FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter
ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to .
Commission file number: 0-28926
MLC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Rd., Suite 110, Reston, VA 20190-5321
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Common Stock outstanding as of November 11,
1998, was 7,467,102.
<PAGE>
MLC HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Part I. Financial Information:
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998
(Unaudited)and March 31, 1998 2
Condensed Consolidated Statements of Earnings, Three months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 3
Condensed Consolidated Statements of Earnings, Six months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows, Six months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
September 30, 1998 March 31, 1998
(Unaudited)
---------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,223,316 $ 18,683,796
Accounts receivable 24,167,898 16,383,314
Other receivables 1,277,801 3,801,808
Employee advances 45,893 53,582
Inventories 6,234,888 1,213,734
Investment in direct financing and sales type leases - net 75,104,615 32,495,594
Investment in operating lease equipment - net 6,597,406 7,295,721
Property and equipment - net 1,407,566 1,131,512
Other assets 9,750,453 2,136,554
===================================================
TOTAL ASSETS $ 129,809,836 $ 83,195,615
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 8,050,299 $ 6,865,419
Accounts payable - equipment 28,123,867 21,283,582
Salaries and commissions payable 338,901 390,081
Accrued expenses and other liabilities 3,858,405 3,560,181
Recourse notes payable 31,879,007 13,037,365
Nonrecourse notes payable 24,738,407 13,027,676
Deferred taxes 1,487,000 1,487,000
Income tax payable 885,153 -
---------------------------------------------------
Total Liabilities 99,361,039 59,651,304
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
6,355,991 and 6,071,505 issued and outstanding at
September 30, 1998 and March 31, 1998, respectively 63,560 60,715
Additional paid-in capital 15,258,225 11,460,331
Retained earnings 15,127,012 12,023,265
---------------------------------------------------
Total Stockholders' Equity 30,448,797 23,544,311
===================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,809,836 $ 83,195,615
===================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
--------------------------------------------
REVENUES
<S> <C> <C>
Sales of equipment $ 19,830,451 $ 10,360,696
Sales of leased equipment 11,648,919 12,046,271
--------------------------------------------
31,479,370 22,406,967
Lease revenues 5,264,385 2,993,670
Fee and other income 1,257,340 1,468,285
--------------------------------------------
6,521,725 4,461,955
--------------------------------------------
TOTAL REVENUES 38,001,095 26,868,922
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 16,724,750 8,104,931
Cost of sales, leased equipment 11,340,648 11,667,934
--------------------------------------------
28,065,398 19,772,865
Direct lease costs 1,678,631 1,238,104
Professional and other fees 322,528 244,612
Salaries and benefits 3,033,226 2,399,029
General and administrative expenses 1,311,804 986,677
Interest and financing costs 856,089 509,480
Non-recurring acquisition costs - 183,453
--------------------------------------------
7,202,278 5,561,355
--------------------------------------------
TOTAL COSTS AND EXPENSES 35,267,676 25,334,220
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,733,419 1,534,702
--------------------------------------------
PROVISION FOR INCOME TAXES 1,093,368 411,820
--------------------------------------------
NET EARNINGS $ 1,640,051 $ 1,122,882
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.26 $ 0.19
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.25 $ 0.18
============================================
PRO FORMA NET EARNINGS (See Note 4) $ 1,640,051 $ 974,536
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.26 $ 0.16
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.25 $ 0.16
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,348,603 6,069,551
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,439,658 6,211,929
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
--------------------------------------------
REVENUES
<S> <C> <C>
Sales of equipment $ 30,104,885 $ 25,493,028
Sales of leased equipment 36,559,565 32,186,511
--------------------------------------------
66,664,450 57,679,539
Lease revenues 10,249,472 6,516,239
Fee and other income 2,669,974 2,819,166
--------------------------------------------
12,919,446 9,335,405
--------------------------------------------
TOTAL REVENUES 79,583,896 67,014,944
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 25,008,422 20,085,389
Cost of sales, leased equipment 36,153,714 31,579,951
--------------------------------------------
61,162,136 51,665,340
Direct lease costs 3,670,459 2,628,859
Professional and other fees 519,493 440,874
Salaries and benefits 5,401,827 4,784,885
General and administrative expenses 2,299,675 2,154,786
Interest and financing costs 1,357,394 975,264
Non-recurring acquisition costs - 183,453
--------------------------------------------
13,248,848 11,168,121
--------------------------------------------
TOTAL COSTS AND EXPENSES 74,410,984 62,833,461
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 5,172,912 4,181,483
--------------------------------------------
PROVISION FOR INCOME TAXES 2,069,165 872,133
--------------------------------------------
NET EARNINGS $ 3,103,747 $ 3,309,350
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.50 $ 0.55
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.49 $ 0.54
============================================
PRO FORMA NET EARNINGS (See Note 4) $ 3,103,745 $ 2,696,089
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.50 $ 0.45
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.49 $ 0.44
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,214,103 5,990,200
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,346,548 6,106,753
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
-------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net earnings $ 3,103,747 $ 3,309,350
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,652,979 2,328,955
Provision for credit losses 500,000 (30,000)
Gain on sale of operating lease equipment (3,689) (313,295)
Adjustment of basis to fair market value of equipment
and investments 268,506 231,000
Payments from lessees directly to lenders (563,025) (992,838)
Compensation to outside directors - stock options - 12,109
Changes in assets and liabilities, net of effects of
purchase acquisition:
Accounts receivable (1,544,834) (4,613,259)
Other receivables 2,524,007 (2,292,681)
Employee advances 14,194 (25,806)
Inventories (4,297,786) (351,452)
Other assets (1,166,603) (429,216)
Accounts payable - equipment 7,794,860 1,820,066
Accounts payable - trade (5,737,180) 1,435,326
Salaries and commissions payable, accrued
expenses and other liabilities 687,224 55,238
-------------------------------------
Net cash provided by operating activities 4,232,400 143,497
-------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 3,750 579,813
Purchase of operating lease equipment (1,678,067) (1,163,208)
Increase in investment in direct financing and sales-type leases (46,697,227) (3,166,666)
Purchases of property and equipment (281,398) (327,366)
Cash used in acquisition, net of cash acquired (3,485,279) -
Increase in other assets (437,809) (223,671)
-------------------------------------
Net cash used in investing activities (52,576,030) (4,301,098)
-------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 18,512,294 2,356,775
Recourse 258,316 109,972
Repayments:
Nonrecourse (2,650,333) (2,246,963)
Recourse (80,011) (110,812)
Distributions to shareholders of combined companies
prior to business combination - (1,087,270)
Proceeds from issuance of capital stock, net of expenses 177,931 -
Proceeds from sale of stock 2,000,000
Proceeds from lines of credit 18,664,953 4,321,000
-------------------------------------
Net cash provided by financing activities 34,883,150 5,342,702
-------------------------------------
Net(Decrease)Increase in Cash and Cash Equivalents (13,460,480) 1,185,101
Cash and Cash Equivalents, Beginning of Period 18,683,796 6,654,209
-------------------------------------
Cash and Cash Equivalents, End of Period $ 5,223,316 $ 7,839,310
=====================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 216,428 $ 206,266
=====================================
Cash paid for income taxes $ 324,446 $ 1,812,233
=====================================
See Notes To Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1998, the condensed
consolidated statements of earnings for the three months and six months ended
September 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six months ended September 30, 1998 and 1997 have been prepared by
the Company without audit.
The quarterly financial information is submitted in response to the requirements
of Form 10-Q and does not purport to be financial statements prepared in
accordance with generally accepted accounting principles. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. They therefore do not include all disclosures which might be associated
with such statements.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, necessary
to present fairly the Company's financial position at September 30 and March 31,
1998, the results of operations for the three and six month periods ending
September 30, 1998 and 1997, and the cash flows for the six month periods ended
September 30, 1998 and 1997. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended March 31, 1998 included in the Company's Annual Report on
Form 10-K (No. 0-28926).
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
<TABLE>
<CAPTION>
The Company's investment in direct financing and sales-type leases consists of the following components:
September 30, March 31,
1998 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
Minimum lease payments $71,813 $ 29,968
Estimated unguaranteed residual value 12,133 7,084
Initial direct costs - net of amortization 1,391 760
Less: Unearned lease income (9,686) (5,270)
Reserve for credit losses (546) (46)
================== ==================
Investment in direct financing and sales type leases - net $75,105 $ 32,496
================== ==================
</TABLE>
<PAGE>
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
<TABLE>
<CAPTION>
The components of the net investment in operating lease equipment are as
follows:
September 30, March 31,
1998 1998
----------------- ------------------
(In thousands)
<S> <C> <C>
Cost of equipment under operating leases $15,403 $ 13,990
Initial direct costs 29 51
Accumulated depreciation and amortization (8,835) (6,745)
----------------- ------------------
Investment in operating leases - net $ 6,597 $ 7,296
================= ==================
</TABLE>
4. 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
(In thousands)
------------ -------------- ------------- ---------------
Net earnings before pro forma adjustment
<S> <C> <C> <C> <C>
$ 1,640 $ 1,123 $ 3,104 $ 3,309
Additional provision for income tax - 148 - 613
============ ============== ============= ==============
Pro forma net income $ 1,640 $ 975 $ 3,104 $ 2,696
============ ============== ============= ===============
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and presentation of comprehensive income
and its components in financial statements by requiring minimum pension
liability adjustments, unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive earnings. The Company currently has no items of other
comprehensive income to be reported.
