenly over the life of the lease.
As a result of these three classifications of leases 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 sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
23
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 equipment sales revenues and cost of equipment 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) sales of
new and/or used equipment which is not subject to any type of lease; (ii) sales
of equipment subject to an existing lease, under which the Company is lessor,
including any underlying financing related to the lease; and (iii) sales of
off-lease equipment to either 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) re-marketing 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 statements of
earnings.
RESULTS OF OPERATIONS
REVENUES
During the three years ended March 31, 1999, the Company experienced growth in
total revenues reflecting an increased volume of leasing and equipment sale
transactions. Total revenues for fiscal year 1999 were $194.0 million, as
compared to $118.4 and $86.2 million in fiscal years 1998 and 1997,
respectively. Total revenues are comprised of equipment sales, revenue from the
sales of leased equipment, lease revenues, and fee and other income.
24
Equipment sales revenue is generated through the sale of new hardware and
software products through our valued added re-seller ("VAR") subsidiaries and
used product through the equipment brokerage and re-marketing activities.
Equipment sales were $83.5 million in fiscal year 1999, as compared to $47.4 and
$52.2 million in fiscal years 1998 and 1997, respectively. Changes in the cost
of equipment sales have been consistent with changes in equipment sale revenue
for the fiscal years 1998 and 1997 with margins on equipment sales of 21.1% and
19.1%, respectively. In July, 1998, we purchased PC Plus, Inc. which sells to
large customers who obtain products at smaller gross margin percentages than the
other VAR subsidiaries. For the year ended March 31, 1999, margin on equipment
sales was 14.5%. The sales generated by PC Plus, Inc. represented 41.7% of the
total sales of equipment during the nine months of the current fiscal year. The
year ended March 31, 1999 margin on equipment sales was $12.1 million as
compared to $10.0 million for the prior two years.
Revenue from the sales of leased equipment increased 67.5% to $84.4 million in
fiscal 1999, as compared to $50.4 million in fiscal year 1998. Leased equipment
sales revenue was $21.6 million in fiscal 1997. For the past two fiscal years,
we have sold a significant portion of the leases originated to one institutional
equity partner, MLC/CLC, LLC. As a result, historical increases of equipment
sales revenue are a direct result of increased lease originations. During fiscal
year 1999, sales to MLC/CLC, LLC accounted for 96.1% of leased equipment sales
revenue, a component of total revenues. While management expects the continued
availability of equity financing through its joint venture partner or other
sources, should such financing unexpectedly become limited or unavailable, it
could have a material adverse effect upon the amount of leased equipment placed,
financial condition and results of operations until other financing arrangements
are secured.
Cost of leased equipment sales represents the book value of equipment sold which
was subject to a lease in which we are the lessor. The revenues from leased
equipment sales, as well as the related cost of sales, can vary significantly
depending on the nature and timing of the sale of the equipment, as well as the
nature and timing of any sale of the lease's rental stream. For example, a lower
margin, or a loss on the equity portion of a lease is often offset by lease
earnings and/or a gain recognized under SFAS No. 125. Additionally, leases which
have been debt funded prior to equity sale will result in lower sales and cost
of sales amounts, although the net earnings on the transaction will be the same
as had the rental stream been sold after the equity sale.
Lease revenues increased to $20.6 million in fiscal 1999, as compared to $14.9
and $9.9 million in fiscal years 1998 and 1997, respectively. These increases
are directly attributable to our increased volume of lease transactions and
reflects the higher investment in direct financing leases and operating lease
equipment. In addition, lease revenues reflect the gains and losses from the
sale of certain financial assets, primarily lease rental streams, to outside
parties on terms that qualify for treatment as a sale under Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which became effective
January 1, 1997.
25
Fee and other income reflects revenues from adjunct services and fees relating
to our lease portfolio, as well as fees and other income generated by the VAR
subsidiaries including support fees, warranty reimbursements, inventory and
technical services and learning center revenues. Fee and other income accounted
for 2.8%, 4.9% and 2.9% of total revenues during the fiscal years 1999, 1998 and
1997, respectively. The decrease as a percentage of revenue in fee and other
income is largely attributable to the addition of PC Plus, Inc. whose main focus
is sales of product and services; fee income represented only 1.7% of its
revenues. Included in fee and other income are certain transactions which, while
in the normal course of business, for which there can be no guarantee of future
transactions of the same nature, size or profitability. The Company's ability to
consummate such transactions, and the timing thereof, may depend largely on
factors outside the control of management, and as such, earnings from these
transactions in one period may not be indicative of earnings that can be
expected in future periods.
EXPENSES
Direct lease costs include expenses directly attributable to the Company's lease
portfolio, the largest being depreciation on the Company's investment operating
lease equipment and the amortization of initial direct costs. During fiscal year
1999, direct lease costs were $6.2 million, as compared to $5.4 and $4.8 million
in fiscal years 1998 and 1997, respectively. The majority of leases originated
in fiscal 1999 were direct financing leases. If the Company continues to
originate primarily direct financing type leases in the future, depreciation on
operating lease equipment will diminish as the Company's operating lease
portfolio matures.
Professional and other costs amounted to $1.2 million during fiscal year 1999,
as compared to $1.1 and $0.6 million during fiscal years 1998 and 1997,
respectively. The increase during the three year period is primarily
attributable to increases in the volume of broker fees the Company pays on
certain lease transactions, and the increased legal and professional fees
associated with the Company's securities being traded in the public market since
November, 1996.
Salaries and benefits and general and administrative expenses both increased
during the three years ended March 31, 1999. Increases in these expenses are
related primarily to the increased number of personnel required to service the
increased volume of leasing and equipment sale transactions during the three
year period. Salaries and benefits and general and administrative expenses
accounted for 8.8%, 11.9% and 12.2% of total revenues during fiscal years 1999,
1998 and 1997, respectively.
Interest and financing costs reflect interest on recourse and non-recourse lease
related debt, operating lines of credit, floor planning agreements in place at
the VAR subsidiaries and other obligations. These costs amounted to $3.6, $1.8
and $1.6 million in fiscal years 1999, 1998 and 1997, respectively.
The Company recognizes as income tax expense the amount of estimated tax due on
current period's income, whether that tax is to be paid currently or in the
future. The provision for taxes was 40.5%, 30.8% and 28.0% of earnings before
income taxes and extraordinary items for the fiscal years 1999, 1998 and 1997,
respectively. The lower provision for income taxes, as compared to earnings
26
before tax and extraordinary items is the result of earnings from two of the
Company's VAR subsidiaries- MLC Network Solutions, Inc. and ECC Integrated, Inc.
which, prior to their combination with the Company, were sub-chapter S
corporations. As such, the provision for income tax for the three fiscal years
ended March 31, 1999 relates only to earnings of the Company, exclusive of those
VAR earnings generated prior to their business combinations.
Net earnings were $6.7, $6.0, and $3.5 million in the fiscal years 1999, 1998
and 1997, respectively. These increases are a result of the fluctuations in
revenues and expenses discussed in the above paragraphs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the period ended March 31, 1999, the Company improved its financial
condition and available capital resources in several significant ways.
Stockholders' equity increased from $23.5 million at the beginning of fiscal
1999 to $43.8 million at March 31, 1999, partially the result of a private
placement for $10 million of 1,111,111 shares of unregistered common stock to a
single investor. Second, the Company continued to finance its lease transactions
through an equity joint venture, MLC/CLC, LLC. Finally, the Company's available
lines of credit used for short term lease financing increased from $5 million to
$50 million, in addition to amounts available to the Company's VAR subsidiaries
through floor planning agreements. All of these factors have allowed the Company
to support the higher levels of sales and leasing activity reflected in its
financial statements.
The Company's total assets increased 85.5% to $154.4 million as of March 31,
1999 as compared to $83.2 million in total assets as of March 31, 1998.
