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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-28926
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MLC Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1817218
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Rd., Suite 110, Reston, VA 20190-5321
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(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value Nasdaq National Market
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Company, computed by reference to the price at which the stock was sold
as of June 18, 1997 was $14,689,530.
The number of shares of Common Stock outstanding as of June 18, 1997,
was 5,150,000.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the
following parts of this Form 10-K:
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Document Part
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Portions of the Company's definitive Part III
Proxy Statement to be filed with the
Securities and Exchange Commission
within 120 days after the Company's
fiscal year end.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MLC Holdings, Inc. was formed in 1996 and is a Delaware corporation
which, pursuant to a reorganization effected September 1, 1996, serves as the
holding company for MLC Group, Inc. ("MLC Group") and other subsidiaries. All
references to the "Company" shall be deemed to include and refer to MLC
Holdings and its subsidiaries, including MLC Group. The Company holds no other
assets and engages in no other business other than serving as the parent
holding Company for MLC Group and MLC Capital, Inc. MLC/GATX Leasing
Corporation is a 50% owned subsidiary of MLC Group.
MLC Group, a Virginia corporation, founded in 1990 and originally
named Municipal Leasing Corporation, currently conducts all business activity
of the Company. MLC Capital, Inc., is an NASD-registered broker-dealer and as
of the date of this report has conducted no business transactions. The Company
does not have any plans at present to engage in business through MLC Capital,
Inc. MLC Group obtains a significant amount of equity financing for its
transactions through two joint venture arrangements: (i) MLC/GATX Limited
Partnership I (a joint venture with GATX Leasing Corporation); and(ii) MLC/CLC
LLC (a joint venture with Cargill Leasing Corporation). MLC Group has a 9.5%
limited partnership ownership interest in MLC/GATX Limited Partnership I and
owns 50% of the stock of MLC/ GATX Leasing Corporation, which serves as general
partner of MLC/GATX Limited Partnership I with a 1% general partnership
interest. MLC Group has a 5% membership interest in MLC/CLC LLC and serves as
its manager.
On November 20, 1996, the Company closed a public stock offering of
1,000,000 shares of its common stock (the "Offering"), and on December 13,
1996, the underwriter exercised its overallottment option of 150,000 additional
shares. The initial offering price was $8.75 per share. The Company received
net proceeds of $8,603,762. Expenses and underwriter's discount relating to the
offering were $1,458,738.
The Company's principal executive offices are located at 11150 Sunset
Hills Road, Suite 110, Reston, Virginia 20190-5321 and its telephone number at
such address is (703) 834-5710. The Company operates through ten offices,
including its principal executive offices and seven regional sales offices
which are located in the following metropolitan areas: Philadelphia,
Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento, California;
Raleigh, North Carolina; Atlanta, Georgia; and San Diego, California. The
Company also has arrangements with independent contractors who work primarily
for the Company in Columbus, Ohio.
The Company currently employs 47 full-time employees and seven
part-time employees, of which 37 of such employees work at the Company's
principal executive offices and the remaining 17 work at the various regional
offices of the Company.
GENERAL
The Company specializes in leasing and financing information
technology assets, provides asset management services, and trades computer
equipment. The Company's targeted customer base includes middle market
commercial customers on a regional basis, select Fortune 1000 firms, federal,
state and local governments, vendors of information technology equipment and
services, and network integrators and consultants. The assets leased by the
Company include personal computers, client server systems, networks, mid-range
and mainframe computer equipment, telecommunications equipment and software.
The ten largest commercial customers of the Company by purchase price
of the equipment leased by the Company, for fiscal year 1997 are, in
alphabetical order:
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BTG, Inc.; Cable & Wireless, Inc.; Checkfree Corporation; Corning Incorporated;
Interealty Corp.; Progressive Casualty Insurance Company; Sandia Corporation;
SCT Software and Resources Management Corporation; Sprint Communications
Company, L.P. and affiliates (collectively, "Sprint"); and Walt Disney
Attractions, Inc. The three largest government customers, based upon purchase
price of the equipment leased by the Company for fiscal year 1997, are, in
alphabetical order: the California Department of Justice; McHenry County,
Illinois; and the State of Missouri. None of the above customers constituted
more than 10% of the Company's revenues for fiscal year 1997.
The Company also leases and finances equipment, software and services
through relationships with vendors, equipment manufacturers, software
companies, and systems integrators and consultants. These vendor clients
represent a variety of high technology industries and include, among others, in
alphabetical order: Cisco Systems, Inc.; EMC Corporation; Sterling Software,
Inc.; and Systems & Computer Technology Corporation; The Company has also
provided financing for other vendors' customers for transactions ranging in
size from approximately $50,000 to $21.0 million based upon the purchase price
of the assets.
In fiscal year 1998 the Company signed two agreements with Cisco
Systems Capital Corporation and Cisco Systems, Inc. (together, "Cisco"), which
name the Company as Cisco's preferred financing provider in the governmental
and educational market segment, and in the domestic commercial market segment
(excluding the high-risk/venture leasing segment). The agreements set forth
certain obligations of the Company, including the obligation to hire and retain
salesman specifically to provide service to Cisco, and certain administrative
and remarketing obligations regarding transactions originated under the Cisco
program. The agreements grant Cisco the right to remarket the equipment at its
option, and the right to purchase all, but not less than all, of the Cisco
equipment portfolio at a certain return. The agreements are subject to
non-renewal and termination for several reasons, including non-performance by
the Company. During fiscal year 1997, the Company originated
a nominal amount of volume from the Cisco agreements.
In fiscal year 1998 the Company signed several exclusive teaming agreements
with various federal government resellers, in anticipation of the acceptance of
leasing terms and conditions by the General Services Administration on vendors
"GSA Schedules". Under the teaming agreements, the Company will provide its
leasing terms and conditions for inclusion on the vendor's GSA schedules in
exchange for the first right of refusal to finance any lease transactions.
During fiscal year 1997 the Company originated no volume from any of these
agreements.
The Company seeks to differentiate itself from its competitors by
offering its customers asset management services and asset trading
capabilities, which may be customized to meet the client's desires. The
Company believes that its ability and willingness to personalize its
relationships and customize its services to meet the specific financial and
managerial needs of each customer enable it to compete effectively against
larger equipment leasing and finance companies. The Company further believes
that, by providing asset management services and asset trading capabilities as
well as other services to its customers, it has a competitive advantage over
smaller competitors which lack the resources and expertise to provide such
services.
The Company's asset trading activity involves the purchase and resale
of previously owned information technology equipment. By offering asset
trading capabilities, the Company is able to develop and maintain knowledge of
current market trends and values which enables the Company to predict more
accurately residual values when pricing leasing transactions, dispose
efficiently of off-lease equipment and offer customers a way to dispose of or
acquire previously owned information technology equipment. Asset management
services, which are offered primarily to enhance customer service, is a general
term used to describe the provision of asset inventory and tracking services,
software and record keeping programs to customers. The asset management
services provided by the Company allow
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the customers to better track their information technology assets. The asset
management services include a software system maintained by the Company which
generates reports and allows customers to dial up and receive information on a
real time basis, thus better utilizing their assets.
The Company's management team is led by Phillip G. Norton, Chairman,
President, and Chief Executive Officer, Bruce M. Bowen, founder of the
Company, a director and Executive Vice President, Thomas B. Howard, Jr., Vice
President and Executive Vice President and Chief Operating Officer of MLC Group
(who joined the Company in January, 1997), Steven J. Mencarini, Senior Vice
President and Chief Financial Officer (who joined the Company in June, 1997),
and Kleyton L. Parkhurst, Director of Finance, Secretary and Treasurer, each of
whom has extensive experience in the leasing and finance industries.
INDUSTRY OVERVIEW
The Company believes that its market is undergoing rapid changes and
expansion which present significant opportunities for growth. The primary
structural changes in the market are the result of customer end-user,
technology and vendor marketing trends.
Customer End-Users -- Commercial. The equipment leasing industry in
the United States is a significant factor in financing capital expenditures of
businesses. According to research by the Equipment Leasing Association of
America ("ELA"), using United States Department of Commerce data, approximately
$151.4 billion of the $538.8 billion of business investment in equipment in
1995 was financed by means of leasing. The ELA estimates that 80% of all U.S.
businesses use leasing or financing to acquire capital assets.
Leasing enables a Company to obtain the equipment it needs, while
preserving cash flow and receiving favorable accounting and tax treatment.
Leasing, particularly through operating leases, also provides a lessee with
greater flexibility than ownership in the event it outgrows the equipment or
requires upgrades of its equipment to higher performance levels. As more
customers become aware of the economic benefits of leasing, they often turn to
independent leasing companies. Independent lessors, such as the Company, offer
tailored financing and can deliver financing for mixed systems from different
vendors.
Management believes the fastest growing market segment of the leasing
industry is information technology leasing. These assets include computers,
telecommunication equipment, software, integration services and client server
equipment. According to the ELA, computers and telecommunications equipment
accounted for 26% of the assets leased in 1995.
Customer End-Users -- Government. According to G2 Research, Inc., in
1994, of $328.6 billion in total information technology spending, $27.3 billion
was spent by the federal government and $34.5 billion was spent by state and
local governments, with the remainder spent by commercial customers. G2
Research, Inc. further estimated that this market segment will maintain a 10%
growth rate through the year 2000 as governments convert to client server
systems.
As reported by G2 Research, Inc., state and local governments spent
over $34 billion on information services and systems in 1994. The Company
believes that state and local governments have realized that information
technology can provide tremendous gains in productivity and a decrease in
overall costs. However, state and local governments are increasingly limited
by budgetary constraints in their efforts to acquire goods and services;
therefore, leasing is more favorable since it allows the immediate use of the
asset while the cost is incurred over the asset's useful life. Moreover,
leasing may facilitate the timely acquisition of equipment when compared to the
lengthy process and many levels of approval necessary for bond referendums. An
additional obstacle facing state and local governments in the
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upcoming years is the shift in program responsibility from the federal
government to the state and local governments. The Company believes that this
shift will require more information technology investment by state and local
governments.
Technology Trends. A major trend toward using client server networks
in corporate applications began in the late 1980s. This trend was driven by
the proliferation of personal computers as personal computers changed from
stand-alone units which accommodated one or two specialized functions to a
multi-application unit and the development of networking applications that
distribute computer power to the desktop. Client server computing provides an
alternative to the highly centralized, mainframe and mini-computer systems that
connect multiple terminals to a central processor and which were the mainstay
of the computing world until this decade. The transition from the mainframe to
the personal computer has enabled smaller corporations to utilize more
extensively information technology and telecommunications equipment in the
operation of their businesses. In addition, as technology increasingly
changes, companies are more frequently acquiring and upgrading information
technology and telecommunications equipment.
The transition from the mainframe to the more complicated client
server applications has also placed a premium on the efficient planning,
tracking, procurement and disposal of each unit. The Gartner Group estimates
that the average cost of a corporate customer acquiring, maintaining,
supporting and disposing of the desktop asset is approximately $41,000 over a
five-year period as compared to the average capital cost of each unit of
$2,500. The above changes have increased the need for the specialized asset
management services such as those provided by the Company because the
procurement and management functions of many end-users are oriented to the
acquisition of a high-priced, centralized unit and not to the management of
numerous small-ticket items in multiple locations.
Vendor Distribution and Marketing. As hardware manufacturers face
increasing competition, many manufacturers have sought greater control over
their installed equipment base, and have entered into joint ventures with
third-party financing sources to provide captive financing services. Under
these arrangements, the third party financing source (such as the Company)
provide various levels of origination, administrative, servicing, and
remarketing services, to complement or to replace a vendor's sales, marketing,
administrative, or financing capabilities. The Company believes it has
developed a vendor model which satisfies the new requirements of equipment
vendors while providing an opportunity to earn a satisfactory return on the
vendor's business. In addition, the Company can originate and control its own
portfolio of non-vendor equipment leases using the vendor-program origination
infrastructure, and such portfolio will remain the property of the Company and
outside the scope of the vendor model.
STRATEGY
Based on industry trends and the Company's historical results, the
Company will continue to implement and improve upon a three-pronged strategy
designed to increase its customer base by: (i) providing continuing superior
customer service while marketing to middle market and select Fortune 1000
end-users of information technology equipment and assets; (ii) purchasing
companies in key regional markets with pre-existing customer bases; and (iii)
further developing vendor leasing programs. Through its marketing strategy,
the Company emphasizes cross selling to the different groups of clients and
attempts to reach the maximum number of potential end-users.
While the Company is pursuing and intends to continue to pursue the
forgoing strategies, there can be no assurance that the Company will be able to
successfully implement such strategies. The Company's ability to implement
these strategies may be limited by a number of factors.
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End-User Marketing Focus. The Company's target customers include
middle market and select Fortune 1000 firms which are significant users of
information technology and telecommunications equipment and other assets, which
also may need other services provided by the Company, such as asset management.
By targeting a potential customer base that is broader than just the Fortune
1000 companies, the Company believes that there is less competition from the
larger equipment finance companies, as their marketing forces are typically
more focused on Fortune 1000 customers. The ability to identify and establish
customer relationships with such firms will be critical to the Company's
strategy. There can be no assurance that the Company will be able to
successfully locate such customers.
Acquisition of Related Companies. The Company believes that
significant opportunities to expand its target customer base in key regional
markets can be realized through the acquisition of strategically selected
companies in related lines of business. The Company's acquisition strategy
will focus on acquiring new customers in the top 50 regional markets in the
country. The Company believes that it can successfully acquire companies and
maintain and expand customer relationships by providing acquired companies with
a lower cost of capital, additional cross-selling opportunities and financial
structuring expertise. In addition, the Company can provide the owners of
privately-held companies with an opportunity to realize their Company's value.
The Company believes that decentralized marketing and centralized operations,
along with other operating synergies, will make it successful in lowering the
operational costs while expanding the customer base of each firm it acquires.
The ability to identify and acquire such firms on prices and terms that are
attractive to the Company and which avoid dilution of earnings for existing
stockholders is crucial to the successful implementation of this strategy. In
addition, after consummating any acquisition, the Company must be able to
successfully integrate the acquired business with the Company to achieve the
cost savings and marketing benefits sought by the Company. There is, however,
no assurance that the Company will be able to successfully acquire such
companies, or, if acquired, successfully implement the foregoing strategy.
The Company has entered into two non-binding proposal letters to
acquire two value-added resellers ("VARs"). The mergers are subject to due
diligence, acceptable documentation, and Company Board of Director approval.
Compuventures of Pitt County, Inc. (d.b.a. "MicroAge of Greenville" and
"MicroAge of Wilmington"), had revenues of approximately $15 million for the 12
months ended December 31, 1996. Compuventures has several locations in eastern
North Carolina and serves primarily commercial and institutional customers. The
second reseller had approximately $30 million in revenues for the 12 months
ending March 31, 1997. There can be no assurance that these contemplated
acquisitions, or any other acquisition opportunities which the Company may
pursue, will be completed successfully.
Vendor Focus. Over the last several years, major manufacturers of
information technology and telecommunications equipment have moved away from
providing financing to end-user customers through captive finance organizations
and have increasingly joint ventured their equipment financing function to
independent leasing companies and financing companies. From the perspective of
the large end-user of information technology and telecommunications equipment,
outsourcing equipment financing can simplify and centralize the financing of
multiple products from different vendors, particularly as most captive finance
organizations will service only their manufacturer's products. Through its
participation in vendor marketing programs, the Company leverages its marketing
efforts by utilizing the sales force of the vendor. The vendor's sales
organization provides the Company access to an extensive and diversified
end-user customer base while saving the Company the cost of establishing these
independent customer relationships. The Company uses its relationships with
these vendors and end-users to create new customer relationships to which other
products and services of the Company can be marketed directly. The ability to
successfully establish such vendor and end user relationships is essential to
the successful implementation of this strategy. In fiscal year 1998, the
Company entered into agreements with Cisco Systems Capital Corporation and
Cisco
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Systems, Inc. There can be, however, no assurance that the Company will be
able to successfully establish such relationships, or that the relationships
will produce anticipated volume, or that the Company will successfully establish
relationships with other vendors.
LEASING, FINANCING AND SALES ACTIVITIES
The Company is in the business of leasing and financing equipment and
assets. Although the majority of the transactions are leases, the use of the
phrase "lease," "leases," "leasing" or "financing" may refer to transactions
involving: equipment leases; conditional sales contracts; installments purchase
contracts; software and services contracts; municipal and federal government
contracts; notes; operating leases; customer agreements; direct financial
leases; receivables; factoring; tax exempt leases; true leases; leases with
option to purchase; leases to purchase; vendor agreements; sales-type leases;
leveraged leases; computer leases; capital leases; private label agreements;
financing agreements; or energy management contracts.
Business Development. The Company conducts its business development
efforts through its marketing staff of both employees and independent
representatives which includes 16 individuals located in nine regional offices
and the Company's principal executive offices. The Company believes that one
of its major strengths is its professional and dedicated sales organization and
back office organization which gives it the ability to customize its programs
to meet its customers' specific objectives.
Products and Services. The information technology and communications
equipment that the Company presently purchases for lease or re-sale
includes:(i) personal computers; (ii) laser printers; (iii) telecommunication
controllers; (iv) tape and disk products; (v) file servers; (vi) mainframe
computers; and (vii) mid-range computers. The software and services financed
by the Company include off-the-shelf products and applications, database
products, utilities and specific application products.
The manufacturers and vendors of the above assets include IBM, EMC
Corporation, Hewlett-Packard Company, Toshiba, Cisco Systems, Inc., Digital
Equipment Corporation, Gateway 2000, Inc., Compaq Computer Corporation,
Microsoft Corporation, Amdahl Corporation, Dell Computer Corporation,
HitachiData Systems Corporation, Sterling Software, Inc. and Systems & Computer
Technology Corporation.
The services and support provided by the Company include: (i) custom
lease and financing payment streams and structures; (ii) asset sales and
trade-ins; (iii) upgrade and add-on leasing and financing; (iv) renewal and
re-marketing; (v) personalized invoicing; and (vi) asset management and
reporting.
Lease Terms and Conditions. Substantially all of the Company's lease
transactions are net leases with a specified non-cancelable lease term. These
noncancelable leases have a "hell-or-high-water" provision which requires the
lessee to make all lease payments regardless of any lessee dissatisfaction with
its equipment. A net lease requires the lessee to make the full lease payment
and pay any other expenses associated with the use of equipment, such as
maintenance, casualty and liability insurance, sales or use taxes and personal
property taxes.
Re-marketing. In anticipation of the expiration of the initial term
of a lease, the Company initiates the re-marketing process for the related
equipment. The Company's goal is to maximize revenues by: (i) re-marketing the
equipment in place either by (a) re-leasing it to the initial lessee, (b)
renting on a month-to-month basis or (c) selling it to the initial lessee; (ii)
selling or leasing the equipment to a different customer; or (iii) selling the
equipment to equipment brokers or dealers. The results of the re-marketing
process significantly impact the degree of profitability of a lease
transaction. Procedures and
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obligations of the Company and its vendors with respect to re-marketing are
defined through the Company's equipment purchase and re-marketing agreements
with vendors. To assist the Company in its re-marketing efforts, the Company
sometimes provides incentives to vendors and their sales personnel through
payment of a re-marketing fee and a sharing of residual profits where
appropriate.
The re-marketing process is intended to enable the Company to recover
its equity investment in the re-marketed equipment (i.e., the purchase price of
the equipment, less the debt obtained to finance the purchase of such
equipment) and enables the Company to receive additional proceeds.
Numerous factors, many of which are beyond the control of the Company,
may have an impact on the Company's ability to re-lease or re-sell equipment on
a timely basis. Among the factors are general market conditions, regulatory
changes, variations in the supply or cost of comparable equipment and
technological improvements that lead to the risk of technological obsolescence.
In particular, the computer and telecommunications industries have been
characterized by significant and rapid technological advances. The equipment
owned and leased by the Company is subject to rapid technological obsolescence,
which is typical of information technology and telecommunications equipment.
Furthermore, decreases in the manufacturer's pricing for equipment may
adversely affect the market value of such equipment under lease. Changes in
values or systems and components may require the Company to liquidate its
inventory of certain products at significant markdowns and write down the
residual value of its leased assets, which may result in substantial losses.
Further, the value of a particular used piece of equipment may vary greatly
depending upon its condition and the degree to which any custom configuration
of the equipment must be altered before reuse.
At the inception of each lease, the Company has historically estimated
a residual value for the leased equipment based on the terms of the related
lease and which will permit the transaction to be financed or sold by means of
external, generally nonrecourse, sources. This estimate is approved by the
Company's investment committee, which acts by a signature process instead of
conducting formal meetings. A decrease in the market value of such equipment
at a rate greater than the rate expected by the Company, whether due to rapid
technological obsolescence or other factors, would adversely affect the
residual values of such equipment. Consequently, there can be no assurance
that the Company's estimated residual value for equipment will be realized.
PROCESS CONTROL AND ADMINISTRATIVE SYSTEMS
The Company has developed and maintains an administration system and
controls, featuring a series of checks and balances. The Company's system
helps protect against entering into lease transactions that may have
undesirable economics or unacceptable levels of risk, without impeding the flow
of business activity or preventing its sales organization from being creative
and responsive to the needs of vendors and customers.
Due in part to the Company's strategy of focusing on a few equipment
categories, the Company generally has extensive product knowledge, historical
re-marketing information and experience. This knowledge assists the Company in
setting and adjusting, on a timely basis, the residual values it assumes on
each lease financing. Prior to the Company entering into any lease agreement,
each transaction is evaluated based on the Company's pre-determined standards
in each of the following areas:
Residual Value. Residual value guidelines for the equipment leased by
the Company are established and reviewed by the Company's investment committee,
which also approves the residual value recorded for specific transactions. The
investment committee typically acts by a signature process instead of
conducting formal meetings. The investment committee also must approve the
pricing, including
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residual values, for all transactions involving $100,000 or more in product
value. The investment committee is composed of the Chief Executive Officer,
the Chief Financial Officer, the Chief Operating Officer, and the Treasurer of
the Company, and each person has various levels of signing and co-signing
authorities.
Structure Review. Every transaction is reviewed by the Director of
Contracts, and if necessary, one or more of the following persons: the Chief
Operating Officer, the Chief Executive Officer, the Executive Vice President,
and/or the Treasurer. The reviews are made to ensure that the transaction meets
the minimum profit expectations of the Company and that the risks associated
with any unusual aspects of the lease have been determined and factored into
the economic analysis.
Documentation Review. Once the Company commits to a lease
transaction, its contract administrators initiate a process of systematically
preparing and gathering relevant lease information and lease documentation.
The contract administrators are also responsible for monitoring the
documentation through the Company's home office documentation and review
process. Every transaction into which the Company enters is reviewed by the
Director of Contracts of the Company and, if necessary, the Company's outside
attorneys to identify any proposed lease modifications or other contractual
provisions that may introduce risks in a transaction which the Company has not
anticipated.
Credit Review. Every transaction into which the Company enters is
reviewed by the Treasurer and Chief Operating Officer of the Company to
determine whether the lease payment stream can be financed on a nonrecourse
basis, or must be financed through partial or total recourse borrowing, and
that the financial condition of the lessee meets the Company's credit
standards.
FINANCING
The business in which the Company is engaged is a capital intensive
business. The Company's business involves both the leasing and the financing of
assets. The leasing business is characterized by ownership of the assets
residing with the Company or its assigns. The financing business is
characterized by the beneficial ownership of assets residing with the asset
user or customer. Several different types of financing, each of which is
described below, are important to the conduct of the Company's leasing and
financing business.
The typical lease transaction requires both nonrecourse debt and an
equity investment by the Company at the time the equipment is purchased. The
typical financing transaction is dependent upon the nonrecourse financing
described below. The Company's equity investment in the typical lease
transaction generally ranges between 5% and 20% of the equipment cost (but
sometimes ranges as high as 35%). The balance of the equipment cost, or the
nonrecourse debt portion, is typically financed with a lender on a nonrecourse
basis to the Company. The Company's equity investment must come from: (i)
equity investments from third parties (including MLC/GATX Limited Partnership I
and MLC/CLC LLC); (ii) internally generated funds; (iii) the net proceeds of
the sale of its securities; or (iv) recourse borrowings. Accordingly, the
Company's ability to successfully execute its business strategy and to sustain
its growth is dependent, in part, on its ability to obtain each of the
foregoing types of financing for both senior debt and equity investment.
Information relating to the sources of each of such sources of
financing for equipment acquisitions are as follows:
Nonrecourse Financing. The credit standing of the Company's customers
must be of such a quality as to allow the Company to finance most of its
leasing or financing transactions on a nonrecourse basis. Under a nonrecourse
loan, the Company borrows an amount equal to the committed lease payments under
the financed lease, discounted at a fixed interest rate. The lender is
entitled to receive the payments under the financed lease in repayment of the
loan, and takes a security
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interest in the related equipment but has no recourse against the Company. The
Company retains ownership of such equipment, subject to the lender's security
interest. Interest rates under this type of financing are negotiated on a
transaction-by-transaction basis and reflect the financial condition of the
lessee, the term of the lease and the amount of the loan. As of March 31,
1997, the Company had aggregate outstanding nonrecourse borrowings of
approximately $19.7 million.
The Company's objective is to enter into leasing or financing
transactions with creditworthy customers whose credit standing will permit the
Company to finance such leases with banks or other financial institutions on a
nonrecourse basis to the Company. The Company's customers which do not have a
credit rating of Baa or better generally are creditworthy non-rated companies
that may be publicly or privately owned. The Company has had success in
meeting this objective in the past, but there is no assurance that banks or
other financial institutions will be willing or able to continue to finance the
Company's lease transactions on a nonrecourse basis, that the Company will
continue to be able to attract customers that meet the credit standards for
nonrecourse financing required by the Company's financing sources or that those
standards will not change in the future.
The Company is not liable for the repayment of nonrecourse loans
unless the Company breaches certain limited representations and warranties in
the loan agreements. The lender assumes the credit risk of each such lease,
and its only recourse, upon a default under a lease, is against the lessee and
the equipment which is being leased thereunder.
The Company's personnel in charge of the financing function are
responsible for maintaining a diversified list of qualified nonrecourse debt
sources so that the financing of transactions is not impaired by a lack of
competitively-priced nonrecourse debt. The Company receives nonrecourse
financing from many different sources, offering various terms and conditions.
These debt sources include regional commercial banks, money-center banks,
finance companies, insurance companies and financial intermediaries.
Government Financing. The Company also originates tax-exempt state
and local lease transactions in which the interest income is exempted from
federal income taxes, and to some degree, certain state income taxes. The
Company assigns its tax-exempt leases to institutional investors, banks and
investment banks which can utilize tax-free income, and has a number of such
entities which regularly purchase the transactions.
Leasing Assignment Financing. Access to nonrecourse financing is also
important to the Company's lease sales revenue and fee income. The Company
enters into many transactions involving government leases which it immediately
assigns, syndicates or sells, on a nonrecourse basis to third parties and books
any gain from the transaction as sales or fee income.
The Company may utilize the public debt securities market in the
future to provide a portion of the nonrecourse debt it requires. The Company
believes that its utilization of the public debt securities markets is likely
to reduce the Company's effective interest cost for its nonrecourse debt and to
provide for a more efficient financing arrangement, than is presently provided
by its existing financing arrangements, to fund its nonrecourse borrowing
requirements. See "Item 7, Management's Discussion and Analysis of Results of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
Equity Joint Ventures. Through MLC/GATX Limited Partnership I and
MLC/CLC LLC, the Company has formal joint venture arrangements with two
institutional investors which provide the equity investment financing for
certain of the Company's transactions. GATX, an unaffiliated Company which
beneficially owns 90% of MLC/GATX Limited Partnership I, is a publicly listed
Company with stockholders' equity in excess of $344 million, as of December 31,
1996. Cargill Leasing Corporation, an
11
<PAGE> 12
unaffiliated investor which owns 95% of MLC/CLC LLC, is affiliated with
Cargill, Inc., a privately held business that was reported by Forbes Magazine
to have 1995 earnings in excess of $900 million. These joint venture
arrangements enable the Company to invest in a significantly greater portfolio
of business than the Company's limited capital base would otherwise allow.
MLC/GATX Limited Partnership I and MLC/CLC LLC provide the majority of
the Company's equity investment from third parties as referenced above. During
fiscal year 1995, the Company's investment in MLC/GATX Limited Partnership I
increased due to the Company's capital contributions for its share of the
partnership's equity investment in leased equipment and partnership expenses.
For the year ending March 31, 1997, out of leased equipment sales of $21.6
million, MLC/GATX Limited Partnership I represented $3.5 million or 16.2% and
MLC/CLC LLC represented $16.9 million or 78.2%. MLC/GATX Limited Partnership I
and MLC/CLC LLC only purchase transactions from the Company.
For fiscal year 1997, of the Company's total revenue, approximately
6.1% was attributable to sales of lease transactions to MLC/GATX Limited
Partnership I, and approximately 30.1% was attributable to sales of lease
transactions to MLC/CLC LLC. Transactions involving the use or placement of
equity from these joint ventures require the consent of the relevant joint
venture partner, and if financing from those sources were to be withheld or
were to become unavailable, it would limit the amount of equity available to
the Company and may have a material adverse effect upon the Company's business,
financial condition and results of operations.
Equity Capital and Internal Financing. Occasionally the Company
finances leases and related equipment internally, rather than with financing
provided by lenders. These internal lease financing typically occur in cases
where the financed amounts, terms, collateral, or structures are not attractive
to lenders, or where the credit rating of the lessee is not acceptable to
lenders. The Company also temporarily finances selected leases internally,
generally for less than 90 days, until permanent outside nonrecourse financing
is obtained.
Recourse Financing. Bank Lines of Credit. The Company relies on
recourse borrowing in the form of revolving lines of credit for working capital
to acquire equipment to be resold in its trading operation and to acquire
equipment for leases and, to a lesser extent, the Company uses recourse
financing for long term financing of leases. As of March 31, 1997, the
Company's available credit under its short-term, recourse facility with First
Union National Bank of Virginia, N.A. (the "First Union Facility") totaled
$5,000,000, and no amounts were outstanding as of March 31, 1997. Borrowing
under the First Union Facility was available through July 30, 1997, with
repayments due 90 days after borrowing, however, on June 10, 1997, the Company
terminated the First Union Facility. Borrowings under the First Union Facility
bore interest at LIBOR plus 275 basis points.
As of March 31, 1997, the Company had aggregate outstanding long-term
recourse borrowings of $268,744 from various lenders, primarily for the long
term financing of leases.
The Company previously had a $2,000,000 facility with NationsBank,
N.A. which it allowed to expire on December 1, 1996.
On June 5, 1997, the Company entered into a $15,000,000 committed
recourse line of credit with CoreStates Bank, N.A. (the "CoreStates Facility")
Borrowings under the CoreStates Facility, which is available through June 5,
1998, bear interest at LIBOR + 110 basis points, or, at the Company's option,
Prime minus one percent. On June 10, 1997, the Company terminated its First
Union Facility, repaid all amounts outstanding, and made its first borrowing
under the CoreStates Facility in the amount of $7,500,000. The CoreStates
Facility is made to MLC Group, Inc. and guaranteed by MLC Holdings, Inc. The
CoreStates Facility is secured by certain of the Company's assets such as
chattel paper (including leases), receivables, inventory, and equipment.
The availability of the line is subject to
12
<PAGE> 13
a borrowing base which consists of inventory, receivables, purchased assets,
and leases.
Availability under the revolving lines of credit may be limited by the
asset value of equipment purchased by the Company and may be further limited by
certain covenants and terms and conditions of the facilities. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
finalized and executed documents establishing a $10,000,000 credit facility
agreement (the "Heller Facility"), with Heller Financial, Inc. ("Heller"), a
Delaware corporation. Under the terms of the Heller Facility, a maximum amount
of Ten Million Dollars ($10,000,000) is available to the Company, provided,
that each draw is subject to the approval of Heller. The Heller Facility is
evidenced by a Loan and Security Agreement dated as of January 31, 1997 (the
"Loan Agreement") and a First Amendment to Loan and Security Agreement (the
"Amendment") dated as of March 12, 1997 (although the Loan Agreement is dated
effective January 31, 1997, all documents were executed concurrently in March,
1997). The primary purpose of the Heller Facility is for the permanent
fixed-rate discounting of rents for commercial leases of information technology
assets with the Company's middle-market customers. As of March 31, 1997, no
advances under the Heller Facility had been made, however, on April 25, 1997,
a loan of $943,642 was advanced to the Company. No other advances have been
made through June 23, 1997. Each advance under the facility will bear interest
at an annual rate equal to the sum of the weekly average U.S. Treasury Constant
Maturities for a Treasury Note having approximately an equal term as the
weighted average term of the contracts subject to the advance, plus an index
ranging from 1.75% to 3.00%, depending on the amount of the advance and the
credit rating (if any) of the lessee. The Heller Facility contains a number of
covenants binding on the Company and is a limited recourse facility, secured
by a first-priority lien in the contracts and chattel paper relating to each
advance, the equipment subject to such contracts, a 10% cross-collateralized
first loss guarantee, and all books, records and proceeds pertaining thereto.
The Heller Facility is made to MLC Group, Inc. and guaranteed by MLC Holdings,
Inc. As compared to a committed line of credit, lending under the Heller
Facility is in Heller's sole discretion, and is further subject to MLC Group's
compliance with certain conditions and procedures. Under the Heller Facility,
upon not less than sixty (60) days' prior notice, either Heller or the Company
may notify the other of its intention not to seek/provide any further financing
thereunder.
DEFAULT AND LOSS EXPERIENCE
From the organization of the Company in 1990 through March 31, 1997,
the Company has not taken any write-offs due to credit losses with respect to
lease transactions financed by the Company though no assurance can be given
about what the Company's future credit loss experience will be. The Company
implemented a credit rating system during the quarter ended March 31, 1997, and
created a reserve for credit losses in the amount of $66,000 relating to its
lease and accounts receivables.
COMPETITION
The Company competes in the information technology and
telecommunications equipment leasing and financing market with bank-affiliated
lessors, captive lessors and other independent leasing or financing companies.
The Company's product and market focus often limits direct competition with
many of these types of companies. Bank affiliated lessors typically do not
directly compete in the operating lease segment of the leasing industry.
Captive leasing companies, such as IBM Credit Corporation, typically finance
only their parent Company's products. The Company competes directly with
various independent leasing companies, such as El Camino Resources, Ltd.,
Comdisco, Inc., and Leasing Solutions, Inc. Many of the Company's
13
<PAGE> 14
competitors have substantially greater resources and capital and longer
operating histories.
The Company believes it competes on the basis of price, responsiveness
to customer needs, flexibility in structuring lease transactions, relationships
with its vendors and knowledge of its vendors' products. The Company has found
it most effective to compete on the basis of providing a high level of customer
service and by structuring custom relationships with vendors and lease
transactions that meet the needs of its vendors and customers. Other important
elements that affect the Company's competitiveness are the high degree of
knowledge and competence of its key employees, specifically relating to
information technology and telecommunications equipment and operating lease
financing. Many of the Company's competitors are well established and have
substantially greater financial, marketing, technical and sales support than
the Company.
