FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to .
Commission file number: 0-28926
MLC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Company, computed by reference to the price at which the stock was sold as of
June 17, 1999 was $22,665,431.
The number of shares of Common Stock outstanding as of June 17, 1999,
was 7,477,532.
<PAGE>
PART I
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying Table of Contents to Financial Statements and Schedule on page
F-1.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MLC HOLDINGS, INC.
/s/Steven J. Mencarini
By: Steven J. Mencarini, Senior Vice President,
Chief Financial Officer, and Principal
Accounting Officer
Date: July 28, 1999
<PAGE>
MLC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999 F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 1997, 1998, and 1999 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1998 and 1999 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-26
SCHEDULE
II-Valuation and Qualifying Accounts for the Three Years S-1
Ended March 31, 1997, 1998 and 1999.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MLC Holdings, Inc.
Herndon, Virginia
We have audited the consolidated balance sheets of MLC Holdings, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of MLC Holdings, Inc. and subsidiaries as of March 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, based on our audits, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
June 11, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31,
1998 1999
----------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents
$ 18,683,796 $ 7,891,661
Accounts receivable 16,383,314 44,090,101
Notes receivable (1) 3,801,808 547,011
Employee advances 53,582 20,078
Inventories 1,213,734 658,355
Investment in direct financing and sales type leases - net 32,495,594 83,370,950
Investment in operating lease equipment - net 7,295,721 3,530,179
Property and equipment - net 1,131,512 2,018,133
Other assets (2) 2,136,554 12,232,130
==============================================
TOTAL ASSETS $ 83,195,615 $ 154,358,598
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 6,865,419 $ 12,518,533
Accounts payable - equipment 21,283,582 18,049,059
Salaries and commissions payable 390,081 535,876
Accrued expenses and other liabilities 3,560,181 4,638,708
Recourse notes payable 13,037,365 19,081,137
Nonrecourse notes payable 13,027,676 52,429,266
Deferred taxes 1,487,000 3,292,210
----------------------------------------------
Total Liabilities $ 59,651,304 110,544,789
Commitments and contingencies (Note 7) - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized at
March 31, 1998 and 1999; 6,071,505 and 7,470,595
issued and outstanding at March 31, 1998 and 1999 respectively 60,715 74,706
Additional paid-in capital 11,460,331 24,999,371
Retained earnings 12,023,265 18,739,732
----------------------------------------------
Total Stockholders' Equity 23,544,311 43,813,809
==============================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,195,615 $ 154,358,598
==============================================
See Notes to Consolidated Financial Statements.
(1) Includes amounts with related parties of $3,709,508 and $518,955 as of March 31, 1998 and 1999,
respectively.
(2) Includes amounts with related parties of $732,051 and $1,281,474 as of March 31, 1998 and 1999,
respectively.
</TABLE>
<TABLE>
<CAPTION>
F-3
<PAGE>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
-------------------------------------------
1997 1998 1999
-------------------------------------------
REVENUES
<S> <C> <C>
Sales of equipment $ 52,166,828$ 47,419,115 $ 83,516,254
Sales of leased equipment
21,633,996 50,362,055 84,378,800
----------------------------------------
73,800,824 97,781,170 167,895,054
Lease revenues
9,908,469 14,882,420 20,610,542
Fee and other income
2,503,381 5,778,685 5,464,242
----------------------------------------
12,411,850 20,661,105 26,074,784
----------------------------------------
TOTAL REVENUES (1)
86,212,674 118,442,275 193,969,838
========== =========== ===========
COSTS AND EXPENSES
Cost of sales, equipment
42,179,823 37,423,397 71,367,090
Cost of sales, leased equipment
21,667,197 49,668,756 83,269,110
-------------------------------------------
63,847,020 87,092,153 154,636,200
Direct lease costs
4,761,227 5,409,338 6,183,562
Professional and other fees 576,855 1,072,691 1,222,080
Salaries and benefits 8,241,405 10,356,456 11,880,062
General and administrative expenses 2,285,878 3,694,309 5,151,494
Nonrecurring acquisition costs - 250,388 -
Interest and financing costs 1,648,943 1,836,956 3,601,348
-------------------------------------------
17,514,308 22,620,138 28,038,546
-------------------------------------------
TOTAL COSTS AND EXPENSES (2) 81,361,328 109,712,291 182,674,746
-------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 4,851,346 8,729,984 11,295,092
-------------------------------------------
PROVISION FOR INCOME TAXES 1,360,000 2,690,890 4,578,625
-------------------------------------------
NET EARNINGS $ 3,491,346 $ 6,039,094 $ 6,716,467
===========================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.67 $ 1.00 $ 0.99
===========================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.66 $ 0.98 $ 0.98
===========================================
PRO FORMA NET EARNINGS (Note 8) $ 3,133,436 $ 5,425,833 $ 6,716,467
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.60 $ 0.90 $ 0.99
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE-DILUTED $ 0.60 $ 0.88 $ 0.98
===========================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,184,261 6,031,088 6,769,732
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,262,697 6,143,017 6,827,528
See Notes to Consolidated Financial Statements.
(1) Includes amounts from related parties of $21,051,453, $46,710,190 and $82,652,623
for the fiscal years ended March 31,1997, 1998 and 1999, respectively.