<PAGE>
6. BUSINESS COMBINATION
On July 1, 1998, the Company, through a new wholly owned subsidiary, MLC Network
Solutions of Virginia, Inc., issued 263,478 common shares, valued at $3,622,822,
and cash of $3,622,836 for all the outstanding common shares of PC Plus, Inc., a
value-added reseller of PC's , related network equipment and software products
and provider of various support services to its customers from its facility in
Reston, Virginia. Subsequent to the acquisition, MLC Network Solutions of
Virginia, Inc. changed its name to PC Plus, Inc. This business combination has
been accounted for using the purchase method of accounting, and accordingly, the
results of operations of PC Plus, Inc. have been included in the Company's
consolidated financial statements from July 1, 1998. The Company's other assets
include goodwill calculated as the excess of the purchase price over the fair
value of the net identifiable assets acquired of $6,045,330, and is being
amortized on a straight-line basis over 27.5 years.
The following unaudited pro forma financial information presents the combined
results of operations of PC Plus, Inc. as if the acquisition had occurred as of
the beginning of the six months ended September 30, 1998 and 1997, after giving
effect to certain adjustments, including amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and PC Plus, Inc. constituted a single
entity during such periods.
Six Months Ended September 30,
(in thousands)
1998 1997
-------------- --------------
Total Revenues 91,522 82,083
Net Earnings 3,323 3,735
Net Earnings per Common Share - Basic .52 .60
Net Earnings per Common Share - Diluted .51 .59
<PAGE>
7. OTHER DEVELOPMENT
One of the Company's equipment sales and lease customers has filed for voluntary
bankruptcy protection. Allegheny Health, Education & Research Foundation
("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. On
July 21, 1998, AHERF, and some but not all of its operating subsidiaries filed
for bankruptcy and agreed to sell its eight Philadelphia-area hospitals to
Vanguard Health Systems, Inc., a Tennessee based for-profit company, subject to
court approval. Since then, the bankruptcy court held an auction and Tenet
Healthcare, Inc. acquired AHERF's assets. As of September 30, 1998, the
Company's net book value of leases to AHERF is approximately $1,983,000 and
receivable balance is approximately $481,000. The Company believes that the fair
market value of the equipment may be below its current balances, and, depending
on the assumption or rejection of the leases by the Bankruptcy Trustee and the
creditor status and ultimate repayment schedule of other claims, upon disposal
of the equipment and disposition of its claims, the Company could incur a loss
with respect to its current balances. The amount and timing of such losses
cannot be accurately estimated by the Company at this time due to the recent
filing and unknown status of many of its claims. On September 21, 1998, the
bankruptcy court issued an order requiring AHERF to make lease payments to the
Company. The Company is vigorously pursuing all available remedies in bankruptcy
court. The Company believes that as of September 30, 1998, its reserves are
adequate to provide for the potential loss resulting from this customer.
8. PRIVATE PLACEMENT OF EQUITY SUBSEQUENT TO QUARTER END
On October 23, 1998, the Company issued 1,111,111 shares of unregistered common
stock to a single investor in a private placement for cash consideration of
$10,000,000 (per share price of $9.00). The investor also received a warrant to
purchase an additional 1,099,909 shares of common stock at an exercise price of
$11.00 per share. The warrant expires December 31, 2001.
<PAGE>
Item 2. Management's Discussion and Analysis of RESULTS OF OPERATIONS, 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
report.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this Report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, including, without
limitation, demand and competition for the Company's lease financing services
and the products to be leased by the Company, the continued availability to the
Company of adequate financing, the ability of the Company to recover its
investment in equipment through re-marketing, the ability of the Company to
manage its growth, and other risks or uncertainties detailed in the Company's
Securities and Exchange Commission filings.
The Company's results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, differences between estimated
residual values and actual amounts realized related to the equipment the Company
leases. Operating results could also fluctuate as a result of the sale by the
Company of equipment in its lease portfolio prior to the expiration of the lease
term to the lessee or to a third party. Such sales of leased equipment prior to
the expiration of the lease term may have the effect of increasing revenues and
net earnings during the period in which the sale occurs, and reducing revenues
and net earnings otherwise expected in subsequent periods.
RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 1998
(Unaudited) Compared to Three and Six Months Ended September 30, 1997
(Unaudited)
The following discussion and analysis of the Company's results of operations
should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements for the three and six month periods ended
September 30, 1998 and 1997.
Total revenues generated by the Company during the three month period ended
September 30, 1998 were $38,001,095, compared to revenues of $26,868,922 during
the comparable period in the prior fiscal year, an increase of 41.4%. During the
six month period ended September 30, total revenues were $79,583,896 and
$67,014,944 in 1998 and 1997, respectively, an increase of 18.8%. The Company's
revenues are composed of sales and other revenue, and may vary considerably from
period to period (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 40.5% to $31,479,370 during the three month period ended September 30,
1998, as compared to $22,406,967 in the corresponding period in the prior fiscal
year. For the six month period ended September 30 1998, sales increased 15.6% to
$66,664,450 over the corresponding period in the prior year.
During the three months ended September 30, 1998 and 1997, sales to MLC/CLC,
LLC, an institutional equity partner of the Company, accounted for 100% of sales
of leased equipment for both periods. During the six month periods ended
September 30, sales to MLC/CLC LLC accounted for 100% and 86.1% of 1998 and 1997
sales of leased equipment, respectively. Sales to the Company's equity joint
ventures require the consent of the relevant joint venture partner. While
management expects the continued availability of equity financing through this
joint venture, if such consent is withheld, or financing from this entity
otherwise becomes unavailable, it could have a material adverse effect upon the
Company's business, financial condition, results of operations and cash flows
until other equity financing arrangements are secured.
<PAGE>
Sales of equipment, both new and used, are generated through the Company's
equipment brokerage and re-marketing activities, and through its valued added
reseller ("VAR") subsidiaries. Sales of equipment increased during the three
month period (91.4%) $9,469,755 compared to the corresponding period in the
prior fiscal year. For the fiscal year to date through September 30, equipment
sales increased 18.09% to $30,104,885. On a pro forma basis, had PC Plus, Inc.'s
equipment sales been included throughout the periods presented, equipment sales
would have increased 5.0% and 4.1% during the three and six month periods ended
September 30, 1998, as compared to the comparable periods in the prior fiscal
year. The Company's brokerage and re-marketing activities accounted for 3.6% and
18.0% of equipment sales during the three month period in 1998 and 1997,
respectively. During the six month periods ended September 30, brokerage and
re-marketing activities accounted for 4.1% and 15.8% of 1998 and 1997 sales,
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. Sales of equipment through the Company's VAR
subsidiaries accounted for the remaining portion of equipment sales.
The Company realized a gross margin on sales of equipment of 15.7% and 16.9% for
the three and six month periods ended September 30, 1998, respectively, as
compared to a gross margin of 21.8% and 21.2% realized on sales of equipment
generated during the three and six months periods, respectively, in the prior
fiscal year. This decrease in net margin percentage can be attributed to the
Company's July 1, 1998 acquisition of PC Plus, Inc., who has a concentration of
higher volume customers with lower gross margin percentages. The Company's gross
margin on sales of equipment can be effected by the mix and volume of products
sold.
The gross margin generated on sales of leased equipment represent the sale of
the equity portion of equipment placed under lease and can vary significantly
depending on the nature, and timing of the sale, as well as the timing of any
debt funding recognized in accordance with SFAS No. 125. For example, a lower
margin or a loss on the equity portion of a transaction is often offset by
higher lease earnings and/or a higher gain on the debt funding recognized under
SFAS No. 125. Additionally, leases which have been debt funded prior to their
equity sale will result in a lower sales and cost of sale figure, but the net
earnings from the transaction will be the same as had the deal been debt funded
subsequent to the sale of the equity. During the three month period ended
September 30, 1998, the Company recognized a gross margin of $308,271 on equity
sales of $11,648,919, as compared to a gross margin of $378,337 on equity sales
of $12,046,271 during the same period in the prior fiscal year. For the fiscal
year to date through September 30, 1998, the Company recognized a gross margin
of $405,851 on equity sales of $36,559,565, as compared to a gross margin of
$606,560 on equity sales of $32,186,511 during the same period in the prior
fiscal year.