EMPLOYEES
As of March 31, 1997, the Company had 47 full time employees and seven
part time employees. Of these, 37 worked in the Company's principal executive
offices and the remaining 17 worked in the various regional offices of the
Company. Regional offices are generally staffed with one or more account
representatives who have daily contact with lessees and vendors.
The Company has assigned its employees to the following functional
areas, with the number of employees in each area indicated in parentheses:
administrative (1); sales and marketing (16); asset management (9); buy/sell
(7); accounting (8); executive (3); finance (3); and operations (7).
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price
of its stock may fluctuate. In the event the Company's revenues or earnings
for any quarter are less than the level expected by securities analysts or the
market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's stock. Any such adverse
impact could be greater if any such shortfall occurs near the time of any
material decrease in any widely followed stock index or in the market price of
the stock of one or more public equipment leasing companies or major customers
or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a
result of sales by the Company of equipment it leases to its customers. Such
sales of leased equipment, which are an ordinary but not predictable part of
the Company's business, will have the effect of increasing revenues, and, to
the extent sales proceeds exceed net book value, net income, during the quarter
in which the sale occurs. Furthermore, any such sale may result in the
reduction of revenue, and net income, otherwise expected in subsequent
quarters, as the Company will not receive lease revenue from the sold equipment
in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased space
of 4,517 square feet at 11150 Sunset Hills Road, Suite 110, Reston, Virginia
20190-5321. The Company also leases office space for its regional offices in
Philadelphia, Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento,
California; Raleigh, North Carolina; Atlanta, Georgia; and San Diego,
California. As of March 31, 1997,
14
<PAGE> 15
the aggregate monthly rent under all of the Company's office leases was
approximately $12,000. The Company has an aggregate of approximately 9,147
square feet of office space under lease with an average remaining lease term of
two years. During June 1997, the Company expanded its principal executive
offices to include an additional 1,228 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings, and is not aware
of any pending or threatened legal proceedings that would have a material
adverse effect upon the Company's business, financial condition or results of
operations.
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<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock has traded on the Nasdaq National Market
since November 20, 1996 under the symbol "MLCH." The following table sets
forth the range of high and low closing sale prices for the Common Stock for
the period November 20, 1996 through March 31, 1997, by quarter.
<TABLE>
<CAPTION>
High Low
----------------
<S> <C> <C>
December 31, 1996* $10.25 $8.75
March 31, 1997 14.50 9.38
</TABLE>
* For the period November 20, 1996 through December 31, 1996.
On June 12, 1997 the last sale price of the Common Stock was $13.00
per share. On June 12, 1997, there were 19 shareholders of record of the
Company's Common Stock.
DIVIDENDS
The Company has never paid a cash dividend to stockholders and the
current policy of the Company's Board of Directors is to retain the earnings of
the Company for use in the business. In addition, the CoreStates Facility
prohibits the Company from paying any dividends. Therefore, the payment of
cash dividends on the Common Stock is unlikely in the foreseeable future. Any
future determination concerning the payment of dividends will depend upon the
elimination of these restrictions and the absence of similar restrictions in
other agreements to which the Company is a party, the Company's financial
condition, the Company's results of operations and any other factors deemed
relevant by the Board of Directors.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements of the Company
and related Notes thereto and the information included under "Item 7,
Management's Discussion and Analysis of Results of Financial Condition and
Results of Operation" and "Item 1, Business."
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------
Statements of Earnings 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of equipment $ 24,357 $ 18,737 $ 26,940 $ 18,524 $ 21,683
Sales of leased equipment -- 5,940 9,958 16,318 21,634
Leased revenues 1,219 1,577 2,968 6,009 10,345
Net margin on sales-type
leases 193 380 277 86 --
Fee and other income 694 979 676 1,863 2,485
------ ------ ------- ------- -------
Total revenues 26,463 27,613 40,819 42,800 56,147
------ ------ ------- ------- -------
Costs and Expenses:
Cost of sales 22,750 23,155 34,353 31,202 40,104
Direct lease costs 140 344 841 2,863 5,198
Professional and other fees 770 595 633 687 534
Salaries and benefits 1,403 1,734 2,631 2,962 3,653
General and administrative expenses 526 994 759 1,018 1,236
Interest and financing costs 251 411 990 1,577 1,581
------ ------ ------- ------- -------
Total costs and expenses 25,840 27,233 40,207 40,309 52,306
------ ------ ------- ------- -------
Earnings Before Provision for
Income Taxes 623 380 612 2,491 3,841
Provision for Income Taxes 185 59 198 881 1,360
------ ------ ------- ------- -------
Net Earnings $ 438 $ 321 $ 414 $ 1,610 $ 2,481
====== ====== ======= ======= =======
Net Earnings per Common Share $ 0.11 $ 0.08 $ 0.10 $ 0.40 $ 0.56
====== ====== ======= ======= =======
Shares Used in Computing per
Share Amounts 4,000,000 4,000,000 4,000,000 4,000,000 4,406,427
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------------------------------------
Balance Sheets 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 106 $ 929 $ 253 $ 358 $ 6,048
Accounts receivable 465 964 2,138 1,273 5,184
Notes receivable 34 87 37 92 2,154
Inventories 456 231 138 86 184
Refundable income taxes -- 13 49 -- --
Investment in direct financing and
sales-type leases -- net 2,577 10,146 12,124 16,273 17,473
Investment in operating lease
equipment -- net 2,104 164 1,874 10,220 11,065
Other Assets 40 334 548 1,178 605
All other assets 82 370 320 356 346
------- -------- -------- -------- --------
Total Assets $ 5,864 $ 13,238 $ 17,481 $ 29,836 $ 43,059
======= ======== ======== ======== ========
Liabilities:
Accounts payable - equipment $ 2,107 $ 1,091 $ 3,014 $ 4,973 $ 4,947
Accounts payable - trade 113 466 395 605 561
Salaries and commissions payable 122 131 118 62 472
Recourse notes payable 634 2,144 1,815 1,285 269
Nonrecourse notes payable 1,917 8,116 10,162 18,351 19,705
All other liabilities 441 439 713 1,685 3,136
------- -------- -------- -------- --------
Total Liabilities 5,334 12,387 16,217 26,961 29,090
------- -------- -------- -------- --------
Total Stockholders' Equity 530 851 1,264 2,875 13,969
------- -------- -------- -------- --------
Total Liabilities &
Stockholders' Equity $ 5,864 $ 13,238 $ 17,481 $ 29,836 $ 43,059
======= ======== ======== ======== ========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report.
Certain statements contained herein are not based on historical fact, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that may not occur. Actual events, transactions and results
may materially differ from the anticipated events, transactions, or results
described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to,
the existence of demand for and acceptance of the Company's services, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the
Company's control. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
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<PAGE> 19
REVENUE RECOGNITION AND LEASE ACCOUNTING
The Company's principal line of business is the leasing, financing and
sale of equipment. The manner in which these lease finance transactions are
characterized and reported for accounting purposes has a major impact upon the
Company's reported revenue, net earnings and the resulting financial measures.
Lease accounting methods significant to the Company's business are discussed
below.
The Company classifies its lease transactions, as required by the
Statement of Financial Accounting Standards No. 13, Accounting for Leases
("FASB No. 13") as: (i) direct financing; (ii) sales-type; or (iii) operating
leases. Revenues and expenses between accounting periods for each lease term
will vary depending upon the lease classification.
For financial statement purposes, the Company includes revenue from all
three classifications in lease revenues, and costs related to these leases in
direct lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type
leases transfer substantially all benefits and risks of equipment ownership to
the customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at inception of the lease.
Direct finance leases are recorded as investment in direct finance
leases upon acceptance of the equipment by the customer. At the inception of
the lease, unearned lease income is recorded which represents the amount by
which the gross lease payments receivable plus the estimated residual value of
the equipment exceeds the equipment cost. Unearned lease income is recognized,
using the interest method, as lease revenue over the lease term.
Sales-type leases include a dealer profit (or loss) which is recorded by
the lessor at the inception of the lease. The dealer's profit (or loss)
represents the difference, at the inception of the lease, between the fair value
of the leased property and its cost or carrying amount. The equipment subject
to such leases may be obtained in the secondary marketplace, but most frequently
is the result of releasing the Company's own portfolio. This profit (or loss)
which is recognized at lease inception, is included in net margin on sales-type
leases. Interest earned on the present value of the lease payments and residual
value is recognized over the lease term using the interest method and is
included as part of the Company's lease revenue.
Operating Leases. All leases that do not meet the criteria to be
classified as direct financing or sales-type leases are accounted for as
operating leases. Rental amounts are accrued evenly over the lease term and are
recognized as lease revenue. The Company's cost of the leased equipment is
recorded on the balance sheet as investment in operating lease equipment and is
depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue, depreciation expense and resultant profit
for operating leases are recorded evenly over the life of the lease.
As a result of these three classifications of lease for accounting
purposes, the revenues resulting from the "mix" of lease classifications during
an accounting period will affect the profit margin percentage for such period
with such profit margin percentage generally increasing as revenues from direct
financing and
19
<PAGE> 20
sales-type leases increase. Should a lease be financed, the interest expense
declines over the term of the financing as the principal is reduced.
Residual Values. Residual values represent the Company's estimated
value of the equipment at the end of the initial lease term. The residual
values for direct financing and sales-type leases are recorded in investment in
direct financing and sales-type leases, on a net present value basis. The
residual values for operating leases are included in the leased equipment's net
book value and are recorded in investment in operating lease equipment. The
estimated residual values will vary, both in amount and as a percentage of the
original equipment cost, and are recorded in investment in operating lease
equipment, depending upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
The Company evaluates residual values on an ongoing basis and records
any required changes in accordance with FASB No. 13. Residual values are
affected by equipment supply and demand and by new product announcements and
price changes by manufacturers. In accordance with generally accepted
accounting principles, residual values can only be adjusted downward.
The Company seeks to realize the estimated residual value at lease
termination through: (i) renewal or extension of the original lease; (ii) sale
of the equipment either to the lessee or the secondary market; or (iii) lease of
the equipment to a new user. The difference between the proceeds of a sale and
the remaining estimated residual value is recorded as a gain or loss in lease
revenues when title is transferred to the lessee, or, if the equipment is sold
on the secondary market, in sales revenues and cost of sales when title is
transferred to the buyer. The proceeds from any subsequent lease are accounted
for as lease revenues at the time such transaction is entered into.
Initial Direct Costs. Initial direct costs related to the origination
of sales-type, direct finance or operating leases, are capitalized and recorded
as part of the investment in direct financing and sales-type leases, net or as
operating lease equipment, net and are amortized over the lease term.
Sales. Sales revenue includes the following types of transactions:
(i)equipment sales to customers involve the sale to customers of new and/or used
equipment that is not subject to any type of lease; (ii) leased equipment sales
to investors relate to equipment being leased for which the Company is the
lessor, and the transfer of any financing related to the specific lease or
equipment; and (iii) sales of equipment which was previously leased involve
sales of equipment which the Company was the lessor whether to the original
lessee or to a new user.
Other Sources of Revenue. Fee and other income results from (i) income
events that occur after the initial sale of a financial asset such as
escrow/prepayment income, (ii) remarketing fees, (iii) brokerage fees earned for
the placement of financing transactions and (iv) interest and other
miscellaneous income. These revenues are included in fee and other income on
the Company's statement of earnings.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED MARCH 31, 1997
REVENUES
In fiscal year 1995, total revenues increased $13.2 million or 47.8%,
from $27.6 million in fiscal year 1994 to $40.8 million. In fiscal year 1996,
total revenues increased $2 million, or 4.9% from fiscal year 1995, to $42.8
million. In fiscal year 1997, total revenues increased $13.3 million or 31.2%
from fiscal year 1996, to $56.1 million.
20
<PAGE> 21
In fiscal year 1995, lease revenue increased $1.4 million, or 88.2%,
from $1.6 million in fiscal year 1994 to $3 million. In fiscal year 1996, lease
revenue increased $3 million, or 102.5%, to $6 million. In fiscal year
1997, lease revenue increased $4.3 million, or 72.2 %, to $10.3 million. The
increases are attributable to the increase of operating leases and direct
financing leases originated or acquired by the Company during the periods, and
the increases should continue to correspond with the level of lease activity
originated or acquired by the Company.
Sales revenue increased 49.5% from $24.7 million in fiscal year 1994 to
$36.9 million in fiscal year 1995 as a result of a 43.1% increase in equipment
sales from $18.8 million to $26.9 million and a 69.5% increase in leased
equipment sales from $5.9 million to $10 million. Sales revenues declined 5.6%
in fiscal year 1996 to $34.8 million as a result of a 31.2% decline in equipment
sales to $18.5 million partially offset by a 63.9% increase in leased equipment
sales to $16.3 million, leased equipment sales to MLC/GATX Limited Partnership I
was $13.1 million of the total $16.3 million. The decline in sales revenues in
fiscal year 1996 is attributable to the Company's focus on higher margin
transactions rather than on volume. Sales revenue increased 24.3%, or $8.5
million, in fiscal year 1997, to $43.3 million as a result of a 17.1% increase
in sales of equipment from $18.5 to $21.7 million and a 32.6% increase in the
sale of leased equipment from $16.3 to $21.6 million. Of the $21.6 million in
sale of leased equipment, $16.9 million was sale of leased equipment to MLC/CLC
LLC. As leasing volume grows, leased equipment sales are expected to grow as
well.
Net margin on sales-type lease revenue decreased $103,758, or 27.3%,
from $380,446 in fiscal year 1994 to $276,688 in fiscal year 1995, and $191,098,
or 69.1%, to $85,590 in fiscal year 1996 as a result of a decrease in the
origination of leases qualifying as sales-type leases. In fiscal year 1997, no
revenues were recorded as sales-type lease revenues due to no leases qualifying
as sales-type leases, and the Company expects this to continue.
Fee and Other Income. Fee and other income totaled $979,451 in fiscal
year 1994 which consisted of several significant transactions including $298,500
from a fee relating to the brokerage of a municipal lease transaction and
$155,000 from the settlement of a dispute. Fee and other income decreased
$302,714, or 30.9%, from $979,451 in fiscal year 1994 to $676,737 in fiscal year
1995 and increased $1.2 million, or 175.6% to $1.9 million in fiscal year 1996.
Fees earned in fiscal year 1996 included $440,570 from the financing of federal
lease transactions and $327,627 from the brokerage of various municipal leases
of lottery equipment. Fees and other income increased $620,638, or 33.3% to
$2.5 million in fiscal year 1997. Fees earned in fiscal year 1997 included a
one time fee of $250,000 for providing advisory services to a company which is
in part owned by one of the Company's outside directors. The increase in fee
and other income is attributable to higher levels of interest income,
remarketing fees, earnings from a prepay escrow fee, and higher levels of
management fee income earned from the equity joint ventures with Cargill and
GATX, as compared to the same periods of 1996. The Company expects that fee
and other income will vary considerably due to the uncertainty of completion
and the timing of specific transactions. See "Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Fluctuations in
Quarterly Operating Results."
EXPENSES
Cost of Sales. Cost of sales increased $11.2 million or 48.4% from
$23.2 million in fiscal year 1994 to $34.4 million in fiscal year 1995,
decreased $3.2 million or 9.2% to $31.2 million in fiscal year 1996, and
increased $8.9 million, or 28.5% to $40.1 million in fiscal year 1997. The
increases in fiscal years 1995 and 1997 and the decrease in fiscal year 1996
relate directly to the volume of sales in each of those years.
21
<PAGE> 22
Depreciation and Operating Leases. Depreciation increased $398,576, or
295.4%, from $134,943 in fiscal year 1994 to $533,519 in fiscal year 1995,
increased $1.5 million, or 286%, to $2.1 million in fiscal year 1996, and
increased $1.4 million, or 67% to $3.5 million for fiscal year 1997. The
increase in depreciation for all years is due to the increased level of
operating leases originated and acquired by the Company and increases in the
Company's operating lease assets over the three-year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $698,764, or 21.1%, from $3.3 million in
fiscal year 1994 to $4 million in fiscal year 1995, and increased $645,295, or
16%, to $4.7 million in fiscal year 1996. Selling, general, and administrative
expenses increased $756,401, or 16.2% to $5.4 million in fiscal year 1997. The
increases during the three-year period are due primarily to increased level of
business and selling activity.
Interest Expense. Interest and other financing expenses increased
$578,921, or 140.7%, from $411,392 in fiscal year 1994 to $990,313 in fiscal
year 1995, increased $586,049 or 59.2%, to $1.6 million in fiscal year 1996, and
increased $4,668, or 0.3% to $1.6 million in fiscal year 1997. The increase in
interest expense during the periods resulted from the Company's increased level
of leasing and business activity, including an increase in recourse and
nonrecourse debt from $10.3 million in fiscal year 1994 to $12 million in fiscal
year 1995 to $19.6 million in fiscal year 1996 to $20 million in fiscal year
1997. The proceeds of the initial public offering in November and December,
1996 reduced the short-term borrowings of the Company and resulted in a smaller
increase in interest expense. The weighted average interest rate for the
Company's nonrecourse debt outstanding as of March 31, 1996 and March 31, 1997
was 7.8%.
Income Taxes. The provision for taxes was 15.6% and 32.4% of earnings
before income taxes for the fiscal years 1994 and 1995 respectively. The
provision for taxes for fiscal years 1996 and 1997 was 35.4%. The lower rate in
fiscal year 1994 is attributable to a higher percentage of nontaxable items and
lower percentage of nondeductible items in relation to earnings before taxes for
that year.
Net Earnings. On a consolidated basis, net earnings and net earnings
per share increased in each of the fiscal years 1995, 1996, and 1997. Net
earnings increased $93,022, or 29%, from $320,533 in fiscal year 1994 to
$413,555 in fiscal year 1995. From fiscal year 1995 to fiscal year 1996, net
earnings increased $1.2 million, or 288.9%, to $1.6 million, from fiscal year
1996 to fiscal year 1997 net earnings increased $870,177, or 54% to $2.5
million. The increases result from the fluctuation in revenues and expenses
discussed in the above paragraphs.
Management of Interest Rate Expense. The Company manages interest rate
expense by pricing its transactions based upon the market rates at the time of
the transaction. Most transactions are funded with matching term debt thereby
locking in the interest costs to match the cash flows from the lease over its
term.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, differences
between estimated residual values and actual amounts realized related to the
equipment the Company leases. Quarterly operating results could also fluctuate
as a result of the sale by the Company of equipment in its lease portfolio prior
to the expiration of the lease term to the lessee or to a third party. Such
sales of leased equipment prior to the expiration of the lease term may have the
effect of increasing revenues and net earnings during the quarter in which the
sale occurs, and reducing revenues and net earnings otherwise expected in
subsequent quarters.
FINANCIAL CONDITION
22
<PAGE> 23
During fiscal year 1995, the Company obtained an additional $3 million
line of credit facility which gave the Company total lines of credit facilities
of $5 million. As a result of fiscal year 1995 net earnings of $414,000
stockholders' equity increased to $1.3 million at March 31, 1995.
During fiscal year 1996, the Company replaced its $3 million bank
facility with the First Union Facility, a $5 million line of credit facility.
In fiscal year 1996, the Company also entered into an equity joint venture with
Cargill Leasing Corporation, a transaction which positioned the Company to
compete more effectively in the growing area of personal computer and network
leasing. See "Item 1, Business -- Financing." As a result of fiscal year 1996
net earnings of $1.6 million, stockholders' equity increased to $2.9 million at
March 31, 1996.
During fiscal year 1997, the Company entered into a $10 million
partial-recourse lease warehouse facility with Heller. In fiscal year 1997, the
Company also completed its initial public offering of 1,150,000 shares of common
stock at a price of $8.75 per share. Net of expenses and underwriter's
discount, the initial public offering increased the Company's paid-in capital
by $8.6 million, which combined with fiscal year 1997 net earnings of $2.5
million increased stockholders' equity to $14 million at March 31, 1997.
During the three year period ended March 31, 1997, the Company improved
its financial condition and available financial resources in the following
ways:(i) available lines of credit increased from $2 million to $5 million;
(ii)stockholders' equity increased from $850,744 to $14 million; and (iii) the
Company entered into one equity joint venture which substantially increased its
ability to finance its lease transactions, and iv) an available partial-recourse
credit facility increased from $0 to $10 million. All of the above factors have
allowed the Company to be able to support the higher levels of sales and leasing
activity reflected in its financial statements.
As part of its ongoing business activity, the Company generates new
equipment leases and also engages in leased equipment sales. From fiscal year
1995 to fiscal year 1996 the minimum lease payments for direct financing and
sales type leases increased from $13.7 million to $18.2 million, or 33.2%. From
fiscal year 1996 to fiscal year 1997 the minimum lease payments for direct
financing and sales type leases increased from $18.2 million to $18.7 million,
or 3.0%. The future minimum lease payments fluctuate, depending on sales and
new lease activity from year to year and quarter to quarter, making it
impractical to accurately trend the minimum lease payments. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. The Company generated cash flow from operations of $1.2
million during the twelve month period ended March 31, 1997, which was lower
than same-period net income of $2.5 million as a result of increases in accounts
receivable of $3.9 million (mostly due to increases in lease receivables for
equipment which has been paid for but not yet booked as a lease), notes
receivable of $2.1 million, (due to amounts owed by MLC/CLC LLC for unfunded
equity sales made at year-end), and Payments from Lessees Directly to Lenders of
$1.6 million, and other non-cash items of $78,849. Non-cash expenses which
increased cash flow included Depreciation and Amortization of $3.6 million (due
to an increase in the amount of operating lease assets held during the year and
amortization of indirect costs), increases in Income Taxes Payable of $924,255,
Salaries & Commissions Payable of $410,348, increases in accrued expenses and
other liabilities of $680,583 (primarily due to an increase in cash held for
others), the net loss on sale of off-lease operating lease equipment of
$83,754, ($299,000 of the losses included in this net figure was a result of
the early termination of a number of operating leases with one customer where
the Company received a termination fee which was in excess of the non-cash
23
<PAGE> 24
adjustment, resulting in positive net fee income for the transaction as a
whole) and increases in other assets and liabilities of $724,136.
Investing activities, which are primarily related to investments in
equipment under lease, used $26.5 million during the twelve month period.
Financing activities in the twelve month period generated $30.9 million which
included $26.8 million from the Company's new borrowings of non-recourse debt,
$221 thousand from new recourse borrowings, and $8.6 million cash proceeds from
the Company's initial public offering and the proceeds from the
fully-subscribed overallottment. The cash raised was offset by repayment of
recourse and non-recourse borrowings aggregating $3.3 million), repayment of
$1.1 million to its lines of credit, and the termination and repayment of loans
from stockholders of $275 thousand. The net result of the above activity for
the twelve month period was an increase in cash and cash equivalents of $5.7
million.
Cash Flow from Borrowings. To date, the financing necessary to support
the Company's leasing and financing activities has been provided principally
from nonrecourse borrowings, and to a lesser extent, recourse borrowings. The
Company anticipates that future leasing and financing activities will be
financed in a similar manner, as well as cash flow from operations.
Historically, the Company has obtained recourse and nonrecourse
borrowings from money center banks, regional banks, insurance companies, finance
companies and financial intermediaries.
In order to take advantage of the most favorable long-term financing
arrangements available to it, the Company often finances equipment purchases and
the related leases on an interim basis with short-term, recourse debt, and
accumulates such leases until it has a sufficient transaction size (either with
a single lessee or a portfolio of lessees) to warrant obtaining long-term
financing for such leases either through nonrecourse borrowings or a sale
transaction. Such interim financing is usually obtained through the Company's
revolving line of credit (such as the CoreStates Facility) or partial-recourse
warehouse lines (such as the Heller Facility) The Company's maximum available
credit under such lines of credit totaled $15 million as of March 31, 1997. As
of June 5, 1997, the Company's available credit under such lines was increased
to $25 million with the replacement of the First Union Facility by the
CoreStates Facility. See "Item 1, Business -- Financing".
Borrowings under the lines of credit are generally secured by lease
receivables and the underlying equipment financed under the facility. At March
31, 1997, there were no balances outstanding under the Company's lines of
credit, however, as of June 23, 1997, there was $7,500,000 outstanding under the
CoreStates Facility and $890,814 outstanding under the Heller Facility. The
agreements for the lines of credit contain covenants regarding leverage (a
maximum debt to net worth ratio of 6.5 to 1.0 and a minimum consolidated
tangible net worth of $9,000,000 as well as interest coverage, minimum net worth
and profitability and a limitation on the payment of dividends). At March 31,
1997, the Company had a recourse liabilities to equity ratio of 0.67 to 1.0.
In July, 1996, the Company entered into the NationsBanc Leasing
Facility, under which NationsBanc Leasing Corporation may lend up to $2 million
in various notes of terms of up to 60 months. The facility expired January 31,
1997, and the Company made no borrowings under the facility.
On June 5, 1997, the Company entered into the CoreStates Facility, a $15
million committed recourse line of credit with CoreStates Bank, N.A. Borrowings
under the CoreStates Facility, which is available through June 5, 1998, bear
interest at LIBOR + 110 basis points, or, at the Company's option, Prime minus
one percent. On June 10, 1997, the Company terminated its First Union Facility
24
<PAGE> 25
and drew down $7.5 million on the CoreState Facility. The line of credit is
made to MLC Group, Inc. and guaranteed by MLC Holdings, Inc.
Availability under the revolving lines of credit may be limited by the
asset value of equipment purchased by the Company and may be further limited by
certain covenants and terms and conditions of the facilities.
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
established the Heller Facility, a $10,000,000 credit facility agreement, with
Heller. Under the terms of the Heller Facility, a maximum amount of $10 million
is available to the Company, provided, that each draw is subject to the
approval of Heller. As of March 31, 1997, no advances under the Heller
Facility have been made, however, on April 28, 1997, a loan of $943,642 was
advanced to the Company. No other advances have been made through June 23,
1997(See "Item 1 - Business --- Financing --- Partial Recourse Borrowing
Facilities")
The Company repaid loans to two stockholders in the amount of $275,000
from the proceeds of the initial public offering.
Payments under the Company's borrowings and the maturities of its
long-term borrowings are typically structured to match the payments due under
the leases securing the borrowings.
Non Recourse Borrowing. The Company's nonrecourse debt financing
activities typically provide a significant portion of the purchase price of the
equipment purchased by the Company for lease to its customers. The balance of
the purchase price (the Company's equity investment in equipment), is financed
from a variety of sources. See "Item 1, Business -- Financing." Although the
Company believes that the credit quality of its lessees will continue to allow
it to obtain such debt financing, no assurances can be given that such financing
will be available at acceptable terms or at all.
ADEQUACY OF CAPITAL RESOURCES
The Company's current lines of credit, if maintained, and its expected
access to the public and private debt securities markets (including financings
for its equity investment in leases) and its estimated cash flow from
operations are anticipated to provide adequate capital to fund the Company's
operations, including acquisitions and financings under its relationships with
vendors, for at least the next 12 months. Although no assurances can be given,
the Company expects to be able to maintain, renew, or replace its existing
short-term lines of credit and to continue to have access to the public and
private securities markets, both for debt and for equity financings.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued FASB No. 128, "Earnings
Per Share" in February 1997. This standard will be effective for the Company
beginning in fiscal year 1998. The pro forma effect of adopting this standard
has no impact on the earnings per share calculation for the years ended March
31, 1995, 1996 and 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying Table of Contents to Financial Statements and Schedule
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
<PAGE> 26
PART III
Except as set forth below, the information required by Items 10, 11, 12
and 13 is incorporated by reference from the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the Company's fiscal
year.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The following table sets forth the name, age and position with the
Company of each person who is an executive officer, director or significant
employee.
<TABLE>
<CAPTION>
Name Age* Position Class
- ---- ---- -------- -----
<S> <C> <C> <C>
Phillip G. Norton........ 53 Chairman of the Board,
President, and Chief
Executive Officer III
Thomas B. Howard..........50 Vice President; Executive Vice President,
and Chief Operating Officer of MLC Group
Bruce M. Bowen .......... 45 Director and Executive Vice
President III
Steven J. Mencarini 41 Senior Vice President,
and Chief Financial Officer
Jonathan J. Ledecky...... 39 Director I
Terrence O'Donnell....... 52 Director II
Carl J. Rickertsen....... 36 Director II
Kleyton L. Parkhurst......34 Secretary and Treasurer
Barbara J. Simmonds...... 37 Vice President and Controller
Kevin M. Norton.......... 41 Vice President of Brokerage
Operations
William J. Slaton........ 49 Vice President of Marketing
Thomas K. McNamara....... 52 Vice President
</TABLE>
*Age as of June 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
(a)(2) Financial Statement Schedule
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the last quarter of the
period covered by this report. This Form 8-K was filed with the Securities and
Exchange Commission on March 28, 1997, and reported the Heller Facility
(discussed herein) under Item 5 ("Other Business"). No financial statements
were filed with this Form 8-K.
26
<PAGE> 27
(c) Exhibits.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
3.1(1) Certificate of Incorporation of Registrant,
as currently in effect
3.2(1) Bylaws of Registrant
4.1(1) Specimen Certificate of Common Stock of the Company
*10.1(1) 1996 Stock Incentive Plan
*10.2(1) 1996 Outside Director Stock Option Plan
*10.3(1) 1996 Nonqualified Stock Option Plan and form of agreement
thereunder
*10.4(1) 1996 Incentive Stock Option Plan and form of agreement
thereunder
10.5(1) Form of Indemnification Agreement entered into between
Registrant and its directors and officers
10.6(1) Lease dated July 14, 1993 for principal executive office
located in Reston, Virginia, together with amendment
thereto dated March 18, 1996
*10.7(1) Form of Employment Agreement between the Registrant and
Phillip G. Norton
*10.8(1) Form of Employment Agreement between the Registrant and
Bruce M. Bowen
*10.9(1) Form of Employment Agreement between the Registrant and
William J. Slaton
*10.10(1) Form of Employment Agreement between the Registrant and Kleyton L.
Parkhurst
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
10.11(1) Form of Irrevocable Proxy and Stock Rights Agreement
10.12(1) Commitment and Loan Agreement by and Between the Company and
NationsBank, N.A.
10.13(1) First Amended and Restated Business Loan and Security
Agreement by and Between the Company and First Union Bank
of Virginia
10.14(1) Credit Agreement by and Between the Company and NationsBanc
Leasing Corporation
10.15(1) Loan Modification and Extension Agreement
10.16(2) Text of Loan and Security Agreement dated January 31, 1997 between
MLC Group, Inc. and Heller Financial, Inc.
10.17(2) Text of First Amendment to Loan and Security Agreement dated March 12, 1997 between
MLC Group, Inc. and Heller Financial, Inc.
10.18 Credit Agreement dated as of June 5, 1997, 1997, by and
between MLC Group, Inc. and CoreStates Bank, N.A.
10.19 Form of Employment Agreement between the Registrant and
Thomas B. Howard, Jr.
10.20 Form of Employment Agreement between the Registrant and
Steven J. Mencarini
21.1(1) Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to the indicated exhibit filed as part of
the Registrant's Registration Statement on Form S-1 (No. 333-11737).
(2) Incorporated herein by reference to the indicated exhibit filed as part of
the registrant's Form 8-K filed March 28, 1997.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MLC Holdings, Inc.
By: /s/ PHILLIP G. NORTON
------------------------------------
Phillip G. Norton, Chief Executive Officer
Date: June 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ PHILLIP G. NORTON
------------------------------------
Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: June 30, 1997
By: /s/ STEVEN J. MENCARINI
------------------------------------
Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
By: /s/ BRUCE M. BOWEN
------------------------------------
Bruce M. Bowen, Director and
Executive Vice-President
Date: June 30, 1997
By:
------------------------------------
Jonathan J. Ledecky, Director
Date: June 30, 1997
By: /s/ TERRENCE O'DONNELL
------------------------------------
Terrence O'Donnell, Director
Date: June 30, 1997
By: /s/ CARL J. RICKERSTEIN
------------------------------------
Carl J. Rickerstein, Director
Date: June 30, 1997
By: /s/ KLEYTON L. PARKHURST
------------------------------------
Kleyton L. Parkhurst, Secretary and Treasurer
Date: June 30, 1997
By: /s/ BARBARA J. SIMMONDS
------------------------------------
Barbara J. Simmonds, Vice President
and Controller, Chief Accounting Officer
Date: June 30, 1997
29
<PAGE> 30
MLC HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1995, 1996, and 1997 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1996 and 1997 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-21
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years S-1
Ended March 31, 1995, 1996 and 1997.
</TABLE>
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
MLC Holdings, Inc.
Reston, Virginia
We have audited the accompanying consolidated balance sheets of MLC
Holdings, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audit also included the
financial statement schedule listed in the foregoing table of contents. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of MLC Holdings, Inc.
and subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information as set forth therein.
/s/ Deloitte & Touche LLP
McLean, VA
June 5, 1997
F-2
<PAGE> 32
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1997
<S> <C> <C>
ASSETS:
Cash and cash equivalents $357,881 $6,048,008
Accounts receivable 1,272,707 5,184,214
Notes receivable (1) 91,857 2,154,250
Employee advances 76,349 47,812
Inventories 86,280 184,085
Investment in direct financing and sales-type
leases - net 16,273,218 17,473,069
Investment in operating lease equipment - net 10,219,826 11,065,159
Property and equipment - net 280,468 297,617
Other assets (2) 1,177,629 604,792
----------- -----------
Total Assets $29,836,215 $43,059,006
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable - equipment $4,972,979 $4,946,422
Accounts payable - trade 604,650 561,482
Salaries and commissions payable 61,910 472,258
Accrued expenses and other liabilities 935,315 1,615,898
Income taxes payable 6,332 930,587
Recourse notes payable 1,284,742 268,744
Nonrecourse notes payable 18,351,579 19,705,059
Loans from stockholders 275,000 -
Deferred taxes 469,000 590,000
----------- -----------
Total liabilities 26,961,507 29,090,450
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000
shares authorized; none issued or outstanding - -
Common stock, $.01 par value -10,000,000 shares
authorized; 4,000,000 and 5,150,000 shares
issued and outstanding, respectively 40,000 51,500
Additional paid-in capital 9,592 8,611,354
Retained earnings 2,825,116 5,305,702
----------- -----------
Total stockholders' equity 2,874,708 13,968,556
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,836,215 $43,059,006
=========== ===========
</TABLE>
(1) Includes amounts with a related party of $1,812,414 as of March 31,
1997.
(2) Includes amounts with related parties of $678,393 and $319,113 as of
March 31, 1996 and 1997.
See notes to consolidated financial statements.
