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PROSPECTUS
2,964,305 SHARES
MLC HOLDINGS, INC.
COMMON STOCK
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This Prospectus relates to 2,000,000 shares (the "Acquisition
Shares") of common stock, $.01 par value (the "Common Stock"), which may be
offered and issued by MLC Holdings, Inc., a Delaware corporation (the
"Company") from time to time in connection with the merger with or acquisition
by the Company of other businesses or assets. The Company, however, has no
present understandings, commitments or agreements with respect to any material
acquisition. It is expected that the terms of acquisitions involving the
issuance of securities covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses or assets
to be merged with or acquired by the Company, and that the shares of Common
Stock issued will be valued at prices reasonably related to market prices
current either at the time of a merger or acquisition are agreed upon or at or
about the time of delivery of shares. No underwriting discounts or commissions
will be paid, although finder's fees may be paid from time to time with respect
to specific mergers or acquisitions. Any person receiving any such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933,
as amended (the "Securities Act").
This Prospectus also relates to 964,305 shares of issued and
outstanding stock (the "Selling Stockholder Shares"). [The Acquisition Shares
and the Selling Stockholder Shares may sometimes hereinafter be collectively
referred to as the "Securities."] The Selling Stockholder Shares will be
offered and sold from time to time by the Selling Stockholders and the Company
will receive none of the proceeds of any such sales. All expenses of this
offering will be paid by the Company. See "Use of Proceeds" and "Selling
Stockholders."
On February 9, 1998 the closing sale price of the Common Stock on the
NASDAQ National Market was $11.75 per share.
(cover continued overleaf)
SEE "RISK FACTORS" BEGINNING ON PAGE 8, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 11, 1998.
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So long as the Registration Statement of which this Prospectus forms
a part is effective and the disclosure set forth herein is current, the Selling
Stockholders may sell the Selling Stockholder Shares publicly. The Selling
Stockholder Shares offered by this Prospectus may be sold from time to time by
the Selling Stockholders. The distribution of the Selling Stockholder Shares by
the Selling Stockholders may be effected in one or more transactions that may
take place on the Nasdaq Stock Market including ordinary broker's transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of such securities as principals at market prices prevailing at the time
of sale at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specially negotiated brokerage fees or
commissions may be paid by the Selling Stockholders in connection with sales of
such Selling Stockholder Shares.
The Selling Stockholders and intermediaries through whom such
securities are sold may be deemed to be "underwriters" within the meaning of
the Securities Act with respect to the securities offered and any profits
realized or commission received may be deemed underwriting compensation. The
Company has agreed to indemnify certain of the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements, and other information
(the "1934 Act Filings") with the Securities and Exchange Commission (the "SEC"
or the "Commission"). In addition, the Company has filed with the SEC (the
"SEC" or "Commission") a Registration Statement on Form S-1 (together with all
exhibits and schedules thereto, the "Registration Statement") under the
Securities Act, with respect to the Securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the
Securities, reference is hereby made to such Registration Statement. Although
statements contained in this Prospectus as to the contents of any contract or
other document are believed by the Company to set forth all material elements
of the contract or document as to which such statements relate, in each
instance, reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of the Registration Statement,
including the exhibits thereto and the 1934 Act Filings, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 500 West Madison Street, Room 1400, Chicago, Illinois
60606, and at 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a web site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company, and the address is http://www.sec.gov.
No action has been or will be taken in any jurisdiction by the
Company or by any underwriter that would permit a public offering of the
Securities or possession or distribution of this Prospectus in any jurisdiction
where action for that purpose is required, other than in the United States.
Persons outside the United States into whose possession this Prospectus comes
are required by the Company to inform themselves about and to observe any
restriction as to the offering of the Securities and the distribution of this
Prospectus.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prospective purchasers of the Securities offered hereby should
carefully consider the factors set forth under "Risk Factors." This Prospectus
gives effect to the reorganization of the Company, pursuant to which MLC Group,
Inc., a Virginia corporation ("MLC Group"), became, effective September 1,
1996, a wholly-owned subsidiary of MLC Holdings, Inc. ("MLC Holdings"),
Delaware corporation. All references to the "Company" shall be deemed to
include and refer to MLC Holdings and its subsidiaries, including MLC Group.
This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Prospective purchasers of the Securities offered hereby are cautioned
that such statements are only predictions and that actual events or results may
differ materially. In evaluating such statements, prospective purchasers of the
Securities should specifically consider the various factors identified in this
Prospectus, including the matters set forth under "Risk Factors," which would
cause actual results to differ materially from those indicated by such
forward-looking statements.
THE COMPANY
MLC Holdings, Inc. ("MLC Holdings" or the "Company") was formed in
1996 and is a Delaware corporation which, pursuant to a reorganization effected
September 1, 1996, serves as the holding company for MLC Group, Inc. ("MLC
Group") and other subsidiaries. All references to the "Company" shall be deemed
to include and refer to MLC Holdings and its subsidiaries, including MLC Group.
The Company engages in no other business other than serving as the parent
holding company for MLC Group, MLC Network Solutions, Inc., ("MLC Network
Solutions"), MLC Federal, Inc., MLC Capital, Inc., Educational Computer
Concepts, Inc. ("ECCI") and MLC Leasing, S.A. de C.V., (a wholly owned
subsidiary of MLC Group and MLC Network Solutions, based in Mexico City,
Mexico). MLC/GATX Leasing Corporation is a 50% owned investment of MLC Group.
See "The Company."
The Company specializes in leasing and financing information
technology assets, providing network services, software and PCs, providing
system design and upgrades, hardware maintenance, on-site technical support,
relocation services and providing asset management services to commercial
customers with annual sales revenue of between $10 million and $500 million
("middle market customers"), select Fortune 1000 firms, federal, state and
local governments and vendors. The assets leased or sold by the Company include
personal computers and peripherals, client server systems, networks, mid-range
and mainframe computer equipment, telecommunications equipment and software.
MLC Network Solutions and ECCI were acquired to provide a wide range of
information technology ("IT") services and solutions to middle market
organizations. The Company offers its clients a single source for a
comprehensive range of services, including procurement of software and PC and
communication equipment, desktop systems maintenance and support, strategic
planning and management consulting, integration and installation of IT systems,
training and continuing education. The Company will focus on marketing its
comprehensive IT offerings to middle market organizations, which typically
spend from $250 thousand to $25 million annually on their IT needs. The IT
service industry has evolved into a highly fragmented environment with a small
number of large, national service providers and a large number of small- and
medium-sized service providers, usually with a regional focus. Large IT service
providers typically address the IT needs of large organizations with
substantial IT requirements for a wide range of services, whereas smaller IT
service firms provide specialized services of limited scope. Consequently,
middle market organizations rely on multiple, often specialized, smaller IT
service providers to help implement and manage their systems. The Company
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believes that a single-source IT service provider will help middle market
organizations reduce cost and management complexity and increase the quality
and compatibility of IT solutions. As part of its strategy, the Company intends
to leverage its high-level services to foster long-term relationships with
clients and to implement technology strategies in order to achieve the clients'
desired IT solutions. The Company also believes it can increase its revenues
from existing clients by cross-selling its services. Another key element of the
Company's strategy is the expansion of service offerings and the addition of
new businesses in order to offer new and existing clients access to a more
complete range of services. The Company also will operate with a decentralized
management structure to provide focus on superior client service and foster a
motivating environment for its various subsidiaries, and will seek to acquire
additional companies to strengthen its core competencies, to offer
complementary services and to facilitate its expansion into new regions.
The Company also leases and finances equipment, software and
services through relationships with vendors, equipment manufacturers and
systems integrators. These vendor clients represent a variety of high
technology industries and include, among others, in alphabetical order: Cisco
Systems, Inc. (including its financing company, Cisco Systems Capital); EMC
Corporation; Systems & Computer Technology Corporation; and Sterling Software,
Inc.
The Company's asset trading activity involves the purchase and
resale of previously owned information technology equipment. By offering asset
trading capabilities, the Company is able to develop and maintain knowledge of
current market trends and values which enables the Company to predict more
accurately residual values when pricing leasing transactions, dispose
efficiently of off-lease equipment and offer customers a way to dispose of or
acquire previously owned information technology equipment. Asset management
services, which are offered primarily to enhance customer service, is a general
term used to describe the provision of asset inventory and tracking services,
software and record keeping programs to customers. The asset management
services provided by the Company allow the customers to better track their
information technology assets. The asset management services include a third
party software system utilized onsite by the Company which generates reports
and allows customers to dial up and receive information on a real time basis.
The Company's network services, software and PC reselling activity involves
closely working with customers to solve their integration solutions and provide
training facilities to educate clients on commercial off the shelf software
items.
The Company's principal executive office is located at 11150 Sunset
Hills Road, Suite 110, Reston, Virginia 20190-5321 and its telephone number at
such address is (703) 834-5710. The Company's 186 employees operate through
twelve offices, including its principal executive offices and regional sales
offices which are located in the following metropolitan and suburban areas:
Pottstown and West Chester, Pennsylvania (both are Philadelphia suburban
locations); Dallas and Austin, Texas; Sacramento and San Diego California;
Greenville, Wilmington and Raleigh (2 offices), North Carolina and Atlanta,
Georgia. The Company also has an arrangement with an independent contractor who
works primarily for the Company from Columbus, Ohio.
THE OFFERING
Common Stock offered by:
The Company 2,000,000 shares (1)
Selling Stockholders 964,305 shares (2)
Common Stock outstanding after this Offering 8,071,305 shares (3)
Nasdaq National Market Symbol MLCH
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(1) Such shares may be offered and issued from time to time in connection with
future acquisitions by the Company. The Company intends to seek the
agreement of recipients of shares of Common Stock in acquisitions to
restrictions on the transfer of such shares for periods ranging from an
estimated six to eighteen months or to structure such transactions to
provide for issuance of shares on a deferred basis over periods of six to
eighteen months.
(2) Such shares are issued and outstanding and may be offered and sold from
time to time by the Selling Stockholders. See "Selling Stockholders."
(3) Up to an additional 20% of the outstanding shares of Common Stock have
been reserved for future issuance under the Company's employee stock
option plans. See "Management -- Compensation Arrangements and Employment
Agreements."
RISK FACTORS
The Company and its business are subject to varying risks which are:
(i) a dependence on the ability to obtain creditworthy customers; (ii) a
dependence on major relationships; (iii) asset ownership resulting from the
majority of the Company's lease transactions and the future realization of the
estimated residual values; (iv) a dependence upon the Company's ability to
obtain financing; (v) substantial competition including numerous national and
regional companies selling, leasing and financing similar or same or equivalent
products; (vi) risk associated with the pursuit and integration of
acquisitions; (vii) a dependence upon the efforts, abilities and relationships
of a few key management personnel; (viii) control of 46.6% of the Company's
Common Stock by a single individual, Phillip G. Norton; (ix) risk associated
with contractual "termination rights" in leases to government customers; (x)
the inability to timely and at a competitive price obtain equipment for lease;
(xi) management's ability to manage the Company's rapid growth; (xii) potential
changes in tax laws which may make leasing less desirable for potential
customers; (xiii) potential changes in accounting practices which may make
leasing less attractive to potential customers; (xiv) interest rate
fluctuations; (xv) provisions of the Company's governing documents and Delaware
law, coupled with control by insiders and a staggered board which may make it
more difficult for a third party to acquire control of the Company without
approval of the Company's Board of Directors; (xvi) volatility of the
public market for the Common Stock; (xvii) absence of dividend history or
intention to pay dividends in the foreseeable future; (xviii) fluctuations in
quarterly operating results; (xix) potential for a larger number of additional
shares held by current stockholders to become eligible for sale and thereby
adversely impact the market price of the Common Stock and (xx) the dependence
on the continued authorization to resell and provide manufacturer authorized
equipment and services.
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary 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 "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition," included elsewhere herein.
The summary consolidated financial data, as of and for, the six months
ended September 30, 1996, and September 30, 1997, has been derived from
unaudited financial information, which, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation. The results of operations for the six months
ended September 30, 1997, are not necessarily indicative of the results of
operations that may be expected for the entire year. See "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business."
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The following consolidated balance sheet and statement of earnings
data have been restated to include the accounts and results of operations of
the Company's two newly acquired subsidiaries which were accounted for under
the pooling-of-interests method.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
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1995 1996 1997 1996 1997
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<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Total revenues $ 64,364 $ 71,880 $ 86,649 $ 38,225 $ 67,717
Total costs and expenses 63,581 68,300 81,798 36,141 63,536
------------------------------------------- ----------------------------
Earnings before provision for income taxes 783 3,580 4,851 2,084 4,181
Provision for income taxes 198 881 1,360 606 872
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Earnings before extrordinary item 585 2,699 3,491 1,478 3,309
Extrordinary gain, net (1) - 117 - - -
------------------------------------------- ----------------------------
Net earnings $ 585 $ 2,816 $ 3,491 $ 1,478 $ 3,309
=========================================== ============================
Earnings per common share, before extraordinary item 0.13 0.59 0.67 0.31 0.55
Extraordinary gain per common share - 0.03 - - -
------------------------------------------- ----------------------------
Net earnings per common share $ 0.13 $ 0.62 $ 0.67 $ 0.31 $ 0.55
=========================================== ============================
Pro forma net earnings (2) $ 529 $ 2,389 $ 3,133 $ 1,342 $ 2,696
=========================================== ============================
Pro forma net earnings per common share $ 0.12 $ 0.52 $ 0.60 $ 0.28 $ 0.45
=========================================== ============================
Weighted average common shares outstanding 4,383,490 4,572,635 5,184,261 4,754,390 5,990,200
AS OF MARCH 31, AS OF SEPTEMBER 30,
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1995 1996 1997 1996 1997
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BALANCE SHEET DATA:
Investment in leases $ 13,998 $ 26,493 $ 28,538 $ 27,825 $ 27,390
Total assets 21,716 35,184 49,024 43,481 57,317
Recourse notes payable 2,597 2,106 439 206 4,764
Nonrecourse notes payable 10,162 18,352 19,705 19,827 16,134
Retained earnings 2,014 4,467 7,071 5,636 9,294
Stockholders' equity 2,801 5,232 16,477 6,400 20,711
</TABLE>
(1) The extraordinary gain in fiscal 1996 was the result of an insurance
settlement for a fire at a subsidiary of the Company.
(2) Pro forma net earnings as if companies which were subchapter S corporations
prior to their business combinations with the Company, which were accounted for
under the pooling of interests method, had been subject to federal income tax
throughout the periods presented.
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RISK FACTORS
An investment in the Securities offered hereby involves a high
degree of risk. In addition to other information in this Prospectus, the
following risk factors should be considered carefully by potential purchasers
in evaluating an investment in the Securities offered hereby. Except for
historical information contained herein, the discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
herein.
DEPENDENCE ON CREDITWORTHY CUSTOMERS
Historically, the credit quality of the Company's customers, and the
Company's credit loss experience, have enabled the Company to raise sufficient
amounts of debt and equity capital to fund its equipment purchases. In the
event the actual or perceived credit quality of the Company's customer base
materially decreases, or the Company has a material increase in its credit loss
experience, the Company may find it difficult to continue to obtain the capital
it requires, resulting in a material adverse effect on its business, financial
condition, results of operations, and cash flows. See "Risk Factors --
Dependence on Availability of Financing." Furthermore, a material increase in
the Company's delinquency and default experience would, alone, have a material
adverse effect on its business, financial condition, results of operations, and
cash flows. See "Business - Financing."
DEPENDENCE ON MAJOR RELATIONSHIPS
As of March 31, 1997, the Company's portfolio consisted of leases
with 135 customers. During fiscal year 1997, the Company originated commercial
leasing transactions with 72 customers, ten of which accounted for
approximately 61% of the aggregate purchase price of equipment leased by the
Company to those 72 customers. During the first six months of fiscal year 1998,
through September 30, 1997, the Company originated leasing transactions with 57
customers, ten of which accounted for 72.5% of the aggregate purchase price of
equipment leased. In the event any of the Company's major customers ceases to
lease additional equipment or materially reduces the amount of equipment it
leases from the Company, this cessation or reduction could have a material
adverse effect upon the Company's business, financial condition, results of
operations, and cash flows. See "Business -- Leasing, Financing and Sales
Activities." In addition to its dependence on a limited number of substantial
customers, the Company also obtains a significant source of its equity
financing for transactions and its revenue through two joint venture
arrangements: (i) MLC/GATX Limited Partnership I, a Colorado limited
partnership, which is used for financing mainframe and peripheral computer
equipment; and (ii) MLC/CLC LLC, a Virginia limited liability company, which is
used for financing personal computers and client server equipment.
The partners in MLC/GATX Limited Partnership I are: the Company,
with a 9.5% limited partnership interest; GATX Capital Corporation ("GATX")
with an 89.5% limited partnership interest; and MLC/GATX Leasing Corporation, a
Colorado corporation, which is equally owned by the Company and GATX and which
is a general partner with a 1% general partnership interest. During fiscal year
1997, revenue recognized from sales to MLC/GATX Limited Partnership I was $3.5
million of the Company's total revenues. The Company's investment in MLC/GATX
Limited Partnership I accounted for by the use of the cost method was $226,835
and $173,733 as of March 31, 1997 and September 30, 1997, respectively.
MLC/GATX Limited Partnership I does not purchase any lease transactions from
anyone other than the Company. GATX, which is based in San Francisco,
California and which is not affiliated with the Company, has been in the
equipment leasing and financing market for over 25 years,
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and has assets of approximately $1.85 billion. GATX is a publicly held
corporation which files periodic reports with the Commission pursuant to the
Exchange Act.
The members of MLC/CLC LLC are the Company, with a 5% membership
interest, and Cargill Leasing Corporation, a Delaware corporation, with a 95%
membership interest. MLC Group serves as the manager for MLC/CLC LLC. For
fiscal year 1997 and the six months ended September 30, 1997, revenue
recognized from the sales to MLC/CLC LLC was $16.9 million and $27.7 million of
the Company's total revenues, respectively. The Company's investment in MLC/CLC
LLC accounted for by the use of the cost method was $168,259 and $417,307 as of
March 31, 1997 and September 30, 1997, respectively. MLC/CLC LLC does not
purchase any lease transactions from anyone other than the Company.
Cargill Leasing Corporation, located in Minnetonka, Minnesota, is a
subsidiary of Cargill, Inc., and is not affiliated with the Company. Cargill,
Inc. has been reported by Forbes Magazine to be one of the largest privately
owned companies in the United States. Cargill Leasing Corporation has been in
the equipment leasing and financing business for over ten years. As privately
held companies, neither Cargill, Inc. or Cargill Leasing Corporation makes
financial information available to the public and neither company issues an
annual report to the general public. Cargill, Inc. has released the following
financial data for its fiscal year ended May, 1997 as reported in Forbes
Magazine issue of December, 1997: sales were $56 billion, operating income was
$3.2 billion and net income was $814 million.
For fiscal year 1997 and fiscal year 1998 through September 30,
1997, the Company did not have any revenue sources which alone accounted for
more than 10% of the Company's revenues except for the Company's relationship
with GATX and Cargill Leasing Corporation. For the year ended 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%. For the six months ended September 30, 1997, out of leased equipment
sales of $32.2 million, MLC/GATX Limited Partnership represented $0.4 million
or 1.2% and MLC/CLC LLC represented $27.7 million or 86.0%. MLC/GATX Limited
Partnership I and MLC/CLC LLC only purchase transactions from the Company. For
the fiscal year ended 1997 and six months ended September 30, 1997, the
Company's network service, software and PC sales subsidiaries had two accounts
that were in excess of 10% of each subsidiaries revenues. ECCI had one account,
AHERF, that represented $5.3 million or 41.2% of its total sales for the 12
month period ended December 31, 1996. AHERF is a Pittsburgh based
not-for-profit entity that owns multiple hospitals, the largest of which
include Hahnemann University Hospital, St. Christopher's Hospital for Children,
Medical College of Pennsylvania and Graduate Hospital, all of which are located
in Philadelphia, Pennsylvania. Compuventures has one account, Corning, Inc.,
that represented $3.2 million or 22% of its year ended December 31, 1996
revenues. The loss of either AHERF or Corning as a customer would have a
material adverse effect upon the Company's success in the network services and
software and PC reselling business, financial condition, results of operations,
and cash flows, and would create a significant adverse financial effect on the
respective subsidiary.
For fiscal year 1997 and six months ended September 30, 1997, of the
Company's total revenue, approximately 4.0% and 0.6%, respectively, was
attributable to sales of lease transactions to MLC/GATX Limited Partnership I,
and approximately 19.5% and 40.9%, respectively, 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, results of operations, and cash flows. The Company does
finance 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
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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.
The loss or dissolution of either of these joint venture
arrangements, and in particular, the MLC/CLC LLC, would have a material adverse
effect upon the Company's ability to finance lease transactions and thus on the
company's business, financial condition, results of operations, and cash flows.
See "Risk Factors -- Dependence on Availability of Financing."
In addition to the relationships described above, the Company, as
part of its strategy, intends to seek to establish both formal and informal
relationships with vendors, and by such participation in vendor marketing
programs, leverage the Company's marketing efforts by using the sales force of
the vendor. There can be no assurance that the Company will be able
successfully to establish such relationships, or if established, that they will
provide the sales leverage desired by the Company. The failure to establish
such relationships would have a material adverse effect upon the Company's
ability to increase its volume of transactions financed and thus on the
Company's business, financial condition, results of operations, and cash flows.
See "Business - Strategy."
ASSET OWNERSHIP RISK OF TECHNOLOGICAL OBSOLESCENCE, INABILITY TO RE-LEASE OR
RE-SELL, OR FLUCTUATING MARKET CONDITIONS
The Company has historically emphasized fair market value ("FMV")
leases, i.e., operating and direct finance leases, where the Company will own
the leased asset at the expiration of the lease term and will sell or re-lease
the asset at that time at market rates either to the existing lessee or to
another party. FMV leases require the Company to re-lease or re-sell the
equipment in its portfolio in a timely manner upon termination of the lease in
order to minimize off-lease time and recover its original investment in the
equipment, and a failure to do so places the Company at a risk of not
recovering its entire investment in the equipment ("residual risk").
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. The computer and telecommunications industries have been
characterized by significant and rapid technological advances.
At the inception of each FMV lease, the Company has historically
estimated a residual value for the leased equipment. 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.
If the Company's estimated residual values are reduced or not
achieved in the future, its business, financial condition, results of
operations, and cash flows could be materially adversely affected. As of March
31, 1997, the total net unrealized residual value at the end of the initial
lease term of the Company's owned lease portfolio was approximately $4.19
million consisting of $2.92 million of operating lease portfolio and $1.27
million of residual values of direct financing lease portfolio. As of September
30, 1997, the total net unrealized residual value at the end of the initial
lease term of the Company's owned lease portfolio was approximately $6.15
million consisting of $2.67 million of operating lease portfolio and $3.48
million of residual values of direct financing lease portfolio. Similarly, if
the Company is unable to re-lease or re-sell equipment on favorable terms, its
business,
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financial condition, results of operations, and cash flows could be materially
adversely affected. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Revenue Recognition and Lease Accounting"
and "Business -- Leasing, Financing and Sales Activities."
The Company also engages in the short-term trading of equipment in
the after market. To the extent the Company purchases equipment without having
a firm commitment for its re-lease or re-sale or if a firm commitment for
re-lease or re-sale were to exist but not be consummated for whatever reason,
the Company would be subject to all the risks of ownership of the equipment as
described above. See "Business -- Industry Overview."
DEPENDENCE ON AVAILABILITY OF 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. An inability to obtain any of these types of financing
would have a material adverse effect upon the Company's business, financial
condition and results of operations.
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 can be as high as 35% depending on the lease term and equipment's
technological life. 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 the
Company's securities; or (iv) recourse borrowings. Accordingly, the Company's
ability to successfully execute its business strategy and to sustain its growth
is dependent largely on its ability to obtain each of the foregoing types of
financing.
Information relating to the sources of each type of financing for
equipment acquisitions is as follows:
Nonrecourse Financing. The credit standing of the Company's
customers must be of such a quality as to allow the Company to finance most of
its leasing or financing transactions on a nonrecourse basis. Under a
nonrecourse loan, the Company borrows an amount equal to the committed lease
payments under the financed lease, discounted at a fixed interest rate. The
lender is entitled to receive the payments under the financed lease in
repayment of the loan, and takes a security interest in the related equipment
but has no recourse against the Company. 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, and September 30, 1997, the Company
had aggregate outstanding nonrecourse borrowings of approximately $19.7 million
and $16.1 million, respectively.
The Company adopted Statement of Financial Accounting Standards No.
125 ("SFAS No. 125"), Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities as of January 1, 1997. SFAS No. 125
has changed the manner in which the Company determines and
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recognizes the gain recorded upon the transfer of its interest in finance
contracts subsequent to December 31, 1996. Additionally, SFAS No. 125 requires
the Company to record gains or losses with respect to transfers of its interest
in leases previously accounted for as direct finance leases. SFAS No. 125 has
also altered the presentation in the Company's consolidated financial
statements of revenues, expenses and certain assets and liabilities associated
with finance contracts sold. Prior to this accounting pronouncement, proceeds
received from assigning receivables from direct financing leases prior to
December 31, 1996 would have been recorded as nonrecourse debt rather than the
required new sale treatment as required under SFAS 125. As a result, certain
aspects of the Company's financial statements as of September 30, 1997 may not
be directly comparable to the prior period financial statements based on the
requirement that no retroactive accounting was allowable.
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.
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. The Company also originates
financings involving various agencies of the U.S. Government. In addition to
the usual risks associated with commercial transactions, these financings may
be subject to numerous termination provisions (see "Risk Factors -- Government
Termination Risk") and may also contain risks associated with a vendor's
inability to meet contractual obligations to provide specified goods or
services as specified on an ongoing basis. Historically, there have been a
limited number of financial institutions which have provided financing for
these contracts, and although the Company maintains favorable relationships
with a few, there can be no assurance that the Company will be able to replace
these relationships or find other lenders in the event existing relationships
are terminated.
Lease 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 and sells on a nonrecourse basis to third parties and records any gain
or loss from the transaction as lease revenue. Unavailability of persons
willing to acquire such government leases on such a nonrecourse basis could
materially adversely affect the Company's ability to consummate such sales
transactions and thus have a material adverse effect upon the Company's
business, financial condition, results of operations, and cash flows. See
"Business -- Financing."
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 $806 million as of June 30,
1997. Cargill Leasing Corporation, an unaffiliated investor which owns 95% of
MLC/CLC LLC, is affiliated with Cargill, Inc., a privately held company that
was reported by Forbes Magazine in December, 1997 to have sales of $56 billion,
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operating income of $3.2 billion and net income of $814 million for the fiscal
year ended May, 1997. See "Risk Factors -- Dependence on Major Relationships."
For fiscal year 1997 and the six months ended September 30, 1997,
approximately $20.4 million or 23.5% and approximately $28.1 million or 41.5%,
respectively, of the Company's total revenue was attributable to sales of lease
transactions to MLC/GATX Limited Partnership I and the MLC/CLC LLC entity.
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 have a material adverse
effect upon the Company's business, financial condition, results of operations,
and cash flows. See "Business -- Financing."
Equity Capital and Internal Financing. Occasionally the Company
finances leases and related equipment internally, rather than with financing
provided by lenders. These internal lease financings typically occur in cases
where the financed amounts are not sufficiently large to be 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.