The Company's lease revenues increased 75.9% to $5,264,385 for the three-month
period ended September 30, 1998, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through September 30, lease
revenues increased 57.2% to $10,249,472 for the 1998 period compared to the same
period in 1997. This increase consists of increased lease earnings and rental
revenues reflecting a higher average investment in direct financing and
sales-type leases. The investment in direct financing and sales-type leases at
September 30, 1998 and March 31, 1998 were $75,104,615 and $32,495,594,
respectively. The September 30, 1998 balance represents an increase of
$42,609,021 or 131.1% over the balance as of March 31, 1998. 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 Financial Assets and Extinguishments
of Liabilities," ("SFAS No. 125") which was effective beginning January 1, 1997.
During the three and six month periods ending September 30, 1998, fewer of the
Company's debt funding transactions qualified for gain on sale treatment
prescribed under SFAS No. 125 as compared to the comparable periods in the prior
fiscal year.
For the three and six months ended September 30, 1998, fee and other income
decreased 14.4% and 5.3%, respectively, over the comparable period in the prior
fiscal year. This decrease is attributable to decreases in revenues from adjunct
services and fees, including broker fees, support fees, warranty reimbursements,
and learning center revenues generated by the Company's VAR subsidiaries.
Included in the Company's fee and other income are earnings from certain
transactions which are in the Company's normal course of business but there is
no guarantee that future transactions of the same nature, size or profitability
will occur. The Company's ability to consumate such transactions, and the timing
thereof, may depend largely upon factors outside the direct control of
management. The earnings from these types of transactions in a particular period
may not be indicative of the earnings that can be expected in future periods.
The Company's direct lease costs increased 35.6% and 39.6% during the three and
six month periods ended September 30, 1998 as compared to the same periods in
the prior fiscal year. Although the largest component of direct lease costs is
depreciation on operating lease equipment, the increase is primarily
attributable to an increase in the allowance for doubtful accounts due to the
increased business volume of leases and retained lease portfolio, increased
amortization of initial direct costs.
Salaries and benefits expenses increased 26.4% during the three month period
ended September 30, 1998 over the same period in the prior year. For the fiscal
year to date through September 30, 1998, salaries and benefits had increased
12.9% over the prior year. These increases reflect both the higher commission
expenses in the value added reseller businesses the increased number of
personnel employed by the Company.
<PAGE>
Interest and financing costs incurred by the Company for the three and six
months ended September 30, 1998 amounted to $856,089 and $1,357,394
respectively, and relate to interest costs on the Company's lines of credit and
notes payable. Payment for interest costs on the majority of non-recourse and
certain recourse notes are typically remitted directly to the lender by the
lessee. The increase in interest and financing costs are primarily due to the
Company's increased utilization of its operating lines of credit during the
three and six month periods in the current fiscal year as compared to the prior
fiscal year.
The Company's provision for income taxes increased to $1,093,368 for the three
months ended September 30, 1998 from $411,820 for the three months ended
September 30, 1997, reflecting effective income tax rates of 40.0% and 26.8%,
respectively. For the six months ended September 30, 1998, the Company's
provision for income tax was $2,069,165, as compared to $872,133 during the
comparable period in the prior year, reflecting effective income tax rates of
40.0% and 20.9%, respectively. The low effective income tax rate for September
30, 1997 was primarily due to the inclusion of the net earnings of businesses
acquired by the Company, which prior to their combination with the Company had
elected subchapter S corporation status, and as such, were not previously
subject to federal income tax. Pro forma tax expense, adjusted as if the
Company's subsidiaries which were previously subchapter S corporations had been
subject to income tax for the three and six months ended September 30, 1997,
would have increased the expense by approximately $148,000 and $613,000.
The foregoing resulted in a 68.3% and 15.1% increase in net earnings for the
three and six month periods ended September 30, 1998, respectively, as compared
to the same periods in the prior fiscal year after taking into consideration the
pro forma tax expense. Notwithstanding pro forma tax adjustments, net earnings
increased 46.1% and decreased 6.2% for the three and six month periods ended
September 30, 1998 as compared to the same periods in the prior fiscal year.
Basic and fully diluted earnings per common share were $.26 and $.25,
respectively, for the three months ended September 30, 1998, as compared to $.19
and .18, respectively, for the three months ended September 30, 1997, based on
weighted average common shares outstanding of 6,348,603 and 6,439,658,
respectively, for 1998, and 6,069,551 and 6,211,929, respectively, for 1997. For
the fiscal year to date through September 30, 1998, the Company's basic and
fully diluted earnings per common share were $.50 and $.49, respectively, as
compared to $.55 and $.54, respectively, for the same period in 1997, based on
weighted average common shares outstanding of 6,214,103 and 6,346,548,
respectively, for 1998, and 5,990,200 and 6,106,753, respectively, for 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended September 30, 1998, the Company generated cash
flows from operations of $4,232,400, and used cash flows from investing
activities of $52,576,030. Cash flows generated by financing activities amounted
to $34,883,150 during the same period. The net effect of these cash flows was to
decrease cash and cash equivalents by $13,460,480 during the six month period.
During the same period, the Company's total assets increased $46,614,221, or
56.0%, primarily the result of increases in direct financing leases and the
acquisition of PC Plus, Inc., a wholly owned subsidiary, on July 1, 1998. The
Company's net investment in operating lease equipment decreased during the
period, as the decrease in book value, primarily due to depreciation, outpaced
new investment in operating lease equipment.
The financing necessary to support the Company's leasing activities has
principally been provided from non-recourse and recourse borrowings.
Historically, the Company has obtained recourse and non-recourse borrowings from
money centers, regional banks, insurance companies, finance companies and
financial intermediaries.
The Company's "Accounts payable - equipment" represents equipment costs that
have been placed on a lease schedule, but for which the Company has not yet
paid. The balance of unpaid equipment cost can vary depending on vendor terms
and the timing of lease originations. As of September 30, 1998, the Company had
$28,123,867 of unpaid equipment cost, as compared to $21,283,582 at March 31,
1998.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. On June 5, 1997, the
Company entered into the First Union Facility with First Union National Bank,
N.A., which is available through December 19, 1998, and bears interest at
LIBOR+110 basis points, or, at the Company's option, Prime minus one percent. On
June 30, 1998, the Company's First Union Facility was increased to a maximum
limit of $35 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, 1998, the Company had an outstanding balance of $30,500,000
on the First Union Facility. The First Union facility is made to MLC Group,
Inc., and guaranteed by MLC Holdings, Inc. In addition, MLC Holdings, Inc. has
guaranteed the lines of credit made to the Company's recently acquired
subsidiaries. The Company expects to renew the First Union Facility at a
reasonable rate when it expires on December 19, 1998.
<PAGE>
The Company's subsidiaries, MLC Network Solutions, Inc. and MLC Integrated,
Inc., and it's recently acquired subsidiary, PC Plus, Inc., have separate credit
sources to finance their working capital requirements for inventories and
accounts receivable. Their traditional business as value-added resellers of PC's
and related network equipment and software products is financed through
agreements known as "floor planning" financing where interest expense for the
first thirty to forty days is 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 thirty to forty day time frame and represent
an assigned accounts payable originally generated with the supplier/distributor.
If the thirty to forty day obligation is not timely liquidated, interest is then
assessed at stated contractual rates. As of September 30, 1998, MLC Network
Solutions, Inc., has floor planning availability of $1,350,000 through Deutsche
Financial, Inc. and $225,000 from IBM Credit Corporation. The outstanding
balances to these respective suppliers were $376,249 and $51,788 as of September
30, 1998. MLC Integrated, Inc. has floor planning availability of $1,500,000
from FINOVA Capital Corporation and $750,000 through IBM Credit Corporation. The
outstanding balances to these respective suppliers were $1,355,505, and $56,162
as of September 30, 1998. In addition, MLC Integrated, Inc. has a line of credit
in place, expiring on October 31, 1998, with PNC Bank, N.A. to provide an asset
based credit facility. The Company is currently negotiating an extension of this
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 $917,000 as of
September 30, 1998. PC Plus, Inc. has floor planning availability of $6,000,000
through Nations Credit as of September 30, 1998. This agreement expires October
1, 1998 and is subject to a one-year renewal. The outstanding balance to this
supplier was $1,942,083 as of September 30, 1998.
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, subject to the approval of Heller for
each draw. As of September 30, 1998, the principal balance due under the Heller
Facility was $3,476,124. Rates are negotiated at the time of each draw.