(2) Includes amounts from related parties of $20,566,924, $44,831,701 and $80,966,659 for
the fiscal years ended March 31, 1997, 1998, and 1999, respectively.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Treasury Stock Paid-in Retained
------------------------- -----------------------
Shares Par Value Shares Cost Capital Earnings TOTAL
------------------------- ----------------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1996 4,754,390 48,661 111,716 28,854 744,485 4,467,223 5,231,515
Compensation to outside directors - - - - 9,500 - 9,500
Distributions to owners - - - - - (859,378) (859,378)
Sale of common shares 1,150,000 11,500 - - 8,592,262 - 8,603,762
Issuance of shares to owners 5,586 56 - - (56) - -
Retirement of treasury shares - (1,117) (111,716) (28,854) 23 (27,760) -
Net earnings - - - - - 3,491,346 3,491,346
========================= ======================= =============== =============== ============
Balance March 31, 1997 5,909,976 $59,100 - $ - $ 9,346,214 7,071,431 $16,476,745
========================= ======================= =============== =============== ============
Sale of common shares 161,329 1,613 - - 1,998,387 - 2,000,000
Issuance of shares for option exercise 200 2 1,748 - 1,750
Compensation to outside directors - - - - 113,982 - 113,982
Distributions to owners - - - - - (1,087,260) (1,087,260)
Net earnings - - - - - 6,039,094 6,039,094
------------------------- ----------------------- --------------- --------------- ------------
Balance, March 31, 1998 6,071,505 $60,715 $ - - $11,460,331 12,023,265 $ 23,544,311
========================= ======================= =============== =============== ============
Issuance of shares for option exercise 10,500 105 - - 91,770 91,875
Issuance of shares to employees 14,001 140 - - 112,452 - 112,592
Issuance of shares in business 263,478 2,635 - - 3,620,188 - 3,622,823
combination
Sale of common shares 1,111,111 11,111 - - 9,714,630 - 9,725,741
Net earnings
- - - - - 6,716,467 6,716,467
------------------------- ----------------------- ---------------------------------------------
Balance, March 31, 1999 7,470,595 $74,706 $ - - $ 24,999,371 $ 18,739,732 $ 43,813,809
========================= ======================= =============== =============== ============
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
--------------------
1997 1998 1999
----------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net earnings $ 3,491,346 $6,039,094 $6,716,467
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,650,248 4,628,272 4,720,241
Abandonment of assets 10,049 - -
Provision for credit losses 66,000 (1,000) 500,000
Loss (Gain) on sale of
operating lease equipment (1) 83,754 (55,881) 57,984
Adjust of basis to fair market value
of operating lease equipment and investments 153,434 - 306,921
Payments from leases directly to lenders (1,590,061) (1,788,611) (970,483)
(Gain) Loss on disposal of property and equipment (9,124) - 26,246
Compensation to outside directors - stock options 9,500 113,982 -
Changes in:
Accounts receivable (4,343,319) (7,536,888) (19,809,403)
Notes receivable (2) (2,062,393) (1,647,558) 3,316,261
Employee advances 28,537 17,030 33,028
Inventories (400,046) 64,410 1,293,081
Other assets (3) 457,169 (893,959) (4,094,505)
Accounts payable - equipment (26,557) 16,337,160 (3,964,145)
Accounts payable - trade 796,740 3,858,482 528,181
Deferred taxes 121,000 897,000 1,805,210
Salaries and commissions payable,
accrued expenses and other liabilities 2,286,921 629,380 1,097,776
--------- ------- ---------
Net cash provided by(used in) operating activities 2,723,198 20,660,913 (8,437,140)
--------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 4,992,050 726,714 138,003
Purchase of operating lease equipment (4) (24,800,360) (2,065,079) (487,418)
Increase in investment in direct financing
and sales-type leases (5) (6,825,873) (18,833,704) (80,744,494)
Proceeds from sale of property and equipment 9,124 800 2,000
Insurance proceeds received 512,044 - -
Purchases of property and equipment (266,061) (1,032,243) (1,249,214)
Cash used in acquisitions, net of cash acquired - - (3,485,279)
Decrease (Increase) in other assets (6) 226,530 (472,962) (788,856)
------- -------- --------
Net cash used in investing activities (26,152,546) (21,676,474) (86,615,258)
----------- ----------- -----------
F-6
<PAGE>
MLC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year Ended March 31,
---------------------
1997 1998 1999
--------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse $ 26,825,118 $ 4,511,517 $79,941,563
Recourse 220,768 174,894 415,606
Repayments:
Nonrecourse (3,199,626) (4,872,557) (10,200,352)
Recourse (434,867) (307,819) (195,892)
Repayments of loans from stockholders (275,000) (10,976) -
Distributions to shareholders of combined companies
prior to business combination (859,378) (1,087,260) -
Proceeds from issuance of capitalstock, net of expenses 8,603,762 2,001,750 9,930,209
Purchase of treasury stock - - -
(Repayments) Proceeds from lines of credit (1,448,370) 12,635,599 4,369,129
---------- ---------- ---------
Net cash provided by financing activities 29,432,407 13,045,148 84,260,263
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 6,003,059 12,029,587 (10,792,135)
Cash and Cash Equivalents, Beginning of Period 651,150 6,654,209 18,683,796
------- --------- ----------
Cash and Cash Equivalents, End of Period $ 6,654,209 $ 18,683,796 $ 7,891,661
============= ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 140,081 $ 347,757 $ 1,475,497
============= ============ ===========
Cash paid for income taxes $ 315,137 $ 2,681,867 $ 2,913,818
============= ============ ===========
See Notes To Consolidated Financial
Statements.
(1) Includes amounts provided by (used by) related parties of $3,930, $(35,540),
and $-0- for the fiscal years ended March 31, 1997, 1997 and 1999.
(2) Includes amounts provided by (used by) related parties of $(1,897,094) and
$3,291,681 for the fiscal years ended March 31, 1998 and 1999.
(3) Includes amounts provided by related parties of $285,943, $ 51,482, and
$329,275 for the fiscal years ended March 31, 1997, 1998 and 1999.
(4) Includes amounts provided by related parties of $2,707,213, $935,737, and
$-0- for the fiscal years ended March 31, 1997, 1998 and 1999.
(5) Includes amounts (used by) provided by related parties of $(23,417),
$43,418,347, and $80,510,214 for the fiscal years ended March 31, 1997, 1998 and
1999.
(6) Includes amounts provided by (used by) provided by related parties of
$73,338, $(473,621), and $652,701 for the fiscal years ended March 31, 1997,
1998 and 1999.
</TABLE>
F-7
<PAGE>
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years Ended March 31, 1997, 1998, and 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective September 1, 1996, MLC Holdings, Inc.,
(incorporated August 27, 1996) became the holding company for MLC Group, Inc.,
and MLC Capital, Inc. (MLC Holdings, Inc., together with its subsidiaries
collectively, "MLC" or the "Company"). The accompanying consolidated financial
statements include the accounts of the wholly owned subsidiary companies (MLC
Network Solutions, Inc. and MLC Integrated, Inc.) at historical amounts as if
the combination had occurred on March 31, 1996 in a manner similar to a pooling
of interest. The accompanying financial statements also include the accounts of
the wholly owned subsidiary (PC Plus, Inc.) from July 1, 1998, accounted for as
a purchase.