If the Company significantly increases its leasing and financing
volumes as a result of new vendor relationships or substantially increases the
size of its leasing portfolio or if other unforeseen developments occur, the
Company may require the proceeds of additional equity financings within the
next 12 to 18 months. Additional equity may also be necessary in order for the
Company to have a sufficient equity position to meet debt-to-equity ratios
required by its recourse lenders in the future. There can be no assurances that
the Company will be able to generate operating cash flow or raise additional
equity at that time or at any time in the future or that the Company will be
able to raise such equity on terms which do not cause significant dilution to
its stockholders. See "Business -- Financing."
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. The Company previously had a
$2,000,000 facility with NationsBank, N.A. which it allowed to expire on
December 1, 1996.
As of March 31, 1997 and September 30, 1997, the Company had
aggregate outstanding recourse borrowings of $439,004 and $4,763,664,
respectively, from various lenders, primarily for the long term financing of
leases.
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 September 5, 1997, the Company entered into
Amendment No. 1 (the "Amendment") dated September 5, 1997 between it and
CoreStates Bank, N.A. The Amendment increases the Loan Commitment from
$15,000,000 to $25,000,000 and increases the amount of Investment Grade Paper
which may qualify as Eligible Leases from $10,000,000 to $15,000,000. In
connection with the Amendment, the Company made and delivered to CoreStates a
$25,000,000 note
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(the "Note") dated September 5, 1997 to replace the $15,000,000 note existing
under the Credit Agreement. 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 and guaranteed by MLC Holdings. 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 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. In the event that the Company is unable to sell
the equipment or unable to finance the equipment on a permanent basis within a
certain period of time, the availability of credit under the lines could be
diminished or eliminated. Furthermore, in the event that receivables
collateralizing the line are uncollectible, the Company would be responsible
for repayment of the lines of credit. Accordingly, such a default could have a
material adverse effect on the business, financial condition and results of
operations of the Company, particularly if the then fair market value of the
equipment is insufficient to satisfy the obligations due to the bank. There can
be no assurance that the Company will be able to renew, extend or replace this
credit facility and a failure to renew, extend or replace any of this facility
would have a material adverse effect upon the Company's business, financial
condition, results of operations, and cash flows.
The Company's newly acquired subsidiaries, MLC Network Solutions
(acquired July 24, 1997) and ECCI (acquired September 29, 1997), both have
separate credit sources to finance their working capital requirements for
inventories and accounts receivable, which the Company has guaranteed. Their
traditional business as value-added resellers of PC's and related network
equipment and software products is financed through agreements known as "floor
planning" financing where interest expense for the first thirty days is charged
to the supplier/distributor but not the reseller. These floor plan liabilities
are recorded under accounts payable as they are normally repaid within the 30
day time frame as they represent an assigned accounts payable originally
generated with the supplier/distributor. If the 30 day obligation is not timely
liquidated, interest is then assessed at stated contractual rates. As of
September 30, 1997 MLC Network Solutions has floor planning availability of
$1,400,000 through Deutsche Financial, Inc. and $300,000 from IBM Credit
Corporation. The outstanding balances to these respective suppliers were
$595,033 and $25,786 as of September 30, 1997. ECCI has floor planning
availability of $1,500,000 from AT&T Credit Corporation, $1,000,000 through IBM
Credit Corporation, and $100,000 through Deutsche Financial, Inc. The
outstanding balances to these respective suppliers were $522,713, $470,454 and
$6,048 as of September 30, 1997. ECCI additionally has a line of credit in
place, expiring on April 30, 1998, with PNC Bank, N.A. to provide an asset
based credit facility. The line has a maximum credit limit of $2,500,000 and
interest is based on the bank's prime rate. The outstanding balance was
$931,000 as of September 30, 1997. There can be no assurance that the Company
will be able to renew, extend or replace these credit facilities and a failure
to renew, extend or replace any of these facilities would have a material
adverse effect upon the Company's business, financial condition, results of
operations, and cash flows.
Partial Recourse Borrowing Facilities. On March 12, 1997, the
Company finalized and executed documents establishing a $10,000,000 credit
facility agreement (the "Heller Facility"), with Heller Financial, Inc.
("Heller"), a Delaware corporation. Under the terms of the Heller Facility, a
maximum amount of $10,000,000 is available to the Company, provided that each
draw is subject to the approval of Heller. The Heller Facility is evidenced by
a Loan and Security Agreement dated as of January 31, 1997 (the "Loan
Agreement") and a First Amendment to Loan and Security Agreement (the
"Amendment") dated as of March 12, 1997 (although the Loan Agreement is dated
effective January 31, 1997, all documents were executed concurrently in March,
1997). 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
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under the Heller Facility had been made. As of September 30, 1997, the
principal balance due under the Heller Facility was $941,187. 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 and guaranteed by MLC Holdings. As compared to a committed line of
credit, lending under the Heller Facility is in Heller's sole discretion, and
is further subject to MLC Group's compliance with certain conditions and
procedures. 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. There can be no
assurance that the Company will be able to renew, extend or replace this credit
facility and a failure to renew, extend or replace any of this facility would
have a material adverse effect upon the Company's business, financial
condition, results of operations, and cash flows.
With respect to the long-term recourse notes to finance certain
leases, the availability of such recourse borrowing is dependent on both the
creditworthiness of the customer, as described above under "-- Dependence on
Availability of Financing -- Nonrecourse Financing," and the creditworthiness
of the Company, including the Company's ability to meet certain debt-to-equity
ratios often required by recourse lenders. The Company's ability to increase
the amount of its recourse debt has been limited by its capital position and,
prior to the Company's initial public offering on November 20, 1996 (the
"Initial Public Offering"), the personal guarantees and collateral provided by
its stockholders. No assurances can be given that the Company will not
experience difficulty in obtaining recourse debt in the future, whether because
lenders change their credit standards for providing such financing, the
stockholders cease to provide personal guarantees or collateral, or because the
Company increases its recourse borrowing to a level where it cannot meet such
debt-to-equity ratio requirements or other financial covenants. The
unavailability of such recourse financing would have a material adverse effect
on the ability of the Company to finance lease transactions and, thus, have a
material adverse effect upon the Company's business, financial condition,
results of operations, and cash flows. See "Business -- Financing."
COMPETITION
The Company faces substantial competition in connection with the
purchase, sale and lease of new and used computer systems, computer peripheral
equipment, upgrades and parts. Among its competitors are numerous national and
regional companies selling, leasing and financing the same or equivalent
products. Many of these competitors are well established, have substantially
greater financial, marketing, technical and sales support than the Company and
have established reputations for success in the purchase, sale and lease of
computer-related products. In addition, many computer manufacturers may sell or
lease directly to the Company's customers, and the Company's continued ability
to compete effectively may be affected by the policies of such manufacturers.
The Company also faces competition from other financial services firms such as
investment banking firms which underwrite municipal bonds to finance large
municipal acquisitions, national finance companies which finance equipment in
the government and commercial sectors, banks which finance local customers and
also engage in lease transactions to obtain favorable tax benefits, as well as
other financial intermediaries similar to the Company which may focus
specifically on geography, asset-type or customer profiles. There can be no
assurance that the Company will be able to compete successfully or that it will
maintain profitability in the future. See "Business -- Competition."
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RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
As part of its long-term business strategy, the Company intends to
pursue acquisitions of other companies. Future acquisitions may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and the amortization of expenses related to goodwill and other
intangible assets, all of which could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
There can be no assurance that the Company will be able to identify, acquire or
profitably manage additional businesses or successfully integrate acquired
businesses, if any, into the Company without substantial costs, delays or other
operational or financial problems. Further, acquisitions may involve a number
of special risks, including adverse effects on the Company's financial
condition, operating results, cash flows, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or circumstances or legal liabilities and amortization of acquired
intangible assets, some or all of which could have a material adverse effect on
the Company's business, financial condition, results of operations, and cash
flows. Client satisfaction or performance problems at a single acquired firm
could have a material adverse impact on the reputation of the Company as a
whole. In addition, there can be no assurance that acquired businesses, if any,
will achieve anticipated revenues and earnings. The inability of the Company to
implement and manage its acquisition strategy successfully may have an adverse
effect on the future prospects of the Company. See "Business -- Strategy" and
"--Acquisition of Related Companies."
Risks Related to Acquisition Financing. The Company currently
intends to finance future acquisitions by primarily using shares of its Common
Stock, including the Acquisition Shares offered by this Prospectus, for all or
a portion of the consideration to be paid. If the Common Stock does not
maintain a sufficient value, or potential acquisition candidates are unwilling
to accept Common Stock as part or all of the consideration for the sale of
their businesses, the Company may be required to use more of its cash
resources, if available, to initiate and maintain its acquisition program. If
the Company does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through additional debt
or equity financing. There can be no assurance that the Company will be able to
obtain such financing if and when it is needed or that, if available, it will
be available on terms the Company deems acceptable. As a result, the Company
might be unable to successfully implement its acquisition strategy. The
inability of the Company to implement and manage its acquisition strategy
successfully may have an adverse effect on the future prospects of the Company.
The Company has financed its last two acquisitions by using shares
of its Common Stock for the total consideration. On July 24, 1997, the Company,
through a new wholly owned subsidiary, MLC Network Solutions, which was
incorporated on July 14, 1997, entered into an Agreement and Plan of Merger
with Compuventures of Pitt County, Inc. ("Compuventures"). Compuventures was
merged into MLC Network Solutions effective July 24, 1997. The outstanding
shares of Compuventures common stock were converted into 260,978 shares, valued
at $3,384,564, of MLC Holdings Common Stock. Educational Computer Concepts,
Inc. (previously defined as "ECCI" and dba "ECC Integrated, Inc."), was
acquired on September 29, 1997 by means of merging MLC Acquisitions
Corporation, a newly formed corporation wholly owned by MLC Holdings, into ECCI
with ECCI being the surviving entity. MLC Holdings effectively exchanged
498,998 shares of its stock, valued at $7,092,000, for the total stock of ECCI.
Each of the mergers was accounted for as a pooling of interests.
The Company anticipates that it will also need additional funds to
implement its acquisition and internal growth strategies. The Company has a
line of credit facility for use for working capital and other general corporate
purposes, which may include acquisitions. There can be no assurance, however,
that the line of credit will be sufficient for the Company's needs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources,"
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"Business --Strategy" and "--Acquisition of Related Companies." The Company
currently has no binding agreements or understandings with regard to any
acquisitions.
DEPENDENCE ON CURRENT MANAGEMENT
The operations and future success of the Company are dependent upon
the efforts, abilities and relationships of the Company's Chairman, Chief
Executive Officer and President, Phillip G. Norton, and its founder and
Executive Vice President, Bruce M. Bowen, who also serves as a director of the
Company, Thomas B. Howard Jr., Executive Vice President and Chief Operating
Officer, Steven J. Mencarini, Senior Vice President and Chief Financial
Officer, Kleyton L. Parkhurst, Secretary and Treasurer, Vincent Marino,
President of ECCI and William G. Garner, President of MLC Network Solutions.
The loss of any of these key management officers and personnel would materially
adversely affect the business, financial condition, results of operations, and
cash flows of the Company. Each of these officers has entered into an
employment agreement with the Company. The Company maintains key-man life
insurance on Mr. Norton in the form of two separate policies, one with First
Colony Forge Life Insurance Company and the second with CNA/Valley Forge Life
Insurance Company Life Co., each in the amount of $5 million, and on Mr. Bowen
with CNA/Valley Forge Life Insurance Company in the amount of $1 million. See
"Management -- Executive Compensation and Other Information -- Compensation
Arrangements and Employment Agreements."
CONTROL BY PRINCIPAL STOCKHOLDERS
One of the Company's current principal stockholders, Phillip G.
Norton, Chairman, Chief Executive Officer and President of the Company,
directly and indirectly controls approximately 46% of the Company's outstanding
Common Stock. In the event of the death of Phillip G. Norton, Patricia A.
Norton, if then living, would succeed to his rights under the Irrevocable Proxy
and Stock Rights Agreement. See "Management -- Executive Compensation and Other
Information" and "Principal Stockholders -- Irrevocable Proxy and Stock Rights
Agreement."
Similarly, another of the Company's current principal stockholders,
Bruce M. Bowen, a director and Executive Vice President of the Company,
directly and indirectly controls approximately 12.7% of the Company's
outstanding Common Stock. See "Management -- Executive Compensation and Other
Information" and "Principal Stockholders."
Because of their ownership positions, Messrs. Norton and Bowen will
have a substantial influence on the election of all of the Company's directors,
and, therefore, substantial control of the direction of the affairs of the
Company. Mr. Norton, acting in concert with Mr. Bowen, will effectively control
the election of a majority of the members of the Company's Board of Directors
and will effectively be able to determine all corporate actions, including
amendments to the Company's charter documents, or take other actions which
could adversely affect minority stockholders. In addition, the Company's
stockholders do not have the right to cumulative voting in the election of
directors, the absence of which has the effect of making it unlikely that the
public stockholders will be able to cause any director to be elected to the
Company's Board of Directors, other than those supported by Messrs. Norton and
Bowen. See "Description of Capital Stock" and "Principal Stockholders."
GOVERNMENT TERMINATION RISK
Virtually all of the Company's lease volume with government
customers is pursuant to leases which are "subject to appropriation," or, with
respect to federal government leases, "also subject to
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termination for convenience or the risk of non-renewal at the end of each
fiscal year." A lease which is subject to termination for convenience may also
be terminated by the government at any time prior to expiration of the fiscal
year on various grounds in which event, while the Company or its assignee
through the contractor may submit a claim for losses, if any, associated
therewith, the timing and amount of a settlement upon such a claim can be
uncertain. In addition, most federal government leases are written over several
fiscal years and give the government the option not to renew at the end of each
fiscal year for any reason, even if funds have been appropriated. In the case
of a lease which is "subject to appropriation," the obligation of the lessor is
subject to and contingent upon appropriation of funding for that lease in
future fiscal years and if such funding is not appropriated, then the
governmental lessee has no obligation to continue the lease. The Company has
historically sought and been able to pass these appropriation, non-renewal and
termination for convenience risks to financial institutions by financing such
leases on a "nonrecourse" basis; however, there can be no assurance that the
Company will be able to obtain such financing in the future. A material
increase in either industry-wide termination experience or in the Company's
termination due to non-appropriation, non-renewal or termination for
convenience experience would make it more difficult for the Company to obtain
nonrecourse financing for similar "subject to appropriation" governmental
leases in the future and would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
As of the end of fiscal year 1997 and as of September 30, 1997, the
Company had $244,115 and $522,576, respectively, of assets leased to
governmental units. All of these leases are subject to termination rights by
the governmental units as described above.
DEPENDENCE UPON AVAILABILITY OF EQUIPMENT
A material portion of the Company's sales and lease revenues are
derived from equipment which the Company obtains in the computer "after
market." As a supplier of used International Business Machines Corporation
("IBM") and IBM-compatible computer equipment and other equipment, the Company
must constantly identify sources for products at costs which permit the Company
to re-sell or re-lease such equipment on a competitive and profitable basis.
Technological advances and shifts in customer preferences may require the
Company to offer additional or different products not available through its
current network of product suppliers and could render a portion of the
Company's inventory and lease portfolio unmarketable or marketable only at
lower prices or rates. From time-to-time, the Company and its competitors have
experienced shortages in the availability of certain products.
The Company obtains after market equipment primarily to fill orders
for such equipment by its customers. The computer market is characterized by a
number of different types of customers. Certain customers seek only the newest
or most sophisticated equipment while other customers are far more price
sensitive. While the risk of technological obsolescence means that one customer
may no longer have need for a specific type of equipment, it may still be
useful to another customer. Similarly, due to changes in customer preferences a
customer may no longer wish to continue leasing a particular piece of
equipment. When the Company is forced to move equipment from one customer to
another, there can be no assurance that the Company will be able to find a new
customer for that equipment or if a new customer is identified, that the price
it will be able to sell or lease the equipment does not result in a loss to the
Company. The occurrence of technological obsolescence or change in preference
may cause a decline in the economic value of equipment.
Like any market, the computer marketplace is subject to product
shortages from time to time. The principal effect on the Company would be on
timely locating computer equipment in the after market. The Company may receive
an order from a customer for a piece of computer equipment that it must obtain
in the after market and be unable to do so in the required time frame.
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The occurrence of these shortages in the future would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows. As of March 31, 1997, the Company's inventory of
information technology equipment was $1,278,144 which also was the highest
inventory level at the end of any quarter during the fiscal year. As of
September 30, 1997, the Company's inventory of information technology equipment
was $1,625,496. See "Business -- Competition."
MANAGEMENT OF GROWTH
In order to support the anticipated growth of its business, the
Company has added new personnel in 1995, 1996, and 1997 and expects to add
additional personnel in 1998. The Company is absorbing, and will continue to
absorb in the future, the effects of additional personnel costs and the
implementation of new systems necessary to manage such growth. The Company's
future operating results will depend on its ability to attract, hire and retain
skilled employees and on the ability of its officers and key employees to
continue to implement and improve its operational and financial control systems
and to train and manage its employees. If the Company is unable to manage
growth effectively, or attract and retain the personnel it requires, the
Company's business, financial condition, results of operations, and cash flows
would be materially adversely affected.
RISK OF CHANGES IN TAX LAWS
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax deductions on an
ongoing basis. Many of the Company's lessees currently enjoy favorable tax
treatment by entering into operating leases. In addition, parties financing
certain leases to state and local governments enjoy favorable tax treatment
based upon their interest income not being subject to certain income taxes. Any
change to current tax laws that makes existing operating lease financing or
municipal lease financing less attractive could materially adversely affect the
Company's business, financial condition, results of operations, and cash flows.
RISK OF CHANGES IN ACCOUNTING PRACTICES
Many of the Company's lessees currently enjoy favorable accounting
treatment of operating leases. Any change to current accounting principles that
make operating lease financing less attractive could materially adversely
affect the Company's business, financial condition, results of operations, and
cash flows. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a discussion of the impact of new accounting
pronouncements.
INTEREST RATE RISK
During the marketing and bid process for new lease transactions, the
Company typically provides a proposal to the customer based upon market
conditions at the time of the proposal. While the proposal in many instances
will provide the Company with the ability to reprice its bid under certain
conditions, in general terms, between the time the proposal is issued by the
Company and the time the lease transaction is ultimately financed by the
Company, the Company is exposed to interest rate risk to the extent interest
rates increase.
In addition, prior to obtaining long-term financing for its leases
and the related equipment, the Company sometimes finances the purchase of those
assets through lines of credit which bear interest at variable rates. See "Risk
Factors -- Dependence on Availability of Financing -- Recourse Financing" and
"Business -- Financing." The Company is exposed to interest rate risk on leases
financed through the
19
<PAGE> 20
CoreStates Bank, N.A. Facility to the extent interest rates increase between
the time the leases are initially financed and the time they are permanently
financed.
ANTI-TAKEOVER EFFECTS OF GOVERNING DOCUMENTS, CONTROL BY INSIDERS, DELAWARE LAW
AND STAGGERED BOARD
The Company's Certificate of Incorporation and Bylaws contain
certain provisions that could have the effect of making it more difficult for a
party to acquire, or of discouraging a party from attempting to acquire,
control of the Company without approval of the Company's Board of Directors.
Under the Company's Certificate of Incorporation, the Board of
Directors has authority to issue up to 2,000,000 shares of $.01 par value
preferred stock of the Company, in one or more series, having such rights and
privileges, including, without limitation, voting rights, as the Board of
Directors may determine in its sole discretion. No consent of the holders of
shares of Common Stock is required to authorize the issuance of any class of
preferred stock of the Company. The rights of the holders of shares of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. While the
Company has no present intention to issue shares of preferred stock, such
issuance could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. See
"Description of Capital Stock."
The Company's Certificate of Incorporation and Bylaws further
provide for the Company's Board of Directors to be divided into three classes,
with directors in each class elected for three-year staggered terms, except for
the initial directors. This classification of the Board of Directors could make
it more difficult for a third party to acquire control of the Company, because
it would require more than one annual meeting of the stockholders to elect a
majority of the Board of Directors. One of the Company's current principal
stockholders, Phillip G. Norton, Chairman, Chief Executive Officer and
President of the Company, controls approximately 46% of the Common Stock, and
thus will likely be able to prevent a third party from acquiring control of the
Company. See "-- Control by Principal Stockholders."
The Company is a Delaware corporation and is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
("DGCL"). In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a "business combination" with the Company for three
years following the date that the person became an interested stockholder
unless the business combination is approved in a prescribed manner. This
statute could make it more difficult for a third party to acquire control of
the Company. See "Description of Capital Stock -- Certain Anti-Takeover
Provisions."
20
<PAGE> 21
PUBLIC MARKET FOR STOCK
The market price of the Common Stock, like that of the securities of
other equipment leasing and financing companies, may be highly volatile. In the
future, there may be significant volatility in the market price of the Common
Stock due to factors that may or may not relate to the Company's performance.
For example, the market price may be significantly affected by the following,
and other factors: actual or anticipated financial results of the Company; the
market price of stocks of other capital equipment leasing and financing
companies; fluctuations and trends in prevailing money market interest rates;
announcements from vendors of the Company's leased equipment regarding new
products or technological innovations; equipment price changes; changes in
government regulations; accounting principles or tax laws applicable to the
Company; the operating results or financial condition of the Company's vendors
or principal customers; or acquisitions affecting the Company's vendors or
principal customers.
ABSENCE OF DIVIDENDS
The Company has never paid a cash dividend to stockholders and does
not anticipate paying dividends on the Common Stock in the foreseeable future,
as the Company's Board of Directors intends to retain the Company's earnings
for use in the business. See "Dividend Policy."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results 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 Common 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 and financing companies or major customers of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, any
reduction of expected residual values related to the equipment the Company
leases, timing of specific transactions and other factors. Quarterly operating
results could also fluctuate as a result of the sale by the Company of
equipment in its lease portfolio, at the expiration of a lease term or prior to
such expiration, to the lessee or to a third party. Such sales of equipment may
have the effect of increasing revenues and net income during the quarter in
which the sale occurs, and reducing revenues and net income otherwise expected
in subsequent quarters. See "Risk Factors -- Asset Ownership Risk of
Technological Obsolescence, Inability to Re-lease or Re-sell, or Fluctuating
Market Conditions" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
Given the possibility of such fluctuations, the Company believes
that comparisons of the results of its operations for one quarter should not be
relied upon as an indication of future performance.
21
<PAGE> 22
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF COMMON
STOCK
The Company has 6,071,305 shares of Common Stock outstanding as of
the date of this Prospectus. Of this amount, 1,150,000 shares of Common Stock
are freely tradable without restriction. The remaining 4,921,305 shares, unless
registered, will be required to be sold pursuant to provisions of Rule 144 under
the Securities Act. Sales of any such shares could adversely affect the market
price of the Common Stock. See "Description of Capital Stock -- Shares Eligible
for Future Sale." The 921,305 shares issued in the acquisitions of Compuventures
and ECCI of 260,978 and 498,998 on July 24, 1997 and September 29, 1997,
respectively, and 161,329 shares issued by the Company in a private placement on
June 18, 1997 are included in the Registration Statement of which this
Prospectus forms a part. See "Selling Stockholders."
DEPENDENCE ON THE CONTINUED AUTHORIZATION TO RESELL AND PROVIDE MANUFACTURER
AUTHORIZED EQUIPMENT AND SERVICES
The Company's future success with IT service offerings and product
sales depends in part on its continued authorization as a service provider and
its continued status as a certified reseller of certain hardware and software
products. Without such sales and service authorizations, the Company would be
severely restricted in its ability to provide the range of services and
products currently offered. In general, the agreements between the Company and
such manufacturers include termination provisions, some of which are immediate.
There can be no assurance that such manufacturers will continue to authorize
the Company as an approved reseller or service provider, and the loss of one or
more of such authorizations could have a material adverse effect on the
Company's results of operations, financial condition and business. Although the
Company has not experienced significant problems with its suppliers of
hardware, software and peripherals, there can be no assurance that such
relationships will continue or that, in the event of a termination of its
relationships with any given supplier, it would be able to obtain alternative
sources of supply without a material disruption in the Company's ability to
provide products and services to its clients. Furthermore, as is typical in the
industry, the Company receives credits or allowances from many manufacturers
for market development which are used to offset a portion of the Company's cost
of products sold. Changes in the availability, structure or timing of these
credits or allowances or any material disruption in the Company's supply of
products could have a material adverse effect on the Company's results of
operations, financial condition, cash flows, and business.
THE COMPANY
The Company is a Delaware corporation which, pursuant to a
reorganization effected September 1, 1996, serves as the holding company for
MLC Group and other subsidiaries. The Company engages in no other business
other than serving as the parent holding company for MLC Group, MLC Capital,
Inc., MLC Federal, Inc., MLC Network Solutions, ECCI and MLC Leasing, S.A. de
C.V. based in Mexico City, Mexico, (a wholly owned subsidiary of MLC Group and
MLC Network Solutions which to date has conducted no business). MLC/GATX
Leasing Corporation is a 50% owned investment of MLC Group.
MLC Group, a Virginia corporation, founded in 1990 and originally
named Municipal Leasing Corporation, currently conducts the majority of all
business activity of the Company. MLC Group has obtained a significant source
of its equity financing for transactions through two joint venture
arrangements: (i) MLC/GATX Limited Partnership I; and (ii) MLC/CLC LLC. 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
22
<PAGE> 23
MLC/CLC LLC and serves as its manager. See "Risk Factors -- Dependence on Major
Relationships" and "Business -- Financing."
On July 24, 1997, the Company, through a new wholly owned
subsidiary, MLC Network Solutions which was incorporated on July 14, 1997,
entered into an Agreement and Plan of Merger with Compuventures. Compuventures
was merged into MLC Network Solutions effective July 24, 1997. The outstanding
shares of Compuventures Common Stock were converted into 260,978 shares, valued
at $3,384,564, of MLC Holdings Common Stock. Compuventures is a value-added
reseller of PC's and related network equipment and software products and
provides various support services to its customers from facilities located in
Greenville, Raleigh and Wilmington, North Carolina. The merger was accounted
for as a pooling of interests.
Educational Computer Concepts, Inc. (referred to as "ECCI" and dba
"ECC Integrated, Inc."), was acquired on September 29, 1997 through the merger
of MLC Acquisitions Corporation, a newly formed corporation wholly owned by MLC
Holdings, which was incorporated on September 2, 1997, into ECCI with ECCI
being the surviving entity. ECCI currently conducts a network services and
software and PC reselling business from its sole location in Pottstown,
Pennsylvania. MLC Holdings effectively exchanged 498,998 shares of its Common
Stock, valued at $7,092,000, for the total stock of ECCI. This transaction was
also accounted for as a pooling of interests.
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 Federal, Inc. was incorporated on September 17, 1997 to handle
future business servicing the Federal government marketplace.
On October 22, 1997, the Company formed MLC Leasing, S.A. de C.V.,
a wholly owned subsidiary of MLC Group and MLC Network Solutions based in
Mexico City, Mexico. To date, no business has been conducted through the new
subsidiary.
On November 20, 1996, the Company closed a public offering of
1,000,000 shares of its Common Stock (the "Initial Public Offering"), and on
December 13, 1996, the underwriter exercised its over-allotment 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 Initial Public Offering were $1,458,738.
On July 1, 1997, the Company issued 161,329 shares of stock to a
single investor in a private placement for cash consideration of $2,000,000 (a
per share price of $12.40). The stock was priced, per a Stock Purchase
Agreement dated June 18, 1997, at a per share price equal to one-twentieth
(1/20) of the sum of the closing price per share of the Company's Common Stock
as reported on the NASDAQ National Market at the close of each of the last
twenty business days immediately prior to the closing date (June 4 to July 1),
multiplied by (.95).