Through MLC/CLC, LLC, the Company has a formal joint venture agreement which
provides the equity investment financing for certain of the Company's
transactions. Firstar Equipment Finance Company ("FEFCO"), formerly Cargill
Leasing Corporation, is an unaffiliated investor which owns 95% of MLC/CLC, LLC.
FEFCO's parent company, Firstar Corporation, is a $20 billion bank holding
company which is publicly traded on the New York Stock Exchange under the symbol
"FSR". This joint venture arrangement enables 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 MLC/CLC, LLC. (See "RESULTS
OF OPERATIONS"). The Company's relationship with GATX, an unaffiliated company
which beneficially owns 90% of MLC/GATX Limited Partnership I, was effectively
terminated in August, 1998. This termination caused the Company to write off
approximately $154,500 in the current period representing its remaining joint
venture investment and miscellaneous receivables.
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 MLC/CLC,LLC , 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, 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 intends to continue pursuing
additional acquisitions, which are expected to be funded through a combination
of cash and 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the time of any material decrease in
any widely followed stock index or in the market price of the stock of one or
more public equipment leasing and financing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, any reduction of
expected residual values related to the equipment under the Company's 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 a 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.
<PAGE>
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first two quarters of fiscal 1999.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
The Company's strategy depends upon acquisitions and organic growth to increase
its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and cross selling activities also could adversely
affect the Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will occur at the same
pace as in prior periods or be available to the Company on favorable terms, if
at all. If the Company is unable to use the Company's common stock as
consideration in acquisitions, for example, because it believes that the market
price of the common stock is too low or because the owners of potential
acquisition targets conclude that the market price of the Company's common stock
is too volatile, the Company would need to use cash to make acquisitions, and,
therefore, would be unable to negotiate acquisitions that it would account for
under the pooling-of-interests method of accounting (which is available only for
all-stock acquisitions). This might adversely affect the pace of the Company's
acquisition program and the impact of acquisitions on the Company's quarterly
results. In addition, the consolidation of the equipment leasing business has
reduced the number of companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. The failure to acquire additional businesses or to acquire such
businesses on favorable terms in accordance with the Company's growth strategy
could have a material adverse impact on future sales and profitability.
There can be no assurance that companies that have been acquired or that may be
acquired in the future will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
The Company has increased the range of products and services it offers through
acquisitions of companies offering products and services that are complementary
to the core financing and equipment brokering services that the Company has
offered since it began operations. The Company's ability to manage an aggressive
consolidation program in markets other than domestic equipment financing has not
yet been fully tested. The Company's efforts to sell additional products and
services to existing customers are in their early stages and there can be no
assurance that such efforts will be successful. In addition, the Company expects
that certain of its products and services will not be easily cross-sold and may
be marketed and sold independently of other products and services.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management administration. The various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. There can be no assurance that the Company's executive
management group can continue to oversee the Company and effectively implement
its operating or growth strategies in each of the markets that it serves. In
addition, there can be no assurance that the pace of the Company's acquisitions,
or the diversification of its business outside of its core leasing operations,
will not adversely affect the Company's efforts to implement its cost-savings
and integration strategies and to manage its acquisitions profitability.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic and
product markets, and other competitors may choose to enter the Company's
geographic and product markets in the future. No assurances can be give that
competition will not have an adverse effect on the Company's business.
<PAGE>
YEAR 2000 ISSUE
The Company has identified all significant internal software and hardware
applications that will require modifications to ensure Year 2000 compliance of
the Company's IT and non-IT systems. Internal and external resources are being
used to make the required modifications and test Year 2000 compliance. The
modification process of all significant internal applications and operational
systems is substantially complete. The Company plans on completing the process
of modifying all significant applications by December 31, 1998. The total cost
to the Company of these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position, results of operations or
cash flows in any given year.
The Company is aware of general risks to third parties with whom it deals on
financial transactions from such parties' failure to remediate their own year
2000 issues; however, due to the nature of the Company's business and
relationships, the Company believes that economy-wide year 2000 issues pose a
greater potential risk than issues arising from the specific nature of the
Company's business or relationships.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Under Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On September 16, 1998, the Company held its Annual Meeting of
Stockholders.
1. At the Annual Meeting, Terrence O'Donnell was elected to the Board of
Directors as a Class II director to hold office for three years until his
successor has been duly elected and shall qualify, with votes cast and
withheld as follows:
For Withheld
4,877,610 1,467,873
2. At the Annual Meeting, Carl J. Rickertson was elected to the Board of
Directors as a Class II director to hold office for three years until his
successor has been
For Withheld
4,877,610 1,467,873
In addition, the Company's stockholders approved the following
proposals at the Annual Meeting, with votes for and against,
abstentions and broker non-votes follow:
3. To approve and adopt the long-term incentive plan.
For Against Abstain Broker Non-Votes
4,458,649 48,000 0 1,838,834
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the Company's fiscal year ending March 31, 1999.
For Against Abstain Broker Non-Votes
4,877,610 0 0 1,467,873
Item 5. Other Information
Not Applicable
<PAGE>
Item 6(a) Exhibits
Exhibit
Number Description Page
-------------- ---------------------------------------------------------
10.27 1998 Long Term Incentive Plan X
27.1 Financial Data Schedule X
Item 6(b) Reports on Form 8-K
During the second fiscal quarter covered by this report, the Company
filed the following Current Reports on form 8-K:
Form 8-K Dated June 30, 1998 and filed with the Commission on July 31,
1998, reporting interim information regarding the acquisition of PC
Plus, Inc. of Reston, Virginia. No financial statements were included.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
MLC Holdings, Inc.
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: November 11, 1998
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: November 11, 1998
MLC HOLDINGS, INC.
1998 LONG-TERM INCENTIVE PLAN
APPENDIX A
ARTICLE I
PURPOSE
1.1 GENERAL. The purpose of the MLC Holdings, Inc. 1998 Long-Term Incentive Plan
(the "Plan") is to promote the success, and enhance the value, of MLC Holdings,
Inc. (the "Corporation"), by linking the personal interests of its employees,
officers, consultants and directors to those of Corporation stockholders and by
providing such persons with an incentive for outstanding performance. The Plan
is further intended to provide flexibility to the Corporation in its ability to
motivate, attract, and retain the services of employees, officers, consultants
and directors upon whose judgment, interest, and special effort the successful
conduct of the Corporation's operation is largely dependent. Accordingly, the
Plan permits the grant of incentive awards from time to time to selected
employees, officers, consultants and directors. In addition, the Plan provides
for automatic annual grants of options to Non-Employee Directors of the Company
as provided in Article 13.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan shall be effective as of the date upon which it
shall be approved by the Board. However, the Plan shall be submitted to the
stockholders of the Corporation for approval within 12 months of the Board's
approval thereof. No Incentive Stock Options granted under the Plan may be
exercised prior to approval of the Plan by the stockholders and if the
stockholders fail to approve the Plan within 12 months of the Board's approval
thereof, any Incentive Stock Options previously granted hereunder shall be
automatically converted to Non-Qualified Stock Options without any further act.
In the discretion of the Committee, Awards may be made to Covered Employees
which are intended to constitute qualified performance-based compensation under
Code Section 162(m). Any such Awards shall be contingent upon the stockholders
having approved the Plan.
ARTICLE 3
DEFINITIONS
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial
letter capitalized, and the word or phrase does not commence a sentence, the
word or phrase shall generally be given the meaning ascribed to it in this
Section, unless a clearly different meaning is required by the context. The
following words and phrases shall have the following meanings:
<PAGE>
"Award" means any Option, Stock Appreciation Right, Restricted Stock Award,
Performance Unit Award, Dividend Equivalent Award, or Other Stock-Based Award,
or any other right or interest relating to Stock or cash, granted to a
Participant under the Plan.
"Award Agreement" means any written agreement, contract, or other instrument or
document evidencing an Award.
"Board" means the Board of Directors of the Corporation.
"Change in Control" means and includes each of the following:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of 25% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(1), the following acquisitions shall not constitute a Change of Control:
(i) any acquisition by a Person who is on the Effective Date the
beneficial owner of 25% or more of the Outstanding Company Voting
Securities, (ii) any acquisition directly from the Company, (iii) any
acquisition by the Company, (iv) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (v) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i),
(ii) and (iii) of subsection (3) of this definition; or
(2) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the Effective Date whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company Voting
Securities immediately prior to such Business Combination
- 2 -
<PAGE>
beneficially own, directly or indirectly, more than 50% of the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Voting Securities, and (ii) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 25% or more of the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such ownership
existed prior to the Business Combination, and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination; or
(4) Approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
"Committee" means the committee of the Board described in Article 4.
"Corporation" means MLC Holdings, Inc., a Delaware corporation.
162(m)(3).
