-----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, Nej8UNuCp35FUYxfS5nvFqECaNwc++p+KjFCwqVC+XntFdSe4FJg/hyN7iAuGW9R JNkIURlXFNFiRUReQ+ZSGQ== 0000950133-96-002237.txt : 19961023 0000950133-96-002237.hdr.sgml : 19961023 ACCESSION NUMBER: 0000950133-96-002237 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961021 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MLC HOLDINGS INC CENTRAL INDEX KEY: 0001022408 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-11737 FILM NUMBER: 96646028 BUSINESS ADDRESS: STREET 1: 11150 SUNSET HILLS ROAD STREET 2: SUITE 110 CITY: RESTON STATE: VA ZIP: 20190-5321 BUSINESS PHONE: 7038345710 MAIL ADDRESS: STREET 1: 11150 SUNSEL HILLS ROAD STREET 2: SUITE 110 CITY: RESTON STATE: VA ZIP: 20190-5321 S-1/A 1 PRE-EFFECTIVE AMEND # 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1996 REGISTRATION NO. 333-11737 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ PRE-EFFECTIVE AMENDMENT NUMBER 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MLC HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 11150 SUNSET HILLS ROAD SUITE 110 RESTON, VIRGINIA 20190-5321 (703) 834-5710 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DELAWARE 6172 54-1817218 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
PHILLIP G. NORTON CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT MLC HOLDINGS, INC. 11150 SUNSET HILLS ROAD SUITE 110 RESTON, VIRGINIA 20190-5321 (703) 834-5710 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: BENTON BURROUGHS, JR., ESQ. FRANK M. CONNER, III, ESQ. ROBERT B. WEBB, III, ESQ. JONATHAN H. TALCOTT, ESQ. HAZEL & THOMAS, P.C. ALSTON & BIRD 3110 FAIRVIEW PARK DRIVE 601 PENNSYLVANIA AVENUE, SUITE 1400 N.W. FALLS CHURCH, VIRGINIA 22042 SUITE 250, NORTH BUILDING (703) 641-4200 WASHINGTON, D.C. 20004 (202) 508-3300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 21, 1996 PROSPECTUS 1,000,000 SHARES MLC HOLDINGS, INC. COMMON STOCK ------------------------ All of the shares of common stock, $0.01 par value per share (the "Common Stock"), offered hereby (the "Offering") are being sold by MLC Holdings, Inc. (together with its subsidiaries, the "Company"). It is currently estimated that the price of the Common Stock to be sold in the Offering will be between $7.00 and $9.00 per share. Prior to the Offering, there has been no public market for the Common Stock. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "MLCH." SEE "RISK FACTORS" ON PAGES 8 THROUGH 18 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - --------------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total(3)................................. $ $ $ - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
(1) See "Underwriting" for information regarding indemnification of the Underwriters. (2) Before deducting expenses payable by the Company estimated to be $ . (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase from the Company up to 150,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made against payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, the representative of the several Underwriters (the "Representative"), or in book entry form, through the book entry facilities of the Depository Trust Company on or about , 1996. ------------------------ FRIEDMAN, BILLINGS, RAMSEY & CO., INC. The date of this Prospectus is , 1996. 3 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement. Although statements contained in this Prospectus as to the contents of any contract or other document are believed by the Company to set forth all material elements of the contract or document as to which such statements relate, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 500 West Madison Street, Room 1400, Chicago, Illinois 60606, and at 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, Washington, D.C. 20549, at prescribed rates. The Commission also maintains a web site on the World Wide Web that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company, and the address is http://www.sec.gov. The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements and an opinion thereon expressed by the Company's independent auditors as well as quarterly reports for the first three fiscal quarters of each fiscal year containing unaudited consolidated condensed financial statements. The Company also intends to provide annual financial statements to each person to whom a copy of this Prospectus has been delivered, upon the request of such person. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No action has been or will be taken in any jurisdiction by the Company or by any Underwriter that would permit a public offering of the Common Stock or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about and to observe any restriction as to the offering of the Common Stock and the distribution of this Prospectus. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective purchasers of the shares of Common Stock offered hereby should carefully consider the factors set forth under "Risk Factors." This Prospectus gives effect to the reorganization of the Company, pursuant to which MLC Group, Inc., a Virginia corporation ("MLC Group"), became, effective September 1, 1996, a wholly-owned subsidiary of MLC Holdings, Inc. ("MLC Holdings"), a newly formed Delaware corporation. All references to the "Company" shall be deemed to include and refer to MLC Holdings and its subsidiaries, including MLC Group. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective purchasers of the shares of Common Stock offered hereby are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective purchasers of the shares of Common Stock should specifically consider the various factors identified in this Prospectus, including the matters set forth under "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. THE COMPANY The Company specializes in leasing and financing information technology assets and providing asset management services to commercial customers with annual sales revenue of between $10 million and $500 million ("middle market customers"), select Fortune 1000 firms, federal, state and local governments and vendors. The assets leased by the Company include personal computers, client server systems, networks, mid-range and mainframe computer equipment, telecommunications equipment and software. The ten largest commercial customers of the Company by purchase price of the equipment leased by the Company, for fiscal year 1996, are, in alphabetical order: America Online, Inc.; Bakery and Confectionary Union and Industry International Health Benefits and Pension Fund; Cable & Wireless, Inc.; Corning Incorporated; Long Island Lighting Company; Lutheran Brotherhood; MCI Telecommunications Corporation; Nationwide Mutual Insurance Company; Progressive Casualty Insurance Company; and Strawbridge & Clothier. The three largest government customers, based upon purchase price of the equipment leased by the Company for fiscal year 1996, are, in alphabetical order: the City of Raleigh, North Carolina; the State of Missouri; and the United States Department of Transportation. None of the above customers constituted more than 10% of the Company's revenues for fiscal year 1996. The Company also leases and finances equipment, software and services through relationships with vendors, equipment manufacturers and systems integrators. These vendor clients represent a variety of high technology industries and include, among others, in alphabetical order: Cisco Systems, Inc.; EMC Corporation; Systems & Computer Technology Corporation; and Sterling Software, Inc. The Company has also provided financing for other vendors' customers for transactions ranging in size from $50,000 to $21.0 million based upon the purchase price of the assets. The Company seeks to differentiate itself from its competitors by offering its customers asset management services and asset trading capabilities, which may be customized to meet the client's desires. The Company believes that its ability and willingness to personalize its relationships and customize its services to meet the specific financial and managerial needs of each customer enable it to compete effectively against larger equipment leasing and finance companies. The Company further believes that, by providing asset management services and asset trading capabilities as well as other services to its customers, it has a competitive advantage over smaller competitors which lack the resources and expertise to provide such services. The Company's asset trading activity involves the purchase and resale of previously owned information technology equipment. By offering asset trading capabilities, the Company is able to develop and maintain knowledge of current market trends and values which enables the Company to predict more accurately 3 5 residual values when pricing leasing transactions, dispose efficiently of off-lease equipment and offer customers a way to dispose of or acquire previously owned information technology equipment. Asset management services, which are offered primarily to enhance customer service, is a general term used to describe the provision of asset inventory and tracking services, software and record keeping programs to customers. The asset management services provided by the Company allow the customers to better track their information technology assets. The asset management services include a software system maintained by the Company which generates reports and allows customers to dial up and receive information on a real time basis. The Company's management team is led by Phillip G. Norton, Chairman, Chief Executive Officer and President, and Bruce M. Bowen, a director, the Chief Financial Officer and Executive Vice President, each of whom has extensive experience in the leasing and finance industries, and who have worked together for three different companies over the past 20 years. Mr. Norton began his business career in 1970 with Memorex Corporation, and started his leasing career in 1975 as National Sales Manager of Federal Leasing, Inc. Mr. Norton founded Systems Leasing Corporation in 1978, which grew to approximately $75 million in assets by the time it was sold to PacifiCorp Capital, Inc. in 1986. Mr. Norton served as President of PacifiCorp Capital, Inc. through 1990, ultimately managing approximately 225 employees and approximately $700 million in assets. Mr. Bowen began his leasing career in 1975 with Federal Leasing, Inc. where he worked until 1978. In 1982, Mr. Bowen joined Mr. Norton at Systems Leasing Corporation as Director of Finance and later became a Senior Vice President of PacifiCorp Capital, Inc., the successor to Systems Leasing Corporation. In 1990, Mr. Bowen left PacifiCorp Capital, Inc. and founded the Company. The extensive experience of the Company's management in leasing and financing information technology equipment has enabled the Company to manage its residual portfolio to achieve superior returns. Since the Company's organization in November, 1990 through March 31, 1996, on matured leases, the Company has realized a return of 139% of the amount originally recorded as residual values for its equipment. As part of its underwriting and risk management