Our cash and cash equivalents represented 5.1% and 22.5% of total assets as of
March 31, 1999 and 1998, respectively. The decrease in cash in the current year
as compared to the prior year is a result of a large volume of fundings from the
sale of lease receivables which were received near the balance sheet date of the
prior year. Our cash balances are invested in overnight, interest bearing
investments.
The largest component of assets is our investment in direct financing and sales
type leases and investment in operating lease equipment. These assets represent
56.3% and 47.8% of total assets as of March 31, 1999 and 1998, respectively. The
Company's investment in direct financing leases and operating lease equipment
amounted to $86.9 and $39.8 million at the end of fiscal years 1999 and 1998,
respectively, reflecting an increased lease transaction volume. The size and
composition of our lease portfolio may vary depending nature and volume of new
leases originated, as well as the nature and timing of sales of lease rental
streams and sale of equipment underlying the leases.
As of March 31, 1999 and 1998, the Company had $0.5 and $3.8 million in notes
receivable, respectively. The majority of these notes are receivable from our
joint venture equity partner and related to the rental stream on leases attached
to equipment which was sold to the equity partner. The vast majority of these
notes receivable are paid off with the proceeds of a non-recourse funding
secured on behalf of the joint venture 30 to 90 days subsequent to an equity
sale. In the event that a rental stream is not funded on behalf of the joint
venture partner, we will continue to receive the rental payments from the
lessee.
27
The Company's liabilities are composed primarily of amounts due to vendors for
equipment to be placed on lease, recourse lines of credit, and nonrecourse debt
associated with the Company's lease portfolio.
As of March 31, 1999 amounts due to vendors for inventory and general expenses
("Accounts Payable - trade") and amounts due to vendors for equipment which will
be placed on lease ("Accounts Payable - equipment") totaled $30.6 million, as
compared to $28.1 million at March 31, 1998. The increase is primarily
attributable to an increase in amounts payable for equipment from our VAR
subsidiaries due to increased sales volume.
Recourse notes payable amounted to $19.1 and $13.0 million as of March 31, 1999
and 1998 respectively. The increase represents an increased amount due under the
Company's lines of credits. Non-recourse notes payable increased to $52.4
million at March 31, 1999 from $13.0 million as of March 31, 1998. The increase
is the result of the debt funding of the increased lease portfolio retained on
our balance sheet.
To date, the financing necessary to support our leasing and financing activities
has been provided principally from non-recourse and recourse borrowings from
money center banks, regional banks, insurance companies, finance companies and
financial intermediaries. 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.
In order to take advantage of the most favorable long-term financing
arrangements, 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 non-recourse borrowings or a sale transaction. Such
interim financing is usually obtained through the Company's main operating line
of credit or partial-recourse warehouse lines.
Borrowings under the main operating line of credit are secured by lease
receivables and the underlying equipment financed under the facility.
Availability under the line 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 facility. At March 31, 1999, there was
$18.0 million outstanding under our main operating line of credit.
ADEQUACY OF CAPITAL RESOURCES
The Company's current working capital 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 minor acquisitions and financings under its relationships
with vendors, for at least the next 12 months. Although no assurances can be
given, we expect 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.
28
THE YEAR 2000 ISSUE
The Company has identified all significant hardware and software applications,
both IT and non-IT based, that will require upgrade or modification to ensure
Year 2000 compliance. The upgrade and/or modification of the majority of these
systems is substantially complete. The Company plans on completing the process
of modifying and/or upgrading its remaining systems by September 30, 1999. The
total cost of these Year 2000 compliance activities has not been, nor is it
anticipated to become, material to the Company's financial position, results of
operations or cash flows in any given year.
The Company recognizes the risks surrounding its own Year 2000 readiness, for
which it believes it has adequately addressed, as well as the risks arising from
the failure of third parties with whom it has a material relationship to
remediate their own Year 2000 issues. While the risks of third party
non-compliance may temporarily affect the ability of a third party to transact
business with the Company, the Company believes such risks are adequately
mitigated by its own contingency plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the Company's liabilities are non-recourse,
fixed interest rate instruments, the Company is reliant upon lines of credit and
other financing facilities which are subject to fluctuations in interest rates.
Should interest rates significantly increase, the Company would incur higher
interest expense, and to the extent that the Company is unable to recover these
higher costs, potentially lower earnings.
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.
29
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
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**..................55 Chairman of the Board, III
President and Chief
Executive Officer
Thomas B. Howard, Jr.................52 Vice President and Chief
Operating Officer
Bruce M. Bowen.......................47 Director and Executive III
Vice President
Steven J. Mencarini..................43 Senior Vice President and
Chief Financial Officer
Terrence O'Donnell...................5 Director II
Carl J. Rickertsen...................3 Director II
C. Thomas Faulders, III..............49 Director I
Dr. Paul G. Stern....................49 Director II
Kleyton L. Parkhurst.................36 Senior Vice President,
Secretary and Treasurer
David Rose...........................38 President, MLC Network Solutions
Vincent M. Marino....................41 President, MLC Integrated
Nadim Achi...........................36 President, PC Plus
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements and Schedule are filed as a part of this report and incorporated
herein by reference.
(a)(2) Financial Statement Schedule
The financial statement schedule listed in the accompanying Index to Financial
Statements and Schedules are filed as a part of this report and incorporated
herein by reference.
(b) Reports on Form 8-K
Form 8-K dated June 30, 1998 and filed with the Commission on July 31, 1998,
reporting interim information regarding the acquisition of PC Plus, Inc. of
Reston, Virginia. No financial statements were included.
Form 8-K dated October 23, 1998 and filed with the Commission on November 13,
1998 reporting interim information regarding the issuance of 1,111,111 shares of
common stock in a private placement. No financial statements were included.
Form 8-K dated December 18, 1998 and filed with the Commission on December 31,
1998, reporting the establishment of a $50,000,000 line of credit with First
Union National Bank. No financial statements were included.
Form 8-K dated January 19, 1999 and filed with the Commission on January
19,1999, reporting the establishment of a lease receivables purchase agreement
between Triple-A One Funding Corporation, as the purchaser, Key Corporate
Capital, Inc., as the agent, and MLC Group, Inc. as the seller. No financial
statements were included.
(c) Exhibits
Exhibit
Number Description
----------- ----------------------------------------------------------------
2.1(4) Agreement and Plan of Merger dated July 24, 1997, by and among
MLC Holdings, Inc., MLC Network Solutions, Inc., Compuventures of
Pitt County, Inc., and the Stockholders of Compuventures of Pitt
County, Inc.
2.2(5) Agreement and Plan of Merger dated September 29, 1997, by and
among MLC Holdings, Inc., MLC Acquisition Corporation,
Educational Computer Concepts, Inc. and the Stockholders of
Educational Computer Concepts, Inc.
2.3(7) Agreement and Plan of Merger dated July 1, 1998, by and among
MLC Holdings, Inc., MLC Network Solutions of Virginia, Inc., PC
Plus, Inc., and the Stockholders of PC Plus, Inc.
2.4(9) Stock Purchase Agreement, dated as of October 23, 1998 by and
between MLC Holdings, Inc., and TC Leasing, LLC
2.5(9) Stockholders Agreement dated as of October 23, 1998, by and
among MLC Holdings, Inc., TC Leasing, LLC, Phillip G. Norton,
Bruce M. Bowen, J.A.P. Investment Group, L.P., Kevin M. Norton,
and Patrick J. Norton, Jr.
2.6(9) Stock Purchase Warrant, dated as of October 23, 1998, by and
between MLC Holdings, Inc., and TC Leasing, LLC.
