Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K Re: Mlc Holdings, Inc. 58 295K
2: EX-23.1 Independent Auditors' Consent 1 5K
3: EX-23.2 Independent Auditors' Consent 1 5K
4: EX-27 Financial Data Schedule 1 6K
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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number: 0-28926
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MLC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 54-1817218
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 SUNSET HILLS RD., SUITE 110, RESTON, VA 20190-5321
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(Address, including zip code, of principal offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 834-5710
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
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, 1998 was $28,294,718.
The number of shares of Common Stock outstanding as of June 17, 1998,
was 6,082,005.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the following parts
of this Form 10-K:
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Document Part
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Portions of the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end. Part III
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PART I
ITEM 1. BUSINESS
THE COMPANY
MLC Holdings, Inc. ("MLC Holdings" or the "Company") was formed in 1996 and is a
Delaware corporation which, pursuant to a reorganization effected September 1,
1996, serves as the holding company for MLC Group, Inc. ("MLC Group") and other
subsidiaries. All references to the "Company" shall be deemed to include and
refer to MLC Holdings and its subsidiaries, including MLC Group. The Company
engages in no other business other than serving as the parent holding company
for MLC Group, MLC Network Solutions, Inc., ("MLC Network Solutions"), MLC
Federal, Inc., MLC Capital, Inc., MLC Integrated, Inc. ("MLCI", formerly known
as Educational Computer Concepts, Inc. or "ECCI") and MLC Leasing, S.A. de C.V.,
(a wholly owned subsidiary of MLC Group and MLC Network Solutions, based in
Mexico City, Mexico). MLC/GATX Leasing Corporation is a 50% owned investment of
MLC Group. MLC Group has a 5% membership interest in MLC/CLC LLC and serves as
its manager. Both MLC Capital, Inc. and MLC Leasing, S.A. de C.V. did not
conduct any business during the year ended March 31, 1998.
On July 24, 1997, the Company, through a new wholly owned subsidiary, MLC
Network Solutions which was incorporated on July 14, 1997, entered into an
Agreement and Plan of Merger with Compuventures. Compuventures was merged into
MLC Network Solutions effective July 24, 1997. The outstanding shares of
Compuventures Common Stock were converted into 260,978 shares, valued at
$3,384,564, of MLC Holdings Common Stock. Compuventures is a value-added
reseller of PC's and related network equipment and software products and
provides various support services to its customers from facilities located in
Greenville, Raleigh and Wilmington, North Carolina. The merger was accounted for
as a pooling of interests.
MLCI was acquired on September 29, 1997 through the merger of MLC Acquisitions
Corporation, a newly formed corporation wholly owned by MLC Holdings, which was
incorporated on September 2, 1997, into ECCI with ECCI being the surviving
entity and being renamed MLC Integrated, Inc. MLCI currently conducts a network
services and software and PC reselling business from its sole location in
Pottstown, Pennsylvania. MLC Holdings effectively exchanged 498,998 shares of
its Common Stock, valued at $7,092,000, for all of the outstanding stock of
ECCI. This transaction was also accounted for as a pooling of interests.
MLC Federal, Inc. was incorporated on September 17, 1997 to handle business
servicing the Federal government marketplace.
On October 22, 1997, the Company formed MLC Leasing, S.A. de C.V., a wholly
owned subsidiary of MLC Group and MLC Network Solutions based in Mexico City,
Mexico. To date, no business has been conducted through the subsidiary.
The Company's principal executive office is located at 11150 Sunset Hills Road,
Suite 110, Reston, Virginia 20190-5321 and its telephone number at such address
is (703) 834-5710. The Company's 179 full time and 11 part time employees
operate through fourteen offices, including
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its principal executive offices and regional sales offices which are located in
the following metropolitan and suburban areas: Pottstown and West Chester,
Pennsylvania (both are Philadelphia suburban locations); Dallas and Austin,
Texas; Sacramento and San Diego California; Greenville, Wilmington and Raleigh
(2 offices), North Carolina; Richmond, Virginia; Pittsburgh, Pennsylvania; and
Atlanta, Georgia. The Company also has an arrangement with an independent
contractor who works primarily for the Company from Columbus, Ohio.
GENERAL
The Company specializes in leasing and financing information technology assets,
providing network services, software and PCs, providing system design and
upgrades, hardware maintenance, on-site technical support, relocation services
and providing asset management services to commercial customers with annual
sales revenue of between $10 million and $500 million ("middle market
customers"), select Fortune 1000 firms, federal, state and local governments and
vendors. The assets leased or sold by the Company include personal computers and
peripherals, client server systems, networks, mid-range and mainframe computer
equipment, telecommunications equipment and software. The Company also leases
and finances equipment, software and services through relationships with
vendors, equipment manufacturers and systems integrators. MLC Network Solutions
and MLCI were acquired to provide a wide range of information technology ("IT")
services and solutions to middle market organizations. The Company offers its
clients a single source for a comprehensive range of services, including
procurement of software, PC and communication equipment, desktop systems
maintenance and support, strategic planning and management consulting,
integration and installation of IT systems, training and continuing education.
The Company will focus on marketing its comprehensive IT offerings to middle
market organizations, which typically spend from $250 thousand to $25 million
annually on their IT needs. The IT service industry has evolved into a highly
fragmented environment with a small number of large, national service providers
and a large number of small- and medium-sized service providers, usually with a
regional focus. Large IT service providers typically address the IT needs of
large organizations with substantial IT requirements for a wide range of
services, whereas smaller IT service firms provide specialized services of
limited scope. Consequently, middle market organizations rely on multiple, often
specialized, smaller IT service providers to help implement and manage their
systems. The Company believes 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 intends to leverage its high-level services to foster long-term
relationships with clients and to implement technology strategies in order to
achieve the clients' desired IT solutions. The Company also believes it can
increase its revenues from existing clients by cross-selling its services.
Another key element of the Company's strategy is the expansion of service
offerings and the addition of new businesses in order to offer new and existing
clients access to a more complete range of services. The Company also will
operate with a decentralized management structure to provide focus on superior
client service and foster a motivating environment for its various subsidiaries,
and will seek to acquire additional companies to strengthen its core
competencies, to offer complementary services and to facilitate its expansion
into new regions.
The Company seeks to differentiate itself from its competitors by offering its
customers asset management services and asset trading capabilities, which may be
customized to meet the client's desires. The Company believes that its ability
and willingness to personalize its relationships and customize its services to
meet the specific financial and managerial needs of
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each customer enable it to compete effectively against larger equipment leasing
and finance companies. The Company further believes that, by providing asset
management services and asset trading capabilities as well as other services to
its customers, it has a competitive advantage over smaller competitors which
lack the resources and expertise to provide such services.
The Company's asset trading activity involves the purchase and resale of
previously owned information technology equipment. By offering asset trading
capabilities, the Company is able to develop and maintain knowledge of current
market trends and values which enables the Company to predict more accurately
residual values when pricing leasing transactions, dispose efficiently of
off-lease equipment and offer customers a way to dispose of or acquire
previously owned information technology equipment. Asset management services,
which are offered primarily to enhance customer service, is a general term used
to describe the provision of asset inventory and tracking services, software and
record keeping programs to customers. The asset management services provided by
the Company allow the customers to better track their information technology
assets. The asset management services include a software system maintained by
the Company which generates reports and allows customers to dial up and receive
information on a real time basis, thus better utilizing their assets.
The Company, for the fiscal year ended March 31, 1998, had two significant
relationships. The loss of either of these two relationships would have a
material effect to the future results of the organization. The first is a lease
customer, Sprint Communications Company and Affiliates, which represented
approximately 37% of the lease volume generated for the year ended March 31,
1998. This represents the largest single lessee of the Company. The second
significant relationship is with MLC/CLC, LLC, of which Cargill Leasing
Corporation owns 95% and the Company owns the remaining 5%. The Company sold
approximately $44.8 million of commercial lease volume to the equity joint
venture entity.
The Company's management team is led by Phillip G. Norton, Chairman of the
Board, President, and Chief Executive Officer, Bruce M. Bowen, founder of the
Company, a Director and Executive Vice President, Thomas B. Howard, Jr., Vice
President and Chief Operating Officer, Steven J. Mencarini, Senior Vice
President and Chief Financial Officer, and Kleyton L. Parkhurst, Secretary and
Treasurer, each of whom has extensive experience in the leasing and finance
industries.
INDUSTRY OVERVIEW
The Company believes that its market is undergoing rapid changes and expansion
which present significant opportunities for growth. The primary structural
changes in the market are the result of customer end-users, technology and
vendor distribution and marketing trends.
Customer End-Users -- Commercial. The equipment leasing industry in the United
States is a significant factor in financing capital expenditures of businesses.
According to research by the Equipment Leasing Association of America ("ELA"),
using United States Department of Commerce data, approximately $180 billion of
the $593 billion of business investment in equipment in 1997 was acquired
through leasing. The ELA estimates that 80% of all U.S. businesses use leasing
or financing to acquire capital assets.
Leasing enables a company to obtain the equipment it needs, while preserving
cash flow and receiving favorable accounting and tax treatment. Leasing,
particularly through operating leases,
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also provides a lessee with greater flexibility than ownership in the event it
outgrows the equipment or requires upgrades of its equipment to higher
performance levels. As more customers become aware of the economic benefits of
leasing, they often turn to independent leasing companies. Independent lessors,
such as the Company, offer tailored financing and can deliver financing for
mixed systems from different vendors.
Management believes the fastest growing market segment of the leasing industry
is information technology leasing. These assets include computers,
telecommunication equipment, software, integration services and client server
equipment.
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. An additional obstacle facing state and local
governments in the upcoming years is the shift in program responsibility from
the federal government to the state and local governments. The Company believes
that this shift will require more information technology investment by state and
local governments.
Technology Trends. A major trend toward using client server networks in
corporate applications began in the late 1980s. This trend was driven by the
proliferation of personal computers as personal computers changed from
stand-alone units which accommodated one or two specialized functions to a
multi-application unit and the development of networking applications that
distribute computer power to the desktop. Client server computing provides an
alternative to the highly centralized, mainframe and mini-computer systems that
connect multiple terminals to a central processor and which were the mainstay of
the computing world until this decade. The transition from the mainframe to the
personal computer has enabled smaller corporations to utilize more extensively
information technology and telecommunications equipment in the operation of
their businesses. In addition, as technology increasingly changes, companies are
more frequently acquiring and upgrading information technology and
telecommunications equipment.
Vendor Distribution and Marketing. As hardware manufacturers face increasing
competition, many manufacturers have sought greater control over their installed
equipment base, and have entered into joint ventures with third-party financing
sources to provide captive financing services. Under these arrangements, the
third-party financing source (such as the Company) provide various levels of
origination, administrative, servicing, and remarketing services, to complement
or to replace a vendor's sales, marketing, administrative, or financing
capabilities. The Company believes it has developed a vendor model which
satisfies the new requirements of equipment vendors while providing an
opportunity to earn a satisfactory return on the vendor's business. In addition,
the Company can originate and control its own portfolio of non-vendor equipment
leases using the vendor-program origination infrastructure, and such portfolio
will remain the property of the Company and outside the scope of the vendor
model.