efforts, the Company's management seeks to structure lease transactions so that they can be financed or sold to third parties on a nonrecourse basis, even if the Company ultimately retains an equity interest in the lease. The Company's underwriting approach has resulted in no credit losses in its leasing operations since its organization. The Company believes that its historical approach to estimating residuals, pricing and underwriting leases and managing relationships among vendors, customers and financial partners provides a foundation for the Company to grow and profitably deploy new capital. Completion of the Offering will substantially increase the Company's equity base, enabling the Company to service a larger volume of business. The proceeds of the Offering will also enable the Company to: (i) reduce its borrowing costs by decreasing the amounts outstanding and negotiating for lower interest rates and fees on its line-of-credit borrowings; (ii) reduce its reliance on joint ventures for certain transactions; and (iii) implement a securitization program for its lease receivables. The Company was founded in November, 1990. The Company has 39 full-time employees and eight part-time employees and operates through ten offices. The Company's principal executive offices are located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 20190-5321, and its telephone number is (703) 834-5710. STRATEGY Based on industry trends and the Company's historical results, the Company will continue to implement and improve upon a three-pronged strategy designed to increase its customer base by: (i) providing continued superior customer service while marketing to middle market and select Fortune 1000 end-users of information technology equipment and assets; (ii) purchasing companies in key regional markets with pre-existing customer bases; and (iii) further developing vendor leasing programs. Through its marketing strategy, the Company emphasizes cross-selling to the different groups of clients and attempts to reach the maximum number of potential end-users. 4 6 While the Company is pursuing and intends to continue to pursue the forgoing strategies, there can be no assurance that the Company will be able to successfully implement such strategies. The Company's ability to implement these strategies may be limited by a number of factors. See "Risk Factors." End-User Marketing Focus. The Company's target customers include middle market and select Fortune 1000 firms which are significant users of information technology and telecommunications equipment and assets and which may need other services provided by the Company, such as asset management. By targeting a potential customer base that is broader than just the Fortune 1000 companies, the Company believes that there is less competition from the larger equipment finance companies, as their marketing forces are typically more focused on Fortune 1000 customers. The Company markets through its principal executive offices and nine regional offices. The ability to identify and establish customer relationships with such firms will be critical to the Company's strategy. There can be no assurance that the Company will be able to successfully locate such customers. See "Risk Factors -- Dependence on Creditworthy Customers." Acquisition of Related Companies. The Company believes that significant opportunities exist to expand its target customer base in key regional markets through the acquisition of strategically selected companies in related lines of business. The Company's acquisition strategy will focus on acquiring new customers in the top 50 regional markets in the country. The Company believes that it can successfully acquire companies and maintain and expand customer relationships by providing acquired companies with a lower cost of capital, additional cross-selling opportunities and financial structuring expertise. In addition, the Company can provide the owners of privately-held companies with an opportunity to realize their company's value. The Company believes that decentralized marketing and centralized operations, along with operating synergies, will make it successful in lowering the operational costs while expanding the customer base of each firm it acquires. The ability to identify and acquire such firms on prices and terms that are attractive to the Company and which avoid dilution of earnings for existing stockholders is crucial to the successful implementation of this strategy. In addition, after consummating any acquisitions, the Company must be able to successfully integrate the acquired business with the Company to achieve the cost savings and marketing benefits sought by the Company. There is, however, no assurance that the Company will be able to successfully acquire such companies, or, if acquired, successfully implement the foregoing strategy. See "Risk Factors -- Potential Acquisitions" and "-- Management of Growth." Increasing Focus on Vendors. Over the last several years, major manufacturers of information technology and telecommunications equipment have moved away from providing financing to end-user customers through captive finance organizations and have increasingly outsourced this equipment financing function to independent leasing companies. From the perspective of the large end-user of information technology and telecommunications equipment, outsourcing equipment financing can simplify and centralize the financing of multiple products from different vendors, particularly as most captive finance organizations will service only their manufacturer's products. Through its participation in vendor marketing programs, the Company is able to leverage its marketing efforts by using the sales force of the vendor. The vendor's sales organization provides the Company with access to an extensive and diversified end-user customer base while saving the Company the cost of establishing these independent customer relationships. The Company uses its relationships with these vendors and end-users to create new customer relationships to which other products and services of the Company can be marketed directly. The ability to successfully establish such vendor and end user relationships is essential to the successful implementation of this strategy. There can be, however, no assurance that the Company will be able to successfully establish such relationships. See "Risk Factors -- Dependence on Major Relationships." RISK FACTORS The Company and its business are subject to varying risks which are (i) a dependence on the ability to obtain creditworthy customers; (ii) a dependence on major relationships; (iii) asset ownership resulting from the majority of the Company's lease transactions; (iv) a dependence upon the Company's ability to obtain financing; (v) substantial competition including numerous national and regional companies selling, leasing and financing similar or same or equivalent products; (vi) risk associated with the pursuit and integration of acquisitions; (vii) a dependence upon the efforts, abilities and relationships of a few key management 5 7 personnel; (viii) control of a majority of the Company's Common Stock by a single individual, Phillip G. Norton; (ix) risk associated with contractual "termination rights" in leases to government customers; (x) the inability to timely and at a competitive price obtain equipment for lease; (xi) management's ability to manage the Company's rapid growth; (xii) potential changes in tax laws which may make leasing less desirable for potential customers; (xiii) potential changes in accounting practices which may make leasing less attractive to potential customers; (xiv) interest rate fluctuations; (xv) provisions of the Company's governing documents and Delaware law, coupled with control by insiders and a staggered board which may make it more difficult for a third party to acquire control of the Company without approval of the Company's board of directors; (xvi) absence of prior public market for the Common Stock; (xvii) absence of dividend history or intention to pay dividends in the foreseeable future; (xviii) immediate and substantial book value dilution to investors in the Common Stock purchased in the Offering; (xix) fluctuations in quarterly operating results; and (xx) potential for a larger number of additional shares held by current stockholders to become eligible for sale and thereby adversely impact the market price of the Common Stock. 6 8 THE OFFERING Common Stock Offered by the Company.................. 1,000,000 shares Common Stock to be Outstanding After the Offering................. 5,000,000 shares Use of Proceeds............ The Company intends to use the proceeds of the Offering: (i) to repay approximately $275,000 of outstanding indebtedness currently owed to two stockholders of the Company; (ii) to reduce the then outstanding balance of the Company's $2,000,000 revolving loan facility, with NationsBank, N.A. (the "NationsBank Facility"), which had an outstanding balance of $1,350,000 as of June 30, 1996 and no outstanding balance as of September 30, 1996; (iii) to reduce the then outstanding balance of the Company's $5,000,000 revolving term loan facility, with First Union National Bank of Virginia (the "First Union Facility"), which had no outstanding balance as of June 30, 1996 and no outstanding balance as of September 30, 1996; and (iv) for general corporate purposes, including purchases of equipment for lease or re-sale, acquisitions of existing portfolio equipment and related leases and acquisitions of related businesses or new joint ventures. See "Use of Proceeds," "Business -- Strategy," "-- Financing" and "Certain Transactions." Proposed Nasdaq National Market Symbol............ MLCH ------------------------ Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and excludes 400,000 shares of Common Stock reserved for issuance under various stock plans or employment agreements of the Company, of which options for 380,000 shares will have been granted upon closing of the Offering. See "Management -- Compensation Arrangements and Employment Arrangements," "Description of Capital Stock" and "Underwriting." In addition, unless otherwise indicated and except as set forth in the Consolidated Financial Statements, all information in this Prospectus has been adjusted to give effect to the reorganization of the Company, pursuant to which MLC Group became a wholly-owned subsidiary of MLC Holdings, effective September 1, 1996. 7 9 SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements of the Company, and related notes thereto, the information included under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Results of Operations and Financial Condition," included elsewhere herein. The consolidated financial data, as of and for, the quarters ended June 30, 1995 and June 30, 1996, have not been audited, but in the opinion of management of the Company all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The results of operations for the quarter ended June 30, 1996 are not necessarily indicative of the results of operations that may be expected for the entire year. See "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business."