All significant intercompany balances and transactions have been eliminated.
Business Combinations - On July 24, 1997, the Company, through a new wholly
owned subsidiary, MLC Network Solutions, Inc., issued 260,978 common shares,
valued at $3,384,564, in exchange for all outstanding common shares of
Compuventures of Pitt County, Inc. ("Compuventures"), a value-added reseller of
PC's and related network equipment and software products a provider of various
support services to its customers from facilities located in Greenville, Raleigh
and Wilmington, North Carolina. On September 29, 1997, the Company issued
498,998 common shares, valued at $7,092,000, in exchange for all outstanding
common shares of Educational Computer Concepts, Inc. (dba "ECC
Integrated")("ECCI"), a network systems integrator and computer reseller serving
customers in eastern Pennsylvania, New Jersey and Delaware. ECC Integrated
subsequently changed its name to MLC Integrated ("MLCI"). These business
combinations have been accounted for as pooling of interests, and accordingly,
the consolidated financial statements for periods prior to the combinations have
been restated to include the accounts and results of operations of the pooled
companies. See Note 12.
New Subsidiaries - On July 1, 1998, the Company, through a new wholly owned
subsidiary, MLC Network Solutions of Virginia, Inc., issued 263,478 common
shares, valued at $3,622,823, and cash of $3,622,836 for all the outstanding
common shares of PC Plus, Inc., a value-added reseller of PC's , related network
equipment and software products and provider of various support services to its
customers from its facility in Reston, Virginia (relocated to Herndon, Virginia
in October 1998). Subsequent to the acquisition, MLC Network Solutions of
F-8
<PAGE>
Virginia, Inc. changed its name to PC Plus, Inc. This business combination has
been accounted for using the purchase method of accounting, and accordingly, the
results of operations of PC Plus, Inc. have been included in the Company's
consolidated financial statements from July 1, 1998. The Company's other assets
include goodwill calculated as the excess of the purchase price over the fair
value of the net identifiable assets acquired of $6,045,330, and is being
amortized on a straight-line basis over 27.5 years. See Note 12.
On September 17, 1997, the Company established MLC Federal, Inc., a wholly owned
subsidiary of MLC Holdings, Inc. The new subsidiary will concentrate on the
origination of leases to federal, state, and local government entities. On
October 22, 1997, the Company formed MLC Leasing, S.A. de C.V., a wholly owned
subsidiary of MLC Group, Inc. and MLC Network Solutions, Inc., based in Mexico
City, Mexico. To date, no business has been conducted through MLC Leasing, S.A.
de C.V.
Revenue Recognition - The Company sells information technology equipment to its
customers and recognizes revenue from equipment sales at the time equipment is
accepted by the customer. The Company is the lessor in a number of its
transactions and these are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Each
lease is classified as either a direct financing lease, sales-type lease, or
operating lease, as appropriate. Under the direct financing and sales-type lease
methods, the Company records the net investment in leases, which consists of the
sum of the minimum lease term payments, initial direct costs, and unguaranteed
residual value (gross investment) less the unearned income. The difference
between the gross investment and the cost of the leased equipment for direct
finance leases is recorded as unearned income at the inception of the lease. The
unearned income is amortized over the life of the lease using the interest
method. Under sales-type leases, the difference between the fair value and cost
of the leased property (net margins) is recorded as revenue at the inception of
the lease. No sales type leases have been consummated during the three years
ended March 31, 1998. The Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
effective January 1, 1997. This standard establishes new criteria for
determining whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral in
a secured borrowing. Certain assignments of direct finance leases made on a
nonrecourse basis by the Company after December 31, 1996 meet the criteria for
surrender of control set forth by SFAS No. 125 and have therefore been treated
as sales for financial statement purposes. SFAS No. 125 prohibits the
retroactive restatement of transactions consummated prior to January 1, 1997
which would have otherwise met the requirements of a sale under the standard.
Sales of leased equipment represents revenue from the sales of equipment subject
to a lease in which the Company is the lessor. If the rental stream on such
lease has nonrecourse debt associated with it, sales revenue is recorded at the
amount of consideration received, net of the amount of debt assumed by the
purchaser. If there is no nonrecourse debt associated with the rental stream,
sales revenue is recorded at the amount of gross consideration received, and
costs of sales is recorded at the book value of the lease.
Lease revenues consist of rentals due under operating leases and amortization of
unearned income on direct financing and sales-type leases. Equipment under
operating leases is recorded at cost and depreciated on a straight-line basis
over the lease term to the Company's estimate of residual value.
The Company assigns all rights, title, and interests in a number of its leases
to third-party financial institutions without recourse. These assignments are
accounted for as sales since the Company has completed its obligations at the
assignment date, and the Company retains no ownership interest in the equipment
under lease.
F-9
<PAGE>
Residuals - Residual values, representing the estimated value of equipment at
the termination of a lease, are recorded in the financial statements at the
inception of each sales-type or direct financing lease as amounts estimated by
management based upon its experience and judgment. The residual values for
operating leases are included in the leased equipment's net book value.
The Company evaluates residual values on an ongoing basis and records any
required adjustments. In accordance with generally accepted accounting
principles, no upward revision of residual values is made subsequent to the
period of the inception of the lease. Residual values for sales-type and direct
financing leases are recorded at their net present value and the unearned
interest is amortized over the life of the lease using the interest method.
Reserve for Credit Losses - The reserve for credit losses (the "reserve") is
maintained at a level believed by management to be adequate to absorb potential
losses inherent in the Company's lease and accounts receivable portfolio.
Management's determination of the adequacy of the reserve is based on an
evaluation of historical credit loss experience, current economic conditions,
volume, growth, the composition of the lease portfolio, and other relevant
factors. The reserve is increased by provisions for potential credit losses
charged against income. Accounts are either written off or written down when the
loss is both probable and determinable, after giving consideration to the
customer's financial condition, the value of the underlying collateral and
funding status (i.e., discounted on a nonrecourse or recourse basis).
Cash and Cash Equivalents - Cash and cash equivalents include short-term
repurchase agreements with an original maturity of three months or less.
Inventories - Inventories are stated at the lower of cost (specific
identification basis) or market.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets, which range from three to seven years.