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STRATEGY
Based on industry trends and the Company's historical results, the Company will
continue to implement and improve upon a three-pronged strategy designed to
increase its customer base by: (i) providing continuing superior customer
service while marketing to middle market and select Fortune 1000 end-users of
information technology equipment and assets; (ii) purchasing companies or assets
of companies in key regional markets with pre-existing customer bases; and (iii)
further developing vendor leasing programs. Through its marketing strategy, the
Company emphasizes cross selling to the different groups of clients and attempts
to reach the maximum number of potential end-users.
While the Company is pursuing and intends to continue to pursue the forgoing
strategies, there can be no assurance that the Company will be able to
successfully implement such strategies. The Company's ability to implement these
strategies may be limited by a number of factors.
End-User Marketing Focus. The Company's target customers include middle market
and select Fortune 1000 firms which are significant users of information
technology and telecommunications equipment and other assets, which also may
need other services provided by the Company, such as asset management. By
targeting a potential customer base that is broader than just the Fortune 1000
companies, the Company believes that there is less competition from the larger
equipment finance companies, as their marketing forces are typically more
focused on Fortune 1000 customers. The ability to identify and establish
customer relationships with such firms will be critical to the Company's
strategy. There can be no assurance that the Company will be able to
successfully locate such customers.
Acquisition of Related Companies. The Company believes that significant
opportunities to expand its target customer base in key regional markets can be
realized through the acquisition of strategically selected companies in related
lines of business. The Company's acquisition strategy will focus on acquiring
new customers in the top 50 regional markets in the country. The Company
believes that it can successfully acquire companies and maintain and expand
customer relationships by providing acquired companies with a lower cost of
capital, additional cross-selling opportunities and financial structuring
expertise. In addition, the Company can provide the owners of privately-held
companies with an opportunity to realize their company's value. The Company
believes that decentralized marketing and centralized operations, along with
other operating synergies, will make it successful in lowering the operational
costs while expanding the customer base of each firm it acquires. The ability to
identify and acquire such firms on prices and terms that are attractive to the
Company and which avoid dilution of earnings for existing stockholders is
crucial to the successful implementation of this strategy. In addition, after
consummating any acquisition, the Company must be able to successfully integrate
the acquired business with the Company to achieve the cost savings and marketing
benefits sought by the Company. There is, however, no assurance that the Company
will be able to successfully acquire such companies, or, if acquired,
successfully implement the foregoing strategy.
Vendor Focus. Over the last several years, major manufacturers of information
technology and telecommunications equipment have moved away from providing
financing to end-user customers through captive finance organizations and have
increasingly joint ventured their equipment financing function to independent
leasing companies and financing companies. From the perspective of the large
end-user of information technology and telecommunications equipment, outsourcing
equipment financing can simplify and centralize the financing of
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multiple products from different vendors, particularly as most captive finance
organizations will service only their manufacturer's products. Through its
participation in vendor marketing programs, the Company leverages its marketing
efforts by utilizing the sales force of the vendor. The vendor's sales
organization provides the Company access to an extensive and diversified
end-user customer base while saving the Company the cost of establishing these
independent customer relationships. The Company uses its relationships with
these vendors and end-users to create new customer relationships to which other
products and services of the Company can be marketed directly. The ability to
successfully establish such vendor and end-user relationships is essential to
the successful implementation of this strategy.
LEASING, FINANCING AND SALES ACTIVITIES
The Company is in the business of selling, leasing and financing equipment and
assets. Although the majority of the transactions are leases, the use of the
phrase "lease," "leases," "leasing" or "financing" may refer to transactions
involving: equipment leases; conditional sales contracts; installments purchase
contracts; software and services contracts; municipal and federal government
contracts; notes; operating leases; customer agreements; direct financial
leases; receivables; factoring; tax exempt leases; true leases; leases with
option to purchase; leases to purchase; vendor agreements; sales-type leases;
leveraged leases; computer leases; capital leases; private label agreements;
financing agreements; or energy management contracts.
Business Development. The Company conducts its business development efforts
through its marketing staff of both employees and independent representatives
which includes 57 individuals located in thirteen regional offices and the
Company's principal executive office. The Company believes that one of its major
strengths is its professional and dedicated sales organization and back office
organization which gives it the ability to customize its programs to meet its
customers' specific objectives.
Products and Services. The information technology and communications equipment
that the Company presently purchases for lease or re-sale includes: (i) personal
computers; (ii) laser printers; (iii) telecommunication controllers; (iv) tape
and disk products; (v) file servers; (vi) mid-range computers; and (vii)
mainframe computers. The software and services financed by the Company include
off-the-shelf products and applications, database products, utilities and
specific application products.
The services and support provided by the Company include: (i) custom lease and
financing payment streams and structures; (ii) asset sales and trade-ins; (iii)
upgrade and add-on leasing and financing; (iv) renewal and re-marketing; (v)
personalized invoicing; (vi) network, acquisition and installation planning and
(vii) asset management and reporting.
Lease Terms and Conditions. Substantially all of the Company's lease
transactions are net leases with a specified non-cancelable lease term. These
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
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revenues by: (i) re-marketing the equipment in place either by (a) re-leasing it
to the initial lessee, (b) renting on a month-to-month basis or (c) selling it
to the initial lessee; (ii) selling or leasing the equipment to a different
customer; or (iii) selling the equipment to equipment brokers or dealers. The
results of the re-marketing process significantly impact the degree of
profitability of a lease transaction. Procedures and obligations of the Company
and its vendors with respect to re-marketing are defined through the Company's
equipment purchase and re-marketing agreements with vendors. To assist the
Company in its re-marketing efforts, the Company sometimes provides incentives
to vendors and their sales personnel through payment of a re-marketing fee and a
sharing of residual profits where appropriate.
The re-marketing process is intended to enable the Company to recover its equity
investment in the re-marketed equipment (i.e., the purchase price of the
equipment, less the debt obtained to finance the purchase of such equipment) and
enables the Company to receive additional proceeds.
Numerous factors, many of which are beyond the control of the Company, may have
an impact on the Company's ability to re-lease or re-sell equipment on a timely
basis. Among the factors are general market conditions, regulatory changes,
variations in the supply or cost of comparable equipment and technological
improvements that lead to the risk of technological obsolescence. In particular,
the computer and telecommunications industries have been characterized by
significant and rapid technological advances. The equipment owned and leased by
the Company is subject to rapid technological obsolescence, which is typical of
information technology and telecommunications equipment. Furthermore, decreases
in the manufacturer's pricing for equipment may adversely affect the market
value of such equipment under lease. Changes in values or systems and components
may require the Company to liquidate its inventory of certain products at
significant markdowns and write down the residual value of its leased assets,
which may result in substantial losses. Further, the value of a particular used
piece of equipment may vary greatly depending upon its condition and the degree
to which any custom configuration of the equipment must be altered before reuse.
At the inception of each lease, the Company has historically estimated a
residual value for the leased equipment based on the terms of the related lease
and which will permit the transaction to be financed or sold by means of
external, generally nonrecourse, sources. This estimate is approved by the
Company's investment committee, which acts by a signature process instead of
conducting formal meetings. A decrease in the market value of such equipment at
a rate greater than the rate expected by the Company, whether due to rapid
technological obsolescence or other factors, would adversely affect the residual
values of such equipment. 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 value for equipment will be realized.
PROCESS CONTROL AND ADMINISTRATIVE SYSTEMS
The Company has developed and maintains an administration system and controls,
featuring a series of checks and balances. The Company's system helps protect
against entering into lease transactions that may have undesirable economics or
unacceptable levels of risk, without impeding the flow of business activity or
preventing its sales organization from being creative and responsive to the
needs of vendors and customers.
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Due in part to the Company's strategy of focusing on a few equipment categories,
the Company generally has extensive product knowledge, historical re-marketing
information and experience. This knowledge assists the Company in setting and
adjusting, on a timely basis, the residual values it assumes on each lease
financing. Prior to the Company entering into any lease agreement, each
transaction is evaluated based on the Company's pre-determined standards in each
of the following areas:
Residual Value. Residual value guidelines for the equipment leased by the
Company are established and reviewed by the Company's investment committee,
which also approves the residual value recorded for specific transactions. The
investment committee typically acts by a signature process instead of conducting
formal meetings. The investment committee also must approve the pricing,
including residual values, for all transactions involving $100,000 or more in
product value. The investment committee is composed of the Chief Executive
Officer, the Chief Financial Officer, the Chief Operating Officer, and the
Treasurer of the Company, and each person has various levels of signing and
co-signing authorities.
Structure Review. Every transaction is reviewed by the Director of Contracts,
and if necessary, one or more of the following persons: the Chief Operating
Officer, the Chief Executive Officer, the Executive Vice President, and/or the
Treasurer. The reviews are made to ensure that the transaction meets the minimum
profit expectations of the Company and that the risks associated with any
unusual aspects of the lease have been determined and factored into the economic
analysis.
Documentation Review. Once the Company commits to a lease transaction, its
contract administrators initiate a process of systematically preparing and
gathering relevant lease information and lease documentation. The contract
administrators are also responsible for monitoring the documentation through the
Company's home office documentation and review process. Every transaction into
which the Company enters is reviewed by the Director of Contracts of the Company
and, if necessary, the Company's outside attorneys to identify any proposed
lease modifications or other contractual provisions that may introduce risks in
a transaction which the Company has not anticipated.
Credit Review. Every transaction into which the Company enters is reviewed by
the Company's Senior Credit Analyst, Treasurer and Chief Operating Officer of
the Company to determine whether the lease payment stream can be financed on a
nonrecourse basis, or must be financed through partial or total recourse
borrowing, and that the financial condition of the lessee meets the Company's
credit standards.
FINANCING
The business in which the Company is engaged is a capital intensive business.
The Company's business involves both the leasing and the financing of assets.
The leasing business is characterized by ownership of the assets residing with
the Company or its assigns. The financing business is characterized by the
beneficial ownership of assets residing with the asset user or customer. Several
different types of financing, each of which is described below, are important to
the conduct of the Company's leasing and financing business.
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The typical lease transaction requires both nonrecourse debt and an equity
investment by the Company at the time the equipment is purchased. The typical
financing transaction is dependent upon the nonrecourse financing described
below. The Company's equity investment in the typical lease transaction
generally ranges between 5% and 20% of the equipment cost (but sometimes ranges
as high as 35%). The balance of the equipment cost, or the nonrecourse debt
portion, is typically financed with a lender on a nonrecourse basis to the
Company. The Company's equity investment must come from: (i) internally
generated funds originated by proceeds from sale of securities or retained
earnings (ii); equity investments from third parties (MLC/CLC LLC); or (iii)
recourse borrowings. Accordingly, the Company's ability to successfully execute
its business strategy and to sustain its growth is dependent, in part, on its
ability to obtain each of the foregoing types of financing for both senior debt
and equity investment.