QUARTER ENDED YEAR ENDED MARCH 31, JUNE 30, ----------------------------------- ---------------------- 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) EARNINGS STATEMENT DATA: Total revenues..................... $ 27,613 $ 40,819 $ 42,800 $ 3,775 $ 12,896 Total costs and expenses........... 27,233 40,207 40,309 3,134 12,097 --------- --------- --------- --------- --------- Earnings before provision for income taxes..................... 380 612 2,491 641 799 Provision for income taxes......... 59 198 881 227 284 --------- --------- --------- --------- --------- Net earnings....................... $ 321 $ 414 $ 1,610 $ 414 $ 515 ======== ======== ======== ======== ======== Net earnings per common share...... $ 0.08 $ 0.10 $ 0.40 $ 0.10 $ 0.13 ======== ======== ======== ======== ======== Shares used in computing per common share amounts.................... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
AS OF MARCH 31, AS OF JUNE 30, ----------------------------------- ---------------------- 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) BALANCE SHEET DATA: Investment in leases............... $ 10,310 $ 13,998 $ 26,493 $ 14,728 $ 22,611 Total assets....................... 13,238 17,481 29,836 17,975 27,521 Recourse notes payable............. 2,144 1,815 1,285 1,419 1,485 Nonrecourse notes payable.......... 8,116 10,162 18,351 11,255 16,564 Retained earnings.................. 801 1,214 2,825 1,628 3,340 Stockholders' equity............... 851 1,264 2,875 1,678 3,390
8 10 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to other information in this Prospectus, the following risk factors should be considered carefully by potential purchasers in evaluating an investment in the Common Stock offered hereby. Except for historical information contained herein, the discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. DEPENDENCE ON CREDITWORTHY CUSTOMERS Historically, the credit quality of the Company's customers, and the Company's credit loss experience, have enabled the Company to raise sufficient amounts of debt and equity capital to fund its equipment purchases. In the event the actual or perceived credit quality of the Company's customer base materially decreases, or the Company has a material increase in its credit loss experience, the Company may find it difficult to continue to obtain the capital it requires, resulting in a material adverse effect on its business, financial condition and results of operations. See "Risk Factors -- Dependence on Availability of Financing." Furthermore, a material increase in the Company's delinquency and default experience would, alone, have a material adverse effect on its business, financial condition and results of operations. DEPENDENCE ON MAJOR RELATIONSHIPS As of June 30, 1996, the Company's portfolio consisted of leases with 109 customers. During fiscal year 1996, the Company originated commercial leasing transactions with 66 customers, ten of which accounted for approximately 65% of the aggregate purchase price of equipment leased by the Company to those 66 customers. In the event any of the Company's major customers ceases to lease additional equipment or materially reduces the amount of equipment it leases from the Company, this cessation or reduction could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Leasing and Sales Activities." For fiscal year 1996, the Company did not have any revenue sources which alone accounted for more than 10% of the Company's revenues except for the Company's relationship with GATX Capital Corporation ("GATX"), as discussed below. In addition to its dependence on a limited number of substantial customers, the Company also obtains a significant source of its equity financing for transactions and, for fiscal year 1996, its revenue, through two joint venture arrangements: (i) MLC/GATX Limited Partnership I, a Colorado limited partnership, which is used for financing mainframe and peripheral computer equipment; and (ii) MLC/CLC LLC, a Virginia limited liability company, which is used for financing personal computers and client server equipment. The partners in MLC/GATX Limited Partnership I are: the Company, with a 9.5% limited partnership interest; GATX, with an 89.5% limited partnership interest; and MLC/GATX Leasing Corporation, a Colorado corporation, which is equally owned by the Company and GATX and which is a general partner with a 1% general partnership interest. During fiscal year 1996, revenue recognized from sales to MLC/GATX Limited Partnership I was $13.1 million or 31% of the Company's total revenues. The Company's investment in MLC/GATX Limited Partnership I accounted for by the use of the cost method was $394,000, as of June 30, 1996. GATX, which is based in San Francisco, California and which is not affiliated with the Company, has been in the equipment leasing and financing market for over 25 years, and has assets of approximately $7.5 billion. GATX is a publicly held corporation which files periodic reports with the Commission pursuant to the Securities Exchange Act of 1934, as amended. The members of MLC/CLC LLC are the Company, with a 5% membership interest, and Cargill Leasing Corporation, a Delaware corporation, with a 95% membership interest. MLC Group serves as the manager for 9 11 MLC/CLC LLC. For fiscal year 1996, revenue recognized from the sales to MLC/CLC LLC was $1.3 million or 3% of the Company's total revenues. The Company's investment in MLC/CLC LLC accounted for by the use of the cost method was $52,149, as of June 30, 1996. Cargill Leasing Corporation, located in Minnetonka, Minnesota, is a subsidiary of Cargill, Inc., and is not affiliated with the Company. Cargill, Inc. has been reported by Forbes Magazine to be one of the largest privately owned companies in the United States. Cargill Leasing Corporation has been in the equipment leasing and financing business for over ten years. As privately held companies, neither Cargill, Inc. or Cargill Leasing Corporation makes financial information available to the public and neither company issues an annual report to the general public. Cargill, Inc. has released the following financial data for its most recent fiscal year ended May 31, 1996: sales were $56 billion, net income was $902 million, total assets were $21 billion, net worth was $5.9 billion, and employees numbered over 76,000 people worldwide. The loss or dissolution of either of these joint venture arrangements, and in particular, the MLC/GATX Limited Partnership I, would have a material adverse effect upon the Company's ability to finance lease transactions and thus on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Availability of Financing." In addition to the relationships described above, the Company, as part of its strategy, intends to seek to establish both formal and informal relationships with vendors, and by such participation in vendor marketing programs, leverage the Company's marketing efforts by using the sales force of the vendor. There can be no assurance that the Company will be able successfully to establish such relationships, or if established, that they will provide the sales leverage desired by the Company. The failure to establish such relationships would have a material adverse effect upon the Company's ability to increase its volume of transactions financed and thus on the Company's business, financial condition and results of operations. ASSET OWNERSHIP RISK OF TECHNOLOGICAL OBSOLESCENCE, INABILITY TO RE-LEASE OR RE-SELL, OR FLUCTUATING MARKET CONDITIONS The Company has historically emphasized fair market value ("FMV") leases, i.e., operating and direct finance leases, where the Company will own the leased asset at the expiration of the lease term and will sell or re-lease the asset at that time at market rates either to the existing lessee or to another party. FMV leases require the Company to re-lease or re-sell the equipment in its portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover its original investment in the equipment, and a failure to do so places the Company at a risk of not recovering its entire investment in the equipment ("residual risk"). Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or re-sell equipment on a timely basis. Among the factors are general market conditions, regulatory changes, variations in the supply or cost of comparable equipment and technological improvements that lead to the risk of technological obsolescence. The computer and telecommunications industries have been characterized by significant and rapid technological advances. At the inception of each FMV lease, the Company has historically estimated a residual value for the leased equipment. A decrease in the market value of such equipment at a rate greater than the rate expected by the Company, whether due to rapid technological obsolescence or other factors, would adversely affect the residual values of such equipment. Consequently, there can be no assurance that the Company's estimated residual value for equipment will be realized. If the Company's estimated residual values are reduced or not achieved in the future, its business, financial condition and results of operations could be materially adversely affected. As of June 30, 1996, the total net unrealized residual value of the Company's leased equipment was approximately $2.8 million. Similarly, if the Company is unable to re-lease or re-sell equipment on favorable terms, its business, financial condition and results of operations could be materially adversely affected. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Revenue Recognition and Lease Accounting" and "Business -- Leasing, Financing and Sales Activities." 