Income Taxes - Deferred income taxes are accounted for in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under this method, deferred income tax
liabilities and assets are based on the difference between financial statement
and tax bases of assets and liabilities, using tax rates currently in effect.
The Company acquired two companies which were accounted for under the pooling of
interests method. Prior to their business combinations with the Company, the two
companies had elected to be taxed under the provisions of Subchapter "S" of the
Internal Revenue Code. Under this election, each company's income or loss was
included in the taxable income of the stockholders. See Note 8.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Reclassifications - Certain items have been reclassified in the March 31, 1997
and 1998 financial statements to conform to the March 31, 1999 presentation.
Initial Public Offering - During November and December 1996, MLC consummated an
initial public offering ("the Offering") of 1,150,000 shares of its common stock
including the over allotment. The Company received proceeds of $9.4 million
(gross proceeds of $10.1 million less underwriters expense of $0.7 million), and
incurred $0.8 million in expenses. Of the net proceeds of approximately $8.6
million, $0.3 million was used to repay outstanding stockholder loans and the
related accrued interest and the balance of $8.3 million was used for general
corporate purposes.
F-10
<PAGE>
Earnings Per Share - Earnings per share have been calculated in accordance with
SFAS No. 128, "Earnings per Share." In accordance with SFAS No. 128, basic EPS
amounts were calculated based on weighted average shares outstanding of
5,184,261 in fiscal 1997, 6,031,088 in fiscal 1998, and 6,769,732 in fiscal
1999. Diluted EPS amounts were calculated based on weighted average shares
outstanding and common stock equivalents of 5,262,697 in fiscal 1997, 6,143,017
in fiscal 1998, and 6,827,528 in fiscal 1999. Additional shares included in the
diluted earnings per share calculations are attributable to incremental shares
issuable upon the assumed exercise of stock options.
Capital Structure - On October 23, 1998, The Company sold 1,111,111 shares of
common stock for a price of $9.00 per share to TC Leasing LLC, a Delaware
limited liability company. In addition, the Company granted TC Leasing LLC stock
purchase warrants granting the right to purchase an additional 1,090,909 shares
of common stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant is exercisable through December 31, 2001, unless it is
extended under the terms of the warrant. Pursuant to a purchase agreement, the
Company's ability to pay dividends is restricted through October 23, 1999.
On July, 1997, the Company sold 161,329 shares of common stock to a single
investor for $12.40 per share.
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of
the following components:
<TABLE>
<CAPTION>
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
<S> <C> <C>
Minimum lease payments $ 29,968 $ 75,449
Estimated unguaranteed residual value 7,084 17,777
Initial direct costs, net of amortization (1) 760 1,606
Less: Unearned lease income (5,270) (10,915)
Reserve for credit losses (46) (546)
================= ================
Investment in direct finance and sales
type leases, net $ 32,496 $ 83,371
================= ================
(1) Initial direct costs are shown net of amortization of $1,592 and
$2,590 at March 31, 1998
and 1999, respectively.
</TABLE>
Future scheduled minimum lease rental payments as of March 31, 1999 are as
follows:
(In Thousands)
Year ending March 31, 2000 $ 35,189
2001 26,168
2002 12,723
2003 1,021
2004 and thereafter 348
-----------
$ 75,449
The Company's net investment in direct financing and sales-type leases is
collateral for nonrecourse and recourse equipment notes. See Note 5.
F-11
<PAGE>
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
Investment in operating leases primarily represents equipment leased for two to
three years. The components of the net investment in operating lease equipment
are as follows:
<TABLE>
<CAPTION>
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
<S> <C> <C>
Cost of equipment under operating leases $ 13,990 $ 8,742
Initial direct costs 51 21
Less: Accumulated depreciation and
Amortization (6,745) (5,233)
================= ================
Investment in operating lease equipment, net $ 7,296 $ 3,530
================= ================
</TABLE>
As of March 31, 1999, future scheduled minimum lease rental payments are as
follows:
(In Thousands)
Year ending March 31, 2000 $ 1,790
2001 88
2002 43
2003 19
----------
$ 1,940
=========
Based on management's evaluation of estimated residual values included within
the Company's operating lease portfolio, certain recorded residuals were written
down to reflect revised market conditions. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of," an impairment loss of $153,434 was recognized in the year ended
March 31, 1997. Impairment losses are reflected as a component of direct lease
costs in the accompanying consolidated statements of earnings.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
As of March 31,
1998 1999
----------------- ----------------
(In Thousands)
<S> <C> <C>
Furniture, fixtures and equipment $ 1,157 $ 2,333
Vehicles 138 139
Capitalized software 477 635
Leasehold improvements 24 193
Less: Accumulated depreciation and
Amortization (664) (1,282)
================= ================
Property and equipment, net $ 1,132 $ 2,018
================= ================
</TABLE>
5. RECOURSE AND NONRECOURSE NOTES PAYABLE
Recourse and nonrecourse obligations consist of the following:
F-12
<PAGE>
As of March 31,
1998 1999
-------------------------
(In Thousands)
Recourse equipment notes secured by related
investments in leases with varying interest
rates ranging from 7.50% to 9.74% in fiscal
years 1998 and 1999 $ 272 $ 497
Recourse line of credit with a maximum
balance of $50,000,000 bearing interest at the
LIBOR rate plus 150 basis points, or, at the
Company's option, prime less 1/2% expiring
December, 1999 $ -0- $ 18,000
Recourse line of credit with a maximum balance of
$2,500,000 bearing interest at prime $ -0- $ 175
Recourse equipment notes with varying interest
rates ranging from 7.13% to 8.61%, secured by
related investment in equipment $ -0- $ 409
Recourse line of credit with a maximum balance
of $25,000,000, bearing interest at the LIBOR rate
plus 1.1%, or, at the Company's option, the prime
rate less 100 basis points, replaced by $50,000,000
line of credit in December, 1998 $ 12,750 $ -0-
Term bank obligations with interest rates ranging
from 8.25% to prime plus 75 basis points $ 10 $ -0-
Loans from related parties with interest rates
ranging from 8% to 10% $ 5 $ -0-
--------- ---------
Total recourse obligations $ 13,037 $ 19,081
========= =========
Non-recourse equipment notes secured by
related investments in leases with interest
rates ranging from 6.30% to 9.99% in fiscal
years 1998 and 1999
$ 13,028 $ 52,429
========= =========
F-13
<PAGE>
Principal and interest payments on the recourse and nonrecourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral, and
the borrower. Under nonrecourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the borrower.