F-3
<PAGE> 33
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
REVENUES:
Sales $36,897,774 $34,841,823 $43,317,666
Lease revenues 2,967,450 6,008,826 10,345,110
Net margin on sales-type leases 276,688 85,590 -
Fee and other income 676,737 1,863,962 2,484,600
---------- ---------- ----------
Total revenues (1) 40,818,649 42,800,201 56,147,376
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 34,353,344 31,202,228 40,104,104
Direct lease costs 841,345 2,862,815 5,197,868
Professional and other fees 632,369 687,276 534,822
Salaries and benefits 2,630,660 2,962,177 3,652,988
General and administrative expenses 759,063 1,017,934 1,235,978
Interest and financing costs 990,313 1,576,362 1,581,030
---------- ---------- ----------
Total costs and expenses (2) 40,207,094 40,308,792 52,306,790
---------- ---------- ----------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES 611,555 2,491,409 3,840,586
PROVISION FOR INCOME TAXES 198,000 881,000 1,360,000
---------- ---------- ----------
NET EARNINGS $413,555 $1,610,409 $2,480,586
========== ========== ==========
NET EARNINGS PER COMMON SHARE $0.10 $0.40 $0.56
========== ========== ==========
</TABLE>
(1) Includes amounts from related parties of $1,901,192, $15,758,510, and
$21,051,450 for the fiscal years ended March 31, 1995, 1996, and 1997.
(2) Includes amounts to related parties of $1,619,830, $15,001,141, and
$20,512,923 for the fiscal years ended March 31, 1995, 1996, and 1997
See notes to consolidated financial statements.
F-4
<PAGE> 34
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995 1996, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------------------------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1994 -- -- 4,000,000 $40,000 $9,592 $801,152 $850,744
Net earnings -- -- -- -- -- 413,555 413,555
---------- ----------- ------------ ---------- ---------- -------- -------
BALANCE, MARCH 31, 1995 -- -- 4,000,000 40,000 9,592 1,214,707 1,264,299
Net earnings -- -- -- -- -- 1,610,409 1,610,409
---------- ----------- ------------ ---------- ---------- --------- ---------
BALANCE, MARCH 31, 1996 -- -- 4,000,000 40,000 9,592 2,825,116 2,874,708
Proceeds from public -- -- 1,150,000 11,500 8,592,262 -- 8,603,762
offering, net of expenses
Compensation to outside -- -- -- -- 9,500 -- 9,500
directors - stock options
Net earnings -- -- -- -- -- 2,480,586 2,480,586
---------- ----------- ------------ ---------- ---------- ---------- -----------
BALANCE, MARCH 31, 1997 -- $ -- 5,150,000 $51,500 $8,611,354 $5,305,702 $13,968,556
========== =========== ============ ========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 35
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $413,555 $1,610,409 $2,480,586
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 580,088 2,136,217 3,578,915
Provision for credit losses - - 66,000
(Gain) loss on sale of operating lease equipment (1) (48,235) (323,422) 83,754
Impairment of operating lease residual values - - 153,434
Payments from lessees directly to lenders-operating
lease equipment (217,375) (884,389) (1,590,061)
Loss (gain) on disposal of property and equipment 974 4,489 (9,124)
Deferred taxes 26,000 623,000 121,000
Compensation to outside directors - stock options - - 9,500
Changes in:
Accounts receivable (1,173,898) 865,122 (3,911,507)
Notes receivable (2) 50,150 (55,088) (2,062,393)
Employee advances 18,922 (61,996) 28,537
Inventories 93,140 51,485 15,038
Other assets (3) (50,335) (299,866) 330,627
Accounts payable - equipment 1,922,938 1,958,532 (26,557)
Accounts payable - trade (71,001) 209,265 (43,168)
Salaries and commissions payable (12,845) (55,796) 410,348
Accrued expenses and other liabilities 198,766 547,093 680,583
Income taxes (refundable) payable (35,742) 55,278 924,255
-------- ------ -------
Net cash provided by
operating activities 1,695,102 6,380,333 1,239,767
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating lease
equipment (4) 73,072 1,383,677 4,992,050
Purchase of operating lease equipment (2,268,792) (13,919,193) (24,800,360)
Increase in investment in direct financing and
sales-type leases (5) (9,766,564) (17,169,201) (6,825,873)
Proceeds from sale of property and equipment 1,588 9,049 9,124
Purchases of property and equipment (43,451) (207,150) (105,048)
(Increase) decrease in investment in joint ventures (6) (164,020) (329,571) 242,211
--------- --------- -------
Net cash used in investing activities (12,168,167) (30,232,389) (26,487,896)
------------ ------------ -----------
</TABLE>
(Continued)
F-6
<PAGE> 36
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES: 1
Borrowings:
Nonrecourse 10,217,530 25,678,168 26,825,118
Recourse 184,359 67,103 220,768
Repayments:
Nonrecourse (348,373) (1,144,023) (3,199,626)
Recourse (44,972) (62,688) (93,396)
Proceeds of loans from stockholders 75,000 - -
Repayments of loans from stockholder - (50,000) (275,000)
Repayments on lines of credit (285,532) (532,098) (1,143,370)
Proceeds from public offering - - 9,358,125
Payments of expenses related to public offering - - (754,363)
--------- ----------- ---------
Net cash provided by financing
activities 9,798,012 23,956,462 30,938,256
--------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (675,053) 104,406 5,690,127
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 928,528 253,475 357,881
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $253,475 $357,881 $6,048,008
======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $161,667 $183,220 $87,161
======== ======== =======
Income taxes paid $219,573 $202,864 $315,137
======== ======== ========
</TABLE>
(Concluded)
(1) Includes amounts provided by (used by) related parties of ($172,956)
and $3,930 for the fiscal years ended March 31, 1996 and 1997.
(2) Includes amounts used by related parties of ($1,812,414) for the
fiscal year ended March 31, 1997.
(3) Includes amounts provided by (used by) related parties of $234,090,
($398,034), and $285,943 for the fiscal years ended March 31, 1995,
1996 and 1997.
(4) Includes amounts provided by related parties of $1,073,427 and
$2,707,213 for the fiscal years ended March 31, 1996 and 1997.
(5) Includes amounts provided by (used by) related parties of ($235,180),
$259,857 and ($23,417) for the fiscal years ended March 31, 1995,
1996 and 1997.
(6) Includes amounts provided by (used by) related parties of ($153,826),
($270,860), and $73,338 for the fiscal years ended March 31, 1995,
1996 and 1997.
See notes to consolidated financial statements.
F-7
<PAGE> 37
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective September 1, 1996, MLC Holdings, Inc.,
(incorporated August 27, 1996) became the holding company for MLC Group,
Inc., and MLC Capital, Inc. (MLC Holdings, Inc., together with its
subsidiaries collectively, "MLC" or "the Company"). The accompanying
consolidated financial statements include the accounts of the wholly owned
subsidiary companies at historical amounts as if the combination had
occurred on March 31, 1994, in a manner similar to a pooling of interests.
MLC Group, Inc. was formed on November 8, 1990, and is a dealer of
information technology equipment and a finance and leasing company serving
federal, state, and local governments, as well as commercial customers. The
Company specializes in financing information technology, equipment,
software, and services. The Company also maintains an active presence in
the secondary market for computer hardware.
All significant intercompany balances and transactions have been eliminated.
Revenue Recognition - The Company sells information technology equipment to
its customers and recognizes revenue from equipment sales at the time
equipment is accepted by the customer. The Company is the lessor in a
number of its transactions and these are accounted for in accordance with
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases."
Each lease is classified as either a direct financing lease, sales-type
lease, or operating lease, as appropriate. Under the direct financing and
sales-type lease methods, the Company records the net investment in leases,
which consists of the sum of the minimum lease term payments, initial direct
costs, and unguaranteed residual value (gross investment) less the unearned
income. The difference between the gross investment and the cost of the
leased equipment for direct finance leases is recorded as unearned income at
the inception of the lease. The unearned income is amortized over the life
of the lease using the interest method. Under sales-type leases, the
difference between the fair value and cost of the leased property (net
margins) is recorded as revenue at the inception of the lease.
Lease revenues consist of rentals due under operating leases and
amortization of unearned income on direct financing and sales-type leases.
Equipment under operating leases is recorded at cost and depreciated on a
straight-line basis over the lease term to the Company's estimate of
residual value.
The Company assigns all rights, title, and interests in a number of its
leases to third-party financial institutions without recourse. These
assignments are accounted for as sales since the Company has completed its
obligations at the assignment date, and the Company retains no ownership
interest in the equipment under lease.
Residuals - Residual values, representing the estimated value of equipment
at the termination of the lease, are recorded in the financial statements at
the inception of each sales-type or direct financing lease as amounts
estimated by management based upon its experience and judgment. The
residual values for operating leases are included in the leased equipment's
net book value.
The Company evaluates residual values on an ongoing basis and records any
required adjustments. In accordance with generally accepted accounting
principles, no upward revision of residual values is made subsequent to the
F-8
<PAGE> 38
period of the inception of the lease. Residual values for sales-type and
direct financing leases are recorded at their net present value and the
unearned interest is amortized over the life of the lease using the interest
method.
Reserve for Credit Losses - The reserve for credit losses ("the reserve") is
maintained at a level believed by management to be adequate to absorb
potential losses inherent in the Company's lease portfolio. Management's
determination of the adequacy of the reserve is based on an evaluation of
historical credit loss experience, current economic conditions, volume,
growth, the composition of the lease portfolio, and other relevant factors.
The reserve is increased by provisions for potential credit losses charged
against income. Accounts are either written off or written down when the
loss is both probable and determinable, after giving consideration to the
lessee's financial condition, the value of the underlying collateral and
funding status (i.e., discounted on a nonrecourse or recourse basis).
Cash and Cash Equivalents - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less.
Inventories - Inventories are stated at the lower of cost (specific
identification basis) or market.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the related assets, which range from three to five years.
Income Taxes - Deferred income taxes are provided for in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred
income tax liabilities and assets are based on the difference between
financial statement and tax bases of assets and liabilities, using tax rates
currently in effect.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - Effective January 1, 1997, the Company
adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This Standard is effective for
transactions occurring after December 31, 1996, and establishes new criteria
for determining whether a transfer of financial assets in exchange for cash
or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. Certain assignments of direct finance
leases made on a nonrecourse basis by the Company after December 31, 1996
meet the criteria for surrender of control set forth by SFAS 125 and have
therefore been treated as sales for financial statement purposes. The net
revenues earned under such transactions are reflected in the accompanying
statement of earnings for the year ended March 31, 1997.
Reclassifications - Certain items have been reclassified in the March 31,
1995 and 1996 financial statements to conform to the March 31, 1997
presentation.
Initial Public Offering - During November and December 1996, MLC Holdings,
Inc., consummated an initial public offering ("the Offering") of 1,150,000
shares of its common stock including the over allotment. The Company
received proceeds of
F-9
<PAGE> 39
$9.4 million (gross proceeds of $10.1 million less underwriters expense of
$0.7 million) from the Offering of MLC Holdings, Inc., and incurred $0.8
million in expenses. Of the net proceeds of approximately $8.6 million,
$0.3 million was used to repay outstanding stockholder loans and the related
accrued interest and the balance of $8.3 million was used for general
corporate purposes.
Earnings Per Share - Earnings per share are based on a weighted average
number of shares outstanding of 4,000,000 in 1995, 4,000,000 in 1996 and
4,406,427 in 1997. The dilutive effect of stock options is not material for
any of the three years.
New Accounting Pronouncement - The Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" in February 1997. This Standard
will be effective for the Company beginning in fiscal year 1998. The pro
forma effect of adopting this Standard has no impact on the earnings per
share calculation for the years ended March 31, 1995, 1996 and 1997.
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists
of the following components:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1996 1997
<S> <C> <C>
Minimum lease payments $ 18,212,328 $ 18,752,170
Estimated unguaranteed residual value 347,811 1,271,232
Initial direct costs, net of amortization of
$590,058 and $1,299,476 at March 31, 1996
and 1997 1,538,756 1,236,442
Less: Unearned lease income (3,825,677) (3,720,775)
Less: Reserve for credit losses - (66,000)
------------ -------------
Investment in direct financing and sales-type leases - net $ 16,273,218 $ 17,473,069
============ =============
</TABLE>
Future scheduled minimum lease rental payments as of March 31, 1997, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998 $ 7,798,931
1999 6,195,191
2000 3,658,044
2001 890,716
2002 and thereafter 209,288
------------
Total $ 18,752,170
============
</TABLE>
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes (see Note 6).
F-10
<PAGE> 40
3. SALES-TYPE LEASES
The detail for the sales-type leases consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Gross minimum lease payments $ 3,451,993 $ 559,256 $ -
Estimated unguaranteed
residual value 3,296 - -
Gross cost of sales (2,628,983) (375,287) -
Unearned lease income (549,618) (98,379) -
------------- ----------- -------------
Net margin $ 276,688 $ 85,590 $ -
============= =========== =============
</TABLE>
4. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases represents primarily equipment leased for two
to three years. The components of the net investment in operating lease
equipment are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1996 1997
<S> <C> <C>
Cost of equipment under operating lease $11,411,105 $14,518,704
Initial direct costs 54,217 41,829
Accumulated depreciation and amortization (1,245,496) (3,495,374)
----------- -----------
Investment in operating lease equipment - net $10,219,826 $11,065,159
=========== ===========
</TABLE>
As of March 31, 1997, future scheduled minimum lease rental payments are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998 $ 5,279,226
1999 3,429,305
2000 1,468,144
2001 31,302
2002 and thereafter 5,217
-----------
$10,213,194
===========
</TABLE>
Based on management's evaluation of estimated residual values included
within the Company's operating lease portfolio, certain recorded
residuals were written down to reflect revised market conditions. In
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," an
impairment loss of $153,434 was recognized during the year
F-11
<PAGE> 41
ended March 31, 1997. The loss is included in direct lease costs in the
accompanying consolidated statements of earnings.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1996 1997
<S> <C> <C>
Furniture and equipment $ 241,859 $ 316,436
Capitalized software 158,666 185,620
Leasehold improvements 14,613 14,613
--------- ----------
415,138 516,669
Accumulated depreciation (134,670) (219,052)
--------- ----------
Property and equipment - net $280,468 $ 297,617
======== ==========
</TABLE>
6. RECOURSE AND NONRECOURSE NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1997
<S> <C> <C>
Revolving line of credit with a maximum
balance of $250,000, bearing interest at the
prime rate plus 1.5% payable on demand,
secured by equipment purchases $ 175,000 $ -
Revolving line of credit with a maximum balance of
$2,000,000, bearing interest at the prime rate
plus 1%, and personally guaranteed by
an employee/stockholder 592,000 -
Revolving line of credit with a maximum balance of
$5,000,000, bearing interest at the LIBOR rate
plus 2.75%, secured by the Company's assets
and personal guarantees from
employees/stockholders 360,000 -
Partial recourse revolving line of credit with a
maximum balance of $10,000,000
bearing interest at a rate indexed to the
prevailing U.S. Treasury yield plus 1.75% - 3.00%,
secured by related investments in leases - -
Recourse equipment notes with varying interest rates
ranging from 8.17% to 8.53%, and 8.53% to
8.75%, respectively, secured by related
investments in leases 141,373 268,744
Noncollateralized recourse note bearing
interest at 8.05% 16,369 -
------------- -----------
</TABLE>
F-12
<PAGE> 42
<TABLE>
<S> <C> <C>
$ 1,284,742 $ 268,744
============= ============
Nonrecourse equipment notes with varying interest
rates ranging from 5.85% to 14.39%, and
6.30% to 9.90%, respectively, secured by related
investments in leases $ 18,351,579 $ 19,705,059
============= =============
</TABLE>
Principal and interest payments on the recourse and nonrecourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral,
and the borrower. Under nonrecourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the borrower.
Borrowings under the $2,000,000 line of credit (which expired on December 1,
1996) and the $5,000,000 line of credit above contain covenants regarding
maximum recourse debt to worth ratio, minimum consolidated tangible net worth,
fixed charge coverage ratio, and prohibit the payment of dividends.
Recourse and nonrecourse notes payable as of March 31, 1997, mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING NONRECOURSE RECOURSE
MARCH 31, NOTES PAYABLE NOTES PAYABLE
<S> <C> <C>
1998 $ 12,724,992 $ 122,959
1999 4,517,030 123,032
2000 1,921,041 16,427
2001 459,452 6,326
2002 and thereafter 82,544 -
------------ ----------
$ 19,705,059 $ 268,744
============ ==========
</TABLE>
F-13
<PAGE> 43
7. RELATED PARTY TRANSACTIONS
Loans from stockholders/officers consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------
1996 1997
<S> <C> <C>
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 $ 175,000 $ --
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 100,000 --
------------- -------------
$ 275,000 $ -
============= =============
</TABLE>
Other - The Company provided loans and advances to employees/stockholders
aggregating a total of $61,583, $139,500, and $12,193, for the years ended
March 31, 1995, 1996, and 1997, respectively. Such balances are to be
repaid from commissions earned by the employees/stockholders on successful
sales or financing arrangements obtained on behalf of the Company.
Repayments on these loans and advances have been made as follows:
- Loans and advances of $80,505, $82,612, and $53,941 were repaid for the
years ended March 31, 1995, 1996, and 1997, respectively. No interest was
charged on advances.
- During the year ended March 31, 1996, an employee/stockholder repaid the
entire amount due the Company under a promissory note with a maximum
amount of $40,000 (loaned in 1994) bearing interest at a rate of 8%. In
addition, the Company loaned a stockholder $54,000 pursuant to a
promissory note bearing interest at a rate of 8%. Under the terms of the
note, interest of $1,608 and $3,193 and principal of $8,392 and $14,507,
respectively, were paid to the Company during the years ended March 31,
1996 and 1997.
The Company sold leased equipment to a company in which an
employee/stockholder has a 45% ownership interest. During the years ended
March 31, 1995 and 1996 revenue recognized from the sale was $1,855,010 and
$1,300,448 and the basis of the equipment sold was $1,619,830 and
$1,271,729, respectively. At March 31, 1996, accrued expenses and other
liabilities include $26,575 due to the related company, notes receivable
include $17,511 due from the company, and other assets include $73,421,
which represents the Company's investment in lease deals with the company.
During the year ended March 31, 1997, the Company received remarketing fees
from the company amounting to $224,126.
During the years ended March 31, 1996 and 1997, the Company paid a
stockholder $120,000 and $90,000, respectively, in exchange for the pledge
of personal assets made to secure one of the Company's revolving
line-of-credit agreements.
During the years ended March 31, 1996 and 1997, the Company sold leased
equipment to MLC/GATX Limited Partnership I (the Partnership), that amounted
to 31% and 6% of the Company's revenues, respectively. The Company has a
9.5% limited partnership interest in the Partnership and owns a 50% interest
in the corporation that owns a 1% general partnership interest in the
Partnership. Revenue recognized from the sales was $13,079,433 and
$3,452,902, and the basis of the equipment sold was $12,273,527 and
$3,309,186, respectively, during the years ended March 31, 1996 and 1997.
Other assets include $209,691 due from, and $75,981 due to the Partnership
as of March 31, 1996 and 1997, respectively. The Company's investment
balance in the Partnership, accounted for using the
F-14
<PAGE> 44
cost method, included in other assets, is $380,757 and $226,835 as of
March 31, 1996 and 1997, respectively. In addition, the Company received
$46,182, $122,111, and $148,590 for the years ended March 31, 1995, 1996,
and 1997, respectively, for accounting and administrative services
provided to the Partnership.
During the year ended March 31, 1997, the recoverability of certain
capital contributions made by the Company to the Partnership was
determined to be impaired. As a result, the Company recognized a
write-down of its recorded investment balance of $195,897 to reflect the
revised net realizable value. The write-down is included in cost of
sales in the accompanying consolidated statements of earnings.
During the years ended March 31, 1996 and 1997, the Company sold leased
equipment to MLC/CLC LLC, in which the Company has a 5% ownership
interest, that amounted to 3% and 30% of the Company's revenues,
respectively. Revenue recognized from the sales was $1,256,518 and
$16,923,090, and the basis of the equipment sold was $1,335,885 and
$16,917,840, respectively, during the years ended March 31, 1996 and
1997. Notes receivable includes $1,812,414 due from the partnership as
of March 31, 1997. Other assets includes an investment of $14,254 and
$168,259, as of March 31, 1996 and 197, respectively, accounted for using
the cost method. In addition, the Company received $52,742 for the year
ended March 31, 1997 for accounting and administrative services provided
to MLC/CLC LLC.
During the year ended March 31, 1997, the Company recognized $250,000 in
broker fees for providing advisory services to a company which is owned
in part by one of the Company's outside directors.
As of March 31, 1996 and 1997, $152,606 and $72,000 was receivable from
MLC Federal, which is owned in part by an individual related to a Company
executive. As of March 31, 1997, the Company fully reserved for the
receivable from MLC Federal.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and a telephone system for the conduct of
its business. Rent expense relating to operating leases was $151,513,
$156,676 and $153,111 for the years ended March 31, 1995, 1996, and 1997,
respectively. As of March 31, 1997, the future minimum lease payments
are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998 $ 92,254
1999 45,056
---------
$ 137,310
=========
</TABLE>
As of March 31, 1997, the Company has guaranteed $172,565 of the residual
value for equipment owned by the MLC/GATX Limited Partnership I.
9. INCOME TAXES
A reconciliation of income tax computed at the statutory Federal rate to
the provision for income tax included in the consolidated statements of
earnings is as follows:
F-15
<PAGE> 45
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Statutory Federal income tax rate 34 % 34 % 34 %
===== ===== ======
Income tax expense computed at the
statutory Federal rate $ 207,929 $ 847,079 $ 1,305,799
State income tax expense, net of Federal
tax expense 6,115 24,643 48,641
Nontaxable interest income (95,000) (79,342) (33,023)
Nondeductible expenses 78,956 88,620 38,583
---------- --------- -----------
Provision for income taxes $ 198,000 $ 881,000 $ 1,360,000
========== ========= ===========
Effective tax rate 32.4% 35.4% 35.4%
========== ========= ===========
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $154,000 $231,000 $1,152,000
State 18,000 27,000 87,000
--------- --------- -----------
172,000 258,000 1,239,000
Deferred:
Federal 17,000 557,000 113,000
State 9,000 66,000 8,000
--------- --------- -----------
26,000 623,000 121,000
--------- --------- -----------
$ 198,000 $ 881,000 $ 1,360,000
========= ========= ===========
</TABLE>
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Alternative minimum tax $ (158,000) $ (200,000) $ 369,000
Lease revenue recognition 184,000 823,000 (248,000)
----------- ------------ ----------
Total $ 26,000 $ 623,000 $ 121,000
=========== ============ ==========
</TABLE>
F-16
<PAGE> 46
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of items comprising the Company's deferred
taxes consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1997
<S> <C> <C>
Alternative minimum tax $ 619,000 $ 250,000
Lease revenue recognition (1,088,000) (840,000)
---------- ---------
Net deferred liability $ (469,000) $ (590,000)
============ ============
</TABLE>
10. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and nonrecourse notes
payable (Note 6) associated with its direct finance and operating lease
activities from payments made directly by customers to the third-party
lenders amounting to $6,150,983, $4,796,306, and $4,214,444 for the years
ended March 31, 1995, 1996, and 1997, respectively. In addition, the
Company realized a reduction in recourse and nonrecourse notes payable
from the sale of the associated assets and liabilities amounting to
$1,855,010, $11,550,446, and $18,057,569, for the years ended March 31,
1995, 1996, and 1997, respectively.
11. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with a contributory 401(k) profit
sharing plan which was adopted during the year ended March 31, 1995. All
employees age 21 and older become eligible to participate in the plan as
of the first day of the month after which a minimum of 20 hours of service
per week, during a consecutive six-month period has been completed. Full
vesting occurs after the fourth consecutive year of plan participation.
Employer contribution percentages are to be determined by the Company and
are discretionary each year. The Company's expense for the plan was
$46,307, and $26,011, for the years ended March 31, 1996 and 1997,
respectively.
Effective September 1, 1996, the Company established a stock incentive
program ("the Plan") to provide an opportunity for directors, executive
officers, independent contractors, key employees, and other employees to
participate in the ownership of the Company. A total of 400,000 shares of
common stock has been reserved for issuance upon exercise of options
granted under the Plan, which encompasses the following agreements:
- compensation agreements and employment arrangements with certain
executives ("Executive Compensation Agreements"), under which 245,000
options have been granted;
- the 1996 Incentive Stock Option Plan ("Employee Plan"), under which
75,000 options have been reserved, and of this amount 73,800 options
granted, to Company employees;
- the 1996 Outside Director Stock Plan ("Outside Director Plan"), under
which 75,000 options have been reserved, and of this amount 30,000
granted; and
F-17
<PAGE> 47
- the 1996 Nonqualified Stock Option Plan ("Nonqualified Plan"), under
which 5,000 options have been granted.
All stock option grants to date were made effective with or subsequent to
the completion of the Company's initial public offering ("IPO") on
November 19, 1996. As of March 31, 1997, no options have been exercised.
The exercise price of options granted under the Executive Compensation
Agreements is equivalent to the fair market value of the Company's common
stock on the date of grant. These options have a ten year term, and vest
in equal increments over three years with 25 % being exercisable and
vested upon completion of the IPO, subject to acceleration upon certain
conditions.
The exercise price of options granted under the Employee Plan is
equivalent to the fair market value of the Company's common stock on the
date of grant. These options have a ten year term, and vest in equal
increments over five years beginning on the first anniversary of the
completion of the IPO, subject to continued employment and acceleration
upon certain conditions.
The exercise price of options granted under the Outside Director Plan is
equivalent to the fair market value of the Company's common stock on the
date of grant. These options have a ten year term, and vest in equal
increments over two years beginning on the first anniversary of the
completion of the IPO, subject to continued service. The Outside Director
Plan also provides for additional option grants on the second, third and
fourth anniversary of service at a price equivalent to the fair market
value of the Company's common stock on the date of grant. Such additional
options vest in equal increments over two years beginning on the first
anniversary of the date of grant.
Any Options issued under the Nonqualified Plan have exercise prices not
less than 80% of the market value of the common stock on the date of grant
and are exercisable over a period not to exceed ten years.
A summary of stock option activity during the year ended March 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Range
-------------------- ----------------------
<S> <C> <C>
Outstanding, April 1 - -
Granted 353,800 $6.40 - $8.75
Exercised - -
Forfeited - -
-------------------- ----------------------
Outstanding, March 31 353,800 $6.40 - $8.75
==================== ======================
Exercisable options 66,250 $6.40 - $8.75
==================== ======================
</TABLE>
F-18
<PAGE> 48
Additional information regarding options outstanding as of March 31, 1997
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C>
353,800 9.6 yrs $8.05 66,250 $7.79
</TABLE>
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of
either (1) continuing to account for stock-based employee compensation
plans in accordance with the guidelines established by Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees" while providing the disclosures required under SFAS No. 123, or
(2) adopting SFAS No. 123 accounting for all employee and non-employee
stock compensation arrangements. The Company opted to continue to account
for its stock-based awards using the intrinsic value method in accordance
with APB No. 25. Accordingly, no compensation expense has been recognized
in the financial statements for employee stock arrangements. Option
grants made to non-employees, including outside directors, have been
accounted for using the fair value method, which resulted in $9,500 in
compensation expense during the year ended March 31, 1997. The following
table summarizes the pro forma disclosures required by SFAS No. 123
assuming the Company had adopted the fair value method for stock-based
awards to employees as of the beginning of fiscal year 1997:
Net Income
As reported $2,480,586
Pro forma $2,399,684
Earnings per common share
As reported $ 0.56
Pro forma $ 0.54
Under SFAS No. 123, the fair value of stock-based awards to employees is
derived through the use of option pricing models which require a number of
subjective assumptions. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Expected dividend yield: 0 %
Expected stock price volatility: 44 %
Expected option term: 8 years (options granted under Executive
Compensation Agreements) and
5 years (all other option grants)
Risk-free interest rate: 6.05 % (options granted under Executive
Compensation Agreements) and
5.81 % (all other option grants)
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is in accordance with the provisions of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
valuation methods used by the Company are set forth below.
F-19
<PAGE> 49
The accuracy and usefulness of the fair value information disclosed
herein is limited by the following factors:
- These estimates are subjective in nature and involved uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
- These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire
holding of a particular financial asset.
- SFAS No. 107 excludes from its disclosure requirements lease
contracts and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
the Company.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Assets:
Cash and cash equivalents $ 6,048,008 $ 6,048,008
Liabilities:
Nonrecourse notes payable 19,705,059 19,752,330
Recourse notes payable 268,744 271,949
</TABLE>
The following methods and assumptions were used by the Company in
computing the estimated fair value in the above table:
Cash and cash equivalents - The carrying amounts of these financial
instruments approximated their fair value.
Recourse and Nonrecourse Notes Payable - The fair value of recourse and
nonrecourse debt is based on the borrowing rates currently available to
the Company for debt with similar terms and average maturities.
F-20
<PAGE> 50
13. QUARTERLY DATA (Unaudited)
Summarized quarterly financial information is as follows (amount in
thousands except per share information):
<TABLE>
<CAPTION>
YEAR ENDED FIRST SECOND THIRD FOURTH
MARCH 31, 1997 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Sales $ 10,412 $ 8,635 $ 8,435 $ 15,836
Total revenues 12,896 11,705 11,800 19,746
Cost of sales 9,894 8,250 7,676 14,284
Total costs and expenses 12,097 10,803 10,810 18,597
Earnings before provision for income taxes 799 902 990 1,150
Provision for income taxes 284 322 349 405
Net earnings 515 580 641 745
Net earnings per common share 0.13 0.15 0.14 0.14
YEAR ENDED
MARCH 31, 1996
Sales $ 2,091 $ 13,031 $ 8,083 $ 11,637
Total revenues 3,775 14,785 10,483 13,757
Cost of sales 1,454 12,115 7,479 10,154
Total costs and expenses 3,134 14,067 10,057 13,051
Earnings before provision for income taxes 641 717 426 707
Provision for income taxes 227 253 153 248
Net earnings 414 464 273 459
Net earnings per common share 0.10 0.12 0.06 0.12
</TABLE>
14. SUBSEQUENT EVENT
During June 1997, MLC Group entered into a Credit Agreement (the
"Agreement") with CoreStates Bank, N.A. (the "CoreStates Facility").
Under terms of the Agreement, MLC Group may borrow up to $15,000,000
through June 5, 1998. All borrowings under the CoreStates Facility bear
interest at the LIBOR rate plus 1.10% or, at MLC Group's option, the prime
rate less 1.00%. Such amounts are secured by MLC Group's business assets,
including accounts receivable, inventory and fixed assets, as well as the
related investments in leases, and are guaranteed by the Company.
* * * * * *
F-21
<PAGE> 51
SCHEDULE II
MLC HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Year Expenses Accounts Deductions of Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowances for doubtful accounts: $ -- $138 $ -- $ -- $138
Customers' accounts receivable ========= ========= ========= ========= =========
1996 Allowances for doubtful accounts: $ -- $ -- $ -- $ -- $ --
Customers' accounts receivable ========= ========= ========= ========= =========
1995 Allowances for doubtful accounts: $ -- $ -- $ -- $ -- $ --
Customers' accounts receivable ========= ========= ========= ========= =========
</TABLE>
S-1
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.18 Credit Agreement dated as of June 5, 1997, 1997, by and
between MLC Group, Inc. and CoreStates Bank, N.A.
10.19 Form of Employment Agreement between the Registrant and
Thomas B. Howard, Jr.
10.20 Form of Employment Agreement between the Registrant and
Steven J. Mencarini
23.1 Consent of Deloitte & Touche LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.18
[CORESTATES LOGO]
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
$15,000,000
between
MLC GROUP, INC.
and
CORESTATES BANK, N.A.
dated as of
JUNE 5, 1997
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2. The Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1. The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2. The Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3. Funding Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(a) Requests for Advance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(b) Irrevocability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(c) Availability of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Funding of Net Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Base Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) LIBO Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(c) Renewals and Conversions of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Automatic Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.5. Administrative Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.6. Reduction or Termination of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Voluntary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) Loan Commitment Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.7. Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Base Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) LIBO Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.8. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(a) Base Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) LIBO Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(c) Form of Payments, Application of Payments, Payment Administration, Etc. . . . . . . . . 15
(d) Net Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(e) Prepayment of LIBO Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(f) Demand Deposit Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.9. Changes in Circumstances; Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.10. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1. Organization, Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.2. Corporate Authority, Validity, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.3. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.4. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.5. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.6. Not in Default, Judgments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.7. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C> <C>
3.8. Permits, Licenses, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.9. No Materially Adverse Contracts, Etc.20
3.10. Compliance with Laws, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Compliance Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Hazardous Wastes, Substances and Petroleum Products . . . . . . . . . . . . . . . . . . 20
3.11. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.12. Subsidiaries, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.13. Title to Properties, Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.14. Public Utility Holding Company; Investment Company . . . . . . . . . . . . . . . . . . . . . . 21
3.15. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.16. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.17. Disclosure Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1. All Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(a) Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(b) Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(c) Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) Covenants; Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(f) Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.2. Conditions to First Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(a) Articles, Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(b) Evidence of Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(c) Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(d) Incumbency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(f) Guaranty Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(g) Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(h) Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(i) Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(j) Fees, Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1. Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Annual Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(b) Quarterly Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(c) Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(d) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(e) Material Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(f) Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(g) Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(h) Monthly Accounts Receivable Aging Report . . . . . . . . . . . . . . . . . . . . . . . . 24
5.2. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.3. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.4. Compliance with Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C> <C>
5.5. Conduct of Business; Permits and Approvals, Compliance with Laws . . . . . . . . . . . . . . . 25
5.6. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.7. Payment of Debt; Payment of Taxes, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.8. Notice of Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.9. Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.10. Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.11. Compliance with Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.12. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.13. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.14. Restrictive Covenants in Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.1. Consolidation and Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.2. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.3. Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.4. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.5. Acquisitions and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.6. Transfer of Assets; Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.7. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.8. Accounting Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.9. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.10. Restriction on Amendment of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.1. Minimum Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.2. Debt to Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3. Minimum Interest Expense Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4. Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8. Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(a) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(b) Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(c) Representations, Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(d) Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(e) Certain Other Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(f) Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(g) Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(h) Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(i) Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(j) Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9. Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.1. Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<S> <C> <C>
10.1. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.2. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.3. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.4. Participations and Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.5. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.7. Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.8. Survival of Warranties and Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . 32
10.9. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.10. No Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.11. Consent to Jurisdiction And Service of Process . . . . . . . . . . . . . . . . . . . . . . . . 33
10.12. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.13. Counterparts; Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.14. Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.15. Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.16. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
- ----------------------------------------------------------
EXHIBIT A NOTE
EXHIBIT B BORROWING BASE CERTIFICATE
EXHIBIT C SECURITY AGREEMENT
EXHIBIT D GUARANTY AGREEMENT
EXHIBIT E COMPLIANCE CERTIFICATE
SCHEDULE 1 MISCELLANEOUS INFORMATION
</TABLE>
- iv -
<PAGE> 6
CREDIT AGREEMENT
This Credit Agreement, dated as of June 5, 1997 (this "AGREEMENT"), is
entered into by and between MLC GROUP, INC., a Virginia corporation ("MLC") and
CORESTATES BANK, N.A., a national banking association ("CORESTATES",
"CORESTATES BANK" or the "BANK").
PRELIMINARY STATEMENT
WHEREAS, MLC desires to have available to it a credit facility the
proceeds of which may be used for the short-term financing of Leases (as
defined herein) and Receivables (as defined herein) prior to the securitization
or discounting of same and for the purchase of AMC Inventory and Equipment (as
defined herein) and Non-AMC Inventory and Equipment (as defined herein), said
Leases, Receivables, AMC Inventory and Equipment and Non-AMC Inventory and
Equipment to constitute part of the Collateral (as defined herein).