Information relating to the sources of each of such sources of financing for
equipment acquisitions are as follows:
Nonrecourse Financing. The credit standing of the Company's customers must be of
such a quality as to allow the Company to finance most of its leasing or
financing transactions on a nonrecourse basis. Under a nonrecourse loan, the
Company borrows an amount equal to the committed lease payments under the
financed lease, discounted at a fixed interest rate. The lender is entitled to
receive the payments under the financed lease in repayment of the loan, and
takes a security interest in the related equipment but has no recourse against
the Company except for the specific items financed under each agreement. The
Company retains ownership of such equipment, subject to the lender's security
interest. The Company is not liable for the repayment of nonrecourse loans
unless the Company breaches certain limited representations and warranties in
the loan agreements. The lender assumes the credit risk of each such lease, and
its only recourse, upon a default under a lease, is against the lessee and the
equipment which is being leased thereunder.
Interest rates under this type of financing are negotiated on a
transaction-by-transaction basis and reflect the financial condition of the
lessee, the term of the lease and the amount of the loan. 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 Company after December 31, 1996 meet
the criteria for surrender of control set forth by SFAS 125 and have therefore
been treated as sales for financial statement purposes and the net proceeds less
the book value of the asset surrendered are recorded net on the income
statement. As the new pronouncement was not retroactive to transactions prior to
this date, the current balance of outstanding nonrecourse borrowings represent
transactions that did not qualify for this accounting treatment. As of March 31,
1998, the Company had aggregate outstanding nonrecourse borrowings of
approximately $13 million.
The Company's objective is to enter into leasing or financing transactions with
creditworthy customers whose credit standing will permit the Company to finance
such leases with banks or other financial institutions on a nonrecourse basis to
the Company. The Company's customers which do not have a credit rating of Baa or
better generally are creditworthy non-rated
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companies that may be publicly or privately owned. The Company has had success
in meeting this objective in the past, but there is no assurance that banks or
other financial institutions will be willing or able to continue to finance the
Company's lease transactions on a nonrecourse basis, that the Company will
continue to be able to attract customers that meet the credit standards for
nonrecourse financing required by the Company's financing sources or that those
standards will not change in the future.
The Company's personnel in charge of the financing function are responsible for
maintaining a diversified list of qualified nonrecourse debt sources so that the
financing of transactions is not impaired by a lack of competitively priced
nonrecourse debt. The Company receives nonrecourse financing from many different
sources, offering various terms and conditions. These debt sources include
regional commercial banks, money-center banks, finance companies, insurance
companies and financial intermediaries.
Government Financing. The Company also originates tax-exempt state and local
lease transactions in which the interest income is exempted from federal income
taxes, and to some degree, certain state income taxes. The Company assigns its
tax-exempt leases to institutional investors, banks and investment banks which
can utilize tax-free income, and has a number of such entities which regularly
purchase the transactions.
Leasing Assignment Financing. Access to nonrecourse financing is also important
to the Company's lease sales revenue and fee income. The Company enters into
many transactions involving government leases which it immediately assigns,
syndicates or sells, on a nonrecourse basis to third parties and books any gain
from the transaction as sales or fee income.
The Company may utilize the public debt securities market in the future to
provide a portion of the nonrecourse debt it requires. The Company believes that
its utilization of the public debt securities markets is likely to reduce the
Company's effective interest cost for its nonrecourse debt and to provide for a
more efficient financing arrangement, than is presently provided by its existing
financing arrangements, to fund its nonrecourse borrowing requirements. See
"Item 7, Management's Discussion and Analysis of Results of Operations,
Financial Condition, Liquidity and Capital Resources - Financial Condition,
Liquidity and Capital Resources."
Equity Joint Ventures. Through MLC/CLC LLC, the Company has a formal joint
venture arrangement with an institutional investor which provides the equity
investment financing for certain of the Company's transactions. Cargill Leasing
Corporation, an unaffiliated investor which owns 95% of MLC/CLC LLC, is a
subsidiary of Cargill, Incorporated, a privately held business in Minnetonka,
Minnesota. Cargill, Inc. has been reported by Forbes Magazine to be one of the
largest privately owned companies in the United States. Cargill Leasing
Corporation has been in the equipment leasing and financing business for over
ten years. As privately held companies, neither Cargill, Inc. or Cargill Leasing
Corporation makes financial information available to the public and neither
company issues an annual report to the general public. Cargill, Inc. has
released the following financial data for its fiscal year ended May, 1997 as
reported in Forbes Magazine issue of December, 1997: sales were $56 billion,
operating income was $3.2 billion and net income was $814 million. MLC/CLC LLC
provided approximately $44.8 million of the Company's leased equipment sales of
$50.4 million or 88.9% for the year ended March 31, 1998. For the year ended
March 31, 1997, out of leased equipment sales of $21.6 million, MLC/CLC LLC
represented $16.9 million or 78.2%. On June 4, 1998 Firstar Corporation and
Cargill, Incorporated, jointly announced that they had signed a definitive
agreement by which Firstar
12
Corporation will purchase 100 percent of the common stock of Cargill Leasing
Corporation. The transaction is expected to close in the third quarter of
calendar 1998, subject to review and approval by the Office of the Comptroller
of the Currency and the Federal Trade Commission. It is expected that Cargill
Leasing Corporation will have assets of approximately $625 million at the
closing. Firstar Corporation is a $20 billion bank holding company which is
publicly traded on the NYSE under the symbol "FSR". For the fiscal year 1998, of
the Company's total revenue, approximately 37.8% was attributable to sales of
lease transactions to MLC/CLC LLC as compared to the prior year when the sales
represented 19.6% of total revenue. Transactions involving the use or placement
of equity from this joint venture require the consent of the relevant joint
venture partner, and if financing from those sources were to be withheld or were
to become unavailable, it would limit the amount of equity available to the
Company and may have a material adverse effect upon the Company's business,
financial condition and results of operations. At this point in time, the
Company is unable to determine the effects of the planned acquisition of Cargill
Leasing by Firstar Corporation.
Equity Capital and Internal Financing. Occasionally the Company finances leases
and related equipment internally, rather than with financing provided by
lenders. These internal lease financings typically occur in cases where the
financed amounts, terms, collateral, or structures are not attractive to
lenders, or where the credit rating of the lessee is not acceptable to lenders.
The Company also temporarily finances selected leases internally, generally for
less than 90 days, until outside nonrecourse financing is obtained. The amount
of equity capital available is a major element in the amount of lease asset
portfolio of which the Company can retain ownership on its balance sheet. The
Company would prefer to expand its retained portfolio through generating the
necessary financial resources to support the required lease equity investment
that it currently obtains through the equity joint ventures. The additional
capital resources may be obtained through alternative recourse and nonrecourse
debt or a secondary stock and/or debt offering. The Company has no commitments
for such financing 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, trading
operation and to acquire equipment for leases and, to a lesser extent, the
Company uses recourse financing for long term financing of leases.
On June 5, 1997, the Company entered into a $15,000,000 committed recourse line
of credit with First Union National Bank, N.A., successor by merger on April 28,
1998 to CoreStates Bank, N.A. (the "First Union Facility"). The facility was
amended by Amendment No. 1, dated September 5, 1997, which increased the
commitment from $15,000,000 to $25,000,000, and increased the sublimit for
Eligible Leases with Investment Grade Leases to $15,000,000 from $10,000,000.
The facility was further amended by Amendment No. 2 dated December 19, 1997
which incorporated participation in the line by Riggs Bank, N.A. and Bank Leumi
USA each in the amount of $5,000,000, and extended the facility to December 19,
1998. The Company is currently in discussions with the bank to increase the line
to $35,000,000, raise the inventory sublimit to $5,000,000 from $1,000,000, and
extend the facility one year from the date of the amendment. Borrowings under
the First Union Facility bear interest at LIBOR + 110 basis points, or, at the
Company's option, Prime minus one percent. On June 10, 1997, the Company
terminated its previous recourse line of credit with First Union Bank of
Virginia, N.A. , repaid all amounts outstanding, and made its first borrowing
under the First Union Facility in the
13
amount of $7,500,000. The First Union Facility is made to MLC Group and
guaranteed by MLC Holdings. The First Union Facility is secured by certain of
the Company's assets such as chattel paper (including leases), receivables,
inventory, and equipment. The availability of the line is subject to a borrowing
base which consists of inventory, receivables, purchased assets, and leases. As
of March 31, 1998, the balance on the First Union Facility was $12,750,000.
There can be no assurance that the Company will be able to renew, extend or
replace this credit facility and a failure to renew, extend or replace the
facility would have a material adverse effect upon the Company's business,
financial condition and results of operations.
The Company's newly acquired subsidiaries, MLC Network Solutions (acquired July
24, 1997) and MLCI (acquired September 29, 1997), both have separate credit
sources to finance their working capital requirements for inventories and
accounts receivable, which the Company has guaranteed. 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 days is charged to the
supplier/distributor but not the reseller. These floor plan liabilities are
recorded under accounts payable as they are normally repaid within the 30 day
time frame as they represent an assigned accounts payable originally generated
with the supplier/distributor. If the 30 day obligation is not timely
liquidated, interest is then assessed at stated contractual rates. As of March
31, 1998 MLC Network Solutions has floor planning availability of $1,350,000
through Deutsche Financial, Inc. and $225,000 from IBM Credit Corporation. The
outstanding balances to these respective suppliers were $1,120,320 and $29,160
as of March 31, 1998. MLCI has floor planning availability of $1,500,000 from
FINOVA Capital Corporation, $750,000 through IBM Credit Corporation, and
$100,000 through Deutsche Financial, Inc. The outstanding balances to these
respective suppliers were $698,738, $104,011 and $0 as of March 31, 1998. MLCI
additionally has a line of credit in place, expiring on July 31, 1998, with PNC
Bank, N.A. to provide an asset based credit facility. The line has a maximum
credit limit of $2,500,000 and interest is based on the bank's prime rate. As of
March 31, 1998, there was no balance outstanding.
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 Operations, Financial Condition,
Liquidity and Capital Resources - Financial Condition, Liquidity and Capital
Resources."
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company finalized
and executed documents establishing a $10,000,000 credit facility agreement (the
"Heller Facility"), with Heller Financial, Inc. ("Heller"), a Delaware
corporation. Under the terms of the Heller Facility, a maximum amount of
$10,000,000 is available to the Company, provided, that each draw is subject to
the approval of Heller. The Heller Facility is evidenced by a Loan and Security
Agreement dated as of January 31, 1997 (the "Loan Agreement") and a First
Amendment to Loan and Security Agreement (the "Amendment") dated as of March 12,
1997 (although the Loan Agreement is dated effective January 31, 1997, all
documents were executed concurrently in March, 1997). On March 12, 1998, the
commitment of Heller to fund additional advances under the line was allowed by
the Company to expire, and the Company and Heller are currently negotiating the
terms of a revised Heller Facility, although there can be no assurance that the
Company will negotiate acceptable terms and conditions for further advances. 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
14
customers. As of March 31, 1998, the balance on this account was $1,205,528.