Borrowings under the Company's $50 million line of credit are subject to certain
covenants regarding minimum consolidated tangible net worth, maximum recourse
debt to worth ratio, cash flow coverage, and minimum interest expense coverage
ratio. The borrowings are secured by the Company's assets such as leases,
receivables, inventory, and equipment. Borrowings are limited to the Company's
collateral base, consisting of equipment, lease receivables and other current
assets, up to a maximum of $50 million. In addition, the credit agreement
restricts, and under some circumstances prohibits the payment of dividends.
Recourse and nonrecourse notes payable as of March 31, 1999, mature as follows:
Recourse Notes Nonrecourse
Payable Notes Payable
------------------ ------------
(In Thousands)
Year ending March 31, 2000 $ 18,567 $ 43,025
2001 231 4,333
2002 151 4,418
2003 102 607
2004 and thereafter 30 46
---- -- --
$ 19,081 $ 52,429
=========== =========
6. RELATED PARTY TRANSACTIONS
The Company provided loans and advances to employees and/or stockholders, the
balances of which amounted to $53,582 and $20,078 as of March 31, 1998 and 1999,
respectively. Such balances are to be repaid from commissions earned on
successful sales or financing arrangements obtained on behalf of the Company, or
via scheduled payroll deductions.
As of March 31, 1998 and 1999, $85,020 and $(100,602) was receivable (payable)
from United Federal Leasing, which is owned in part by an individual related to
a Company executive. As of March 31, 1998 and 1999, the Company had fully
reserved for the receivable. During the year ended March 31, 1998, the Company
recognized re-marketing fees of $561,000 from United Federal Leasing.
F-14
<PAGE>
At March 31, 1998 and 1999, accrued expenses and other liabilities include
$9,599 and $19,416, respectively, due to a company in which an
employee/stockholder has a 45% ownership interest. During the years ended March
31, 1998 and 1999, respectively, the Company recognized remarketing fees from
the company amounting to $216,828 and $88,180.
During the years ended March 31, 1997 and 1998, the Company sold leased
equipment to MLC/GATX Limited Partnership I (the "Partnership"), which amounted
to 0.3% and 0% of the Company's revenues, respectively. The Company has a 9.5%
limited partnership interest in the Partnership and owns a 50% interest in the
corporation that owns a 1% general partnership interest in the Partnership.
Revenue recognized from the sales was $3,452,902 and $406,159, the basis of the
equipment sold was $3,309,186 and $372,306 during the years ended March 31, 1997
and 1998, respectively. Other assets include $75,981, $136,664, and $(6,989) due
to (from) the Partnership as of March 31, 1997, 1998, 1999, respectively. Also
reflected in other assets is the Company's investment balance in the
Partnership, which is accounted for using the cost method, and amounts to
$226,835, $132,351, and $-0- as of March 31, 1997, 1998, and 1999 respectively.
In addition, the Company received $148,590, $104,277 and $-0- for the years
ended March 31, 1997, 1998 and 1999, respectively, for accounting and
administrative services provided to the Partnership.
During the years ended March 31, 1998 and 1999 the recoverability of certain
capital contributions made by the Company to the Partnership was determined to
be impaired. As a result, the Company recognized a write-down of its recorded
investment balance of $105,719 and $161,387 to reflect the revised net
realizable value. These write-downs are included in cost of sales in the
accompanying consolidated statements of earnings.
During the years ended March 31, 1997, 1998, and 1999, the Company sold leased
equipment to MLC/CLC LLC, a joint venture in which the Company has a 5%
ownership interest, that amounted to 20%, 38% and 42% of the Company's revenues,
respectively. Revenue recognized from the sales was $16,923,090, $44,784,727,
and $81,089,883, respectively. The basis for the equipment sold was $16,917,840,
$44,353,676, and $80,510,214, respectively. Notes receivable includes $3,709,508
and $518,955 due from the partnership as of March 31, 1998 and 1999. Other
assets reflects the investment in the joint venture of $736,364 and $1,389,065,
as of March 31, 1998 and 1999, respectively, accounted for using the cost
method. The Company receives an origination fee on leased equipment sold to the
joint venture. In addition, the Company recognized $170,709 and $301,708 for the
years ended March 31, 1998 and 1999 for accounting and administrative services
provided to MLC/CLC LLC.
During the year ended March 31, 1997, the Company recognized $250,000 in broker
fees for providing advisory services to a company which is owned in part by one
of the Company's outside directors.
The Company leases certain office space from entities which are owned, in part,
by executives of subsidiaries of the Company. During the years ended March 31,
1997, 1998, and 1999, rent expense paid to these related parties was $124,222,
$306,479, and $269,558, respectively.
F-15
<PAGE>
The Company is reimbursed for certain general and administrative expenses by a
company owned, in part, by an executive of a subsidiary of the Company. The
reimbursements totaled $176,075, $81,119, and $25,500 for the years ended March
31, 1997, 1998 and 1999.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment for the conduct of
its business. Rent expense relating to these operating leases was $347,553,
$505,032, and $629,456 for the years ended March 31, 1997, 1998, and 1999,
respectively. As of March 31, 1999, the future minimum lease payments are due as
follows:
Year ending March 31, 1999 $ 760,330
2000 633,831
2001 337,986
2002 251,345
2003 and thereafter 350,303
-------------
$ 2,333,795
As of March 31, 1998, the Company had guaranteed $172,565 of the residual value
for equipment owned by the MLC/GATX Limited Partnership I. No guarantee was made
for the year ended March 31, 1999.
