-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E+PIJjuKpQo8JGzg8Wkv8NpaWN+0rEjuSevgXvL6a490zryrTcLTjLQ3r1G3uaBr 4vqW5h/4L+Ou5ntd6zm6cA== 0001022408-99-000008.txt : 19990729 0001022408-99-000008.hdr.sgml : 19990729 ACCESSION NUMBER: 0001022408-99-000008 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MLC HOLDINGS INC CENTRAL INDEX KEY: 0001022408 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 541817218 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-28926 FILM NUMBER: 99672191 BUSINESS ADDRESS: STREET 1: 400 HERNDON PARKWAY CITY: HERNDON STATE: VA ZIP: 20170 BUSINESS PHONE: 7038345710 MAIL ADDRESS: STREET 1: 400 HERNDON PARKWAY STREET 2: SUITE B CITY: HERNDON STATE: VA ZIP: 20170 10-K/A 1 ANNUAL REPORT 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. PART I ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See accompanying Table of Contents to Financial Statements and Schedule on page F-1. 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 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 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
MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 31, 1998 1999 ---------------------------------------------- ASSETS 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.
F-3 MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year Ended March 31, ------------------------------------------- 1997 1998 1999 ------------------------------------------- REVENUES 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.
F-4
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 ------------------------- ----------------------- --------------- --------------- ------------ 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.
F-5
MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended March 31, -------------------- 1997 1998 1999 ---------------------------------- Cash Flows From Operating Activities: 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 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.
F-7 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 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 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 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:
As of March 31, 1998 1999 ----------------- ---------------- (In Thousands) 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.
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 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:
As of March 31, 1998 1999 ----------------- ---------------- (In Thousands) 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 ================= ================
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:
As of March 31, 1998 1999 ----------------- ---------------- (In Thousands) 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 ================= ================
5. RECOURSE AND NONRECOURSE NOTES PAYABLE Recourse and nonrecourse obligations consist of the following: F-12 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 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 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 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:
For the Year Ended March 31, 1997 1998 1999 --------------- -------------- --------------- 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% =============== ============== ===============
F-16 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 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 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 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 Additional information regarding options outstanding as of March 31, 1999 is as follows:
Options Outstanding Options Exercisable - ----------------------------------------------------------------- ---------------------------------------- Weighted Average Remaining Weighted Average Weighted Average Number Contractual Life Exercise Price Number Exercisable Exercise Price Outstanding - ----------------------- --------------------- -------------------- --------------------- -------------------- 779,907 8.0 years $9.53 326,566 $9.30
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 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 - 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:
As of March 31, 1998 As of March 31, 1999 Carrying Fair Value Carrying Fair Value Amount Amount ------------- ------------- -------------- ------------- (In Thousands) Assets: 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
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 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.
Lease Value-added Financing Re-selling Total ------------- ----------------- ---------------- (In Thousands) Year ended and as of March 31, 1997 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 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
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
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 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 ============================== ==============================
F-26 EX-23.1 2 CONSENT OF DELOITTE & TOUCHE LLP 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 -----END PRIVACY-ENHANCED MESSAGE-----