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's 186 employees operate
through twelve offices, including its principal executive office and eleven
regional sales offices which are located in the following metropolitan and
suburban areas: Pottstown and West Chester, Pennsylvania (both are Philadelphia
suburban locations); Dallas and Austin, Texas; Sacramento and San Diego
California; Greenville, Wilmington and Raleigh (2 offices),
23
<PAGE> 24
North Carolina and Atlanta, Georgia. The Company also has an arrangement with
an independent contractor who works primarily for the Company in Columbus,
Ohio.
USE OF PROCEEDS
The 2,000,000 Acquisition Shares to be offered and issued by the
Company will be issued from time to time in full or part consideration in
connection with future acquisitions by the Company.
An additional 964,305 Selling Stockholder Shares subject of this
Prospectus have been previously issued to the Selling Stockholders and are
being offered for sale by the Selling Stockholders. Consequently, the Company
will not receive any of the proceeds from the sales of such shares.
DIVIDEND POLICY
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 under certain circumstances.
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of September 30, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
------------------------
(Dollars in thousands)
<S> <C>
Nonrecourse notes payable.......................................................... $4,764
Recourse notes payable............................................................. 16,134
------
Total.............................................................................. 20,898
Stockholders' equity:
Preferred stock, $0.01 par value -- 2,000,000
shares authorized; none issued or outstanding............................... --
Common stock, $0.01 par value - 25,000,000 shares
authorized; 6,071,305 shares issued and
outstanding (actual)........................................................ 61
Additional paid-in capital......................................................... 11,356
Retained earnings.................................................................. 9,294
------
Total stockholders' equity.................................................... 20,711
------
Total capitalization.......................................................... $41,609
======
</TABLE>
24
<PAGE> 25
SELECTED CONSOLIDATED 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 "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
included elsewhere herein. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and "Business."
The following condensed consolidated balance sheets and statements
of earnings have been restated to include the accounts and results of
operations of the Company's two newly acquired subsidiaries which were
accounted for under the pooling-of-interests method. Although the balance
sheets of the Company as of March 31, 1993, 1994 and 1995, prior to
restatement, as well as the balance sheets of Compuventures and ECCI as of
March 31, 1995 have been audited, the restated balance sheets of the Company as
of March 31, 1993, 1994 and 1995 have been prepared by the Company, without
audit. Additionally, although the Company's statements of earnings for the years
ended March 31, 1993 and 1994 have been audited, the restated statements of
earnings for the years ended March 31, 1993 and 1994 have been prepared by the
Company without audit. The Company elected to consolidate the data presented
for its years ended March 31, 1993 and 1994 to reflect the results of
operations of the two newly acquired subsidiary companies as of and for their
years ended December 31, 1992 and 1993.
The consolidated financial data, as of and for the six months ended
September 30, 1996, and September 30, 1997, has been derived from unaudited
financial information, which in the opinion of management of the Company
includes all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation. The results of operations for the six months
ended September 30, 1997, are not necessarily indicative of the results of
operations that may be expected for the entire year. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Business." Dollars are in thousands, except per share data.
25
<PAGE> 26
MLC HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenue:
Sales of equipment $ 44,179 $ 43,262 $ 50,471 $ 47,591 $ 52,167
Sales of leased equipment - 5,940 9,958 16,318 21,634
Lease 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 787 1,046 690 1,876 2,503
-----------------------------------------------------------------------
Total revenues 46,378 52,205 64,364 71,880 86,649
-----------------------------------------------------------------------
Costs and Expenses:
Cost of sales of equipment 38,760 37,924 44,157 38,782 42,180
Cost of sales of leased equipment - 5,698 9,463 15,522 21,667
Direct lease costs 140 344 841 2,863 5,198
Professional and other costs 792 628 657 709 577
Salaries and benefits 3,907 4,590 5,679 6,682 8,241
General and administrative expenses 1,331 1,781 1,673 2,040 2,286
Interest and financing costs 333 512 1,111 1,702 1,649
Nonrecurring acquisition costs - - - - -
-----------------------------------------------------------------------
Total costs and expenses 45,263 51,477 63,581 68,300 81,798
-----------------------------------------------------------------------
Earnings before provision for income taxes 1,115 728 783 3,580 4,851
Provision for income taxes 185 59 198 881 1,360
-----------------------------------------------------------------------
Net earnings before extrordinary item 930 669 585 2,699 3,491
Extraordinary gain, net (1) - - - 117 -
-----------------------------------------------------------------------
Net earnings $ 930 $ 669 $ 585 $ 2,816 $ 3,491
=======================================================================
Earnings per common share, before extraordinary item 0.21 0.15 0.13 0.59 0.67
Extraordinary gain per common share - - - 0.03 -
-----------------------------------------------------------------------
Net earnings per common share $ 0.21 $ 0.15 $ 0.13 $ 0.62 $ 0.67
=======================================================================
Pro forma net earnings (2) $ 756 $ 545 $ 529 $ 2,389 $ 3,133
=======================================================================
Pro forma net earnings per common share $ 0.17 $ 0.12 $ 0.12 $ 0.52 $ 0.60
=======================================================================
Weighted average common shares outstanding 4,380,270 4,380,270 4,383,490 4,572,635 5,184,261
AS OF MARCH 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------------------------------------------
BALANCE SHEETS
Assets:
Cash and cash equivalents $ 669 $ 1,632 $ 276 $ 651 $ 6,654
Accounts receivable 2,513 3,384 4,852 4,526 8,846
Notes receivable 34 87 37 92 2,154
Inventories 1,844 1,692 1,294 965 1,278
Net 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 82 374 587 1,935 741
All other assets 224 553 672 522 813
-----------------------------------------------------------------------
Total assets $ 10,047 $ 18,032 $ 21,716 $ 35,184 $ 49,024
=======================================================================
Liabilities:
Accounts payable - equipment $ 2,107 $ 1,092 $ 3,014 $ 4,973 $ 4,946
Accounts payable - trade 1,627 1,970 1,890 2,215 3,007
Salaries and commissions payable 313 280 316 153 672
Recourse notes payable 1,419 3,113 2,597 2,106 439
Nonrecourse notes payable 1,917 8,116 10,162 18,352 19,705
All other liabilities 679 1,113 936 2,154 3,778
-----------------------------------------------------------------------
Total liabilities 8,062 15,684 18,915 29,953 32,547
Total stockholders' equity 1,985 2,348 2,801 5,232 16,477
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,047 $ 18,032 $ 21,716 $ 35,184 $ 49,024
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
STATEMENTS OF EARNINGS
Revenue:
Sales of equipment $ 22,344 $ 25,493
Sales of leased equipment 9,707 32,187
Lease revenues 3,911 7,218
Net margin on sales type leases - -
Fee and other income 2,263 2,819
-----------------------------------
Total revenues 38,225 67,717
-----------------------------------
Costs and Expenses:
Cost of sales of equipment 18,765 20,085
Cost of sales of leased equipment 9,591 31,580
Direct lease costs 1,697 3,331
Professional and other costs 232 441
Salaries and benefits 3,648 4,785
General and administrative expenses 1,415 2,155
Interest and financing costs 794 975
Nonrecurring acquisition costs - 183
-----------------------------------
Total costs and expenses 36,141 63,536
-----------------------------------
Earnings before provision for income taxes 2,084 4,181
Provision for income taxes 606 872
-----------------------------------
Net earnings before extrordinary item 1,478 3,309
Extraordinary gain, net (1) - -
-----------------------------------
Net earnings $ 1,478 $ 3,309
===================================
Earnings per common share, before extraordinary item 0.31 0.55
Extraordinary gain per common share - -
-----------------------------------
Net earnings per common share $ 0.31 $ 0.55
===================================
Pro forma net earnings (2) $ 1,342 $ 2,696
===================================
Pro forma net earnings per common share $ 0.28 $ 0.45
===================================
Weighted average common shares outstanding 4,754,390 5,990,200
AS OF SEPTEMBER 30,
-------------------------------------
1996 1997
-------------------------------------
BALANCE SHEETS
Assets:
Cash and cash equivalents $ 3,328 $ 7,839
Accounts receivable 7,680 13,032
Notes receivable 1,120 4,447
Inventories 1,619 1,625
Net investment in direct financing and sales
type leases, net 16,933 18,590
Investment in operating lease equipment, net 10,892 8,799
Other assets 998 1,858
All other assets 911 1,127
-----------------------------------
Total assets $ 43,481 $ 57,317
===================================
Liabilities:
Accounts payable - equipment $ 11,959 $ 6,766
Accounts payable - trade 2,014 4,237
Salaries and commissions payable 214 335
Recourse notes payable 206 4,764
Nonrecourse notes payable 19,827 16,134
All other liabilities 2,861 4,370
-----------------------------------
Total liabilities 37,081 36,606
Total stockholders' equity 6,400 20,711
-----------------------------------
Total liabilities and stockholders' equity $ 43,481 $ 57,317
===================================
</TABLE>
(1) The extraordinary gain in fiscal 1996 was the result of an insurance
settlement for a fire at a subsidiary of the Company.
(2) Pro forma net earnings as if companies which were subchapter S corporations
prior to their business combinations with the Company, which were accounted for
under the pooling of interests method, had been subject to federal income tax
throughout the periods presented.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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 Prospectus.
The discussion and analysis of the Company's financial condition and
results of operations relates to the accompanying condensed consolidated
balance sheets, statements of earnings, and statements of cash flow as restated
to include the accounts and results of operations of the Company's two newly
acquired subsidiaries which were accounted for under the pooling-of-interests
method. The balance sheets and statements of earning as of and for the six
months ended September 30, 1996 and 1997 have been prepared by the Company,
without audit.
REVENUE RECOGNITION AND LEASE ACCOUNTING
The Company's principal line of business is the leasing, financing,
sale of equipment and software and providing technical and asset management
services. 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
27
<PAGE> 28
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.
The Company adopted Statement of Financial Accounting Standards No.
125 ("SFAS No. 125"), Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities as of January 1, 1997. SFAS No. 125
has changed the manner in which the Company determines and recognizes the gain
recorded upon the transfer of its interest in finance contracts subsequent to
December 31, 1996. Additionally, SFAS No. 125 requires the Company to record
gains or losses with respect to transfers of its interest in leases previously
accounted for as direct finance leases. SFAS No. 125 has also altered the
presentation in the Company's consolidated financial statements of revenues,
expenses and certain assets and liabilities associated with finance contracts
sold. Prior to this accounting pronouncement, proceeds received from assigning
receivables from direct financing leases prior to December 31, 1996 would have
been recorded as nonrecourse debt rather than the required new sale treatment.
As a result, certain aspects of the Company's financial statements as of
September 30, 1997 may not be directly comparable to the prior period financial
statements based on the requirement that no retroactive accounting was
allowable.
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 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
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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 software
and personal computers 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, (iv) interest and other
miscellaneous income, (v) various technical support and maintenance fees and
(vi) educational training revenues. These revenues are included in fee and
other income on the company's statement of earnings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
REVENUES
During the six month period ended September 30, total revenues were
$67,717,056 and $38,224,790 in 1997 and 1996, respectively, an increase of
77.2% and sales increased 80.0% to $57,679,539 over the corresponding period in
the prior year. These increases are largely attributable to the 231.6% increase
in sales of leased equipment. Historically, the majority of sales of leased
equipment have been to one of the Company's two institutional equity partners.
During the six month periods ended September 30, sales to MLC/CLC, LLC
accounted for 86.1% and 66.9% of 1997 and 1996 sales of leased equipment,
respectively. Sales to these entities require the consent of the relevant joint
venture partner. While management expects the continued availability of equity
financing through these joint ventures, if such consent is withheld, or
financing from these entities otherwise becomes unavailable, it could have a
material adverse effect upon the Company's business, financial condition and
results of operations until other equity financing arrangements are secured.
Sales of equipment, both new and used, are generated through the
Company's equipment brokerage and re-marketing activities, and through its
newly acquired valued added-reseller ("VAR") subsidiaries. For the fiscal year
to date through September 30, 1997, equipment sales increased 14.1% to
$25,493,028. During the six month periods ended September 30, 1997 and 1996,
brokerage and re-marketing activities generated 15.8% and 41.8% of equipment
sales revenue, respectively. Brokerage and re-marketing revenue can vary
significantly from period to period, depending on the volume and timing of
transactions, and the availability of equipment for sale. VAR sales accounted
for the remaining portion of equipment sales.
For the fiscal year to date through September 30, 1997, the
Company's lease revenues increased 84.6% to $7,218,351 for the 1997 period
compared to the same period in 1996. These increases reflect increased rental
revenues due to a higher average investment in operating lease equipment. In
addition, lease revenue includes the gain or loss on the sale of certain
financial assets, as required under the provisions of Financial Accounting
Standard No. 125 "Accounting for Transfers and Servicing of
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Financial Assets and Extinguishments of Liabilities," which was required to be
in effect as of January 1, 1997.
For the six months ended September 30, 1997, fee and other income
increased 24.6% over the comparable periods in the prior year. These increases
are attributable to increases in revenues from adjunct services and fees,
including support fees, warranty reimbursements, and learning center revenues,
generated by the Company's VAR subsidiaries.
EXPENSES
Cost of Sales. The Company's cost of sales have increased
approximately in proportion with the increase in total revenues. In comparing
the six month periods ended September 30, cost of sales increased 82.2%, while
total revenues increased 77.2% during the same period.
The Company's direct lease costs increased 96.3% during the six
month period ended September 30, 1997, as compared to the same period in the
prior year. The largest component of direct lease costs is depreciation on
operating lease equipment. The increase in direct lease costs is consistent
with the Company's higher average investment in operating lease equipment for
the six month periods in 1997 as compared to the same period in the prior year.
Professional and Other Costs, Salaries and Benefits, and General and
Administrative Expenses. Professional and other fees incurred by the Company
during the six month period ended September 30, 1997 were $440,874, reflecting
increases of 90.2% over the comparable periods in 1996. These increases are
attributable to increases in the volume of broker fees which the Company pays
on certain transactions, and the increased legal and professional fees
associated with the Company's securities being publicly traded.
For the fiscal year to date through September 30, 1997, salaries and
benefits and general and administrative costs had increased 31.2% and 52.2%
over the prior year, respectively. These increases are the result of
additional personnel and administrative costs associated with the increased
volume of leasing transactions the Company has generated in comparison to the
corresponding periods in the prior year.
Interest Expense. Interest and financing costs incurred by the
Company for the six months ended September 30, 1997 and 1996 amounted to
$975,264 and $793,867, respectively, and related to interest costs on the
Company's lines of credit and notes payable. Interest costs on the majority of
the non-recourse and certain recourse notes are typically remitted directly to
the lender by the lessee.
Non-Recurring Acquisition Expense. The Company recognized
non-recurring acquisition costs of $183,453 during the six months ended
September 30, 1997 in conjunction with business combinations accounted for
under the pooling-of-interests method. These non-recurring acquisition costs
included accounting and legal fees, and various other acquisition related
costs. Generally accepted accounting principles require the Company to expense
all acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method. The Company expects to incur similar
non-recurring costs in the future, as the Company anticipates completing
additional acquisitions accounted for under the pooling-of-interests method.
Income Taxes. For the six months ended September 30, 1997, the
Company's provision for income tax was $872,133, as compared to $606,000 during
the comparable period in the prior year, reflecting effective income tax rates
of 20.9% and 29.1%, respectively. The low effective income tax rates, compared
to the federal statutory rate of 35.0%, was primarily due to the inclusion of
the net earnings of businesses acquired by the Company, which prior to their
combination with the Company
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had elected subchapter S corporation status, and as such were not previously
subject to federal income tax.
The foregoing resulted in a 124.0% increase in net earnings for the
six month period ended September 30, 1997, as compared to the same period in
the prior year. For the fiscal year to date through September 30, the Company's
earnings per share were $.55 in 1997, as compared to $.31 in 1996, based on
weighted average common shares outstanding of 5,990,200 and 4,754,390,
respectively, and pro forma net earnings per share were $0.45 and $0.28,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations. During the six month period ended
September 30, 1997, the Company generated cash flows from operations of
$143,497, and cash flows from financing activities of $5,342,702. Cash used in
investing activities amounted to $4,301,098 during the same period. The net
effect of these cash flows was to increase cash and cash equivalents by
$1,185,101 during the six month period. During the same period, the Company's
total assets increased $8,293,663, or 16.9%, primarily the result of increases
in accounts receivable arising from equipment purchased on behalf of lessees
but not yet placed under an equipment schedule, and notes receivable arising
from the equity sale of unfunded leases to MLC/CLC, LLC.
Cash Flow from Borrowings. On June 5, 1997, the Company entered into
the CoreStates Facility, which is available through June 5, 1998, bears
interest at LIBOR+110 basis points, or, at the Company's option, Prime minus
one percent. On September 5, 1997, the Company's CoreStates Facility was
increased to a maximum limit of $25 million. 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. As of September 30, 1997, the Company had an
outstanding balance on the CoreStates Facility of $3.5 million. The CoreStates
facility is made to MLC Group, and guaranteed by MLC Holdings. The Company's
newly acquired subsidiaries, MLC Network Solutions and ECCI, both have separate
credit sources to finance their working capital requirements for inventories
and accounts receivable, which the Company has guaranteed. Their traditional
business as value-added resellers of PC's and related network equipment and
software products is financed through agreements known as "floor planning"
financing where interest expense for the first thirty days is charged to the
supplier/distributor but not the reseller. These floor plan liabilities are
recorded under accounts payable as they are normally repaid within the 30 day
time frame as they represent an assigned accounts payable originally generated
with the supplier/distributor. If the 30 day obligation is not timely
liquidated, interest is then assessed at stated contractual rates. As of
September 30, 1997 MLC Network Solutions, has floor planning availability of
$1,400,000 through Deutsche Financial, Inc. and $300,000 from IBM Credit
Corporation. The outstanding balances to these respective suppliers were
$595,033 and $25,786 as of September 30, 1997. ECCI has floor planning
availability of $1,500,000 from AT&T Credit Corporation, $1,000,000 through IBM
Credit Corporation, and $100,000 through Deutsche Financial, Inc. The
outstanding balances to these respective suppliers were $522,713, $470,454 and
$6,048 as of September 30, 1997. ECCI additionally has a line of credit in
place, expiring on April 30, 1998, with PNC Bank, N.A. to provide an asset
based credit facility. The line has a maximum credit limit of $2,500,000 and
interest is based on the bank's prime rate. The outstanding balance was
$931,000 as of September 30, 1997.
In March 1997, the Company established the Heller Facility, a
$10,000,000 partial recourse credit facility agreement, with Heller Financial,
Inc., Vendor Finance Division. 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 September 30, 1997, the
principal balance due under the Heller Facility was $941,187.
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Through MLC/GATX Limited Partnership I and MLC/CLC, LLC, the Company
has formal joint venture agreements 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 held company with stockholders'
equity in excess of $804 million, as of June 30, 1997. Cargill Leasing
Corporation, an 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 1997 earnings in excess of $800 Million. These joint
ventures arrangements enable the Company to invest in a significantly greater
portfolio of business than its limited capital base would otherwise allow. A
significant portion of the Company's revenue generated by the sale of leased
equipment is attributable to sales to either MLC/CLC, LLC or MLC/GATX Limited
Partnership I.
The Company's debt financing activities typically provide
approximately 80% to 100% of the purchase price of the equipment purchased by
the Company for lease to its customers. Any balance of the purchase price (the
Company's equity investment in the equipment) must generally be financed by
cash flow from its operations, the sale of the equipment lease to one of its
institutional partnerships with GATX or Cargill, or other internal means of
financing. Although the Company expects that the credit quality of its leases
and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available, at
acceptable terms, or at all.
The Company anticipates that its current cash on hand, cash flow
from operations and additional financing available under the Company's credit
facilities will be sufficient to meet the Company's liquidity requirements for
its operations through the remainder of the fiscal year. However, the Company
is currently, and intends to continue, pursuing additional acquisitions, which
are expected to be funded primarily through the issuance by the Company of
shares of its Common Stock. To the extent that the Company elects to pursue
acquisitions involving the payment of significant amounts of cash (to fund the
purchase price of such acquisitions and the repayment of assumed indebtedness),
the Company is likely to require additional sources of financing to fund such
non-operating cash needs.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED MARCH 31, 1997
REVENUES
Total revenues increased $14.8 million or 20.6%, from $71.9 million
in fiscal year 1996 to $86.6 million in fiscal year 1997. In fiscal year 1996,
total revenues increased $7.5 million, or 11.7% from fiscal year 1995, to $71.9
million. Lease revenue increased $2.8 million, or 87.8%, from $3.2 million in
fiscal year 1995 to $6.1 million in fiscal year 1996, and $4.2 million, or
69.8%, to $10.3 million in fiscal year 1997, as a result of the increase of
operating leases and direct financing leases originated or acquired and
retained by the Company during the periods. This trend is expected to continue
as the Company increases its sales activity in the area of acquiring leased
equipment. Sales revenue increased 5.8% from $60.4 million in fiscal year 1995
to $63.9 million in fiscal year 1996 as a result of a 63.9% increase in sales
of leased equipment from $10.0 million to $16.3 million combined with a 5.9%
decrease in sales of equipment from $50.5 million to $47.6 million. The major
component of the decrease was a reduction in sales revenue in the buy/sell area
from $26.9 million in fiscal year 1995 to $18.5 million in fiscal 1996. Sales
revenue increased 15.5% from $63.9 million in fiscal year 1996 to $73.8 million
in fiscal year 1997. The increase reflected the 32.6% increase in sales of
leased equipment and 9.6% increase in sales of equipment. Sales of leased
equipment has become a major revenue source for the Company and represents
15.5%, 22.7% and 24.9% of the Company's revenues for the fiscal years ended
1995, 1996 and 1997.
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Net margin on sales-type leases revenue was $276,688 in fiscal year
1995 and decreased to $85,590 in fiscal year 1996 as a result of a decrease in
the origination of leases qualifying as sales-type leases. This downward trend
is expected to continue as the Company decreases its emphasis in this area. In
fiscal year 1997, there were no sales-type lease revenues.
Fee and Other Income. Fee and other income totaled $690,466 in
fiscal year 1995 and increased $1,185,944, or 171.8% to $1,876,410 in fiscal
year 1996. Fiscal year 1997 fee income was $2,503,381, a 33.4% increase over
the prior year. 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 earned in fiscal 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 "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Fluctuations in Quarterly
Operating Results."
EXPENSES
Cost of Sales. Cost of sales increased from $53.6 million in fiscal
year 1995 to $54.3 million in fiscal year 1996, and increased $9.5 million or
17.6% to $63.8 million in fiscal year 1997. The increase in fiscal years 1996
and 1997 relate directly to the volume of sales in each of those years.
Depreciation and Operating Leases. Depreciation increased from
$597,309 in fiscal year 1995 to $2,117,760, or 254.5% in fiscal year 1996, and
$1,405,099, or 66.4%, to $3,522,859 in fiscal year 1997. The increase
in depreciation for both 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 and internal equipment over the three-year period.
General and Administrative Expenses. General and administrative
expenses increased $.37 million or 22% to $2.04 million in fiscal year 1996 and
$.25 million, or 12% to $2.3 million in fiscal year 1997. The increases during
the two year period is due primarily to increased level of business and selling
activity.
Interest Expense. Interest and other financing expenses increased
$590,510, or 53.1%, from $1,111,128 in fiscal year 1995 to $1,701,638 in fiscal
year 1996, and decreased $52,695 or 3.1%, to $1,648,943 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 $12.8 million in fiscal year 1995 to $20.5
million in fiscal year 1996 to $20.1 million in fiscal year 1997. The weighted
average interest rate for the Company's nonrecourse debt outstanding as of
March 31, 1997 was 7.8%.
Income Taxes. The provision for taxes was 25.3%, 24.6% and 28.0% of
earnings before income taxes for the fiscal years 1995, 1996 and 1997,
respectively. The low rates are reflective of the effects of the pooling of
interests method of accounting for the two companies acquired, Educational
Computer Concepts, Inc. and Compuventures, Inc. as both were subchapter S
corporations prior to the business combination and were not subject to income
taxes at the corporate level. See Note 9) in the accompanying consolidated
financial statements.
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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 in fiscal year 1996 $2.23 million to $2.816 million, or
382%, from $.585 million in fiscal year 1995. In fiscal 1997 net income
increased 24% to $3.491 million over the prior year. The increases result from
the fluctuation in revenues and expenses discussed in the above paragraphs. Pro
forma net earnings for the fiscal years 1995, 1996 and 1997 were $.53 million,
$2.39 million, and $3.13 million, respectively.
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
At the start of fiscal year 1995 the Company's financial resources
consisted of its stockholders' equity of $2,488,265 and various lines of credit
and recourse loans totaling $3,112,830. During fiscal year 1995, the Company
entered into its partnership with GATX which gave it access to additional
financial resources to finance the equity investment in its lease transactions.
See "Risk Factors -- Dependence on Major Relationships," "-- Dependence on
Availability of Financing," "The Company" and "Business -- Financing". Through
this partnership, the Company was able to compete on a larger volume of lease
transactions than it could have without this 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
"Risk Factors -- Dependence on Major Relationships," " -- Dependence on
Availability of Financing," "The Company," and "Business -- Financing." As a
result of fiscal year 1995, 1996 and 1997 net earnings of $.6 million, $2.8
million and $3.5 million respectively, stockholders' equity increased to $16.5
million at March 31, 1997, including net proceeds from the Initial Public
Offering of $8.6 million.
During the three year period ended March 31, 1997, the Company
improved its financial condition and increased available financial resources in
the following ways: (i) available lines of credit increased from $2.4 million
to $16.2 million; (ii) stockholders' equity increased from $2.5 million to
$16.5 million from net earnings, proceeds from the Initial Public Offering in
November, 1996 and subsequent over subscription in December, 1996; and (iii)
the Company entered into two equity joint ventures which substantially
increased its ability to finance its lease transactions. 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 balance increased from $13.7 million to $18.2 million
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or 32.9% and increased another 3% in the fiscal year 1997 to $18.8 million. For
the quarter ended September 30, 1997, the minimum lease payments for direct
financing and sales type leases decreased from the end of the fiscal year 1997
from $18.8 million to $17.5 million, or 6.7%. This decrease is a result of the
Company's leased equipment sales activity which were in excess of its new lease
activity. 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 "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations. The Company generated cash flow from
operating activities of $2.7 million for fiscal year 1997. Cash flow from
operations in fiscal year 1997 was lower than net earnings of $3.5 million,
primarily due to increases in accounts receivable of $4,343,319, notes
receivable of $2,062,393 and payments from leases directly to lenders of
$1,590,061, and increases in inventories of $400,046 and offset by increases in
accounts payable-trade of $796,740, increases in accrued expenses, salaries and
commissions payable of $2,286,921. In addition, cash flow used for investing
activities primarily related to leases was $31.6 million. Financing activities
from both recourse and nonrecourse borrowing produced $27 million for fiscal
year 1997. The net result of all of the above activities was an increase in
cash of $6 million for fiscal year 1997.
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 buy/sell and new equipment and software sales are financed, in
part, with recourse lines of credit that require a borrowing base of
unencumbered receivables and inventory. The Company anticipates that future
leasing and financing activities will be financed in a similar manner, as well
as from cash flow from operations and proceeds from the previous stock
placements.