8. INCOME TAXES
A reconciliation of income tax computed at the statutory Federal rate to the
provision for income tax included in the consolidated statements of earnings is
as follows:
<TABLE>
<CAPTION>
For the Year Ended March 31,
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Statutory Federal income tax rate 34% 34% 34%
Income tax expense computed at the statutory
Federal rate $ 1,649,458 $ 2,968,195 $3,840,331
Income tax expense based on the statutory
Federal rate for subsidiaries which were
Sub-S prior to their combination with the
Company (343,658) (568,893) -
State income tax expense, net of Federal tax 48,641 250,692 528,447
Non-taxable interest income (33,023) (35,350) (16,137)
Non-deductible expenses 38,582 76,246 225,984
=============== ============== ===============
Provision for income taxes $ 1,360,000 $2,690,890 $4,578,625
=============== ============== ===============
Effective tax rate 28.0% 30.8% 40.54%
=============== ============== ===============
</TABLE>
F-16
<PAGE>
The components of the provision for income taxes are as follows:
For the Year Ended March 31,
1997 1998 1999
--------------- -------------- ---------------
(In Thousands)
Current:
Federal $ 1,152 $ 1,669 $2,519
State 87 125 255
--------------- -------------- ---------------
1,239 1,794 2,774
--------------- -------------- ---------------
Deferred:
Federal 113 802 $1,259
State 8 95 546
--------------- -------------- ---------------
121 897 1,805
--------------- -------------- ---------------
$ 1,360 $ 2,691 $4,579
=============== ============== ===============
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows:
F-17
<PAGE>
For the Year Ended March 31,
1997 1998 1999
-------------- -------------- ---------
(In Thousands)
Alternative minimum tax $ 369 $ 18 $(1,207)
Lease revenue recognition (248) 797 2,740
Other - 82 272
============== ============== =========
$ 121 $ 897 $ 1,805
============== ============== =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of items
comprising the Company's deferred tax liability consists of the following:
As of March 31,
1998 1999
------------------ ------------------
(In Thousands)
Alternative minimum tax $ 232 $ 1,539
Lease revenue recognition (1,637) (4,720)
Other (82) (111)
================== ==================
$ (1,487) $(3,292)
================== ==================
During the year ended March 31, 1998, the Company entered into business
combinations with companies which, prior to their combination with the Company,
had elected to be treated as Sub-chapter "S" ("Sub-S") corporations. As Sub-S
corporations, taxable income and losses were passed through the corporate entity
to the individual shareholders. These business combinations were accounted for
using the pooling of interests method. Therefore, the consolidated financial
statements do not reflect a provision for income taxes relating to the pooled
companies for the periods prior to their combination with the Company.
In accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," the following pro forma income tax information is
presented as if the pooled companies had been subject to federal income taxes
throughout the periods presented.
For the Year Ended March 31,
1997 1998 1999
-------------- -------------- --------
Net earnings before pro
forma adjustment adjustment $3,491,346 $ 6,039,094 $6,716,467
Additional provision for
income taxes (357,910) (613,261) -
============== ============== ========
Pro forma net earnings $3,133,436 $ 5,425,833 $6,716,467
============== ============== ========
F-18
<PAGE>
9. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company recognized a reduction in recourse and nonrecourse notes payable
(Note 5) associated with its direct finance and operating lease activities from
payments made directly by customers to the third-party lenders amounting to
$4,214,444, $5,258,955 and $10,733,555 for the years ended March 31, 1997, 1998,
and 1999, respectively. In addition, the Company realized a reduction in
recourse and nonrecourse notes payable from the sale of the associated assets
and liabilities amounting to $18,057,569, $1,057,389 and $10,231,793 for the
years ended March 31, 1997, 1998, and 1999, respectively.
10. BENEFIT AND STOCK OPTION PLANS
The Company provides its employees with contributory 401(k) profit sharing
plans. To be eligible to participate in the plan, employees must be at least 21
years of age and have completed a minimum service requirement. Full vesting in
the plans vary from after the fourth to the sixth consecutive year of plan
participation. Employer contributions percentages are determined by the Company
and are discretionary each year. The Company's expense for the plans was
$56,291, $80,291 and $104,617 for the years ended March 31, 1997, 1998 and 1999,
respectively.
The Company has established a stock incentive program (the "Master Stock
Incentive Plan") to provide an opportunity for directors, executive officers,
independent contractors, key employees, and other employees of the Company to
participate in the ownership of the Company. The Master Stock Incentive Plan
provides for the award to eligible directors, employees, and independent
contractors of the Company, of a broad variety of stock-based compensation
alternatives under a series of component plans. These component plans include
tax advantaged incentive stock options for employees under the Incentive Stock
Option Plan, formula length of service based nonqualified options to nonemployee
directors under the Outside Director Stock Plan, nonqualified stock options
under the Nonqualified Stock Option Plan, a program for employee purchase of
Common Stock of the Company at 85% of fair market value under a tax advantaged
Employee Stock Purchase Plan approved by the Board of Directors and effective
September 16, 1998, as well as other restrictive stock and performance based
stock awards and programs which may be established by the Board of Directors.
The aggregate number of shares reserved for grant under all plans which are a
part of the Master Stock Incentive Plan represent a floating number equal to 20%
of the issued and outstanding stock of the Company (after giving effect to pro
forma assumed exercise of all outstanding options and purchase rights). The
number that may be subject to options granted under the Incentive Stock Option
Plan is also further capped at a maximum of 4,000,000 shares to comply with IRS
requirements for a specified maximum. As of March 31, 1999 a total of 1,650,100
shares of common stock have been reserved for issuance upon exercise of options
granted under the Plan, which encompasses the following component plans:
a) the Incentive Stock Option Plan ("ISO Plan"), under which 265,900
options are outstanding or have been exercised as of March 31, 1999;
b) the Nonqualified Stock Option Plan ("Nonqualified Plan"), under which
265,000 options are outstanding as of March 31, 1999;
c) the Outside Director Stock Option Plan ("Outside Director Plan"),
under which 63,507 are outstanding as of March 31, 1999;
F-19
<PAGE>
d) the Employee Stock Purchase Plan ("ESPP") under which 185,500 shares
have been issued as of March 31, 1999.
The exercise price of options granted under the Master Stock Incentive Plan is
equivalent to the fair market value of the Company's stock on the date of grant,
or, in the case of the ESPP, not less than 85% of the lowest fair market value
of the Company's stock during the purchase period, which is generally six
months. Options granted under the plan have various vesting schedules with
vesting periods ranging from one to five years. The weighted average fair value
of options granted during the years ended March 31, 1997, 1998 and 1999 was
$5.10, $4.84 and $3.69 per share, respectively.