10 12 The Company also engages in the short-term trading of equipment in the aftermarket. To the extent the Company purchases equipment without having a firm commitment for its re-lease or re-sale or if a firm commitment for re-lease or re-sale were to exist but not be consummated for whatever reason, the Company would be subject to all the risks of ownership of the equipment as described above. See "Business -- Industry Overview." DEPENDENCE ON AVAILABILITY OF FINANCING The business in which the Company is engaged is a capital intensive business. The Company's business involves both the leasing and the financing of assets. The leasing business is characterized by ownership of the assets residing with the Company or its assigns. The financing business is characterized by the beneficial ownership of assets residing with the asset user or customer. Several different types of financing, each of which is described below, are important to the conduct of the Company's leasing and financing business. An inability to obtain any of these types of financing would have a material adverse effect upon the Company's business, financial condition and results of operations. The typical lease transaction requires both nonrecourse debt and an equity investment by the Company at the time the equipment is purchased. The typical financing transaction is dependent upon the nonrecourse financing described below. The Company's equity investment in the typical lease transaction generally ranges between 5% and 20% of the equipment cost (but sometimes ranges as high as 35%). The balance of the equipment cost, or the nonrecourse debt portion, is typically financed with a lender on a nonrecourse basis to the Company. The Company's equity investment must come from: (i) equity investments from third parties (including MLC/GATX Limited Partnership I and MLC/CLC LLC); (ii) internally generated funds; (iii) the net proceeds of the sale of the Company's securities; or (iv) recourse borrowings. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its growth is dependent largely on its ability to obtain each of the foregoing types of financing. Information relating to the sources of each of such sources of financing for equipment acquisitions is as follows: Nonrecourse Financing. The credit standing of the Company's customers must be of such a quality as to allow the Company to finance most of its leasing or financing transactions on a nonrecourse basis. Under a nonrecourse loan, the Company borrows an amount equal to the committed lease payments under the financed lease, discounted at a fixed interest rate. The lender is entitled to receive the payments under the financed lease in repayment of the loan, and takes a security interest in the related equipment but has no recourse against the Company. The Company retains ownership of such equipment, subject to the lender's security interest. Interest rates under this type of financing are negotiated on a transaction-by-transaction basis and reflect the financial condition of the lessee, the term of the lease and the amount of the loan. As of June 30, 1996, the Company had aggregate outstanding nonrecourse borrowings of approximately $16.6 million. The Company's objective is to enter into leasing or financing transactions with creditworthy customers whose credit standing will permit the Company to finance such leases with banks or other financial institutions on a nonrecourse basis to the Company. The Company's customers which do not have a credit rating of Baa or better generally are creditworthy non-rated companies that may be publicly or privately owned. The Company has had success in meeting this objective in the past, but there is no assurance that banks or other financial institutions will be willing or able to continue to finance the Company's lease transactions on a nonrecourse basis, that the Company will continue to be able to attract customers that meet the credit standards for nonrecourse financing required by the Company's financing sources or that those standards will not change in the future. Government Financing. The Company also originates tax-exempt state and local lease transactions in which the interest income is exempted from federal income taxes, and to some degree, certain state income taxes. The Company assigns its tax-exempt leases to institutional investors, banks and investment banks which can utilize tax-free income, and has a number of such entities which regularly purchase the transactions. The Company also originates financings involving various agencies of the U.S. Government. In addition to the usual risks associated with commercial transactions, these financings may be subject to numerous termination 11 13 provisions (see "Risk Factors -- Government Termination Risk") and may also contain risks associated with a vendor's inability to meet contractual obligations to provide specified goods or services as specified on an ongoing basis. Historically, there have been a limited number of financial institutions which have provided financing for these contracts, and although the Company maintains favorable relationships with a few, there can be no assurance that the Company will be able to replace these relationships or find other lenders in the event existing relationships are terminated. Lease Assignment Financing. Access to nonrecourse financing is also important to the Company's lease sales revenue and fee income. The Company enters into many transactions involving government leases which it immediately assigns and sells, on a nonrecourse basis to third parties and records any gain or loss from the transaction as lease revenue. Unavailability of persons willing to acquire such government leases on such a nonrecourse basis could materially adversely affect the Company's ability to consummate such sales transactions and thus have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Financing." Equity Joint Ventures. Through MLC/GATX Limited Partnership I and MLC/CLC LLC, the Company has formal joint venture arrangements with two institutional investors which provide the equity investment financing for certain of the Company's transactions. GATX, an unaffiliated company which beneficially owns 90% of MLC/GATX Limited Partnership I, is a publicly listed company with stockholders' equity in excess of $332 million, as of June 30, 1996. Cargill Leasing Corporation, an unaffiliated investor which owns 95% of MLC/CLC LLC, is affiliated with Cargill, Inc., a privately held company that was reported by Forbes Magazine to have 1995 earnings in excess of $900 million. See "Risk Factors -- Dependence on Major Relationships." For fiscal year 1996, approximately 31% of the Company's total revenue was attributable to sales of lease transactions to MLC/GATX Limited Partnership I. Transactions involving the use or placement of equity from these joint ventures require the consent of the relevant joint venture partner, and if financing from those sources were to be withheld or were to become unavailable, it would limit the amount of equity available to the Company and have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Financing." Equity Capital and Internal Financing. Occasionally the Company finances leases and related equipment internally, rather than with financing provided by lenders. These internal lease financings typically occur in cases where the financed amounts are not sufficiently large to be attractive to lenders or where the credit rating of the lessee is not acceptable to lenders. The Company also temporarily finances selected leases internally, generally for less than 90 days, until permanent outside nonrecourse financing is obtained. If the Company significantly increases its leasing and financing volumes as a result of new vendor relationships or substantially increases the size of its leasing portfolio or if other unforeseen developments occur, the Company may require the proceeds of additional equity financings within the next 12 to 18 months. Additional equity may also be necessary in order for the Company to have a sufficient equity position to meet debt-to-equity ratios required by its recourse lenders in the future. There can be no assurances that the Company will be able to generate operating cash flow or raise additional equity at that time or at any time in the future or that the Company will be able to raise such equity on terms which do not cause significant dilution to its stockholders. See "Business -- Financing." Recourse Financing. The Company relies on recourse borrowing in the form of revolving lines of credit, under the NationsBank Facility and the First Union Facility, for working capital to acquire equipment to be resold in its trading operation and to acquire equipment for leases, and to a lesser extent, for long-term financing of leases. As of June 30, 1996, the Company had aggregate outstanding recourse borrowings of approximately $1.5 million of which approximately $1.4 million was borrowed under the NationsBank Facility and $135,165 was borrowed pursuant to long term recourse notes payable. In addition, the Company recently established a third line of credit for borrowings of $2 million with NationsBanc Leasing Corporation, an affiliate of NationsBank, N.A. (the "NationsBanc Leasing Facility"). Availability under the revolving lines of credit may be limited by the asset value of equipment purchased by the Company and may be further limited by certain covenants and terms and conditions of the facilities. In the event that Company is unable to sell the 12 14 equipment or unable to finance the equipment on a permanent basis within a certain period of time, the availability of credit under the lines could be diminished or eliminated. Furthermore, in the event that receivables collateralizing the line are uncollectible, the Company would be responsible for repayment of the lines of credit. Accordingly, such a default could have a material adverse effect on the business, financial condition and results of operations of the Company, particularly if the then fair market value of the equipment is insufficient to satisfy the obligations due to the bank. The First Union Facility expires on April 30, 1997. The NationsBank Facility expires on December 1, 1996 and the NationsBanc Leasing Facility expires on January 31, 1997. There can be no assurance that the Company will be able to renew, extend or replace these credit facilities and a failure to renew, extend or replace any of these facilities would have a material adverse effect upon the Company's business, financial condition and