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 covenants binding on the Company and is a
limited recourse facility, secured by a first-priority lien in the contracts and
chattel paper relating to each advance, the equipment subject to such contracts,
a 10% cross-collateralized first loss guarantee, and all books, records and
proceeds pertaining thereto. The Heller Facility is made to MLC Group and
guaranteed by MLC Holdings. As compared to a committed line of credit, lending
under the Heller Facility is in Heller's sole discretion, and is further subject
to MLC Group's compliance with certain conditions and procedures.
DEFAULT AND LOSS EXPERIENCE
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. The Company currently has a
consolidated reserve for credit losses on leases and accounts receivable of
$142,097. The Company believes that its reserve for credit losses is adequate at
March 31, 1998.
COMPETITION
The Company believes it competes on the basis of price, responsiveness to
customer needs, flexibility in structuring lease transactions, relationships
with its vendors and knowledge of its vendors' products. The Company has found
it most effective to compete on the basis of providing a high level of customer
service and by structuring custom relationships with vendors and lease
transactions that meet the needs of its vendors and customers. Other important
elements that affect the Company's competitiveness are the high degree of
knowledge and competence of its key employees, specifically relating to
information technology and telecommunications equipment and operating lease
financing. The Company competes in the information technology and
telecommunications equipment leasing and financing market with bank-affiliated
lessors, captive lessors and other independent leasing or financing companies.
The Company's product and market focus often limits direct competition with many
of these types of companies. Bank affiliated lessors typically do not directly
compete in the operating lease segment of the leasing industry. Captive leasing
companies, such as IBM Credit Corporation, typically finance only their parent
Company's products. The Company competes directly with various independent
leasing companies, such as El Camino Resources, Ltd., Comdisco, Inc., and
Leasing Solutions, Inc. Many of the Company's competitors have substantially
greater resources and capital and longer operating histories. The Company faces
substantial competition in connection with the purchase, sale and lease of new
and used computer systems, computer peripheral equipment, upgrades and parts.
Among its 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 the Company and have established reputations for success
in the purchase, sale and lease of computer-related products. In addition, many
computer manufacturers may sell or lease directly to the Company's customers,
and the Company's continued ability to compete effectively may be affected by
the policies of such manufacturers. The Company also faces competition from
other financial services firms such as
15
investment banking firms which underwrite municipal bonds to finance large
municipal acquisitions, national finance companies which finance equipment in
the government and commercial sectors, banks which finance local customers and
also engage in lease transactions to obtain favorable tax benefits, as well as
other financial intermediaries similar to the Company which may focus
specifically on geography, asset-type or customer profiles. There can be no
assurance that the Company will be able to compete successfully or that it will
maintain profitability in the future.
EMPLOYEES
As of March 31, 1998, the Company had 179 full time employees and 11 part time
employees. The Company has assigned its employees to the following functional
areas, with the number of employees in each area indicated in parentheses:
administrative and operations (24); sales and marketing (57); asset management
(9); contracts (18); accounting (18); technical support (53); executive (5);
finance (3); and operations (3). No employees of the Company are represented by
a labor union. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company has fourteen leased office facilities with an aggregate of
approximately 40,255 square feet of office space under lease. The Company's four
largest offices are its principal executive office which is approximately 6,625
square feet at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 20190,
MLCI's sole location, a 16,200 square foot facility, located in Pottstown, PA,
and MLC Network Solutions's two main locations in Greenville and Wilmington, NC
which are 5,719 and 4,460 square feet respectively. The other regional offices
in Austin, TX, San Diego, CA, Dallas, TX; Sacramento, CA; Pittsburg and West
Chester, PA; Atlanta, GA; Richmond, VA; and Raleigh, NC comprise a total of
7,251 square feet. As of March 31, 1998, the aggregate monthly rent under all of
the Company's office leases was approximately $46,014. The Reston office lease
expires on November 19, 1998 and the Company believes it will be able to either
renew its current lease or obtain other office space in the same general area.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings, and is not aware of any
pending or threatened legal proceedings that would have a material adverse
effect upon the Company's business, financial condition, 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
November 20, 1996 through March 31, 1998, by quarter.
[Download Table]
Quarter Ended High Low
------------- ---- ---
December 31, 1996* $10.25 $ 8.75
March 31, 1997 $14.50 $ 9.37
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
*For the period November 20, 1996 to December 31, 1996.
On June 19, 1998 the closing price of the Common Stock was $13.00 per share. On
June 17, 1998, there were 36 shareholders of record of the Company's Common
Stock. Management believes there are over 400 beneficial holders of the
Company's Common Stock and has been advised that there are individual
participants holding approximately 22% of the outstanding Common Stock pursuant
to security position listings furnished by Cede & Company, New York, New York,
registered clearing agency and depository.
DIVIDENDS
The Company has never paid a cash dividend to stockholders and the current
policy of the Company's Board of Directors is to retain the earnings of the
Company for use in the business. In addition, the FirstUnion Facility prohibits
the Company from paying any dividends. Therefore, the payment of cash dividends
on the Common Stock is unlikely in the foreseeable future. Any future
determination concerning the payment of dividends will depend upon the
elimination of these restrictions and the absence of similar restrictions in
other agreements to which the Company is a party, the Company's financial
condition, the Company's results of operations and any other factors deemed
relevant by the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On July 24, 1997, the Company, through a new wholly owned subsidiary, MLC
Network Solutions which was incorporated on July 14, 1997, entered into an
Agreement and Plan of Merger with Compuventures. Compuventures was merged into
MLC Network Solutions effective July 24, 1997. The outstanding shares of
Compuventures Common Stock were
17
converted into 260,978 shares, valued at $3,384,564, of MLC Holdings Common
Stock. This transaction was accounted for as a pooling of interests.
MLCI was acquired on September 29, 1997 through the merger of MLC
Acquisitions Corporation, a newly formed corporation wholly owned by MLC
Holdings, which was incorporated on September 2, 1997, into ECCI with ECCI
being the surviving entity and being renamed MLC Integrated, Inc. MLCI
currently conducts a network services and software and PC reselling business
from its sole location in Pottstown, Pennsylvania. MLC Holdings effectively
exchanged 498,998 shares of its Common Stock, valued at $7,092,000, for all
of the outstanding stock of ECCI. This transaction was also accounted for as
a pooling of interests.
On July 1, 1997, the Company issued 161,329 shares of stock to a single
investor in a private placement for cash consideration of $2,000,000 (a per
share price of $12.40). The stock was priced, per a Stock Purchase Agreement
dated June 18, 1997, at a per share price equal to one-twentieth (1/20) of
the sum of the closing price per share of the Company's Common Stock as
reported on the NASDAQ National Market at the close of each of the last
twenty business days immediately prior to the closing date (June 4 to July
1), multiplied by (.95).
All of the above shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
18
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, 1996, 1997 and
1998" and "Item 1, Business."
MLC HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
[Enlarge/Download Table]
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------
STATEMENTS OF EARNINGS
Revenue:
Sales of equipment $ 43,262 $ 50,471 $ 47,591 $ 52,167 $ 47,419
Sales of leased equipment 5,940 9,958 16,318 21,634 50,362
Lease revenues 1,957 3,245 5,928 9,909 14,882
Fee and other income 1,046 690 1,877 2,503 5,779
--------------------------------------------------------
Total revenues 52,205 64,364 71,714 86,213 118,442
--------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 37,924 44,157 38,782 42,180 37,423
Cost of sales of leased equipment 5,698 9,463 15,522 21,667 49,669
Direct lease costs 344 841 2,697 4,761 5,409
Professional and other costs 628 657 709 577 1,073
Salaries and benefits 4,590 5,679 6,682 8,241 10,357
General and administrative expenses 1,781 1,673 2,040 2,286 3,694
Interest and financing costs 512 1,111 1,702 1,649 1,837
Nonrecurring acquisition costs - - - - 250
--------------------------------------------------------
Total costs and expenses 51,477 63,581 68,134 81,361 109,712
--------------------------------------------------------
Earnings before provision for income taxes
and extraordinary item 728 783 3,580 4,852 8,730
Provision for income taxes 59 198 881 1,360 2,691
--------------------------------------------------------
Net earnings before extraordinary item 669 585 2,699 3,492 6,039
Extraordinary gain (1) - - 117 - -
--------------------------------------------------------
Net earnings $ 669 $ 585 $ 2,816 $ 3,492 $ 6,039
========================================================
Net earnings per common share, before
extraordinary item 0.15 0.13 0.59 0.67 1.00
Extraordinary gain per common share - - 0.03 - -
--------------------------------------------------------
Net earnings per common share - Basic $ 0.15 $ 0.13 $ 0.62 $ 0.67 $ 1.00
========================================================
Pro forma net earnings (2) $ 545 $ 529 $ 2,389 $ 3,133 $ 5,426
========================================================
Pro forma net earnings per common share - Basic $ 0.12 $ 0.12 $ 0.52 $ 0.60 $ 0.90
========================================================
Weighted average shares outstanding - Basic 4,380,270 4,383,490 4,572,635 5,184,261 6,031,088
(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.
19
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
MLC HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
[Enlarge/Download Table]
AS OF MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------
BALANCE SHEETS
Assets:
Cash and cash equivalents $ 1,632 $ 276 $ 651 $ 6,654 $ 18,684
Accounts receivable 3,384 4,852 4,526 8,846 16,383
Notes receivable 87 37 92 2,154 3,802
Inventories 1,692 1,294 965 1,278 1,214
Investment in direct financing and sales
type leases, net 10,146 12,124 16,273 17,473 32,496
Investment in operating lease equipment, net 164 1,874 10,220 11,065 7,296
Other assets 374 587 1,935 741 2,137
All other assets 553 672 522 813 1,184
--------------------------------------------------------
Total assets $ 18,032 $ 21,716 $ 35,184 $ 49,024 $ 83,196
========================================================
Liabilities:
Accounts payable - equipment $ 1,092 $ 3,014 $ 4,973 $ 4,946 $ 21,284
Accounts payable - trade 1,970 1,890 2,215 3,007 6,865
Salaries and commissions payable 280 316 153 672 390
Recourse notes payable 3,113 2,597 2,106 439 13,037
Nonrecourse notes payable 8,116 10,162 18,352 19,705 13,028
All other liabilities 1,113 936 2,153 3,778 5,048
--------------------------------------------------------
Total liabilities 15,684 18,915 29,952 32,547 59,652
Total stockholders' equity 2,348 2,801 5,232 16,477 23,544
--------------------------------------------------------
Total liabilities and stockholders' equity $ 18,032 $ 21,716 $ 35,184 $ 49,024 $ 83,196
========================================================
20
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, 1996, 1997 AND 1998
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
creditworthiness of the customer and the collectibility of lease
21
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.