31
3.1(5) Certificate of Incorporation of the Company, as amended
3.2(1) Bylaws of the Company
4.1(1) Specimen certificate of Common Stock of the Company
5.1(10) Text of Credit Agreement dated December 18, 1998, between MLC
Holdings, Inc., MLC Group, Inc., and MLC Federal, Inc. and
Certain Banking Institutions with First Union National Bank as
Agent
5.2(10) Text of Security Agreement dated December 18, 1998 between MLC
Holdings, Inc., MLC Group, Inc., and MLC Federal, Inc. and
Certain Banking Institutions with First Union National Bank As
Agent
5.3(10) Text of Pledge AGreement dated December 18, 1998 between MLC
Holdings, Inc., MLC Group, Inc., and MLC Federal, Inc. and
Certain Banking Institutions with First Union National Bank As
Agent
5.4(10) Text of Notes by and between MLC Holdings, Inc., MLC Group, Inc.,
MLC Federal, Inc., and First Union National Bank, Bank Leumi USA,
Riggs Bank N.A., Wachovia Bank, Summit Bank, and Key Bank
National Association, respectively
5.5(10) Amendment Number one, dated June 21, 1999 to Credit Agreement
between the Company and first Union National Bank dated December
18, 1998
10.1(1) * 1996 Stock incentive Plan (see 10.21 below for
amended version)
10.2(1) * 1996 Outside Directors Stock Option Plan (see 10.23 below
for amended version)
10.3(1) * 1996 Nonqualified Stock Option Plan (see 10.24 below for
amended version)
10.4(1) * 1996 Incentive Stock Option Plan (see 10.22 below for
amended version)
10.5(1 Form of Indemnification Agreement entered into between the
Company and its directors and officers
10.6(1) Lease dated July 14, 1993 for principal executive offices
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
10.11(1 Form of Irrevocable Proxy and Stock Rights Agreement
10.12(1) First Amended and Restated Business Loan and Security
Agreement by and between the company and First Union Bank of
Virginia, N.A.
10.13(1) Loan Modification and Extension Agreement by and between the
Company and First Union National Bank of Virginia, N.A.
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) Test 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.
32
10.18(3) Credit Agreement dated as of June 5, 1997, by and between ML
Group, and Corestates Bank, N.A.
10.19(3) Form of Employment Agreement between the Registrant and
Thomas B. Howard, Jr.
10.20(3) Form of Employment Agreement between the Registrant and
Steven J. Mencarini
10.21(5) MLC Master Stock Incentive Plan
10.22(5) Amended and Restated Incentive Stock Option Plan
10.23(5) Amended and Restated Outside Director Stock Option Plan
10.24(5) Amended and Restated Nonqualified Stock Option Plan
10.25(5) 1997 Employee Stock Purchase Plan
10.26(5) Amendment No. 1 dated September 5, 1997 to Credit Agreement
dated June 5, 1997 between MLC Group, Inc. and CoreStates Bank,
N.A.
10.27(7) Form of Employment Agreement between the Registrant and Nadim
Achi
10.28(7) Escrow Agreement between the Company, Crestar Bank and Nadim
Achi as representative of PC Plus, Inc. shareholders dated July
1, 1998
10.29(7) Amendment Number 3 dated June 30, 1998 to Credit Agreement
dated June 5, 1997 between MLC Group, Inc. and First Union
National Bank, successor to Corestates Bank, N.A.
10.30(8) 1998 Long Term Incentive Stock Option Plan
10.31(9) Sublease by and between Cisco Systems ("Tenent") and MLC
Holdings, Inc. ("Sub-tenent")
21.1(6) Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
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)
33
(2) Incorporated herein by reference to Exhibits 5.1 and
5.2 filed as part of the Registrant's Form 8-K filed March
28, 1997
(3) Incorporated herein by reference to the indicated exhibit
filed as part of the Registrant's Form 10-K filed on June
30, 1997
(4) Incorporated herein by reference to the indicated exhibit
filed as part of the Registrant's Form 8-K filed on
August 8, 1997
(5) Incorporated herein by reference to the indicated exhibit
filed as part of the Registrant's Form 10-Q filed on
November 14, 1997
(6) Incorporated herein by reference to the indicated exhibit
filed as part of the Registrant's Registration Statement
on Form S-1 (No.333-44335)
(7) Incorporated herein by reference to the indicated exhibit
filed as a part of the Registrant's Form 8-K filed on
July 31, 1998
(8) Incorporated herein by reference to exhibit 10.27 filed as
a part of the Registrant's Form 10-Q filed on November 12,
1998
(9) Incorporated herein by reference to exhibits 2.1, 2.2, and
2.3 filed as a part of the Registrant's Form 8-K filed on
November 13, 1998.
(10) Incorporated herein by reference to the indicated exhibit
filed as a part of the Registrant's Form 8-K filed on
December 31, 1998.
(11) Incorporated herein by reference to exhibit 10.28 filed as
a part of the Registrant's Form 10-Q filed on February 16, 1999
34
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.
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 25, 1999
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.
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 25, 1999
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
Chief Financial Officer, Principal Accounting
Officer
Date: June 25, 1999
/s/ THOMAS B. HOWARD
By: Thomas B. Howard, Vice President and
Chief Operating Officer
Date: June 25, 1999
/s/ BRUCE M. BOWEN
By: Bruce M. Bowen, Director and Executive
Vice-President
Date: June 25, 1999
/s/ TERRENCE O'DONNELL
By: Terrence O'Donnell, Director
Date: June 25, 1999
/s/ CARL J. RICKERTSEN
By: Carl J. Rickertsen, Director
Date: June 25, 1999
35
MLC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1997, 1998, and 1999 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1998 and 1999 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-26
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years S-1
Ended March 31, 1997, 1998 and 1999.
ii
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MLC Holdings, Inc.
Herndon, Virginia
We have audited the consolidated balance sheets of MLC Holdings, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of MLC Holdings, Inc. and subsidiaries as of March 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, based on our audits, 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 set forth therein.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
June 11, 1999
F-2
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31,
1998 1999
----------------------------------------------
ASSETS
Cash and cash equivalents
$ 18,683,796 $ 7,891,661
Accounts receivable 16,383,314 44,090,101
Notes receivable (1) 3,801,808 547,011
Employee advances 53,582 20,078
Inventories 1,213,734 658,355
Investment in direct financing and sales type leases - net 32,495,594 83,370,950
Investment in operating lease equipment - net 7,295,721 3,530,179
Property and equipment - net 1,131,512 2,018,133
Other assets (2) 2,136,554 12,232,130
==============================================
TOTAL ASSETS $ 83,195,615 $ 154,358,598
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 6,865,419 $ 12,518,533
Accounts payable - equipment 21,283,582 18,049,059
Salaries and commissions payable 390,081 535,876
Accrued expenses and other liabilities 3,560,181 4,638,708
Recourse notes payable 13,037,365 19,081,137
Nonrecourse notes payable 13,027,676 52,429,266
Deferred taxes 1,487,000 3,292,210
----------------------------------------------
Total Liabilities $ 59,651,304 110,544,789
Commitments and contingencies (Note 7) - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized at
March 31, 1998 and 1999; 6,071,505 and 7,470,595
issued and outstanding at March 31, 1998 and 1999 respectively 60,715 74,706
Additional paid-in capital 11,460,331 24,999,371
Retained earnings 12,023,265 18,739,732
----------------------------------------------
Total Stockholders' Equity 23,544,311 43,813,809
==============================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,195,615 $ 154,358,598
==============================================
See Notes to Consolidated Financial Statements.
(1) Includes amounts with related parties of $3,709,508 and $518,955 as of March 31, 1998 and 1999,
respectively.
(2) Includes amounts with related parties of $732,051 and $1,281,474 as of March 31, 1998 and 1999,
respectively.