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 portfolio large enough (generally at
least $1.0 million, based on the aggregate balance of periodic lease payments
under such leases) to warrant obtaining long-term financing for such leases
either through nonrecourse borrowings or sales transactions. Such interim
financing is usually obtained through secured, "warehouse" lines of credit,
which generally have a term of one year. The Company's maximum available credit
under such lines of credit totaled $27.5 million as of September 30, 1997. A
brief description of each line of credit presently in place as of September 30,
1997 follows: (i) the Corestates Bank Facility is an asset backed facility
secured by specific leases with a maximum loan of $25 million and bears
interest at LIBOR +110 basis points, or, at the Company's option, prime minus
one percent, and the PNC Bank, N.A. an asset based credit facility with a
maximum credit limit of $2.5 million and carries interest at the bank's prime
rate. The business segment of reselling PC's and related network equipment is
financed through agreements known as "floor planning" facilities from IBM
Credit Corporation, AT&T Credit Corporation and Deutsche Financial, Inc. These
facilities, totaling a maximum limit of $4.3 million, are classified as trade
payables as the interest for the liabilities for the first 30 days is the
responsibility of the supplier or distributor. The Company feels that these
agreements could be substituted with the line of credit facilities noted above
but will continue their use as long as they carry beneficial short term rates.
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The Company had borrowed $275,000 on March 1, 1995 from two
stockholders at a rate of 10% per annum. The loans were repayable at any time
without premium or penalty and were originally due in full on or before March
1, 1998. Both the loans were liquidated in November, 1996 utilizing proceeds
from the Initial Public Offering.
The Company obtains long-term, nonrecourse financing for individual
significant lease transactions near or at the time it purchases the related
equipment. The Company entered into various nonrecourse financings during the
six months ended September 30, 1997 most of which were accounted for under SFAS
125 (which was effective subsequent to December 31, 1996) and received sales
treatment. As such, these transactions were not recorded as nonrecourse debt
but were part of a period gain or loss. The transactions recorded as
nonrecourse loan additions for the six months ended September 30, 1997 totaled
$2,356,775 compared to the six months ended September 30, 1996 of $12,998,838
(prior to SFAS 125 effective date).
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.
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 "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 renewed or replaced, and
its 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 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 SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," in June 1996. SFAS No. 125 requires sales treatment for a
material number of direct financing leases that are financed using nonrecourse
debt subsequent to December 31, 1996 and was, specifically, not retroactive to
prior periods. As such, many areas of financial reporting of direct financing
leases and nonrecourse debt for periods subsequent to December 31, 1996 will
not be stated on the same basis as periods prior to January 1, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). The Company is required to adopt SFAS 128 in the fourth calendar quarter
of 1997 and will restate at that time earnings per share ("EPS") data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
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SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the
weighted average number of shares of Common Stock outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue Common Stock were exercised or converted into common
stock.
Earnings per share amounts are calculated based on the net income
(loss) divided by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. Common stock
equivalents consist of options, warrants and convertible redeemable preferred
stock.
The weighted average number of shares of Common Stock and Common
Stock equivalents outstanding used for computing earnings or loss per share for
the years ended March 31, 1995, 1996, 1997, and the six months ended September
30, 1996 and 1997 were 4,383,490, 4,572,635, 5,184,261, 4,754,390, and
5,990,200, respectively. Had SFAS 128 been in effect during the current and
prior periods, basic and diluted EPS would have been the same as previously
presented.
If SFAS 128 had been in effect during the current and prior year
periods basic EPS for the years ended March 31, 1995, 1996, 1997, and the six
months ended September 30, 1996 and 1997 would have been $0.13, $0.62, $0.67,
$0.31, and $0.55, respectively.
In June, 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The Company will apply this statement beginning in Fiscal 1999
and reclassify its financial statements for earlier periods provided for
comparative purposes.
SFAS 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement supersedes
SFAS Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. It amends FASB No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries.
At this point, the Company has not determined the impact of adopting
SFAS 131.
BUSINESS
GENERAL
The Company specializes in leasing and financing information
technology assets and providing asset management services to middle market
commercial customers, select Fortune 1000 firms, federal, state and local
governments and vendors. The assets leased by the Company include personal
computers, client server systems, networks, mid-range and mainframe computer
equipment, telecommunications equipment and software. The Company is also a
value-added reseller of PC's and related network equipment and software
products and provides various support services to its customers from facilities
located in Greenville, Raleigh and Wilmington, North Carolina and Pottstown,
Pennsylvania, located in the suburbs of Philadelphia. The Company's value-added
reseller business is basically a desktop and
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network equipment distribution business and service provider that requires
minimal inventories and costs are variable to the level of business.
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): 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 customers of the network services,
software and PC reselling business for fiscal year 1997 are AHERF, Corning,
Inc. and PPD 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. The three largest 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 and
systems integrators. These vendor clients represent a variety of high
technology industries and include, among others, in alphabetical order: Cisco
Systems, Inc.; EMC Corporation; Systems & Computer Technology Corporation; and
Sterling Software, Inc. The Company has also provided financing for other
vendors' customers for transactions ranging in size from $50,000 to $21.0
million based upon the purchase price of the assets.
In the 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 salesmen 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 1998, 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.
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
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predict more accurately residual values when pricing leasing transactions,
dispose efficiently of off-lease equipment and offer customers a way to dispose
of or acquire previously owned information technology equipment. Asset
management services, which are offered primarily to enhance customer service,
is a general term used to describe the provision of asset inventory and
tracking services, software and record keeping programs to customers. The asset
management services provided by the Company allow the customers to better track
their information technology assets. The asset management services include a
software system maintained by the Company which generates reports and allows
customers to dial up and receive information on a real time basis, thus better
utilizing their assets.
The extensive experience of the Company's management in leasing and
financing information technology equipment has enabled the Company to manage
its residual portfolio to achieve superior returns. Since the Company's
organization in November, 1990 through March 31, 1997, on matured leases, the
Company has realized a return of 142% of the amount originally recorded as
residual values for its equipment. As part of its underwriting and risk
management efforts, the Company's management seeks to structure lease
transactions so that they can be financed or sold to third parties on a
nonrecourse basis, even if the Company ultimately retains an equity interest in
the lease. The Company's underwriting approach has resulted in no credit losses
in its leasing operations since its organization. The Company believes that its
historical approach to estimating residuals, pricing and underwriting leases
and managing relationships among vendors, customers and financial partners
provides a foundation for the Company to grow and profitably deploy new
capital. See "Management."
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
$169.9 billion of the $566.2 billion spent on productive assets in 1996 was
financed by means of leasing. The ELA estimates that 80% of all U.S. businesses
are leasing or financing to acquire some of their 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
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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 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 in
their May 9, 1996 statement on PC total cost of ownership under the "Windows 95
Model" 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
$5,500. 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 outsourced their distribution
channels to other companies rather than rely solely on their own sales force.
This has led many vendors to develop re-seller relationships with financiers
such as the Company, and the Company intends to enter into or acquire value
added re-seller relationships with selected vendors.
The opening up of the distribution channels has forced vendors to
support used equipment and sell parts and refurbishment services to end-users
and third-party lessors such as the Company. This has created a more fluid and
sustainable secondary market for certain equipment, which allows the Company to
trade the equipment, make equity investments and compete more effectively with
the vendor or vendor's captive financing companies.
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STRATEGY
Based on industry trends and the Company's historical results, the
Company will continue to implement and improve upon a three-pronged strategy
designed to increase its customer base by: (i) providing continuing superior
customer service while marketing to middle market and select Fortune 1000
end-users of information technology equipment and assets; (ii) purchasing
companies 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
foregoing 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. See "Risk Factors."
End-User Marketing Focus. The Company's target customers include
middle market and select Fortune 1000 firms which are significant users of
information technology and telecommunications equipment and other assets, which
also may need other services provided by the Company, such as asset management.
By targeting a potential customer base that is broader than just the Fortune
1000 companies, the Company believes that there is less competition from the
larger equipment finance companies, as their marketing forces are typically
more focused on Fortune 1000 customers. The ability to identify and establish
customer relationships with such firms will be critical to the Company's
strategy. There can be no assurance that the Company will be able to
successfully locate such customers. See "Risk Factors -- Dependence on
Creditworthy Customers."
Acquisition of Companies in Related Lines of Business. 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.
See "Risk Factors - Risk Related to the Company's Acquisition Strategy" and "--
Management of Growth."
On July 24, 1997, the Company, through a new wholly owned
subsidiary, MLC Network Solutions which was incorporated on July 14, 1997,
entered into an Agreement and Plan of Merger with Compuventures. Compuventures
was merged into MLC Network Solutions effective July 24, 1997. The outstanding
shares of Compuventures Common Stock were converted into 260,978 common shares,
valued at $3,384,564, of MLC Holdings Common Stock. Compuventures is a
value-added reseller of PC's and related network equipment and software
products and provides various support services to its
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customers from facilities located in Greenville, Raleigh and Wilmington, North
Carolina. The merger was accounted for as a pooling of interests.
ECCI (dba "ECC Integrated, Inc."), was acquired on September 29,
1997 through the merger of MLC Acquisitions Corporation, a newly formed
corporation wholly owned by MLC Holdings which was incorporated on September 2,
1997, into ECCI with ECCI being the surviving entity. ECCI currently conducts a
network services and software and PC reselling business from its sole location
in Pottstown, Pa. MLC Holdings effectively exchanged 498,998 shares of its
stock, valued at $7,092,000, for the total stock of ECCI.
Increasing Focus on Vendors. 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 outsourced this equipment financing
function to independent leasing 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. There can be, however, no
assurance that the Company will be able to successfully establish such
relationships. See "Risk Factors -- Dependence on Major Relationships."
LEASING, FINANCING AND SALES ACTIVITIES
The Company is in the business of leasing and financing equipment
and assets, and is also a value-added reseller of PC's and related network
equipment and software products, and provides various support service to its
customers. 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; installment 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 55 individuals located in twelve 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.
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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 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 FMV 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
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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 review
process, which also determines and reviews the residual value recorded for
specific transactions. The investment review process typically acts by a
signature process instead of conducting formal meetings. The investment review
process approves the pricing, including residual values, for all transactions
involving $100,000 or more in product value. The investment review process is
conducted by the Chief Executive Officer, the Chief Operating Officer, the
Credit Manager and the Treasurer of the Company.
Structure Review. Every lease or financing transaction is reviewed
by the Director of Contracts and the Treasurer of the Company in an effort 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 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
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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 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 $19,705,060 and $16,134,240 at September 30, 1997.
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.
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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 plans to 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 "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources."
Equity Joint Ventures. Through MLC/GATX Limited Partnership I and
MLC/CLCLLC, 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 $806 million, as of June 30,
1997. Cargill Leasing Corporation, an unaffiliated investor which owns 95% of
MLC/CLC LLC, is affiliated with Cargill, Inc., a privately held business that
was reported by Forbes Magazine in December, 1997 to have sales of $56 billion,
operating income of $3.2 billion and net income of $814 million for the fiscal
year ended May, 1997. 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. See "Risk Factors -- Dependence on
Major Relationships."
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. During fiscal year 1997, revenue recognized from sales to
MLC/GATX Limited Partnership I was $3.5 million of the Company's total
revenues. For the six months ending September 30, 1997, revenue recognized from
sales to MLC/GATX Limited Partnership I was $0.4 million. MLC/GATX Limited
Partnership I does not purchase any lease transactions from anyone other than
the Company. MLC/CLC LLC does not purchase any lease transactions from anyone
other than the Company.
For fiscal year 1997, approximately 23.5% of the Company's total
revenue was attributable to sales of lease transactions to MLC/GATX Limited
Partnership I and 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 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 are not sufficiently large to be attractive to
lenders
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<PAGE> 47
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. The Company previously had a
$2,000,000 facility with NationsBank, N.A. which it allowed to expire on
December 1, 1996.
As of March 31, 1997 and September 30, 1997, the Company had
aggregate outstanding long-term recourse borrowings of $439,004 and $4,763,664,
respectively, from various lenders, primarily for the long term financing of
leases.
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 September 5, 1997, the Company entered into
Amendment No. 1 (the "Amendment") dated September 5, 1997 between it and
CoreStates Bank, N.A. The Amendment increases the Loan Commitment from
$15,000,000 to $25,000,000 and increases the amount of Investment Grade Paper
which may qualify as Eligible Leases from $10,000,000 to $15,000,000. In
connection with the Amendment, the Company made and delivered to CoreStates a
$25,000,000 note (the "Note") dated September 5, 1997 to replace the
$15,000,000 note existing under the Credit Agreement. 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 and guaranteed by MLC
Holdings. 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 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. In the event that the
Company is unable to sell the equipment or unable to finance the equipment on a
permanent basis within a certain period of time, the availability of credit
under the lines could be diminished or eliminated. Furthermore, in the event
that receivables collateralizing the line are uncollectible, the Company would
be responsible for repayment of the lines of credit. Accordingly, such a
default could have a material adverse effect on the business, financial
condition and results of operations of the Company, particularly if the then
fair market value of the equipment is insufficient to satisfy the obligations
due to the bank. There can be no assurance that the Company will be able to
renew, extend or replace this credit facility and a failure to renew, extend or
replace any of this facility would have a material adverse effect upon the
Company's business, financial condition and results of operations.
The CoreStates Facility contains covenants and restrictions
including prohibitions against certain mergers or consolidations in which the
Company is not the surviving entity, creation of liens against the Company's
property, guarantees of obligations in excess of $10 million, use of proceeds
to acquire margin stock, certain purchases of stock or assets in the event a
default exists or is likely, sales, pledge or assignment of assets other than
in the ordinary course of business and certain redemptions, repurchases,
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<PAGE> 48
dividends or distributions of stock. As of the date of this Prospectus, the
Company is in compliance with all applicable financial ratios and covenants
under the CoreStates Facility.
The Company's newly acquired subsidiaries, MLC Network Solutions
(acquired July 24, 1997) and ECCI (acquired September 29, 1997), both have
separate credit sources to finance their working capital requirements for
inventories and accounts receivable, which the Company has guaranteed. Their
traditional business as value-added resellers of PC's and related network
equipment and software products is financed through agreements known as "floor
planning" financing where interest expense for the first thirty days is charged
to the supplier/distributor but not the reseller. These floor plan liabilities
are recorded under accounts payable as they are normally repaid within the 30
day time frame as they represent an assigned accounts payable originally
generated with the supplier/distributor. If the 30 day obligation is not timely
liquidated, interest is then assessed at stated contractual rates. As of
September 30, 1997 MLC Network Solutions has floor planning availability of
$1,400,000 through Deutsche Financial, Inc. and $300,000 from IBM Credit
Corporation. The outstanding balances to these respective suppliers were
$595,033 and $25,786 as of September 30, 1997. ECCI has floor planning
availability of $1,500,000 from AT&T Credit Corporation, $1,000,000 through IBM
Credit Corporation, and $100,000 through Deutsche Financial, Inc. The
outstanding balances to these respective suppliers were $522,713, $470,454 and
$6,048 as of September 30, 1997. ECCI additionally has a line of credit in
place, expiring on April 30, 1998, with PNC Bank, N.A. to provide an asset
based credit facility. The line has a maximum credit limit of $2,500,000 and
interest is based on the bank's prime rate. The outstanding balance was
$931,000 as of September 30, 1997. There can be no assurance that the Company
will be able to renew, extend or replace these credit facilities and a failure
to renew, extend or replace any of these facilities would have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Partial Recourse Borrowing Facilities. On March 12, 1997, the
Company finalized and executed documents establishing a $10,000,000 credit
facility agreement (the "Heller Facility"), with Heller Financial, Inc.
("Heller"), a Delaware corporation. Under the terms of the Heller Facility, a
maximum amount of $10,000,000 is available to the Company, provided, that each
draw is subject to the approval of Heller. The Heller Facility is evidenced by
a Loan and Security Agreement dated as of January 31, 1997 (the "Loan
Agreement") and a First Amendment to Loan and Security Agreement (the
"Amendment") dated as of March 12, 1997 (although the Loan Agreement is dated
effective January 31, 1997, all documents were executed concurrently in March,
1997). 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. As of September 30, 1997, the
principal balance due under the Heller Facility was $941,187. 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 and guaranteed by MLC Holdings. As compared to a committed line of
credit, lending under the Heller Facility is in Heller's sole discretion, and
is further subject to MLC Group's compliance with certain conditions and
procedures. 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. There can be no
assurance that the Company will be able to renew, extend or replace this credit
facility and a failure to renew, extend or replace any of this facility would
have a material adverse effect upon the Company's business, financial condition
and results of operations.
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<PAGE> 49
With respect to the long-term recourse notes to finance certain
leases, the availability of such recourse borrowing is dependent on both the
creditworthiness of the customer, as described above under "-- Dependence on
Availability of Financing -- Nonrecourse Financing," and the creditworthiness
of the Company, including the Company's ability to meet certain debt-to-equity
ratios often required by recourse lenders. The Company's ability to increase
the amount of its recourse debt has been limited by its capital position and,
prior to the Initial Public Offering, the personal guarantees and collateral
provided by its stockholders. No assurances can be given that the Company will
not experience difficulty in obtaining recourse debt in the future, whether
because lenders change their credit standards for providing such financing, the
stockholders cease to provide personal guarantees or collateral, or because the
Company increases its recourse borrowing to a level where it cannot meet such
debt-to-equity ratio requirements or other financial covenants. The
unavailability of such recourse financing would have a material adverse effect
on the ability of the Company to finance lease transactions and, thus, have a
material adverse effect upon the Company's business, financial condition,
results of operations, and cash flows. See "Business -- Financing."
DEFAULT AND LOSS EXPERIENCE
From the organization of the Company in 1990 through September 30,
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 is
aware of one customer that had filed for Chapter 11 protection in December,
1997. The net book value of the leased assets involving such customer, as of
September 30, 1997, was $35,573.
The VAR line of business had write-offs of approximately $14,000,
$58,000 and $57,900 for the twelve months ended December 31, 1995, 1996 and
nine months ended September 30, 1997, respectively.
PROPERTIES
The Company has twelve leased office facilities with an aggregate of
approximately 39,455 square feet of office space under lease with an average
remaining lease term of 40 months. The Company's four largest offices are its
principal executive office which is approximately 6,625 square feet at 11150
Sunset Hills Road, Suite 110, Reston, Virginia 20190, ECCI's sole location, a
16,200 square foot facility, located in Pottstown, PA, and Compuventures' two
main locations in Greenville and Wilmington, NC which are 5,719 and 4,460
square feet respectively. The other regional offices in Austin, TX, San Diego,
CA, Dallas, TX, Sacramento, CA, West Chester, PA, Atlanta, GE and Raleigh, NC
comprise a total of 6,451 square feet. As of September 30, 1997, the aggregate
monthly rent under all of the Company's office leases was approximately
$42,000. For the fiscal year ended March 31, 1997 rental expense for facilities
totaled $335,997.
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<PAGE> 50
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., Leasing Solutions, Inc. and General Electric Capital
Corporation. Many of the Company's competitors have substantially greater
resources and capital and longer operating histories.
The market for the Company's value-added reseller of PC's and
related network equipment and software products and various support services is
highly competitive. The Company's competitors vary in size and in the range of
the products and services that they offer. Primary competitors include
participants from a variety of market segments, specifically other national and
regional value-added resellers of same or similar products, systems consulting
and implementation firms, computer equipment manufacturers, and other IT
service providers. Many of the Company's competitors have greater financial,
development, technical, marketing and sales resources than the Company. There
can be no assurance that the Company will continue to provide IT services and
products demanded by the market or be able to compete successfully with
existing or new competitors. An inability to compete in its market effectively
would have a material adverse effect on the Company's results of operations,
financial condition and business.
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. See "Risk
Factors -- Competition."
EMPLOYEES
As of September 30, 1997 the Company had 186 employees. Of these, 44
work in the Company's principal executive office in Reston, Virginia, 57 work
at ECCI from a single location in Pottstown, Pennsylvania, 64 of Compuventures'
personnel work out of three locations in North Carolina and the remaining 21
work in the various regional offices of the Company. Regional offices are
generally staffed with one or more account representatives who have daily
contact with customers, lessees and vendors.
The Company has assigned its employees to the following functional
areas, with the number of employees in each area indicated in parenthesis:
sales (55), technical (57), officers and managers (14), contracts and
accounting (28), clerical (29), and warehouse/distribution (3).
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LITIGATION
The Company is not involved in any legal proceedings, and is not
aware of any pending or threatened legal proceedings that would have a material
adverse effect upon the Company's business, financial condition, results of
operations, or cash flows.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Board of Directors of the Company is divided into three classes:
(i) Class I (initial term ending after 2000 annual stockholders meeting); (ii)
Class II (initial term ending after 1998 annual stockholders meeting); and
(iii) Class III (initial term ending after 1999 annual stockholders meeting).
After his or her initial term, each director serves for a term ending after the
third annual meeting following the annual meeting at which such director is
elected and until his or her successor is elected. Each officer of the Company
is chosen by the Board of Directors and holds his or her office until his or
her successor shall have been duly chosen and qualified or until his or her
death or until he or she shall resign or be removed as provided by the By-Laws.
The following table sets forth the name, age and position with the
Company of each person who served as an executive officer, director or
significant employee as of February 1, 1998.
<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, Jr............................50 Vice President; Executive
Vice President, and Chief
Operating Officer of MLC Group
Bruce M. Bowen..................................46 Director and Executive Vice
President III
Steven J. Mencarini.............................42 Senior Vice President and
Chief Financial Officer
Jonathan J. Ledecky.............................40 Director I
Terrence O'Donnell..............................53 Director II
Carl J. Rickertsen..............................37 Director II
Kleyton L. Parkhurst............................34 Secretary and Treasurer
William G. Garner...............................40 President, MLC Network Solutions
Vincent M. Marino...............................40 President, ECCI
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C>
Kevin M. Norton**...............................41 Vice President of Brokerage
Operations
William J. Slaton...............................50 Vice President of Marketing
Thomas K. McNamara..............................52 Vice President
</TABLE>
**Phillip G. Norton, Kevin M. Norton and Patrick J. Norton, Jr. are brothers.
All references to a Mr. Norton contained herein refer to Mr. Phillip G. Norton
unless otherwise indicated.
The name and business experience during the past five years of each
director, executive officer and key employee of the Company as of February 1,
1998 are described below.
Phillip G. Norton joined the Company in March, 1993 and has served
since then as its Chairman of the Board and Chief Executive Officer. Since
September 1, 1996, Mr. Norton has served as President of the Company. From
October, 1990 through March, 1993, Mr. Norton was an investor and devoted the
majority of his time to managing his personal investments. From October, 1992
to March, 1993, Mr. Norton served as a consultant to the Company and engaged in
private investment activity. Prior to 1990, Mr. Norton was President and Chief
Executive Officer of PacifiCorp Capital, Inc. (formerly Systems Leasing
Corporation), a wholly owned indirect subsidiary of PacifiCorp, Inc., an
information technology leasing company and an SEC reporting entity. Mr. Norton
started his leasing career as the National Sales Manager at Federal Leasing,
Inc. Mr. Norton is a 1966 graduate of the U.S. Naval Academy. Phillip G.
Norton, Kevin M. Norton and Patrick J. Norton, Jr. are brothers.
Bruce M. Bowen founded the Company in 1990 and served as its
President until September 1, 1996. Since September 1, 1996, Mr. Bowen has
served as a Director and Executive Vice President of the Company, and from
September 1, 1996 to June 18, 1997, he served as Chief Financial Officer. Mr.
Bowen has been a director of the Company since it was formed. Prior to founding
the Company, from 1986 through 1990, Mr. Bowen was Senior Vice President of
PacifiCorp Capital, Inc. Prior to his tenure at PacifiCorp Capital Inc., Mr.
Bowen was with Systems Leasing Corporation and Federal Leasing, Inc., where his
leasing career started in 1975. Mr. Bowen is a past President of the
Association of Government Leasing and Finance and currently serves as Vice-
Chairman for the State and Local Public Enterprise Committee of the Information
Technology Association of America. Mr. Bowen is a 1973 graduate of the
University of Maryland and in 1978 received a Masters of Business
Administration from the University of Maryland.
Thomas B. Howard, Jr. joined the Company in January of 1997 as Vice
President and Chief Operating Officer. Prior to joining the Company, Mr. Howard
was President of Allstate Leasing, Inc., a third party lessor, from 1995 to
January, 1997. Mr. Howard has spent over 20 years in the banking industry, most
recently having served as President of Signet Leasing and a Senior Vice
President of Signet Bank. As President of Signet Leasing, Mr. Howard directed
all of the capital equipment financing and leasing products for commercial,
federal and municipal accounts at the leasing company. He oversaw a staff of 60
people and effectively led the Company's growth from approximately $25 million
in assets to approximately $650 million in assets in nine years, while
maintaining loan loss ratios which were less than industry standards. Mr.
Howard trained and motivated sales teams which greatly increased business
volumes and led the leasing division through three major reorganizations in
five years, and to increased profitability each year. Mr. Howard began his
career at Signet in 1975 as an Assistant Vice President at Union Trust Bancorp,
one of its predecessor banks. Mr. Howard, a member of the American Institute of
Certified Public Accountants, is a 1970 graduate of the University of Maryland
and received an MBA in Finance from Loyola College of Maryland.
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<PAGE> 53
Steven J. Mencarini joined the Company in June of 1997 as Senior
Vice President and Chief Financial Officer. Prior to joining the Company, Mr.
Mencarini was Controller of the Technology Management Group of Computer
Sciences Corporation ("CSC"), a New York Stock Exchange company and one of the
nation's three largest information technology outsourcing organizations. At
CSC, Mr. Mencarini supervised 72 people and was responsible for all financial
and tax reporting, financial review of MIS systems, financial planning and
approval for a $150 million capital annual budget, tax research, sales and
personal property tax, asset management of owned and leased equipment, and the
review and analysis of proposed work for outsourcing contracts which included
costing, pricing, residual analysis, lease financing, and equipment
liquidation. Mr. Mencarini joined CSC in 1991 as Director of Finance and was
promoted to Controller in 1996. Prior to working at CSC, Mr. Mencarini was the
Vice President-Finance of PacifiCorp Capital from 1981 to 1991, and was Senior
Auditor of Deloitte, Haskins & Sells from 1979 to 1981. Mr. Mencarini is a 1976
graduate of the University of Maryland and has a Masters of Taxation from
American University.
Jonathan J. Ledecky joined the Company's Board of Directors in
November, 1996 upon the completion of the Company's Initial Public Offering.
Mr. Ledecky founded Consolidation Capital Corporation in February, 1997 to
build consolidated enterprises through the acquisition and integration of
multiple businesses in one or more fragmented industries. Mr. Ledecky founded
U.S. Office Products Company in October, 1994, a Nasdaq National Market
Company, and has served as its Chairman and until November 5, 1997, its Chief
Executive Officer. Mr. Ledecky has also served as the Non-Executive Chairman of
the Board of U.S. Floral since April, 1997 and as the Non-Executive Chairman of
the Board of US Leasing since October, 1997. Prior to founding U.S. Office
Products Company, Mr. Ledecky served as the President of The Legacy Fund, Inc.,
an investment management firm, from 1989 through 1991 and as President and
Chief Executive Officer of Legacy Dealer Capital, Inc., a wholly owned
subsidiary of Steelcase Inc., and the nation's largest manufacturer of office
furniture products, from 1991 to September, 1994 . Prior to his tenure at The
Legacy Fund, Inc., Mr. Ledecky was a partner at Adler and Company, an
investment management firm, and a Senior Vice President at Allied Capital
Corporation, a publicly traded investment management company. Mr. Ledecky is a
1979 graduate of Harvard College, and in 1983, received a Masters of Business
Administration from Harvard Business School.
Terrence O'Donnell joined the Company's Board of Directors in
November, 1996 upon the completion of the Company's Initial Public Offering.