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
22
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) remarketing fees, (iii) brokerage fees earned for the placement of
financing transactions and (iv) interest and other miscellaneous income. These
revenues are included in fee and other income on the Company's statements of
earnings.
RESULTS OF OPERATIONS
REVENUES
During the three years ended March 31, 1998, the Company experienced growth in
total revenues reflecting an increased volume of leasing and equipment sale
transactions. Total revenues for fiscal year 1998 were $118.4 million, as
compared to $86.2 and $71.7 million in fiscal years 1997 and 1996, respectively.
Total revenues are comprised of equipment sales, revenue from the sales of
leased equipment, lease revenues, and fee and other income.
Equipment sales revenue is generated through the sale of new and used equipment
via the Company's equipment brokerage and re-marketing activities and through
its recently acquired valued added re-seller ("VAR") subsidiaries. Equipment
sales were $47.4 million in fiscal year 1998, as compared to $52.2 and $47.6
million in fiscal years 1997 and 1996, respectively. Changes in the cost of
equipment sales have been consistent with changes in equipment sale revenue, and
reflect a margin on equipment sales of 18.5%, 19.1% and 21.1%.
Revenue from the sales of leased equipment increased 132.8% to $50.4 million in
fiscal 1998, as compared to $21.6 million in fiscal year 1997. Leased equipment
sales revenue was $16.3 million in fiscal 1996. Historically, the Company has
sold a significant portion of the leases it originates to one of its two
institutional equity partners, MLC/CLC, LLC and MLC/GATX Limited Partnership I.
As a result, historical increases equipment sales revenue are a direct
23
result of increased lease originations. During fiscal year 1998, sales to
MLC/CLC, LLC accounted for 88.9% of leased equipment sales revenue, a component
of the Company's total revenues. Sales to the Company's equity partners requires
the consent of the relevant joint venture partner. While management expects the
continued availability of equity financing through its joint venture partners or
other sources, should such financing unexpectedly become limited or unavailable,
it could have a material adverse effect upon the Company's business, 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 under which the Company is 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 $14.9 million in fiscal 1998, as compared to $9.9
and $5.9 million in fiscal years 1997 and 1996, respectively. These increases
are directly attributable to the Company's increased volume of lease
transactions and reflects the Company's higher average 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.
Fee and other income reflects the Company's revenues from adjunct services and
fees relating to the Company's lease portfolio, as well as fees and other income
generated by the Company's VAR subsidiaries including support fees, warranty
reimbursements, and learning center revenues. Fee and other income accounted for
4.9%, 2.9% and 2.6% of total revenues during the fiscal years 1998, 1997 and
1996, respectively. The increase in fee and other income is largely attributable
to an increased volume of fees relating to the Company's lease portfolio and
fees earned by the Company for the management of leases which it has sold to an
equity partner. 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. During fiscal year 1998, direct lease costs were $5.4 million,
as compared to $4.8 and $2.7 million in fiscal years 1997 and 1996,
respectively. The majority of leases the Company originated in fiscal 1998 were
direct financing leases, as compared to primarily operating leases in the past.
If the Company continues to originate primarily direct financing type leases in
the future,
24
depreciation on operating lease equipment will diminish as the Company's
operating lease portfolio matures.
Professional and other costs amounted to $1.1 million during fiscal year 1998,
as compared to $0.6 and $0.7 million during fiscal years 1997 and 1996,
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, 1998. 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 11.9%, 12.2% and 12.2% of total revenues during fiscal years 1998,
1997 and 1996, respectively.
Interest and financing costs reflect interest on recourse and nonrecourse lease
related debt, operating lines of credit, floor planning agreements in place at
the Company's VAR subsidiaries and other obligations of the Company. These costs
amounted to $1.8, $1.6 and $1.7 million in fiscal years 1998, 1997 and 1996,
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 30.8%, 28.0% and 24.6% of earnings before
income taxes and extraordinary items for the fiscal years 1998, 1997 and 1996,
respectively. The lower provision for income taxes, as compared to earnings
before tax and extraordinary items is the result of earnings from the Company's
VAR subsidiaries 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, 1998 relates only to earnings of the Company,
exclusive of VAR earnings generated prior to their business combinations.
The Company's net earnings and net earnings per common share increased in each
of the fiscal years 1998, 1997, and 1996. Net earnings were $6.0, $3.5, and $2.8
million in the fiscal years 1998, 1997 and 1996, 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 two year period ended March 31, 1998, the Company improved its
financial condition and available capital resources in several significant ways
First, stockholders' equity increased from $5.2 million at the beginning of
fiscal 1997 to $23.5 million at March 31, 1998, partially the result of the
Company's initial public offering and a private placement of the Company's
common stock. Second, the Company expanded its ability to finance its lease
transactions through the formation of 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 $25 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.
25
The Company's total assets increased 69.7% to $83.2 million as of March 31, 1998
as compared to $49.0 million in total assets as of March 31, 1997.
The Company's cash and cash equivalents represented 22.5% and 13.6% of total
assets as of March 31, 1998 and 1997, respectively. The increase 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. The Company's cash balances are invested in overnight, interest
bearing investments.
The largest component of the Company's assets is its investment in direct
financing and sales type leases and investment in operating lease equipment.
These assets represent 47.8% and 58.2% of total assets as of March 31, 1998 and
1997, respectively. The Company's investment in direct financing leases and
operating lease equipment amounted to $39.8 and $28.5 million at the end of
fiscal years 1998 and 1997, respectively, reflecting an increased lease
transaction volume. The size and composition of the Company's 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, 1998 and 1997, the Company had $3.8 and $2.2 million in notes
receivable, respectively. The majority of these notes are receivable from the
Company's 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, the Company will continue to receive the
rental payments from the lessee.
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, 1998 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 $28.1 million, as
compared to $8.0 million at March 31, 1997. The increase is primarily
attributable to an increase in amounts payable for equipment to be placed on
lease reflecting the Company's higher lease transaction volume.
Recourse notes payable amounted to $13.0 and $0.4 million as of March 31, 1998
and 1997 respectively. The increase represents an increased amount due under the
Company's lines of credits. Nonrecourse notes payable decreased to $13.0 million
at March 31, 1998 from $19.7 million as of March 31, 1997. The decrease is the
result of the current portfolio of nonrecourse notes being paid down.
Additionally, the majority of nonrecourse debt notes originated during the
current fiscal year qualified for sale treatment under SFAS No. 125, resulting
in a significantly decreased amount of nonrecourse debt additions than in the
prior fiscal year.
To date, the financing necessary to support the Company's leasing and financing
activities has been provided principally from nonrecourse 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.
26
In order to take advantage of the most favorable long-term financing
arrangements available to it, the Company often finances equipment purchases and
the related leases on an interim basis with short-term, recourse debt, and
accumulates such leases until it has a sufficient transaction size (either with
a single lessee or a portfolio of lessees) to warrant obtaining long-term
financing for such leases either through nonrecourse borrowings or a sale
transaction. Such interim financing is usually obtained through the Company's
operating lines of credit or partial-recourse warehouse lines.
Borrowings under the operating lines of credit are generally secured by lease
receivables and the underlying equipment financed under the facility.
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. At March 31, 1998,
there was $12,750,000 outstanding under the Company's operating lines 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 acquisitions and financings under its relationships with
vendors, for at least the next 12 months. Although no assurances can be given,
the Company expects to be able to maintain, renew, or replace its existing
short-term lines of credit and to continue to have access to the public and
private securities markets, both for debt and for equity financings.
THE YEAR 2000 ISSUE
The Company has identified all significant internal software and hardware
applications that will require modifications to ensure Year 2000 compliance.
Internal and external resources are being used to make the required
modifications and test Year 2000 compliance. The modification process of all
significant applications and operational systems is substantially complete. The
Company plans on completing the process of modifying all significant
applications by December 31, 1998. The total cost to the Company of these Year
2000 compliance activities has not been and is not anticipated to be material to
its financial position, results of operations or cash flows in any given year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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.
27
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.
[Download Table]
NAME AGE POSITION CLASS
---- --- -------- -----
Phillip G. Norton**......................54 Chairman of the Board, III
President and Chief
Executive Officer
Thomas B. Howard, Jr.....................51 Vice President and Chief
Operating Officer
Bruce M. Bowen...........................46 Director and Executive Vice III
President
Steven J. Mencarini......................42 Senior Vice President and
Chief Financial Officer
Terrence O'Donnell.......................53 Director II
Carl J. Rickertsen.......................37 Director II
Kleyton L. Parkhurst.....................35 Secretary and Treasurer
William G. Garner........................40 President, MLC Network Solutions
Vincent M. Marino........................40 President, ECCI
Kevin M. Norton**........................42 Vice President of Brokerage
Operations
William J. Slaton........................50 Vice President of Marketing
Thomas K. McNamara.......................52 Vice President
**Phillip G. Norton, Kevin M. Norton and Patrick J. Norton, Jr. are brothers.
All references to a Mr. Norton contained herein refer to Mr. Phillip G. Norton
unless otherwise indicated.
28
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
None
(c) EXHIBITS
[Download Table]
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 Corp., Educational Computer
Concepts, Inc. and the Stockholders of Educational Computer
Concepts, Inc.
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
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 office located
in Reston, Virginia, together with amendment thereto dated March
18, 1996
10.7(1)* Form of Employment Agreement between the Registrant and Philip 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
29
[Download Table]
Exhibit
Number Description
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) Text of Loan and Security Agreement dated January 31, 1997 between
MLC Group, Inc. and Heller Financial, Inc.
10.17(2) Text of First Amendment to Loan and Security Agreement dated March
12, 1997 between MLC Group, Inc. and Heller Financial, Inc.
10.18(3) Credit Agreement dated as of June 5, 1997, by and between MLC
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.
21.1(6) Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Herbein & Company, Inc.
27.1 Financial Data Schedule
99.1(6) Independent Auditor's Report of Herbein & Company, Inc. as to ECCI
-------------------
* Indicates a management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to the indicated exhibit filed as part of
the Registrant's Registration Statement on Form S-1 (No. 333-11737).
(2) Incorporated herein by reference to 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).
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 26, 1998
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 26, 1998
/s/ STEVEN J. MENCARINI
-------------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: June 26, 1998
/s/ THOMAS B. HOWARD
-------------------------------------------------
By: Thomas B. Howard, Vice President and
Chief Operating Officer
Date: June 26, 1998
/s/ BRUCE M. BOWEN
-------------------------------------------------
By: Bruce M. Bowen, Director and Executive
Vice-President
Date: June 26, 1998
/s/ KLEYTON L. PARKHURST
-------------------------------------------------
By: Kleyton L. Parkhurst, Secretary and Treasurer
Date: June 26, 1998
/s/ TERRENCE O'DONNELL
-------------------------------------------------
30
By: Terrence O'Donnell, Director
Date: June 26, 1998
/s/ CARL J. RICKERTSEN
-------------------------------------------------
By: Carl J. Rickertsen, Director
Date: June 26, 1998
31
MLC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
[Download Table]
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1996, 1997, and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1997 and 1998 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-23
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years S-1
Ended March 31, 1996, 1997 and 1998.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MLC Holdings, Inc.