WHEREAS, MLC has requested that CoreStates Bank establish such credit
facility and make loans to MLC under the terms and conditions hereinafter set
forth.
WHEREAS, MLC Holdings, Inc., a Delaware corporation ("HOLDINGS"),
owns, of record and beneficially, all of the capital stock of MLC, has joined
in said request for the credit facility, and will unconditionally guarantee the
prompt and punctual performance of all liabilities and obligations of MLC
hereunder and under any other Loan Document (as defined herein).
WHEREAS, the Bank is willing to establish such credit facility and to
make loans to MLC under the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and promises
hereinafter set forth and intending to be legally bound hereby, the parties
hereto agree as follows:
1. CERTAIN DEFINITIONS
1.1. DEFINITIONS.
"ACCOUNTS RECEIVABLE AGING REPORT" shall mean a report in summary form
of the status of accounts receivable in respect of all Leases and
Receivables which are part of the Collateral in form and substance
reasonably satisfactory to the Bank.
"ADDITIONAL AMOUNT" shall have the meaning set forth in Section
2.8.(e).
"ADMINISTRATIVE FEE" shall have the meaning set forth in Section 2.5
"AFFILIATE" shall mean any Person: (1) which directly or indirectly
controls, or is controlled by, or is under common control with MLC;
(2) which directly or indirectly beneficially owns or holds ten
percent (10%) or more of any class of voting stock of MLC; or (3) ten
percent (10%) or more
Credit Agreement - 1 - June 5, 1997
<PAGE> 7
of whose voting stock of which is directly or indirectly beneficially
owned or held by MLC. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise.
"AGREEMENT" shall mean this Credit Agreement, as amended,
supplemented, modified, replaced, substituted for or restated from
time to time and all exhibits and schedules attached hereto.
"AMC INVENTORY AND EQUIPMENT" shall mean new or used items of
Inventory or Equipment purchased by MLC for sale or lease to any AMC
Party under an Asset Management Contract. Once an item of AMC
Inventory and Equipment has been sold or leased by MLC to an AMC
Party, such item shall no longer be an item of AMC Inventory and
Equipment but, instead, shall result in the creation of either a
Receivable or a Lease.
"AMC PARTIES" shall mean those entities approved by CoreStates (in
CoreStates' absolute discretion) which become parties to Asset
Management Contracts.
"ASSET MANAGEMENT CONTRACTS" shall mean those leases and contracts
which are entered into in the ordinary course of business between MLC
and the AMC Parties pursuant to which MLC is obligated to supply an
AMC Party with certain computer and other technology equipment. In
order to qualify as an Asset Management Contract, the lease or
contract must specifically identify the equipment supplied to the AMC
Party and must absolutely obligate the AMC Party to purchase or lease
the identified equipment from MLC by a date certain.
"BASE RATE" shall mean, for any day, the higher of the Federal Funds
Rate plus 1/2 of 1% or the prime commercial lending rate of
CoreStates Bank, N.A., as announced from time to time at its head
office, calculated on the basis of 30 day months and a year of 360
days.
"BORROWING BASE" shall mean: (i) with respect to Leases, the lesser
of 100% of the cost of the Equipment subject to Eligible Leases or
100% of the Net Present Value of Lease Payments; (ii) with respect to
Receivables, 100% of Eligible Receivables up to $3,000,000; (iii) with
respect to AMC Inventory and Equipment, 100% of the cost to MLC of the
Eligible AMC Inventory and Equipment, net of all rebates, allowances
and credits; and (iv) with respect to Non-AMC Inventory and Equipment,
90% of the cost to MLC of the Eligible Non-AMC Inventory and Equipment
up to $1,000,000, net of all rebates, allowances and credits.
"BORROWING BASE CERTIFICATE" shall mean a certificate in substantially
the form attached hereto as Exhibit B which shall be signed by the
chief financial officer, treasurer or controller of MLC.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks in Philadelphia are authorized or
required to close under the laws of the Commonwealth of Pennsylvania.
"CAPITALIZED LEASE" shall mean all lease obligations of any Person for
any property (whether real, personal or mixed) which have been or
should be capitalized on the books of the lessee in accordance with
General Accepted Accounting Principles.
Credit Agreement - 2 - June 5, 1997
<PAGE> 8
"CAPITALIZED LEASE OBLIGATIONS" with respect to any Person, shall mean
the aggregate amount which, in accordance with GAAP, is required to be
reported as a liability on the balance sheet of such Person at such
time in respect of such Person's interest as lessee under a Capital
Lease.
"CLOSING DATE" shall mean the date closing shall occur.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and all rules and regulations with respect thereto in
effect from time to time.
"COLLATERAL" shall have the meaning set forth in Section 9.1.
"COMPLIANCE CERTIFICATE" shall have the meaning set forth in Section
4.1(b).
"CREDIT TERMINATION DATE" shall have the meaning set forth in Section
2.2.
"DEBT" shall mean, as of any date of determination with respect to
MLC, without duplication, (i) all items which in accordance with
Generally Accepted Accounting Principles would be included in
determining total liabilities as shown on the liability side of a
balance sheet of MLC as of the date on which Debt is to be determined,
(ii) all indebtedness of others with respect to which MLC has become
liable by way of a guarantee or endorsement (other than for collection
or deposit in the ordinary course of business), (iii) all contingent
liabilities of MLC, and (iv) lease obligations that, in conformity
with GAAP, have been capitalized on MLC's balance sheet.
"DEBT SERVICE" shall mean actual payments of principal on Debt and
Capitalized Lease Obligations (including any Debt or Capital Lease
Obligations paid from the sale of equipment during the period), plus
Operating Lease expenses during the period, plus interest expense
incurred during the period, plus 25% of the outstanding balance under
the Note.
"DEFAULT RATE" on any Loan shall mean the higher of 2% per annum above
the Base Rate or 2% per annum above the rate of interest otherwise in
effect for such Loan.
"DOLLARS" shall mean the lawful currency of the United States of
America.
"EBITDA" shall mean the sum of (i) net income, plus (ii) amounts
deducted for interest, taxes, depreciation and amortization.
"ELIGIBLE AMC INVENTORY AND EQUIPMENT" shall mean all AMC Inventory
and Equipment so long as: (i) the relevant Asset Management Contract
has not been terminated; (ii) the relevant AMC Party is in compliance
with its obligations under its Asset Management Contract (and no
payment under that Asset Management Contract is more than 30 days past
due); (iii) the relevant AMC Party has not notified MLC that MLC is in
default of any of its obligations under the Asset Management Contract;
(iv) the AMC Inventory and Equipment is not subject to any prior
assignment, claim, lien, security interest or other limitation on the
absolute title of MLC thereto; and (v) the AMC Inventory and Equipment
constitutes Collateral as defined in the Security Agreement.
Credit Agreement - 3 - June 5, 1997
<PAGE> 9
"ELIGIBLE LEASE" shall mean a Lease in which: (i) MLC is the sole
lessor; (ii) the Lease arose in the ordinary course of business of
MLC; (iii) the lessee is not an Affiliate of MLC or Holdings; (iv) the
Equipment has been delivered to the lessee and is currently subject to
the Lease; (v) neither the Lease nor the related Equipment is subject
to any prior assignment, claim, lien, security interest or other
limitation on the absolute title of MLC thereto; (vi) the Lease
payments are not more than 60 days past due with respect to any
payment required thereby; (vii) the Lease provides that the
obligations of the lessee to make payments thereunder is absolute;
(viii) the Lease is freely assignable; (ix) the Lease is not subject
to any defense of the lessee; (x) the lessee is not the subject of an
bankruptcy, reorganization or similar proceedings and is not
insolvent; (xi) the Lease is with a lessee/account debtor which is not
located outside of the United States of America; (xii) the Lease has
not been part of the Borrowing Base for more than 12 months; (xiii)
the Lease is dated and has been in effect for not more than 90 days;
and (xiv) the Lease and the Equipment being leased constitute
Collateral as defined in the Security Agreement. In addition, the
aggregate of all Eligible Receivables and Eligible Leases for any one
account debtor/lessee or group of affiliated account debtors/lessees
which is included in the Collateral shall not at any time exceed: (i)
$10,000,000 for Investment Grade Credits; and $2,500,000 for
Non-Investment Grade Credits.
"ELIGIBLE NON-AMC INVENTORY AND EQUIPMENT" shall mean all Non-AMC
Inventory and Equipment so long as such AMC Inventory and Equipment:
(i) has a wholesale value equal to or greater than the cost of same to
MLC; (ii) is not subject to any prior assignment, claim, lien,
security interest or other limitation on the absolute title of MLC
thereto; and (ii) constitutes Collateral as defined in the Security
Agreement.
"ELIGIBLE RECEIVABLE" shall mean any Receivables with respect to
which: (i) MLC is the sole account creditor; (ii) the Receivable
arose in the ordinary course of business of MLC; (iii) the account
debtor is not an Affiliate of MLC or Holdings; (iv) the goods giving
rise to the Receivable have been delivered to the account debtor; (v)
the Receivable is not subject to any prior assignment, claim, lien,
security interest or other limitation on the absolute title of MLC
thereto; (vi) the Receivable is not more than 30 days past due; (vii)
the Receivable is not subject to any defense of the account debtor;
(viii) the Receivable is freely assignable; (ix) the Receivable is not
questionable as to collectibility; (x) the account debtor is not the
subject of an bankruptcy, reorganization or similar proceedings and is
not insolvent; (xi) the Receivable is with an account debtor which is
not located outside of the United States of America; (xii) the
Receivable does not have a due date longer than 60 days from the date
of provision of the goods to the account debtor; and (xiii) the
Receivable constitutes Collateral as defined in the Security
Agreement. In addition, the aggregate of all Eligible Receivables and
Eligible Leases for any one account debtor/lessee or group of
affiliated account debtors/lessees which is included in the Collateral
shall not at any time exceed: (i) $10,000,000 for Investment Grade
Credits; and $2,500,000 for Non-Investment Grade Credits.
"ENVIRONMENTAL CONTROL STATUTES" shall mean each and every applicable
federal, state, county or municipal environmental statute, ordinance,
rule, regulation, order, directive or requirement, together with all
successor statutes, ordinances, rules, regulations, orders, directives
or requirements, of any Governmental Authority, including without
limitation laws in any way related to Hazardous Substances.
Credit Agreement - 4 - June 5, 1997
<PAGE> 10
"EQUIPMENT" shall mean new and used equipment purchased by MLC from
unaffiliated Persons for lease to unaffiliated Persons. The term
"equipment" also shall include all items shown on the original
purchase invoice pertaining to said equipment including computer
software, installation charges and training.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as it may be amended from time to time.
"ERISA AFFILIATE" shall mean any corporation which is a member of the
same controlled group of corporations as MLC within the meaning of
Section 414(b) of the Code, or any trade or business which is under
common control with MLC within the meaning of Section 414(c) of the
Code.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 8.1.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to
the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published by the Federal Reserve
Bank of New York on the Business Day next succeeding such day,
provided that if the day for which such rate is to be determined is
not a Business Day, the Federal Funds Rate for such day shall be such
rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day.
"FISCAL QUARTER" shall mean a fiscal quarter of MLC, which shall be
any quarterly period ending on March 31, June 30, September 30 or
December 31 of any year.
"FISCAL YEAR" shall mean a fiscal year of MLC, which shall end on the
last day of March.
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" OR "GAAP" shall mean
generally accepted accounting principles as in effect from time to
time in the United States, consistently applied.
"GOVERNMENTAL AUTHORITY" shall mean the federal, state, county or
municipal government, or any department, agency, bureau or other
similar type body obtaining authority therefrom or created pursuant to
any laws, including without limitation Environmental Control Statutes.
"GUARANTY AGREEMENT" shall mean that certain guaranty agreement of
even date herewith made by Holdings in favor of the Bank with respect
to the obligations of MLC to the Bank, the form of which is attached
hereto as Exhibit D.
"HAZARDOUS SUBSTANCES" shall mean without limitation, any regulated
substance, toxic substance, hazardous substance, hazardous waste,
pollution, pollutant or contaminant, as defined or referred to in the
Resource Conservation and Recovery Act, as amended, 15 U.S.C., Section
2601 et seq.; the Comprehensive Environmental Response, Compensation
and Liability Act, 33 U.S.C. Section 1251 et seq.; the federal
underground storage tank law, Subtitle I of the Resource Conservation
and Recovery Act, as amended, P.L. 98-616, 42 U.S.C. Section 6901 et
seq.; together with any amendments thereto, regulations promulgated
thereunder and all substitutions thereof, as well as words of similar
purport or meaning referred to in any other federal, state, county or
municipal environmental statute, ordinance, rule or regulation.
Credit Agreement - 5 - June 5, 1997
<PAGE> 11
"INDEBTEDNESS FOR BORROWED MONEY" shall mean (i) all indebtedness,
liabilities, and obligations, now existing or hereafter arising, for
money borrowed by MLC, whether or not evidenced by any note,
indenture, or agreement (including, without limitation, the Note and
any indebtedness for money borrowed from an Affiliate) and (ii) all
indebtedness of others for money borrowed (including indebtedness of
an Affiliate) with respect to which MLC has become liable by way of a
guarantee or indemnity.
"INTANGIBLE ASSETS" shall mean all assets which would be classed as
intangible assets under GAAP consistently applied, including, without
limitation, goodwill (whether representing the excess of cost over
book value of assets acquired or otherwise), patents, trademarks,
trade names, copyrights, franchises, and deferred charges (including,
without limitation, unamortized debt discount and expense,
organization costs, and research and development costs). For purposes
of this definition, prepayments of taxes, license fees and other
expenses shall not be deemed Intangible Assets.
"INTEREST PERIOD" shall mean with respect to any LIBO Rate Loan, each
period commencing on the date any such Loan is made, or, with respect
to a Loan being renewed, the last day of the next preceding Interest
Period with respect to a Loan, and ending on the numerically
corresponding day (or, if there is no numerically corresponding day,
on the last day of the calendar month) in the first, second or third
calendar month thereafter as selected under the procedures specified
in Section 2.3, if the Bank is then offering LIBO Rate Loans for such
period; provided that each LIBO Rate Loan Interest Period which would
otherwise end on a day which is not a Business Day (or, for purposes
of Loans to be repaid on a London Business Day, such day is not a
London Business Day) shall end on the next succeeding Business Day (or
London Business Day, as appropriate) unless such next succeeding
Business Day (or London Business Day, as appropriate) falls in the
next succeeding calendar month, in which case the Interest Period
shall end on the next preceding Business Day (or London Business Day,
as appropriate).
"INVENTORY" shall mean new and used goods purchased by MLC from
unaffiliated Persons for sale to unaffiliated Persons. The term
"inventory" also shall include all items shown on the original
purchase invoice pertaining to said inventory including computer
software, installation charges and training.
"INVESTMENT" in any Person shall mean (a) the acquisition (whether for
cash, property, services or securities or otherwise) of capital stock,
bonds, notes, debentures, partnership or other ownership interests or
other securities of such Person; (b) any deposit with, or advance,
loan or other extension of credit to, such Person (other than any such
deposit, advance, loan or extension of credit having a term not
exceeding 90 days in the case of unaffiliated Persons and 120 days in
the case of Affiliates representing the purchase price of inventory or
supplies purchased in the ordinary course of business) or guarantee or
assumption of, or other contingent obligation with respect to,
Indebtedness for Borrowed Money or other liability of such Person; and
(c) (without duplication of the amounts included in (a) and (b)) any
amount that may, pursuant to the terms of such investment, be required
to be paid, deposited, advanced, lent or extended to or guaranteed or
assumed on behalf of such Person.
"INVESTMENT GRADE CREDIT" shall mean any account debtor/lessee of MLC
which is rated BBB- or higher by Standard & Poor's or Baa3 or higher
by Moody's.
Credit Agreement - 6 - June 5, 1997
<PAGE> 12
"LEASE" shall mean any lease of Equipment (or conditional sales
agreement or similar financing arrangement) made by MLC, as lessor.
"LIBO RATE" shall mean, for the applicable Interest Period, (i) the
rate, rounded upwards to the next one-sixteenth of one percent,
determined by the Bank two London Business Days prior to the date of
the corresponding LIBO Rate Loan, at which the Bank is offered
deposits in dollars at approximately 11:00 A.M., London time by
leading banks in the interbank Eurodollar or eurocurrency market for
delivery on the date of such Loan in an amount and for a period
comparable to the amount and Interest Period of such Loan and in like
funds, divided by (ii) a number equal to one (1.0) minus the LIBO Rate
Reserve Percentage. The LIBO Rate shall be adjusted automatically
with respect to any LIBO Rate Loan outstanding on the effective date
of any change in the LIBO Rate Reserve Percentage, as of such
effective date. LIBO Rate shall be calculated on the basis of the
number of days elapsed in a year of 360 days.
"LIBO RATE LOANS" shall mean Revolving Credit Loans and Term Loans
accruing interest based on the LIBO Rate.
"LIBO RATE RESERVE PERCENTAGE" shall mean, for any LIBO Rate Loan for
any Interest Period therefor, the daily average of the stated maximum
rate (expressed as a decimal) at which reserves (including any
marginal, supplemental, or emergency reserves) are required to be
maintained during such Interest Period under Regulation D by the Bank
against "Eurocurrency liabilities" (as such term is used in Regulation
D) but without benefit of credit proration, exemptions, or offsets
that might otherwise be available to the Bank from time to time under
Regulation D. Without limiting the effect of the foregoing, the LIBO
Rate Reserve Percentage shall reflect any other reserves required to
be maintained by the Bank against (1) any category of liabilities
which includes deposits by reference to which the rate for LIBO Rate
Loans is to be determined; or (2) any category of extension of credit
or other assets which include LIBO Rate Loans.
"LIEN" shall mean any lien, mortgage, security interest, chattel
mortgage, pledge or other encumbrance (statutory or otherwise) of any
kind securing satisfaction of an Obligation, including any agreement
to give any of the foregoing, any conditional sales or other title
retention agreement, any lease in the nature thereof, and the filing
of or the agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction or similar evidence of any
encumbrance, whether within or outside the United States.
"LOAN" or "LOANS" shall mean the meanings set forth in Section 2.1.
"LOAN COMMITMENT" shall have the meaning set forth in Section 2.1.
"LOAN DOCUMENTS" shall mean this Agreement, the Note, the Security
Agreement, the Guaranty Agreement and all other documents directly
related or incidental to said documents, the Loans or the Collateral.
"MATERIAL ADVERSE CHANGE" shall mean any event or condition which, in
the reasonable determination of the Bank, could result in a material
adverse change in the financial condition, business, properties or
profits of MLC, or which gives reasonable grounds to conclude that
MLC,
Credit Agreement - 7 - June 5, 1997
<PAGE> 13
may not or will not be able to perform or observe (in the normal
course) its obligations under the Loan Documents to which it is a
party, including but not limited to the Note.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect (i) on
the financial condition, business, properties, or profits of MLC, (ii)
the ability of MLC to perform its obligations under this Agreement,
the Note and the other Loan Documents, or (iii) the legality, validity
or enforceability of this Agreement or the Note or the rights and
remedies of the holders of the Loans.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in
ERISA Section 4001(a)(3), which covers employees of MLC or any ERISA
Affiliate.
"NET COST" shall mean with respect to any item of Inventory, the net
cost to MLC of such Inventory, excluding delivery, installation and
similar charges and after giving effect to all discounts and credits
provided in connection with the purchase thereof, as established by
the invoice for such Inventory, a copy of which MLC shall deliver to
CoreStates upon CoreStates' request.
"NET INCOME" shall mean net income after income taxes as shown on the
balance sheet.
"NET PRESENT VALUE OF LEASE PAYMENTS" shall mean, with respect to any
Eligible Lease, the Present Value of Lease Payments less any sums
payable by MLC under that Eligible Lease.
"NET WORTH" shall mean the sum of capital stock, plus paid-in capital,
plus retained earnings and Debt subordinated to the Obligations,
minus treasury stock.
"NON-AMC INVENTORY AND EQUIPMENT" shall mean new or used items of
Inventory or Equipment purchased by MLC for sale or lease to any
Person other than an AMC Party. Once an item of Non-AMC Inventory and
Equipment has been sold or leased by MLC to a Person, such item shall
no longer be an item of Non-AMC Inventory and Equipment but, instead,
shall result in the creation of either a Receivable or a Lease.
"NON-INVESTMENT GRADE CREDIT" shall mean any account debtor/lessee of
MLC which is not an Investment Grade Credit.
"NOTE" shall have the meaning set forth in Section 2.2.
"OBLIGATIONS" shall mean all now existing or hereafter arising debts,
obligations, covenants, and duties of payment or performance of every
kind, matured or unmatured, direct or contingent, owing, arising, due,
or payable to the Bank by or from MLC arising out of this Agreement or
any other Loan Document, including, without limitation, all
obligations to repay principal of and interest on the Loans, and to
pay interest, fees, costs, charges, expenses, professional fees, and
all sums chargeable to MLC or for which MLC is liable as indemnitor
under the Loan Documents, whether or not evidenced by any note or
other instrument.
"OPERATING LEASE" shall mean an operating lease as defined by
Generally Accepted Accounting Principles, excluding all leases the
expenses of which may be charged to a customer of MLC pursuant to the
written terms of the contract with such customer.
Credit Agreement - 8 - June 5, 1997
<PAGE> 14
"ORDINARY COURSE SALE OR FINANCING" shall mean each of the following
to occur in the ordinary course of business of MLC:
(a) the sale (including the installment or conditional
sale) by MLC of Inventory so long as MLC receives from such
sale 100% of the Net Cost of the Inventory being sold;
(b) the financing (including refinancing) by MLC of
Inventory with a lender other than CoreStates so long as MLC
receives from such financing 100% of the Net Cost of the
Inventory being financed; provided, however, that except to
the extent otherwise provided in clause (d) below in
connection with the simultaneous sale or financing of any
Lease described therein (i) any Lien granted by MLC to such
lender in connection with such financing (which may a first
priority Lien) shall not attach to any property of MLC other
than the specific financed Inventory, and (ii) the Debt of MLC
to such lender in connection with such financing shall be
without recourse to MLC except with respect to MLC's interest
in the financed Inventory;
(c) the sale by MLC of its ownership interest in any
Inventory which has been refinanced in an Ordinary Course Sale
or Financing described in clause (b) above; and
(d) the sale, financing (including refinancing) by MLC of
any Lease providing for the lease of Inventory so long as MLC
receives from such sale or financing 100% of the Net Present
Value of Lease Payments for the Leases being sold or financed;
provided, however, that, except to the extent otherwise
provided in the clause (b) above in connection with the
simultaneous financing of Inventory (i) any Lien granted by
MLC to such lender in connection with any such financing
(which may be a first priority Lien) shall not attach to any
property of MLC other than the specific financed Lease, and
(ii) the Debt of MLC to such lender in connection with such
financing shall be without recourse to MLC except with respect
to MLC's interest in the financed Lease.
Notwithstanding the foregoing, a financing transaction described in
clauses (b) or (d) above shall still qualify as an Ordinary Course
Sale or Financing even if the Debt of MLC to such lender in connection
with such financing is with recourse to MLC, as long as the total of
such recourse financing is not more than 15% of the total amount of
such financing in effect at any time under clauses (b) and (d).
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
"PENSION PLAN" shall mean, at any time, any Plan (including a
Multiemployer Plan), the funding requirements of which (under ERISA
Section 302 or Code Section 412) are, or at any time within the six
years immediately preceding the time in question, were in whole or in
part, the responsibility of MLC or any ERISA Affiliate.
"PERMITTED LIENS" shall mean (a) any Liens for current taxes,
assessments and other governmental charges not yet due and payable or
being contested in good faith by MLC by appropriate proceedings and
for which adequate reserves have been established by MLC as reflected
in MLC's financial statements; (b) any mechanic's, materialman's,
carrier's, warehousemen's or similar Liens for sums not yet due or
being contested in good faith by MLC by appropriate proceedings
Credit Agreement - 9 - June 5, 1997
<PAGE> 15
and for which adequate reserves have been established by MLC as
reflected in MLC's financial statements; (c) easements, rights-of-way,
restrictions and other similar encumbrances on the real property or
fixtures of MLC incurred in the ordinary course of business which
individually or in the aggregate are not substantial in amount and
which do not in any case materially detract from the value or
marketability of the property subject thereto or interfere with the
ordinary conduct of the business of MLC; (d) Liens (other than Liens
imposed on any property of MLC pursuant to ERISA or Section 412 of the
Code) incurred or deposits made in the ordinary course of business,
including Liens in connection with workers' compensation, unemployment
insurance and other types of social security and Liens to secure
performance of tenders, statutory obligations, surety and appeal bonds
(in the case of appeal bonds such Lien shall not secure any
reimbursement or indemnity obligation in an amount greater than
$250,000), bids, leases that are not Capitalized Leases, performance
bonds, sales contracts and other similar obligations, in each case,
not incurred in connection with the obtaining of credit or the payment
of a deferred purchase price, and which do not, in the aggregate,
result in a Material Adverse Effect; (e) Liens, if any, existing on
the date hereof and listed in Schedule 1 hereto; and (f) Liens on
specific assets, if any, whether existing on the date hereof or
hereafter created, with respect to Indebtedness for Borrowed Money of
a type similar to that contemplated herein (including any Lien on
Inventory, Equipment or Leases granted in connection with a
nonrecourse refinancing transaction which qualifies as an Ordinary
Course Sale or Financing) provided that no such Lien shall be a Lien
on any of the Collateral.
"PERSON" shall mean any individual, corporation, partnership, joint
venture, association, company, business trust or entity, or other
entity of whatever nature.
"PLAN" shall mean an employee benefit plan as defined in Section 3(3)
of ERISA, other than a Multiemployer Plan, whether formal or informal
and whether legally binding or not.
"POTENTIAL DEFAULT" shall mean an event, condition or circumstance
that with the giving of notice or lapse of time or both would become
an Event of Default.
"PRESENT VALUE OF LEASE PAYMENTS" shall mean the sum of all payments
required to be paid to MLC under the Eligible Leases with each of such
payments discounted to its present value by applying a discount rate
to each payment equal to the interest rate then applicable under the
Note; provided, however, that any payment under an Eligible Lease
shall only be included for the purpose of calculating the Present
Value of Lease Payments if (i) the payment is not yet due under the
Lease; and (ii) the lessee has no discretion as to whether or not to
make the payment.
"PROHIBITED TRANSACTION" shall mean a transaction that is prohibited
under Code Section 4975 or ERISA Section 406 and not exempt under Code
Section 4975 or ERISA Section 408.
"RECEIVABLES" shall mean all contractual accounts receivable of MLC.
"REGULATION" shall mean any statute, law, ordinance, regulation, order
or rule of any United States or foreign, federal, state, local or
other government or governmental body, including, without limitation,
those covering or related to banking, financial transactions,
securities, public utilities, environmental control, energy, safety,
health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wages and hours, employee benefits, and
price and wage control matters.
Credit Agreement - 10 - June 5, 1997
<PAGE> 16
"REGULATION D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System, as it may be amended from time to time.
"REGULATORY CHANGE" shall mean any change after the date of this
Agreement in any Regulation (including Regulation D) or the adoption
or making after such date of any interpretations, directives or
requests of or under any Regulation (whether or not having the force
of law) by any court or governmental or monetary authority charged
with the interpretation or administration thereof applying to a class
of banks but excluding any foreign office of the Bank.
"RELEASE" shall mean without limitation, the presence, leaking,
leaching, pouring, emptying, discharging, spilling, using, generating,
manufacturing, refining, transporting, treating, or storing of
Hazardous Substances at, into, onto, from or about the property or the
threat thereof, regardless of whether the result of an intentional or
unintentional action or omission, and which is in violation of
applicable law.
"REPORTABLE EVENT" shall mean, with respect to a Pension Plan: (a) Any
of the events set forth in ERISA Sections 4043(b) (other than a
reportable event as to which the provision of 30 days' notice to the
PBGC is waived under applicable regulations) or 4063(a) or the
regulations thereunder, (b) an event requiring any MLC or any ERISA
Affiliate to provide security to a Pension Plan under Code Section
401(a)(29) and (c) any failure by any MLC or any ERISA Affiliate to
make payments required by Code Section 412(m).
"SECURITY AGREEMENT" shall mean the Security Agreement in the form and
substance attached hereto as Exhibit C.
"SOLVENT" shall mean, with respect to any Person, that the aggregate
present fair saleable value of such Person's assets is in excess of
the total amount of its probable liabilities on its existing debts as
they become absolute and matured, such Person has not incurred debts
beyond its foreseeable ability to pay such debts as they mature, and
such Person has capital adequate to conduct the business it is
presently engaged in or is about to engage in.
"SUBSIDIARY" shall mean a corporation or other entity the shares of
stock or other equity interests of which having ordinary voting power
(other than stock or other equity interests having such power only by
reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the
time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries or both, by
MLC.
"TANGIBLE NET WORTH" shall mean Net Worth, minus Intangible Assets.
"TAXES" shall have the meaning set forth in Section 2.8.(d).
"TERMINATION EVENT" shall mean, with respect to a Pension Plan: (a) a
Reportable Event, (b) the termination of a Pension Plan, or the filing
of a notice of intent to terminate a Pension Plan, or the treatment of
a Pension Plan amendment as a termination under ERISA Section 4041(c),
(c) the institution of proceedings to terminate a Pension Plan under
ERISA Section 4042 or (d) the appointment of a trustee to administer
any Pension Plan under ERISA Section 4042.
Credit Agreement - 11 - June 5, 1997
<PAGE> 17
"UNFUNDED PENSION LIABILITIES" shall mean, with respect to any Pension
Plan at any time, the amount determined by taking the accumulated
benefit obligation, as disclosed in accordance with Statement of
Accounting Standards No. 87, over the fair market value of Pension
Plan assets.
"UNRECOGNIZED RETIREE WELFARE LIABILITY" shall mean, with respect to
any Plan that provides post-retirement benefits other than pension
benefits, the amount of the accumulated post-retirement benefit
obligation, as determined in accordance with Statement of Financial
Accounting Standards No. 106, as of the most recent valuation date.
Prior to the date such statement is applicable to any MLC, such amount
of the obligation shall be based on an estimate made in good faith.
1.2. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles consistent with those applied in the preparation of the
financial statements referred to in Section 3.5, and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with such
principles.
2. THE CREDIT
2.1. THE LOANS. Subject to the terms and conditions herein set
forth, CoreStates Bank agrees to make loans (herein called individually a
"LOAN" and collectively, the "LOANS") to MLC upon receipt of loan requests
therefor. Each Loan made shall be in a minimum principal amount of two hundred
and fifty thousand dollars ($250,000). All Loans together shall not exceed an
aggregate principal amount outstanding at any time of FIFTEEN MILLION DOLLARS
($15,000,000) from the date hereof through Credit Termination Date (such
amount, as the same may be reduced pursuant to Section 2.6 hereof being
hereinafter called the "LOAN COMMITMENT"). All Loans shall be made to MLC at
the main office of the Bank, Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19101.
2.2. THE NOTE. The Loans made by the Bank shall be evidenced by a
single promissory note of MLC (such promissory note as it may be amended,
extended, modified, restated, replaced, substituted for or renewed, the "NOTE")
in principal face amount equal to FIFTEEN MILLION DOLLARS ($15,000,000) payable
to the order of the Bank and otherwise in the form attached hereto as Exhibit
A. The Note shall be dated the Closing Date, shall bear interest at the rate
per annum and be payable as to principal and interest in accordance with the
terms hereof. The Note shall mature on the earliest to occur of (i) the date
the maturity of the Note is accelerated as provided in Section 8.1 hereof, or
(iii) the first anniversary of the Closing Date (this date to be deemed the
"CREDIT TERMINATION DATE"). Upon maturity, the Loan evidenced by the Note
shall be due and payable. The Bank shall maintain records of all Loans
evidenced by the Note and of all payments thereon, which records shall be
conclusive absent manifest error.
2.3. FUNDING PROCEDURES.
(a) REQUESTS FOR ADVANCE. Each request for a Loan or the
conversion or renewal of an interest rate with respect to a Loan shall be made
not later than 2:00 p.m. on a Business Day by delivery to the Bank of a written
request signed by MLC or in the alternative a telephone request followed
promptly by written confirmation of the request, specifying the date and amount
of the Loan to be made, converted or renewed, selecting the interest rate
option applicable thereto, and in the case of a LIBO Rate Loan, specifying the
Interest Period applicable to such Loan. Each request shall be received not
less than one
Credit Agreement - 12 - June 5, 1997
<PAGE> 18
Business Day prior to the date of the proposed borrowing, conversion or renewal
in the case of Base Rate Loans and two London Business Days prior to the date
of the proposed borrowing, conversion or renewal in the case of LIBO Rate
Loans. No request shall be effective until actually received in writing by the
Bank.
(b) IRREVOCABILITY. Upon receipt of a request for a Loan by the
Bank, the request shall not be revocable by MLC.
(c) AVAILABILITY OF FUNDS. Unless the Bank knows that any
applicable condition specified herein has not been satisfied, it will make
funds immediately available to MLC on the date of each Loan by a credit to the
account of MLC at the Bank's address set forth opposite its name on the
signature page hereof or to such other destination and in such other form as
MLC may request, in writing.
(d) FUNDING OF NET AMOUNT. If the Bank makes a Loan on a day on
which all or any part of an outstanding Loan from the Bank is to be repaid, the
Bank shall apply the proceeds of its new Loan to make such repayment and only
an amount equal to the difference (if any) between the amount being borrowed
and the amount being repaid shall be made available by the Bank to MLC as
provided in clause (c).
2.4. INTEREST. The following interest rates may be applicable to
any Loan or Loans, as requested by MLC from time to time.
(a) BASE RATE. Each Base Rate Loan shall bear interest on the
principal amount thereof from the date made until such Loan is paid in full or
converted, at a rate per annum equal to the Base Rate minus one percent (1%).
(b) LIBO RATE. Each LIBO Rate Loan shall bear interest on the
principal amount thereof from the date made until such Loan is paid in full,
renewed, or converted, at a rate per annum equal to the LIBO Rate plus 110
basis points. After receipt of a request for a LIBO Rate Loan, the Bank shall
proceed to determine the LIBO Rate to be applicable thereto. The Bank shall
give prompt notice by telephone or facsimile to MLC of the LIBO Rate thus
determined in respect of each LIBO Rate Loan or any change therein. Not more
than [twelve] LIBO Rate Loans shall be in existence at any one time in any
combination of LIBO Rates applicable to the Loans.