Mr. O'Donnell is a partner with the law firm of Williams & Connolly in
Washington, D.C. Mr. O'Donnell has practiced law with Williams & Connolly since
1977, with the exception of the period from 1989 through 1992 when he served as
general counsel to the U.S. Department of Defense. Prior to commencing his law
practice, Mr. O'Donnell served as Special Assistant to President Ford from 1974
through 1976 and as Deputy Special Assistant to President Nixon from 1972
through 1974. Mr. O'Donnell presently also serves as a director of IGI, Inc., a
Nasdaq National Market Company which manufactures and markets a broad range of
animal health products used in poultry production and pet care. IGI also
markets cosmetics, consumer products and human pharmaceuticals. Mr. O'Donnell
is a 1966 graduate of the U.S. Air Force Academy, and in 1971, received a Juris
Doctor from Georgetown University Law Center.
Carl J. Rickertsen joined the Company's Board of Directors in
November, 1996 upon the completion of the Company's Initial Public Offering.
Mr. Rickertsen is a partner in Thayer Capital Partners, a $364 million
institutional private equity fund based in Washington, D.C. Mr. Rickertsen has
been with Thayer Capital Partners since September, 1994. Prior to his tenure at
Thayer Capital Partners, Mr. Rickertsen acted as a private financial consultant
from 1993 through 1994 and was a partner of Hancock Park Associates, a private
equity investment firm, from 1989 through 1993. Prior to that, Mr. Rickertsen
was associated with Brentwood Associates from 1987 through 1989 and was a
Financial
53
<PAGE> 54
Analyst with Morgan Stanley & Co., Incorporated from 1983 through 1985. Mr.
Rickertsen is a 1983 graduate of Stanford University and, in 1987, received a
Masters of Business Administration from Harvard Business School.
Kleyton L. Parkhurst joined the Company in May, 1991 as Director of
Finance and, since September 1, 1996, has served as Secretary and Treasurer of
the Company. Mr. Parkhurst is responsible for all of the Company's financing
activities, credit review, and manages the Company's bank facilities. Mr.
Parkhurst has syndication expertise in commercial nonrecourse debt, federal
government leases, state and local taxable and tax-exempt leases, and computer
lease equity placements. From 1988 through 1991, Mr. Parkhurst was an Assistant
Vice President of PacifiCorp Capital, Inc. Mr. Parkhurst is a 1985 graduate of
Middlebury College.
Vincent M. Marino, President of ECCI, joined the Company on
September 29, 1997, upon the Company's acquisition of ECCI and has played the
key leadership role in the founding and developing the business since ECCI's
origin in January 1986. He currently manages the operational, administrative
and sales staff of 56 people located at ECCI's location in Pottstown,
Pennsylvania. He has a MBA from Drexel University and an undergraduate degree
from Ursinus College in Biology.
William G. Garner, President of MLC Network Solutions, joined the
Company on July 24, 1997, upon the Company's acquisition of Compuventures.
William G. Garner manages the three office Compuventures subsidiary in North
Carolina which has 64 employees. Mr. Garner was a co-founder of Compuventures
and has over 10 years of experience in the network services and PC reselling
business. He received his MBA from Harvard Business School and undergraduate
degree from East Carolina University.
Kevin M. Norton joined the Company in 1991 and has served since then
as Vice President of Brokerage Operations. Mr. Norton is responsible for all of
the Company's equipment brokerage activities. He has a wide variety of
equipment experience including mainframes and peripheral equipment. Prior to
joining the Company, he was employed in a similar capacity with PacifiCorp
Capital, Inc. Mr. Norton is a 1979 graduate of the University of North
Carolina. Kevin M. Norton, Phillip G. Norton and Patrick J. Norton, Jr. are
brothers.
William J. Slaton joined the Company in 1991 and has served since
then as Vice President of Marketing. His primary responsibility is the
management of the Company's marketing of its public sector finance products.
From 1986 through 1991 and from 1980 through 1986, Mr. Slaton held various
marketing positions, specializing in technology financing for local and state
government agencies, with PacifiCorp Capital, Inc. and Systems Leasing
Corporation, respectively. From 1969 through 1977, Mr. Slaton held various
marketing positions with IBM, also focusing on state and local government
customers in Texas and California. Mr. Slaton is a 1969 graduate of the
University of Texas at Austin.
Thomas K. McNamara joined the Company in 1994 upon the acquisition by
the Company of the business assets of Pilot Associates and serves as Vice
President and Regional Manager of the Pilot Associates division. In 1989, Mr.
McNamara co-founded and was responsible for sales at Pilot Associates. Prior to
founding Pilot Associates, Mr. McNamara served as Sales Representative with
Memorex Corporation from 1974 through 1989. Mr. McNamara was also previously
with Computer Communication, Inc., from 1970 through 1974 and with Philco Ford,
Inc. from 1966 through 1970. Mr. McNamara is a 1966 graduate of the Philco
Technical Institute.
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<PAGE> 55
There are no material proceedings to which any director, officer of
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company or any of its subsidiaries.
COMMITTEES AND MEETINGS
Audit Committee. The audit committee of the Board of Directors (the
"Audit Committee") is responsible for making recommendations to the Board
concerning the engagement of independent public accountants, monitoring and
reviewing the quality and activities of the Company's external audit functions
and monitoring the adequacy of the Company's operating and internal controls as
reported by management and the external auditors. The members of the Audit
Committee are Terrence O'Donnell and Carl J. Rickertsen.
Compensation Committee. The compensation committee of the Board of
Directors (the "Compensation Committee") is responsible for reviewing the
salaries, benefits and other compensation, excluding stock based compensation,
of Mr. Norton and Mr. Bowen and will make recommendations to the Board based on
its review. The members of the Compensation Committee are Terrence O'Donnell,
Jonathan J. Ledecky and Carl J. Rickertsen. Mr. Norton and Mr. Bowen, as
directors, will not vote on any matters affecting their personal compensation.
Mr. Bowen and Mr. Norton will be responsible for reviewing and establishing
salaries, benefits and other compensation for other directors and all other
employees. Since compensation for Mr. Norton and Mr. Bowen was established
prior to the Company's Initial Public Offering in November, 1996, the
Compensation Committee did not meet during the fiscal year ended March 31,
1997.
The current members of the Compensation Committee were not appointed
until January, 1997, and the Compensation Committee has neither reviewed nor
approved any compensation actions relating to the Company's fiscal year ended
March 31, 1997. The Compensation Committee recognizes that as a company which
recently became a public company, the Company needs a transition period during
which to establish its long-range compensation philosophy and objectives. The
Compensation Committee is developing its compensation policies and will
describe them in the proxy materials to be furnished in connection with the
Company's 1998 annual meeting of shareholders.
Stock Incentive Committee. The stock incentive committee of the
Board of Directors (the "Stock Incentive Committee") is authorized to award
stock, and various stock options and rights and other stock based compensation
grants under the Company's Master Stock Incentive Plan (formerly the 1996 Stock
Incentive Plan prior to an amendment and restatement effective May 14, 1997)
and its component plans, which include the Amended and Restated Incentive Stock
Option Plan (formerly the 1996 Incentive Stock Option Plan prior to an
amendment and restatement effective May 14, 1997), the Amended and Restated
Outside Director Stock Option Plan (formerly the 1996 Outside Director Stock
Option Plan prior to an amendment and restatement effective May 14, 1997), the
Amended and Restated Nonqualified Stock Option Plan (formerly the 1996
Nonqualified Stock Option Plan prior to an amendment and restatement effective
May 14, 1997), and the Employee Stock Purchase Plan (approved by the
stockholders in September, 1997, and expected to be activated in April, 1998).
See "Executive Compensation -- 1996 Stock Incentive Plan." The members of the
Stock Incentive Committee presently are Phillip G. Norton and Bruce M. Bowen.
Except for options granted to Mr. Norton and Mr. Bowen under the employment
agreements, formula plan grants to the outside directors under the Amended and
Restated Outside Director Stock Option Plan and grants that are approved by a
majority of the
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<PAGE> 56
disinterested members of the Board of Directors, no member of the Stock
Incentive Committee is eligible to receive grants under the Stock Incentive
Plan.
The Company has no nominating committee or any committee serving a
similar function.
DIRECTOR COMPENSATION
Directors who are also employees of the Company do not currently
receive any compensation or other services as members of the Board of
Directors. Prior to May 14, 1997, the outside directors were paid $500 per
meeting. On May 14, 1997, the Board of Directors adopted a revised outside
director compensation program which provides for each outside director to
receive a $10,000 annual retainer, and $500 for each special committee meeting.
The $500 fee for regular Board meetings was terminated. All directors will be
reimbursed for their out-of-pocket expenses incurred to attend board or
committee meetings. The Company has adopted the Amended and Restated Outside
Director Stock Option Plan (formerly the 1996 Outside Director Stock Option
Plan prior to an amendment and restatement effective May 14, 1997), which
provides for the award and exercise of certain options to nonemployee directors
on a formula basis based upon length of service. In November, 1996, under the
1996 Outside Director Stock Option Plan, the Company granted options to its
nonemployee directors to purchase an aggregate of 30,000 shares of Common Stock
at an exercise price equal to $8.75 per share, 50% of which may be exercised
after the first year of service and the remaining 50% of which may be exercised
after the second year of service, provided they continue to serve as directors.
The Amended and Restated Outside Director Stock Option Plan made the options
granted in November, 1996 immediately exercisable and also provides for the
grant of options for 10,000 shares of Common Stock to each nonemployee director
on the anniversary of each year of service as a director at an exercise price
equal to the market price as of the date of grant, with each option being
subject to a one-year vesting requirement. See "-- Executive Compensation and
Other Information -- Master Stock Incentive Plan" for a description of option
grants to nonemployee directors.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table. The following table provides certain
summary information concerning the compensation earned, for services rendered
in all capacities to the Company, by the Company's Chief Executive Officer and
certain other executive officers (together with the Chief Executive Officer,
the "Named Executive Officers") of the Company for the fiscal year ended March
31, 1997. Certain columns have been omitted from this summary compensation
table as they are not applicable.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------------------------------
Other
Bonus/ Annual All Other
Name and Principal Position Year Salary Commission Compensation Compensation
--------------------------- ---- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Phillip G. Norton 1997 $67,265 $-- $348 $90,000(1)
Chairman, Chief Executive 1996 984 -- -- 120,000(1)
Officer and President 1995 376 -- -- --
Bruce M. Bowen 1997 130,000 10,000 12,729(2)(3) --
Director, Chief Financial 1996 120,000 40,000 13,206(2)(3) 1,000(4)
Officer, Executive Vice 1995 120,000 16,000 11,500(2)(3) 1,000(4)
President
Kevin M. Norton 1997 30,000(5) 249,015 1,500(2) --
Vice President of 1996 -- 347,023 3,087(2) --
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C> <C> <C> <C> <C>
Brokerage Operations 1995 -- 348,944 1,068(2) --
Kleyton L. Parkhurst 1997 40,000(5) 117,567 1,500(2) --
Secretary and Treasurer 1996 -- 169,352 1,356(2) --
1995 -- 237,153 1,500(2) --
Thomas K. McNamara 1997 42,000 351,781 1,109
Vice President 1996 42,000 98,257 3,234(2) --
1995 42,000 335,699 1,500 --
</TABLE>
- --------------------
(1) Represents guarantee fees paid to Mr. Norton's spouse, Patricia Norton.
See "Certain Transactions -- Guarantee Fees."
(2) Employer 401(k) plan match.
(3) Includes $11,229 in fiscal year 1997 and $10,000 in fiscal years 1996 and
1995, respectively, of interest paid on loans by Mr. Bowen to the Company;
the balance represents employer 401(k) plan match amounts.
(4) Represents the personal use of the Company's country club membership.
(5) Until December 1, 1996 Kevin M. Norton and Kleyton L. Parkhurst were paid
on a commission basis and thereafter, pursuant to their employment
agreements received base salaries plus bonus. See "-- Compensation
Arrangements and Employment Agreements".
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to
options granted during the last fiscal year ended March 31, 1997 to the Named
Executive Officers in the above Summary Compensation Table.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Number of Total Term (6)
Securities Options/SARS
Underlying Granted to Exercise or --------------------------
Options/SARS Employees in Base Price Expiration
Name Granted (#) Fiscal Year(5) ($/Sh) Date 5% ($) 10% ($)
---- ----------- -------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Phillip G. Norton 130,000(1) 36.7% $ 8.75 11/19/2006 715,390 1,812,850
Bruce M. Bowen 15,000(1) 4.2% $ 8.75 11/19/2006 82,545 209,175
Kevin M. Norton ---- --- --- --- --- ---
Kleyton L. Parkhurst 100,000(2) 28.3% $ 6.40 11/19/2006 785,300 1,629,500
Thomas K. McNamara 5,000(3) 1.4% $ 8.75 11/19/2006 27,515 69,725
5,000(4) 1.4% $10.75 01/07/2007 17,515 59,725
</TABLE>
- ----------------
(1) The options were granted to Mr. Norton and Mr. Bowen on September 1, 1996,
under employment agreements, with an exercise price equal to the Initial
Public Offering price. These options are nonqualified options and were not
issued as part of the Company's Stock Incentive
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<PAGE> 58
Plan. They become exercisable in four annual increments beginning on the
date of the Initial Public Offering.
(2) The options were granted to Mr. Parkhurst on September 1, 1996 under an
employment agreement. These options are nonqualified options and were not
issued as part of the Company's Stock Incentive Plan. They become
exercisable in four annual increments beginning on the date of the Initial
Public Offering.
(3) The options were granted to Mr. McNamara on November 20, 1996 under the
1996 Incentive Stock Option Plan, a component plan of the Company's Stock
Incentive Program. These options become exercisable in four increments
beginning one year after grant. See Note 11 of the Company's consolidated
financial statements appearing elsewhere herein for further discussion of
the Company's Stock Incentive Plan and "-- Master Stock Incentive Plan."
(4) The options were granted to Mr. McNamara on January 7, 1997 under the 1996
Incentive Stock Option Plan, a component plan of the Company's Stock
Incentive Program. These options become exercisable in four installments
beginning one year after grant. See Note 11 of the Company's consolidated
financial statements appearing elsewhere herein for further discussion of
the Company's Stock Incentive Plan and "-- Master Stock Incentive Plan."
(5) Based on options to purchase an aggregate of 353,800 shares granted during
fiscal 1997 to certain employees of the Company.
(6) Potential realizable value is calculated based on an assumption that the
price of the Company's Common Stock will appreciate at the assumed annual
rates shown (5% and 10%), compounded annually, from the date of grant of
the option until the end of the option term (10 years). The 5% and 10%
assumed rates of appreciation are required by the rules of the SEC and do
not represent the Company's estimate of future market prices of the Common
Stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR (3/31/97) AND FISCAL
YEAR-END (3/31/97) OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised during the Company's fiscal year ended March 31, 1997 by the Named
Executive Officers in the Summary Compensation Table, and with respect to
unexercised options held by such persons at the end of fiscal year 1997.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired On Value Underlying Unexercised Money Options/SARs at
Name Exercise (#) Realized ($) Options/SARS at FY- End (#) FY-End ($)(1)
- ---- ------------ ------------ --------------------------- -------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Philip G. Norton --- --- 32,500 97,500 105,625 316,875
Bruce M. Bowen --- --- 3,750 11,250 12,188 36,562
Kevin M. Norton --- --- --- --- --- ---
Kleyton L. Parkhurst --- --- 25,000 75,000 140,000 420,000
Thomas K. McNamara --- --- --- 10,000 --- 22,500
</TABLE>
- ------------------
(1) Based on a closing bid price of $12.00 per share as of the close of
business on March 31, 1997.
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<PAGE> 59
Compensation Arrangements and Employment Agreements. The Company has
entered into employment agreements with Phillip G. Norton, Bruce M. Bowen,
Kleyton L. Parkhurst and William J. Slaton, each effective as of September 1,
1996, with Thomas B. Howard, Jr. effective as of April 1, 1997, with Steven J.
Mencarini effective as of June 18, 1997, with William G. Garner, effective July
24, 1997, and with Vincent W. Marino effective September 29, 1997. Each
employment agreement, except for William G. Garner's who has a one year term,
provides for an initial term of three years, and is subject to an automatic
one-year renewal at the expiration thereof unless the Company or the employee
provides notice of an intention not to renew at least three months prior to
expiration. Under each employment agreement, the employee is entitled to
receive an annual base salary ($200,000 in the case of Phillip G. Norton;
$150,000 in the case of Bruce M. Bowen; $150,000 in the case of Vincent W.
Marino; $120,000 in the case of Kleyton L. Parkhurst and William J. Slaton;
$125,000 in the case of Thomas B. Howard, Jr. and Steven J. Mencarini; and
$36,000 for William G. Garner who is under a part time requirement) and are
eligible for commissions or performance bonuses. The performance bonus for
Phillip G. Norton for each fiscal year is equal to 5% of the increase in the
Company's net income before taxes over net income before taxes for the
preceding fiscal year, not to exceed $150,000 for any fiscal year. The
performance bonus for Bruce M. Bowen for each fiscal year is equal to 5% of the
increase in the Company's net income before taxes over net income before taxes
for the preceding fiscal year, not to exceed $100,000 for any fiscal year. The
performance bonus for Kleyton L. Parkhurst, William J. Slaton, Thomas B.
Howard, Jr. and Steven J. Mencarini are paid based upon performance criteria
established by Phillip G. Norton and Bruce M. Bowen, not to exceed $80,000 each
per fiscal year as to Kleyton L. Parkhurst and William Slaton, not to exceed
$100,000 for Thomas B. Howard, Jr. and not to exceed $25,000 for Steven J.
Mencarini. Thomas K. McNamara is compensated pursuant to the Company's
commission program which is generally based on the profitability of business
produced. Vincent W. Marino and William G. Garner are eligible for annual
discretionary bonuses determined by the Chief Executive Officer or the Board of
Directors.
Under the employment agreements, each receives certain other
benefits including medical, insurance, death and long term disability benefits,
401(k), and reimbursement of employment related expenses. Mr. Bowen's country
club dues are paid by the Company. The employment agreements of Messrs. Norton,
Bowen, Slaton, Howard and Mencarini contain a covenant not to compete on the
part of each, whereby in the event of a voluntary termination of employment,
upon expiration of the term of the agreement or upon the termination of
employment by the Company for cause, each are subject to restrictions upon
acquiring, consulting with or otherwise engaging in or assisting in the
providing of capital needs for competing business activities or entities within
the United States for a period of one year after the date of such termination
or expiration of the term of the employment agreement. Both Mr. Marino and Mr.
Garner have 24 month non-competition and non-solicitation clauses in their
employment agreements following termination of employment for any reason.
Under his employment agreement, Phillip G. Norton was granted
options to acquire 130,000 shares of Common Stock at a price per share equal to
$8.75 per share. These options have a ten year term, and became exercisable and
vested 25% on November 20, 1996, and the balance will be exercisable and vest
in 25% increments over three years on November 20, 1997, November 20, 1998, and
November 20, 1999, respectively, subject to acceleration upon certain
conditions. The Company had paid a $120,000 annual guarantee fee payable in
$10,000 monthly payments to Patricia A. Norton, wife of Phillip G. Norton, in
consideration of providing certain guarantees and collateral for the
NationsBank and First Union Facilities. This fee was terminated when these
credit facilities were terminated in November, 1996 and the guarantee released.
See "Certain Transactions."
Under his employment agreement, Bruce M. Bowen was granted options
to acquire 15,000 shares of Common Stock at a price equal to $8.75 per share.
These options have a ten year term, and became exercisable and vested 25% on
November 20, 1996, and the balance will be exercisable and vest
<PAGE> 60
in 25% increments over three years on November 20, 1997, November 20, 1998, and
November 20, 1999, respectively, subject to acceleration upon certain
conditions.
Under his employment agreement, Kleyton L. Parkhurst was granted
options to acquire 100,000 shares of Common Stock at a price per share equal to
$6.40 per share. These options have a ten year term, and became exercisable and
vested 25% on November 20, 1996, and the balance will become exercisable and
vest in 25% increments over three years on November 20, 1997, November 20,
1998, and November 20, 1999, respectively, subject to acceleration upon certain
conditions.
In connection with his employment, Thomas B. Howard, Jr. was granted
incentive stock options to acquire 30,000 shares of Common Stock at a price
equal to $11.00 per share. See "-- Executive Compensation and Other Information
- -- Master Stock Incentive Plan." These options have a ten year term, and will
be exercisable and vest 20% at the end of each year of service and are subject
to acceleration upon certain conditions.
In connection with his employment, Steven J. Mencarini was granted
incentive stock options to acquire 16,200 shares of Common Stock at a price
equal to $12.75 per share. See "-- Executive Compensation and Other Information
- -- Master Stock Incentive Plan." These options have a ten year term, and will
be exercisable and vest 20% at the end of each year of service and are subject
to acceleration upon certain conditions.
The Company maintains key-man life insurance on Mr. Norton in the
amount of $10 million and on Mr. Bowen in the amount of $1 million. The Company
maintains key-man life insurance on Mr. Norton in the form of two separate
policies, one with the Prudential Life Insurance Company and the second with
TransAmerica Life Co., each in the amount of $5 million and on Mr. Bowen with
CNA Insurance Company in the amount of $1 million.
Master Stock Incentive Plan. The Company has established a stock
incentive program (the "Master Stock Incentive Plan") (formerly the 1996 Stock
Incentive Plan prior to amendment and restatement effective May 14, 1997 which
has been adopted by the Board of Directors and was ratified by stockholders at
the annual stockholder meeting on September 30, 1997) to provide an opportunity
for directors, executive officers, independent contractors, key employees, and
other employees of the Company to participate in the ownership of the Company.
The Master Stock Incentive Plan provides for the award to eligible directors,
employees, and independent contractors of the Company, of a broad variety of
stock-based compensation alternatives under a series of component plans. These
component plans include tax advantaged incentive stock options for employees
under the Incentive Stock Option Plan (formerly the 1996 Incentive Stock Option
Plan prior to amendment and restatement effective May 14, 1997), formula length
of service based nonqualified options to nonemployee directors under the
Outside Director Stock Plan (formerly the 1996 Outside Director Stock Option
Plan prior to amendment and restatement effective May 14, 1997), nonqualified
stock options under the Nonqualified Stock Option Plan (formerly the 1996
Nonqualified Stock Option Plan prior to amendment and restatement effective May
14, 1997), a program for employee purchase of Common Stock of the Company at
85% of fair market value under a tax advantaged Employee Stock Purchase Plan
(approved by the Board of Directors and ratified at the annual stockholder
meeting on September 30, 1997), as well as other restrictive stock and
performance based stock awards and programs which may be established by the
Board of Directors. (The above-described amendments effective May 14, 1997 are
hereinafter collectively referred to as the "May 14, 1997 Amendments.") Prior
to the May 14, 1997 Amendments which were ratified by stockholders in
September, 1997, the Company had reserved a total of 155,000 shares of Common
Stock (subsequently increased as described below) for issuance upon exercise of
options under: (i) the 1996 Incentive Stock Option Plan (under which options
for an aggregate of 202,150 shares were granted through December 31, 1997; (ii)
the 1996 Outside Director Stock Plan (under which options for an aggregate of
75,000
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<PAGE> 61
shares of Common Stock were reserved for grant under a formula plan based upon
length of service, which reserved number was reduced to 30,000 shares which were
transferred to the Incentive Stock Option Plan by the Board of Directors on May
14, 1997, and under which options for 30,000 shares of Common Stock were granted
on November 20, 1996 and November 20, 1997, respectively); and (iii) the 1996
Nonqualified Stock Option Plan (under which options for an aggregate of 5,000
shares of Common Stock were granted on January 8, 1997). The May 14, 1997
Amendments increase the aggregate number of shares reserved for grant under all
plans which are a part of the Master Stock Incentive Plan to a floating number
equal to 20% of the issued and outstanding stock of the Company (after giving
effect to pro forma assumed exercise of all outstanding options and purchase
rights). The number that may be subject to options granted under the Incentive
Stock Option Plan is also further capped at a maximum of 4,000,000 shares to
comply with IRS requirements for a specified maximum. As of December 31, 1997,
based on 6,071,305 shares outstanding and 482,150 shares of Common Stock for
which options have been granted, this 20% number would be 1,310,691 shares.
The Stock Incentive Plan is administered by the Stock Incentive
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The Stock Incentive
Committee is also authorized to adopt, amend and rescind the rules relating to
the administration of the Stock Incentive Plan. Except for grants that are
approved by a majority of the Company's Board of Directors, no member of the
Stock Incentive Committee is eligible to participate in future grants of
options in the Stock Incentive Plan.
Incentive stock options issued under the 1996 Incentive Stock Option
Plan are designed to comply with the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and are subject to restrictions contained in the
Code, including a requirement that exercise prices be equal to at least 100% of
fair market value of the shares of Common Stock on the grant date and a
ten-year restriction on the option term. The incentive stock options may be
subsequently modified to disqualify them from treatment as incentive stock
options. Under the Stock Incentive Plan and the Code, non-employee directors
are not permitted to receive incentive stock options.
Nonqualified stock options issued under the Stock Incentive Plan may
be granted to directors, officers, independent contractors and employees and
will provide for the right to purchase shares of Common Stock at a specified
price which may be less than fair market value on the date of grant, and
usually will become exercisable in installments after the grant date.
Nonqualified stock options may be granted for any reasonable term.
Under the Outside Director Stock Option Plan, each of the three
nonemployee directors were granted options, on November 20, 1996, to purchase
an aggregate of 30,000 shares of Common Stock, which, as amended, became
immediately exercisable in May, 1997. The Outside Director Stock Option Plan
also provides for the grant of options for 10,000 shares to each nonemployee
director (30,000 annually in the aggregate) on each anniversary of service, at
an exercise price equal to the market price as of the date of grant, with each
option being exercisable on the first anniversary of grant.
In May, 1997, the Board of Directors adopted a resolution to approve
an Employee Stock Purchase Plan which was ratified by the stockholders at the
annual meeting on September 30, 1997. Under the plan, employees will be
eligible to purchase up to the lesser of ten percent of their total
compensation or $5,000 of stock each six month period, subject to a $10,000
annual maximum, by purchasing the shares at the end of the quarter at a price
equal to 85% of the lesser of (a) the Fair Market Value of a share of Common
Stock on the first day of the six month period (or such other offering period
as the Board may adopt) or (b) the Fair Market Value of a share of Stock on the
last day of the six month
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<PAGE> 62
period (or such other offering period as the Board may adopt). As a part of the
Employee Stock Purchase Plan employees will participate via payroll
withholding.
Compensation Committee Interlocks and Insider Participation. For the
year ended March 31, 1997, all decisions regarding executive compensation were
made by the Compensation Committee when applicable or by Mr. Norton as
President. None of the executive officers of the Company currently serves on
the Compensation Committee of another entity or any other committee of the
board of directors of another entity performing similar functions. For a
description of transactions between the Company and Mr. Bowen, see "Certain
Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Indemnification Agreements. The Company has entered into separate
but identical indemnification agreements (the "Indemnification Agreements")
with each director and executive officer of the Company and expects to enter
into Indemnification Agreements with persons who become directors or executive
officers in the future. The Indemnification Agreements provide that the Company
will indemnify the director or officer (the "Indemnitee") against any expenses
or liabilities in connection with any proceeding in which such Indemnitee may
be involved as a party or otherwise, by reason of the fact that such Indemnitee
is or was a director or officer of the Company or by reason of any action taken
by or omitted to be taken by such Indemnitee while acting as an officer or
director of the Company, provided that such indemnity shall only apply if (i)
the Indemnitee was acting in good faith and in a manner the Indemnitee
reasonably believed to be in the best interests of the Company, and, with
respect to any criminal action, had no reasonable cause to believe the
Indemnitee's conduct was unlawful, (ii) the claim was not made to recover
profits made by such indemnitee in violation of Section 16(b) of the Exchange
Act, or any successor statute, (iii) the claim was not initiated by the
Indemnitee, or (iv) the claim was not covered by applicable insurance, or (v)
the claim was not for an act or omission of a director of the Company from
which a director may not be relieved of liability under Section 103(b)(7) of
the DGCL. Each Indemnitee has undertaken to repay the Company for any costs or
expenses paid by the Company if it shall ultimately be determined that such
Indemnitee is not entitled to indemnification under the Indemnification
Agreements.