Reston, Virginia
We have audited the consolidated balance sheets of MLC Holdings, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. 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. The consolidated financial statements
give retroactive effect to the merger of MLC Holdings, Inc., ECC Integrated,
Inc. and Compuventures of Pitt County, Inc., which have been accounted for as a
pooling of interests as described in Note 1 to the consolidated financial
statements. We did not audit the statements of earnings, stockholders' equity,
and cash flows of ECC Integrated, Inc. for the year ended March 31, 1996, which
statements reflect total revenues of $15,291,164 for the year ended March 31,
1996. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for ECC Integrated, Inc. for 1996, is based solely on the report of such other
auditors.
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 and the report of the other auditors, 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1998 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 22, 1998
F-2
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
As of March 31,
1997 1998
---------------------------------------
ASSETS
Cash and cash equivalents $ 6,654,209 $ 18,683,796
Accounts receivable 8,846,426 16,383,314
Notes receivable (1) 2,154,250 3,801,808
Employee advances 70,612 53,582
Inventories 1,278,144 1,213,734
Investment in direct financing and sales type leases - net 17,473,069 32,495,594
Investment in operating lease equipment - net 11,065,159 7,295,721
Property and equipment - net 740,744 1,131,512
Other assets (2) 740,925 2,136,554
---------------------------------------
TOTAL ASSETS $ 49,023,538 $ 83,195,615
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 3,006,937 $ 6,865,419
Accounts payable - equipment 4,946,422 21,283,582
Salaries and commissions payable 671,899 390,081
Accrued expenses and other liabilities 2,256,884 3,560,181
Recourse notes payable 439,004 13,037,365
Nonrecourse notes payable 19,705,060 13,027,676
Deferred taxes 590,000 1,487,000
Income tax payable 930,587 -
---------------------------------------
Total Liabilities 32,546,793 59,651,304
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; 10,000,000 authorized at
March 31, 1997; 25,000,000 authorized at March 31, 1998;
5,909,976 and 6,071,505 issued and outstanding at March31,
1997 and 1998, respectively 59,100 60,715
Additional paid-in capital 9,346,214 11,460,331
Retained earnings 7,071,431 12,023,265
---------------------------------------
Total Stockholders' Equity 16,476,745 23,544,311
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,023,538 $ 83,195,615
=======================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(1) Includes amounts with related parties of $1,835,214 and $3,709,508 as of
March 31, 1997 and 1998, respectively.
(2) Includes amounts with related parties of $338,226 and $732,051 as of March
31, 1997 and 1998, respectively.
F-3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
[Enlarge/Download Table]
Year Ended March 31,
--------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------
REVENUES
Sales of equipment $ 47,591,068 $ 52,166,828 $ 47,419,115
Sales of leased equipment 16,318,049 21,633,996 50,362,055
--------------------------------------------------------------
63,909,117 73,800,824 97,781,170
Lease revenues 5,928,228 9,908,469 14,882,420
Fee and other income 1,876,410 2,503,381 5,778,685
--------------------------------------------------------------
7,804,638 12,411,850 20,661,105
--------------------------------------------------------------
TOTAL REVENUES (1) 71,713,755 86,212,674 118,442,275
--------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 38,782,181 42,179,823 37,423,397
Cost of sales, leased equipment 15,522,469 21,667,197 49,668,756
--------------------------------------------------------------
54,304,650 63,847,020 87,092,153
Direct lease costs 2,696,627 4,761,227 5,409,338
Professional and other fees 709,350 576,855 1,072,691
Salaries and benefits 6,682,005 8,241,405 10,356,456
General and administrative expenses 2,039,970 2,285,878 3,694,309
Nonrecurring acquisition costs - - 250,388
Interest and financing costs 1,701,638 1,648,943 1,836,956
--------------------------------------------------------------
13,829,590 17,514,308 22,620,138
--------------------------------------------------------------
TOTAL COSTS AND EXPENSES (2) 68,134,240 81,361,328 109,712,291
--------------------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 3,579,515 4,851,346 8,729,984
--------------------------------------------------------------
PROVISION FOR INCOME TAXES 881,000 1,360,000 2,690,890
--------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEMS 2,698,515 3,491,346 6,039,094
EXTRAORDINARY GAIN 117,044 - -
--------------------------------------------------------------
NET EARNINGS $ 2,815,559 $ 3,491,346 $ 6,039,094
==============================================================
NET EARNINGS PER COMMON SHARE, BEFORE
EXTRAORDINARY ITEM 0.59 0.67 1.00
EXTRAORDINARY GAIN PER COMMON SHARE 0.03 - -
--------------------------------------------------------------
NET EARNINGS PER COMMON SHARE - BASIC $ 0.62 $ 0.67 $ 1.00
==============================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.62 $ 0.66 $ 0.98
==============================================================
PRO FORMA NET EARNINGS (Note 8) $ 2,389,418 $ 3,133,436 $ 5,425,833
==============================================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.52 $ 0.60 $ 0.90
==============================================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.52 $ 0.60 $ 0.88
==============================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,572,635 5,184,261 6,031,088
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 4,572,635 5,262,697 6,143,017
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(1) Includes amounts from related parties of $15,758,610, $21,051,453 and
$46,710,190 for the fiscal years ended March 31, 1996, 1997, and 1998,
respectively.
(2) Includes amounts from related parties of $15,055,141, $20,566,924 and
$44,831,701 for the fiscal years ended March 31, 1996, 1997, and 1998,
respectively.
F-4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Common Stock Treasury Stock Additional
------------------------------ ----------------------------- Paid-in
Shares Par Value Shares Cost Capital
------------------------------ ----------------------------- ---------------
Balance March 31, 1995 4,386,658 $ 44,960 109,389 $ 5,854 $ 748,186
Issuance of shares to owners 370,059 3,701 - - (3,701)
Purchase of treasury shares (2,327) - 2,327 23,000 -
Distributions to owners - - - - -
Net earnings - - - - -
------------------------------ ----------------------------- ---------------
Balance March 31, 1996 4,754,390 48,661 111,716 28,854 744,485
Compensation to outside directors - - - - 9,500
Distributions to owners - - - - -
Sale of common shares 1,150,000 11,500 - - 8,592,262
Issuance of shares to owners 5,586 56 - - (56)
Retirement of treasury shares - (1,117) (111,716) (28,854) 23
Net earnings - - - - -
------------------------------ ----------------------------- ---------------
Balance March 31, 1997 5,909,976 59,100 - - 9,346,214
Sale of common shares 161,329 1,613 - - 1,998,387
Issuance of shares for option exercise 200 2 - - 1,748
Compensation to outside directors - - - - 113,982
Distributions to owners - - - - -
Net earnings - - - - -
============================== ============================= ===============
Balance, March 31, 1998 6,071,505 $ 60,715 - $ - $ 11,460,331
============================== ============================= ===============
[Download Table]
Retained
Earnings TOTAL
--------------- ------------------
Balance March 31, 1995 $ 2,013,994 $ 2,801,286
Issuance of shares to owners - -
Purchase of treasury shares - (23,000)
Distributions to owners (362,330) (362,330)
Net earnings 2,815,559 2,815,559
--------------- ------------------
Balance March 31, 1996 4,467,223 5,231,515
Compensation to outside directors - 9,500
Distributions to owners (859,378) (859,378)
Sale of common shares - 8,603,762
Issuance of shares to owners - -
Retirement of treasury shares (27,760) -
Net earnings 3,491,346 3,491,346
--------------- ------------------
Balance March 31, 1997 7,071,431 16,476,745
Sale of common shares - 2,000,000
Issuance of shares for option exercise - 1,750
Compensation to outside directors - 113,982
Distributions to owners (1,087,260) (1,087,260)
Net earnings 6,039,094 6,039,094
=============== ==================
Balance, March 31, 1998 $ 12,023,265 $ 23,544,311
=============== ==================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Year Ended March 31,
-------------------------------------------------
1996 1997 1998
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,815,559 $ 3,491,346 $ 6,039,094
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,199,722 3,650,248 4,628,272
Abandonment of assets 17,984 10,049 -
Provision for credit losses - 66,000 (1,000)
Extraordinary gain (117,044) - -
(Loss) (Gain) on sale of operating lease equipment (1) (323,422) 83,754 (55,881)
Impairment of operating lease residual values - 153,434 -
Payments from leasees directly to lenders (884,389) (1,590,061) (1,788,611)
Loss (Gain) on disposal of property and equipment 4,489 (9,124) -
Deferred taxes 623,000 121,000 897,000
Compensation to outside directors - stock options - 9,500 113,982
Changes in:
Accounts receivable 323,782 (4,343,319) (7,536,888)
Notes receivable (2) (55,088) (2,062,393) (1,647,558)
Employee advances (61,996) 28,537 17,030
Inventories (813,491) (400,046) 64,410
Other assets (3) (342,209) 457,169 (893,959)
Accounts payable - equipment 1,958,532 (26,557) 16,337,160
Accounts payable - trade 329,149 796,740 3,858,482
Salaries and commissions payable, accrued
expenses and other liabilities 638,690 2,286,921 629,380
-------------------------------------------------
Net cash provided by operating activities 6,313,268 2,723,198 20,660,913
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating equipment 1,383,677 4,992,050 726,714
Purchase of operating lease equipment (4) (13,919,193) (24,800,360) (2,065,079)
Increase in investment in direct financing and sales-type leases (5) (17,169,201) (6,825,873) (18,833,704)
Proceeds from sale of property and equipment 9,049 9,124 800
Insurance proceeds received 750,000 512,044 -
Purchases of property and equipment (301,039) (266,061) (1,032,243)
(Increase) Decrease in other assets (6) (306,228) 226,530 (472,962)
-------------------------------------------------
Net cash used in investing activities (29,552,935) (26,152,546) (21,676,474)
-------------------------------------------------
F-6
MLC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
[Enlarge/Download Table]
Year Ended March 31,
------------------------------------------------
1996 1997 1998
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse 25,678,168 26,825,118 4,511,517
Recourse 67,103 220,768 174,894
Repayments:
Nonrecourse (1,144,023) (3,199,626) (4,872,557)
Recourse (231,273) (434,867) (307,819)
Repayments of loans from stockholders (50,000) (275,000) (10,976)
Distributions to shareholders of combined companies
prior to business combination (362,330) (859,378) (1,087,260)
Proceeds from issuance of capital stock, net of expenses - 8,603,762 2,001,750
Purchase of treasury stock (23,000) - -
Proceeds (Repayments) from lines of credit (252,098) (1,448,370) 12,635,599
------------------------------------------------
Net cash provided by financing activities 23,682,547 29,432,407 13,045,148
------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 442,880 6,003,059 12,029,587
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 208,270 651,150 6,654,209
------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 651,150 $ 6,654,209 $ 18,683,796
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 302,214 $ 140,081 $ 347,757
================================================
Cash paid for income taxes $ 202,864 $ 315,137 $ 2,681,867
================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(1) Includes amounts (used by) provided by related parties of ($172,956),
$3,930, and $(35,540) for the fiscal years ended March 31, 1996, 1997 and
1998.