F-3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
-------------------------------------------
1997 1998 1999
-------------------------------------------
REVENUES
Sales of equipment $ 52,166,828$ 47,419,115 $ 83,516,254
Sales of leased equipment
21,633,996 50,362,055 84,378,800
----------------------------------------
73,800,824 97,781,170 167,895,054
Lease revenues
9,908,469 14,882,420 20,610,542
Fee and other income
2,503,381 5,778,685 5,464,242
----------------------------------------
12,411,850 20,661,105 26,074,784
----------------------------------------
TOTAL REVENUES (1)
86,212,674 118,442,275 193,969,838
========== =========== ===========
COSTS AND EXPENSES
Cost of sales, equipment
42,179,823 37,423,397 71,367,090
Cost of sales, leased equipment
21,667,197 49,668,756 83,269,110
-------------------------------------------
63,847,020 87,092,153 154,636,200
Direct lease costs
4,761,227 5,409,338 6,183,562
Professional and other fees 576,855 1,072,691 1,222,080
Salaries and benefits 8,241,405 10,356,456 11,880,062
General and administrative expenses 2,285,878 3,694,309 5,151,494
Nonrecurring acquisition costs - 250,388 -
Interest and financing costs 1,648,943 1,836,956 3,601,348
-------------------------------------------
17,514,308 22,620,138 28,038,546
-------------------------------------------
TOTAL COSTS AND EXPENSES (2) 81,361,328 109,712,291 182,674,746
-------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 4,851,346 8,729,984 11,295,092
-------------------------------------------
PROVISION FOR INCOME TAXES 1,360,000 2,690,890 4,578,625
-------------------------------------------
NET EARNINGS $ 3,491,346 $ 6,039,094 $ 6,716,467
===========================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.67 $ 1.00 $ 0.99
===========================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.66 $ 0.98 $ 0.98
===========================================
PRO FORMA NET EARNINGS (Note 8) $ 3,133,436 $ 5,425,833 $ 6,716,467
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.60 $ 0.90 $ 0.99
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE-DILUTED $ 0.60 $ 0.88 $ 0.98
===========================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,184,261 6,031,088 6,769,732
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,262,697 6,143,017 6,824,633
See Notes to Consolidated Financial Statements.
(1) Includes amounts from related parties of $21,051,453, $46,710,190 and $82,652,623
for the fiscal years ended March 31,1997, 1998 and 1999, respectively.
(2) Includes amounts from related parties of $20,566,924, $44,831,701 and $80,966,659 for
the fiscal years ended March 31, 1997, 1998, and 1999, respectively.
F-4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Treasury Stock Paid-in Retained
------------------------- -----------------------
Shares Par Value Shares Cost Capital Earnings TOTAL
------------------------- ----------------------- --------------- --------------- ------------
Balance March 31, 1996 4,754,390 48,661 111,716 28,854 744,485 4,467,223 5,231,515
Compensation to outside directors - - - - 9,500 - 9,500
Distributions to owners - - - - - (859,378) (859,378)
Sale of common shares 1,150,000 11,500 - - 8,592,262 - 8,603,762
Issuance of shares to owners 5,586 56 - - (56) - -
Retirement of treasury shares - (1,117) (111,716) (28,854) 23 (27,760) -
Net earnings - - - - - 3,491,346 3,491,346
========================= ======================= =============== =============== ============
Balance March 31, 1997 5,909,976 $59,100 - $ - $ 9,346,214 7,071,431 $16,476,745
========================= ======================= =============== =============== ============
Sale of common shares 161,329 1,613 - - 1,998,387 - 2,000,000
Issuance of shares for option exercise 200 2 1,748 - 1,750
Compensation to outside directors - - - - 113,982 - 113,982
Distributions to owners - - - - - (1,087,260 (1,087,260)
Net earnings - - - - - 6,039,094 6,039,094
------------------------- ----------------------- --------------- --------------- ------------
Balance, March 31, 1998 6,071,505 $60,715 $ - - $ 11,460,331 $ 12,023,265 $ 23,544,311
========================= ======================= =============== =============== ============
Issuance of shares for option exercise 10,500 105 - - 91,770 91,875
Issuance of shares to employees 14,001 140 - - 112,452 - 112,592
Issuance of shares in business 263,478 2,635 - - 3,620,188 - 3,622,823
combination
Sale of common shares 1,111,111 11,111 - - 9,714,630 - 9,725,741
Net earnings
- - - - - 6,716,467 6,716,467
------------------------- ----------------------- ---------------------------------------------
Balance, March 31, 1999 7,470,595 $74,706 $ - - $ 24,999,371 $ 18,739,732 $ 43,813,809
========================= ======================= =============== =============== ============
See Notes to Consolidated Financial Statements.
F-5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
--------------------
1997 1998 1999
----------------------------------
Cash Flows From Operating Activities:
Net earnings $ 3,491,346 $6,039,094 $6,716,467
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,650,248 4,628,272 4,720,241
Abandonment of assets 10,049 - -
Provision for credit losses 66,000 (1,000) 500,000
Loss (Gain) on sale of
operating lease equipment (1) 83,754 (55,881) 57,984
Adjust of basis to fair market value
of operating lease equipment and investments 153,434 - 306,921
Payments from leases directly to lenders (1,590,061) (1,788,611) (970,483)
(Gain) Loss on disposal of property and equipment (9,124) - 26,246
Compensation to outside directors - stock options 9,500 113,982 -
Changes in:
Accounts receivable (4,343,319) (7,536,888) (19,809,403)
Notes receivable (2) (2,062,393) (1,647,558) 3,316,261
Employee advances 28,537 17,030 33,028
Inventories (400,046) 64,410 1,293,081
Other assets (3) 457,169 (893,959) (4,094,505)
Accounts payable - equipment (26,557) 16,337,160 (3,964,145)
Accounts payable - trade 796,740 3,858,482 28,181
Deferred taxes 121,000 897,000 1,805,210
Salaries and commissions payable,
accrued expenses and other liabilities 2,286,921 629,380 1,097,776
--------- ------- ---------
Net cash provided by(used in) operating activitie 2,723,198 20,660,913 (8,437,140)
--------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 4,992,050 726,714 138,003
Purchase of operating lease equipment (4) (24,800,360) (2,065,079) (487,418)
Increase in investment in direct financing
and sales-type leases (5) (6,825,873) (18,833,704 ( 80,744,494)
Proceeds from sale of property and equipment 9,124 800 2,000
Insurance proceeds received 512,044 - -
Purchases of property and equipment (266,061 (1,032,243) (1,249,214)
Cash used in acquisitions, net of cash acquired - - (3,485,279)
Decrease (Increase) in other assets (6) 226,530 (472,962) (788,856)
------- -------- --------
Net cash used in investing activities (26,152,530) (21,676,474) (86,615,258)
----------- ----------- -----------
F-6
MLC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year Ended March 31,
---------------------
1997 1998 1999
--------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 26,825,118 $ 4,511,517 $79,941,563
Recourse 220,768 174,894 415,606
Repayments:
Nonrecourse (3,199,626) (4,872,557) (10,200,352)
Recourse (434,867) (307,819) (195,892)
Repayments of loans from stockholders (275,000) (10,976) -
Distributions to shareholders of combined companies
prior to business combination (859,378) (1,087,260) -
Proceeds from issuance of capitalstock, net of expenses 8,603,762 2,001,750 9,930,209
Purchase of treasury stock - - -
(Repayments) Proceeds from lines of credit (1,448,370) 12,635,599 4,369,129
---------- ---------- ---------
Net cash provided by financing activities 29,432,407 13,045,148 84,260,263
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 6,003,059 12,029,587 (10,792,135)
Cash and Cash Equivalents, Beginning of Period 651,150 6,654,209 18,683,796
------- --------- ----------
Cash and Cash Equivalents, End of Period $ 6,654,209 $ 18,683,796 $ 7,891,661
============= ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 140,081 $ 347,757 $ 1,475,497
============= ============ ===========
Cash paid for income taxes $ 315,137 $ 2,681,867 $ 2,913,818
============= ============ ===========
See Notes To Consolidated Financial
Statements.
(1) Includes amounts provided by (used by) related parties of $3,930, $(35,540),
and $-0- for the fiscal years ended March 31, 1997, 1997 and 1999.
(2) Includes amounts provided by (used by) related parties of $(1,897,094) and
$3,291,681 for the fiscal years ended March 31, 1998 and 1999.
(3) Includes amounts provided by related parties of $285,943, $ 51,482, and
$329,275 for the fiscal years ended March 31, 1997, 1998 and 1999.
(4) Includes amounts provided by related parties of $2,707,213, $935,737, and
$-0- for the fiscal years ended March 31, 1997, 1998 and 1999.