Provisions of Certificate of Incorporation. As allowed by the DGCL,
the Company's Certificate of Incorporation provides for the limitation of the
liability of the directors of the Company for monetary damages to the fullest
extent permissible under Delaware law. This is intended to limit the personal
liability of a director to monetary damages incurred in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its stockholders: (i) for acts or omissions that involve intentional misconduct
or a knowing and culpable violation of law; (ii) for any breach of the
director's duty of loyalty to the Company or its stockholders; (iii) for any
transaction from which a director has derived an improper personal benefit; and
(iv) as expressly imposed by statute, for approval of certain improper
distributions to stockholders or the wasting of Company assets.
Bylaws. The Company's Bylaws also permit the Company to indemnify
its officers and directors to the fullest extent permitted by law.
Directors and Officers Insurance. The Company has bound directors
and officers liability and company reimbursement insurance pursuant to a policy
in effect (the "D&O Policy") with the Genesis Insurance Company ("Genesis"), a
wholly owned subsidiary of the American International Group. Pursuant to the
D&O Policy, Genesis will pay, on behalf of directors and officers of the
Company, certain losses ("Losses") incurred as a result of a wrongful act (a
"Wrongful Act") by such persons, for which they are not indemnified by the
Company. In addition, Genesis will reimburse the Company for Losses over
$100,000 incurred as a result of the Company's indemnification of an officer or
director in
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<PAGE> 63
connection with a Wrongful Act. The D&O Policy provides that Genesis' aggregate
liability to the Company with respect to a single policy year shall not exceed
$3 million and is subject to customary exclusions.
CERTAIN TRANSACTIONS
GUARANTEES OF NATIONSBANK FACILITY
Through December, 1996, the NationsBank Facility was guaranteed by
Phillip G. Norton, Patricia A. Norton, Bruce M. Bowen, Elizabeth D. Bowen,
William J. Slaton, Margaret Newton, Kevin M. Norton, Brianna Norton and Patrick
J. Norton. In addition, this line was secured by a pledge of approximately $1.5
million of cash collateral pledged by Phillip G. Norton and his spouse,
Patricia A. Norton. The Company terminated the NationsBank Facility on December
31, 1996, at which time all stockholders' personal guarantees were removed and
collateral pledges released. See "Business -- Financing."
GUARANTEES OF FIRST UNION FACILITY
Through June 10, 1997, the First Union Facility was guaranteed by
Phillip G. Norton, Patricia A. Norton, Bruce M. Bowen, Elizabeth D. Bowen,
William J. Slaton, Kevin M. Norton and Patrick J. Norton, each of whom is a
beneficial owner of Common Stock. In addition, the facility was secured by cash
and securities having a value of approximately $1.2 million, pledged as
collateral by Patricia A. Norton, as trustee for the Phillip G. Norton Jr.
Trust, the Andrew L. Norton Trust and the Jeremiah O. Norton Trust. Upon
termination of the facility on June 10, 1997, all stockholders' personal
guarantees were removed and collateral pledges released. See "Business --
Financing."
GUARANTEES OF NATIONSBANK LEASING FACILITY
Through January 31, 1997, the NationsBank Facility was guaranteed by
Philip G. Norton and Bruce M. Bowen. The Company terminated the Facility, at
which time all personal guarantees were removed. See "Business -- Financing."
LOANS FROM STOCKHOLDERS
During November, 1996, the Company repaid a total of $275,000 in
outstanding borrowings from stockholders ($175,000 from Bruce M. Bowen and
$100,000 from William J. Slaton) with a portion of proceeds received from the
Initial Public Offering. Each of these loans was evidenced by a promissory note
dated March 1, 1995, bearing interest at a rate of 10% per annum, and due March
1, 1998. The Company paid $17,500 and $10,000 in interest for fiscal year 1996,
and $11,229 and $6,417 in interest for fiscal year 1997 to Messrs. Bowen and
Slaton, respectively. Additionally, the Company had various unsecured notes
payable to stockholders of ECC Integrated, Inc. with no formal amortization of
principal, with interest rates ranging from 7% to 10%. All obligations were
fully paid during the year ended March 31, 1997 and the balance as of March 31,
1996 and March 31, 1995 were $162,824 and $162,900, respectively.
NEW ENERGY LEASING CORPORATION OBLIGATIONS
The Company is a party to an agreement entered into in 1994 with New
Energy Leasing Corporation ("New Energy"), of which Bruce M. Bowen is a 45%
stockholder. Under that arrangement, the Company has sold leases to New Energy
under which the Company remains obligated to manage the lease and to provide
remarketing or asset disposition services upon expiration or other termination
of the
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<PAGE> 64
lease. The Company recognized revenue for such transactions of approximately
$1.3 million for the year ended March 31, 1996, and the basis of the equipment
sold was approximately $1.6 million. During the year ended March 31, 1997, the
Company received remarketing fees from New Energy in the amount of $224,126.
New Energy is entitled to the first $75,000 of proceeds from any remarketing or
sale of the assets, with the Company being entitled to 90% of any proceeds
above that amount. This agreement and the lease transactions to which it
relates are slated to expire in 1999. The Company does not intend to enter into
any further lease sale transactions with New Energy.
UNITED FEDERAL OBLIGATIONS
Marcella A. Dilworth and Donna O'Hear, sister-in-law of Philip G.
Norton, two of the Company's employees, own 51% and 49% respectively of United
Federal Leasing, Inc. (formerly MLC Federal, Inc.), a woman-owned small
business which was purchased from the Company in 1992. The Company and United
Federal have entered into a Servicing Agreement which sets forth cost and
profit sharing and reimbursement for transactions which are jointly originated,
serviced, or financed by United Federal and/or the Company. The Company expects
to continue this relationship to originate various federal government contracts
and financing arrangements. In July, 1997, Marcella Dilworth gave notice of her
resignation from the Company but may continue to work with the Company as an
outside contractor.
As of March 31, 1996 and 1997, $152,606 and $72,000, respectively,
was receivable from United Federal, the payment of which is unlikely. As of
March 31, 1997, the Company fully reserved for the receivable from United
Federal.
GUARANTEE FEES
From April 1, 1995 through June 30, 1996, the Company paid a total
of $150,000 of guarantee fees, $10,000 per month, to Patricia A. Norton, the
spouse of Phillip G. Norton, as consideration for her providing personal
guarantees and pledging personal assets for the NationsBank Facility. The
guarantee requirement was liquidated upon the termination of the facility on
December 1, 1996.
ADVANCES AND LOANS TO EMPLOYEES AND STOCKHOLDERS
The Company has in the past provided loans and advances to employees
and certain stockholders. Such balances are to be repaid from personal funds or
commissions earned by the employees/stockholders on successful sales or
financing arrangements obtained on behalf of the Company. Loans and advances
totalled $77,664, $70,612 and $95,918 for March 31, 1996, March 31, 1997, and
September 30, 1997, respectively.
LOANS TO STOCKHOLDERS
In 1994, the Company loaned $40,000 to Kevin M. Norton, an officer
and a stockholder of the Company, pursuant to a promissory note dated February
15, 1994 bearing interest at 8% per annum and due July 31, 1995. Kevin M.
Norton paid interest of $2,048 and $382 during fiscal years 1995 and 1996,
respectively, and made principal repayments of $25,505 and $14,495 during
fiscal years 1995 and 1996, respectively. The Company's $40,000 loan to Kevin
M. Norton was repaid in full during fiscal year 1996.
In 1995, the Company loaned $74,115 to William J. Slaton, an officer
and a stockholder of the Company, pursuant to a promissory note dated January
5, 1995 bearing no interest and due on demand. Mr. Slaton repaid this note in
full in 1995.
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<PAGE> 65
In 1995, the Company loaned $54,000 to Patrick J. Norton, a
stockholder of the Company, pursuant to a promissory note dated November 17,
1995, bearing interest at 8% per annum. Patrick J. Norton paid interest of
$1,608 and made principal repayments of $8,392 during fiscal year 1996 and
interest of $3,193 and principal payments of $14,507 during fiscal year 1997.
The Company's loan to Patrick J. Norton had balances of $31,101 and $45,608 as
of March 31, 1997 and 1996, respectively. As of September 30, 1997, Patrick J.
Norton had a balance of $32,481 owed to the Company.
BROKERAGE FEE
During the year ended March 31, 1997 and the six months ended
September 30, 1997, the Company recognized $250,000 and $0, respectively, in
income from broker fees for providing advisory services to a company which is
owned, in part, by Carl J. Rickertsen, one of the Company's outside directors.
REIMBURSEMENT OF CERTAIN EXPENSES
The Company is reimbursed for certain general and administrative
expenses by a company owned, in part, by an executive of a subsidiary of the
Company. The reimbursements totaled $282,200, $128,310 and $176,075 for the
years ended March 31, 1995, 1996 and 1997 and $69,396 for the six months ended
September 30, 1997.
INDEMNIFICATION AGREEMENTS
Prior to the completion of the Initial Public Offering, the Company
entered into separate but identical indemnification agreements (the
"Indemnification Agreements") with each director and executive officer of the
Company and expects to enter into Indemnification Agreements with persons who
become directors or executive officers in the future. The Indemnification
Agreements provide that the Company will indemnify the director or officer (the
"Indemnitee") against any expenses or liabilities in connection with any
proceeding in which such Indemnitee may be involved as a party or otherwise, by
reason of the fact that such Indemnitee is or was a director or officer of the
Corporation or by reason of any action taken by or omitted to be taken by such
Indemnitee while acting as an officer or director of the Corporation, provided
that such indemnity shall only apply if (i) the Indemnitee was acting in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Corporation, and, with respect to any criminal action, had no
reasonable cause to believe the Indemnitee's conduct was unlawful, (ii) the
claim was not made to recover profits made by such indemnitee in violation of
Section 16(b) of the Exchange Act, or any successor statute, (iii) the claim
was not initiated by the Indemnitee, or (iv) the claim was not covered by
applicable insurance, or (v) the claim was not for an act or omission of a
director of the Company from which a director may not be relieved of liability
under Section 103(b)(7) of the DGCL. Each Indemnitee has undertaken to repay
the Company for any costs or expenses paid by the Company if it shall
ultimately be determined that such Indemnitee is not entitled to
indemnification under the Indemnification Agreements. For more information on
director and officer liability, see "Management -- Limitation of Liability and
Indemnification."
FUTURE TRANSACTIONS
Certain of the transactions described above may be on terms more
favorable to officers, directors and principal stockholders than they could
obtain in transaction with an unaffiliated party. The Company intends to adopt
a policy requiring that all material transactions between the Company and its
officers, directors or other affiliates must (i) be approved by a majority of
the disinterested members of the Board
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<PAGE> 66
of Directors of the Company, and (ii) be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
PRINCIPAL STOCKHOLDERS
GENERAL
The following table sets forth certain information, as of November
30, 1997, regarding the beneficial ownership of the Common Stock, with respect
to (i) each director of the Company, (ii) each person who is known by the
Company to own beneficially 5% or more of the Common Stock, (iii) each of the
Named Executive Officers and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Name and Address of Owned Prior to Offering Owned After Offering (2)
Beneficial Owner(1) Number Percent Number Percent
<S> <C> <C> <C> <C>
Phillip G. Norton(3) 2,878,000 46.9% 2,878,000 35.4%
1019 Basil Road
McLean, Virginia 22101
Bruce M. and Elizabeth D. Bowen (4) 767,500 12.6% 767,500 9.5%
10895 Lake Windermere Drive
Great Falls, Virginia 22066
William J. Slaton 400,000 6.6% 400,000 5.0%
1850 Maple Glen
Sacramento, California 95864
Vincent W. Marino(5) 372,386 6.1% 0 0%
89 Heffner Road
Limerick, Pennsylvania 19468
Kevin M. Norton (6) 376,500 6.28% 376,500 4.7%
5920 Royal Palm
Plano, Texas 75093
Patrick J. Norton (6) 376,500 6.2% 376,500 4.7%
705 Brookfield Road
Raleigh, North Carolina 27615
Kleyton L. Parkhurst (7) 93,000 1.5% 50,000 1.0%
605 Abbott Lane
Falls Church, Virginia 22046
Thomas B. Howard, Jr. 0 0% 0 0%
11565 Embers Court
Reston, Virginia 20191
Steven J. Mencarini 0 0% 0 0%
1921 Batten Hollow Road
Vienna, Virginia 22182
Terrence O'Donnell (8) 10,000 * 10,000 *
5133 Yuma Street, N.W.
Washington, D.C. 20016
Carl J. Rickertsen (8) 10,000 * 10,000 *
4016 Linnean Avenue, N.W.
Washington, D.C. 20008
Laifer Capital Management (9) 474,000 7.8% 474,000 5.9%
114 West 47th Street
New York, New York 10036
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Name and Address of Owned Prior to Offering Owned After Offering (2)
Beneficial Owner(1) Number Percent Number Percent
<S> <C> <C> <C> <C>
Jonathan Ledecky (8) 10,000 * 10,000 *
c/o Consolidation Capital Corp.
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20008
All executive officers and directors
as a group (10 persons) 4,159,500 66.9% 4,116,500 50.6%
</TABLE>
- -----------------
*Less than 1%
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned by such stockholder. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options and warrants. Each
beneficial owner's percentage ownership is determined by assuming options
that are held by such person (but not those held by any other person) and
that are exercisable within sixty days from the date of this Prospectus
have been exercised.
(2) Assumes the issuance of the entirety of the 2,000,000 shares subject of
this Prospectus to be issued by the Company and the sale by each Selling
Stockholder of the entirety of the Selling Stockholder Shares included in
the Registration Statement of which this Prospectus forms a part.
(3) Includes 2,040,000 shares held by J.A.P. Investment Group, L.P., a
Virginia limited partnership, of which J.A.P., Inc., a Virginia
corporation, is the sole general partner, and Patricia A. Norton, trustee
for the benefit of Phillip G. Norton, Jr., u/a dated as of July 20, 1983,
Patricia A. Norton, trustee for the benefit of Andrew L. Norton u/a dated
as of July 20, 1983, Patricia A. Norton, trustee for the benefit of
Jeremiah O. Norton u/a dated as of July 20, 1983, and Patricia A. Norton
are the limited partners. Patricia A. Norton, spouse of Phillip G. Norton,
is the sole stockholder of J.A.P., Inc. and Phillip G. Norton is the sole
director and President of J.A.P., Inc. Includes the 753,000 shares as to
which Phillip G. Norton holds sole voting rights together with all shares
of voting stock acquired in the future held by J.A.P. Investment Group,
L.P., Kevin M. Norton and Patrick J. Norton, Jr. under the Irrevocable
Proxy and Stock Rights Agreement. See "Principal Stockholders --
Irrevocable Proxy and Stock Rights Agreement" and footnote (5). Also
includes 65,000 shares of Common Stock that Phillip G. Norton has rights
to acquire pursuant to options, which are vested and which are immediately
exercisable and excludes 65,000 options to acquire shares of Common Stock
which are not vested and not exercisable. See "Management -- Executive
Compensation and Other Information -- Compensation Arrangements and
Employment Agreements," and "Irrevocable Proxy and Stock Rights
Agreement,"
(4) Includes 600,000 shares held by Bruce M. And Elizabeth D. Bowen, as
tenants by the entirety, and includes 160,000 shares held by Bowen
Holdings L.C., a Virginia limited liability company composed of Bruce M.
Bowen and three minor children, Daniel Bowen, Sarah Bowen and Margaret
Bowen, of whom Bruce M. Bowen is legal guardian and for which Bruce M.
Bowen serves as manager. Also includes 7,500 shares of Common Stock that
Bruce M. Bowen has rights to acquire pursuant to options and excludes
7,500 options to acquire Common Stock which
(5) Does not include options to purchase 5,000 shares issuable pursuant to an
employment agreement dated September 25, 1997 and which are not vested or
exercisable.
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<PAGE> 68
are not vested and not immediately exercisable. See "Management --
Executive Compensation and Other Information -- Compensation Arrangements
and Employment Agreements."
(6) Phillip G. Norton holds sole voting rights and certain rights to acquire
all of the foregoing shares of Common Stock under an Irrevocable Proxy and
Stock Rights Agreement. See "-- Irrevocable Proxy and Stock Rights
Agreement."
(7) Includes 13,000 shares held by Kleyton L. Parkhurst, 30,000 shares held by
three minor children of Kleyton L. Parkhurst, Charlotte A. Parkhurst,
Madeline M. Parkhurst, and Kleyton L. Parkhurst, Jr., all of which are
voted by Kleyton L. Parkhurst, Custodian, under the Virginia Uniform Gift
to Minors Act and 50,000 shares of Common Stock that Kleyton L. Parkhurst
has rights to acquire pursuant to options which are vested and immediately
exercisable, and excludes 50,000 options to acquire Common Stock which are
not vested and not immediately exercisable. See "Management -- Executive
Compensation and Other Information -- Compensation Arrangements and
Employment Agreements."
(8) Represents shares of Common Stock issuable upon exercise of options which
are vested and immediately exercisable. Does not include options to
purchase 10,000 shares granted to each outside director in November 1997
and which are not vested or exercisable.
(9) On May 28, 1997, a Schedule 13D was filed by Laifer Capital Management,
Inc. According to the filing, Laifer Capital Management, Inc. is the
beneficial owner of 474,000 shares, or 9.2%. The 474,000 shares of Common
Stock beneficially owned by Laifer Capital Management, Inc. includes: (i)
267,500 shares of Common Stock beneficially owned by Laifer Capital
Management, Inc. in its capacity as General Partner and investment advisor
to Hilltop Partners, L.P.; and (ii) 206,500 shares of Common Stock
beneficially owned by Laifer Capital Management, Inc. in its capacity as
investment advisor to various other clients. These clients include: (a)
various Wolfson family entities ("Wolfson"), with an address at One State
Street Plaza, New York, New York 10004-1505, and (b) Hilltop Offshore
Limited, a Cayman Islands company, with an address c/o Consolidated Fund
Management Limited, P.O. Box HM 2257, Par La Ville Place, 14 Par La Ville
Road, Hamilton HMJX, Bermuda. Lance Laifer, as president, sole director
and principal stockholder of Laifer Capital Management, Inc., is deemed to
have the same beneficial ownership as Laifer Capital Management, Inc.
IRREVOCABLE PROXY AND STOCK RIGHTS AGREEMENT
Phillip G. Norton and J.A.P. Investments Group, L.P., Kevin M. Norton and
Patrick J. Norton have entered into an agreement entitled "Irrevocable Proxy
and Stock Rights Agreement" pursuant to the terms of which (i) each of J.A.P.
Investments, L.P., Kevin M. Norton and Patrick J. Norton have granted Phillip
G. Norton an irrevocable proxy to vote their shares of Common Stock, which
proxy terminates only upon the death or mental incapacity of Phillip G. Norton
or in the event of his death or mental incapacity, then to Patricia A. Norton,
if then living, or upon the sale or transfer to a third party of the shares of
Common Stock subject thereto and (ii) Kevin M. Norton or Patrick J. Norton have
granted Phillip G. Norton a first right to buy their shares of Common Stock in
the event they desire to sell or transfer any shares of Common Stock to a third
party. The foregoing first right to buy is at 85% of the market value, or if
sold for less, for a period of three years from November 20, 1996 and at 95% of
the market value thereafter. Phillip G. Norton may assign his first right to
buy to a third party, and if exercised, the terms of the Irrevocable Proxy and
Stock Rights Agreement provide for a deferred purchase money note to finance
the purchase. Any shares of Common Stock which Kevin M. Norton or Patrick J.
Norton offers to Phillip G. Norton and which are subsequently sold or
transferred to a third party after Phillip G. Norton's nonexercise of his first
right to buy, will no longer be subject to the Irrevocable Proxy and Stock
Rights Agreement.
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<PAGE> 69
SELLING STOCKHOLDERS
The following table assumes that each Selling Stockholder is
offering for sale securities previously issued or issuable by the Company. The
Company has agreed to pay all expenses in connection therewith (other than
brokerage commissions and fees and expenses of their respective counsel). None
of the Selling Stockholders has ever held any position with the Company or had
any other material relationship with the Company except that Kleyton L.
Parkhurst is the Secretary/Treasurer of the Company. Vincent M. Marino,
President of Educational Computer Concepts, Inc., and William G. Garner,
President of Compuventures hold management positions in wholly owned
subsidiaries of the Company. See "Risk Factors -- Dependence on Current
Management" and "Management."
The following table sets forth the beneficial ownership of the
Selling Stockholder Shares by each person who is a Selling Stockholder. The
Company will not receive any proceeds from the sale of such Securities by the
Selling Stockholders.
<TABLE>
<CAPTION> Percentage of Common Stock Owned
Name and Address Shares of Common --------------------------------
of Beneficial Owner Stock Being Offered (1) Before Offering (1) After Offering(2)
- ------------------- ----------------------- ------------------- -----------------
<S> <C> <C> <C>
Vincent W. Marino (3) 372,386 6.13% 0%
89 Heffner Road
Limerick, Pennsylvania 19468
WIHL-IV, a Cayman Islands Corp.(4) 161,329 2.66% 0%
C/o Hitachi Leasing America, Ltd.
400 Madison Avenue, Ste 301
New York, New York 10017
Elaine G. Denton (5) 119,927 1.98% 0%
Rt. 8 Box 767
Greenville, North Carolina 27834
William G. Garner (5) 99,400 1.64% 0%
4104 Hardwick Court
Greenville, North Carolina 27834
Kleyton L. Parkhurst (6) 43,000 * 0%
605 Abbott Lane
Falls Church, Virginia 22046
Ralph E. Marcellus (3) 65,168 1.07% 0%
3 Legend lane
Chadds Ford, Pennsylvania
Rodney Gamet (3) 55,858 * 0%
111 Goshen Road
Schwenksville, Pennsylvania 19473
Leslie H. Garner Jr (5) 21,635 * 0%
800 1st Street
Mount Vernon, Iowa 52314
Nan F. Spainhour (5) 6,814 * 0%
118 Lees Cut
Wrightsville Beach, North Carolina 28480
David J. Rose III (5) 6,814 * 0%
3220 Graylyn Terrace
Wilmington, North Carolina 28405
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION> Percentage of Common Stock Owned
Name and Address Shares of Common --------------------------------
of Beneficial Owner Stock Being Offered (1) Before Offering (1) After Offering(2)
- ------------------- ----------------------- ------------------- -----------------
<S> <C> <C> <C>
Susan P. Chatham (5) 6,388 * 0%
1601 Canterbury Road
Greenville, North Carolina 27858
Lucille Defrancesco (3) 1,862 * 0%
696 Springdell Roan
King of Prussia, Pennsylvania 19406
Mathew A. McBride (3) 1,862 * 0%
1746 Nathan's Drive
Tampa, Florida 33647
David M. Winans (3) 1,862 * 0%
1600 Briarwood Lane
Pottstown, Pennsylvania 19464
</TABLE>
- --------------------
*Less than 1%
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned by such stockholder. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options and warrants. Each
beneficial owner's percentage ownership is determined by assuming options
that are held by such person (but not those held by any other person) and
that are exercisable within sixty days from the date of this Prospectus
have been exercised.
(2) Unless otherwise indicated, assumes the sale of the entirety of the shares
being offered by the noted stockholder.
(3) Represents a portion of a total of 498,998 shares issued by the Company in
the acquisition of ECCI on September 29, 1997. See "The Company." An
aggregate of 49,900 of such shares have been deposited in escrow pursuant
to the Agreement and Plan of Merger with ECCI until the second anniversary
of the merger to fund any indemnity claim made by the Company. After
registration of the shares is completed and after the Company publishes the
results for the quarter ended December 31, 1997 in its Form 10-Q on
February 14, 1998, the shares, though registered, will be subject to
certain restrictions on transfer, including (without limitation) that no
more than 49.9% of such shares may be transferred before October 1, 1998,
and, in the case of Vincent M. Marino, the further restriction that no more
than 75% of his shares may be transferred before October 1, 1999.
(4) Represents stock issued in a private placement on July 1, 1997 which
provided the purchaser the right to request inclusion in any subsequent
registration of shares. See "The Company."
(5) Represents a portion of a total of 260,978 shares issued by the Company in
the acquisition of Compuventures on July 24, 1997. See "The Company." An
aggregate of 13,049 of such shares have been deposited in escrow pursuant
to the Agreement and Plan of Merger with Compuventures until the second
anniversary of the merger to fund any indemnity claim made by the Company.
The acquisition agreement with Compuventures requires the Company to
register one-half of the common shares issued in connection with the
merger. The shares, though registered, will be restricted for sale as
follows: (1) in the first year after registration up to 50% of the
registered shares may be sold and, (2) in subsequent years up to 25% each
year thereafter pursuant to an agreement with the Company.
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<PAGE> 71
(6) Includes 13,000 shares held by Kleyton L. Parkhurst, 30,000 shares held by
three minor children of Kleyton L. Parkhurst, Charlotte A. Parkhurst,
Madeline M. Parkhurst, and Kleyton L. Parkhurst, Jr., all of which are
voted by Kleyton L. Parkhurst, Custodian, under the Virginia Uniform Gift
to Minors Act. Under the employment agreement between Kleyton L. Parkhurst
and the Company, Mr. Parkhurst has the right to request, at any time the
Company proposes to file an applicable SEC registration form that may
include restricted stock, to have his stock registered.
Stock Restriction Agreement. In January, 1998, the Company entered into
stock restriction agreements with each of Vincent Marino, Ralph Marcellus,
Rodney Gamet, David Winans, Lucille DeFrancesco and Matthew McBride, who were
stockholders of ECCI prior to the Company's acquisition of ECCI. In connection
with the acquisition, these stockholders received shares of MLC Holdings Common
Stock. See "BUSINESS -- Strategy -- Acquisition of Companies in Related Lines
of Business." The stock restriction agreements impose certain quantitative and
other restrictions on the ability of these stockholders to transfer their
shares of MLC Holdings Common Stock. Among other restrictions, these
stockholders may not transfer more than 49.9% of their shares before October 1,
1998, and certain of these stockholders are further prohibited from
transferring more than 75% of their shares before October 1, 1999. None of the
shares may be transferred until the later of February 16, 1998 or such date as
the Company shall have filed with the SEC financial statements covering at
least 30 days of post-merger combined results of the Company and ECCI. These
restrictions are intended to prevent any transfer that would disqualify the
merger as a reorganization for federal income tax purposes or as a pooling of
interests for financial reporting purposes, and to ensure compliance with
federal and state securities laws.
PRICE RANGE OF COMMON STOCK
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
quarterly periods after November 20, 1996.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
December 31, 1996* $10.25 $ 8.75
March 31, 1997 $14.50 $ 9.37
June 30, 1997 $14.00 $10.75
September 30, 1997 $14.75 $12.75
December 31, 1997 $14.75 $11.75
</TABLE>
*For the period November 20, 1996 to December 31, 1996.