A summary of stock option activity during the three years ended March 31, 1999
is as follows:
Weighted
Number of Exercise Price Average Exercise
Shares Range Price
------ ----- -----
Outstanding, April 1, 1996 - - -
Options granted 353,800 $6.40-$10.75 $8.20
Options exercised - - -
Options forfeited - - -
-------
Outstanding, March 31, 1997 353,800
=======
Exercisable, March 31, 1997 66,250
======
Outstanding, April 1, 1997 353,800 - -
Options granted 277,200 $10.75-$13.25 $11.94
Options exercised (200) $8.75 $8.75
Options forfeited (18,900) $8.75-$13.00 $11.18
========
Outstanding, March 31, 1998 611,900
========
Exercisable, March 31, 1998 199,540
========
Outstanding, April 1, 1998 611,900 - -
Options granted 275,507 $7.25-$13.63 $9.89
Options exercised (10,500) $8.75 $8.75
Options forfeited (97,000) $8.75-$13.50 $12.57
----------
Outstanding, March 31, 1999 779,907
==========
Exercisable, March 31, 1999 326,566
==========
F-20
<PAGE>
Additional information regarding options outstanding as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ----------------------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Number Contractual Life Exercise Price Number Exercisable Exercise Price
Outstanding
- ----------------------- --------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
779,907 8.0 years $9.53 326,566 $9.30
</TABLE>
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of either
(1) continuing to account for stock-based employee compensation plans in
accordance with the guidelines established by Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees" while providing the
disclosures required under SFAS No. 123, or (2) adopting SFAS No. 123 accounting
for all employee and non-employee stock compensation arrangements. The Company
opted to continue to account for its stock-based awards using the intrinsic
value method in accordance with APB No. 25. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Option grants made to non-employees, including outside directors, which have
been accounted for using the fair value method resulted in $113,982 in
compensation expense during the year ended March 31, 1998. The following table
summarizes the pro forma disclosures required by SFAS No. 123 assuming the
Company had adopted the fair value method for stock-based awards to employees as
of the beginning of fiscal year 1998:
Year Ended March 31,
1997 1998 1999
---- ---- ----
Net earnings, as reported $3,491,346 $ 6,039,094 $ 6,716,467
Net earnings, pro forma 3,198,669 5,346,761 5,687,667
Basic earnings per share, as reported $ 0.67 $ 1.00 $ 0.99
Basic earnings per share, pro forma 0.62 0.89 0.84
Diluted earnings per share, as reported $ 0.66 $ 0.98 $ 0.98
Diluted earnings per share, pro forma 0.61 0.87 0.83
Under SFAS No. 123, the fair value of stock-based awards to employees is derived
through the use of option pricing models which require a number of subjective
assumptions. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions:
F-21
<PAGE>
For the Year Ended March 31,
1997 1998 1999
- --------------------------
Options granted under the Incentive Stock
Option Plan:
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 44.00% 30.95% 37.02%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.81% 5.82% 5.46%
Options granted under the Nonqualified
Stock Option Plan:
Expected life of option 8 years 8 years 5 years
Expected stock price volatility 44.00% 30.95% 37.02%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.05% 5.62% -
Options granted under the Outside Director
Stock Option Plan:
Expected life of option - - 8 years
Expected stock price volatility - - 37.02%
Expected dividend yield - - 0%
Risk-free interest rate - - 4.95%
Options granted under the Employee Stock
Purchase Plan:
Expected life of option - - 5 years
Expected stock price volatility - - 37.02%
Expected dividend yield - - 0%
Risk-free interest rate - - 4.74%
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's financial
instruments is in accordance with the provisions of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments." The valuation methods used by the
Company are set forth below.
The accuracy and usefulness of the fair value information disclosed herein is
limited by the following factors:
- These estimates are subjective in nature and involved uncertainties
and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
- These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holding
of a particular financial asset.
F-22
<PAGE>
- SFAS No. 107 excludes from its disclosure requirements lease contracts
and various significant assets and liabilities that are not considered
to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
As of March 31, 1998 As of March 31, 1999
Carrying Fair Value Carrying Fair Value
Amount Amount
------------- ------------- -------------- -------------
(In Thousands)
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $18,684 $18,684 $7,892 $7,892
Liabilities:
Nonrecourse notes payable 13,028 12,973 52,429 55,341
Recourse notes payable 13,037 13,033 19,081 19,092
</TABLE>
12. BUSINESS COMBINATIONS
During the year ended March 31, 1998, the Company acquired Compuventures of Pitt
County, Inc. ("Compuventures") and Educational Computer Concepts, Inc. ("ECCI"),
both value added resellers of personal computers and related network equipment
and software products. These business combinations have been accounted for as
pooling of interests, and accordingly, the consolidated financial statements for
periods prior to the combinations have been restated to include the accounts and
results of operations of the pooled companies. The results of operations
previously reported by the Company and the pooled companies and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
For the Year Ended March 31,
1997 1998
--------------- -------------
(In Thousands)
Revenues:
MLC Holdings, Inc. $ 55,711 $ 77,178
Pooled companies 30,502 41,264
=============== =============
Combined $ 86,213 $ 118,442
=============== =============
Net earnings:
MLC Holdings, Inc. $ 2,481 $ 3,785
Pooled companies 1,010 2,254
=============== =============
Combined $ 3,491 $ 6,039
=============== =============
F-23
<PAGE>
During the year ended March 31, 1999, the Company acquired PC Plus, Inc., a
value-added reseller of personal computers, related network equipment and
software products and provider of various support services. This business
combination has been accounted for as a purchase.
The following pro forma financial information presents the combined results of
operations including PC Plus, Inc. as if the acquisition had occurred as of the
beginning of the twelve months ended March 31, 1998 and 1999, after giving
effect to certain adjustments, including amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and PC Plus, Inc. constituted a single
entity during such periods.
Year Ended March 31,
( In Thousands)
1998 1999
---------------- -------------
Total Revenues $156,321 $205,944
Net Earnings 6,885 6,956
Net Earnings per Common Share - Basic 1.09 1.03
Net Earnings per Common Share - Diluted 1.07 1.02
13. PRIVATE PLACEMENTS OF COMMON STOCK
On July 1, 1997, the Company sold 161,329 shares of common stock to a single
investor for a price of $9.00 per share.