(c) RENEWALS AND CONVERSIONS OF LOANS. On the last day of each
Interest Period, the LIBO Rate Loan then maturing shall automatically be
renewed for a new Interest Period of like duration, unless MLC shall have given
the Bank notice of a permitted conversion or renewal for an Interest Period of
different duration as provided in Section 2.3 hereof, or an Event of Default,
or Potential Default exists or would thereby occur. If no Event of Default or
Potential Default exists or would thereby occur, MLC shall have the right to
convert Base Rate Loans into LIBO Rate Loans, to convert LIBO Rate Loans into
Base Rate Loans, and to renew LIBO Rate Loans for Interest Periods of different
duration, from time to time, provided that it shall give the Bank notice of
each permitted conversion or renewal as provided in Section 2.3 hereof, and
LIBO Rate Loans may be converted or renewed for different Interest Periods only
as of the last day of the applicable Interest Period for such Loans. The Bank
shall use its best efforts to notify MLC of the effectiveness of such
conversion or renewal (automatic or not automatic), and the new interest rate
to which the converted or renewed Loan is subject, as soon as practicable after
the conversion or renewal; provided, however, that any failure to give such
notice shall not affect MLC's obligations or the Bank's
Credit Agreement - 13 - June 5, 1997
<PAGE> 19
rights and remedies hereunder in any way whatsoever. In the event a LIBO Rate
Loan is not automatically renewed as provided herein and MLC shall not have
selected an alternative Interest Period for any LIBO Rate Loan maturing as
provided herein, such Loan shall be automatically converted into a Base Rate
Loan on the last day of the Interest Period for such Loan.
(d) AUTOMATIC REINSTATEMENT. The liability of MLC under this
Section 2.4 shall continue to be effective or be automatically reinstated, as
the case may be, if at any time payment, in whole or in part, of any of the
payments to the Bank is rescinded or must otherwise be restored or returned
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
MLC or any other Person, or upon or as a result of the appointment of a
custodian, receiver, trustee or other officer with similar powers with respect
to MLC or any other Person or any substantial part of its property, or
otherwise, all as though such payment had not been made.
2.5. ADMINISTRATIVE FEE. MLC agrees to pay to the Bank an annual
fee (the "ADMINISTRATIVE FEE") in an amount equal to 1/4 of 1% of the Loan
Commitment, which fee is payable quarterly in arrears commencing upon the date
which is three months from the Closing Date.
2.6. REDUCTION OR TERMINATION OF COMMITMENT.
(a) VOLUNTARY. MLC may at any time, on not less than two Business
Days' written notice, terminate or permanently reduce the Loan Commitment,
provided that any reduction shall be in the amount of $250,000 or a multiple
thereof and that no such reduction shall cause the principal amount of Loans
outstanding to exceed the Loan Commitment as reduced.
(b) LOAN COMMITMENT TERMINATION. In the event the Loan Commitment
is terminated, the Credit Termination Date shall accelerate and MLC shall,
simultaneously with such termination, repay the Base Rate Loans and LIBO Rate
Loans in accordance with Section 2.8.
2.7. VOLUNTARY PREPAYMENTS.
(a) BASE RATE LOANS. On two Business Day's notice to the Bank,
MLC may, at its option, prepay any Base Rate Loan in whole at any time or in
part from time to time, provided that each partial prepayment shall be in the
principal amount of $250,000 or, if greater, then in multiples thereof and, if
less than $250,000 shall be outstanding, in principal amount equal to the
amount remaining outstanding.
(b) LIBO RATE LOANS. On two Business Day's notice to the Bank, MLC
may, at its option prepay any LIBO Rate Loan provided that if it shall prepay a
LIBO Rate Loan prior to the last day of the applicable Interest Period, or
shall fail to borrow any LIBO Rate Loan on the date such Loan is to be made, it
shall pay to the Bank, in addition to the principal and interest then to be
paid in the case of a prepayment, on such date of prepayment, the Additional
Amount incurred or sustained by the Bank as a result of such prepayment or
failure to borrow.
Credit Agreement - 14 - June 5, 1997
<PAGE> 20
2.8. PAYMENTS.
(a) BASE RATE LOANS. Accrued interest on all Base Rate Loans
shall be due and payable on the first Business Day of each calendar month and
upon the Credit Termination Date.
(b) LIBO RATE LOANS. Accrued interest on LIBO Loans with Interest
Periods of one, two or three months shall be due and payable on the last day of
such Interest Period.
(c) FORM OF PAYMENTS, APPLICATION OF PAYMENTS, PAYMENT
ADMINISTRATION, ETC. Provided that no Event of Default or Potential Default
then exists, all payments and prepayments shall be applied to the Loans in such
order and to such extent as shall be specified by MLC, by written notice to the
Bank at the time of such payment or prepayment. Except as otherwise provided
herein, all payments of principal, interest, fees, or other amounts payable by
MLC hereunder shall be remitted to the Bank at the address set forth opposite
its name on the signature page hereof or at such office or account as the Bank
shall specify to MLC, in immediately available funds not later than 2:00 p.m.
on the day when due. Whenever any payment is stated as due on a day which is
not a Business Day, the maturity of such payment shall, except as otherwise
provided in the definition of "Interest Period", be extended to the next
succeeding Business Day and interest shall continue to accrue during such
extension. MLC authorizes the Bank to deduct from any account of MLC
maintained at the Bank or over which the Bank has control any amount payable
under this Agreement, the Notes or any other Loan Document. The Bank's failure
to deliver any bill, statement or invoice with respect to amounts due under
this Section or under any Loan Document shall not affect MLC's obligation to
pay any installment of principal, interest or any other amount under this
Agreement when due and payable.
(d) NET PAYMENTS. (i) All payments made to the Bank by MLC
hereunder, under the Note or under any other Loan Document will be made without
set off, counterclaim or other defense. All such payments will be made free
and clear of, and without deduction or withholding for, any present or future
taxes, levies, imposts, duties, fees, assessments or other charges of whatever
nature now or hereafter imposed by any jurisdiction or any political
subdivision or taxing authority thereof or therein (but excluding, except as
provided below, any tax imposed on or measured by the gross or net income of
the Bank (including all interest, penalties or similar liabilities related
thereto) pursuant to the laws of the United States of America or any political
subdivision thereof, or taxing authority of the United States of America or any
political subdivision thereof, in which the principal office or applicable
lending office of the Bank is located), and all interest, penalties or similar
liabilities with respect thereto (collectively, together with any amounts
payable pursuant to the next sentence, "TAXES"). MLC shall also reimburse the
Bank, upon the written request of the Bank, for Taxes imposed on or measured by
the gross or net income of the Bank pursuant to the laws of the United States
of America (or any State or political subdivision thereof), or the jurisdiction
(or any political subdivision or taxing authority thereof) in which the
principal office or applicable lending office of the Bank is located as the
Bank shall determine are payable by the Bank due to the amount of Taxes paid to
or on behalf of the Bank pursuant to this or the preceding sentence. If any
Taxes are so levied or imposed, MLC agrees to pay the full amount of such
Taxes, and such additional amounts as may be necessary so that every payment of
all amounts due hereunder, under the Note or under any other Loan Document,
after withholding or deduction for or on account of any Taxes, will not be less
than the amount provided for herein or in the Note. MLC will furnish to the
Bank upon request certified copies of tax receipts evidencing such payment by
MLC. MLC will indemnify and hold harmless the Bank, and reimburse the Bank
upon its written request, for the amount of any Taxes so levied or imposed and
paid or withheld by the Bank.
Credit Agreement - 15 - June 5, 1997
<PAGE> 21
(e) PREPAYMENT OF LIBO RATE LOANS. If any principal of a LIBO
Rate Loan shall be repaid (whether upon prepayment, reduction of the Loan
Commitment after acceleration or for any other reason) or converted to a Base
Rate Loan prior to the last day of the Interest Period applicable to such LIBO
Rate Loan or if MLC fails for any reason to borrow a LIBO Rate Loan after
giving irrevocable notice pursuant to Section 2.3, MLC shall pay to the Bank,
in addition to the principal and interest then to be paid, such additional
amounts as may be necessary to compensate the Bank for all direct and indirect
costs and losses (including losses resulting from redeployment of prepaid or
unborrowed funds at rates lower than the cost of such funds to the Bank, and
including lost profits incurred or sustained by the Bank) as a result of such
repayment or failure to borrow (the "ADDITIONAL AMOUNT"). The Additional
Amount (which the Bank shall take reasonable measures to minimize) shall be
specified in a written notice or certificate delivered to MLC by the Bank.
Such notice or certificate shall contain a calculation in reasonable detail of
the Additional Amount to be compensated and shall be conclusive as to the facts
and the amounts stated therein, absent manifest error.
(f) DEMAND DEPOSIT ACCOUNT. MLC shall maintain at least one
demand deposit account with the Bank for purposes of this Agreement. MLC
authorizes the Bank (but the Bank shall not be obligated) to deposit into said
account all amounts to be advanced to MLC hereunder. Further, MLC authorizes
the Bank (but the Bank shall not be obligated) to deduct from said account, or
any other account maintained by MLC at the Bank, any amount payable hereunder
on or after the date upon which it is due and payable. Such authorization
shall include but not be limited to amounts payable with respect to principal,
interest, fees and expenses.
2.9. CHANGES IN CIRCUMSTANCES; YIELD PROTECTION.
(a) If any Regulatory Change or compliance by the Bank with any
request made after the date of this Agreement by the Board of Governors of the
Federal Reserve System or by any Federal Reserve Bank or other central bank or
fiscal, monetary or similar authority (in each case whether or not having the
force of law) shall:
(i) impose, modify or make applicable any reserve, special
deposit, Federal Deposit Insurance Corporation premium or similar
requirement or imposition against assets held by, or deposits in or
for the account of, or loans made by, or any other acquisition of
funds for loans or advances by, the Bank;
(ii) impose on the Bank any other condition regarding the
Note;
(iii) subject the Bank to, or cause the withdrawal or
termination of any previously granted exemption with respect to, any
tax (including any withholding tax but not including any income tax
not currently causing the Bank to be subject to withholding) or any
other levy, impost, duty, charge, fee or deduction on or from any
payments due from MLC; or
(iv) change the basis of taxation of payments from MLC to the
Bank (other than by reason of a change in the method of taxation of
the Bank's net income);
and the result of any of the foregoing events is to increase the cost to the
Bank of making or maintaining any Loan or to reduce the amount of principal,
interest or fees to be received by the Bank hereunder in respect of any Loan,
the Bank will immediately so notify MLC. If the Bank determines in good faith
that
Credit Agreement - 16 - June 5, 1997
<PAGE> 22
the effects of the change resulting in such increased cost or reduced amount
cannot reasonably be avoided or the cost thereof mitigated, then upon notice by
the Bank to MLC, MLC shall pay to the Bank on each interest payment date of the
Loan, such additional amount as shall be necessary to compensate the Bank for
such increased cost or reduced amount.
(b) If the Bank shall determine that any Regulation regarding capital
adequacy or the adoption of any Regulation regarding capital adequacy, which
Regulation is applicable to banks (or their holding companies) generally and
not CoreStates Bank (or its holding company) specifically, or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank (or its
holding company) with any such request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has the effect of reducing the rate of return on the Bank's
capital as a consequence of its obligations hereunder to a level below that
which the Bank could have achieved but for such adoption, change or compliance
(taking into consideration the Bank's policies with respect to capital
adequacy) by an amount deemed by the Bank to be material, MLC shall promptly
pay to the Bank, upon the demand of the Bank, such additional amount or amounts
as will compensate the Bank for such reduction.
(c) If the Bank shall determine (which determination shall be, in the
absence of fraud or manifest error, conclusive and binding upon all parties
hereto) that by reason of abnormal circumstances affecting the interbank
Eurodollar or applicable eurocurrency market, adequate and reasonable means do
not exist for ascertaining the LIBO Rate to be applicable to the requested LIBO
Rate Loan or that Eurodollar or eurocurrency funds in amounts sufficient to
fund all the LIBO Rate Loans are not obtainable on reasonable terms, the Bank
shall give notice of such inability or determination by telephone and thereupon
the obligations of the Bank to make, convert other Loans to, or renew such LIBO
Rate Loan shall be excused, subject, however, to the right of MLC at any time
thereafter to submit another request.
(d) Determination by the Bank for purposes of this Section 2.9 of the
effect of any Regulatory Change or other change or circumstance referred to
above on its costs of making or maintaining Loans or on amounts receivable by
it in respect of the Loans and of the additional amounts required to compensate
the Bank in respect of any additional costs, shall be made in good faith and
shall be evidenced by a certificate, signed by an officer of the Bank and
delivered to MLC, as to the fact and amount of the increased cost incurred by
or the reduced amount accruing to the Bank owing to such event or events. Such
certificate shall be prepared in reasonable detail and shall be conclusive as
to the facts and amounts stated therein, absent manifest error.
(e) The Bank will notify MLC of any event occurring after the date of
this Agreement that will entitle the Bank to compensation pursuant to this
Section as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation. Said notice shall be in writing,
shall specify the applicable Section or Sections of this Agreement to which it
relates and shall set forth the amount or amounts then payable pursuant to this
Section. MLC shall pay the Bank the amount shown as due on such notice within
30 days after its receipt of the same.
2.10. ILLEGALITY. Notwithstanding any other provision in this
Agreement, if the adoption of any applicable Regulation, or any change therein,
or any change in the interpretation or administration thereof by any
governmental authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive (whether or not having the
Credit Agreement - 17 - June 5, 1997
<PAGE> 23
force of law) of any such authority, central bank, or comparable agency shall
make it unlawful or impossible for the Bank to (1) maintain its Loan
Commitment, then upon notice to MLC by the Bank, the Loan Commitment shall
terminate; or (2) maintain or fund its LIBO Rate Loans, then upon notice to MLC
of such event, MLC's outstanding LIBO Rate Loans shall be converted into Base
Rate Loans.
3. REPRESENTATIONS AND WARRANTIES
MLC represents and warrants to the Bank that:
3.1. ORGANIZATION, STANDING. It and Holdings, each, (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (ii) has the corporate power and
authority necessary to own its assets, carry on its business and enter into and
perform its obligations hereunder and under each Loan Document to which it is a
party, and (iii) is qualified to do business and is in good standing in each
jurisdiction where the nature of its business or the ownership of its
properties requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect.
3.2. CORPORATE AUTHORITY, VALIDITY, ETC. The making and performance
of the Loan Documents to which it and Holdings, as applicable, is a party are
within its and Holdings' power and authority and have been duly authorized by
all necessary corporate action. The making and performance of the Loan
Documents do not and under present law will not require any consent or approval
of any of MLC's shareholders, Holdings's shareholders or any other person, do
not and under present law will not violate any law, rule, regulation order,
writ, judgment, injunction, decree, determination or award, do not violate any
provision of its or Holdings's charter or by-laws, do not and will not result
in any breach of any material agreement, lease or instrument to which it or
Holdings is a party, by which it or Holdings is bound or to which any of its or
Holdings's assets are or may be subject, and do not and will not give rise to
any Lien upon any of its or Holdings's assets. The number of shares and
classes of the capital stock of MLC and Holdings, respectively, and the
ownership thereof are accurately set forth on Schedule 1 attached hereto; all
such shares are validly issued, fully paid and non-assessable, and the issuance
and sale thereof are in compliance with all applicable federal and state
securities and other applicable laws; and the shareholders' ownership thereof
is free and clear of any liens or encumbrances or other contractual
restrictions. Further, neither MLC nor Holdings is in default under any such
agreement, lease or instrument except to the extent such default reasonably
could not have a Material Adverse Effect. No authorizations, approvals or
consents of, and no filings or registrations with, any governmental or
regulatory authority or agency are necessary for the execution, delivery or
performance by MLC or Holdings, as applicable, of any Loan Document to which it
is a party or for the validity or enforceability thereof. Each Loan Document,
when executed and delivered, will be the legal, valid and binding obligation of
MLC and Holdings, as applicable, enforceable against it in accordance with its
terms.
3.3. LITIGATION. Except as disclosed on Schedule 1, there are no
actions, suits or proceedings pending or, to MLC's or Holdings's knowledge,
threatened against or affecting MLC or Holdings or any assets of either of them
before any court, government agency, or other tribunal which if adversely
determined reasonably could have a Material Adverse Effect upon the ability of
MLC or Holdings to perform under the Loan Documents. If there is any
disclosure on Schedule 1, the status (including the
Credit Agreement - 18 - June 5, 1997
<PAGE> 24
tribunal, the nature of the claim and the amount in controversy) of each such
litigation matter as of the date of this Agreement is set forth in Schedule 1.
3.4. ERISA. (a) MLC and each ERISA Affiliate are in compliance in
all material respects with all applicable provisions of ERISA and the
regulations promulgated thereunder; and, neither MLC nor any ERISA Affiliate
maintains or contributes to or has maintained or contributed to any
multiemployer plan (as defined in Section 4001 of ERISA) under which MLC or any
ERISA Affiliate could have any withdrawal liability; (b) neither MLC nor any
ERISA Affiliate sponsors or maintains any Plan under which there is an
accumulated funding deficiency within the meaning of Section 412 of the Code,
whether or not waived; (c) the aggregate liability for accrued benefits and
other ancillary benefits under each Plan that is or will be sponsored or
maintained by MLC or any ERISA Affiliate (determined on the basis of the
actuarial assumptions prescribed for valuing benefits under terminating
single-employer defined benefit plans under Title IV of ERISA) does not exceed
the aggregate fair market value of the assets under each such defined benefit
pension Plan; (d) the aggregate liability of MLC and each ERISA Affiliate
arising out of or relating to a failure of any Plan to comply with the
provisions of ERISA or the Code, will not have a Material Adverse Effect; and
(e) there does not exist any unfunded liability (determined on the basis of
actuarial assumptions utilized by the actuary for the plan in preparing the
most recent Annual Report) of MLC or any ERISA Affiliate under any plan,
program or arrangement providing post-retirement life or health benefits.
3.5. FINANCIAL STATEMENTS. The consolidated financial statements
of Holdings and MLC as of and for the Fiscal Years ending March 31, 1994, March
31, 1995 and March 31, 1996 and for the interim nine-month period ending
December 31, 1996, consisting in each case of a balance sheet, a statement of
operations, a statement of shareholders' equity, a statement of cash flows and
accompanying footnotes, furnished to the Bank in connection herewith, present
fairly, in all material respects, the financial position, results of operations
and operating statistics of Holdings and MLC as of the dates and for the
periods referred to, in conformity with Generally Accepted Accounting
Principles. Except as set forth on Schedule 1 hereto, there are no
liabilities, fixed or contingent, which are not reflected in such financial
statements, other than liabilities which are not required to be reflected in
such balance sheets. There has been no Material Adverse Change since December
31, 1996.
3.6. NOT IN DEFAULT, JUDGMENTS, ETC.. No Event of Default or
Potential Default under any Loan Document has occurred and is continuing. MLC
and Holdings each has satisfied all judgments and is not in default with
respect to any judgment, writ, injunction, decree, rule, or regulation of any
court, arbitrator, or federal, state, municipal, or other governmental
authority, commission, board, bureau, agency, or instrumentality, domestic or
foreign.
3.7. TAXES. MLC and Holdings each has filed all federal, state,
local and foreign tax returns and reports which it is required by law to file
and as to which its failure to file would have a Material Adverse Effect, and
has paid all taxes, including wage taxes, assessments, withholdings and other
governmental charges which are presently due and payable, other than those
being contested in good faith by appropriate proceedings, if any, and disclosed
on Schedule 1. The tax charges, accruals and reserves on the books of MLC and
Holdings are adequate to pay all such taxes that have accrued but are not
presently due and payable.
3.8. PERMITS, LICENSES, ETC. MLC and Holdings each possesses all
permits, licenses, franchises, trademarks, trade names, copyrights and patents
necessary to the conduct of its business as
Credit Agreement - 19 - June 5, 1997
<PAGE> 25
presently conducted or as presently proposed to be conducted, except where the
failure to possess the same would not have a Material Adverse Effect.
3.9. NO MATERIALLY ADVERSE CONTRACTS, ETC.. Neither MLC nor
Holdings is subject to any charter, corporate or other legal restriction, or
any judgment, decree, order, rule or regulation which in the judgment of its
directors or officers has or is expected in the future to have a materially
adverse effect on its operations, business, assets, liabilities or upon its
ability to perform under the Loan Documents. Neither MLC nor Holdings is a
party to any contract or agreement which in the judgment of its directors or
officers has or is expected to have any materially adverse effect on its
business, except as otherwise reflected in adequate reserves.
3.10. COMPLIANCE WITH LAWS, ETC.
(a) COMPLIANCE GENERALLY. MLC and Holdings each is in compliance
in all material respects with all Regulations applicable to its business
(including obtaining all authorizations, consents, approvals, orders, licenses,
exemptions from, and making all filings or registrations or qualifications
with, any court or governmental department, public body or authority,
commission, board, bureau, agency, or instrumentality), the noncompliance with
which reasonably could have a Material Adverse Effect.
(b) HAZARDOUS WASTES, SUBSTANCES AND PETROLEUM PRODUCTS. MLC and
Holdings each has received all permits and filed all notifications necessary to
carry on its business; and is in compliance in all respects with all
Environmental Control Statutes. Neither MLC nor Holdings has given any written
or oral notice, nor has it failed to give required notice, to the Environmental
Protection Agency ("EPA") or any state or local agency with regard to any
actual or imminently threatened Release of Hazardous Substances on properties
owned, leased or operated by it or used in connection with the conduct of its
business and operations. Neither MLC nor Holdings has received notice that it
is potentially responsible for costs of clean-up or remediation of any actual
or imminently threatened Release of Hazardous Substances pursuant to any
Environmental Control Statute. To the best of MLC's and Holdings's knowledge
and belief, no real property owned or leased by it is in violation of any
Environmental Laws and no Hazardous Substances are present on said real
property in violation of applicable law. Neither MLC nor Holdings has been
identified in any litigation, administrative proceedings or investigation as a
potentially responsible party for any liability under any Environmental Laws.
3.11. SOLVENCY. MLC and Holdings each is, and after giving effect
to the transactions contemplated hereby, will be, Solvent.
3.12. SUBSIDIARIES, ETC. Neither MLC nor Holdings has any
Subsidiaries, except as set forth in Schedule 1 hereto. Set forth in Schedule
1 hereto is a complete and correct list, as of the date of this Agreement, of
all Investments held by MLC and Holdings in any joint venture or other Person.
3.13. TITLE TO PROPERTIES, LEASES. MLC and Holdings each has good
and marketable title to all assets and properties reflected as being owned by
it in its financial statements as well as to all assets and properties acquired
since said date (except property disposed of since said date in the ordinary
course of business). Except for the Liens set forth in Schedule 1 hereto and
any other Permitted Liens, there are no Liens on any of such assets or
properties. It has the right to, and does, enjoy peaceful and undisturbed
possession under all material leases under which it is leasing property as a
lessee. All such leases are valid,
Credit Agreement - 20 - June 5, 1997
<PAGE> 26
subsisting and in full force and effect, and none of such leases is in default,
except where such default, either individually or in the aggregate, could not
have a Material Adverse Effect.
3.14. PUBLIC UTILITY HOLDING COMPANY; INVESTMENT COMPANY. Neither
MLC nor Holdings is a "public utility company" or a "holding company", or a
"subsidiary company" of a "holding company", or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended; or a
"public utility" within the meaning of the Federal Power Act, as amended.
Further, neither is an "investment company" or an "affiliated person" of an
"investment company" or a company "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended.
3.15. MARGIN STOCK. Neither MLC nor Holdings is and will be engaged
principally or as one of its important activities in the business of extending
credit for the purpose of purchasing or carrying or trading in any margin
stocks or margin securities (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System as amended from time to time). Neither
will use or permit any proceeds of the Loans to be used, either directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying margin stocks or margin securities.
3.16. USE OF PROCEEDS. MLC will use the proceeds of any Loan only
(i) to provide the short term financing of Eligible Leases and Eligible
Receivables prior to the securitization or discounting thereof and (ii) to
purchase Eligible AMC Inventory and Equipment and Eligible Non-AMC Inventory
and Equipment.
3.17. DISCLOSURE GENERALLY. The representations and statements made
by MLC or Holdings or on its behalf in connection with this credit facility and
the Loans, including representations and statements in each of the Loan
Documents, do not and will not contain any untrue statement of a material fact
or omit to state a material fact or any fact necessary to make the
representations made not materially misleading. No written information,
exhibit, report, brochure or financial statement furnished by MLC or Holdings
to the Bank in connection with this credit facility, the Loans, or any Loan
Document contains or will contain any material misstatement of fact or omit to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
4. CONDITIONS PRECEDENT
4.1. ALL LOANS. After this Agreement has become effective, the
obligation of the Bank to make any Loan (including but not limited to the first
Loan hereunder) is conditioned upon the following:
(a) DOCUMENTS. MLC shall have delivered and the Bank shall have
received a request for a Loan in such form as the Bank may request from time to
time.
(b) COMPLIANCE CERTIFICATE. CoreStates shall have received a
certificate in the form attached hereto as Exhibit E ("COMPLIANCE
CERTIFICATE").
(c) BORROWING BASE CERTIFICATE. MLC shall have delivered and the
Bank shall have received a Borrowing Base Certificate dated the date of the
Loan requested under this Agreement.
Credit Agreement - 21 - June 5, 1997
<PAGE> 27
(d) COVENANTS; REPRESENTATIONS. MLC and Holdings, respectively,
each shall be in compliance with all covenants, agreements and conditions in
each Loan Document and each representation and warranty contained in each Loan
Document shall be true with the same effect as if such representation or
warranty had been made on the date such Loan is made or issued.
(e) DEFAULTS. Immediately prior to and after giving effect to
such transaction, no Event of Default or Potential Default shall exist.
(f) MATERIAL ADVERSE CHANGE. Since December 31, 1996, there shall
not have been any Material Adverse Change with respect to MLC or Holdings, and
there shall not be any other event or circumstance which gives the Bank
reasonable grounds to conclude that MLC or Holdings may not or will not be able
to perform or observe (in the normal course) its obligations hereunder and
under the Note, the Guaranty Agreement or the other Loan Documents.
4.2. CONDITIONS TO FIRST LOAN. In addition to the conditions to
all Loans as provided in Section 4.1, the obligation of the Bank to make the
first Loan hereunder is conditioned upon the following:
(a) ARTICLES, BYLAWS. The Bank shall have received copies of the
Articles or Certificates of Incorporation and Bylaws of MLC and Holdings each
certified by its Secretary or Assistant Secretary; together with a Certificate
of Good Standing from any jurisdiction where the nature of its business or the
ownership of its properties requires such qualification except where the
failure to be so qualified would not have a Material Adverse Effect.
(b) EVIDENCE OF AUTHORIZATION. The Bank shall have received
copies certified by the Secretary or Assistant Secretary of MLC and Holdings or
other appropriate official (in the case of a Person other than MLC) of all
corporate or other action taken by each Person other than the Bank who is a
party to any Loan Document to authorize its execution and delivery and
performance of the Loan Documents and to authorize the Loans, together with
such other related papers as the Bank shall reasonably require.
(c) LEGAL OPINIONS. The Bank shall have received a favorable
written opinion in form and substance satisfactory to the Bank from Michael E.
Geltner & Associates, as counsel for MLC and Holdings, which shall be addressed
to the Bank and be dated the date of the first Loan.
(d) INCUMBENCY. The Bank shall have received a certificate signed
by the secretary or assistant secretary of MLC and Holdings, together with the
true signature of the officer or officers authorized to execute and deliver the
Loan Documents and certificates thereunder, upon which the Bank shall be
entitled to rely conclusively until it shall have received a further
certificate of the secretary or assistant secretary of MLC or Holdings, as
applicable, amending the prior certificate and submitting the signature of the
officer or officers named in the new certificate as being authorized to execute
and deliver Loan Documents and certificates thereunder.
(e) NOTE. The Bank shall have received the Note duly executed,
completed and issued in accordance herewith.
(f) GUARANTY AGREEMENT. The Bank shall have received the Guaranty
Agreement duly executed, completed and issued in accordance herewith.
Credit Agreement - 22 - June 5, 1997
<PAGE> 28
(g) DOCUMENTS. The Bank shall have received all certificates,
instruments and other documents then required to be delivered pursuant to any
Loan Documents, in each instance in form and substance reasonably satisfactory
to it.
(h) CONSENTS. MLC and Holdings shall have provided to the Bank
evidence satisfactory to it that all governmental, shareholder and third party
consents and approvals necessary in connection with the transactions
contemplated hereby have been obtained and remain in effect.
(i) OTHER AGREEMENTS. MLC and Holdings shall have executed and
delivered each other Loan Document required hereunder.
(j) FEES, EXPENSES. MLC shall simultaneously pay or shall have
paid all fees and expenses due hereunder or any other Loan Document.
5. AFFIRMATIVE COVENANTS
MLC covenants and agrees that from and after the date hereof and so
long as the Loan Commitment is in effect or any Obligation remains unpaid or
outstanding, it will:
5.1. FINANCIAL STATEMENTS AND REPORTS. Furnish to the Bank the
following financial information:
(a) ANNUAL STATEMENTS. No later than one hundred and twenty (120)
days after the end of each Fiscal Year, the consolidated and consolidating
balance sheet of Holdings and MLC as of the end of such year and the prior year
in comparative form, and related statements of operations, shareholders'
equity, and cash flows for the Fiscal Year and the prior Fiscal Year in
comparative form. The financial statements shall be in reasonable detail with
appropriate notes and be prepared in accordance with Generally Accepted
Accounting Principles. The consolidated annual financial statements shall be
certified (without any qualification or exception) by independent certified
public accountants of nationally recognized standing reasonably acceptable to
the Bank. Such financial statements shall be accompanied by a report of such
independent certified public accountants stating that, in the opinion of such
accountants, such financial statements present fairly, in all material
respects, the financial position, and the results of operations and the cash
flows of Holdings and MLC for the period then ended in conformity with
Generally Accepted Accounting Principles, except for inconsistencies resulting
from changes in accounting principles and methods agreed to by such accountants
and specified in such report, and that, in the case of such financial
statements, the examination by such accountants of such financial statements
has been made in accordance with generally accepted auditing standards and
accordingly included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements and assessing the
accounting principles used and significant estimates made, as well as
evaluating the overall financial statement presentation. Each financial
statement provided under this subsection (a) shall be accompanied by a
certificate signed by such accountants either stating that during the course of
their examination nothing came to their attention which would cause them to
believe that any event has occurred and is continuing which constitutes an
Event of Default or Potential Default, or describing each such event. In
addition to the annual financial statements, MLC shall, promptly upon receipt
thereof, furnish to the Bank a copy of each other report submitted to its board
of directors by its independent accountants in connection with any annual,
interim or special audit made by them of the financial records of Holdings or
MLC.
Credit Agreement - 23 - June 5, 1997
<PAGE> 29
(b) QUARTERLY STATEMENTS. No later than forty-five (45) calendar
days after the end of each Fiscal Quarter of each Fiscal Year, the consolidated
and consolidating balance sheet and related statements of operations,
shareholders' equity and cash flows of Holdings and MLC for such quarterly
period and for the period from the beginning of such fiscal year to the end of
such Fiscal Quarter and a corresponding financial statement for the same
periods in the preceding Fiscal Year certified by the chief financial officer
of Holdings and of MLC as having been prepared in accordance with Generally
Accepted Accounting Principles (subject to changes resulting from audits and
year-end adjustments); provided, however, that if the independent certified
public accountants issue a review report on the quarterly financial statements
of Holdings and MLC, the financial statements required by this subsection (b)
shall be accompanied by a certificate signed by such accountants either stating
that during the course of their examination nothing came to their attention
which would cause them to believe that any event has occurred and is continuing
which constitutes an Event of Default or Potential Default, or describing each
such event and the remedial steps being taken by Holdings and MLC.
(c) COMPLIANCE CERTIFICATE. Within forty-five (45) calendar days
after the end of each of the first three Fiscal Quarters of each Fiscal Year
and within one hundred and twenty (120) calendar days after the end of each
Fiscal Year, a Compliance Certificate signed by the chief financial officer of
Holdings and of MLC.
(d) ERISA. All reports and forms filed with respect to all Plans,
except as filed in the normal course of business and that would not result in
an adverse action to be taken under ERISA, and details of related information
of a Reportable Event, promptly following each filing.
(e) MATERIAL CHANGES. Notification to the Bank of any litigation,
administrative proceeding, investigation, business development, or change in
financial condition which could reasonably have a Material Adverse Effect,
promptly following its discovery.
(f) OTHER INFORMATION. Promptly, upon request by the Bank from
time to time (which may be on a monthly or other basis), MLC shall provide such
other information and reports regarding its operations, business affairs,
prospects and financial condition as the Bank may reasonably request.
(g) BORROWING BASE CERTIFICATE. In the event MLC shall not have
delivered a Borrowing Base Certificate to the Bank during a calendar month, it
will deliver to the Bank, no later than 15 days after the end of such calendar
month as of the last day of the preceding calendar month, a Borrowing Base
Certificate signed by the chief financial officer, treasurer or controller of
MLC.
(h) MONTHLY ACCOUNTS RECEIVABLE AGING REPORT. MLC will deliver to
the Bank, no later than 15 days after the end of each calendar month, an
Accounts Receivable Aging Report. Such report shall include all Receivables
and Leases, including but not limited to those pertaining to the Collateral.
5.2. CORPORATE EXISTENCE. Preserve its corporate existence and all
material franchises, licenses, patents, copyrights, trademarks and trade names
consistent with good business practice; and maintain, keep, and preserve all of
its properties (tangible and intangible) necessary or useful in the conduct of
its business in good working order and condition, ordinary wear and tear
expected.
5.3. ERISA. Comply in all material respects with the provisions of
ERISA to the extent applicable to any Plan maintained for the employees of MLC
or any ERISA Affiliate; do or cause to be
Credit Agreement - 24 - June 5, 1997
<PAGE> 30
done all such acts and things that are required to maintain the qualified
status of each Plan and tax exempt status of each trust forming part of such
Plan; not incur any material accumulated funding deficiency (within the meaning
of ERISA and the regulations promulgated thereunder), or any material liability
to the PBGC (as established by ERISA); not permit any event to occur as
described in Section 4042 of ERISA or which may result in the imposition of a
lien on its properties or assets; notify the Bank in writing promptly after it
has come to the attention of senior management of MLC of the assertion or
threat of any "reportable event" or other event described in Section 4042 of
ERISA (relating to the soundness of a Plan) or the PBGC's ability to assert a
material liability against it or impose a lien on its, or any ERISA Affiliates'
properties or assets; and refrain from engaging in any Prohibited Transactions
or actions causing possible liability under Section 5.02 of ERISA.
5.4. COMPLIANCE WITH REGULATIONS. Comply in all material respects
with all Regulations applicable to its business, the noncompliance with which
reasonably could have a Material Adverse Effect.
5.5. CONDUCT OF BUSINESS; PERMITS AND APPROVALS, COMPLIANCE WITH
LAWS. Continue to engage in an efficient and economical manner in a business
substantially the same as conducted by it on the date of this Agreement;
maintain in full force and effect, its franchises, and all licenses, patents,
trademarks, trade names, contracts, permits, approvals and other rights
necessary to the profitable conduct of its business.
5.6. MAINTENANCE OF INSURANCE. Maintain insurance with financially
sound and reputable insurance companies or associations in such amounts and
covering such risks as are usually carried by companies engaged in the same or
a similar business and similarly situated, which insurance may provide for
reasonable deductibility from coverage thereof.