On February 9, 1997, the last sale price of the Common Stock was $11.75
per share. As of January 6, 1998, there were approximately 38 stockholders of
record of the Company's Common Stock. In addition, as of December 23, 1997,
there were approximately 44 individual participants holding 18.9% of the
outstanding Common Stock in security position listings furnished by Cede & Co.,
New York, New York, registered clearing agency and depository.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to applicable provisions of Delaware law
and the Certificate of Incorporation and the Bylaws of the Company, which are
exhibits to the Registration Statement on file with the Commission.
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<PAGE> 72
COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes
the issuance of up to 25,000,000 shares of Common Stock. Each holder of Common
Stock on the applicable record date is entitled to receive such dividends as
may be declared by the Board of Directors out of funds legally available
therefor and in the event of dissolution, to share pro rata in any distribution
of the Company's assets after payment or providing for the payments of the
Company's liabilities. Each holder of Common Stock is entitled to one vote for
each share held of record on the applicable record date on all matters
presented to a vote of the stockholders. Holders of Common Stock have no
preemptive rights to purchase or subscribe for any stock or other securities,
and there are no conversion rights or redemption or sinking fund provisions
with respect to the Common Stock. All outstanding shares of Common Stock and
the shares of Common Stock issued pursuant to this Prospectus will be, when
issued, fully paid and non-assessable.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors
of the Company to issue up to 2,000,000 shares of $.01 par value preferred
stock of the Company (the "Preferred Stock"), in one or more series, having
such rights and preferences including, without limitation, voting rights, as
the Board of Directors may determine, in its sole discretion. No consent of the
holders of Common Stock is required to authorize the issuance of any class of
Preferred Stock. The rights of the holders of the Preferred Stock may be senior
to the holders of the Common Stock. The Board of Directors currently has no
plans to issue any class of Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, proxy contest or otherwise, and the removal
of incumbent officers and directors.
There has been a recent trend towards the accumulation of
substantial stock positions in public companies by third parties as a prelude
to proposing a takeover or a restructuring or sale of all or part of a company
or other similar extraordinary corporate action. Such actions are often
undertaken by the third party without advance notice to or consultation with
management of the company. In many cases, the purchaser seeks representation on
the company's board of directors in order to increase the likelihood that its
proposal will be implemented by the company. If the company resists the efforts
of the purchaser to obtain representation on the company's board, the purchaser
may commence a proxy contest to have the purchaser or its nominees elected to
the board in place of certain directors, or the entire board.
The Board of Directors of the Company believes that an imminent
threat of removal of the Company's management severely curtails its ability to
negotiate effectively with such purchasers. Under such a threat, management is
deprived of the time and information necessary to evaluate the takeover
proposal, to study alternative proposals and to help ensure that the best price
is obtained in any transaction which may ultimately be undertaken. Takeovers or
changes in management of the Company which may be proposed and effected without
prior consultation and negotiation with the Company's management would not be
necessarily detrimental to the Company and its stockholders. However, the Board
feels that the benefits of seeking to protect its ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to take over or restructure
the Company outweigh the disadvantages of discouraging such proposals.
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<PAGE> 73
The provisions of the Certificate of Incorporation and Bylaws
described herein would make more difficult or discourage a proxy contest or the
assumption of control by a holder of a substantial block of the Company's
Common Stock or the removal of the incumbent Board, and thus could have the
effect of perpetuating the incumbent management. At the same time, the
provisions would help ensure that the Board, if confronted by a surprise
proposal from a third party who has recently acquired a block of the Company's
voting stock, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to seek a premium price for the stockholders.
These provisions are thus intended to encourage persons seeking to acquire
control of the Company to initiate such an acquisition through arms-length
negotiations with the Company's management and Board of Directors. The
provisions are permitted under Delaware law and are consistent with the rules
of the Nasdaq National Market.
These provisions are not in response to any efforts of which the
Company is aware to accumulate the Company's voting stock or to obtain control
of the Company. The Board of Directors does not presently contemplate
recommending to the stockholders for their approval any further measures which
would affect the ability of third parties to change control of the Company.
The following discussion is a general summary of material provisions
of the Company's Certificate of Incorporation and Bylaws, as currently in
effect, and certain other regulatory provisions, which may be deemed to have an
"anti-takeover" effect. The following description of certain of these
provisions is necessarily general and, with respect to provisions contained in
the Company's Certificate of Incorporation and Bylaws, as currently in effect,
reference should be made in each case to the document in question, each of
which is part of the Registration Statement filed with the Commission. See
"Available Information."
Directors. Certain provisions of the Certificate of Incorporation
and Bylaws will impede changes in majority control of the Board of Directors.
The Company's Certificate of Incorporation provides that the Board of Directors
of the Company are divided into three classes, with directors in each class
elected for three-year staggered terms except for the initial directors. This
classification of the Board of Directors could make it more difficult for a
third party to acquire control of the Company, because it would require more
than one annual meeting of stockholders to elect a majority of the directors.
The Company's Bylaws provide that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a
majority vote of the directors then in office. The number of directors
constituting the board will initially be five.
Restrictions on Call of Special Meetings. The Bylaws provide that a
special meeting of stockholders may be called only by the Board of Directors,
the Chairman of the Board, the President, or the Executive Vice President, and
for the transaction of any proper business. Holders of Common Stock, in their
capacity as stockholders, are not authorized to call a special meeting.
Absence of Cumulative Voting. The Certificate of Incorporation does
not provide for cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Certificate of Incorporation
authorizes 2,000,000 shares of Preferred Stock. The Company is authorized to
issue Preferred Stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, powers, preferences and rights of such share, including
voting rights and conversion rights. In the event of a proposed merger, tender
offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the
73
<PAGE> 74
issuance of a series of Preferred Stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of Preferred Stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any Preferred Stock, and does not intend to issue any Preferred Stock except on
terms which the Board deems to be in the best interests of the Company and its
stockholders.
Amendment to Certificate of Incorporation and Bylaws. Amendments to
the Certificate of Incorporation requires the approval by a majority vote of
the Company's Board of Directors and also by a majority vote of the outstanding
shares of the Company's stock entitled to vote thereon.
The Bylaws may be amended by a majority vote of the Board of
Directors or the affirmative vote of a majority of the outstanding shares of
the Company's stock entitled to vote thereon.
Delaware Anti-Takeover Statute. Generally, Section 203 of the DGCL
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the outstanding voting stock of a Delaware corporation, such as the
Company) from engaging in a "business combination" with such corporation for
three years following the date that the person became an interested
stockholder. However, the takeover can be completed if (i) the buyer, while
acquiring the 15% interest, acquires at least 85% of the Company's outstanding
stock (the 85% requirement excludes shares held by directors who are also
officers and certain shares held under employee stock plans), or (ii) the
takeover is approved by the target corporation's board of directors and
two-thirds of the shares of outstanding stock of the Company (excluding shares
held by the bidder). Section 203 could make it more difficult for a third party
to acquire control of the Company. Section 203 does not apply to Delaware
corporations which do not have a class of voting stock listed on a national
exchange, authorized for quotation on an inter-dealer quotation system of a
registered national securities association or held of record by more than 2,000
stockholders. The Company may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by this provision. At the present time, the Board
of Directors does not intend to propose any such amendment.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued and outstanding 6,071,305 shares of Common
Stock. Of these shares, the 1,150,000 shares sold in the Initial Public
Offering are freely tradable without restriction under the Securities Act,
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. The remaining 4,921,305 shares of
Common Stock outstanding are "restricted securities" as that term is defined in
Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if the sale transaction qualifies for an exemption
from registration, such as that provided by Rule 144 under the Securities Act,
which is summarized below. Sales of Restricted Shares in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the Common Stock.
In general, unless an exemption applies, under Rule 144 as currently
in effect, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in the Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the filing of the date
on which notice of such sale is filed. In addition, under Rule 144(k), a person
who is not an affiliate and has not been an affiliate for at least three months
prior to the sale and who has beneficially owned Restricted Shares for at least
two years may sell such shares without compliance with the foregoing
requirements.
74
<PAGE> 75
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company.
The 2,964,305 shares being offered by this Prospectus will generally
be freely tradable after their issuance, unless the sale thereof is
contractually restricted. Sales of significant numbers of shares of the Common
Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. The 964,305 Selling Stockholder
Shares are subject to contractual restrictions on resale. See "Selling
Stockholders."
Transfer Agent and Registrar. The transfer agent and registrar of
the Common Stock is First Union National Bank.
Reports to Stockholders. The Company will furnish each stockholder
with annual reports containing financial statements audited by independent
accountants and quarterly reports for the first three quarters of each year
containing unaudited financial statements.
PLAN OF DISTRIBUTION
The Selling Stockholder Shares subject hereto are being offered for
sale by the Selling Stockholders. Consequently, the Selling Stockholders will
receive the proceeds from the sale of such securities by the Selling
Stockholders pursuant to this Prospectus. The Selling Stockholder Shares may be
sold to purchasers from time to time in privately negotiated transactions
directly by and subject to the discretion of the Selling Stockholders. The
Selling Stockholders may from time to time offer their respective securities
for sale through underwriters, dealers or agents, who may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of such securities for whom they may
act as agents. The Selling Stockholders and any underwriter, dealer or agent
who participates in the distribution of such Selling Stockholders' securities
may be deemed to be "underwriters" under the Securities Act and any profit on
the sale of such securities by any of them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents may be deemed
to be underwriting compensation under the Securities Act.
At the time a particular offer of the Selling Stockholder Shares is
made by or on the behalf of a Selling Stockholder, a Prospectus and a
Prospectus Supplement, to the extent required, will be distributed which will
set forth the number of securities being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, the
purchase price paid by any underwriter for such securities purchased from the
Selling Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders, any discounts, commissions or
concessions allowed, reallowed or paid to dealers, and the proposed selling
price to the public.
The Selling Stockholder Shares may be sold from time to time in one
or more transactions: (i) at an offering price which is fixed or which may vary
from transaction to transaction depending upon the time of sale, or (ii) at
prices otherwise negotiated at the time of sale. Such prices will be determined
by the Selling Stockholders or by agreement between the Selling Stockholders
and their underwriter.
In order to comply with the applicable securities laws, if any, of
certain states, the Securities may be offered or sold in such states through
registered or licensed brokers or dealers in those states. In addition, in
certain states, such securities may not be offered or sold unless they have
been registered or qualified for sale in such states or an exemption from such
registration or qualification requirement is available and is complied with.
75
<PAGE> 76
Under applicable rules and regulations promulgated under the
Exchange Act, any person engaged in a distribution of securities may not
simultaneously bid for or purchase securities of the same class for a period of
two business days prior to the commencement of such distribution. In addition
and without limiting the foregoing, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-5 and Regulation M, in
connection with transactions in the Selling Stockholder Shares during
effectiveness of the registration statement of which this Prospectus is a part.
All of the foregoing may affect the marketability of such securities.
The Company has paid all of the expenses incident to the
registration of the foregoing securities (including registration pursuant to
the securities laws of certain states) other than: (i) any fees or expenses of
any counsel retained by any Selling Stockholder and any out-of-pocket expenses
incurred by any Selling Stockholder or any person retained by any Selling
Stockholder in connection with registration of the Selling Stockholder Shares
and (ii) commissions, expenses, reimbursements and discounts of underwriters,
dealers or agents, if any.
LEGAL MATTERS
The legality of the Securities being offered hereby has been passed
upon for the Company by Hazel & Thomas, P.C., Falls Church, Virginia, counsel
to the Company.
EXPERTS
The consolidated financial statements of the Company and its
consolidated subsidiaries as of March 31, 1997, and for each of the three years
in the period ended March 31, 1997 except ECC Integrated, Inc. as of March 31,
1996 and for each of the two years in the period ended March 31, 1996, included
in this Prospectus and the related financial statement schedules included
elsewhere in the Registration Statement have been audited by Deloitte & Touche
LLP, as stated in their report appearing herein and elsewhere in the
Registration Statement. The financial statements of ECC Integrated, Inc.
(consolidated with those of the Company) as of March 31, 1996 and for each of
the two years in the period ended March 31, 1996 have been audited by Herbein &
Company, Inc. as stated in their report included herein. Such financial
statements of the Company and its consolidated subsidiaries are included herein
in reliance upon the respective reports of such firms given upon their
authority as experts in accounting and auditing. Both of the foregoing firms
are independent auditors.
76
<PAGE> 77
MLC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997, and
September 30, 1997 (unaudited)..............................................F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1995, 1996 and 1997 and for the six months
ended September 30, 1997 and 1996 (unaudited).............................F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1995, 1996 and 1997 and for the
six months ended September 30, 1997 (unaudited)............................F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1996 and 1997 and for the six months ended
September 30, 1996 and 1997(unaudited).....................................F-6
Notes to Consolidated Financial Statements..................................F-8
F-1
<PAGE> 78
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
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of MLC Holdings, Inc., ECC Integrated, Inc. and Compuventures of Pitt
County, Inc. which have been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the balance sheet of ECC Integrated, Inc. as of March 31, 1996, or the related
statements of earnings, stockholders' equity, and cash flows of ECC Integrated,
Inc. for the years ended March 31, 1996 and 1995, which statements reflect total
assets of $2,613,757 as of March 31, 1996, and total revenues of $15,291,164 and
$11,350,568 for the years ended March 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for ECC
Integrated, Inc. for 1996 and 1995, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MLC Holdings, Inc. and subsidiaries
as of March 31, 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.
/s/ Deloitte & Touche LLP
McLean, Virginia
June 5, 1997, except for the
second and third paragraphs
of Note 1, and Notes 13 and 14, as to
which the date is October 22, 1997.
F-2
<PAGE> 79
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of March 31, As of
1996 1997 September 30, 1997
-------------------------------- ------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 651,150 $ 6,654,209 $ 7,839,310
Investment in direct financing and sales type leases - net 16,273,218 17,473,069 18,590,416
Accounts receivable 4,525,907 8,846,426 13,031,809
Notes receivable(1) 91,857 2,154,250 4,446,931
Employee advances 77,664 70,612 95,918
Inventories 964,637 1,278,144 1,625,496
Investment in operating lease equipment - net 10,219,826 11,065,159 8,799,124
Property and equipment - net 444,584 740,744 1,029,857
Other assets(2) 1,935,350 740,925 1,858,340
------------------------------ ------------
Total Assets $ 35,184,193 $ 49,023,538 $ 57,317,201
============================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 2,215,116 $ 3,006,937 $ 4,237,264
Accounts payable - equipment 4,972,979 4,946,422 6,766,488
Salaries and commissions payable 153,326 671,899 335,361
Accrued expenses and other liabilities 1,402,873 2,256,884 3,779,240
Recourse notes payable 2,106,473 439,004 4,763,664
Nonrecourse notes payable 18,351,579 19,705,060 16,134,240
Loans from stockholders 275,000 - -
Deferred taxes 469,000 590,000 590,000
Income tax payable 6,332 930,587 -
------------------------------ ------------
Total Liabilities 29,952,678 32,546,793 36,606,257
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 authorized at
March 31, 1996 and 1997, 25,000,000 authorized at
September 30, 1997; 4,754,390, 5,909,976, and
6,071,305 issued and outstanding at March 31, 1996,
1997 and September 30, 1997 (unaudited) 48,661 59,100 60,713
Additional paid-in capital 744,485 9,346,214 11,356,710
Retained earnings 4,467,223 7,071,431 9,293,521
Less: Cost of 111,716 treasury shares at March 31, 1996 (28,854) - -
------------------------------ ------------
Total Stockholders' Equity 5,231,515 16,476,745 20,710,944
------------------------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,184,193 $ 49,023,538 $ 57,317,201
============================== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(1) Includes amounts with related parties of $11,250 and $1,835,214 as of March
31, 1996 and 1997 and $3,325,137 as of September 30, 1997 (unaudited).
(2) Includes amounts with related parties of $678,383 and $338,226 as of March
31, 1996 and 1997 and $670,921 as of September 30, 1997 (unaudited).
F-3
<PAGE> 80
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended September 30,
------------------------------------------------------------------------------
1995 1996 1997 1996 1997
------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales of equipment $50,471,192 $47,591,068 $52,166,828 $22,343,509 $25,493,028
Sales of leased equipment 9,958,125 16,318,049 21,633,996 9,707,396 32,186,511
------------------------------------------- ---------------------------
60,429,317 63,909,117 73,800,824 32,050,905 57,679,539
Lease revenues 3,244,138 6,094,416 10,345,110 3,910,603 7,218,351
Fee and other income 690,466 1,876,410 2,503,381 2,263,282 2,819,166
------------------------------------------- ---------------------------
3,934,604 7,970,826 12,848,491 6,173,885 10,037,517
------------------------------------------- ---------------------------
TOTAL REVENUES (1) 64,363,921 71,879,943 86,649,315 38,224,790 67,717,056
------------------------------------------- ---------------------------
COSTS AND EXPENSES
Cost of sales, equipment 44,157,058 38,782,181 42,179,823 18,764,709 20,085,389
Cost of sales, leased equipment 9,463,075 15,522,469 21,667,197 9,590,999 31,579,951
------------------------------------------- ---------------------------
53,620,133 54,304,650 63,847,020 28,355,708 51,665,340
Direct lease costs 841,345 2,862,815 5,197,868 1,696,743 3,330,971
Professional and other costs 657,109 709,350 576,855 231,789 440,874
Salaries and benefits 5,678,926 6,682,005 8,241,405 3,647,597 4,784,885
General and administrative expenses 1,672,663 2,039,970 2,285,878 1,415,412 2,154,786
Nonrecurring acquisition costs - - - - 183,453
Interest and financing costs 1,111,128 1,701,638 1,648,943 793,867 975,264
------------------------------------------- ---------------------------
9,961,171 13,995,778 17,950,949 7,785,408 11,870,233
------------------------------------------- ---------------------------
TOTAL COSTS AND EXPENSES (2) 63,581,304 68,300,428 81,797,969 36,141,116 63,535,573
------------------------------------------- ---------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 782,617 3,579,515 4,851,346 2,083,674 4,181,483
AND EXTRAORDINARY ITEM ------------------------------------------- ---------------------------
PROVISION FOR INCOME TAXES 198,000 881,000 1,360,000 606,000 872,133
------------------------------------------- ---------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 584,617 2,698,515 3,491,346 1,477,674 3,309,350
EXTRAORDINARY GAIN - 117,044 - - -
------------------------------------------- ---------------------------
NET EARNINGS $ 584,617 $ 2,815,559 $ 3,491,346 $ 1,477,674 $ 3,309,350
=========================================== ===========================
EARNINGS PER COMMON SHARE, BEFORE
EXTRAORDINARY ITEM 0.13 0.59 0.67 0.31 0.55
EXTRAORDINARY GAIN PER COMMON SHARE - 0.03 - - -
------------------------------------------- ---------------------------
NET EARNINGS PER COMMON SHARE $ 0.13 $ 0.62 $ 0.67 $ 0.31 $ 0.55
=========================================== ===========================
PRO FORMA NET EARNINGS $ 529,228 $2,389,418 $3,133,436 $1,341,841 $ 2,696,089
=========================================== ===========================
PRO FORMA NET EARNINGS PER COMMON
SHARE $ 0.12 $ 0.52 $ 0.60 $ 0.28 $ 0.45
=========================================== ===========================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,383,490 4,572,635 5,184,261 4,754,390 5,990,200
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(1) Includes amounts from related parties of $1,901,192, $15,758,610 and
$21,051,453 for the fiscal years ended March 31, 1995, 1996 and 1997 and
$8,854,546 and $30,543,774 for the six months ended September 30, 1996 and 1997
(unaudited).
(2) Includes amounts to related parties of $1,673,830, $15,055,141 and
$20,566,924 for the fiscal years ended March 31, 1995, 1996 and 1997 and
$8,670,226 and $29,884,057 for the six months ended September 30, 1996 and 1997
(unaudited).
F-4
<PAGE> 81
MLC HOLDINGS, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
----------------------------------- ---------------------
Shares Par Value Shares Cost
----------------------------------- ---------------------
<S> <C> <C> <C> <C>
Balance, April 1, 1994 4,380,270 $ 45,022 121,995 $ 47,156
Distributions to owners - - - -
Sale of common shares 6,388 64 - -
Retirement of treasury shares - (126) (12,606) (41,302)
Net earnings - - - -
----------------------------------- ---------------------
Balance, March 31, 1995 4,386,658 44,960 109,389 5,854
Issuance of shares to owners 370,059 3,701 - -
Purchase of treasury shares (2,327) - 2,327 23,000
Distributions to owners - - - -
Net earnings - - - -
----------------------------------- ----------------------
Balance, March 31, 1996 4,754,390 48,661 111,716 28,854
Compensation to outside directors - - - -
Distributions to owners - - - -
Sale of common shares 1,150,000 11,500 - -
Issuance of shares to owners 5,586 56 - -
Retirement of treasury shares - (1,117) (111,716) (28,854)
Net earnings - - - -
----------------------------------- -----------------------
Balance, March 31, 1997 5,909,976 59,100 - -
Sale of common shares (unaudited) 161,329 1,613 - -
Compensation to outside directors (unaudited) - - - -
Distributions to owners (unaudited) - - - -
Net earnings (unaudited) - - - -
----------------------------------- ----------------------
Balance, September 30, 1997 (unaudited) 6,071,305 $ 60,713 - $ -
=================================== ======================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Retained
Capital Earnings TOTAL
------------- ------------- ------------
<S> <C> <C> <C>
Balance, April 1, 1994 $ 764,301 $ 1,726,098 $ 2,488,265
Distributions to owners - (296,721) (296,721)
Sale of common shares 25,061 - 25,125
Retirement of treasury shares (41,176) - -
Net earnings - 584,617 584,617
------------ ------------ ------------
Balance, March 31, 1995 748,186 2,013,994 2,801,286
Issuance of shares to owners (3,701) - -
Purchase of treasury shares - - (23,000)
Distributions to owners - (362,330) (362,330)
Net earnings - 2,815,559 2,815,559
------------ ------------ ------------
Balance, March 31, 1996 744,485 4,467,223 5,231,515
Compensation to outside directors 9,500 - 9,500
Distributions to owners - (859,378) (859,378)
Sale of common shares 8,592,262 - 8,603,762
Issuance of shares to owners (56) - -
Retirement of treasury shares 23 (27,760) -
Net earnings - 3,491,346 3,491,346
------------ ------------ ------------
Balance, March 31, 1997 9,346,214 7,071,431 16,476,745
Sale of common shares (unaudited) 1,998,387 - 2,000,000
Compensation to outside directors (unaudited) 12,109 - 12,109
Distributions to owners (unaudited) - (1,087,260) (1,087,260)
Net earnings (unaudited) - 3,309,350 3,309,350
------------ ------------ -------------
Balance, September 30, 1997 (unaudited) $ 11,356,710 $ 9,293,521 $ 20,710,944
============ ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE> 82
MLC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $584,617 $2,815,559 $3,491,346
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 648,512 2,199,722 3,650,248
Abandonment of assets 17,984 10,049
Provision for credit losses 66,000
Extraordinary gain (117,044)
Gain (Loss) on sale of operating lease equipment(1) (48,235) (323,422) 83,754
Adjustment of basis to fair market value of early
returned operating lease equipment
Impairment of operating lease residual values 153,434
Payments from lessees directly to lenders (217,375) (884,389) (1,590,061)
Loss 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 (928,727) 323,782 (4,343,319)
Notes receivable(2) 50,150 (55,088) (2,062,393)
Employee advances 18,922 (61,996) 28,537
Inventories 633,567 (813,491) (400,046)
Other assets(3) (192,088) (342,209) 457,169
Accounts payable - equipment 1,922,938 1,958,532 (26,557)
Accounts payable - trade (827,485) 329,149 796,740
Salaries and commissions payable, accrued
expenses and other liabilities 299,223 638,690 2,286,921
-------------------------------------------------
Net cash provided by operating activities 1,970,993 6,313,268 2,723,198
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating equipment 73,072 1,383,677 4,992,050
Purchase of operating lease equipment(4) (2,268,792) (13,919,193) (24,800,360)
Increase in net 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 23,638 9,049 9,124
Insurance proceeds received 750,000 512,044
Purchase of property and equipment (46,150) (301,039) (266,061)
Decrease (Increase) in other assets(6) (158,841) (306,228) 226,530
------------------------------------------------
Net cash used in investing activities (12,143,637) (29,552,935) (26,152,546)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse 10,217,530 25,678,168 26,825,118
Recourse 165,089 67,103 220,768
Repayments:
Nonrecourse (348,373) (1,144,023) (3,199,626)
Recourse (102,886) (231,273) (434,867)
Proceeds of loans from stockholders 75,000 - -
Repayments of loans from stockholders (50,000) (275,000)
Distributions to shareholders of combined companies
prior to business combination (296,721) (362,330) (859,378)
Proceeds from sale of capital stock, net of expenses 25,125 8,603,762
Purchase of treasury stock (23,000)
Proceeds (Repayments) from lines of credit (450,532) (252,098) (1,448,370)
------------------------------------------------
Net cash provided by financing activities 9,284,232 23,682,547 29,432,407
------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (888,412) 442,880 6,003,059
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,163,913 208,270 651,150
------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $275,501 $651,150 $6,654,209
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $264,929 $302,214 $140,081
================================================
Cash paid for income taxes $219,573 $202,864 $315,137
================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended September 30,
-------------------------------
1996 1997
------------------------------
( Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,477,674 $3,309,350
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,111,827 2,328,955
Abandonment of assets
Provision for credit losses (30,000)
Extraordinary gain
Gain (Loss) on sale of operating lease equipment(1) (44,172) (313,295)
Adjustment of basis to fair market value of early
returned operating lease equipment 299,403 231,000
Impairment of operating lease residual values
Payments from lessees directly to lenders (794,668) (992,838)
Loss on disposal of property and equipment (8,740)
Deferred taxes 21,000
Compensation to outside directors - stock options 12,109
Changes in:
Accounts receivable (3,167,299) (4,613,259)
Notes receivable(2) (1,036,993) (2,292,681)
Employee advances (16,507) (25,806)
Inventories (757,017) (351,452)
Other assets(3) 612,823 (429,216)
Accounts payable - equipment 6,985,881 1,820,066
Accounts payable - trade (200,927) 1,435,326
Salaries and commissions payable, accrued
expenses and other liabilities 745,996 55,238
---------------------------------
Net cash provided by operating activities 5,228,281 143,497
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating equipment 1,290,311 579,813
Purchase of operating lease equipment(4) (10,653,298) (1,163,208)
Increase in net investment in direct financing
and sales-type leases(5) (3,515,521) (3,166,666)
Proceeds from sale of property and equipment 8,740
Insurance proceeds received
Purchase of property and equipment (20,968) (327,366)
Decrease (Increase) in other assets(6) 147,270 (223,671)
------------------------------
Net cash used in investing activities (12,743,466) (4,301,098)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse 12,998,838 2,356,775
Recourse 109,972
Repayments:
Nonrecourse (597,629) (2,246,963)
Recourse (761,046) (110,812)
Proceeds of loans from stockholders
Repayments of loans from stockholders
Distributions to shareholders of combined companies
prior to business combination (308,938) (1,087,270)
Proceeds from sale of capital stock, net of expenses
Purchase of treasury stock 2,000,000
Proceeds (Repayments) from lines of credit (1,139,195) 4,321,000
------------------------------
Net cash provided by financing activities 10,192,030 5,342,702
------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,676,845 1,185,101
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 651,149 6,654,209
------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,327,994 $7,839,310
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $15,439 $206,266
==============================
Cash paid for income taxes $108,176 $1,812,233
==============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE> 83
(1) Includes amounts provided (used) by related parties of $(172,956), $3,930,
$40,549 and $(36,963) for the fiscal years ended March 31, 1996 and 1997 and the
six months ended September 30, 1996 and 1997 (unaudited).