(2) Includes amounts used by related parties of ($1,812,414) and $(1,897,094)
for the fiscal years ended March 31, 1997 and 1998.
(3) Includes amounts (used by) provided by related parties of ($398,034),
$285,943, and $ 51,482 for the fiscal years ended March 31, 1996, 1997 and
1998.
(4) Includes amounts provided by related parties of $1,073,427, $2,707,213, and
$935,737 for the fiscal years ended March 31, 1996, 1997 and 1998.
(5) Includes amounts provided by (used by) related parties of $259,857,
($23,417), and $43,418,347 for the fiscal years ended March 31, 1996, 1997
and 1998.
(6) Includes amounts (used by) provided by related parties of ($270,860),
$73,338, ($473,621) for the fiscal years ended March 31, 1996, 1997 and
1998.
F-7
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED MARCH 31, 1996, 1997, AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective September 1, 1996, MLC Holdings, Inc.,
(incorporated August 27, 1996) became the holding company for MLC Group, Inc.,
and MLC Capital, Inc. (MLC Holdings, Inc., together with its subsidiaries
collectively, "MLC" or the "Company"). The accompanying consolidated financial
statements include the accounts of the wholly owned subsidiary companies at
historical amounts as if the combination had occurred on March 31, 1995 in a
manner similar to a pooling of interest.
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 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.
All significant intercompany balances and transactions have been eliminated.
Revenue Recognition - The Company sells information technology equipment to its
customers and recognizes revenue from equipment sales at the time equipment is
accepted by the customer. The Company is the lessor in a number of its
transactions and these are accounted for in accordance with 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
F-8
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 (sales type leases have not
been consumated 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 non-recourse 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 non-recourse debt associated with the rental
stream, sales revenue is recorded at the amount of gross consideration
received, and cost 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.
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.
F-9
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, 1996
and 1997 financial statements to conform to the March 31, 1998 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.
Earnings Per Share - Earnings per share have been calculated in accordance with
SFAS No. 128, "Earnings per Share," issued in February, 1997 and effective
beginning in fiscal year 1998. Earnings per share amounts for fiscal years prior
to 1998 have been restated to comply with SFAS No. 128. Basic EPS amounts were
calculated based on weighted average shares outstanding of 4,572,635 in fiscal
1996, 5,184,261 in fiscal 1997, and 6,031,088 in fiscal 1998. Diluted EPS
amounts were calculated based on weighted average shares outstanding and common
stock equivalents of 4,572,635 in fiscal 1996, 5,262,697 in fiscal 1997 and
6,143,017 in fiscal 1998. Additional shares included in the diluted EPS
calculation are attributable to incremental shares issuable upon the assumed
exercise of stock options.
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:
F-10
[Enlarge/Download Table]
As of March 31,
1997 1998
----------------------------------
(In Thousands)
Minimum lease payments $ 18,752 $ 29,968
Estimated unguaranteed residual value 1,271 7,084
Initial direct costs, net of amortization (1) 1,237 760
Less: Unearned lease income (3,721) (5,270)
Reserve for credit losses (66) (46)
----------------------------------
Investment in direct finance and sales
type leases, net $ 17,473 $ 32,496
==================================
(1) Initial direct costs are shown net of amortization of $1,299 and $1,592 at March 31, 1997
and 1998, respectively.
Future scheduled minimum lease rental payments as of March 31, 1998 are as
follows:
[Download Table]
(In Thousands)
Year ending March 31, 1999 $ 13,301
2000 9,119
2001 5,632
2002 1,618
2003 and thereafter 298
-----------
$ 29,968
===========
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes. See Note 5.
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:
[Download Table]
As of March 31,
1997 1998
----------------------------------
(In Thousands)
Cost of equipment under operating leases $ 14,519 $ 13,990
Initial direct costs 42 51
Less: Accumulated depreciation and
amortization (3,496) (6,745)
----------------------------------
Investment in operating lease equipment, net $ 11,065 $ 7,296
==================================
F-11
As of March 31, 1998, future scheduled minimum lease rental payments are as
follows:
[Download Table]
(In Thousands)
Year ending March 31, 1999 $ 3,320
2000 1,496
2001 50
2002 5
----------
$ 4,871
==========
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:
[Download Table]
As of March 31,
1997 1998
----------------------------------
(In Thousands)
Furniture and fixtures $ 852 $ 1,157
Vehicles 142 138
Capitalized software 186 477
Leasehold improvements 23 24
Less: Accumulated depreciation and
amortization (462) (664)
----------------------------------
Property and equipment, net $ 741 $ 1,132
==================================
5. RECOURSE AND NONRECOURSE NOTES PAYABLE
Recourse and nonrecourse obligations consist of the following:
[Download Table]
As of March 31,
1997 1998
----------------------------------
(In Thousands)
Recourse equipment notes secured by related
investments in leases with varying interest
rates ranging from 8.53% to 8.75% in fiscal
1997 and 1998 $ 269 $ 272
Recourse line of credit with a maximum
balance of $25,000,000, bearing interest at the
F-12
[Download Table]
LIBOR rate plus 1.1% or, at the Company's
option, the prime rate less 100 basis points - 12,750
Recourse line of credit with a maximum
balance of $2,500,000 with an interest rate
based on the prime rate 110 -
Term bank obligations with interest rates
ranging from 8.25% to bank prime plus 75
basis points 31 10
Capitalized equipment lease debt with interest
imputed at 9% 4 -
Loans from related parties with interest rates
ranging from 8% to 10% 25 5
----------------------------------
Total recourse obligations $ 439 $ 13,037
==================================
Nonrecourse equipment notes secured by
related investments in leases with interest
rates ranging from 6.30% to 9.90% in fiscal
1997 and 6.30% to 9.99% in fiscal 1998 $ 19,705 $ 13,028
==================================
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 $25 million line of credit are subject to certain
covenants regarding minimum consolidated tangible net worth, maximum recourse
debt to worth ratio, and minimum interest expense coverage ratio. Borrowings are
limited to the Company's collateral base, consisting of equipment, lease
receivables and other current assets, up to a maximum of $25 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, 1998, mature as follows:
F-13
[Download Table]
Recourse Nonrecourse
Notes Payable Notes Payable
-------------------------------------
(In Thousands)
Year ending March 31, 1999 $ 12,950 $ 7,606
2000 56 4,322
2001 31 1,006
2002 - 94
-------------------------------------
$ 13,037 $ 13,028
=====================================
6. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees and/or stockholders, the
balances of which amounted to $70,612 and $53,582 as of March 31, 1997 and 1998,
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, 1997 and 1998, $72,000 and $85,020 was receivable from United
Federal Leasing, which is owned in part by an individual related to a Company
executive. As of March 31, 1997 and 1998, 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.
During the year ended March 31, 1996, the Company sold leased equipment to a
company in which an employee/stockholder has a 45% ownership interest. Revenue
recognized from the sales amounted to $1,300,448. The basis of the equipment
sold was $1,271,729. At March 31, 1998, accrued expenses and other liabilities
include $9,599 due to the related company. During the years ended March 31, 1997
and 1998, respectively, the Company recognized remarketing fees from the company
amounting to $224,126 and $216,828.
During the years ended March 31, 1996 and 1997, the Company paid a stockholder
$120,000 and $90,000, respectively, in exchange for the pledge of personal
assets made to secure one of the Company's revolving line-of-credit agreements.
During the years ended March 31, 1996, 1997 and 1998, the Company sold leased
equipment to MLC/GATX Limited Partnership I (the "Partnership"), which amounted
to 18%, 4% and 0.3% of the Company's revenues, respectively. The Company has a
9.5% limited partnership interest in the Partnership and owns a 50% interest in
the corporation that owns a 1% general partnership interest in the Partnership.
Revenue recognized from the sales was $13,079,433, $3,452,902 and $406,159, and
the basis of the equipment sold was $12,273,527, $3,309,186 and $372,306 during
the years ended March 31, 1996, 1997 and 1998, respectively. Other assets
include $209,691 due from, $75,981 and $136,664 due to the Partnership as of
March 31, 1996, 1997 and 1998, 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 $380,757, $226,835 and $132,351 as of
March 31, 1996, 1997 and 1998, respectively. In addition, the Company received
$122,111, $148,590 and $104,277 for the years ended March 31, 1996, 1997 and
1998, respectively, for accounting and administrative services provided to the
Partnership.
F-14
During the years ended March 31, 1997 and 1998 the recoverability of certain
capital contributions made by the Company to the Partnership was determined to
be impaired. As a result, the Company recognized a write-down of its recorded
investment balance of $195,897 and $105,719 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, 1996, 1997 and 1998, the Company sold leased
equipment to MLC/CLC LLC, a joint venture in which the Company has a 5%
ownership interest, that amounted to 2%, 20%, and 38% of the Company's revenues,
respectively. Revenue recognized from the sales was $1,256,518, $16,923,090 and
$44,784,727, respectively. The basis for the equipment sold was $1,335,885,
$16,917,840, and $44,353,676, respectively. Notes receivable includes $1,812,414
and $3,709,508 due from the partnership as of March 31, 1997 and 1998. Other
assets reflects the investment in the joint venture of $168,259 and $736,364, as
of March 31, 1997 and 1998, 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 $52,742 and $170,709 for the years
ended March 31, 1997 and 1998 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 exeutives of subsidiaries of the Company. During the years ended March 31,
1996, 1997 and 1998, rent expense paid to these related parties was $132,111,
$124,222 and $306,479, respectively.
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 $128,310, $176,075 and $81,119 for the years ended March
31, 1996, 1997 and 1998.
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 $396,829,
$347,553 and $505,032 for the years ended March 31, 1996, 1997, and 1998,
respectively. As of March 31, 1998, the future minimum lease payments are due as
follows:
[Download Table]
Year ending March 31, 1999 $ 413,937
2000 270,876
2001 231,522
2002 232,780
2003 and thereafter 469,509
------------
$ 1,618,624
============
As of March 31, 1998, the Company has guaranteed $172,565 of the residual value
for equipment owned by the MLC/GATX Limited Partnership I.