(5) Includes amounts (used by) provided by related parties of $(23,417),
$43,418,347, and $80,510,214 for the fiscal years ended March 31, 1997, 1998 and
1999.
(6) Includes amounts provided by (used by) provided by related parties of
$73,338, $(473,621), and $652,701 for the fiscal years ended March 31, 1997,
1998 and 1999.
F-7
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years Ended March 31, 1997, 1998, and 1999
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 (MLC
Network Solutions, Inc. and MLC Integrated, Inc.) at historical amounts as if
the combination had occurred on March 31, 1996 in a manner similar to a pooling
of interest. The accompanying financial statements also include the accounts of
the wholly owned subsidiary (PC Plus, Inc.) from July 1, 1998, accounted for as
a purchase.
All significant intercompany balances and transactions have been eliminated.
Business Combinations - On July 24, 1997, the Company, through a new wholly
owned subsidiary, MLC Network Solutions, Inc., issued 260,978 common shares,
valued at $3,384,564, in exchange for all outstanding common shares of
Compuventures of Pitt County, Inc. ("Compuventures"), a value-added reseller of
PC's and related network equipment and software products a provider of various
support services to its customers from facilities located in Greenville, Raleigh
and Wilmington, North Carolina. On September 29, 1997, the Company issued
498,998 common shares, valued at $7,092,000, in exchange for all outstanding
common shares of Educational Computer Concepts, Inc. (dba "ECC
Integrated")("ECCI"), a network systems integrator and computer reseller serving
customers in eastern Pennsylvania, New Jersey and Delaware. ECC Integrated
subsequently changed its name to MLC Integrated ("MLCI"). These business
combinations have been accounted for as pooling of interests, and accordingly,
the consolidated financial statements for periods prior to the combinations have
been restated to include the accounts and results of operations of the pooled
companies. See Note 12.
New Subsidiaries - On July 1, 1998, the Company, through a new wholly owned
subsidiary, MLC Network Solutions of Virginia, Inc., issued 263,478 common
shares, valued at $3,622,823, and cash of $3,622,836 for all the outstanding
common shares of PC Plus, Inc., a value-added reseller of PC's , related network
equipment and software products and provider of various support services to its
customers from its facility in Reston, Virginia (relocated to Herndon, Virginia
in October 1998). Subsequent to the acquisition, MLC Network Solutions of
F-8
Virginia, Inc. changed its name to PC Plus, Inc. This business combination has
been accounted for using the purchase method of accounting, and accordingly, the
results of operations of PC Plus, Inc. have been included in the Company's
consolidated financial statements from July 1, 1998. The Company's other assets
include goodwill calculated as the excess of the purchase price over the fair
value of the net identifiable assets acquired of $6,045,330, and is being
amortized on a straight-line basis over 27.5 years. See Note 12.
On September 17, 1997, the Company established MLC Federal, Inc., a wholly owned
subsidiary of MLC Holdings, Inc. The new subsidiary will concentrate on the
origination of leases to federal, state, and local government entities. On
October 22, 1997, the Company formed MLC Leasing, S.A. de C.V., a wholly owned
subsidiary of MLC Group, Inc. and MLC Network Solutions, Inc., based in Mexico
City, Mexico. To date, no business has been conducted through MLC Leasing, S.A.
de C.V.
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 Statement of
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. No sales type leases have been consummated during the three years
ended March 31, 1998. The Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
effective January 1, 1997. This standard 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 No. 125 and have therefore been treated
as sales for financial statement purposes. SFAS No. 125 prohibits the
retroactive restatement of transactions consummated prior to January 1, 1997
which would have otherwise met the requirements of a sale under the standard.
Sales of leased equipment represents revenue from the sales of equipment subject
to a lease in which the Company is the lessor. If the rental stream on such
lease has nonrecourse debt associated with it, sales revenue is recorded at the
amount of consideration received, net of the amount of debt assumed by the
purchaser. If there is no nonrecourse debt associated with the rental stream,
sales revenue is recorded at the amount of gross consideration received, and
costs of sales is recorded at the book value 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.
F-9
Residuals - Residual values, representing the estimated value of equipment at
the termination of a 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
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 and accounts receivable 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
customer'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 seven years.
Income Taxes - Deferred income taxes are accounted 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.
The Company acquired two companies which were accounted for under the pooling of
interests method. Prior to their business combinations with the Company, the two
companies had elected to be taxed under the provisions of Subchapter "S" of the
Internal Revenue Code. Under this election, each company's income or loss was
included in the taxable income of the stockholders. See Note 8.
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.
Reclassifications - Certain items have been reclassified in the March 31, 1997
and 1998 financial statements to conform to the March 31, 1999 presentation.
Initial Public Offering - During November and December 1996, MLC 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 $9.4 million
(gross proceeds of $10.1 million less underwriters expense of $0.7 million), 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.
F-10
Earnings Per Share - Earnings per share have been calculated in accordance with
SFAS No. 128, "Earnings per Share." In accordance with SFAS No. 128, basic EPS
amounts were calculated based on weighted average shares outstanding of
5,184,261 in fiscal 1997, 6,031,088 in fiscal 1998, and 6,769,732 in fiscal
1999. Diluted EPS amounts were calculated based on weighted average shares
outstanding and common stock equivalents of 5,262,697 in fiscal 1997, 6,143,017
in fiscal 1998, and 6,824,633 in fiscal 1999. Additional shares included in the
diluted earnings per share calculations are attributable to incremental shares
issuable upon the assumed exercise of stock options.
Capital Structure - On October 23, 1998, The Company sold 1,111,111 shares of
common stock for a price of $9.00 per share to TC Leasing LLC, a Delaware
limited liability company. In addition, the Company granted TC Leasing LLC stock
purchase warrants granting the right to purchase an additional 1,090,909 shares
of common stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant is exercisable through December 31, 2001, unless it is
extended under the terms of the warrant. Pursuant to a purchase agreement, the
Company's ability to pay dividends is restricted through October 23, 1999.
On July, 1997, the Company sold 161,329 shares of common stock to a single
investor for $12.40 per share.
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:
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
Minimum lease payments $ 29,968 $ 75,449
Estimated unguaranteed residual value 7,084 17,777
Initial direct costs, net of amortization (1) 760 1,606
Less: Unearned lease income (5,270) (10,915)
Reserve for credit losses (46) (546)
================= ================
Investment in direct finance and sales
type leases, net $ 32,496 $ 83,371
================= ================
(1) Initial direct costs are shown net of amortization of $1,592 and
$2,590 at March 31, 1998
and 1999, respectively.
Future scheduled minimum lease rental payments as of March 31, 1999 are as
follows:
(In Thousands)
Year ending March 31, 2000 $ 35,189
2001 26,168
2002 12,723
2003 1,021
2004 and thereafter 348
-----------
$ 75,449
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes. See Note 5.