"Disability" shall mean any illness or other physical or mental condition of a
Participant that renders the Participant incapable of performing his customary
and usual duties for the Corporation, or any medically determinable illness or
other physical or mental condition resulting from a bodily injury, disease or
mental disorder which, in the judgment of the Committee, is permanent and
continuous in nature. The Committee may require such medical or other evidence
as it deems necessary to judge the nature and permanency of the Participant's
condition.
"Dividend Equivalent" means a right granted to a Participant under Article 11.
"Effective Date" has the meaning assigned such term in Section 2.1.
- 3 -
<PAGE>
"Fair Market Value", on any date, means (i) if the Stock is listed on a
securities exchange or is traded over the Nasdaq National Market, the closing
sales price on such exchange or over such system on such date or, in the absence
of reported sales on such date, the closing sales price on the immediately
preceding date on which sales were reported, or (ii) if the Stock is not listed
on a securities exchange or traded over the Nasdaq National Market, the mean
between the bid and offered prices as quoted by Nasdaq for such date, provided
that if it is determined that the fair market value is not properly reflected by
such Nasdaq quotations, Fair Market Value will be determined by such other
method as the Committee determines in good faith to be reasonable.
"Incentive Stock Option" means an Option that is intended to meet the
requirements of Section 422 of the Code or any successor provision thereto.
"Non-Employee Director" means a member of the Board who is not an employee of
the Corporation or any Parent or Subsidiary.
"Non-Qualified Stock Option" means an Option that is not an Incentive Stock
Option.
"Option" means a right granted to a Participant under the Plan to purchase Stock
at a specified price during specified time periods. An Option may be either an
Incentive Stock Option or a Non-Qualified Stock Option; provided, that Options
granted under Article 13 shall be Non-Qualified Options.
"Other Stock-Based Award" means a right, granted to a Participant under Article
12, that relates to or is valued by reference to Stock or other Awards relating
to Stock.
"Parent" means a corporation which owns or beneficially owns a majority of the
outstanding voting stock or voting power of the Corporation. For Incentive Stock
Options, the term shall have the same meaning as set forth in Code Section
424(e).
"Participant" means a person who, as an employee, officer, consultant or
director of the Corporation or any Subsidiary, has been granted an Award under
the Plan.
"Performance Unit" means a right granted to a Participant under Article 9, to
receive cash, Stock, or other Awards, the payment of which is contingent upon
achieving certain performance goals established by the Committee.
"Plan" means the MLC Holdings, Inc. 1998 Long-Term Incentive Plan, as amended
from time to time.
"Restricted Stock Award" means Stock granted to a Participant under Article 10
that is subject to certain restrictions and to risk of forfeiture.
- 4 -
<PAGE>
"Stock" means the $.01 par value common stock of the Corporation and such other
securities of the Corporation as may be substituted for Stock pursuant to
Article 15.
"Stock Appreciation Right" or "SAR" means a right granted to a Participant under
Article 8 to receive a payment equal to the difference between the Fair Market
Value of a share of Stock as of the date of exercise of the SAR over the grant
price of the SAR, all as determined pursuant to Article 8.
"Subsidiary" means any corporation, limited liability company, partnership or
other entity of which a majority of the outstanding voting stock or voting power
is beneficially owned directly or indirectly by the Corporation. For Incentive
Stock Options, the term shall have the meaning set forth in Code Section 424(f).
"1933 Act" means the Securities Act of 1933, as amended from time to
time.
"1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Compensation Committee of
the Board or, at the discretion of the Board from time to time, by the Board.
The Committee shall consist of two or more members of the Board. It is intended
that the directors appointed to serve on the Committee shall be "non-employee
directors" (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and
"outside directors" (within the meaning of Code Section 162(m) and the
regulations thereunder). However, the mere fact that a Committee member shall
fail to qualify under either of the foregoing requirements shall not invalidate
any Award made by the Committee which Award is otherwise validly made under the
Plan. The members of the Committee shall be appointed by, and may be changed at
any time and from time to time in the discretion of, the Board. During any time
that the Board is acting as administrator of the Plan, it shall have all the
powers of the Committee hereunder, and any reference herein to the Committee
(other than in this Section 4.1) shall include the Board.
4.2 ACTION BY THE COMMITTEE. For purposes of administering the Plan, the
following rules of procedure shall govern the Committee. A majority of the
Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved
unanimously in writing by the members of the Committee in lieu of a meeting,
shall be deemed the acts of the Committee. Each member of the Committee is
entitled to, in good faith, rely or act upon any report or other information
furnished to that member by any officer or other employee of the Corporation or
any Parent or Subsidiary, the Corporation's independent certified
- 5 -
<PAGE>
public accountants, or any executive compensation consultant or other
professional retained by the Corporation to assist in the administration of the
Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power, authority and
discretion to do the following; except as such discretion shall be limited by
the automatic provisions of Article 13 with respect to annual grants of Options
to Non-Employee Directors:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number of
shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted under
the Plan, including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the
Award, any schedule for lapse of forfeiture restrictions or
restrictions on the exercisability of an Award, and accelerations
or waivers thereof, based in each case on such considerations as
the Committee in its sole discretion determines;
(e) Accelerate the vesting or lapse of restrictions of any
outstanding Award, based in each case on such considerations as the
Committee in its sole discretion determines;
(f) Determine whether, to what extent, and under what circumstances
an Award may be settled in, or the exercise price of an Award may
be paid in, cash, Stock, other Awards, or other property, or an
Award may be canceled, forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(h) Decide all other matters that must be determined in connection
with an Award;
(i) Establish, adopt or revise any rules and regulations as it may
deem necessary or advisable to administer the Plan;
(j) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan; and
(k) Amend the Plan or any Award Agreement as provided herein.
- 6 -
<PAGE>
4.4. DECISIONS BINDING. The Committee's interpretation of the Plan, any Awards
granted under the Plan, any Award Agreement and all decisions and determinations
by the Committee with respect to the Plan are final, binding, and conclusive on
all parties.
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 15.1, the
aggregate number of shares of Stock reserved and available for Awards or which
may be used to provide a basis of measurement for or to determine the value of
an Award (such as with a Stock Appreciation Right or Performance Unit Award)
shall be that number of shares of Stock equal to: (i) 20% of the total number of
shares of Stock outstanding from time to time, as determined immediately after
giving pro forma effect to the assumed exercise of all options or other rights
to acquire Stock, less (ii) any shares of Stock that have been purchased under
the Corporation's 1997 Employee Stock Purchase Plan from time to time, and less
(iii) any shares granted pursuant to the exercise of options or otherwise
granted as awards under the MLC Master Stock Option Plan. Notwithstanding the
foregoing, (i) not more than 4,000,000 shares authorized herein may be granted
as Incentive Stock Options, and (ii) not more than 10% of the shares authorized
herein may be granted as Awards of Restricted Stock or unrestricted Stock
Awards.
5.2. LAPSED AWARDS. To the extent that an Award is canceled, terminates, expires
or lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs or
other Awards settled in cash will be available for the grant of an Award under
the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist,
in whole or in part, of authorized and unissued Stock, treasury Stock or Stock
purchased on the open market.
5.4. LIMITATION ON AWARDS. Notwithstanding any provision in the Plan to the
contrary, the maximum number of shares of Stock with respect to one or more
Options and/or SARs that may be granted during any one calendar year under the
Plan to any one Covered Employee shall be 500,000. The maximum fair market value
(measured as of the date of grant) of any Awards other than Options and SARs
that may be received by a Covered Employee (less any consideration paid by the
Participant for such Award) during any one calendar year under the Plan shall be
$2,000,000.
ARTICLE 6
ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are employees,
officers, consultants or directors of the Corporation or a Parent or Subsidiary.
ARTICLE 7
STOCK OPTIONS
- 7 -
<PAGE>
7.1. GENERAL. The Committee is authorized to grant Options to Participants on
the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock under an
Option shall be determined by the Committee, provided that the
exercise price for any Option shall not be less than the Fair
Market Value as of the date of the grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine
the time or times at which an Option may be exercised in whole or
in part. The Committee also shall determine the performance or
other conditions, if any, that must be satisfied before all or part
of an Option may be exercised. The Committee may waive any exercise
provisions at any time in whole or in part based upon factors as
the Committee may determine in its sole discretion so that the
Option becomes exerciseable at an earlier date.
(c) PAYMENT. The Committee shall determine the methods by which the
exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock, or other
property (including "cashless exercise" arrangements), and the
methods by which shares of Stock shall be delivered or deemed to be
delivered to Participants; provided that if shares of Stock
surrendered in payment of the exercise price were themselves
acquired otherwise than on the open market, such shares shall have
been held by the Participant for at least six months.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a written
Award Agreement between the Corporation and the Participant. The
Award Agreement shall include such provisions, not inconsistent
with the Plan, as may be specified by the Committee or, in the case
of Options granted pursuant to Article 13, by the provisions of
Article 13.