results of operations. With respect to the long-term recourse notes to finance certain leases, the availability of such recourse borrowing is dependent on both the creditworthiness of the customer, as described above under "Risk Factors -- Dependence on Availability of Financing -- Nonrecourse Financing," and the creditworthiness of the Company, including the Company's ability to meet certain debt-to-equity ratios often required by recourse lenders. The Company's ability to increase the amount of its recourse debt has been limited by its capital position and the personal guarantees and collateral provided by its stockholders. While the Company expects that the increase in its stockholders' equity resulting from the sale of the Common Stock in the Offering will make available to it, as necessary, additional recourse borrowing, the Company plans to use this increased stockholders' equity, in part, to enable the Company to reduce or eliminate the personal guarantees and collateral provided by its stockholders on such recourse debt. No assurances can be given that the Company will not experience difficulty in obtaining recourse debt in the future, whether because lenders change their credit standards for providing such financing, the stockholders cease to provide personal guarantees or collateral, or because the Company increases its recourse borrowing to a level where it cannot meet such debt-to-equity ratio requirements or other financial covenants. The unavailability of such recourse financing would have a material adverse effect on the ability of the Company to finance lease transactions and, thus, have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Financing." COMPETITION The Company faces substantial competition in connection with the purchase, sale and lease of new and used computer systems, computer peripheral equipment, upgrades and parts. Among its competitors are numerous national and regional companies selling, leasing and financing the same or equivalent products. Many of these competitors are well established, have substantially greater financial, marketing, technical and sales support than the Company and have established reputations for success in the purchase, sale and lease of computer-related products. In addition, many computer manufacturers may sell or lease directly to the Company's customers, and the Company's continued ability to compete effectively may be affected by the policies of such manufacturers. The Company also faces competition from other financial service firms such as investment banking firms which underwrite municipal bonds to finance large municipal acquisitions, national finance companies which finance equipment in the governmental and commercial sectors, banks which finance local customers and also engage in lease transactions to obtain favorable tax benefits, as well as other financial intermediaries similar to the Company which may focus specifically on geography, asset-type or customer profiles. There can be no assurance that the Company will be able to compete successfully or that it will maintain profitability in the future. See "Business -- Competition." POTENTIAL ACQUISITIONS As part of its long-term business strategy, the Company intends to pursue acquisitions of other companies. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on the Company's business, financial condition and results of operations. Future acquisitions would involve numerous additional risks, including: difficulties in the assimilation of the 13 15 operations, services, products and personnel of the acquired company; the diversion of management's attention from other business concerns; entering markets in which the Company has little or no direct prior experience; and the potential loss of key employees of the acquired company. The Company currently has no agreements or understandings with regard to any acquisitions. See "Business -- Strategy." DEPENDENCE ON CURRENT MANAGEMENT The operations and future success of the Company are dependent upon the efforts, abilities and relationships of the Company's Chairman, Chief Executive Officer and President, Phillip G. Norton, and its founder, Chief Financial Officer and Executive Vice President, Bruce M. Bowen, who also serves as a director of the Company, and its Secretary and Treasurer, Kleyton L. Parkhurst. The loss of any of these key management officers would materially adversely affect the business, financial condition and results of operations of the Company. Each of these officers has entered into an employment agreement with the Company. The Company maintains key-man life insurance on Mr. Norton in the form of two separate policies, one with the Prudential Life Insurance Company and the second with TransAmerica Life Co., each in the amount of $5,000,000 and on Mr. Bowen with CNA Insurance Company in the amount of $1,000,000. See "Management -- Compensation Arrangements and Employment Agreements." CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the Offering, one of the Company's current principal stockholders, Phillip G. Norton, Chairman, Chief Executive Officer and President of the Company, will directly and indirectly control approximately 56.2% of the Company's outstanding Common Stock. Phillip G. Norton also has the option to acquire an additional 130,000 shares of Common Stock of which options to acquire 32,500 shares of Common Stock are immediately exercisable upon completion of the Offering. In the event of the death of Phillip G. Norton, Patricia A. Norton, if then living, would succeed to the rights under the Irrevocable Proxy and Stock Rights Agreement. See "Management -- Executive Compensation and Other Information" and "Principal Stockholders." Similarly, upon completion of the Offering, another of the Company's current principal stockholders, Bruce M. Bowen, a director, the Chief Financial Officer and Executive Vice President of the Company, will directly and indirectly control approximately 15.3% of the Company's outstanding Common Stock. See "Management -- Executive Compensation and Other Information" and "Principal Stockholders." Because of their ownership positions, Messrs. Norton and Bowen will have a substantial influence on the election of all of the Company's directors, and, therefore, substantial control of the direction of the affairs of the Company. Mr. Norton, acting alone, or in concert with Mr. Bowen, will effectively control the election of a majority of the members of the Company's Board of Directors and will effectively be able to determine all corporate actions, including amendments to the Company's charter documents, or take other actions which could adversely affect minority stockholders. In addition, the Company's stockholders do not have the right to cumulative voting in the election of directors, the absence of which has the effect of making it unlikely that the public stockholders will be able to cause any director to be elected to the Company's Board of Directors, other than those supported by Mr. Norton, individually, or, if Mr. Norton's ownership position should decrease, those supported by Messrs. Norton and Bowen. See "Description of Capital Stock." GOVERNMENT TERMINATION RISK Virtually all of the Company's lease volume with government customers is pursuant to leases which are "subject to appropriation," or, with respect to federal government leases, "also subject to termination for convenience or the risk of non-renewal at the end of each fiscal year." A lease which is subject to termination for convenience may also be terminated by the government at any time prior to expiration of the fiscal year on various grounds in which event, while the Company or its assignee through the contractor may submit a claim for losses, if any, associated therewith, the timing and amount of a settlement upon such a claim can be uncertain. In addition, most federal government leases are written over several fiscal years and give the government the option not to renew at the end of each fiscal year for any reason, even if funds have been 14 16 appropriated. In the case of a lease which is "subject to appropriation," the obligation of the lessor is subject to and contingent upon appropriation of funding for that lease in future fiscal years and if such funding is not appropriated, then the governmental lessee has no obligation to continue the lease. The Company has historically sought and been able to pass these appropriation, non-renewal and termination for convenience risks to financial institutions by financing such leases on a "nonrecourse" basis; however, there can be no assurance that the Company will be able to obtain such financing in the future. A material increase in either industry-wide termination experience or in the Company's termination due to non-appropriation, non-renewal or termination for convenience experience would make it more difficult for the Company to obtain nonrecourse financing for similar "subject to appropriation" governmental leases in the future and would have a material adverse effect on the Company's business, financial condition and results of operations. As of the end of fiscal year 1996, the Company had $6.8 million of assets leased to governmental units. All of these leases are subject to termination rights by the governmental units as described above. As of the end of fiscal year 1996, approximately $5.35 million of this amount was financed through non-recourse financing and the termination risk passed to the lender. Of the remaining approximately $1.4 million, $800,000 or 55% was sold to non-recourse lending sources in the first quarter of fiscal year 1997. DEPENDENCE UPON AVAILABILITY OF EQUIPMENT A substantial portion of the Company's sales and lease revenues are derived from equipment which the Company obtains in the computer "aftermarket." As a supplier of used International Business Machines Corporation ("IBM") and IBM-compatible computer equipment and other equipment, the Company must constantly identify sources for products at costs which permit the Company to re-sell or re-lease such equipment on a competitive and profitable basis. Technological