F-11
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases primarily represents equipment leased for two to
three years. The components of the net investment in operating lease equipment
are as follows:
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
Cost of equipment under operating leases $ 13,990 $ 8,742
Initial direct costs 51 21
Less: Accumulated depreciation and
Amortization (6,745) (5,233)
================= ================
Investment in operating lease equipment, net $ 7,296 $ 3,530
================= ================
As of March 31, 1999, future scheduled minimum lease rental payments are as
follows:
(In Thousands)
Year ending March 31, 2000 $ 1,790
2001 88
2002 43
2003 19
----------
$ 1,940
=========
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 $153,435 was recognized in the year ended
March 31, 1997. Impairment losses are reflected as a component of direct lease
costs in the accompanying consolidated statements of earnings.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
Furniture, fixtures and equipment $ 1,157 $ 2,333
Vehicles 138 139
Capitalized software 477 635
Leasehold improvements 24 193
Less: Accumulated depreciation and
Amortization (664) (1,282)
================= ================
Property and equipment, net $ 1,132 $ 2,018
================= ================
5. RECOURSE AND NONRECOURSE NOTES PAYABLE
Recourse and nonrecourse obligations consist of the following:
F-12
As of March 31,
1998 1999
-------------------------
(In Thousands)
Recourse equipment notes secured by related
investments in leases with varying interest
rates ranging from 7.50% to 9.74% in fiscal
years 1998 and 1999 $ 272 $ 497
Recourse line of credit with a maximum
balance of $50,000,000 bearing interest at the
LIBOR rate plus 150 basis points, or, at the
Company's option, prime less 1/2% expiring
December, 1999 $ -0- $ 18,000
Recourse line of credit with a maximum balance of
$2,500,000 bearing interest at prime $ -0- $ 175
Recourse equipment notes with varying interest
rates ranging from 7.13% to 8.61%, secured by
related investment in equipment $ -0- $ 409
Recourse line of credit with a maximum balance
of $25,000,000, bearing interest at the LIBOR rate
plus 1.1%, or, at the Company's option, the prime
rate less 100 basis points, replaced by $50,000,000
line of credit in December, 1998 $ 12,750 $ -0-
Term bank obligations with interest rates ranging
from 8.25% to prime plus 75 basis points $ 10 $ -0-
Loans from related parties with interest rates
ranging from 8% to 10% $ 5 $ -0-
--------- ---------
Total recourse obligations $ 13,037 $ 19,081
========= =========
Non-recourse equipment notes secured by
related investments in leases with interest
rates ranging from 6.30% to 9.99% in fiscal
years 1998 and 1999
$ 13,028 $ 52,429
========= =========
F-13
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 Company's $50 million line of credit are subject to certain
covenants regarding minimum consolidated tangible net worth, maximum recourse
debt to worth ratio, cash flow coverage, and minimum interest expense coverage
ratio. The borrowings are secured by the Company's assets such as leases,
receivables, inventory, and equipment. Borrowings are limited to the Company's
collateral base, consisting of equipment, lease receivables and other current
assets, up to a maximum of $50 million. In addition, the credit agreement
restricts, and under some circumstances prohibits the payment of dividends.
Recourse and nonrecourse notes payable as of March 31, 1999, mature as follows:
Recourse Notes Nonrecourse
Payable Notes Payable
------------------ ------------
(In Thousands)
Year ending March 31, 2000 $ 18,567 $ 43,025
2001 231 4,333
2002 151 4,418
2003 102 607
2004 and thereafter 30 46
---- -- --
$ 19,081 $ 52,429
=========== =========
6. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees and/or stockholders, the
balances of which amounted to $53,582 and $20,078 as of March 31, 1998 and 1999,
respectively. Such balances are to be repaid from commissions earned on
successful sales or financing arrangements obtained on behalf of the Company, or
via scheduled payroll deductions.
As of March 31, 1998 and 1999, $85,020 and $(100,602) was receivable (payable)
from United Federal Leasing, which is owned in part by an individual related to
a Company executive. As of March 31, 1998 and 1999, the Company had fully
reserved for the receivable. During the year ended March 31, 1998, the Company
recognized re-marketing fees of $561,000 from United Federal Leasing.
F-14
At March 31, 1998 and 1999, accrued expenses and other liabilities include
$9,599 and $19,416, respectively, due to a company in which an
employee/stockholder has a 45% ownership interest. During the years ended March
31, 1998 and 1999, respectively, the Company recognized remarketing fees from
the company amounting to $216,828 and $88,180.
During the years ended March 31, 1997 and 1998, the Company sold leased
equipment to MLC/GATX Limited Partnership I (the "Partnership"), which amounted
to 0.3% and 0% 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 $3,452,902 and $406,159, the basis of the
equipment sold was $3,309,186 and $372,306 during the years ended March 31, 1997
and 1998, respectively. Other assets include $75,981, $136,664, and $(6,989) due
to (from) the Partnership as of March 31, 1997, 1998, 1999, respectively. Also
reflected in other assets is the Company's investment balance in the
Partnership, which is accounted for using the cost method, and amounts to
$226,835, $132,351, and $-0- as of March 31, 1997, 1998, and 1999 respectively.
In addition, the Company received $148,590, $104,277 and $-0- for the years
ended March 31, 1997, 1998 and 1999, respectively, for accounting and
administrative services provided to the Partnership.
During the years ended March 31, 1998 and 1999 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 $105,719 and $161,387 to reflect the revised net
realizable value. These write-downs are included in cost of sales in the
accompanying consolidated statements of earnings.
During the years ended March 31, 1997, 1998, and 1999, the Company sold leased
equipment to MLC/CLC LLC, a joint venture in which the Company has a 5%
ownership interest, that amounted to 20%, 38% and 42% of the Company's revenues,
respectively. Revenue recognized from the sales was $16,923,090, $44,784,727,
and $81,089,883, respectively. The basis for the equipment sold was $16,917,840,
$44,353,676, and $80,510,214, respectively. Notes receivable includes $3,709,508
and $518,955 due from the partnership as of March 31, 1998 and 1999. Other
assets reflects the investment in the joint venture of $736,364 and $1,389,065,
as of March 31, 1998 and 1999, respectively, accounted for using the cost
method. The Company receives an origination fee on leased equipment sold to the
joint venture. In addition, the Company recognized $170,709 and $301,708 for the
years ended March 31, 1998 and 1999 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.
The Company leases certain office space from entities which are owned, in part,
by executives of subsidiaries of the Company. During the years ended March 31,
1997, 1998, and 1999, rent expense paid to these related parties was $124,222,
$306,479, and $269,558, respectively.
F-15
The Company is reimbursed for certain general and administrative expenses by a
company owned, in part, by an executive of a subsidiary of the Company. The
reimbursements totaled $176,075, $81,119, and $25,500 for the years ended March
31, 1997, 1998 and 1999.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment for the conduct of
its business. Rent expense relating to these operating leases was $347,553,
$505,032, and $629,456 for the years ended March 31, 1997, 1998, and 1999,
respectively. As of March 31, 1999, the future minimum lease payments are due as
follows:
Year ending March 31, 1999 $ 760,330
2000 633,831
2001 337,986
2002 251,345
2003 and thereafter 350,303
-------------
$ 2,333,795
As of March 31, 1998, the Company had guaranteed $172,565 of the residual value
for equipment owned by the MLC/GATX Limited Partnership I. No guarantee was made
for the year ended March 31, 1999.
8. 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:
For the Year Ended March 31,
1997 1998 1999
--------------- -------------- ---------------
Statutory Federal income tax rate 34% 34% 34%
Income tax expense computed at the statutory
Federal rate $ 1,649,458 $ 2,968,195 $3,840,331
Income tax expense based on the statutory
Federal rate for subsidiaries which were
Sub-S prior to their combination with the
Company (343,658) (568,893) -
State income tax expense, net of Federal tax 48,641 250,692 528,447
Non-taxable interest income (33,023) (35,350) (16,137)
Non-deductible expenses 38,582 76,246 225,984
=============== ============== ===============
Provision for income taxes $ 1,360,000 $2,690,890 $4,578,625
=============== ============== ===============
Effective tax rate 28.0% 30.8% 40.54%
=============== ============== ===============
F-16
The components of the provision for income taxes are as follows:
For the Year Ended March 31,
1997 1998 1999
--------------- -------------- ---------------
(In Thousands)
Current:
Federal $ 1,152 $ 1,669 $2,519
State 87 125 255
--------------- -------------- ---------------
1,239 1,794 2,774
--------------- -------------- ---------------
Deferred:
Federal 113 802 $1,259
State 8 95 546
--------------- -------------- ---------------
121 897 1,805
--------------- -------------- ---------------
$ 1,360 $ 2,691 $4,579
=============== ============== ===============
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
F-17
For the Year Ended March 31,
1997 1998 1999
-------------- -------------- ---------
(In Thousands)
Alternative minimum tax $ 369 $ 18 $(1,207)
Lease revenue recognition (248) 797 2,740
Other - 82 272
============== ============== =========
$ 121 $ 897 $ 1,805
============== ============== =========
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 tax liability consists of the following:
As of March 31,
1998 1999
------------------ ------------------
(In Thousands)
Alternative minimum tax $ 232 $ 1,539
Lease revenue recognition (1,637) (4,720)
Other (82) (111)
================== ==================
$ (1,487) $(3,292)
================== ==================
During the year ended March 31, 1998, the Company entered into business
combinations with companies which, prior to their combination with the Company,
had elected to be treated as Sub-chapter "S" ("Sub-S") corporations. As Sub-S
corporations, taxable income and losses were passed through the corporate entity
to the individual shareholders. These business combinations were accounted for
using the pooling of interests method. Therefore, the consolidated financial
statements do not reflect a provision for income taxes relating to the pooled
companies for the periods prior to their combination with the Company.
In accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," the following pro forma income tax information is
presented as if the pooled companies had been subject to federal income taxes
throughout the periods presented.
For the Year Ended March 31,
1997 1998 1999
-------------- -------------- --------
Net earnings before pro
forma adjustment adjustment $3,491,346 $ 6,039,094 $6,716,467
Additional provision for
income taxes (357,910) (613,261) -
============== ============== ========
Pro forma net earnings $3,133,436 $ 5,425,833 $6,716,467
============== ============== ========
F-18
9. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and nonrecourse notes payable
(Note 5) associated with its direct finance and operating lease activities from
payments made directly by customers to the third-party lenders amounting to
$4,214,444, $5,258,955 and $10,733,555 for the years ended March 31, 1997, 1998,
and 1999, 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 $18,057,569, $1,057,389 and $10,231,793 for the
years ended March 31, 1997, 1998, and 1999, respectively.
10. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with contributory 401(k) profit sharing
plans. To be eligible to participate in the plan, employees must be at least 21
years of age and have completed a minimum service requirement. Full vesting in
the plans vary from after the fourth to the sixth consecutive year of plan
participation. Employer contributions percentages are determined by the Company
and are discretionary each year. The Company's expense for the plans was
$56,291, $80,291 and $104,617 for the years ended March 31, 1997, 1998 and 1999,
respectively.
The Company has established a stock incentive program (the "Master Stock
Incentive Plan") to provide an opportunity for directors, executive officers,
independent contractors, key employees, and other employees of the Company to
participate in the ownership of the Company. The Master Stock Incentive Plan
provides for the award to eligible directors, employees, and independent
contractors of the Company, of a broad variety of stock-based compensation
alternatives under a series of component plans. These component plans include
tax advantaged incentive stock options for employees under the Incentive Stock
Option Plan, formula length of service based nonqualified options to nonemployee
directors under the Outside Director Stock Plan, nonqualified stock options
under the Nonqualified Stock Option Plan, a program for employee purchase of
Common Stock of the Company at 85% of fair market value under a tax advantaged
Employee Stock Purchase Plan approved by the Board of Directors and effective
September 16, 1998, as well as other restrictive stock and performance based
stock awards and programs which may be established by the Board of Directors.
The aggregate number of shares reserved for grant under all plans which are a
part of the Master Stock Incentive Plan represent a floating number equal to 20%
of the issued and outstanding stock of the Company (after giving effect to pro
forma assumed exercise of all outstanding options and purchase rights). The
number that may be subject to options granted under the Incentive Stock Option
Plan is also further capped at a maximum of 4,000,000 shares to comply with IRS
requirements for a specified maximum. As of March 31, 1999 a total of 1,650,100
shares of common stock have been reserved for issuance upon exercise of options
granted under the Plan, which encompasses the following component plans:
a) the Incentive Stock Option Plan ("ISO Plan"), under which 265,900
options are outstanding or have been exercised as of March 31, 1999;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under which
265,000 options are outstanding as of March 31, 1999;
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 63,507 are outstanding as of March 31, 1999;
F-19
d) the Employee Stock Purchase Plan ("ESPP") under which 185,500 shares
have been issued as of March 31, 1999.
The exercise price of options granted under the Master Stock Incentive Plan is
equivalent to the fair market value of the Company's stock on the date of grant,
or, in the case of the ESPP, not less than 85% of the lowest fair market value
of the Company's stock during the purchase period, which is generally six
months. Options granted under the plan have various vesting schedules with
vesting periods ranging from one to five years. The weighted average fair value
of options granted during the years ended March 31, 1997, 1998 and 1999 was
$5.10, $4.84 and $3.69 per share, respectively.
A summary of stock option activity during the three years ended March 31, 1999
is as follows:
Weighted
Number of Exercise Price Average Exercise
Shares Range Price
------ ----- -----
Outstanding, April 1, 1996 - - -
Options granted 353,800 $6.40-$10.75 $8.20
Options exercised - - -
Options forfeited - - -
-------
Outstanding, March 31, 1997 353,800
=======
Exercisable, March 31, 1997 66,250
======
Outstanding, April 1, 1997 353,800 - -
Options granted 277,200 $10.75-$13.25 $11.94
Options exercised (200) $8.75 $8.75
Options forfeited (18,900) $8.75-$13.00 $11.18
========
Outstanding, March 31, 1998 611,900
========
Exercisable, March 31, 1998 199,540
========
Outstanding, April 1, 1998 611,900 - -
Options granted 275,507 $7.25-$13.63 $9.89
Options exercised (10,500) $8.75 $8.75
Options forfeited (97,000) $8.75-$13.50 $12.57
----------
Outstanding, March 31, 1999 779,907
==========
Exercisable, March 31, 1999 326,566
==========
F-20
Additional information regarding options outstanding as of March 31, 1999 is as
follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ----------------------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Number Contractual Life Exercise Price Number Exercisable Exercise Price
Outstanding
- ----------------------- --------------------- -------------------- --------------------- --------------------
779,907 8.0 years $9.53 326,566 $9.30
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, which have
been accounted for using the fair value method resulted in $113,982 in
compensation expense during the year ended March 31, 1998. 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 1998:
Year Ended March 31,
1997 1998 1999
---- ---- ----
Net earnings, as reported $3,491,346 $ 6,039,094 $ 6,716,467
Net earnings, pro forma 3,198,669 5,346,761 5,687,667
Basic earnings per share, as reported $ 0.67 $ 1.00 $ 0.99
Basic earnings per share, pro forma 0.62 0.89 0.84
Diluted earnings per share, as reported $ 0.66 $ 0.98 $ 0.98
Diluted earnings per share, pro forma 0.61 0.87 0.83
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:
F-21
For the Year Ended March 31,
1997 1998 1999
- --------------------------
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 44.00% 30.95% 37.02%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.81% 5.82% 5.46%
Options granted under the Nonqualified
Stock Option Plan:
Expected life of option 8 years 8 years 5 years
Expected stock price volatility 44.00% 30.95% 37.02%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.05% 5.62% -
Options granted under the Outside Director
Stock Option Plan:
Expected life of option - - 8 years
Expected stock price volatility - - 37.02%
Expected dividend yield - - 0%
Risk-free interest rate - - 4.95%
Options granted under the Employee Stock
Purchase Plan:
Expected life of option - - 5 years
Expected stock price volatility - - 37.02%
Expected dividend yield - - 0%
Risk-free interest rate - - 4.74%
11. 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.
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.
F-22
- 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:
As of March 31, 1998 As of March 31, 1999
Carrying Fair Value Carrying Fair Value
Amount Amount
------------- ------------- -------------- -------------
(In Thousands)
Assets:
Cash and cash equivalents $18,684 $18,684 $7,892 $7,892
Liabilities:
Nonrecourse notes payable 13,028 12,973 52,429 55,341
Recourse notes payable 13,037 13,033 19,081 19,092
12. BUSINESS COMBINATIONS
During the year ended March 31, 1998, the Company acquired Compuventures of Pitt
County, Inc. ("Compuventures") and Educational Computer Concepts, Inc. ("ECCI"),
both value added resellers of personal computers and related network equipment
and software products. These business combinations have been accounted for as
pooling of interests, and accordingly, the consolidated financial statements for
periods prior to the combinations have been restated to include the accounts and
results of operations of the pooled companies. The results of operations
previously reported by the Company and the pooled companies and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
For the Year Ended March 31,
1997 1998
--------------- -------------
(In Thousands)
Revenues:
MLC Holdings, Inc. $ 55,711 $ 77,178
Pooled companies 30,502 41,264
=============== =============
Combined $ 86,213 $ 118,442
=============== =============
Net earnings:
MLC Holdings, Inc. $ 2,481 $ 3,785
Pooled companies 1,010 2,254
=============== =============
Combined $ 3,491 $ 6,039
=============== =============
F-23
During the year ended March 31, 1999, the Company acquired PC Plus, Inc., a
value-added reseller of personal computers, related network equipment and
software products and provider of various support services. This business
combination has been accounted for as a purchase.