On October 23, 1998, the Company sold 1,111,111 shares of common stock to TC
Leasing, LLC, a Delaware limited liability company, for a price of $9.00 per
share. In addition, the Company granted to TC Leasing, LLC, a stock purchase
warrant granting the right to purchase an additional 1,090,909 shares of common
stock at a price of $11.00 per share, subject to certain anti-dilution
adjustments. The warrant is exercisable through December 31, 2001, unless
extended pursuant to the terms of the warrant. Pursuant to the terms of this
private placement, the Company agreed to expand its' Board of Directors to six
persons, four of whom shall be appointed, in whole or in part, by TC Leasing,
LLC. Additionally, the terms of the private placement restrict the Company's
ability to pay dividends until October 23, 1999 without the consent of TC
Leasing, LLC
14. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its lease
financing and value-added re-seller business units. The lease financing business
unit offers lease financing solutions to corporations and governmental entities
nationwide. The value-added re-seller business unit sells information technology
equipment and related services primarily to corporate customers in the eastern
United States. The Company's management evaluates segment performance on the
basis of segment earnings.
The accounting policies of the segments are the same as those described in Note
1, "Organization and Summary of Significant Accounting Policies." Corporate
overhead expenses are allocated on the basis of revenue volume, estimates of
actual time spent by corporate staff, and asset utilization, depending on the
type of expense.
<TABLE>
<CAPTION>
Lease Value-added
Financing Re-selling Total
------------- ----------------- ----------------
(In Thousands)
Year ended and as of March 31, 1997
<S> <C> <C> <C>
Revenues $ 56,147 $ 30,066 $ 86,213
Interest expense 1,581 68 1,649
Earnings before income taxes 3,841 1,010 4,851
Assets 42,317 6,707 49,024
Year ended and as of March 31, 1998
Revenues 77,178 41,264 118,442
F-24
<PAGE>
Interest expense 1,732 105 1,837
Earnings before income taxes 6,143 2,587 8,730
Assets 66,960 16,236 83,196
Year ended and as of March 31, 1999
Revenues 110,362 83,608 193,970
Interest expense 3,367 234 3,601
Earnings before income taxes 8,649 2,646 11,295
Assets 129,425 24,934 154,359
</TABLE>
15. QUARTERLY DATA - UNAUDITED
Condensed quarterly financial information is as follows (amounts in thousands,
except per share amounts). Adjustments reflect the results of operations of
business combinations accounted for under the pooling of interests method and
the reclassification of certain prior period amounts to conform with current
period presentation.
F-25
<PAGE>
<TABLE>
<CAPTION>
MLC Holdings, Inc. and Subsidiaries
Condensed Quarterly
Information
(In Thousands)
First Quarter Second Quarter
Previously Adjusted Previously Adjusted
Reported Adjustment Amount Reported Adjustments Amount
--------------------------------- ------------------------------
Year Ended March 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Sales $ 35,273 $ - $ 35,273 $ 22,407 $ - $ 22,407
Total revenues 40,146 - 40,146 26,869 - 26,869
Cost of sales 31,892 - 31,892 19,773 - 19,773
Total costs and expenses 37,499 - 37,499 25,335 - 25,335
Earnings before provision
for income taxes 2,647 - 2,647 1,534 - 1,534
Provision for income taxes 460 - 460 412 - 412
Net earnings 2,187 - 2,187 1,122 - 1,122
============================== ==============================
Net earnings per common
share-Basic $ 0.37 $ 0.37 $ 0.19 $ 0.19
========== ============ =========== ============
Year Ended March 31, 1999
Sales $ 35,185 - $ 35,185 $ 31,479 - $ 31,479
Total Revenues 41,583 - 41,583 38,001 - 38,001
Cost of Sales 33,097 - 33,097 28,065 - 28,065
Total Costs and Expenses 39,143 - 39,143 35,268 - 35,268
Earnings before provision
for income taxes 2,440 - 2,440 2,733 - 2,733
Provision for income taxes 976 - 976 1,093 - 1,093
Earnings before
extraordinary item 1,464 - 1,464 1,640 - 1,640
Net earnings 1,464 - 1,464 1,640 - 1,640
============================== ==============================
Net earnings per common
share $ 0.24 $ 0.24 $ 0.26 $ 0.26
========== ============ =========== ============
Third Quarter Fourth Quarter
Previously Adjusted Previously Adjusted
Reported Adjustment Amount Reported Adjustmets Amount
------------------------------ ------------------------------
Year Ended March 31, 1998
Sales $ 18,097 - $ 18,097 $ 22,004 - $ 22,004
Total revenues 23,276 - 23,276 28,151 - 28,151
Cost of sales 15,625 - 15,625 19,802 - 19,802
Total costs and expenses 21,148 - 21,148 25,730 - 25,730
Earnings before provision
for income taxes 2,128 - 2,128 2,421 - 2,421
Provision for income taxes 851 - 851 968 - 968
Earnings before
extraordinary item 1,277 - 1,277 - - -
Extraordinary gain - - - - - -
Net earnings 1,277 - 1,277 1,453 - 1,453
============================== ==============================
Net earnings per common
share-Basic $ 0.21 $ 0.21 $ 0.24 $ 0.24
========== ============ =========== ============
Year Ended March 31, 1999
Sales $ 63,689 - $ 63,689 $ 37,542 - $ 37,542
Total Revenues 69,947 - 69,947 44,439 - 44,439
Cost of Sales 59,625 - 59,625 33,849 - 33,849
Total Costs and Expenses 67,117 - 67,117 41,147 - 41,147
Earnings before provision
for income taxes 2,830 - 2,830 3,292 - 3,292
Provision for income taxes 1,132 - 1,132 1,378 - 1,378
Earnings before
extraordinary item 1,698 - 1,698 1,914 - 1,914
Net earnings 1,698 - 1,698 1,914 - 1,914
========== ============ =========== ============
Net earnings per common share $ 0.24 $ 0.24 $ 0.25 $ 0.25
============================== ==============================
</TABLE>
F-26
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21295 of MLC Holdings, Inc. on Form S-8 of our report dated June 11, 1999,
appearing in this Annual Report on Form 10-K of MLC Holdings, Inc., for the year
ended March 31, 1999.
/s/Deloitte & Touche LLP
McLean, VA
July 27, 1999