5.7. PAYMENT OF DEBT; PAYMENT OF TAXES, ETC. Where the amount
involved exceeds $250,000 or where the non-payment or non-discharge would
otherwise have a Material Adverse Effect on MLC or any of its assets: promptly
pay and discharge (a) all of its Debt in accordance with the terms thereof; (b)
all taxes, assessments, and governmental charges or levies imposed upon it or
upon its income and profits, upon any of its property, real, personal or mixed,
or upon any part thereof, before the same shall become in default; (c) all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might become a lien or charge upon such property or any part thereof; provided,
however, that so long as MLC first notifies the Bank of its intention to do so,
MLC shall not be required to pay and discharge any such Debt, tax, assessment,
charge, levy or claim so long as the failure to so pay or discharge does not
constitute or result in an Event of Default or a Potential Default hereunder
and so long as no foreclosure or other similar proceedings shall have been
commenced against such property or any part thereof and so long as the validity
thereof shall be contested in good faith by appropriate proceedings diligently
pursued and it shall have set aside on its books adequate reserves with respect
thereto.
5.8. NOTICE OF EVENTS. Promptly upon discovery of any of the
following events, MLC shall provide telephone notice to the Bank (confirmed
within three (3) calendar days by written notice), describing the event and all
action MLC or Holdings, as applicable, proposes to take with respect thereto:
(a) an Event of Default or Potential Default under this Agreement
or any other Loan Document;
Credit Agreement - 25 - June 5, 1997
<PAGE> 31
(b) any default or event of default under a contract or contracts
and the default or event of default involves payments by MLC or Holdings in an
aggregate amount equal to or in excess of $250,000;
(c) a default or event of default under or as defined in any
evidence of or agreements for Indebtedness for Borrowed Money under which the
MLC's or Holdings' liability is equal to or in excess of $250,000, singularly
or in the aggregate, whether or not an event of default thereunder has been
declared by any party to such agreement or any event which, upon the lapse of
time or the giving of notice or both, would become an event of default under
any such agreement or instrument or would permit any party to any such
instrument or agreement to terminate or suspend any commitment to lend to MLC
or Holdings or to declare or to cause any such indebtedness to be accelerated
or payable before it would otherwise be due;
(d) the institution of, any material adverse determination in, or
the entry of any default judgment or order or stipulated judgment or order in,
any suit, action, arbitration, administrative proceeding, criminal prosecution
or governmental investigation against MLC or Holdings in which the amount in
controversy is in excess of $250,000, singularly or in the aggregate; or
(e) any change in any Regulation, including, without limitation,
changes in tax laws and regulations, which would have a Material Adverse
Effect.
5.9. INSPECTION RIGHTS. During regular business hours and then as
often as requested of MLC by the Bank, permit the Bank, or any authorized
officer, employee, agent, or representative of the Bank to examine and make
abstracts from the records and books of account of MLC, wherever located, and
to visit the properties of MLC; and to discuss the affairs, finances, and
accounts of MLC with its Chairman, President, any executive vice president, it
chief financial officer, treasurer, controller or independent accountants. If
no Event of Default or Potential Default shall be in existence, the Bank shall
limit such examination to two times each calendar year and MLC shall reimburse
the Bank its expenses in connection with each such examination (up to $6,000
for each examination) promptly following the completion of each such
examination. If the inspection shall be made during the continuance of a
Potential Default or an Event of Default, MLC shall reimburse the Bank for the
Bank's expense of such inspection. At all times, it is understood and agreed
by MLC that all expenses in connection with any such inspection which may be
incurred by MLC, any officers and employees thereof and the attorneys and
independent certified public accountants therefor shall be expenses payable by
MLC and shall not be expenses of the Bank.
5.10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Maintain books and
records at all times in accordance with Generally Accepted Accounting
Principles.
5.11. COMPLIANCE WITH MATERIAL CONTRACTS. MLC will comply in all
material respects with all obligations, terms, conditions and covenants, as
applicable, in all Debt of MLC and all instruments and agreements related
thereto, and all other instruments and agreements to which it is a party or by
which it is bound or any of its properties is affected and in respect of which
the failure to comply reasonably could have a Material Adverse Effect.
5.12. USE OF PROCEEDS. MLC will use the proceeds of any Loan made
pursuant hereto only (i) to provide the short term financing of Eligible Leases
and Eligible Receivables prior to the securitization or discounting thereof and
(ii) to purchase Eligible AMC Inventory and Equipment and Eligible Non-AMC
Inventory and Equipment.
Credit Agreement - 26 - June 5, 1997
<PAGE> 32
5.13. FURTHER ASSURANCES. Do such further acts and things and
execute and deliver to the Bank such additional assignments, agreements, powers
and instruments, as the Bank may reasonably require or reasonably deem
advisable to carry into affect the purposes of this Agreement or to better
assure and confirm unto the Bank its rights, powers and remedies hereunder.
5.14. RESTRICTIVE COVENANTS IN OTHER AGREEMENTS. In the event that
MLC shall enter into or otherwise become subject to or suffer to exist any
agreement pertaining to Debt which contains covenants or restrictions that are
more restrictive on it than the covenants and restrictions contained in this
Agreement, each and every such covenant and restriction shall be deemed
incorporated herein by reference as fully as if set forth herein. If and to
the extent that any such covenant or restriction shall be inconsistent with or
otherwise be in conflict with any covenant or restriction set forth herein
(other than by reason of its being more restrictive), this Agreement shall
govern.
6. NEGATIVE COVENANTS
MLC covenants and agrees that, without the prior written consent of
the Bank, from and after the date hereof and so long as the Loan Commitment is
in effect or any Obligation remains unpaid or outstanding, it will not:
6.1. CONSOLIDATION AND MERGER. Merge or consolidate with or into
any corporation except, if no Potential Default or Event of Default shall have
occurred and be continuing either immediately prior to or upon the consummation
of such transaction, any Person may be merged into MLC as long as MLC is the
surviving entity.
6.2. LIENS. Create, assume or permit to exist any Lien on any of
its property or assets, whether now owned or hereafter acquired, or upon any
income or profits therefrom, except Permitted Liens.
6.3. GUARANTEES. Guarantee or otherwise in any way become or be
responsible for indebtedness or obligations (including working capital
maintenance, take-or-pay contracts) of any other Person, contingently or
otherwise, in any amounts that would exceed $2,500,000 in the aggregate.
6.4. MARGIN STOCK. Use or permit any proceeds of the Loans to be
used, either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying margin stock within the meaning
of Regulation U of The Board of Governors of the Federal Reserve System, as
amended from time to time.
6.5. ACQUISITIONS AND INVESTMENTS. If an Event of Default or a
Potential Default exists or would exist immediately thereafter: purchase or
otherwise acquire (including without limitation by way of share exchange) any
part or amount of the capital stock or assets of, or make any Investments in
any other Person; or enter into any new business activities or ventures not
directly related to its present business; or create any Subsidiary, except (a)
it may acquire and hold stock, obligations or securities received in settlement
of debts (created in the ordinary course of business) owing to it, and (b) it
may make and own (i) Investments in certificates of deposit or time deposits
having maturities in each case not exceeding one year from the date of issuance
thereof and issued by a Bank, or any FDIC-insured commercial bank incorporated
in the United States or any state thereof having a combined capital and surplus
of not less than $150,000,000, (ii) Investments in marketable direct
obligations issued or unconditionally guaranteed by
Credit Agreement - 27 - June 5, 1997
<PAGE> 33
the United States of America, any agency thereof, or backed by the full faith
and credit of the United States of America, in each case maturing within one
year from the date of issuance or acquisition thereof, (iii) Investments in
commercial paper issued by a corporation incorporated in the United States or
any State thereof maturing no more than one year from the date of issuance
thereof and, at the time of acquisition, having a rating of A-1 (or better) by
Standard & Poor's Corporation or P-1 (or better) by Moody's Investors Service,
Inc., and (iv) Investments in money market mutual funds all of the assets of
which are invested in cash or investments described in the immediately
preceding clauses (i), (ii) and (iii).
6.6. TRANSFER OF ASSETS; NATURE OF BUSINESS. Sell, transfer,
pledge, assign or otherwise dispose of any of its assets unless such sale or
disposition shall be in the ordinary course of its business for value received
(and in the case of any sale or refinancing of Inventory or Leases, each such
sale or refinancing must be an Ordinary Course Sale or Financing), or
discontinue, liquidate or change in any material respect any substantial part
of its operations or business. Sales of groups of Leases in securitization
transactions that comply with the requirements of an Ordinary Course Sale or
Financing shall be permitted.
6.7. RESTRICTED PAYMENTS.
(a) Make or pay any redemptions, repurchases, dividends or
distributions of any kind with respect to its capital stock except that as long
as no Event of Default or Potential Default shall be in existence (i) dividends
may be made and paid as long as the aggregate thereof does not exceed 50% of
its net income (net of any net losses) accumulated after December 31, 1996.
(b) Make any repayment or advance any monies to Holdings in
respect of intercompany obligations, except that as long as no Event of Default
or Potential Default shall be in existence repayments or advances may be made
to Holdings in the ordinary course of the business of MLC.
6.8. ACCOUNTING CHANGE. Make or permit any change in financial
accounting policies or financial reporting practices, except as required by
Generally Accepted Accounting Principles or regulations of the Securities and
Exchange Commission, if applicable.
6.9. TRANSACTIONS WITH AFFILIATES. Enter into any transaction
(including, without limitation, the purchase, sale or exchange of property, the
rendering of any services or the payment of management fees) with any
Affiliate, except transactions in the ordinary course of, and pursuant to the
reasonable requirements of, its business, and in good faith and upon
commercially reasonable terms.
6.10. RESTRICTION ON AMENDMENT OF THIS AGREEMENT. Enter into or
otherwise become subject to or suffer to exist any agreement which would
require it to obtain the consent of any other person as a condition to the
ability of CoreStates and MLC to amend or otherwise modify this Agreement.
7. FINANCIAL COVENANTS
7.1. MINIMUM TANGIBLE NET WORTH. Tangible Net Worth will not at
any time be less than the sum of (i) $9,000,000, (ii) fifty percent (50%) of
net income for each Fiscal Quarter ending after December 31, 1996 without
deduction for any net losses and (iii) any additions to paid-in capital
contributed after December 31, 1996, provided however any additions to paid-in
capital after December
Credit Agreement - 28 - June 5, 1997
<PAGE> 34
31, 1996 which are made for the purpose of enabling MLC to be in compliance
with the terms and conditions of this Agreement or any other Loan Document
shall not increase minimum Tangible Net Worth requirement if at the time of
such addition MLC shall provide written notice of such purpose to the Bank
specifying the amount required therefor.
7.2. DEBT TO TANGIBLE NET WORTH. From and after December 31, 1996,
the ratio of Debt (including, without limitation, Debt represented by the Note)
to Tangible Net Worth will not exceed 6.5:1 as at the end of any Fiscal
Quarter. For the purposes of calculating this ratio, the term "Debt" shall not
include any debts with respect to which the creditor does not have recourse to
MLC, Holdings or any of their respective assets.
7.3. MINIMUM INTEREST EXPENSE COVERAGE. From and after December
31, 1996, the ratio of EBITDA to Debt Service for the four (4) most recently
ended consecutive Fiscal Quarters will not be less than 1.25:1.
7.4. BORROWING BASE. The aggregate principal amount of Loans
outstanding shall not at any time exceed the Borrowing Base or the Loan
Commitment, whichever is less; provided, however, that this covenant shall not
be deemed breached if, at the time such aggregate amount exceeds said level,
within four Business Days after the earlier of the date MLC first has knowledge
of such excess or the date of the next Borrowing Base Certificate disclosing
the existence of such excess, a prepayment of Loans shall be made in an amount
sufficient to assure continued compliance with this covenant in the future.
8. DEFAULT
8.1. EVENTS OF DEFAULT. MLC shall be in default if any one or more
of the following events (each an "EVENT OF DEFAULT") occurs:
(a) PAYMENTS. MLC fails to pay any principal of or interest on
the Note when due and payable (whether at maturity, by notice of
intention to prepay, or otherwise) or fails to pay when it is due and
payable any other amount payable under any Loan Document and such
failure shall continue for a period of five days or more.
(b) COVENANTS. MLC fails to observe or perform (1) any term,
condition or covenant set forth in Sections 5.1(a), 5.1(b), 5.1(c),
5.1(g) or 5.1(h), Section 5.2 (first sentence only) or Sections 6.1
through 6.10 of this Agreement, as and when required, or (2) any term,
condition or covenant contained in this Agreement or any other Loan
Document other than as set forth in (1) above, as and when required
and such failure shall continue for a period of 10 days or more.
(c) REPRESENTATIONS, WARRANTIES. Any representation or warranty
made or deemed to be made by MLC or Holdings, as applicable, herein or
in any Loan Document or in any exhibit, schedule, report or
certificate delivered pursuant hereto or thereto shall prove to have
been false, misleading or incorrect in any material respect when made
or deemed to have been made.
(d) BANKRUPTCY. MLC or Holdings is dissolved or liquidated, makes
an assignment for the benefit of creditors, files a petition in
bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies
to any tribunal for any receiver or trustee, commences any proceeding
relating to itself
Credit Agreement - 29 - June 5, 1997
<PAGE> 35
under any bankruptcy, reorganization, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, has
commenced against it any such proceeding which remains undismissed for
a period of thirty (30) days, or indicates its consent to, approval of
or acquiescence in any such proceeding, or any receiver of or trustee
for MLC or Holdings or any substantial part of the property of MLC or
Holdings is appointed, or if any such receivership or trusteeship to
continues undischarged for a period of thirty (30) days.
(e) CERTAIN OTHER DEFAULTS. MLC or Holdings shall fail to pay
when due any Indebtedness for Borrowed Money which singularly or in
the aggregate exceeds $250,000, and such failure shall continue beyond
any applicable cure period, or MLC or Holdings shall suffer to exist
any default or event of default in the performance or observance,
subject to any applicable grace period, of any agreement, term,
condition or covenant with respect to any agreement or document
relating to Indebtedness for Borrowed Money if the effect of such
default is to permit, with the giving of notice or passage of time or
both, the holders thereof, or any trustee or agent for said holders,
to terminate or suspend any commitment (which is equal to or in excess
of $250,000) to lend money or to cause or declare any portion of any
borrowings thereunder to become due and payable prior to the date on
which it would otherwise be due and payable, provided that during any
applicable cure period the Bank's obligations hereunder to make
further Loans shall be suspended. Notwithstanding anything to the
contrary in the immediately preceding sentence, it shall not be an
Event of Default hereunder for MLC or Holdings to fail to pay when due
any Indebtedness for Borrowed Money so long as MLC or Holdings is
contesting in good faith through litigation its obligation to pay such
Indebtedness for Borrowed Money; provided, however, that if the
aggregate amount of any Indebtedness for Borrowed Money contested by
MLC or Holdings exceeds $500,000, MLC and Holdings shall be required
to post a bond equal to the amount that such Indebtedness for Borrowed
Money exceeds $500,000 (unless CoreStates otherwise agrees in writing
at the time).
(f) JUDGMENTS. Any judgments against MLC or Holdings or against
its assets or property for amounts in excess of $250,000 in the
aggregate remain unpaid, unstayed on appeal, undischarged, unbonded
and undismissed for a period of thirty (30) days.
(g) ATTACHMENTS. Any assets of MLC or Holdings shall be subject
to attachments, levies, or garnishments for amounts in excess of
$250,000 in the aggregate which have not been dissolved or satisfied
within twenty (20) days after service of notice thereof to MLC or
Holdings, as applicable.
(h) CHANGE IN CONTROL. Holdings shall cease to be the record and
beneficial owner of all of the issued and outstanding voting and
capital stock of MLC; or Phillip G. Norton shall cease either (i) to
maintain effective control of the operation of Holdings and MLC or
(ii) to be the record and beneficial owner of at least 25% of the
issued and outstanding shares of the voting and capital stock of
Holdings.
(i) SECURITY INTERESTS. Any security interest created pursuant to
any Loan Document shall cease to be in full force and effect, or
shall cease in any material respect to give the Bank, the Liens,
rights, powers and privileges purported to be created thereby
(including, without limitation, a perfected security interest in, and
Lien on, all of the Collateral), superior to and prior to the rights
of all third Persons, and subject to no other Liens (except as
permitted by Section 6.2).
Credit Agreement - 30 - June 5, 1997
<PAGE> 36
(j) MATERIAL ADVERSE CHANGE. In the determination of the Bank, in
its sole discretion reasonably exercised, a Material Adverse Change
shall have occurred or any event or circumstance shall have occurred
which gives reasonable grounds to conclude that MLC or Holdings, as
applicable, may not or will not be able to perform or observe in the
normal course its obligations under this Agreement, the Note, the
Guaranty Agreement, the Security Agreement or any other Loan Document.
THEN and in every such event other than that specified in Section 8.1.(d), the
Bank may immediately declare the Note and all other Obligations, including
without limitation accrued interest, to be, and they shall thereupon forthwith
become due and payable without presentment, demand, or notice of any kind, all
of which are hereby expressly waived by MLC. Upon the occurrence of any event
specified in Section 8.1.(d), the Note and all other Obligations, including
without limitation accrued interest, shall immediately be due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by MLC. From and after the date an Event of
Default shall have occurred and for so long as an Event of Default shall be
continuing, the Loans shall bear interest at the Default Rate.
9. COLLATERAL
9.1. COLLATERAL. Except as otherwise specifically set forth herein
or in any other Loan Document, any Loans made and outstanding and their
repayment at all times shall be secured by a first priority, perfected,
security interest in the Collateral (as defined in the Security Agreement,
hereinafter referred to as the "COLLATERAL") subject only to Permitted Liens.
10. MISCELLANEOUS
10.1. WAIVER. No failure or delay on the part of the Bank or any
holder of the Note in exercising any right, power or remedy under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under any
Loan Document. The remedies provided under the Loan Documents are cumulative
and not exclusive of any remedies provided by law.
10.2. AMENDMENTS. No amendment, modification, termination or waiver
of any Loan Document or any provision thereof nor any consent to any departure
by MLC or Holdings therefrom shall be effective unless the same shall have been
approved in writing by the Bank, be in writing and be signed by the Bank and
MLC and Holdings, as applicable, and then any such waiver or consent shall be
effective only in the instance and for the specific purpose for which given.
No notice to or demand on the MLC or Holdings shall entitle MLC or Holdings to
any other or further notice or demand in similar or other circumstances.
10.3. GOVERNING LAW. The Loan Documents and all rights and
obligations of the parties thereunder shall be governed by and be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania
without regard to Pennsylvania or federal principles of conflict of laws.
Credit Agreement - 31 - June 5, 1997
<PAGE> 37
10.4. PARTICIPATIONS AND ASSIGNMENTS. MLC hereby acknowledges and
agrees that CoreStates may at any time: (a) grant participations in all or any
portion of the Note or of its right, title and interest therein or in or to
this Agreement (collectively, "PARTICIPATIONS") to any other lending office of
CoreStates or, with the consent of MLC (not to be unreasonably withheld), to
any other bank, lending institution or other entity which has the requisite
sophistication to evaluate the merits and risks of investments in
Participations ("PARTICIPANTS"); provided, however, that: (i) all amounts
payable by MLC hereunder shall be determined as if CoreStates had not granted
such Participation; and (ii) any agreement pursuant to which CoreStates may
grant a Participation: (x) shall provide that CoreStates shall retain the sole
right and responsibility to enforce the obligations of MLC hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provisions of this Agreement; and (y) such participation agreement may
provide that CoreStates will not agree to any modification, amendment or waiver
of this Agreement without the consent of the Participant if such modification,
amendment or waiver would reduce the principal of or rate of interest on any
Loan or postpone the date fixed for any payment of principal of or interest on
any Loan; and (b) CoreStates may assign any of its obligations under this
Agreement and the Loan Documents.
10.5. CAPTIONS. Captions in the Loan Documents are included for
convenience of reference only and shall not constitute a part of any Loan
Document for any other purpose.
10.6. NOTICES. All notices, requests, demands, directions,
declarations and other communications between the Bank and the MLC provided for
in any Loan Document shall, except as otherwise expressly provided, be mailed
by registered or certified mail, return receipt requested, or telegraphed, or
faxed, or delivered in hand to the applicable party at its address indicated
opposite its name on the signature pages hereto. The foregoing shall be
effective and deemed received three days after being deposited in the mails,
postage prepaid, addressed as aforesaid and shall whenever sent by telegram,
telegraph or fax or delivered in hand be effective when received. Any party
may change its address by a communication in accordance herewith.
10.7. EXPENSES; INDEMNIFICATION. MLC will from time to time
reimburse the Bank promptly following demand for all reasonable out-of-pocket
expenses (including the reasonable fees and expenses of legal counsel) in
connection with (i) the preparation of the Loan Documents, (ii) the making of
any Loans, (iii) the administration of the Loan Documents, and (iv) the
enforcement of the Loan Documents. In addition to the payment of the foregoing
expenses, MLC hereby agrees to indemnify, protect and hold the Bank and any
holder of the Note and the officers, directors, employees, agents, affiliates
and attorneys of the Bank and such holder (collectively, the "INDEMNITEES")
harmless from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and
disbursements of any kind or nature, including reasonable fees and expenses of
legal counsel, which may be imposed on, incurred by, or asserted against such
Indemnitee by MLC or other third parties and arise out of or relate to this
Agreement or the other Loan Documents or any other matter whatsoever related to
the transactions contemplated by or referred to in this Agreement or the other
Loan Documents; provided, however, that MLC shall have no obligation to an
Indemnitee hereunder to the extent that the liability incurred by such
Indemnitee has been determined by a court of competent jurisdiction to be the
result of gross negligence or willful misconduct of such Indemnitee.
10.8. SURVIVAL OF WARRANTIES AND CERTAIN AGREEMENTS. All
agreements, representations and warranties made or deemed made herein shall
survive the execution and delivery of this Agreement, the making of the Loans
hereunder and the execution and delivery of the Note. Notwithstanding anything
in
Credit Agreement - 32 - June 5, 1997
<PAGE> 38
this Agreement or implied by law to the contrary, the agreements of MLC set
forth in Sections 2.8(e), 2.9, 2.10 and 10.7 shall survive the payment of the
Loans and the termination of this Agreement. This Agreement shall remain in
full force and effect until the repayment in full of all amounts owed by MLC
under the Note or any other Loan Document.
10.9. SEVERABILITY. The invalidity, illegality or unenforceability
in any jurisdiction of any provision in or obligation under this Agreement, the
Note or other Loan Documents shall not affect or impair the validity, legality
or enforceability of the remaining provisions or obligations under this
Agreement, the Note or other Loan Documents or of such provision or obligation
in any other jurisdiction.
10.10. NO FIDUCIARY RELATIONSHIP. No provision in this Agreement or
in any of the other Loan Documents and no course of dealing between the parties
shall be deemed to create any fiduciary duty by the Bank to MLC.
10.11. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. MLC AND
CORESTATES EACH HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE EASTERN DISTRICT OF PENNSYLVANIA AND IRREVOCABLY
AGREES THAT, ANY ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTE,
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS MAYBE LITIGATED IN SUCH COURTS.
EACH PARTY TO THIS AGREEMENT ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENT, AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT, ANY NOTE, OR SUCH OTHER LOAN DOCUMENT.
10.12. WAIVER OF JURY TRIAL. MLC AND CORESTATES EACH HEREBY WAIVES
ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE
LENDER/BORROWER RELATIONSHIP ESTABLISHED HEREBY. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND
ALL OTHER COMMON LAW AND STATUTORY CLAIMS. MLC AND CORESTATES EACH
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE TRANSACTION, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. MLC
AND CORESTATES EACH FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER
IS IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS, MODIFICATIONS, REPLACEMENTS OR RESTATEMENTS TO THIS
AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING
TO THE LOANS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
Credit Agreement - 33 - June 5, 1997
<PAGE> 39
10.13. COUNTERPARTS; EFFECTIVENESS. This Agreement and any amendment
hereto or waiver hereof may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement and any amendments
hereto or waivers hereof shall become effective when the Bank shall have
received signed counterparts or notice by fax of the signature page that the
counterpart has been signed and is being delivered to it or facsimile that such
counterparts have been signed by all the parties hereto or thereto.
10.14. USE OF DEFINED TERMS. All words used herein in the singular
or plural shall be deemed to have been used in the plural or singular where the
context or construction so requires. Any defined term used in the singular
preceded by "any" shall be taken to indicate any number of the members of the
relevant class.
10.15. OFFSETS. Nothing in this Agreement shall be deemed a waiver
or prohibition of the Bank's right of banker's lien or offset.
10.16. ENTIRE AGREEMENT. This Agreement, the Note issued hereunder
and the other Loan Documents constitute the entire understanding of the parties
hereto as of the date hereof with respect to the subject matter hereof and
thereof and supersede any prior agreements, written or oral, with respect
hereto or thereto.
Credit Agreement - 34 - June 5, 1997
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed by their duly authorized representatives as of the date
first above written.
<TABLE>
<S> <C>
MLC GROUP, INC.
By:
----------------------------------
Phillip G. Norton
Chairman of the Board, Chief
Executive Officer and President
Notices To:
MLC Group, Inc.
11150 Sunset Hills Road
Suite 110
Reston, Virginia 20190
FAX No. 703-834-5718
CORESTATES BANK, N.A.
By:
----------------------------------
Michael J. Labrum, Vice President
Notices To:
Mr. Michael J. Labrum
Vice President
CoreStates Bank, N.A.
Transportation Leasing and Construction Industry Services
FC 1-8-11-24
1339 Chestnut Street
Philadelphia, PA 19107
FAX No. (215) 973-6054
</TABLE>
Credit Agreement - 35 - June 5, 1997
<PAGE> 41
REFERENCE TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
DEFINITION PAGE DEFINED
<S> <C>
Accounts Receivable Aging Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Additional Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Administrative Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
AMC Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
AMC Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Asset Management Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Base Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Capitalized Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Capitalized Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CoreStates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CoreStates Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Credit Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eligible AMC Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eligible Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Eligible Non-AMC Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 4
Eligible Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Environmental Control Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ERISA Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Federal Funds Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . 5
Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
Credit Agreement - 36 - June 5, 1997
<PAGE> 42
<TABLE>
<S> <C>
Guaranty Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Hazardous Substances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Indebtedness for Borrowed Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Grade Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LIBO Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LIBO Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LIBO Rate Reserve Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Net Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Net Present Value of Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Non-AMC Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Non-Investment Grade Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Operating Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Ordinary Course Sale or Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Potential Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Present Value of Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Prohibited Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Regulation D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Regulatory Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
Credit Agreement - 37 - June 5, 1997
<PAGE> 43
<TABLE>
<S> <C>
Reportable Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Solvent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Termination Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Unfunded Pension Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Unrecognized Retiree Welfare Liability . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
Credit Agreement - 38 - June 5, 1997
<PAGE> 44
EXHIBIT A
[CORESTATES LOGO]
NOTE
$15,000,000 Philadelphia, PA
June 5, 1997
For Value Received, MLC GROUP, INC., a Virginia corporation ("MLC"), hereby
promises to pay to the order of CORESTATES BANK, N.A. (the "BANK"), in lawful
currency of the United States of America in immediately available funds at the
Bank's offices located at Broad and Chestnut Streets, Philadelphia,
Pennsylvania, on the earliest to occur of demand, acceleration of the maturity
date as provided in the Credit Agreement described below or the Credit
Termination Date, the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000)
or, if less, the then unpaid principal amount of all Loans made by the Bank
pursuant to the Credit Agreement (defined below).
MLC promises also to pay interest on the unpaid principal amount hereof in like
money at such office from the date hereof until paid in full at the rates and
at the times provided in the Credit Agreement.
This Note is the Note referred to in, is entitled to the benefits of and is
secured by security interests referred to in the Credit Agreement, dated as of
June 5, 1997 by and between MLC and the Bank (as such may be amended, modified,
supplemented, restated or replaced from time to time, the "CREDIT AGREEMENT").
Capitalized terms used in this Note but not defined herein shall have the
meanings ascribed to such terms in the Credit Agreement. This Note is subject
to voluntary prepayment and mandatory repayment prior to demand, acceleration
of maturity or the Credit Termination Date, in whole or in part, as provided in
the Credit Agreement.
In case an Event of Default shall occur and be continuing, the maturity date of
the principal of and the accrued interest on this Note may be accelerated and
be declared to be due and payable in the manner and with the effect provided in
the Credit Agreement.
MLC hereby waives presentment, demand, protest or notice of any kind in
connection with this Note.
Notwithstanding the face amount of this Note, the undersigned's liability
hereunder shall be limited, at all times, to the actual aggregate outstanding
indebtedness to the Bank relating to such Bank's Loans, including all principal
and interest, together with all fees and expenses as provided in the Credit
Agreement, as established by the Bank's books and records which shall be
conclusive absent manifest error.
Note - 1 - June 5, 1997
<PAGE> 45
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF
THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO PENNSYLVANIA OR FEDERAL
PRINCIPLES OR CONFLICT OF LAWS.
MLC GROUP, INC.
By
------------------------------------
Phillip G. Norton, Chairman of the
Board, Chief Executive Officer and
President
Note - 2 - June 5, 1997
<PAGE> 46
EXHIBIT B
BORROWING BASE CERTIFICATE
Date of Certificate:
-------------------------
Date of Information:
-------------------------
To: CORESTATES BANK, N.A.
Gentlemen:
This Borrowing Base Certificate is delivered to you pursuant to the terms of
Sections 4.1(b) or 5.1(g), as appropriate, of the Credit Agreement, dated as of
June 5, 1997, as currently in effect. Capitalized terms used without
definition below have the same meanings as they have in the Credit Agreement.
We hereby certify that:
1. No Potential Default or Event of Default has occurred and is
continuing as of the date of this Borrowing Base Certificate.
2. There has been no Material Adverse Change since [insert the date of
the most recent financial statements delivered to the Bank pursuant to
the terms of Section 5.1 of the Credit Agreement], except as disclosed
on the attached schedules.
3. The information set forth on the attached schedules is true, current
and complete as of the date of this Borrowing Base Certificate.
MLC GROUP, INC.
By
------------------------------
Name:
Title:
Borrowing Base Certificate - 1 - June 5, 1997
<PAGE> 47
MLC GROUP, INC.
COMPUTATION OF BORROWING BASE AVAILABILITY
,
--------------------------- -------------
<TABLE>
<S> <C>
COLLATERAL LOAN VALUE
A. Eligible Leases @ the lesser of:
(a) 100% of the acquisition cost
of the equipment subject to such
Leases or (b) 100% of the Net
Present Value of Lease Payments $
-------------
B. Eligible Receivables @ 100%
(subject to $3,000,000 sublimit) $
-------------
C. Eligible AMC Equipment
and Inventory @ 100% $
-------------
D. Eligible Non-AMC Equipment
and Inventory @ 90%
(subject to $1,000,000 sublimit) $
-------------
1. Total Eligible Collateral $
--------------------
MAXIMUM LOANS
2. Maximum Loans: $15,000,000 $ 15,000,000.00
CREDIT USAGE
3. Aggregate Loan Balance (principal) at date of certificate $
--------------------
LOAN AVAILABILITY
4. Line 1 minus Line 3 $
--------------------
5. Line 2 minus Line 3 $
--------------------
6. Availability (Line 4 or Line 5 whichever is less) $
--------------------
7. Amount of Loan Requested This Date (if any) $
(Not to exceed line 6) --------------------
</TABLE>
Borrowing Base Certificate - 2 - June 5, 1997
<PAGE> 48
Certification: MLC GROUP, INC.
Date: By:
-------------------------------- -------------------------------
Name:
Title:
Borrowing Base Certificate - 3 - June 5, 1997
<PAGE> 49
MLC GROUP, INC.
NEW COLLATERAL INFORMATION SCHEDULE
FOR BORROWING ON
,
-------------------------------------- ----------
MLC Group, Inc. has requested this date that a Loan be made to it by CoreStates
Bank, N.A. The following table sets forth information with respect to items
being added to the Collateral with this request for a Loan.
MLC Group, Inc. has delivered the original counterpart of each lease to
CoreStates Bank, N.A. and it represents and warrants hereby that all other
copies of each lease are clearly marked to indicate that each is not the
lessor's original counterpart of that lease.
<TABLE>
<CAPTION>
Customer Contract Monthly Lease Remaining Gross Equipment
Name Number Payment Term(1) Term(2) Remaining(3) Cost(4)
- ------------ ----------- ----------- ------- ----------- ------------ ------------
<S> <C>
------------ ------------
Totals
</TABLE>
MLC GROUP, INC.
By
-------------------------
Name:
Title:
- ----------------------------------
(1) This is the original term of months of the lease.
(2) This is the number of months remaining on the lease at the date of
this Schedule.
(3) This is the gross amount remaining payable in respect of the lease
minus the unearned finance charge.
(4) This is the purchase price of the equipment to MLC Group, Inc. as
shown on the invoice of the manufacturer or distributor of the
equipment.
Borrowing Base Certificate - 4 - June 5, 1997
<PAGE> 50
MLC GROUP, INC.
COLLATERAL CUMULATIVE INFORMATION SCHEDULE
,
---------------------- ----------
As of the date listed above, MLC Group, Inc. has pledged, assigned and created
security interests in the Collateral listed below all of which is in effect at
the date hereof.
<TABLE>
<CAPTION>
Customer Contract Monthly Lease Remaining Gross Equipment
Name Number Payment Term(1) Term(2) Remaining(3) Cost(4)
- ------------ ----------- ----------- ------- ----------- ------------ ------------
<S> <C>
------------ ------------
Totals
</TABLE>
MLC GROUP, INC.
By
-------------------------
Name:
Title:
- ----------------------------------
(1) This is the original term of months of the lease.
(2) This is the number of months remaining on the lease at the date of
this Schedule.
(3) This is the gross amount remaining payable in respect of the lease
minus the unearned finance charge.
(4) This is the purchase price of the equipment to MLC Group, Inc. as
shown on the invoice of the manufacturer or distributor of the
equipment.
Borrowing Base Certificate - 5 - June 5, 1997
<PAGE> 51
EXHIBIT C
[CORESTATES LOGO]
SECURITY AGREEMENT
This Security Agreement, dated June 5, 1997, by and between MLC GROUP,
INC., a Virginia corporation, with its main business office located at 11150
Sunset Hills Road, Suite 110, Reston, Virginia 20190 (the "DEBTOR") and
CORESTATES BANK, N.A., a national banking association (the "SECURED PARTY").
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned in the Credit Agreement (defined below).
PRELIMINARY STATEMENT
This Security Agreement is entered into in accordance with and is a
condition precedent to any Loan under the Credit Agreement.
NOW, THEREFORE, the Debtor and the Secured Party, intending to be
legally bound, agree as follows:
1. DEFINITIONS.
As used herein the following terms shall have the meanings indicated:
(A) "ACCOUNTS," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT,"
"GENERAL INTANGIBLES," "INSTRUMENTS," "INVENTORY" and "PROCEEDS" shall have the
meanings assigned to them under the Uniform Commercial Code as in effect in the
Commonwealth of Pennsylvania and shall be applicable solely for purposes of the
Collateral.