The following pro forma financial information presents the combined results of
operations including PC Plus, Inc. as if the acquisition had occurred as of the
beginning of the twelve months ended March 31, 1998 and 1999, after giving
effect to certain adjustments, including amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and PC Plus, Inc. constituted a single
entity during such periods.
Year Ended March 31,
( In Thousands)
1998 1999
---------------- -------------
Total Revenues $156,321 $205,944
Net Earnings 6,885 6,956
Net Earnings per Common Share - Basic 1.09 1.03
Net Earnings per Common Share - Diluted 1.07 1.02
13. PRIVATE PLACEMENTS OF COMMON STOCK
On July 1, 1997, the Company sold 161,329 shares of common stock to a single
investor for a price of $9.00 per share.
On October 23, 1998, the Company sold 1,111,111 shares of common stock to TC
Leasing, LLC, a Delaware limited liability company, for a price of $9.00 per
share. In addition, the Company granted to TC Leasing, LLC, a stock purchase
warrant granting the right to purchase an additional 1,090,909 shares of common
stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant is exercisable through December 31, 2001, unless
extended pursuant to the terms of the warrant. Pursuant to the terms of this
private placement, the Company agreed to expand its' Board of Directors to six
persons, four of whom shall be appointed, in whole or in part, by TC Leasing,
LLC. Additionally, the terms of the private placement restrict the Company's
ability to pay dividends until October 23, 1999 without the consent of TC
Leasing, LLC
14. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its lease
financing and value-added re-seller business units. The lease financing business
unit offers lease financing solutions to corporations and governmental entities
nationwide. The value-added re-seller business unit sells information technology
equipment and related services primarily to corporate customers in the eastern
United States. The Company's management evaluates segment performance on the
basis of segment earnings.
The accounting policies of the segments are the same as those described in Note
1, "Organization and Summary of Significant Accounting Policies." Corporate
overhead expenses are allocated on the basis of revenue volume, estimates of
actual time spent by corporate staff, and asset utilization, depending on the
type of expense.
Lease Value-added
Financing Re-selling Total
------------- ----------------- ----------------
(In Thousands)
Year ended and as of March 31, 1997
Revenues $ 56,147 $ 30,066 $ 86,213
Interest expense 1,581 68 1,649
Earnings before income taxes 3,841 1,010 4,851
Assets 42,317 6,707 49,024
Year ended and as of March 31, 1998
Revenues 77,178 41,264 118,442
F-24
Interest expense 1,732 105 1,837
Earnings before income taxes 6,143 2,587 8,730
Assets 66,960 16,236 83,196
Year ended and as of March 31, 1999
Revenues 110,362 83,608 193,970
Interest expense 3,367 234 3,601
Earnings before income taxes 8,649 2,646 11,295
Assets 129,425 24,934 154,359
15. QUARTERLY DATA - UNAUDITED
Condensed quarterly financial information is as follows (amounts in thousands,
except per share amounts). Adjustments reflect the results of operations of
business combinations accounted for under the pooling of interests method and
the reclassification of certain prior period amounts to conform with current
period presentation.
F-25
MLC Holdings, Inc. and Subsidiaries
Condensed Quarterly
Information
(In Thousands)
First Quarter Second Quarter
Previously Adjusted Previously Adjusted
Reported Adjustment Amount Reported Adjustments Amount
--------------------------------- ------------------------------
Year Ended March 31, 1998
Sales $ 35,173 $ - $ 35,273 $ 22,407 $ - $ 22,407
Total revenues 40,146 - 40,146 26,869 - 26,869
Cost of sales 31,892 - 31,892 19,773 - 19,773
Total costs and expenses 37,499 - 37,499 25,335 - 25,335
Earnings before provision
for income taxes 2,647 - 2,647 1,534 - 1,534
Provision for income taxes 460 - 460 412 - 412
Net earnings 2,187 - 2,187 1,122 - 1,122
============================== ==============================
Net earnings per common
share-Basic $ 0.37 $ 0.37 $ 0.19 $ 0.19
========== ============ =========== ============
Year Ended March 31, 1999
Sales $ 35,185 - $ 35,185 $ 31,479 - $ 31,479
Total Revenues 41,583 - 41,583 38,001 - 38,001
Cost of Sales 33,097 - 33,097 28,065 - 28,065
Total Costs and Expenses 39,143 - 39,143 35,268 - 35,268
Earnings before provision
for income taxes 2,440 - 2,440 2,733 - 2,733
Provision for income taxes 976 - 976 1,093 - 1,093
Earnings before
extraordinary item 1,464 - 1,464 1,640 - 1,640
Net earnings 1,464 - 1,464 1,640 - 1,640
============================== ==============================
Net earnings per common
share $ 0.24 $ 0.24 $ 0.26 $ 0.26
========== ============ =========== ============
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustment Amount Reported Adjustmets Amount
------------------------------ ------------------------------
Year Ended March 31, 1998
Sales $ 18,097 - $ 18,097 $ 22,004 - $ 22,004
Total revenues 23,276 - 23,276 28,151 - 28,151
Cost of sales 15,625 - 15,625 19,802 - 19,802
Total costs and expenses 21,148 - 21,148 25,730 - 25,730
Earnings before provision
for income taxes 2,128 - 2,128 2,421 - 2,421
Provision for income taxes 851 - 851 968 - 968
Earnings before
extraordinary item 1,277 - 1,277 - - -
Extraordinary gain - - - - - -
Net earnings 1,277 - 1,277 1,453 - 1,453
============================== ==============================
Net earnings per common
share-Basic $ 0.21 $ 0.21 $ 0.24 $ 0.24
========== ============ =========== ============
Year Ended March 31, 1999
Sales $ 63,689 - $ 63,689 $ 37,542 - $ 37,542
Total Revenues 69,947 - 69,947 44,439 - 44,439
Cost of Sales 59,625 - 59,625 33,849 - 33,849
Total Costs and Expenses 67,117 - 67,117 41,147 - 41,147
Earnings before provision
for income taxes 2,830 - 2,830 3,292 - 3,292
Provision for income taxes 1,132 - 1,132 1,378 - 1,378
Earnings before
extraordinary item 1,698 - 1,698 1,914 - 1,914
Net earnings 1,698 - 1,698 1,914 - 1,914
========== ============ =========== ============
Net earnings per common share $ 0.24 $ 0.24 $ 0.25 $ 0.25
============================== ==============================
F-26
SCHEDULE II
MLC HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 1997, 1998 and 1999
(In Thousands)
Column C - Additions
---------------------------
Column B (1) Charged (2) Charged Column E
Balance at to costs to other Balance at
beginning and expenses accounts Column D end of period
Column A - Description of period Deductions
- --------------------------------------- ------------- ------------- ------------- ------------- --------------
1999 Allowance for doubtful accounts
and credit losses $ 142 $ 811 $ 75 $ 300 $ 728
============= ============= ============= ============= ==============
1998 Allowance for doubtful accounts
and credit losses $ 143 $ 56 $ - $ 57 $ 142
============= ============= ============= ============= ==============
1997 Allowance for doubtful accounts
and credit losses $ 8 $ 144 $ - $ 9 $ 143
============= ============= ============= ============= ==============
S-1