(2) Includes amounts used by related parties of $1,812,414, and $1,762,763 for
the fiscal year ended March 31, 1997 and for the six months ended September 30,
1997 (unaudited).
(3) Includes amounts provided (used) by related parties of $234,090,
$(398,034), and $285,943 for the fiscal years ended March 31, 1995, 1996 and
1997 and $186,646 and $(108,641) for the six months ended September 30, 1996
and 1997 (unaudited).
(4) Includes amounts provided by related parties of $1,073,427, $2,707,213,
$1,208,321 and $883,610 for the fiscal years ended March 31, 1996 and 1997 and
the six months ended September 30, 1996 and 1997 (unaudited).
(5) Includes amounts provided (used) by related parties of $(235,180), $259,857,
and $(23,417) for the fiscal years ended March 31, 1995, 1996 and 1997 and
$(41,327) and $9,568,554 for the six months ended September 30, 1996 and 1997
(unaudited).
(6) Includes amounts provided (used) by related parties of $(153,826),
$(270,860) and $73,338 for the fiscal years ended March 31, 1995, 1996 and 1997
and $(10,718) and $(195,946) for the six months ended September 30, 1996 and
1997 (unaudited).
F-7
<PAGE> 84
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996, AND 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(ALL FIGURES ARE IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 interest.
Business Combinations - On July 24, 1997, the Company, through a new wholly
owned subsidiary, MLC Network Solutions, Inc., issued 260,978 common shares,
valued at $3,384,564, in exchange for all outstanding common shares of
Compuventures of Pitt County, Inc. ("Compuventures"), a value-added reseller of
PC's and related network equipment and software products and provides various
support services to its customers from facilities located in Greenville, Raleigh
and Wilmington, North Carolina. On September 29, 1997, the Company issued
498,998 common shares, valued at $7,092,000, in exchange for all outstanding
common shares of Educational Computer Concepts, Inc. (dba "ECC
Integrated")("ECCI"), a network systems integrator and computer reseller serving
customers in eastern Pennsylvania, New Jersey and Delaware. These business
combinations have been accounted for as pooling-of-interests, and accordingly,
the consolidated financial statements for periods prior to the combinations have
been restated to include the accounts and results of operations of the pooled
companies.
New Subsidiaries - On September 17, 1997, the Company established MLC
Federal, Inc., a wholly owned subsidiary of MLC Holdings, Inc. The new
subsidiary will concentrate on the origination of leases to federal, state, and
local government entities. On October 22, 1997, the Company formed MLC Leasing,
S.A. de C.V., a wholly owned subsidiary of MLC Group, Inc. and MLC Network
Solutions, Inc., based in Mexico City, Mexico. To date, no business has been
conducted through the new subsidiaries.
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.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities - Effective January 1, 1997, the Company adopted SFAS No.
F-8
<PAGE> 85
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.
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
period of the inception of the lease. Residual values for sales-type and direct
financing leases are recorded at their net present value and the unearned
interest is amortized over the life of the lease using the interest method.
Reserve for Credit Losses - The reserve for credit losses ("the reserve") is
maintained at a level believed by management to be adequate to absorb potential
losses inherent in the Company's lease and accounts receivable portfolio.
Management's determination of the adequacy of the reserve is based on an
evaluation of historical credit loss experience, current economic conditions,
volume, growth, the composition of the lease portfolio, and other relevant
factors. The reserve is increased by provisions for potential credit losses
charged against income. Accounts are either written off or written down when the
loss is both probable and determinable, after giving consideration to the
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 seven 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. The Company acquired two companies that were accounted under the pooling
of interests method. The two companies had elected to be taxed under the
provisions of Subchapter "S" of the Internal Revenue Code. Under this election,
each company's income or loss was included in the
F-9
<PAGE> 86
taxable income of the stockholders and thus, there is no provision for federal
or state income taxes in these financial statements for these companies.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain items have been reclassified in the March 31,
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 $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 4,383,490 in 1995, 4,572,635 in 1996 and
5,184,261 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.
Interim Financial Statements (Unaudited) - In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
on of various normal accruals) necessary to present fairly the Company's
financial position, results of earnings and cash flows. The results of earnings
for the six months ended September 30, 1997, are not necessarily indicative of
the results of operations to be expected for the full year.
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>
As of March 31, As of September 30
1996 1997 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Minimum Lease Payments $18,212 $18,752 $17,493
Estimated unguaranteed residual value 347 1,271 3,482
Initial direct costs - net of amortization 1,539 1,237 846
Less: Unearned lease income (3,825) (3,721) (3,195)
Reserve for credit losses - (66) (36)
------- ------- -------
Investment in direct financing lease and
sales-type lease - net $16,273 $17,473 $18,590
======= ====== ======
</TABLE>
F-10
<PAGE> 87
Initial direct costs, are shown net of amortization of $590, $1,299 and $846 at
March 31, 1996 and 1997 and September 30, 1997, respectively.
Future scheduled minimum lease rental payments as of March 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C> <C>
1998 $7,799
1999 6,195
2000 3,658
2001 890
2002 and thereafter 210
-------
Total $18,752
=======
</TABLE>
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes. (see Note 6).
3. SALES-TYPE LEASES
The detail for the sales-type leases consists of the following:
<TABLE>
<CAPTION>
For the Six Months Ended
For the year ended March 31, September 30,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Gross minimum lease payments $3,452 $559 $- $- $-
Estimated unguaranteed
residual value 3 - - - -
Gross cost of sales (2,629) (375) - - -
Unearned lease income (549) (98) - - -
------ --- --- --- --
Net margin $ 277 $ 86 $- $- $-
====== ==== ==== === ===
</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>
As of March 31, As of September 30,
1996 1997 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cost of equipment under operating lease $11,411 $14,519 $13,771
Initial direct costs 54 42 42
Accumulated depreciation and amortization (1,245) (3,496) (5,014)
------- ------- -------
Investment in operating lease equipment - net $10,220 $11,065 $8,799
======= ======= =======
</TABLE>
F-11
<PAGE> 88
As of March 31, 1997, future scheduled minimum lease rental payments are as
follows:
Year ending March 31,
1998 $5,279
1999 3,429
2000 1,469
2001 31
2002 and thereafter 5
-------
$10,213
=======
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 was recognized in the year 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>
As of As of
March 31, September 30,
1996 1997 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Furniture and equipment $ 478 $ 852 $ 1,061
Capitalized software 168 186 378
Leasehold improvements 23 23 24
Vehicles 100 142 142
Accumulated depreciation (324) (462) (575)
------- ------- -------
Property and equipment - net $ 445 $ 741 $ 1,030
======= ======= =======
</TABLE>
F-12
<PAGE> 89
6. RECOURSE AND NONRECOURSE NOTES PAYABLE
<TABLE>
<CAPTION>
As of As of
March 31, September 30,
1996 1997 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Recourse equipment notes with varying interest rates
ranging from 8.17% to 8.53%, 8.53% to 8.75% and 8.53%
to 8.75%, respectively, secured by
related investments in leases $ 141 $ 269 $ 295
Noncollateralized recourse note bearing
interest at 8.05% 16 - -
Revolving line of credit with a maximum
balance of $250, bearing interest at the
prime rate plus 1.5% payable on demand,
secured by equipment purchases 175 - -
Revolving line of credit with a maximum
balance of $2,000, bearing interest at
the prime rate plus 1%, and personally
guaranteed by an employee/stockholder 592 - -
Revolving line of credit with a maximum
balance of $5,000 bearing interest at
the LIBOR rate plus 2.75%, secured by
the Company's assets and personal
guarantees from employees/stockholders 361 - -
Recourse line of credit with a maximum
balance of $15,000, bearing an interest
of LIBOR plus 110 basis points or, at
the Company's option, prime minus 100
basis points - - 3,500
Recourse line of credit with a maximum
balance of $2,500 with interest based
on the prime rate 215 110 931
Demand note payable with an interest rate of prime
plus .75% 200 - -
Term banks obligations with interest rates from 8.25%
to bank prime plus .75% 68 31 22
Notes to various unsecured individuals at
interest rates of 7% to 10% 82 - -
Capitalized equipment lease debt imputed at 9% 9 4 -
Various unsecured notes from Stockholders
with interest rates ranging from 7% to 10% 163 - -
</TABLE>
F-13
<PAGE> 90
<TABLE>
<S> <C> <C> <C>
Loans from Related Party at 8% to 10% 61 25 16
Recourse line of credit at prime plus
one half point 23 - -
------ ------ ------
$2,106 $ 439 $4,764
====== ====== ======
Nonrecourse equipment notes with varying interest
rates ranging from 5.85% to 14.39%, 6.30% to 9.90%
and 6.30% to 9.99%, respectively, secured by related
investments in leases $18,352 $19,705 $16,134
====== ====== ======
</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 line of credit (which expired on December 1,
1996) and the $5,000 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 a
follows:
<TABLE>
<CAPTION>
Nonrecourse Recourse
Notes Payable Notes Payable
------------- -------------
Year Ending March 31,
<S> <C> <C>
1998 $12,725 $292
1999 4,517 124
2000 1,921 16
2001 459 7
2002 and thereafter 83 -
------- ----
$19,705 $439
======= ====
</TABLE>
7. RELATED PARTY TRANSACTIONS
Loans from stockholders/officers consist of the following:
<TABLE>
<CAPTION>
As of March 31,
1996 1997
---- ----
<S> <C> <C>
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 $175 $--
Note payable to stockholder bearing interest at 10%,
maturing March 1, 1998 100 --
--- --
$275 $-
==== ===
</TABLE>
F-14
<PAGE> 91
Other
- The Company provided loans and advances to employees/stockholders
aggregating a total of $62, $139, and $12, 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, $83, and $54 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 (loaned in 1994) bearing interest at a rate of 8%. In
addition, the Company loaned a stockholder $54 pursuant to a promissory
note bearing interest at a rate of 8%. Under the terms of the note,
interest of $2 and $3 and principal of $8 and $15, 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 and $1,300 and the
basis of the equipment sold was $1,620 and $1,272 respectively. At March 31,
1996, accrued expenses and other liabilities include $27 due to the related
company, notes receivable include $17 due from the company, and other assets
include $73, 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.
During the years ended March 31, 1996 and 1997, the Company paid a
stockholder $120 and $90, 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 and $3,453, and the basis of the
equipment sold was $12,274 and $3,309, respectively, during the years ended
March 31, 1996 and 1997. Other assets include $210 due from, and $76 due to the
Partnership as of March 31, 1996 and 1997, respectively. The Company's
investment balance in the Partnership, accounted for using the cost method,
included in other assets, is $381 and $227 as of March 31, 1996 and 1997,
respectively. In addition, the Company received $46, $122, and $149 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 $196 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, and for the six months
ended September 30, 1996 and 1997 (unaudited) the Company sold leased equipment
to MLC/CLC LLC, in which the Company has a 5% ownership interest, that amounted
to 1.8%, 19.5%, 17.0% and 40.9% of the Company's revenues, respectively. Revenue
recognized from the sales was $1,257, $16,923, $6,489 and $27,717 and the
respective basis for the equipment sold was $1,335, $16,918, $6,521, and
$27,407. Notes receivable includes $1,812 due from the partnership as of March
31, 1997. Other assets includes an investment of $14 and $168, as of March 31,
1996 and 1997, respectively, accounted for using the
F-15
<PAGE> 92
cost method. In addition, the Company received $53 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 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, $153 and $72 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.
The Company is reimbursed for certain general and administrative expenses
by a company owned, in part, by an executive of a subsidiary of the Company. The
reimbursements totaled $282,200, $128,310 and $176,075 for the years ended March
31, 1995, 1996 and 1997 and $69,396 for the six months ended September 30, 1997
(unaudited).
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and some office equipment for the conduct
of its business. Rent expense relating to operating leases was $376, $397 and
$348 for the years ended March 31, 1995, 1996, and 1997, respectively and $173
and $200 for the six month periods ending September 30, 1996 and 1997. As of
March 31, 1997, the future minimum lease payments are due as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
<S> <C>
1998 $360
1999 285
2000 236
2001 209
2002 196
Thereafter 424
---
$1,710
======
</TABLE>
As of March 31, 1997, the Company has guaranteed $173 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:
<TABLE>
<CAPTION>
For the For the Six Months Ended
Year Ended March 31, September 30,
(Unaudited)
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory Federal income tax rate 34% 34% 34% 34%
Income tax expense computed at the
statutory Federal rate $263 $1,272 $1,664 $1,345
</TABLE>
F-16
<PAGE> 93
<TABLE>
<S> <C> <C> <C> <C>
Income tax expense of Sub
S not subject to tax (55) (426) (358) (613)
State income tax expense, net of Federal
tax expense 6 25 49 117
Nontaxable interest income (95) (79) (34) (7)
Nondeductible expenses 79 89 39 31
-- -- -- --
Provision for income taxes $198 $881 $1,360 $873
==== ==== ====== ====
Effective tax rate 25.3% 31.3% 28.0% 20.9%
===== ===== ===== =====
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
For the Year
Ended March 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $154 $231 $1,152
State 18 27 87
-- -- --
172 258 1,239
--- --- -----
Deferred:
Federal 17 557 113
State 9 66 8
- -- -
26 623 121
-- --- ---
$198 $881 $1,360
==== ==== ======
</TABLE>
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
<TABLE>
<CAPTION>
For the Year
Ended March 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Alternative minimum tax $(158) $(200) $369
Lease revenue recognition 184 823 (248)
----- ----- -----
Total $26 $623 $121
===== ===== =====
</TABLE>
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:
F-17
<PAGE> 94
<TABLE>
<CAPTION>
As of March 31,
1996 1997
<S> <C> <C>
Alternative minimum tax $619 $250
Lease revenue recognition (1,088) (840)
------ ----
Net deferred liability $(469) $(590)
===== =====
</TABLE>
UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," as if the pooled companies, which were subchapter S
corporations prior to their business combinations with the Company, had been
subject to federal income taxes throughout the periods presented. The managed
companies acquired had elected S Corporation status for income tax purposes for
various periods until acquisition date at the time the S Corporation tax
elections were elected. As S Corporations, the income or loss from these
entities was includable by their shareholders in their individual income tax
returms. Therefore for the companies acquired accounted for using the
pooling-of-interests method of accounting, no provision for income taxes has
been made in the consolidated financial statements for the respective periods
the entities were S Corporations.
<TABLE>
<CAPTION>
For the For the Six Months Ended
Year Ended March 31, September 30,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before pro forma
adjustment, per the
consolidated income
statement $585 $2,816 $3,491 $3,309
Additional provision for
income taxes 56 427 358 613
-- --- --- ---
Pro forma net income $529 $2,389 $3,133 $2,696
==== ====== ====== ======
</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 $6,151, $4,796, and $4,214 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, $11,550, and $18,058, for the years ended
March 31, 1995, 1996, and 1997, respectively.
F-18
<PAGE> 95
11. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with contributory 401(k) profit sharing
plans. General eligibility for employees requires a minimum age of 21,
completion of a minimum amount of hours and a short time period before entrance
into the plan. Full vesting in the plans vary from after the fourth to the sixth
consecutive year of plan participation. Employer contributions are discretionary
for each year. The Company's expense for the plans was $30, $76 and $55 for the
years ended March 31, 1995, 1996 and 1997, respectively.
Effective September 1, 1996 (and modified on May 24, 1997 and ratified by
the stockholders on September 30, 1997 as noted below), 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
- - 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 which was completed in November, 1996 and 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.
F-19
<PAGE> 96
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>
Additional information regarding options outstanding as of March 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted-
Remaining Average
Number Contractual Exercise Number
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 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:
F-20
<PAGE> 97
Net Income
As reported $3,491
Pro forma $3,410
Earnings per common share
As reported $0.67
Pro forma $0.65
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>
Master Stock Incentive Plan Amendment
The Company has established a stock incentive program (the "Master Stock
Incentive Plan")(formerly the 1996 Stock Incentive Plan prior to amendment and
restatement effective May 14, 1997 which has been adopted by the Board of
Directors and received on September 30, 1997 stockholder ratification) to
provide an opportunity for directors, executive officers, independent
contractors, key employees, and other employees of the Company to participate in
the ownership of the Company. The Master Stock Incentive Plan provides for the
award to eligible directors, employees, and independent contractors of the
Company, of a broad variety of stock-based compensation alternatives under a
series of component plans. These component plans include tax advantaged
incentive stock options for employees under the Incentive Stock Option Plan
(formerly the 1996 Incentive Stock Option Plan prior to amendment and
restatement effective May 14, 1997), formula length of service based
nonqualified options to nonemployee directors under the Outside Director Stock
Plan (formerly the 1996 Outside Director Stock Option Plan prior to amendment
and restatement effective May 14, 1997), nonqualified stock options under the
Nonqualified Stock Option Plan (formerly the 1996 Nonqualified Stock Option Plan
prior to amendment and restatement effective May 14, 1997), a program for
employee purchase of Common Stock of the Company at 85% of fair market value
under a tax advantaged Employee Stock Purchase Plan (approved by the Board of
Directors but which is not effective until stockholder ratification), as well as
other restrictive stock and performance based stock awards and programs which
may be established by the Board of Directors. The May 14, 1997 Amendments
increase the aggregate number of shares reserved for grant under all plans which
are a part of the Master Stock Incentive Plan to a floating number equal to 20%
of the issued and outstanding stock of the Company (after giving effect to pro
forma assumed exercise of all outstanding options and purchase rights). The
number that may be subject to options granted under the Incentive Stock Option
Plan is also further capped at a maximum of 4,000,000 shares to comply with IRS
requirements for a specified maximum.
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-21
<PAGE> 98
The accuracy and usefulness of the fair value information disclosed
herein is limited by the following factors:
<TABLE>
<S> <C>
- - 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.
</TABLE>
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>
As of March 31, 1997
--------------------
Carrying Fair
Amount Value
<S> <C> <C>
Assets:
Cash and cash equivalents $6,654 $6,654
Liabilities:
Nonrecourse notes payable $19,705 $19,752
Recourse notes payable $439 $465
</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.
13. BUSINESS COMBINATIONS
On July 24, 1997, the Company, through a new wholly owned subsidiary, MLC
Network Solutions, Inc., issued 260,978 common shares, valued at $3,385, in
exchange for all outstanding common shares of Compuventures of Pitt County,
Inc. ("Compuventures"), a value-added reseller of PC's and related network
equipment and software products and provides various support services to its
customers from facilities located in Greenville, Raleigh and Wilmington, North
Carolina.
F-22
<PAGE> 99
On September 29, 1997, the Company issued 498,998 common shares, valued
at $7,092 in exchange for all outstanding common shares of Educational Computer
Concepts, Inc. (dba "ECC Integrated")("ECCI"), a network systems integrator and
computer reseller serving customers in eastern Pennsylvania, New Jersey and
Delaware.
These business combinations have been accounted for as
pooling-of-interests, and accordingly, the consolidated financial statements
for periods prior to the combinations have been restated to include the
accounts and results of operations of the pooled companies. The results of
operations previously reported by the Company and the pooled companies and the
combined amounts presented in the accompanying unaudited consolidated financial
statements are presented below.
<TABLE>
<CAPTION>
For the Year For the Six
Ended March 31, Months Ended September 30,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
MLC Holdings, Inc. $40,819 $42,800 $56,147 $24,601 $44,975
Pooled companies 23,545 29,080 30,502 13,624 22,742
------- ------- ------- ------- -------
Combined $64,364 $71,880 $86,649 $38,225 $67,717
======= ======= ======= ======= =======
Net Income:
MLC Holdings, Inc. $414 $1,610 $2,481 $1,095 $1,582
Pooled companies 171 1,205 1,010 383 1,727
--- ----- ----- --- -----
Combined $585 $2,815 $3,491 $1,478 $3,309
==== ====== ====== ====== ======
</TABLE>
14. SUBSEQUENT EVENTS
Private Placement of Equity - On July 1, 1997, the Company issued 161,329
shares of stock to a single investor in a private placement for cash
consideration of $2,000 (per share price at $12.40). The stock was priced, per
a Stock Purchase Agreement dated June 18, 1997, at a per share price equal to
one-twentieth (1/20) of the sum of the closing price per share of the Company's
common stock as reported on the NASDAQ National Market at the close of each of
the last twenty business days immediately prior to the closing date (June 4 to
July 1), multiplied by (.95).
Credit Agreement - 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
through June 5, 1998. On September 5, the facility was increased to $25,000.
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.
15. QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial information is as follows (amounts in thousands
except per share information). Adjustments reflect the results of operations of
business combinations accounted for under the pooling of interests method.
F-23
<PAGE> 100
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
FIRST QUARTER
Previously Adjusted
Reported Adjustments Amount
-----------------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1996
Sales $ 2,091 $ 6,770 $ 8,861
Total revenues 3,775 6,773 10,548
Cost of sales 1,454 5,719 7,173
Total costs and expenses 3,134 6,908 10,042
Earnings before provision for income taxes 641 (135) 506
Provision for income taxes 227 - 227
Earnings before extraordinary item 414 (135) 279
Extraordinary gain - - -
Net earnings 414 (135) 279
-----------------------------------------------
Net earnings per common share $ 0.10 $ 0.06
================ ==============
Year Ended March 31, 1997
Sales $ 10,412 $ 6,978 $ 17,390
Total revenues 12,896 7,304 20,200
Cost of sales 9,894 5,649 15,543
Total costs and expenses 12,097 7,226 19,323
Earnings before provision for income taxes 799 79 878
Provision for income taxes 284 - 284
Earnings before extraordinary item 515 79 594
Extraordinary gain - - -
Net earnings 515 79 594
-----------------------------------------------
Net earnings per common share $ 0.13 $ 0.12
================ ==============
Year Ended March 31, 1998
Sales $ 22,309 $ 12,964 $ 35,273
Total revenues 26,763 13,701 40,464
Cost of sales 21,859 10,033 31,892
Total costs and expenses 25,379 12,438 37,817
Earnings before provision for income taxes 1,384 1,263 2,647
Provision for income taxes 460 - 460
Earnings before extraordinary item 923 1,264 2,187
Extraordinary gain - - -
Net earnings 923 1,264 2,187
-----------------------------------------------
Net earnings per common share $ 0.18 $ 0.37
================ ==============
</TABLE>
<TABLE>
<CAPTION>
SECOND QUARTER
Previously Adjusted
Reported Adjustments Amount
----------------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1996
Sales $ 13,031 $ 8,911 $ 21,942
Total revenues 14,785 8,914 23,699
Cost of sales 12,115 7,001 19,116
Total costs and expenses 14,067 8,343 22,410
Earnings before provision for income taxes 718 571 1,289
Provision for income taxes 253 - 253
Earnings before extraordinary item 465 571 1,036
Extraordinary gain - - -
Net earnings 465 571 1,036
----------------------------------------------
Net earnings per common share $ 0.12 $ 0.24
============== ===============
Year Ended March 31, 1997
Sales $ 8,635 $ 6,026 $ 14,661
Total revenues 11,705 6,320 18,025
Cost of sales 8,250 4,563 12,813
Total costs and expenses 10,803 6,015 16,818
Earnings before provision for income taxes 902 304 1,206
Provision for income taxes 322 - 322
Earnings before extraordinary item 580 304 884
Extraordinary gain - - -
Net earnings 580 304 884
----------------------------------------------
Net earnings per common share $ 0.15 $ 0.19
============== ===============
Year Ended March 31, 1998
Sales $ 22,407 - $ 22,407
Total revenues 27,253 - 27,253
Cost of sales 19,773 - 19,773
Total costs and expenses 25,719 - 25,719
Earnings before provision for income taxes 1,535 - 1,535
Provision for income taxes 412 - 412
Earnings before extraordinary item 1,123 - 1,123
Extraordinary gain - - -
Net earnings 1,123 - 1,123
----------------------------------------------
Net earnings per common share $ 0.19 $ 0.19
============== ===============
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER
Previously Adjusted
Reported Adjustments Amount
----------------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1996
Sales $ 8,083 $ 7,598 $ 15,681
Total revenues 10,483 7,601 18,084
Cost of sales 7,479 6,012 13,491
Total costs and expenses 10,057 7,058 17,115
Earnings before provision for income taxes 426 543 969
Provision for income taxes 153 - 153
Earnings before extraordinary item 273 543 816
Extraordinary gain - 117 117
Net earnings 273 660 933
----------------------------------------------
Net earnings per common share $ 0.06 $ 0.21
=============== ==============
Year Ended March 31, 1997
Sales $ 8,435 $ 8,745 $ 17,180
Total revenues 11,800 8,445 20,245
Cost of sales 7,676 7,112 14,788
Total costs and expenses 10,810 8,437 19,247
Earnings before provision for income taxes 990 8 998
Provision for income taxes 349 - 349
Earnings before extraordinary item 641 8 649
Extraordinary gain - - -
Net earnings 641 8 649
----------------------------------------------
Net earnings per common share $ 0.14 $ 0.12
=============== ==============
Year Ended March 31, 1998
Sales
Total revenues
Cost of sales
Total costs and expenses
Earnings before provision for income taxes
Provision for income taxes
Earnings before extraordinary item
Extraordinary gain
Net earnings
Net earnings per common share
</TABLE>
<TABLE>
<CAPTION>
FOURTH QUARTER
Previously Adjusted
Reported Adjustments Amount
-----------------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1996
Sales $ 11,637 $ 5,788 $ 17,425
Total revenues 13,757 5,791 19,548
Cost of sales 10,154 4,371 14,525
Total costs and expenses 13,051 5,682 18,733
Earnings before provision for income taxes 706 109 815
Provision for income taxes 248 - 248
Earnings before extraordinary item 458 109 567
Extraordinary gain - - -
Net earnings 458 109 567
-----------------------------------------------
Net earnings per common share $ 0.12 $ 0.12
=============== ===============
Year Ended March 31, 1997
Sales $ 15,836 $ 8,733 $ 24,569
Total revenues 19,746 8,433 28,179
Cost of sales 14,284 6,419 20,703
Total costs and expenses 18,597 7,813 26,410
Earnings before provision for income taxes 1,149 620 1,769
Provision for income taxes 405 - 405
Earnings before extraordinary item 744 620 1,364
Extraordinary gain - - -
Net earnings 744 620 1,364
---------------------------------------------------
Net earnings per common share $ 0.14 $ 0.23
=============== ===============
Year Ended March 31, 1998
Sales
Total revenues
Cost of sales
Total costs and expenses
Earnings before provision for income taxes
Provision for income taxes
Earnings before extraordinary item
Extraordinary gain
Net earnings
Net earnings per common share
</TABLE>
F-24
<PAGE> 101
<TABLE>
<S> <C>
================================================================================ =====================================
No person has been authorized in connection with the Offering made hereby to 2,964,305 SHARES
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be MLC HOLDINGS, INC.
relied upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation to buy any of COMMON STOCK
the securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
----------------
------------------------
PROSPECTUS
TABLE OF CONTENTS
---------------
------------------------
Page
----
Available Information................................................ 2
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 8
The Company...........................................................22
Use of Proceeds...................................................... 24
Dividend Policy...................................................... 24
Capitalization........................................................24
Selected Consolidated Financial Data..................................25
Management's Discussion and Analysis of
Results of Operations and Financial February 11, 1998
Condition.......................................................... 27
Business .............................................................37
Management............................................................51
Certain Transactions..................................................63
Principal Stockholders................................................66
Selling Stockholders..................................................69
Price Range of Common Stock .........................................71
Description of Capital Stock..........................................71
Plan of Distribution..................................................75
Legal Matters.........................................................76
Experts...............................................................76
Index to Consolidated Financial
Statements.........................................................F-1
================================================================================ =====================================
</TABLE>