F-15
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:
[Enlarge/Download Table]
For the Year Ended March 31,
1996 1997 1998
-----------------------------------------------
Statutory Federal income tax rate 34% 34% 34%
Income tax expense computed at the statutory
Federal rate $ 1,217,035 $ 1,649,458 $ 2,968,195
Income tax expense based on the statutory
Federal rate for subsidiaries which were
Sub-S prior to their combination with the
Company (369,956) (343,658) (568,893)
State income tax expense, net of Federal tax 24,643 48,641 250,692
Non-taxable interest income (79,342) (33,023) (35,350)
Non-deductible expenses 88,620 38,582 76,246
-----------------------------------------------
Provision for income taxes $ 881,000 $ 1,360,000 $ 2,690,890
===============================================
Effective tax rate 24.6% 28.0% 30.8%
===============================================
The components of the provision for income taxes are as follows:
[Download Table]
For the Year Ended March 31,
1996 1997 1998
-----------------------------------------------
(In Thousand)
Current:
Federal $ 231 $ 1,152 $ 1,669
State 27 87 125
-----------------------------------------------
258 1,239 1,794
-----------------------------------------------
Deferred:
Federal 557 113 802
State 66 8 95
-----------------------------------------------
623 121 897
-----------------------------------------------
$ 881 $ 1,360 $ 2,691
===============================================
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
F-16
[Download Table]
For the Year Ended March 31,
1996 1997 1998
-----------------------------------------------
(In Thousands)
Alternative minimum tax $ (200) $ 369 $ 18
Lease revenue recognition 823 (248) 797
Other - - 82
-----------------------------------------------
$ 623 $ 121 $ 897
===============================================
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:
[Download Table]
As of March 31,
1997 1998
--------------------------------------
(In Thousands)
Alternative minimum tax $ 250 $ 232
Lease revenue recognition (840) (1,637)
Other - (82)
--------------------------------------
$ (590) $ (1,487)
======================================
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.
[Enlarge/Download Table]
For the Year Ended March 31,
1996 1997 1998
-----------------------------------------------
Net earnings before pro forma adjustment $ 2,815,559 $ 3,491,346 $ 6,039,094
Additional provision for income taxes (426,141) (357,910) (613,261)
-----------------------------------------------
Pro forma net earnings $ 2,389,418 $ 3,133,436 $ 5,425,833
===============================================
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
$4,796,306, $4,214,444 and $5,258,955 for the years ended March 31, 1996, 1997,
and 1998, respectively. In addition, the Company realized a reduction in
recourse and nonrecourse notes payable from the sale of the associated assets
and
F-17
liabilities amounting to $11,550,446, $18,057,569 and $1,057,389 for the
years ended March 31, 1996, 1997, and 1998, 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
$77,145, $56,291 and $80,291 for the years ended March 31, 1996, 1997 and 1998,
respectively.
The Company has established a stock incentive program (the "Master Stock
Incentive Plan")(formerly the 1996 Stock Incentive Plan prior to amendment and
restatement effective May 14, 1997 which has been adopted by the Board of
Directors and received on September 30, 1997 stockholder ratification) 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
(formerly the 1996 Incentive Stock Option Plan prior to amendment and
restatement effective May 14, 1997), formula length of service based
nonqualified options to nonemployee directors under the Outside Director Stock
Plan (formerly the 1996 Outside Director Stock Option Plan prior to amendment
and restatement effective May 14, 1997), nonqualified stock options under the
Nonqualified Stock Option Plan (formerly the 1996 Nonqualified Stock Option Plan
prior to amendment and restatement effective May 14, 1997), 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 but which is not effective until stockholder ratification), as well as
other restrictive stock and performance based stock awards and programs which
may be established by the Board of Directors. The May 14, 1997 Amendments
increase the aggregate number of shares reserved for grant under all plans which
are a part of the Master Stock Incentive Plan to 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, 1998 a total of 1,214,301
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 Amended and Restated Incentive Stock Option Plan ("ISO
Plan"), under which 297,100 options are outstanding or have been
exercised as of March 31, 1998;
b) the Amended and Restated Nonqualified Stock Option Plan
("Nonqualified Plan"), under which 265,000 options are
outstanding as of March 31, 1998;
F-18
c) the Amended and Restated Outside Director Stock Option Plan
("Outside Director Plan"), under which 50,000 are outstanding as
of March 31, 1998;
d) the Employee Stock Purchase Plan ("ESPP") under which no shares
have been issued as of March 31, 1998.
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.
A summary of stock option activity during the two years ended March 31, 1998 is
as follows:
[Download Table]
Number of Shares Exercise Price Range
-------------------------------------------------------
Outstanding, April 1, 1996 - -
Options granted 353,800 $6.40 - $10.75
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
Options exercised (200) $8.75
Options forfeited (18,900) $8.75 - $13.00
-----------------------------
Outstanding, March 31, 1998 611,900
=============================
Exercisable, March 31, 1998 199,540
=============================
Additional information regarding options outstanding as of March 31, 1998 is as
follows:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------------
Weighted
Average
Number Remaining Weighted Average Weighted Average
Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------
611,900 8.2 years $9.58 199,540 $8.81
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
F-19
accounting for all employee and non-employee stock compensation arrangements.
The Company opted to continue to account for its stock-based awards using the
intrinsic value method in accordance with APB No. 25. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements. Option grants made to non-employees, including
outside directors, have been accounted for using the fair value method, which
resulted in $9,500 and $113,982 in compensation expense during the years ended
March 31, 1997 and 1998, respectively. The following table summarizes the pro
forma disclosures required by SFAS No. 123 assuming the Company had adopted the
fair value method for stock-based awards to employees as of the beginning of
fiscal year 1997:
[Download Table]
Year Ended March 31,
1997 1998
--------------------------------------
Net earnings, as reported $ 3,491,346 $ 6,039,094
Net earnings, pro forma 3,198,669 5,345,456
Basic earnings per share, as reported $ 0.67 $ 1.00
Basic earnings per share, pro forma 0.62 0.89
Diluted earnings per share, as reported $ 0.66 $ 0.98
Diluted earnings per share, pro forma 0.61 0.87
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:
[Download Table]
For the Year Ended March 31,
1997 1998
--------------------------------------
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years
Expected stock price volatility 44.00% 30.95%
Expected dividend yield 0% 0%
Risk-free interest rate 5.81% 5.82%
Options granted under the Nonqualified
Stock Option Plan:
Expected life of option 8 years 8 years
Expected stock price volatility 44.00% 30.95%
Expected dividend yield 0% 0%
Risk-free interest rate 6.05% 5.62%
F-20
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.
- 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:
[Enlarge/Download Table]
As of March 31, 1997 As of March 31, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------
(In Thousands)
Assets:
Cash and cash equivalents $ 6,654 $ 6,654 $ 18,684 $ 18,684
Liabilities:
Nonrecourse notes payable 19,705 19,752 13,028 12,973
Recourse notes payable 439 465 13,037 13,033
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
F-21
previously reported by the Company and the pooled companies and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
[Download Table]
For the Year Ended March 31,
1996 1997 1998
-----------------------------------------------
(In Thousands)
Revenues:
MLC Holdings, Inc. $ 42,634 $ 55,711 $ 77,178
Pooled companies 29,080 30,502 41,264
-----------------------------------------------
Combined $ 71,714 $ 86,213 $ 118,442
===============================================
Net earnings:
MLC Holdings, Inc. $ 1,610 $ 2,481 $ 3,785
Pooled companies 1,205 1,010 2,254
-----------------------------------------------
Combined $ 2,815 $ 3,491 $ 6,039
===============================================
F-22
13. CONDENSED 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.
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED QUARTERLY INFORMATION
(IN THOUSANDS)
[Enlarge/Download Table]
FIRST QUARTER SECOND QUARTER
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
------------------------------------------ ------------------------------------------
Year Ended March 31, 1997
Sales $10,412 $ 6,978 $17,390 $ 8,635 $6,026 $14,661
Total revenues 12,896 7,267 20,163 11,705 6,284 17,989
Cost of sales 9,894 5,649 15,543 8,250 4,563 12,813
Total costs and expenses 12,097 7,189 19,286 10,803 5,979 16,782
Earnings before provision for
income taxes 799 78 877 902 305 1,207
Provision for income taxes 284 - 284 322 - 322
Net earnings 515 78 593 580 305 885
========================================================================================
Net earnings per common share $ 0.13 $ 0.12 $ 0.15 $ 0.19
========= ========= ========= =========
Year Ended March 31, 1998
Sales $22,309 $12,964 $35,273 $22,407 $ - $22,407
Total revenues 26,763 13,383 40,146 27,253 (384) 26,869
Cost of sales 21,858 10,034 31,892 19,773 - 19,773
Total costs and expenses 25,379 12,120 37,499 25,719 (384) 25,335
Earnings before provision for
income taxes 1,384 1,263 2,647 1,534 - 1,534
Provision for income taxes 460 - 460 412 - 412
Net earnings 924 1,263 2,187 1,122 - 1,122
========================================================================================
Net earnings per common share $ 0.18 $ 0.37 $ 0.19 $ 0.19
========= ========= ========= =========
[Enlarge/Download Table]
THIRD QUARTER FOURTH QUARTER
Previously Adjusted Previously Adjusted
Reported Adjustments Amount Reported Adjustments Amount
------------------------------------------ ------------------------------------------
Year Ended March 31, 1997
Sales $ 8,435 $8,106 $16,541 $15,836 $9,373 $25,209
Total revenues 11,800 8,345 20,145 19,747 8,169 27,916
Cost of sales 7,676 6,712 14,388 14,284 6,819 21,103
Total costs and expenses 10,810 7,957 18,767 18,597 7,929 26,526
Earnings before provision for
income taxes 990 388 1,378 1,150 240 1,390
Provision for income taxes 349 - 349 405 - 405
Net earnings 641 388 1,029 745 240 985
=========================================================================================
Net earnings per common share $ 0.14 $ 0.19 $ 0.14 $ 0.17
========= ========= ========= =========
Year Ended March 31, 1998
Sales $18,097 $ - $18,097 $ - $ - $22,004
Total revenues 23,563 (287) 23,276 - - 28,151
Cost of sales 15,625 - 15,625 - - 19,802
Total costs and expenses 21,435 (287) 21,148 - - 25,730
Earnings before provision for
income taxes 2,128 - 2,128 - - 2,421
Provision for income taxes 851 - 851 - - 968
Net earnings 1,277 - 1,277 - - 1,453
=========================================================================================
Net earnings per common share $ 0.21 $ 0.21 $ - $ 0.24
========= ========= ========= =========
F-23
SCHEDULE II
MLC HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
[Enlarge/Download Table]
Column C - Additions
--------------------------
Column B (1) (2) Column E
Balance at Charged to Charged to Balance
beginning costs and other Column D at end
Column A - Description of period expenses accounts Deductions of year
------------------------------------------------------------------------------------------------------------
1998 Allowances for doubtful
accounts and credit losses $ 143 $ 56 $ -- $ 57 $ 142
================================================================
1997 Allowances for doubtful
accounts and credit losses $ 8 $ 144 $ -- $ 9 $ 143
================================================================
1996 Allowances for doubtful
accounts and credit losses $ 4 $ 15 $ -- $ 11 $ 8
================================================================
S-1
INDEX TO EXHIBITS
Exhibit
Number Description
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Herbein & Company, Inc.
27.1 Financial Data Schedule
Dates Referenced Herein and Documents Incorporated by Reference
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