(B) "COLLATERAL" means
(i) all the Debtor's Chattel Paper consisting of all
leases of personal property (including Leases), all
Inventory and/or Equipment consisting of all of the
personal property leased pursuant to such Chattel
Paper and all returned and repossessed items of
Inventory and Equipment previously related to such
Chattel Paper,
(ii) Receivables, and
(iii) all of the Debtor's Inventory and Equipment
(including, without limitation, all AMC Inventory and
Equipment and all Non-AMC Inventory and Equipment).
now or hereafter collaterally assigned to the Secured Party pursuant to one or
more security agreements, assignment agreements or other agreements, now or
hereafter entered into between the Debtor and the
Security Agreement - 1 - June 5, 1997
<PAGE> 52
Secured Party, all whether now owned or hereafter acquired or arising; all
amendments, replacements, accessions, accessories, substitutions for, and all
parts affixed to or used in connection with any the foregoing; all rights,
powers, privileges and monies due or to become due thereunder; all Accounts,
Instruments, Documents, contract rights and General Intangibles relating
thereto; all cash and non-cash Proceeds of all of the foregoing, including
without limitation, insurance Proceeds; any balance or share belonging to the
Debtor of any deposit, agency or other account with the Secured Party and any
other amounts which may be owing from time to time by the Secured Party to the
Debtor; and all property of any nature whatsoever of the Debtor now or
hereafter in the possession of or assigned or hypothecated to the Secured
Party, together with all products and Proceeds (including insurance Proceeds)
of any of the foregoing. The term "Collateral" shall not include any Inventory
or Chattel Paper that has been sold to a third party or refinanced with
another lender pursuant to an Ordinary Course Sale or Financing (provided,
however, that if any of such Inventory or Chattel Paper is ever returned to the
Debtor, it shall once again be deemed "Collateral").
(C) "CREDIT AGREEMENT" means that certain Credit Agreement, dated
the date hereof (as such agreement may be amended, restated, modified, replaced
or substituted hereafter) between the Debtor and CoreStates Bank, N.A.
(D) "LEASE" means any capital lease or operating lease (or
conditional sales agreement or any similar financing arrangement) upon which
the Debtor is the lessor or an assignee of the lessor which lease is included
in the Collateral.
(E) "LIABILITIES" means all existing and future indebtedness and
other liabilities, absolute or contingent, direct or indirect, primary or
secondary, of the Debtor to the Secured Party arising hereunder or in respect
of the Note or otherwise in connection with the Credit Agreement or any Loan
Document plus all obligations of the Debtor to the Secured Party in respect of
any interest rate swap agreement, interest rate cap agreement, interest collar
agreement, interest rate hedging agreement, interest rate floor agreement or
other similar agreement or arrangement.
(F) "PREVAILING INTEREST RATE" as of any date means the highest
rate of interest then payable by the Debtor under any Loan.
2. GRANT OF SECURITY; ASSIGNMENT OF LEASES.
To secure the payment, promptly when due, and the punctual performance
of all of the Liabilities, the Debtor hereby:
(A) pledges and assigns to the Secured Party, and grants to the
Secured Party and agrees that the Secured Party shall have, a general
continuing lien upon and security interest in all the Collateral, which lien
and security interest shall be a general continuing first priority lien upon
and security interest in all the Collateral.
(B) assigns and transfers to the Secured Party all Debtor's right,
title and interest in and to all rentals and other amounts payable under the
Leases, and all proceeds from insurance and any proceeding, payable to or
receivable by the Debtor under or in connection therewith, and all rights,
powers and remedies (but none of the duties or obligations, if any) of the
Debtor under the Leases, including all rights of the Debtor to give and receive
any notice, consent, waiver, demand or approval under or in respect of
Security Agreement - 2 - June 5, 1997
<PAGE> 53
the Leases, to exercise any election or option thereunder or in respect
thereof, to accept any surrender of any property subject thereto, to execute
and deliver any bill of sale for any such property, and to do all other things
which Debtor is entitled to do under the Leases.
3. LEASES.
(A) The Debtor shall remain liable as lessor under the Leases to
perform all the obligations assumed by the Debtor thereunder. The obligations
of Debtor under the Leases may be performed by Secured Party or any subsequent
assignee of the Secured Party ("SUBSEQUENT SECURED PARTY") without releasing
Debtor therefrom. The Secured Party or any Subsequent Secured Party shall have
no liability or obligation under the Leases by reason of this Agreement and
shall not, by reason of this Agreement, be obligated to perform any of the
obligations of Debtor under the Leases or to file any claim or take any other
action to collect or enforce any payment assigned hereunder.
(B) The Debtor hereby agrees (i) to perform duly and punctually
each of the terms, conditions and covenants contained in the Leases, and (ii)
subject to the Debtor's business judgment and reasonable commercial practice,
to exercise promptly and diligently each and every right it may have under the
Leases.
(C) The Debtor does hereby warrant and represent that all Leases
are in full force and effect and that the Debtor has not assigned or pledged,
and hereby covenants that it will not assign or pledge, so long as this
Agreement shall remain in effect, the whole or any part of the rights hereby
assigned, to anyone other than the Secured Party.
(D) Subject to the provisions of this Agreement, and until the
occurrence of an Event of Default and upon demand by the Secured Party, the
Debtor may exercise all the rights and enjoy all the benefits of the lessor
under the Leases.
4. BOOKS AND RECORDS. The Debtor shall faithfully keep complete
and accurate books and records and make all necessary entries therein to
reflect the quantities, costs, current values and locations of all Collateral,
the events and transactions giving rise thereto and all payments, credits and
adjustments applicable thereto, shall keep the Secured Party fully and
accurately informed as to the locations of all such books and records and shall
permit the Secured Party's agents to have such access to them and to any other
records pertaining to the Debtor's business as the Secured Party may request
from time to time.
5. CONTROL OF AND ACCESS TO COLLATERAL.
(A) Prior to any Lease being included in the Borrowing Base
calculation, each originally executed Lease included in the Collateral shall be
(i) marked "original" and legended in form satisfactory to the Secured Party to
indicate that it is the original of the Lease with all other copies marked
"copy" and (ii) delivered by the Debtor to the Secured Party together with
either (a) in the case of equipment not leased pursuant to an Asset Management
Contract, the original paid invoices for the equipment being leased or (b) in
the case of equipment leased pursuant to an Asset Management Contract, a list
of the invoices for the equipment being leased (which list shall include the
invoice number, invoice date, vendor identity, description of equipment, amount
of invoice and the number and date of the MLC check whereby the invoice was
paid by MLC). Further, if Lender shall so request in connection with its
periodic reviews of the Collateral and the Borrowing Base (or at any time after
the occurrence of an Event of Default), MLC
Security Agreement - 3 - June 5, 1997
<PAGE> 54
shall make available to Lender the original paid invoices with respect to all
equipment related to Leases, regardless of whether such Leases were made
pursuant to Asset Management Contracts.
(B) Upon the occurrence of an Event of Default, the Secured Party
shall have the right at any time to take possession of the Collateral or any
part thereof. Notwithstanding any such taking of possession, the Collateral
shall remain at all times at the Debtor's sole risk, and to the full extent
permitted by law the Secured Party shall not be responsible for any loss,
damage or diminution in the value thereof. All costs of transportation,
packaging, custody, processing, storage, and insurance of any unit or item of
Collateral which may be incurred by the Secured Party shall be promptly repaid
to the Secured Party by the Debtor together with interest thereon at the
Prevailing Interest Rate, and the Debtor's liability to the Secured Party for
such repayment with interest shall be included in the Liabilities.
(C) If any item or unit of Collateral is now or hereafter the
subject of a certificate of title or is required by law so to be, the Debtor
will promptly procure the necessary certificate of title and take all steps
necessary to cause the Secured Party's lien or security interest therein to be
noted on the face of such certificate and undertake such other steps as may be
necessary to assure that the Secured Party has a first priority, perfected
security interest in each such item or unit of Collateral, and shall thereafter
deposit the original of such certificate of title with the Secured Party.
(D) The Debtor shall immediately notify the Secured Party of any
event causing any deterioration, loss or depreciation in value of any
substantial portion of the Collateral and the Debtor's best estimate of the
amount of such deterioration, loss or depreciation.
(E) The Debtor shall afford the Secured Party's agents access to
the Collateral from time to time upon request for purposes of examination,
inspection and appraisal thereof and to verify the Debtor's books and records
pertaining thereto. After an Event of Default and upon the Secured Party's
demand therefor, the Debtor shall assemble the Collateral and make it available
to the Secured Party at such place reasonably convenient to both parties as the
Secured Party may designate, and the Secured Party's rights to such assemblage
shall be enforceable by injunction. If an Event of Default shall not exist,
the Secured Party shall furnish written prior notice to the Debtor reasonably
in advance of any intended examination, inspection, appraisal and verification
and such activity shall commence during the Debtor's normal business hours.
(F) From and after the occurrence of an Event of Default
hereunder, the Debtor shall pay to the Secured Party on demand any and all
expenses of conducting any and all periodic examinations or reviews or causing
any periodic examinations or reviews of Collateral determined to be appropriate
by the Secured Party (including but not limited to reasonable attorneys' fees
and legal expenses) which may be incurred by the Secured Party, with interest
at the Prevailing Interest Rate.
(G) Upon an Event of Default, the Secured Party is hereby granted
a license or other right to use, without charge, Debtor's labels, intellectual
property, or use of any name, trade secrets, tradenames, trademarks and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in advertising for sale and selling any Collateral, and Debtor's
rights under all licenses and all franchise agreements shall inure to the
Secured Party's benefit.
6. MAINTENANCE OF COLLATERAL; SALE. Subject to the Debtor's
business judgment and reasonable commercial practice, the Debtor shall take
good care of the Collateral and shall afford it suitable
Security Agreement - 4 - June 5, 1997
<PAGE> 55
preventive maintenance. The Debtor shall pay the cost of all repairs to or
maintenance of the Collateral and shall not permit anything to be done that
might in any way impair the value of any of the Collateral or any of the
security intended to be afforded by this Agreement. The Debtor shall
conscientiously adhere to a well designed internal control system with respect
to the Collateral, and such system shall be capable of permitting the Debtor
and the Secured Party to identify readily at any time the location and
condition of each and every item of Collateral. The Debtor will not permit any
of the Collateral to become or be a fixture. The Debtor shall not sell,
exchange, salvage, replace or dispose of any items or unit of its Inventory or
Equipment or any of its rights therein, except that so long as the Debtor is
not in default hereunder, it shall have the right to sell its Inventory and
Equipment in each case in the ordinary course of its business and it shall have
the right to lease or re-lease its Inventory and Equipment in the ordinary
course of its business.
7. INSURANCE.
(a) The Debtor shall bear the risk of each item or unit of
Inventory and Equipment being lost, destroyed, irreparably damaged or rendered
permanently unfit for sale, lease or use or being damaged in part, from any
cause whatsoever at any time during the term of this Agreement, and shall at
its own cost and expense obtain and keep in full force and effect, in kind and
form reasonably satisfactory to the Secured Party, or in the alternative shall
cause the lessee under each applicable Lease to do the same with respect to
Inventory or Equipment subject to the lessee's Lease, all risk of physical loss
or damage insurance covering the Inventory and Equipment wherever the same may
be located, insuring against the risks of fire, explosion, theft and such other
risks as are customarily insured against by organizations engaged in the same
business and similarly situated with the Debtor (and specifically including
vandalism, malicious mischief coverage, loss overboard and breakage), in an
amount usually carried by organizations engaged in the same business or
similarly situated with the Debtor. All policies of such insurance shall be
written for the benefit of the Debtor as the insured.
(b) If the Debtor or the applicable lessee fails to pay any
premium on any such insurance, the Secured Party shall have the right, but
shall be under no obligation, to pay such premium for the Debtor's account.
The Debtor shall repay to the Secured Party on demand all sums which the
Secured Party shall have paid under this section in respect of insurance
premiums, with interest thereon at the Prevailing Interest Rate, and the
Debtor's liability to the Secured Party for such repayment with interest shall
be included in the Liabilities. The Debtor hereby assigns to the Secured Party
any return or unearned premium which may be due upon the cancellation for any
reason whatsoever of any policy of insurance maintained in respect of the
Collateral and hereby directs the insurer to pay the Secured Party any amount
so due. The Debtor's right to receive payment of any such return or unearned
premium and the proceeds of any such insurance shall constitute a part of the
Collateral for all purposes hereof.
8. TITLE TO COLLATERAL.
(A) The Debtor has acquired or shall acquire absolute and
exclusive title to each and every item or unit of the Collateral free and clear
of all liens, claims, security interests and other encumbrances, except as
permitted under the Credit Agreement, and the Debtor shall warrant and defend
its title to the Collateral, subject to the rights of the Secured Party,
against the claims and demands of all persons whomsoever. Without limiting the
generality of the foregoing, the Debtor shall not pledge, assign or otherwise
encumber, or permit any liens or security interests (other than those in favor
of the Secured
Security Agreement - 5 - June 5, 1997
<PAGE> 56
Party) to attach to, any of the Collateral, nor permit any of the Collateral to
be levied upon under any legal process.
(B) The Secured Party may, at its sole election but without
obligation to do so, discharge any unpermitted encumbrance pertaining to the
Collateral and all expenses incurred by the Secured Party in so doing, together
with interest thereon at the Prevailing Interest Rate, shall be added to the
Liabilities and shall be payable by the Debtor on demand.
9. TAXES AND LIENS. The Debtor shall promptly notify the Secured
Party in the event there ever arises against any of the Collateral any lien,
assessment or tax or other liability, whether or not entitled to priority over
the Secured Party's security interest hereunder. In any such event, whether or
not such notice is given, the Secured Party shall have the right (but shall be
under no obligation) to pay any tax or other liability of the Debtor deemed by
the Secured Party in good faith to affect the Secured Party's interests
hereunder. The Debtor shall repay to the Secured Party on demand all sums
which the Secured Party shall have paid under this section in respect of taxes
or other liabilities of the Debtor, with interest thereon at the Prevailing
Interest Rate, and the Debtor's liability to the Secured Party for such
repayment with interest shall be included in the Liabilities. The Secured
Party shall be subrogated to the extent of any such payment by it to all the
rights and liens of the payee against the Debtor's assets.
10. COLLECTION OF ACCOUNTS, ETC.
(A) Until otherwise notified by the Secured Party, the Debtor may
collect all the Accounts but the Proceeds of all Accounts so collected by the
Debtor shall be held by the Debtor in trust for the Secured Party. The Secured
Party may at any time during the existence of an Event of Default terminate the
authority hereby given to the Debtor to collect the Proceeds of such Accounts
and, acting if it so chooses in the Debtor's name, collect such Accounts
itself, directly or through an agent, sell, assign, compromise, discharge or
extend the time for payment of such Accounts, institute legal action for the
collection of such Accounts and do all acts and things necessary or incidental
thereto, and the Debtor hereby ratifies all that the Secured Party shall
lawfully do under the authority hereby granted to it. The Secured Party may at
any time during the existence of an Event of Default, without notice to the
Debtor, notify any account debtor on any such Account that such Account has
been assigned to the Secured Party and is to be paid directly to the Secured
Party. Alternatively, at its election the Secured Party may require the Debtor
to, and in such event the Debtor at its sole expense will, notify its account
debtors that payments thereon are thenceforth to be made directly to the
Secured Party. Without the written consent of the Secured Party in each case,
the Debtor shall not compromise, discharge, extend the time for payment of or
otherwise grant any indulgence or allowance with respect to any such Account
except for minor indulgences or allowances in the ordinary course of business
which are not related to an extension or restructuring of credit to an account
debtor of a duration in excess of 30 days in any instance.
(B) If any such Account arises out of a contract with the United
States or any department, agency or instrumentality thereof, the Debtor will
immediately so notify the Secured Party in writing and will execute all
instruments and take all steps required by the Secured Party in order that the
security interest of the Secured Party hereunder in all such Accounts under
such contract and the Proceeds thereof shall be perfected under the Federal
Assignment of Claims Act.
(C) From and after the occurrence and during the continuance of
any Event of Default, if any of the Collateral is or becomes evidenced by a
promissory note, draft, trade acceptance, Chattel Paper,
Security Agreement - 6 - June 5, 1997
<PAGE> 57
Instrument or Document of Title, the Debtor will promptly deliver the same to
the Secured Party appropriately endorsed to the Secured Party's order.
Regardless of the form of such endorsement, the Debtor hereby waives
presentment, demand, notice of dishonor, protest and notice of protest and all
other notices with respect thereto. The Debtor will promptly notify the
Secured Party of any Material Adverse Change of which it has knowledge in the
financial condition of any account debtor on any material Account pertaining to
a Lease or in the collectibility of any of such Accounts, and of all claims,
rejections, returns and adjustments which may result in a material reduction of
the liability of an account debtor on any such Account.
11. LOCATIONS OF THE COLLATERAL; NAME.
(A) If any of the Collateral or any of the Debtor's records
concerning any of the Collateral are at any time to be located on premises
leased by the Debtor, or any premises owned by the Debtor subject to a mortgage
or other lien, the Debtor shall obtain and deliver to the Secured Party, prior
to the delivery of any such Collateral or books or records to such premises, an
agreement in form satisfactory to the Secured Party waiving the landlord's,
mortgagee's or other lienholder's right to enforce against the Collateral or
the Debtor's records concerning the same and assuring the Secured Party's
access to such Collateral and books and records to facilitate the Secured
Party's exercise of its rights to take possession thereof. The location of
Debtor's chief executive office and all locations at which the Debtor maintains
a place of business are set forth in Schedule A, and the Debtor agrees to
provide the Secured Party annually with a list of each location of any such
place of business or the establishment of any additional place of business of
the Debtor.
(B) The Debtor represents and warrants that at no time during the
past five (5) years has it been known by or used any other name, including any
trade or fictitious name, except as disclosed in Schedule A.
12. FURTHER ASSURANCES. The Debtor shall continue to conduct its
business in substantially the manner heretofore conducted and will make no
material changes therein which might impair the security of the Secured Party.
The Debtor shall execute and deliver to the Secured Party from time to time all
such other agreements, instruments and other documents (including without
limitation all requested financing and continuation statements) and do all such
other and further acts and things as the Secured Party may reasonably request
in order further to evidence or carry out the intent of this Agreement or to
perfect the liens and security interests created hereby or intended so to be.
13. DEFAULT AND REMEDIES.
(A) The Debtor shall be in default hereunder upon the occurrence
of any one of the following events (each an "Event of Default"):
(1) the Debtor shall fail to pay any amount payable in
respect of any Liability when due (including the
expiration of any applicable grace periods).
(2) any representation, warranty or information herein,
heretofore or hereafter furnished to the Secured
Party by the Debtor in connection with any of the
Liabilities, including any warranty made by the
Debtor through the submission of
Security Agreement - 7 - June 5, 1997
<PAGE> 58
any schedule, statement, certificate or other
document pursuant to or in connection with this
Agreement, shall be false in any material respect.
(3) the Debtor shall fail to timely perform any of its
obligations under this Agreement.
(4) there shall exist any Potential Default or Event of
Default as defined under the Credit Agreement.
(B) Upon the occurrence of any Event of Default which shall be
continuing, (i) unless the Secured Party elects otherwise, the entire unpaid
amount of such of the Liabilities as is not then otherwise due and payable
shall become immediately due and payable without notice to or demand on the
Debtor, (ii) the Secured Party or its agents may enter the Debtor's premises to
exercise the Secured Party's right to take possession of any Collateral, and
(iii) the Secured Party may at its option exercise from time to time any and
all rights and remedies available to it under the Uniform Commercial Code or
otherwise, including the right to assemble, receipt for, adjust, modify,
repair, refurnish or refurbish (but without any obligation to do so) or
foreclose or otherwise realize upon any of the Collateral and to dispose of any
of the Collateral at one or more public or private sales or other proceedings.
The Debtor agrees that the Secured Party or its nominee may become the
purchaser at any such sale or sales. The Debtor further agrees that ten (10)
days shall be reasonable prior notice of the date of any public sale or other
disposition of all or any part of the Collateral, or of the date on or after
which any private sale or other disposition of the same may be made.
(C) The exercise by the Secured Party of any one right or remedy
shall not be deemed a waiver or release of or any election against any other
right or remedy, and the Secured Party may proceed against the Debtor and the
Collateral and any other collateral granted by the Debtor to the Secured Party
under any other agreement, all in any order and through any available remedies.
A waiver on any one occasion shall not be construed as a waiver or bar on any
future occasion. All property of any kind held at any time by the Secured
Party as Collateral shall stand as one general continuing collateral security
for all the Liabilities and may be retained by the Secured Party as security
until all the Liabilities are fully satisfied. The Debtor shall pay to the
Secured Party on demand any and all expenses (including reasonably attorneys'
fees and legal expenses) which may have been incurred by the Secured Party with
interest at the Prevailing Interest Rate (i) in the prosecution or defense of
any action growing out of or connected with the subject matter of this
Agreement, the Liabilities, the Collateral or any of the Secured Party's rights
therein or thereto; or (ii) in connection with the custody, preservation, use,
operation, preparation for sale or sale of any of the Collateral, the incurring
of all of which are hereby authorized to the extent the Secured Party deems the
same advisable. The Debtor's liability to the Secured Party for any such
payment with interest shall be included in the Liabilities. The Proceeds of
any Collateral received by the Secured Party at any time before or after
default, whether from a sale or other disposition of Collateral or otherwise,
or the Collateral itself, may be applied to the payment in full or in part of
such of the Liabilities and in such order and manner as the Secured Party may
elect. The Debtor to the extent of its rights in the Collateral waives and
releases any right to require the Secured Party to collect any of the
Liabilities from any other of the Collateral or any other collateral then held
by the Secured Party under any theory of marshaling of assets or otherwise.
14. POWER OF ATTORNEY. The Debtor hereby irrevocably appoints any
officer, employee or agent of the Secured Party as the Debtor's true and lawful
attorney-in-fact with power to (i) endorse the Debtor's name upon any notes,
checks, drafts, money orders, or other instruments or payments or other
Security Agreement - 8 - June 5, 1997
<PAGE> 59
Collateral that may come into the Secured Party's possession; (ii) sign and
endorse the Debtor's name upon any documents of title, invoices, freight or
express bills, assignments, verifications and notices in connection with any of
the Collateral, and any instruments or documents relating thereto or to the
Debtor's rights therein; and (iii) execute in the Debtor's name and file one or
more financing, amendment and continuation statements covering the Collateral.
Any such attorney of the Debtor shall have full power to do any and all things
necessary to be done with respect to the above transactions as fully and
effectually as the Debtor might do, and the Debtor hereby ratifies all that
said attorney shall lawfully do or cause to be done by virtue hereof.
15. FINANCING STATEMENTS. The Debtor shall execute all financing
statements and amendments thereto as the Secured Party may request from time to
time to evidence the security interest granted to the Secured Party hereunder
and will pay all filing fees and taxes, if any, necessary to effect the filing
thereof. Wherever permitted by law, the Debtor authorizes the Secured Party to
file financing statements with respect to the Collateral without the signature
of the Debtor. A copy of this Agreement or a copy of any financing statement
prepared in connection with this Agreement may itself be filed as a financing
statement.
16. MISCELLANEOUS.
(A) This Agreement shall commence on the date hereof and shall
continue in full force and effect so long as any of the Liabilities shall exist
from time to time.
(B) No modification or waiver of any provision hereof shall be
effective unless the same is in writing and signed by the party against whom
its enforcement is sought. This Agreement and any amendment hereto or waiver
of any provision hereof may be signed in any number of counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
(C) The representations, warranties, covenants and agreements
contained herein are all material and continuing, and any breach of them shall
constitute a material breach of this Agreement.
(D) All the rights and remedies of the Secured Party hereunder
shall be concurrent and cumulative with and not alternative to or in lieu of
the Secured Party's rights and remedies under any other agreement or
agreements.
(E) This Agreement shall bind and inure to the benefit of the
parties and their respective successors and assigns, except that the Debtor
shall not assign any of its rights hereunder without the Secured Party's prior
written consent.
(F) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
(G) No persons other than the Debtor and the Secured Party, and
the assignees of the Secured Party, are intended to be benefitted hereby or
shall have any rights hereunder, as third-party beneficiaries or otherwise.
Security Agreement - 9 - June 5, 1997
<PAGE> 60
(H) The Debtor acknowledges that this Agreement and the
obligations of the Debtor hereunder and the security created or intended to be
created hereby have constituted, and were intended by the Debtor to constitute,
a material inducement to the Secured Party to enter into the Credit Agreement
and other agreements referred to therein, knowing that the Secured Party will
rely upon this Agreement. The Debtor intends to be legally bound hereby.
(I) This Agreement shall be deemed to be a contract made under and
shall be construed in accordance with the laws of the Commonwealth of
Pennsylvania without regard to Pennsylvania or federal principles of conflict
of laws.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed by their duly authorized representatives as of the date
first above written.
<TABLE>
<S> <C>
DEBTOR
MLC GROUP, INC.
By
---------------------------------------
Phillip G. Norton
Chairman of the Board, Chief
Executive Officer and President
Notices To:
MLC Group, Inc.
11150 Sunset Hills Road
Suite 110
Reston, Virginia 20190
FAX No. 703-834-5718
SECURED PARTY
CORESTATES BANK, N.A.
By
---------------------------------------
Michael J. Labrum, Vice President
Notices To:
Michael J. Labrum
Vice President
CoreStates Bank, N.A.
Transportation Leasing and Construction Industry Services
FC 1-8-11-24
1339 Chestnut Street
Philadelphia, PA 19107
FAX No. (215) 973-6054
</TABLE>
Security Agreement - 10 - June 5, 1997
<PAGE> 61
SCHEDULE A
1. None of the Collateral or books and records relating to the Collateral
is or will be located or used at any location other than the
following:
11150 Sunset Hills Road, Suite 110, Reston, Virginia 21090
5220 Spring Valley, Suite 202, Dallas, TX 75240
5130 Bonita Road, Suite C, Bonita, CA 91502
6616 Six Forks Road, Suite 201, Raleigh, NC 27615
1900 Point West Way, Suite 120, Sacramento, CA 95815
406 Willowbrook Lane, West Chester, PA 19382
1000 Johnson Ferry Road, Suite G-150, Marietta, GA 30068
1177 High Ridge Road, Stanford, CT 06905
1933 Greenwich, San Francisco, CA 94125
950 N. Raddant Road, Batavia, IL 60510
2895 113th Street, Grand Praire, TX 75050
3209 Wellington Court, Suite G, Raleigh, NC 27615
Mt. Ridge Business Park, 1248 Sussex Turnipike, Suite C1,
Randolph, NJ 07869
2. The location of the Debtor's chief executive office and all locations
at which the Debtor maintains a place of business are as follows:
Chief executive office: 11150 Sunset Road, Suite 110,
Reston, VA 21090
Other locations:
5220 Spring Valley, Suite 202, Dallas, TX 75240
5130 Bonita Road, Suite C, Bonita, CA 91502
6616 Six Forks Road, Suite 201, Raleigh, NC 27615
1900 Point West Way, Suite 120, Sacramento, CA 95815
406 Willowbrook Lane, West Chester, PA 19382
1000 Johnson Ferry Road, Suite G-150, Marietta, GA 30068
1177 High Ridge Road, Stanford, CT 06905
1933 Greenwich, San Francisco, CA 94125
950 N. Raddant Road, Batavia, IL 60510
2895 113th Street, Grand Praire, TX 75050
3209 Wellington Court, Suite G, Raleigh, NC 27615
Mt. Ridge Business Park, 1248 Sussex Turnipike, Suite C1,
Randolph, NJ 07869
3. During the past five years the Debtor has not used or been known by
any other name, including any trade or fictitious name, except that
the Debtor was formerly known as "Municipal Leasing Corporation".
Security Agreement - 1 - June 5, 1997
<PAGE> 62
EXHIBIT D
[CORESTATES LOGO]
GUARANTY AGREEMENT
This Guaranty Agreement is executed and delivered on June 5, 1997
(this "AGREEMENT") by MLC HOLDINGS, INC., a Delaware corporation ("HOLDINGS"),
in favor of CORESTATES BANK, N.A., a national banking association ("CORESTATES
BANK").
PRELIMINARY STATEMENT
MLC Group, Inc. ("MLC") and CoreStates Bank are entering into a
$15,000,000 Credit Agreement of even date herewith (such agreement as it may be
amended from time to time after the date hereof, the "CREDIT AGREEMENT"). All
capitalized terms used herein and not otherwise defined shall have the
respective meanings ascribed to them in the Credit Agreement.
Holdings is the owner, beneficially and of record, of 100% of the
issued and outstanding capital stock of MLC and as such will benefit for the
extension of credit to MLC pursuant to the Credit Agreement.
It is a condition to the making of any Loan under the Credit Agreement
that this Agreement be executed and delivered by Holdings in favor of
CoreStates Bank and be in continuous full force and effect.
NOW, THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, Holdings hereby
makes the following representations and warranties to CoreStates Bank and
covenants and agrees with CoreStates Bank as follows:
1. CONTINUING AND UNCONDITIONAL GUARANTY. Holdings hereby
unconditionally and absolutely guaranties to and for CoreStates Bank the due
performance, including without limitation the prompt payment when due or within
any applicable grace period, whether at stated maturity, upon acceleration or
otherwise and at all times thereafter of any and all obligations of MLC owed to
CoreStates Bank under the Credit Agreement and the Note and Loan Documents
referred to therein, or under any renewals, extensions or modifications
thereof, or any interest rate swap agreement, interest rate cap agreement,
interest collar agreement, interest rate hedging agreement, interest rate floor
agreement or other similar agreement or arrangement relating to the foregoing
(the "OBLIGATIONS") irrespective of (a) any lack of enforceability of any
Obligation, (b) any change of the time, manner, place of payment, or any other
term of any Obligation, (c) any exchange, release or non-perfection of any
collateral securing payment of
Guaranty Agreement - 1 - June 5, 1997
<PAGE> 63
any Obligation, (d) any law, regulation or order of any jurisdiction affecting
the genuineness, validity, or rights of CoreStates Bank with respect to the
Obligations or any instruments evidencing any of the Obligations, or (e) any
other circumstance which might otherwise constitute a defense to or discharge
of Holdings. Holdings agrees that its obligations hereunder are irrevocable;
that a separate action or actions may be brought and prosecuted against
Holdings regardless of whether MLC is joined in any such action or actions; and
that Holdings waives the benefit of any statute of limitations affecting its
liabilities hereunder or the enforcement hereof.
If, absent the provisions of this paragraph, this Agreement would be
held or determined to be void, invalid or unenforceable on account of the
amount of Holdings's aggregate liability under this Agreement, then,
notwithstanding any other provision of this Agreement to the contrary, the
aggregate amount of such liability shall, without any further action by
Holdings, CoreStates Bank or any other person, be automatically limited and
reduced to the highest amount which is valid and enforceable as determined in
such action or proceeding, which (without limiting the generality of the
foregoing) may be an amount which is not greater than the greater of the excess
of the amount of the fair saleable value of the assets of Holdings, over the
amount of all liabilities of Holdings (all as determined in accordance with
applicable federal and state laws governing determinations of the insolvency of
debtors), (a) as of the date hereof, and (b) as of the date of the enforcement
of this Agreement. Nothing contained in this paragraph shall be deemed to
waive, diminish or modify Holdings's representations, acknowledgments or
recitals set forth herein, in the Credit Agreement or in any other Loan
Document.
Holdings agrees that its obligations as a guarantor shall not be
impaired, modified, changed, released, or limited in any manner whatsoever by
any impairment, modification, change, release or limitation of the liability of
MLC or its estate in bankruptcy, resulting from the operation of any present or
future provision of the bankruptcy laws or other similar statute, or from the
decision of any court in a bankruptcy proceeding. Notwithstanding any
provision herein to the contrary, the Obligations shall include all amounts
that would otherwise constitute Obligations but for the fact that they are
unenforceable or not allowable due to the existence of any proceedings or
taking of any actions under any such laws. This Agreement shall continue to be
effective, or shall be reinstated, as the case may be, if at any time payment,
or any part thereof, of any Obligation is rescinded or must otherwise be
restored or returned by CoreStates Bank in connection with any proceeding
involving MLC, Holdings or any other person under any bankruptcy, insolvency,
reorganization or similar laws relating to relief of debtors.
This is a continuing guaranty and shall remain in full force and
effect and be binding upon Holdings, its successors and assigns until payment
in full of all the Obligations.
2. PAYMENT OF OBLIGATIONS. In furtherance of, and not limiting
Holdings' obligations pursuant to Section 1 hereof, upon the occurrence of an
Event of Default under the Credit Agreement or any demand by CoreStates Bank
upon MLC for payment of any amount in respect of any Obligation, Holdings shall
immediately pay the Obligation or Obligations demanded (as determined pursuant
to Section 1 hereof) in lawful currency of the United States of America and in
same day funds to the office of CoreStates Bank as set forth in the Credit
Agreement, or to such other location as CoreStates Bank may from time to time
specify. Notwithstanding anything to the contrary contained herein or
elsewhere, it shall not be necessary for CoreStates Bank to make any demand
upon or bring any legal, equitable or other action, institute suit, to exhaust
it rights against MLC or any other guarantor of MLC, or to proceed, enforce or
exhaust its rights against any security given to secure payment of the
Obligations.
Guaranty Agreement - 2 - June 5, 1997
<PAGE> 64
3. WAIVERS. Holdings hereby waives all notices of any character
whatsoever with respect to this Agreement and the Obligations, including but
not limited to notice of the acceptance hereof and reliance hereon, of the
present existence or future incurring of any Obligations, of the amounts, terms
and conditions thereof, and of any defaults thereon and further waives the
defenses of diligence, presentment for payment, protest, demand or extensions
of time for payment. Holdings hereby consents to the taking of, or failure to
take, from time to time without notice to Holdings, any such action of any
nature whatsoever with respect to the Obligations and with respect to any
rights against any person or persons or in any property, including but not
limited to any renewals, extensions, modifications, postponements, compromises,
settlements, substitutions, refusals or failures to exercise or enforce,
indulgences, waivers, surrenders, exchanges and releases, and Holdings will
remain fully liable hereon notwithstanding any of the foregoing. Holdings
hereby waives the benefit of all laws now or hereafter in effect in any way
limiting or restricting the liability of Holdings hereunder, including without
limitation (a) all defenses whatsoever to Holdings' liability hereunder except
the defense of payment made on account of the Obligations to CoreStates Bank
and Holdings' liability hereunder; (b) all right to stay of execution and
exemption of property in any action to enforce the liability of Holdings
hereunder; and (c) all rights accorded Holdings under any other statutory
provisions of any other applicable jurisdiction affecting the rights of
CoreStates Bank to enforce the obligations of Holdings under this Agreement.
4. REPRESENTATIONS AND WARRANTIES. Holdings hereby represents
and warrants to CoreStates Bank as follows:
(a) ORGANIZATION; GOOD STANDING. Holdings is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, and has the corporate power and
authority necessary to own its assets, carry on its business and enter into and
perform its obligations hereunder and under the other Loan Documents to which
it is a party. Holdings is qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which it is required to so
qualify.