7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock
Options granted under the Plan must comply with the following
additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock shall be
set by the Committee, provided that the exercise price for any
Incentive Stock Option shall not be less than the Fair Market Value
as of the date of the grant.
(b) EXERCISE. In no event may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under
the earliest of the following circumstances; provided, however,
that the Committee may, prior to the lapse of the Incentive Stock
Option under the circumstances described in paragraphs (3), (4) and
(5) below, provide in writing that the Option will extend until a
later date, but if Option is exercised after the dates specified in
- 8 -
<PAGE>
paragraphs (3), (4) and (5) below, it will automatically become a
Non-Qualified Stock Option:
(1) The Incentive Stock Option shall lapse as of the option
expiration date set forth in the Award Agreement.
(2) The Incentive Stock Option shall lapse ten years after it is
granted, unless an earlier time is set in the Award Agreement.
(3) If the Participant terminates employment for any reason other
than as provided in paragraph (4) or (5) below, the Incentive Stock
Option shall lapse, unless it is previously exercised, three months
after the Participant's termination of employment; provided,
however, that if the Participant's employment is terminated by the
Company for cause or by the Participant without the consent of the
Company, the Incentive Stock Option shall (to the extent not
previously exercised) lapse immediately.
(4) If the Participant terminates employment by reason of his
Disability, the Incentive Stock Option shall lapse, unless it is
previously exercised, one year after the Participant's termination
of employment.
(5) If the Participant dies while employed, or during the
three-month period described in paragraph (3) or during the
one-year period described in paragraph (4) and before the Option
otherwise lapses, the Option shall lapse one year after the
Participant's death. Upon the Participant's death, any exercisable
Incentive Stock Options may be exercised by the Participant's
beneficiary, determined in accordance with Section 14.6.
Unless the exercisability of the Incentive Stock Option is
accelerated as provided in Article 15, if a Participant exercises
an Option after termination of employment, the Option may be
exercised only with respect to the shares that were otherwise
vested on the Participant's termination of employment.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value
(determined as of the time an Award is made) of all shares of Stock
with respect to which Incentive Stock Options are first exercisable
by a Participant in any calendar year may not exceed $100,000.00.
(e) TEN PERCENT OWNERS. No Incentive Stock Option shall be granted
to any individual who, at the date of grant, owns stock possessing
more than ten percent of the total combined voting power of all
classes of stock of the Corporation or any Parent or Subsidiary
unless the exercise price per share of such Option is at least 110%
of the Fair Market Value per share of Stock at the date of grant
and the Option expires no later than five years after the date of
grant.
- 9 -
<PAGE>
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive
Stock Option may be made pursuant to the Plan after the day
immediately prior to the tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant or,
in the case of the Participant's Disability, by the Participant's
guardian or legal representative.
(h) NON-EMPLOYEES. The Committee may not grant an Incentive Stock
Option to a non-employee. The Committee may grant an Incentive
Stock Option to a director who is also an employee of the
Corporation or Parent or Subsidiary but only in that individual's
position as an employee and not as a director.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation
Right, the Participant to whom it is granted has the right to
receive the excess, if any, of:
(1) The Fair Market Value of one share of Stock on the date of
exercise; over
(2) The grant price of the Stock Appreciation Right as determined
by the Committee, which shall not be less than the Fair Market
Value of one share of Stock on the date of grant.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall be
evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement,
and any other terms and conditions of any Stock Appreciation Right
shall be determined by the Committee at the time of the grant of
the Award and shall be reflected in the Award Agreement.
ARTICLE 9 PERFORMANCE UNITS
9.1. GRANT OF PERFORMANCE UNITS. The Committee is authorized to
grant Performance Units to Participants on such terms and
conditions as may be selected by the Committee. The Committee shall
have the complete discretion to determine the number of Performance
Units granted to each Participant. All Awards of Performance Units
shall be evidenced by an Award Agreement.
- 10 -
<PAGE>
9.2. RIGHT TO PAYMENT. A grant of Performance Units gives the Participant
rights, valued as determined by the Committee, and payable to, or exercisable
by, the Participant to whom the Performance Units are granted, in whole or in
part, as the Committee shall establish at grant or thereafter. The Committee
shall set performance goals and other terms or conditions to payment of the
Performance Units in its discretion which, depending on the extent to which they
are met, will determine the number and value of Performance Units that will be
paid to the Participant.
9.3. OTHER TERMS. Performance Units may be payable in cash, Stock, or other
property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10
RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to make Awards of
Restricted Stock to Participants in such amounts and subject to such terms and
conditions as may be selected by the Committee. All Awards of Restricted Stock
shall be evidenced by a Restricted Stock Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions as the Committee may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, upon the satisfaction of performance
goals or otherwise, as the Committee determines at the time of the grant of the
Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Committee at the time of
the grant of the Award or thereafter, upon termination of employment during the
applicable restriction period or upon failure to satisfy a performance goal
during the applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Corporation;
provided, however, that the Committee may provide in any Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or in part
restrictions or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock.
ARTICLE 11 DIVIDEND EQUIVALENTS
- 11 -
<PAGE>
11.1 GRANT OF DIVIDEND EQUIVALENTS. The Committee is authorized to grant
Dividend Equivalents to Participants subject to such terms and conditions as may
be selected by the Committee. Dividend Equivalents shall entitle the Participant
to receive payments equal to dividends with respect to all or a portion of the
number of shares of Stock subject to an Award, as determined by the Committee.
The Committee may provide that Dividend Equivalents be paid or distributed when
accrued or be deemed to have been reinvested in additional shares of Stock, or
otherwise reinvested.
ARTICLE 12
OTHER STOCK-BASED AWARDS
12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that are payable in, valued in whole or in part by reference to, or otherwise
based on or related to shares of Stock, as deemed by the Committee to be
consistent with the purposes of the Plan, including without limitation shares of
Stock awarded purely as a "bonus" and not subject to any restrictions or
conditions, convertible or exchangeable debt securities, other rights
convertible or exchangeable into shares of Stock, and Awards valued by reference
to book value of shares of Stock or the value of securities of or the
performance of specified Parents or Subsidiaries. The Committee shall determine
the terms and conditions of such Awards.
ARTICLE 13
ANNUAL AWARD OF OPTIONS TO NON-EMPLOYEE DIRECTORS
13.1. GRANT OF OPTIONS. Each Non-Employee Director who is serving in such
capacity as of the day following the annual meeting of the Corporation's
stockholders ("Annual Meeting") held in 1998 shall be granted a Non-Qualified
Option to purchase 10,000 shares of Stock, subject to adjustment as provided in
Section 15.1. As of the day following each subsequent Annual Meeting, each
Non-Employee Director who is serving in such capacity as of such date shall be
granted a Non-Qualified Option to purchase 10,000 shares of Stock, subject to
adjustment as provided in Section 15.1. Each such day that Options are to be
granted under this Article 13 is referred to hereinafter as a "Grant Date."
If on any Grant Date, shares of Stock are not available under the Plan to grant
to Non-Employee Directors the full amount of a grant contemplated by the
immediately preceding paragraph, then each Non-Employee Director shall receive
an Option (a "Reduced Grant") to purchase shares of Stock in an amount equal to
the number of shares of Stock then available under the Plan divided by the
number of Non-Employee Directors as of the applicable Grant Date. Fractional
shares shall be ignored and not granted.
If a Reduced Grant has been made and, thereafter, during the term of the Plan,
additional shares of Stock become available for grant, then each person who was
a Non-Employee Director both on the Grant Date on which the Reduced Grant was
made and on the date additional shares of Stock become available (a "Continuing
Non-Employee Director") shall receive an additional Option to purchase shares of
Stock. The number of
- 12 -
<PAGE>
newly available shares shall be divided equally among the Options granted to the
Continuing Non-Employee Directors; provided, however, that the aggregate number
of shares of Stock subject to a Continuing Non-Employee Director's additional
Option plus any prior Reduced Grant to the Continuing Non-Employee Director on
the applicable Grant Date shall not exceed 10,000 shares (subject to adjustment
pursuant to Section 15.1). If more than one Reduced Grant has been made,
available Options shall be granted beginning with the earliest such Grant Date.
13.2. OPTION PRICE. The option price for each Option granted under this Article
13 shall be the Fair Market Value on the date of grant of the Option.
13.3. TERM. Each Option granted under this Article 13 shall, to the extent not
previously exercised, terminate and expire on the date ten (10) years after the
date of grant of the option, unless earlier terminated as provided in Section
13.4.