advances and shifts in customer preferences may require the Company to offer additional or different products not available through its current network of product suppliers and could render a portion of the Company's inventory and lease portfolio unmarketable or marketable only at lower prices or rates. From time-to-time, the Company and its competitors have experienced shortages in the availability of certain products. The Company obtains aftermarket equipment primarily to fill orders for such equipment by its customers. The computer market is characterized by a number of different types of customers. Certain customers seek only the newest or most sophisticated equipment while other customers are far more price sensitive. While the risk of technological obsolescence means that one customer may no longer have need for a specific type of equipment, it may still be useful to another customer. Similarly due to changes in customer preferences a customer may no longer wish to continue leasing a particular piece of equipment. When the Company is forced to move equipment from one customer to another, there can be no assurance that the Company will be able to find a new customer for that equipment or if a new customer is identified, that the price it will be able to sell or lease the equipment does not result in a loss to the Company. The occurrence of technological obsolescence or change in preference may cause a decline in the economic value of equipment. Like any market, the computer marketplace is subject to product shortages from time to time. The principal effect on the Company would be on timely locating computer equipment in the aftermarket. The Company may receive an order from a customer for a piece of computer equipment that it must obtain in the aftermarket and be unable to do so in the required time frame. The occurrence of these shortages in the future would have a material adverse effect on the Company's business, financial condition and results of operations. As of June 30, 1996, the Company's inventory of information technology equipment was $67,267, and the highest inventory level at the end of any quarter during fiscal year 1996 was $531,732 on June 30, 1995. See "Business -- Competition." MANAGEMENT OF GROWTH In order to support the anticipated growth of its business, the Company has added new personnel in 1995 and 1996 and expects to add additional personnel in 1997. The Company is absorbing, and will continue to absorb in the future, the effects of additional personnel costs and the implementation of new systems necessary to manage such growth. The Company's future operating results will depend on its ability to attract, hire and 15 17 retain skilled employees and on the ability of its officers and key employees to continue to implement and improve its operational and financial control systems and to train and manage its employees. If the Company is unable to manage growth effectively, or attract and retain the personnel it requires, the Company's business, financial condition and results of operations would be materially adversely affected. RISK OF CHANGES IN TAX LAWS The Company's leasing activities generate significant depreciation allowances that provide the Company with substantial tax deductions on an ongoing basis. Many of the Company's lessees currently enjoy favorable tax treatment by entering into operating leases. In addition, parties financing certain leases to state and local governments enjoy favorable tax treatment based upon their interest income not being subject to certain income taxes. Any change to current tax laws that makes existing operating lease financing or municipal lease financing less attractive could materially adversely affect the Company's business, financial condition and results of operations. RISK OF CHANGES IN ACCOUNTING PRACTICES Many of the Company's lessees currently enjoy favorable accounting treatment of operating leases. Any change to current accounting principles that make operating lease financing less attractive could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for a discussion of the impact of a recently promulgated financial accounting staff bulletin. INTEREST RATE RISK During the marketing and bid process for new lease transactions, the Company typically provides a proposal to the customer based upon market conditions at the time of the proposal. While the proposal in many instances will provide the Company with the ability to reprice its bid under certain conditions, in general terms, between the time the proposal is issued by the Company and the time the lease transaction is ultimately financed by the Company, the Company is exposed to interest rate risk to the extent interest rates increase. In addition, prior to obtaining long-term financing for its leases and the related equipment, the Company sometimes finances the purchase of those assets through lines of credit which bear interest at variable rates. See "Risk Factors -- Dependence on Availability of Financing -- Recourse Financing" and "Business -- Financing." The Company is exposed to interest rate risk on leases financed through the NationsBank Facility, the First Union Facility and the NationsBanc Leasing Facility to the extent interest rates increase between the time the leases are initially financed and the time they are permanently financed. ANTI-TAKEOVER EFFECTS OF GOVERNING DOCUMENTS, CONTROL BY INSIDERS, DELAWARE LAW AND STAGGERED BOARD The Company's Certificate of Incorporation and Bylaws contain certain provisions that could have the effect of making it more difficult for a party to acquire, or of discouraging a party from attempting to acquire, control of the Company without approval of the Company's Board of Directors. Under the Company's Certificate of Incorporation, the Board of Directors has authority to issue up to 2,000,000 shares of $.01 par value preferred stock of the Company, in one or more series, having such rights and privileges, including, without limitation, voting rights, as the Board of Directors may determine in its sole discretion. No consent of the holders of shares of Common Stock is required to authorize the issuance of any class of preferred stock of the Company. The rights of the holders of shares of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While the Company has no present intention to issue shares of preferred stock, such issuance could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. See "Description of Capital Stock." The Company's Certificate of Incorporation and Bylaws further provide for the Company's Board of Directors to be divided into three classes, with directors in each class elected for three-year staggered terms, 16 18 except for the initial directors. This classification of the Board of Directors could make it more difficult for a third party to acquire control of the Company, because it would require more than one annual meeting of the stockholders to elect a majority of the Board of Directors. Upon completion of the Offering, one of the Company's current principal stockholders, Phillip G. Norton, Chairman, Chief Executive Officer and President of the Company, will control approximately 56.2% of the Common Stock, and thus will probably be able to prevent a third party from acquiring control of the Company. See "-- Control by Principal Stockholders." The Company is a Delaware corporation and is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of the Company's outstanding voting stock) from engaging in a "business combination" with the Company for three years following the date that the person became an interested stockholder unless the business combination is approved in a prescribed manner. This statute could make it more difficult for a third party to acquire control of the Company. See "Description of Capital Stock -- Certain Provisions of Delaware Law." ABSENCE OF PRIOR PUBLIC MARKET FOR STOCK The Common Stock has not been previously traded on an established market; thus, there exists a degree of uncertainty as to the volume and the price at which sustained market trading will occur. The initial public offering price of the Common Stock has been determined by negotiations among the Company and the Representative and may not reflect the market price of the Common Stock after the Offering. See "Underwriting" for a discussion of factors considered in determining the initial public offering price. The assumed initial public offering price of $8.00 per share is substantially in excess of the pro forma net book value of $0.85 per share, derived from the Company's June 30, 1996 balance sheet. See "Dilution" and "Underwriting." The market price of the Common Stock, like that of the securities of other equipment leasing and financing companies, may be highly volatile. In the future, there may be significant volatility in the market price of the Common Stock due to factors that may or may not relate to the Company's performance. For example, the market price may be significantly affected by the following, and other factors: actual or anticipated financial results of the Company; the market price of stocks of other capital equipment leasing and financing companies; fluctuations and trends in prevailing money market interest rates; announcements from vendors of the Company's leased equipment regarding new products or technological innovations; equipment price changes; changes in government regulations; accounting principles or tax laws applicable to the Company; the operating results or financial condition of the Company's vendors or principal customers; or acquisitions affecting the Company's vendors or principal customers. ABSENCE OF DIVIDENDS The Company has never paid a cash dividend to stockholders and does not anticipate paying dividends on the Common Stock in the foreseeable future, as the Company's Board of Directors intends to retain the Company's earnings for use in the business. In addition, the First Union Facility includes a covenant which prohibits the Company from paying any dividends. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION An investor in the Common Stock will experience immediate and substantial dilution. As of June 30, 1996, the Company had a net book value of approximately $3.4 million or $0.85 per share of Common Stock, based upon 4,000,000 shares of Common Stock outstanding. After giving effect to the sale of the Common Stock in the Offering at an assumed initial public offering price of $8.00 per share, and after deducting the underwriting discount and commissions and estimated expenses of the Offering, the Company's pro forma net book value would have been approximately $9.9 million or $1.98 per share of Common Stock, as of June 30, 1996, based on 5,000,000 shares of Common Stock outstanding. The result will be an immediate increase in 17 19 net book value of $1.13 share of Common Stock to existing stockholders and an immediate dilution to new investors of $6.02 per share of Common Stock (representing a 75% dilution from the assumed initial public offering price per share). As a result, new investors will bear most of the risk of loss since their shares are being purchased at a cost substantially above the price that existing stockholders acquired their shares. See "Dilution." POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's future quarterly operating results may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Common Stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies or major customers of the Company. The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, any reduction of expected residual values related to the equipment the Company leases, timing of specific transactions and other factors. Quarterly operating results could also fluctuate as a result of the sale by the Company of equipment in its lease portfolio, at the expiration of a lease term or prior to such expiration, to the lessee or to a third party. Such sales of equipment may have the effect of increasing revenues and net income during the quarter in which the sale occurs, and reducing revenues and net income otherwise expected in subsequent quarters. See "Risk Factors -- Asset Ownership Risk" and "Management's Discussion and Analysis of Results of Operations and Financial Condition." Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations for one quarter should not be relied upon as an indication of future performance. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF COMMON STOCK Upon the completion of the Offering, 5,000,000 shares of Common Stock (including the 1,000,000 shares sold in the Offering ) will be outstanding. Of this amount, 1,000,000 shares of Common Stock will be freely tradable without restriction. The remaining 4,000,000 shares of Common Stock will be subject to a lock-up agreement described below. Under the lock-up agreements, each of the Company's directors, officers and shareholders including Messrs. Norton and Bowen, has agreed not to sell, without the prior written consent of the Underwriters, any shares owned by such person, directly or indirectly, within the 360-day period after the date of this Prospectus. While at the end of such 360-day period, the 4,000,000 shares subject to such lock-up agreement will no longer be subject to such agreement, such shares will be required to be sold pursuant to provisions of Rule 144 under the Securities Act. Sales of any such shares after such periods could adversely affect the market price of the Common Stock. See "Description of Capital Stock -- Shares Eligible for Future Sale" and "Underwriting." 18 20 THE COMPANY The Company is a recently formed Delaware corporation which, pursuant to a reorganization effected September 1, 1996, serves as the holding company for MLC Group and other subsidiaries. The Company holds no other assets and engages in no other business other than serving as the parent holding company for MLC Group and MLC Capital, Inc. MLC/GATX Leasing Corporation is a 50% owned subsidiary of MLC Group. MLC Group, a Virginia corporation, founded in 1990 and originally named Municipal Leasing Corporation, currently conducts all business activity of the Company. MLC Capital, Inc., is an NASD-registered broker-dealer and as of the date of this Prospectus has conducted no business transactions. The Company does not have any plans at present to engage in business through MLC Capital, Inc. MLC Group obtains a significant source of its equity financing for transactions through two joint venture arrangements: (i) MLC/GATX Limited Partnership I; and (ii) MLC/CLC LLC. MLC Group has a 9.5% limited partnership ownership interest in MLC/GATX Limited Partnership I and owns 50% of the stock of MLC/ GATX Leasing Corporation, which serves as general partner of MLC/GATX Limited Partnership I with a 1% general partnership interest. MLC Group has a 5% membership interest in MLC/CLC LLC and serves as its manager. See "Risk Factors -- Dependence on Major Relationships" and "Business -- Financing." The Company's principal executive offices are located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 20190-5321 and its telephone number at such address is (703) 834-5710. The Company operates through 10 offices, including its principal executive offices and seven regional sales offices which are located in the following metropolitan areas: Philadelphia, Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento, California; Raleigh, North Carolina; Atlanta, Georgia; San Diego, California. In addition the Company also has arrangements with two independent contractors who work primarily for the Company in Columbus and Cincinnati, Ohio. The Company currently employs 39 full-time employees and eight part-time employees, of which 27 of such employees work at the Company's principal executive offices and the remaining 20 work at the various regional offices of the Company. USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,000,000 shares of Common Stock offered hereby are estimated to be approximately $6.5 million after deducting the Underwriter's discount and commissions and estimated expenses of the Offering payable by the Company ($7.6 million if the Underwriters' over- allotment option is exercised in full for an additional 150,000 shares). The net proceeds of the Offering will be used as follows: (i) approximately $275,000 will be used to repay outstanding indebtedness currently owed to two stockholders of the Company; (ii) any outstanding indebtedness on the NationsBank Facility and the First Union Facility will be retired (the aggregate amount outstanding under both facilities, as of June 30, 1996, was $1.4 million and there was no indebtedness outstanding as of September 30, 1996); and (iii) the balance, which based on amount of indebtedness outstanding under the two facilities as of September 30, 1996, would be approximately $6.25 million or 96% of the net proceeds ($7.35 million or 97% if the Underwriters' over-allotment option is exercised in full for an additional 150,000 shares), will be used for general corporate purposes. Management will have complete discretion to apply this amount towards general corporate purposes. Such general corporate purposes include purchases of equipment for lease or re-sale, acquisitions of existing portfolio equipment and related leases and acquisitions of related businesses or new joint ventures. The Company does not have any agreements or understandings with respect to any acquisitions of existing portfolio equipment and related leases and acquisitions of related businesses or new joint ventures at the present time. Further, the Company cannot currently predict the amount of its short-term debt, if any, that it will repay with such proceeds, and in any event, expects that it may reborrow all or a portion of any such amount within 90 days after it has been repaid to repurchase equipment for lease or sale. 19 21 The indebtedness to be retired with the proceeds of the Offering consists of: (i) approximately $275,000 outstanding pursuant to two separate demand notes, one of which is held by Bruce M. Bowen, in the amount of $175,000, and the other of which is held by William J. Slaton, in the amount of $100,000, each dated March 1, 1995, and each accruing interest at the rate of 10% per annum and due in full on March 3, 1998; (ii) any balance outstanding, as of closing under the NationsBank Facility, a $2 million revolving loan facility, bearing interest at prime plus 1% and expiring December 1, 1996 (which balance was $1.4 million as of June 30, 1996 and zero as of September 30, 1996); and (iii) the amount outstanding, if any, under the First Union Facility, a $5 million revolving term loan facility, with advances bearing interest at LIBOR plus 275 basis points and expiring October 31, 1996, which had no outstanding balance, as of June 30, 1996 or as of September 30, 1996. Pending such uses, the Company expects to invest the net proceeds in United States government agency secured investments or other short-term investment grade securities. DIVIDEND POLICY The Company has never paid a cash dividend to stockholders and the current policy of the Company's Board of Directors is to retain the earnings of the Company for use in the business. In addition, the First Union Facility prohibits the Company from paying any dividends. Therefore, the payment of cash dividends on the Common Stock is unlikely in the foreseeable future. Any future determination concerning the payment of dividends will depend upon the elimination of these restrictions and the absence of similar restrictions in other agreements to which the Company is a party, the Company's financial condition, the Company's results of operations and any other factors deemed relevant by the Board of Directors. 20 22 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996 on an actual basis and on an adjusted basis giving effect to (i) the sale of 1,000,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $8.00 per share of Common Stock (the mid-point of the price range set forth on the cover page of this Prospectus) after deducting underwriting discounts and commissions and estimated expenses of the Offering and (ii) the repayment by the Company of certain indebtedness. See "Use of Proceeds" and "Certain Transactions."