(b) CORPORATE AUTHORITY. The making and performance of
this Agreement and the other Loan Documents to which Holdings is a party are
within Holdings' power and authority and have been duly authorized by all
necessary corporate action. The making and performance of this Agreement and
the other Loan Documents to which Holdings is a party (i) do not and under
present law will not require any consent or approval of any of Holdings'
shareholders or any other person, and (ii) do not and under present law will
not violate any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award, do not and will not violate any provision of
Holdings' charter or by-laws, do not and will not result in any breach of any
agreement, lease or instrument to which Holdings is a party, by which Holdings
is bound or to which any of its assets are or may be subject. Holdings is not
in default in any material respect under any of the foregoing.
(c) VALIDITY OF DOCUMENTS. This Agreement and the other
Loan Documents to which Holdings is a party, if any, are, or when executed and
delivered will be, the legal, valid and binding obligation of Holdings
enforceable against it in accordance with its terms. Except as has been duly
obtained, no authorization, consent, approval, license, exemption of or filing
or registration with any court, governmental agency or other tribunal is or
under present law will be necessary to the validity or performance of this
Agreement or the other Loan Documents to which Holdings is a party.
Guaranty Agreement - 3 - June 5, 1997
<PAGE> 65
(d) CONFIRMATION OF CREDIT AGREEMENT REPRESENTATIONS AND
WARRANTIES. All representations and warranties with respect to MLC or Holdings
which are set forth in the Credit Agreement and the other Loan Documents are
true and correct as of their respective dates.
5. COVENANTS. Holdings hereby covenants and agrees that from and
after the date hereof and so long as any Obligation remains unpaid or
outstanding:
(a) ASSISTANCE TO MLC. It will provide its full
assistance and cooperation in order to enable MLC to comply with all covenants
and agreements set forth in the Credit Agreement and the other Loan Documents
to the extent such covenants and agreements relate to MLC, its assets, business
and operations.
(b) CREDIT AGREEMENT AFFIRMATIVE AND NEGATIVE COVENANTS.
It will comply with each of the affirmative covenants set forth in Sections 5.2
through 5.14 of the Credit Agreement and the negative covenants set forth in
Sections 6.1 and 6.10 of the Credit Agreement substituting its name for the
name of MLC throughout as fully as if set forth herein without the necessity of
restating each and every said covenant herein.
6. EXPENSES. In addition to all other liabilities of Holdings
hereunder, Holdings also agrees to pay to CoreStates Bank, on demand, all
reasonable costs and expenses (including reasonable fees, costs and
disbursements of counsel) which may be incurred in the enforcement of the
Obligations or the liabilities of Holdings hereunder.
7. MODIFICATION OF OBLIGATIONS. Holdings hereby consents and
agrees that without further notice to or assent from it, the amount of the
Obligations, the time of payment of any or all the Obligations may be changed,
any other term or condition relating to any or all the Obligations may be
changed, MLC may be discharged from any or all the Obligations, any composition
or settlement relating thereto may be consummated and accepted, and that
Holdings will remain bound upon this Agreement notwithstanding any or all of
the foregoing.
8. NO WAIVERS; RIGHTS AND REMEDIES CUMULATIVE. No failure on the
part of CoreStates Bank to exercise, and no delay in exercising, any right,
power or remedy shall operate as a waiver thereof, nor shall any single or
partial exercise by CoreStates Bank of any right, power or remedy preclude any
other further exercise thereof or the exercise of any other right, power or
remedy. The rights and remedies provided herein shall be in addition to and
not exclusive of any rights or remedies provided at law or in equity, and may
be exercised in such order as CoreStates Bank shall determine, in its sole
discretion.
9. OTHER GUARANTIES. A subsequent guaranty by any other
guarantor of any of the Obligations shall not be deemed to be in lieu of or to
supersede or terminate this Agreement but shall be construed as an additional
or supplementary guaranty unless otherwise expressly provided therein; and if
any other guarantor has given to CoreStates Bank a previous guaranty or
guaranties, this Agreement shall be construed to be an additional or
supplementary guaranty, and not to be in lieu thereof or to terminate such
previous guaranty or guaranties.
10. RIGHT OF SET-OFF. Upon an Event of Default under the Credit
Agreement, CoreStates Bank is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set-off and apply any and all
deposits at any time held and other indebtedness at any time owing by
CoreStates Bank
Guaranty Agreement - 4 - June 5, 1997
<PAGE> 66
to or for the credit of Holdings against any and all of the obligations of
Holdings now or hereafter existing under this Agreement.
11. WAIVER OF SUBROGATION. Notwithstanding anything to the
contrary in this Agreement, Holdings hereby irrevocably waives all rights it
may have at law or in equity (including, without limitation, any law
subrogating any guarantor to the rights of CoreStates Bank) to seek
contribution, indemnification or any other form of reimbursement from MLC, any
other guarantor or any other person now or hereafter primarily or secondarily
liable for any obligations of MLC to CoreStates Bank, for any disbursement made
by Holdings under or in connection with this Agreement or otherwise.
12. TERMINATION OF GUARANTY. Nothing except payment in full of
all the Obligations shall release Holdings from liability under this Agreement.
This Agreement will be returned when (a) all Obligations shall have been paid
in full, and (b) the term of the Credit Agreement shall have expired.
13. BINDING EFFECT; ASSIGNMENT. The provisions of this Agreement
shall be binding upon and inure to the benefit of Holdings and CoreStates Bank
and their respective successors and assigns, except that Holdings may not
assign or otherwise transfer any of its rights hereunder. CoreStates Bank may
at any time sell, assign, pledge, grant participations in or otherwise transfer
its rights under this Agreement in whole or in part.
14. AMENDMENTS AND WAIVERS. Any provision of this Agreement may
be amended if such amendment is in writing and is signed by Holdings and
CoreStates Bank, and any provision of this Agreement may be waived by
CoreStates Bank.
15. GOVERNING LAW; JURISDICTION. THIS GUARANTY SHALL BE CONSTRUED
IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF
PENNSYLVANIA WITHOUT REGARD TO PENNSYLVANIA OR FEDERAL PRINCIPLES OF CONFLICT
OF LAWS. Holdings hereby consents to the jurisdiction of the courts of
Pennsylvania in any action or proceeding which may be brought against it under
or in connection with this Agreement or any transaction contemplated hereby or
to enforce any agreement contained herein, and in the event any such action or
proceeding shall be brought against it, Holdings agrees not to raise any
objection to such jurisdiction or to the laying of venue in Philadelphia
County. Holdings agrees that service of process in such action or proceeding
may be duly effected upon it by service in accordance with the provisions of
the Uniform Interstate and International Procedure Act.
IN WITNESS WHEREOF, MLC Holdings, Inc. has executed this Agreement as
of the day and year first above written.
MLC HOLDINGS, INC.
By
------------------------------------
Philip G. Norton, Chairman of the
Board, Chief Executive Officer and
President
Guaranty Agreement - 5 - June 5, 1997
<PAGE> 67
EXHIBIT E
COMPLIANCE CERTIFICATE
The undersigned officers of MLC Group, Inc. ("MLC") and MLC Holdings,
Inc. ("Holdings") hereby certify to CoreStates Bank, N.A. (the "Bank"), as
required by that certain Credit Agreement, dated June 5, 1997 (the "Agreement")
between MLC and the Bank (terms not defined herein to have the meanings defined
in the Agreement) that as such officers they are authorized to execute this
certificate on behalf of MLC and Holdings and do further certify that:
1. Each of MLC and Holdings has complied and is in compliance
with all covenants, agreements and conditions in the Agreement
and each other Loan Document at the date hereof.
2. Each representation and warranty contained in the Agreement
and each other Loan Document is true and correct at the date
hereof.
3. No Event of Default or Potential Default under the Agreement
or any other Loan Document exists at the date hereof.
4. No Material Adverse Change has occurred since the date of the
Agreement.
5. The covenant compliance calculations set forth in Attachment 1
hereto are true and correct at the dates specified.
IN WITNESS WHEREOF, the undersigned has executed this Certificate in
his capacity as an officer of MLC this ___ day of ______________, _______.
MLC GROUP, INC.
By:
------------------------
Name:
Title:
<PAGE> 68
ATTACHMENT NO. 1
TO COMPLIANCE CERTIFICATE
COVENANT COMPLIANCE CALCULATIONS
MLC GROUP, INC.
for the (quarter, year)
---------------
ending
----------------------
1. Section 7.1 MINIMUM TANGIBLE NET WORTH.
Tangible Net Worth will not at any time be less than the sum of (i)
$9,000,000, (ii) fifty percent (50%) of net income for each Fiscal
Quarter ending after December 31, 1996 without deduction for any net
losses and (iii) any additions to paid-in capital contributed after
December 31, 1996, provided however any additions to paid-in capital
after December 31, 1996 which are made for the purpose of enabling MLC
to be in compliance with the terms and conditions of this Agreement or
any other Loan Document shall not increase minimum Tangible Net Worth
requirement if at the time of such addition MLC shall provide written
notice of such purpose to the Bank specifying the amount required
therefor.
CALCULATION:
2. Section 7.2 DEBT TO TANGIBLE NET WORTH.
This ratio shall not be greater than 6.5:1 at the end of any Fiscal
Quarter.
CALCULATION:
3. Section 7.3 MINIMUM INTEREST EXPENSE COVERAGE.
The ratio of EBITDA to Debt Service for the four (4) most recently
ended consecutive Fiscal Quarters will not be less than 1.25:1.
CALCULATION:
<PAGE> 69
SCHEDULE I
DISCLOSURE SCHEDULE
SECTION 3.2 STOCK OWNERSHIP (only holders of 5% or more of the relevant
company's stock are named)
MLC Holdings, Inc.
<TABLE>
<CAPTION>
Stockholder Percentage Held
----------- ---------------
<S> <C>
J.A.P. Investment Group, L.P. 39.6%
Bruce M. and Elizabeth D. Bowen 14.8%
William J. Slaton 7.8%
Kevin M. Norton 7.3%
Patrick J. Norton 7.3%
</TABLE>
MLC Group, Inc.
<TABLE>
<CAPTION>
Stockholder Percentage Held
----------- ---------------
<S> <C>
MLC Holdings, Inc. 100.00%
</TABLE>
SECTION 3.3 LITIGATION
None.
SECTION 3.5 CHANGES TO FINANCIAL STATEMENTS
None.
SECTION 3.7 CONTESTED TAXES
None.
SECTION 3.12 SUBSIDIARIES AND INVESTMENTS IN OTHER PERSONS
None, except that MLC is a wholly owned subsidiary of Holdings.
SECTION 3.13 ADDITIONAL PERMITTED LIENS
None.
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
(Thomas B. Howard, Jr.)
THIS EMPLOYMENT AGREEMENT is hereby made as of April 1, 1997, by and between
THOMAS B. HOWARD, JR., hereinafter referred to as the "Employee," and MLC
HOLDINGS, INC., a Delaware corporation, whose principal place of business is
located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190,
hereinafter referred to as the "Employer."
RECITALS:
A. The Employer is engaged in the business of specialized asset financing
with a focus on the leasing of information technology equipment and services.
B. The Employee has substantial experience in the business of the Employer.
C. The Employer desires to secure the services of the Employee, and the
Employee is willing to be employed as Vice President of the Employer and
Executive Vice President of its subsidiaries, including without limitation MLC
Group, Inc. and MLC GATX, Inc. (hereinafter, collectively, the "Company"), on
the terms, covenants and conditions hereinafter set forth.
THEREFORE, in consideration of the mutual promises and agreements hereinafter
set out, the Employer and the Employee agree as follows:
1. Employment. The Employer hereby employs, engages, and hires the
Employee, and the Employee hereby accepts employment with the Employer as set
forth herein to render such services for the Employer as determined by the
Board of Directors of the Employer. The Employee accepts and agrees to such
hiring, engagement and employment, subject to the general supervision and
pursuant to the orders, advice and direction of the directors of the Employer.
2. Extent of Efforts; Other Employment. The Employee agrees that the
Employee shall devote his entire productive time and attention to the business
affairs of the Employer and, to the best of the Employee's ability, experience
and talents, shall perform all of the duties that may be required of and from
the Employee pursuant to the express and implicit terms hereof to the
reasonable satisfaction of the Employer. The Employee shall not engage in any
other employment duties or pursuits whatsoever, or directly or indirectly
render any services of a business, commercial, or professional nature to any
person or organization, whether for compensation or otherwise, without the
prior written consent of the Employer's Board of Directors. This paragraph 2
shall not prohibit the making of passive, personal investments, nor the conduct
to a reasonable extent of private business affairs if those activities do not
interfere with the services required under this Agreement. [The Employer agrees
to waive the corporate opportunity doctrine for any endeavor that might be
brought to Employee except those which relate to the business of Employer.]
3. Term and Termination of Employment.
A. Term - Subject to the provisions of Section 3(B), the "Term" of the
Employee's employment shall be three (3) years, commencing on April 1, 1997
(the "Effective Date"), and shall renew automatically for successive one (1)
year periods unless a party hereto provides written notice to terminate to the
other party prior to thirty (30) days before the end of the original period or
any successive period.
B. Termination - This Agreement shall automatically terminate upon the
occurrence of any of the following events:
(i) The death of the Employee;
(ii) The "Permanent Disability" (hereinafter defined) of the
Employee; or
<PAGE> 2
(iii) Written notice from the Board of Directors to the Employee of his
termination for "Cause" (hereinafter defined).
As used herein, "Permanent Disability" means any mental or physical illness or
disability continuing for a period of more than six (6) consecutive months
which renders the Employee unable to perform his duties and services hereunder
in a satisfactory manner. In the event of any disputes over the existence or
commencement of such disability, the issue shall be determined by a qualified
physician mutually agreed to by the Employer and the Employee, or, if
applicable, the Employee's legal representative. The determination of such
physician shall be conclusive and binding on the parties hereto.
As used herein, "Cause" means: gross neglect of duty, prolonged absence from
duty without the consent of the Employer, the acceptance by the Employee of a
position with another employer without consent, intentionally engaging in any
activity which is in conflict with or adverse to the business or other
interests of the Company, willful misconduct on the part of the Employee,
misfeasance or malfeasance of duty causing a violation of any law which is
reasonably determined to be detrimental to the Company, breach of a fiduciary
duty owed to the Company or any material breach of this Agreement by the
Employee which has not been corrected by the Employee within (30) days after
his receipt of notice of such breach from the Employer.
4. Compensation of the Employee. As the Employee's entire compensation
(exclusive of director's fees, if any) for all services rendered to the
Employer during the term of this Agreement, the Employee shall have and
receive, subject to withholding and other applicable employment taxes:
A. Commencing on the first day of the first month immediately following the
Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate
of One Hundred Twenty Five Thousand and 00/100 Dollars ($125,000) per annum,
payable in cash or good check, not less frequently than monthly and not later
than the last day of the month in question; provided, however, that the rate of
such salary shall be reviewed by the Board of Directors of the Employer not
less often than annually and may be increased (but not decreased) at each
yearly renewal date. Prior to the Salary Commencement Date, the Employee shall
continue to receive his basic salary as in effect on the date of this
Agreement.
B. Bonus compensation over and above the basic salary in such amount and
pursuant to such criteria as shall be determined by Philip G. Norton and Bruce
M. Bowen in their sole and absolute discretion, but not to exceed One Hundred
Thousand and 00/100 Dollars ($100,000) for any fiscal year.
C. The right to receive or participate in any additional "fringe" benefits,
including but not limited to insurance programs and pension or profit-sharing
plans, which may from time to time be made available to executives of the
Employer.
5. Facilities and Expenses.
A. The Employer shall provide the Employee with a private office, office
equipment, supplies and other facilities and services consistent with the
current practices of the Employer, and suitable to the Employee's position and
adequate for the performance of his duties.
B. The Employee may be authorized from time to time to incur reasonable
expenses for promoting the business of the corporation, including expenses for
entertainment, travel, and similar items. The Employer will reimburse the
Employee for all such authorized expenses upon the presentation by the Employee
of an itemized account of such expenditures. The Employee shall provide the
Employee's own personal transportation, except for such times as the Employee
is using the Employer-owned vehicles for official business.
6. Reimbursement of Disallowed Expenses. If any salary payment, medical
reimbursement, employee fringe benefit, expense allowance payment, or other
expense incurred by the Employer for the benefit of the Employee is disallowed,
in whole or in part, as a deductible expense of the Employer for federal income
tax purposes, the Employee shall reimburse the Employer upon notice and demand,
to the full extent of the disallowance. This legally enforceable obligation is
in accordance with the provisions of Revenue Ruling 69-115 and is for the
purpose of entitling the Employee to a business expense deduction for the
taxable year in which the repayment is made to the Employer.
7. Vacation and Sick Leave.
2
<PAGE> 3
A. The Employee shall accrue three (3) weeks vacation each calendar year and
may take such vacation at times to be determined in the manner most convenient
to the business of the Employer. In addition, the Employee may take time off at
such times as may be determined by the Board of Directors to attend such
meetings and postgraduate courses as may directly benefit the Employer and the
Employee. Unused days of vacation may not be carried over to future years. In
addition, the Employee may take as holidays five (5) days of the Employee's
choosing, so long as it is convenient to and approved by the Employer.
B. The Employee shall accrue one (1) day sick leave in each calendar month,
not to exceed a total of thirty (30) days. Unused days of sick leave may not
be carried over to future years. Any date used for the purpose of determining
the date of permanent or partial disability under this Agreement shall be
postponed until such time as all of the Employee's sick leave shall be
exhausted.
8. Illness or Incapacity. If the Employee becomes unable to devote the
Employee's full time to the business of the Employer because of illness or
incapacity during the term of this Agreement, then during such period of
illness or incapacity, the Employee's compensation shall be as follows:
A. For the first six (6) months thereof--One Hundred percent (100%) of the
compensation provided for by paragraph 4 of this Agreement.
B. If the Employee shall not have resumed the Employee's duties within the six
(6) month period specified above, then the Employee's compensation hereunder
shall be terminated as of the end of the six (6) month period, and the Employer
shall have no further financial obligation to the Employee.
9. Death During Employment. If the Employee dies during the term of the
Employee's employment, the Employer shall pay to the estate of the Employee the
basic salary which would otherwise be payable to the Employee up to the end of
the month in which the Employee's death occurs, not including any bonuses. The
Employer shall have no further financial obligations to the Employee or to the
Employee's estate under the terms of this Agreement.
10. Non-Competition Agreement.
During the duration of this Agreement and any extensions or renewals hereof and
for a period of one (1) year after the later of (i) the date this Agreement is
terminated by the Employer for cause or by voluntary termination by the
Employee, or (ii) the expiration of this Agreement at the end of the initial or
any renewal term or extensions thereof, the Employee agrees as follows:
A. The Employee agrees that the Employee shall not:
(i) in any capacity whatsoever, whether as a proprietor, partner, investor,
corporate stockholder, director, officer, employee, consultant, independent
contractor, co-venturer, employer, agent, representative, or otherwise, own,
engage directly or indirectly in, or be interested in a business or business
activities competing with the Employer in the United States;
(ii) in any capacity whatsoever, whether as a lender, guarantor,
accommodation party, financier, investor, or otherwise, assist or attempt to
assist with respect to the providing of capital needs, borrowing needs, or
credit needs of any person, persons or entities of every nature and
description, other than the Employer, who or which shall be engaged in, or
intend to be engaged in, a business or business activities competing with the
Employer in the United States.
B. The Employee hereby agrees that the Employee will not at any time
disclose to any person, individual or entity, who or which is, or reasonably
may be expected to be, in competition with the Employer in the United States,
any confidential information or trade secrets of the Employer, the contents of
any client lists of the Employer, or the general needs of any client or other
contracting parties with the Employer; provided, however, the foregoing shall
not prevent such Employee from responding to the request of a governmental
agency or pursuant to a court order or as otherwise required by law.
C. The Employee hereby agrees that the Employee shall not at any time
after execution of this Agreement, interfere with, solicit, or disrupt the
relationship, contractual or
3
<PAGE> 4
otherwise, between the Employer and its clients, suppliers, agents,
consultants, officers or employees.
D. The Employee acknowledges (i) that the foregoing provisions are
reasonable as to time and areas as to which their activities are to be
restricted, (ii) that the Employee understands the same and intends to be fully
bound with respect thereto, and (iii) that such limitations upon the Employee's
activities for the time and in the designated market area shall not prevent the
Employee from earning a reasonable livelihood during the two year period
following the termination or expiration of this Agreement.
E. Recognizing that a breach of any covenant contained in Section 10 hereof
would cause the Employer irreparable injury and that damages at law would be
difficult to ascertain, the Employee hereby consents to the granting of
equitable relief (without the posting of any bond by the Employer) by way of a
restraining order or temporary or permanent injunction by any court of
competent jurisdiction to prohibit the breach or enforce the performance of any
covenant contained in Section 10 hereof. Employee shall only be liable for
actual monetary damages to the Company, and not any consequential or punitive
damages for any breach of any covenant of Section 10 hereof.
11. Severability. All agreements and covenants contained herein are
severable, and in the event any of them shall be held to be invalid by any
competent court, this contract shall be interpreted as if such invalid
agreements or covenants were not contained herein.
12. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified or registered
mail, return receipt requested, to the parties at the following addresses:
TO THE EMPLOYER:
MLC Group, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190
TO THE EMPLOYEE:
Thomas B. Howard, Jr., 11565 Embers Court, Reston, VA 20191
13. Assignment. This Agreement is personal to each of the parties hereto and
neither may assign or delegate any of the party's rights or obligations
hereunder without first obtaining the written consent of the other party.
14. Miscellaneous.
A. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties hereto.
B. This Agreement shall be governed in all respects by the laws of or
applicable to the State of Delaware. The paragraph headings in this Agreement
are included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
C. This contract contains the complete agreement concerning the employment
arrangement between the parties and shall, as of the commencement of the term
of employment hereunder, supersede all other agreements between the parties.
The parties stipulate that neither of them has made any representation with
respect to the subject matter of this Agreement or any representations,
including the execution and delivery hereof, except such representations as are
specifically set forth herein, and each of the parties acknowledges that the
party has relied on the party's own judgment in entering into this Agreement.
D. The waiver by the Employer of a breach of any condition of this Agreement
by the Employee shall not be construed as a waiver of any subsequent breach by
the Employee.
IN WITNESS WHEREOF, the parties have executed this Agreement as the date first
above written.
EMPLOYER:
MLC HOLDINGS, INC., a Delaware corporation
4
<PAGE> 5
By:
------------------------------------
Phillip G. Norton, President
EMPLOYEE:
By:
------------------------------------
Thomas B. Howard, Jr.
5
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
(Steven J. Mencarini)
THIS EMPLOYMENT AGREEMENT is hereby made as of June 19, 1997, by and between
Steven J. Mencarini, hereinafter referred to as the "Employee," and MLC
HOLDINGS, INC., a Delaware corporation, whose principal place of business is
located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190,
hereinafter referred to as the "Employer."
RECITALS:
A. The Employer is engaged in the business of specialized asset financing
with a focus on the leasing of information technology equipment and services.
B. The Employee has substantial experience in the business of the Employer.
C. The Employer desires to secure the services of the Employee, and the
Employee is willing to be employed as Senior Vice President and Chief Financial
Officer of the Employer and Senior Vice President of its subsidiaries,
including without limitation MLC Group, Inc. and MLC GATX, Inc. (hereinafter,
collectively, the "Company"), on the terms, covenants and conditions
hereinafter set forth.
THEREFORE, in consideration of the mutual promises and agreements hereinafter
set out, the Employer and the Employee agree as follows:
1. Employment. The Employer hereby employs, engages, and hires the
Employee, and the Employee hereby accepts employment with the Employer as set
forth herein to render such services for the Employer as determined by the
Board of Directors of the Employer. The Employee accepts and agrees to such
hiring, engagement and employment, subject to the general supervision and
pursuant to the orders, advice and direction of the directors of the Employer.
2. Extent of Efforts; Other Employment. The Employee agrees that the
Employee shall devote his entire productive time and attention to the business
affairs of the Employer and, to the best of the Employee's ability, experience
and talents, shall perform all of the duties that may be required of and from
the Employee pursuant to the express and implicit terms hereof to the
reasonable satisfaction of the Employer. The Employee shall not engage in any
other employment duties or pursuits whatsoever, or directly or indirectly
render any services of a business, commercial, or professional nature to any
person or organization, whether for compensation or otherwise, without the
prior written consent of the Employer's Board of Directors. This paragraph 2
shall not prohibit the making of passive, personal investments, nor the conduct
to a reasonable extent of private business affairs if those activities do not
interfere with the services required under this Agreement. [The Employer agrees
to waive the corporate opportunity doctrine for any endeavor that might be
brought to Employee except those which relate to the business of Employer.
3. Term and Termination of Employment.
A. Term - Subject to the provisions of Section 3(B), the "Term" of the
Employee's employment shall be three (3) years, commencing on June 19, 1997
(the "Effective Date"), and shall renew automatically for successive one (1)
year periods unless a party hereto provides written notice to terminate to the
other party prior to thirty (30) days before the end of the original period or
any successive period.
B. Termination - This Agreement shall automatically terminate upon the
occurrence of any of the following events:
(i) The death of the Employee;
(ii) The "Permanent Disability" (hereinafter defined) of the
Employee; or
(iii) Written notice from the Board of Directors to the Employee of his
termination for "Cause" (hereinafter defined).
<PAGE> 2
As used herein, "Permanent Disability" means any mental or physical illness or
disability continuing for a period of more than six (6) consecutive months
which renders the Employee unable to perform his duties and services hereunder
in a satisfactory manner. In the event of any disputes over the existence or
commencement of such disability, the issue shall be determined by a qualified
physician mutually agreed to by the Employer and the Employee , or, if
applicable, the Employee's legal representative. The determination of such
physician shall be conclusive and binding on the parties hereto.
As used herein, "Cause" means: gross neglect of duty, prolonged absence from
duty without the consent of the Employer, the acceptance by the Employee of a
position with another employer without consent, intentionally engaging in any
activity which is in conflict with or adverse to the business or other
interests of the Company, willful misconduct on the part of the Employee,
misfeasance or malfeasance of duty causing a violation of any law which is
reasonably determined to be detrimental to the Company, breach of a fiduciary
duty owed to the Company or any material breach of this Agreement by the
Employee which has not been corrected by the Employee within (30) days after
his receipt of notice of such breach from the Employer.
4. Compensation of the Employee. As the Employee's entire compensation
(exclusive of director's fees, if any) for all services rendered to the
Employer during the term of this Agreement, the Employee shall have and
receive, subject to withholding and other applicable employment taxes:
A. Commencing on the first day of the first month immediately following the
Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate
of One Hundred Twenty Five Thousand and 00/100 Dollars ($125,000) per annum,
payable in cash or good check, not less frequently than monthly and not later
than the last day of the month in question; provided, however, that the rate of
such salary shall be reviewed by the Board of Directors of the Employer not
less often than annually and may be increased (but not decreased) at each
yearly renewal date. Prior to the Salary Commencement Date, the Employee shall
continue to receive his basic salary as in effect on the date of this
Agreement.
B. Bonus compensation over and above the basic salary in such amount and
pursuant to such criteria as shall be determined by Philip G. Norton and Bruce
M. Bowen in their sole and absolute discretion, but not to exceed Twenty Five
Thousand and 00/100 Dollars ($25,000) for any fiscal year.
C. The right to receive or participate in any additional "fringe" benefits,
including but not limited to insurance programs and pension or profit-sharing
plans, which may from time to time be made available to executives of the
Employer.
5. Facilities and Expenses.
A. The Employer shall provide the Employee with a private office, office
equipment, supplies and other facilities and services consistent with the
current practices of the Employer, and suitable to the Employee's position and
adequate for the performance of his duties.
B. The Employee may be authorized from time to time to incur reasonable
expenses for promoting the business of the corporation, including expenses for
entertainment, travel, and similar items. The Employer will reimburse the
Employee for all such authorized expenses upon the presentation by the Employee
of an itemized account of such expenditures. The Employee shall provide the
Employee's own personal transportation, except for such times as the Employee
is using the Employer-owned vehicles for official business.
6. Reimbursement of Disallowed Expenses. If any salary payment, medical
reimbursement, employee fringe benefit, expense allowance payment, or other
expense incurred by the Employer for the benefit of the Employee is disallowed,
in whole or in part, as a deductible expense of the Employer for federal income
tax purposes, the Employee shall reimburse the Employer upon notice and demand,
to the full extent of the disallowance. This legally enforceable obligation is
in accordance with the provisions of Revenue Ruling 69-115 and is for the
purpose of entitling the Employee to a business expense deduction for the
taxable year in which the repayment is made to the Employer.
7. Vacation and Sick Leave.
2
<PAGE> 3
A. The Employee shall accrue three (3) weeks vacation each calendar year and
may take such vacation at times to be determined in the manner most convenient
to the business of the Employer. In addition, the Employee may take time off at
such times as may be determined by the Board of Directors to attend such
meetings and postgraduate courses as may directly benefit the Employer and the
Employee. Unused days of vacation may not be carried over to future years. In
addition, the Employee may take as holidays five (5) days of the Employee's
choosing, so long as it is convenient to and approved by the Employer.
B. The Employee shall accrue one (1) day sick leave in each calendar month,
not to exceed a total of thirty (30) days. Unused days of sick leave may not
be carried over to future years. Any date used for the purpose of determining
the date of permanent or partial disability under this Agreement shall be
postponed until such time as all of the Employee's sick leave shall be
exhausted.
8. Illness or Incapacity. If the Employee becomes unable to devote the
Employee's full time to the business of the Employer because of illness or
incapacity during the term of this Agreement, then during such period of
illness or incapacity, the Employee's compensation shall be as follows:
A. For the first six (6) months thereof--One Hundred percent (100%) of the
compensation provided for by paragraph 4 of this Agreement.
B. If the Employee shall not have resumed the Employee's duties within the six
(6) month period specified above, then the Employee's compensation hereunder
shall be terminated as of the end of the six (6) month period, and the Employer
shall have no further financial obligation to the Employee.
9. Death During Employment. If the Employee dies during the term of the
Employee's employment, the Employer shall pay to the estate of the Employee the
basic salary which would otherwise be payable to the Employee up to the end of
the month in which the Employee's death occurs, not including any bonuses. The
Employer shall have no further financial obligations to the Employee or to the
Employee's estate under the terms of this Agreement.
10. Non-Competition Agreement.
During the duration of this Agreement and any extensions or renewals hereof and
for a period of one (1) year after the later of (i) the date this Agreement is
terminated by the Employer for cause or by voluntary termination by the
Employee, or (ii) the expiration of this Agreement at the end of the initial or
any renewal term or extensions thereof, the Employee agrees as follows:
A. The Employee agrees that the Employee shall not:
(i) in any capacity whatsoever, whether as a proprietor, partner, investor,
corporate stockholder, director, officer, employee, consultant, independent
contractor, co-venturer, employer, agent, representative, or otherwise, own,
engage directly or indirectly in, or be interested in a business or business
activities competing with the Employer in the United States;
(ii) in any capacity whatsoever, whether as a lender, guarantor,
accommodation party, financier, investor, or otherwise, assist or attempt to
assist with respect to the providing of capital needs, borrowing needs, or
credit needs of any person, persons or entities of every nature and
description, other than the Employer, who or which shall be engaged in, or
intend to be engaged in, a business or business activities competing with the
Employer in the United States.
B. The Employee hereby agrees that the Employee will not at any time
disclose to any person, individual or entity, who or which is, or reasonably
may be expected to be, in competition with the Employer in the United States,
any confidential information or trade secrets of the Employer, the contents of
any client lists of the Employer, or the general needs of any client or other
contracting parties with the Employer; provided, however, the foregoing shall
not prevent such Employee from responding to the request of a governmental
agency or pursuant to a court order or as otherwise required by law.
C. The Employee hereby agrees that the Employee shall not at any time
after execution of this Agreement, interfere with, solicit, or disrupt the
relationship, contractual or
3
<PAGE> 4
otherwise, between the Employer and its clients, suppliers, agents,
consultants, officers or employees.
D. The Employee acknowledges (i) that the foregoing provisions are
reasonable as to time and areas as to which their activities are to be
restricted, (ii) that the Employee understands the same and intends to be fully
bound with respect thereto, and (iii) that such limitations upon the Employee's
activities for the time and in the designated market area shall not prevent the
Employee from earning a reasonable livelihood during the two year period
following the termination or expiration of this Agreement.
E. Recognizing that a breach of any covenant contained in Section 10
hereof would cause the Employer irreparable injury and that damages at law
would be difficult to ascertain, the Employee hereby consents to the granting
of equitable relief (without the posting of any bond by the Employer) by way of
a restraining order or temporary or permanent injunction by any court of
competent jurisdiction to prohibit the breach or enforce the performance of any
covenant contained in Section 10 hereof. Employee shall only be liable for
actual monetary damages to the Company, and not any consequential or punitive
damages for any breach of any covenant of Section 10 hereof.
11. Severability. All agreements and covenants contained herein are
severable, and in the event any of them shall be held to be invalid by any
competent court, this contract shall be interpreted as if such invalid
agreements or covenants were not contained herein.
12. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified or registered
mail, return receipt requested, to the parties at the following addresses:
TO THE EMPLOYER:
MLC Holdings, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190
TO THE EMPLOYEE:
Steven J. Mencarini, 1921 Batten Hollow Road, Vienna, VA 22182
13. Assignment. This Agreement is personal to each of the parties hereto
and neither may assign or delegate any of the party's rights or obligations
hereunder without first obtaining the written consent of the other party.
14. Miscellaneous.
A. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties hereto.
B. This Agreement shall be governed in all respects by the laws of or
applicable to the State of Delaware. The paragraph headings in this Agreement
are included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
C. This contract contains the complete agreement concerning the employment
arrangement between the parties and shall, as of the commencement of the term
of employment hereunder, supersede all other agreements between the parties.
The parties stipulate that neither of them has made any representation with
respect to the subject matter of this Agreement or any representations,
including the execution and delivery hereof, except such representations as are
specifically set forth herein, and each of the parties acknowledges that the
party has relied on the party's own judgment in entering into this Agreement.
D. The waiver by the Employer of a breach of any condition of this Agreement
by the Employee shall not be construed as a waiver of any subsequent breach by
the Employee.
IN WITNESS WHEREOF, the parties have executed this Agreement as the date first
above written.
EMPLOYER:
MLC HOLDINGS, INC., a Delaware corporation
4
<PAGE> 5
By
------------------------------------
Phillip G. Norton, President
EMPLOYEE:
By:
------------------------------------
Steven J. Mencarini
5
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement No.
333-21295 of MLC Holdings, Inc. on Form S-8 of our report dated June 5, 1997,
appearing in this Annual Report on Form 10-K of MLC Holdings, Inc. for the year
ended March 31, 1997.
/s/Deloitte & Touche LLP
McLean, VA
June 30, 1997
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,048
<SECURITIES> 0
<RECEIVABLES> 7,338
<ALLOWANCES> 138
<INVENTORY> 184
<CURRENT-ASSETS> 0
<PP&E> 298
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,059
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,059
<SALES> 43,318
<TOTAL-REVENUES> 56,147
<CGS> 40,104
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,581
<INCOME-PRETAX> 3,841
<INCOME-TAX> 1,360
<INCOME-CONTINUING> 2,481
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,481
<EPS-PRIMARY> 0.56
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