13.4 LAPSE OF OPTION. An Option granted under this Article 13 shall not
automatically lapse by reason of the Participant ceasing to qualify as a
Non-Employee Director but remaining as a member of the Board. An Option granted
under this Article 13 shall lapse under the earliest of the following
circumstances:
(1) The Option shall lapse ten years after it is granted.
(2) If the Participant ceases to serve as a member of the Board for any
reason other than as provided in paragraph (3) or (4) below, the Option
shall lapse, unless it is previously exercised, three months after the
Participant's termination as a member of the Board; provided, however,
that if the Participant is removed for cause (determined in accordance
with the Corporation's bylaws, as amended from time to time), the Option
shall (to the extent not previously exercised) lapse immediately.
(3) If the Participant ceases to serve as a member of the Board by reason
of his Disability, the Option shall lapse, unless it is previously
exercised, one year after the Participant's termination as a member of
the Board.
(4) If the Participant dies while serving as a member of the Board, or
during the three-month period described in paragraph (2) or during the
one-year period described in paragraph (3) and before the Option
otherwise lapses, the Option shall lapse one year after the Participant's
death. Upon the Participant's death, any exercisable Options may be
exercised by the Participant's beneficiary, determined in accordance with
Section 14.6.
If a Participant exercises Options after termination of his service on
the Board, he may exercise the Options only with respect to the shares
that were otherwise exercisable on the date of termination of his service
on the Board. Such exercise otherwise shall be subject to the terms and
conditions of this Article 13.
- 13 -
<PAGE>
13.5. EXERCISABILITY. Each Option granted under this Article 13 shall be
immediately exercisable, in whole or in part, on the first anniversary of the
date of grant.
13.6. EXERCISE AND PAYMENT. An Option granted under this Article 13 shall be
exercised by written notice directed to the Secretary of the Company (or his
designee) and accompanied by payment in full of the exercise price in cash, by
check, in shares of Stock, or in any combination thereof; provided that if
shares of Stock surrendered in payment of the exercise price were themselves
acquired otherwise than on the open market, such shares shall have been held by
the Participant for at least six months. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, such Options may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the Option shares and delivers cash sales
proceeds to the Corporation in payment of the exercise price.
13.7. TRANSFERABILITY OF OPTIONS. Any Option granted pursuant to this Article 13
shall be assignable or transferable by the Participant by will, by the laws of
descent and distribution, or pursuant to a qualified domestic relations order
that would satisfy Section 414(p)(1)(A) of the Code if such section applied to
an Award under the Plan. In addition, any Option granted pursuant to this
Article 13 shall be transferable by the Participant to any of the following
permitted transferees, upon such reasonable terms and conditions as the
Committee may establish (and, unless specifically permitted by the Board in
advance, such transfers shall be limited to one transfer per Participant to no
more than four transferees): (i) one or more of the following family members of
the Participant: any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, (ii) a trust, partnership or other entity established and
existing for the sole benefit of, or under the sole control of, one or more of
the above family members of the Participant, or (iii) any other transferee
specifically approved by the Committee after taking into account any state or
federal tax, securities or other laws applicable to transferable options.
13.8. TERMINATION OF ARTICLE 13. No Options shall be granted under this Article
13 after September 1, 2006.
13.9. NON-EXCLUSIVITY. Nothing in this Article 13 shall prohibit the Committee
from making discretionary Awards to Non-Employee Directors pursuant to the other
provisions of the Plan before or after September 1, 2006. Options granted
pursuant to this Article 13 shall be governed by the provisions of this Article
13 and by other provisions of the Plan to the extent not inconsistent with the
provisions of Article 13.
ARTICLE 14
PROVISIONS APPLICABLE TO AWARDS
14.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan
may, in the discretion of the Committee, be granted either alone or in addition
to, in tandem with, or in substitution for, any other Award granted under the
Plan. If an Award is granted in substitution for another Award, the Committee
may
- 14 -
<PAGE>
require the surrender of such other Award in consideration of the grant of the
new Award. Awards granted in addition to or in tandem with other Awards may be
granted either at the same time as or at a different time from the grant of such
other Awards.
14.2. EXCHANGE PROVISIONS. The Committee may at any time offer to exchange or
buy out any previously granted Award for a payment in cash, Stock, or another
Award (subject to Section 14.1), based on the terms and conditions the Committee
determines and communicates to the Participant at the time the offer is made.
14.3. TERM OF AWARD. The term of each Award shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant
(or, if Section 7.2(e) applies, five years from the date of its grant).
14.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any
applicable law or Award Agreement, payments or transfers to be made by the
Corporation or a Parent or Subsidiary on the grant or exercise of an Award may
be made in such form as the Committee determines at or after the time of grant,
including without limitation, cash, Stock, other Awards, or other property, or
any combination, and may be made in a single payment or transfer, in
installments, or on a deferred basis, in each case determined in accordance with
rules adopted by, and at the discretion of, the Committee.
14.5. LIMITS ON TRANSFER. No right or interest of a Participant in any
unexercised or restricted Award may be pledged, encumbered, or hypothecated to
or in favor of any party other than the Corporation or a Parent or Subsidiary,
or shall be subject to any lien, obligation, or liability of such Participant to
any other party other than the Corporation or a Parent or Subsidiary. No
unexercised or restricted Award shall be assignable or transferable by a
Participant other than by will or the laws of descent and distribution or,
except in the case of an Incentive Stock Option, pursuant to a domestic
relations order that would satisfy Section 414(p)(1)(A) of the Code if such
Section applied to an Award under the Plan; provided, however, that the
Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not result in accelerated taxation,
(ii) does not cause any Option intended to be an incentive stock option to fail
to be described in Code Section 422(b), and (iii) is otherwise appropriate and
desirable, taking into account any factors deemed relevant, including without
limitation, any state or federal tax or securities laws or regulations
applicable to transferable Awards.
14.6 BENEFICIARIES. Notwithstanding Section 14.5, a Participant may, in the
manner determined by the Committee, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject to
all terms and conditions of the Plan and any Award Agreement applicable to the
Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee.
If no beneficiary has been designated or survives the
- 15 -
<PAGE>
Participant, payment shall be made to the Participant's estate. Subject to the
foregoing, a beneficiary designation may be changed or revoked by a Participant
at any time provided the change or revocation is filed with the Committee.
14.7. STOCK CERTIFICATES. All Stock certificates delivered under the Plan are
subject to any stop-transfer orders and other restrictions as the Committee
deems necessary or advisable to comply with federal or state securities laws,
rules and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Committee may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
14.8 ACCELERATION UPON DEATH OR DISABILITY. Notwithstanding any other provision
in the Plan or any Participant's Award Agreement to the contrary, upon the
Participant's death or Disability during his employment or service as a
consultant or director, all outstanding Options, Stock Appreciation Rights, and
other Awards in the nature of rights that may be exercised (including, without
limitation, Options granted pursuant to Article 13) shall become fully
exercisable and all restrictions on outstanding Awards shall lapse. Any Option
or Stock Appreciation Rights Awards shall thereafter continue or lapse in
accordance with the other provisions of the Plan and the Award Agreement. To the
extent that this provision causes Incentive Stock Options to exceed the dollar
limitation set forth in Section 7.2(d), the excess Options shall be deemed to be
Non-Qualified Stock Options.
14.9. ACCELERATION UPON A CHANGE IN CONTROL. Except as otherwise provided in the
Award Agreement, upon the occurrence of a Change in Control, all outstanding
Options, Stock Appreciation Rights, and other Awards in the nature of rights
that may be exercised (including, without limitation, Options granted pursuant
to Article 13) shall become fully exercisable and all restrictions on
outstanding Awards shall lapse; provided, however that such acceleration will
not occur if, in the opinion of the Company's accountants, such acceleration
would preclude the use of "pooling of interest" accounting treatment for a
Change in Control transaction that (a) would otherwise qualify for such
accounting treatment, and (b) is contingent upon qualifying for such accounting
treatment. To the extent that this provision causes Incentive Stock Options to
exceed the dollar limitation set forth in Section 7.2(d), the excess Options
shall be deemed to be Non-Qualified Stock Options.
14.10. ACCELERATION UPON CERTAIN EVENTS NOT CONSTITUTING A CHANGE IN CONTROL. In
the event of the occurrence of any circumstance, transaction or event not
constituting a Change in Control (as defined in Section 3.1) but which the Board
of Directors deems to be, or to be reasonably likely to lead to, an effective
change in control of the Company of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of the 1934 Act, the Committee
may in its sole discretion declare all outstanding Options, Stock Appreciation
Rights, and other Awards in the nature of rights that may be exercised
(including, without limitation, Options granted pursuant to Article 13) to be
fully exercisable, and/or all restrictions on all outstanding Awards to have
lapsed, in each case, as of such date as the Committee may, in its sole
discretion, declare, which may be on or before the consummation of such
- 16 -
<PAGE>
transaction or event. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the excess
Options shall be deemed to be Non-Qualified Stock Options.
14.11. ACCELERATION FOR ANY OTHER REASON. Regardless of whether an event has
occurred as described in Section 14.9 or 14.10 above, the Committee may in its
sole discretion at any time determine that all or a portion of a Participant's
Options, Stock Appreciation Rights, and other Awards in the nature of rights
that may be exercised (including, without limitation, Options granted pursuant
to Article 13) shall become fully or partially exercisable, and/or that all or a
part of the restrictions on all or a portion of the outstanding Awards shall
lapse, in each case, as of such date as the Committee may, in its sole
discretion, declare. The Committee may discriminate among Participants and among
Awards granted to a Participant in exercising its discretion pursuant to this
Section 14.11.
14.12 EFFECT OF ACCELERATION. If an Award is accelerated under Section 14.9 or
14.10, the Committee may, in its sole discretion, provide (i) that the Award
will expire after a designated period of time after such acceleration to the
extent not then exercised, (ii) that the Award will be settled in cash rather
than Stock, (iii) that the Award will be assumed by another party to the
transaction giving rise to the acceleration or otherwise be equitably converted
in connection with such transaction, or (iv) any combination of the foregoing.
The Committee's determination need not be uniform and may be different for
different Participants whether or not such Participants are similarly situated.
14.13. PERFORMANCE GOALS. The Committee may determine that any Award granted
pursuant to this Plan to a Participant (including, but not limited to,
Participants who are Covered Employees, but excluding Options granted pursuant
to Article 13) shall be determined solely on the basis of (a) the achievement by
the Corporation or a Parent or Subsidiary of a specified target return, or
target growth in return, on equity or assets, (b) the Corporation's, Parent's or
Subsidiary's stock price, (c) the achievement by an individual or a business
unit of the Corporation, Parent or Subsidiary of a specified target, or target
growth in, revenues, net income or earnings per share, (d) the achievement of
objectively determinable goals with respect to service or product delivery,
service or product quality, customer satisfaction, meeting budgets and/or
retention of employees or (e) any combination of the goals set forth in (a)
through (d) above. If an Award is made on such basis, the Committee shall
establish goals prior to the beginning of the period for which such performance
goal relates (or such later date as may be permitted under Code Section 162(m)
or the regulations thereunder) and the Committee may for any reason reduce (but
not increase) any Award, notwithstanding the achievement of a specified goal.
Any payment of an Award granted with performance goals shall be conditioned on
the written certification of the Committee in each case that the performance
goals and any other material conditions were satisfied.
14.14. TERMINATION OF EMPLOYMENT. Whether military, government or other service
or other leave of absence shall constitute a termination of employment shall be
determined in each case by the Committee at its discretion, and any
determination by the Committee shall be final and conclusive. A termination of
employment shall not occur
- 17 -
<PAGE>
in a circumstance in which a Participant transfers from the Corporation to one
of its Parents or Subsidiaries, transfers from a Parent or Subsidiary to the
Corporation, or transfers from one Parent or Subsidiary to another Parent or
Subsidiary.
ARTICLE 15
CHANGES IN CAPITAL STRUCTURE
15.1. GENERAL. In the event a stock dividend is declared upon the Stock, the
shares of Stock then subject to each Award shall be increased proportionately
without any change in the aggregate purchase price therefor. In the event the
Stock shall be changed into or exchanged for a different number or class of
shares of stock or securities of the Corporation or of another corporation,
whether through reorganization, recapitalization, reclassification, stock
split-up, combination of shares, merger or consolidation, there shall be
substituted for each such share of Stock then subject to each Award the number
and class of shares into which each outstanding share of Stock shall be so
exchanged, all without any change in the aggregate purchase price for the shares
then subject to each Award.
ARTICLE 16
AMENDMENT, MODIFICATION AND TERMINATION
16.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the Committee may,
at any time and from time to time, amend, modify or terminate the Plan without
stockholder approval; provided, however, that the Board or Committee may
condition any amendment or modification on the approval of stockholders of the
Company if such approval is necessary or deemed advisable with respect to tax,
securities or other applicable laws, policies or regulations.
16.2 AWARDS PREVIOUSLY GRANTED. At any time and from time to time, the Committee
may amend, modify or terminate any outstanding Award without approval of the
Participant; provided, however, that, subject to the terms of the applicable
Award Agreement, such amendment, modification or termination shall not, without
the Participant's consent, reduce or diminish the value of such Award determined
as if the Award had been exercised, vested, cashed in or otherwise settled on
the date of such amendment or termination. No termination, amendment, or
modification of the Plan shall adversely affect any Award previously granted
under the Plan, without the written consent of the Participant.
ARTICLE 17
GENERAL PROVISIONS
17.1. NO RIGHTS TO AWARDS. No Participant or employee, officer, consultant or
director shall have any claim to be granted any Award under the Plan, and
neither the Corporation nor the Committee is obligated to treat Participants and
employees, officers, consultants or directors uniformly.
- 18 -
<PAGE>
17.2. NO STOCKHOLDER RIGHTS. No Award gives the Participant any of the rights of
a stockholder of the Corporation unless and until shares of Stock are in fact
issued to such person in connection with such Award.
17.3. WITHHOLDING. The Corporation or any Parent or Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Corporation, an amount sufficient to satisfy federal, state, and local
taxes (including the Participant's FICA obligation) required by law to be
withheld with respect to any taxable event arising as a result of the Plan. With
respect to withholding required upon any taxable event under the Plan, the
Committee may, at the time the Award is granted or thereafter, require that any
such withholding requirement be satisfied, in whole or in part, by withholding
shares of Stock having a Fair Market Value on the date of withholding equal to
the amount to be withheld for tax purposes, all in accordance with such
procedures as the Committee establishes.
17.4. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Corporation
or any Parent or Subsidiary to terminate any Participant's employment or status
as a consultant or director at any time, nor confer upon any Participant any
right to continue as an employee, officer, consultant or director of the
Corporation or any Parent or Subsidiary.
l6.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" plan
for incentive and deferred compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Corporation or any Parent or Subsidiary.
17.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken
into account in determining any benefits under any pension, retirement, savings,
profit sharing, group insurance, welfare or benefit plan of the Corporation or
any Parent or Subsidiary unless provided otherwise in such other plan.
17.7. EXPENSES. The expenses of administering the Plan shall be borne by the
Corporation and its Parents or Subsidiaries.
17.8. TITLES AND HEADINGS. The titles and headings of the Sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles or headings, shall control.
17.9. GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
17.10. FRACTIONAL SHARES. No fractional shares of Stock shall be issued and the
Committee shall determine, in its discretion, whether cash shall be given in
lieu of fractional shares or whether such fractional shares shall be eliminated
by rounding up.
- 19 -
<PAGE>
17.11. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Corporation to
make payment of awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by government agencies as
may be required. The Corporation shall be under no obligation to register under
the 1933 Act, or any state securities act, any of the shares of Stock paid under
the Plan. The shares paid under the Plan may in certain circumstances be exempt
from registration under the 1933 Act, and the Corporation may restrict the
transfer of such shares in such manner as it deems advisable to ensure the
availability of any such exemption.
17.12. GOVERNING LAW. To the extent not governed by federal law, the Plan and
all Award Agreements shall be construed in accordance with and governed by the
laws of the State of Delaware.
17.13 ADDITIONAL PROVISIONS. Each Award Agreement may contain such other terms
and conditions as the Committee may determine; provided that such other terms
and conditions are not inconsistent with the provisions of this Plan.
The foregoing is hereby acknowledged as being the MLC Holdings, Inc. 1998
Long-Term Incentive Plan as adopted by the Board of Directors of the Company on
July _ _, 1998 and approved by the stockholders of the Company on _______, 1998.
MLC HOLDINGS, INC.
By:
Its:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> JUL-01-1998 JUL-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 5,223 5,223
<SECURITIES> 0 0
<RECEIVABLES> 24,168 24,168
<ALLOWANCES> 0 0
<INVENTORY> 6,235 6,235
<CURRENT-ASSETS> 0 0
<PP&E> 1,408 1,408
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 129,810 129,810
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 64 64
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 129,810 129,810
<SALES> 31,479 66,664
<TOTAL-REVENUES> 38,001 79,584
<CGS> 28,065 61,162
<TOTAL-COSTS> 35,268 74,411
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 856 1,357
<INCOME-PRETAX> 2,733 5,173
<INCOME-TAX> 1,093 2,069
<INCOME-CONTINUING> 1,640 3,104
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,640 3,104
<EPS-PRIMARY> 0.26 0.50
<EPS-DILUTED> 0.25 0.49
</TABLE>