AT JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS) Nonrecourse notes payable............................................... $16,564 $16,564 Recourse notes payable.................................................. 1,485 135 Loans from stockholders................................................. 275 -- ------- ------- Total......................................................... 18,324 16,699 Stockholders' equity: Preferred stock, $0.01 par value -- 2,000,000 shares authorized; none issued or outstanding........................................ -- -- Common stock, $0.01 par value -- 10,000,000 shares authorized; 4,000,000 shares issued and outstanding (actual), 5,000,000 shares; issued and outstanding (as adjusted)(1)................... 40 50 Additional paid-in capital......................................... 10 6,500 Retained earnings.................................................. 3,340 3,340 ------- ------- Total stockholders' equity.................................... 3,390 9,890 ------- ------- Total capitalization.......................................... $21,714 $26,589 ======= =======
- ------------------ (1) Excludes a total of 400,000 shares of Common Stock reserved for issuance under various employment agreements and certain stock option plans of the Company as follows: (i) 30,000 shares of Common Stock reserved for issuance upon exercise of options granted to nonemployee directors under the 1996 Outside Director Stock Plan with an exercise price equal to the initial public offering price and 45,000 shares of Common Stock reserved for issuance under future options to be granted under the 1996 Outside Director Stock Plan at an exercise price equal to the market price at the time of grant; (ii) 100,000 shares of Common Stock reserved for issuance upon exercise of options granted Kleyton L. Parkhurst under an employment agreement with an exercise price equal to $6.40 per share of Common Stock; (iii) 15,000 shares of Common Stock issuable upon exercise of options granted Bruce M. Bowen under an employment agreement with an exercise price equal to the initial public offering price; (iv) 130,000 shares of Common Stock reserved for issuance upon exercise of options granted to Phillip Norton under an employment agreement with an exercise price equal to the initial public offering price; (v) 60,000 shares of Common Stock issuable upon exercise of options granted other employees under the 1996 Incentive Stock Option Plan with an exercise price equal to the initial public offering price; and (vi) 20,000 additional shares of Common Stock reserved for issuance under the 1996 Stock Incentive Plan. See "Management -- Compensation Arrangements and Employment Agreements" and "-- 1996 Stock Incentive Plan" and "Underwriting." 21 23 DILUTION The net book value of the Company, as of June 30, 1996, was approximately $3.4 million or $0.85 per share of Common Stock. Net book value represents the amount of the Company's stockholder's equity. Dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net book value per share of Common Stock immediately after completion of the Offering. After giving effect to the sale of the Common Stock at an estimated initial public offering price of $8.00 per share of Common Stock (the mid-point of the price range set forth on the cover page of this Prospectus) and after deduction of the underwriting discount and commissions and estimated expenses of the Offering, the adjusted pro forma net book value, as of June 30, 1996, would have been approximately $9.9 million or $1.98 per share of Common Stock. This represents an immediate increase in net book value of $1.13 per share to existing stockholders and an immediate dilution of $6.02 per share to new investors purchasing the Common Stock. The following table illustrates the pro forma per share dilution, as of June 30, 1996: Estimated initial public offering price per share(1).................. $8.00 Net book value per share at June 30, 1996........................ $0.85 Increase per share in pro forma net book value attributable to new investors................................................... 1.13 ----- Pro forma net book value per share after the Offering(2).............. 1.98 ----- Dilution per share to new investors................................... $6.02 =====
- --------------- (1) Before deducting estimated underwriting discounts and commissions and estimated expenses of the Offering payable by the Company. (2) Excludes 400,000 shares of Common Stock reserved for issuance upon the exercise of options granted or to be granted or reserved for future grant pursuant to employment agreements and the 1996 Stock Incentive Plan. See "Management -- Executive Compensation and Other Information." The following table sets forth, on a pro forma basis as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders for shares of Common Stock held prior to the Offering and paid by the new investors for shares of Common Stock purchases in the Offering, based upon the estimated initial public offering price of $8.00 per share of Common Stock (the mid-point of the price range set forth on the cover page of this Prospectus) before deduction of the underwriting discount and estimated expenses of the Offering:
SHARES OWNED AFTER THE OFFERING TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ---------- ------- ------------- Existing stockholders............ 4,000,000 80.00% $ 49,592 0.62% $0.01 New investors.................... 1,000,000 20.00 8,000,000 99.38 8.00 --------- ------- ---------- ------- Total.................. 5,000,000 100.00% $8,049,592 100.00% ======== ====== ========= ======
22 24 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with the consolidated financial statements of the Company and related notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition," included elsewhere herein. The consolidated financial data as of and for the quarters ended June 30, 1995 and June 30, 1996, have not been audited, but in the opinion of management of the Company all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The results of operations for the quarter ended June 30, 1996 are not necessarily indicative of the results of operations that may be expected for the entire year. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business."
QUARTER ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------------------ -------------------- STATEMENTS OF EARNINGS 1992(1) 1993 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUE: Sales.............................. $ 6,183 $ 24,357 $ 24,677 $ 36,898 $ 34,842 $ 2,091 $ 10,412 Lease revenues..................... 377 1,219 1,577 2,968 5,900 968 1,791 Net margin on sales-type leases.... -- 193 380 277 86 75 -- Fee and other income............... 47 694 979 676 1,972 641 693 --------- --------- --------- --------- --------- --------- --------- Total revenues................ 6,607 26,463 27,613 40,819 42,800 3,775 12,896 --------- --------- --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales...................... 5,635 22,750 23,155 34,353 31,202 1,454 9,894 Direct lease costs................. -- 140 344 841 2,863 286 781 Professional and other fees........ 388 770 595 633 687 49 128 Salaries and benefits.............. 313 1,403 1,734 2,631 2,962 846 665 General and administrative expenses......................... 185 526 994 759 1,018 191 259 Interest and financing costs....... 43 251 411 990 1,577 308 370 --------- --------- --------- --------- --------- --------- --------- Total costs and expenses...... 6,564 25,840 27,233 40,207 40,309 3,134 12,097 --------- --------- --------- --------- --------- --------- --------- EARNINGS BEFORE PROVISION FOR INCOME TAXES......................... 43 623 380 612 2,491 641 799 PROVISION FOR INCOME TAXES............. -- 185 59 198 881 227 284 --------- --------- --------- --------- --------- --------- --------- NET EARNINGS........................... $ 43 $ 438 $ 321 $ 414 $ 1,610 $ 414 $ 515 ========= ========= ========= ========= ========= ========= ========= NET EARNINGS PER COMMON SHARE.......... $ 0.02 $ 0.11 $ 0.08 $ 0.10 $ 0.40 $ 0.10 $ 0.13 ========= ========= ========= ========= ========= ========= ========= SHARES USED IN COMPUTING PER COMMON SHARE AMOUNTS........................ 1,800,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
- --------------- (1) Includes financial results for the period November 8, 1990 (organization) to March 31, 1992 23 25
AS OF MARCH 31, AS OF JUNE 30, --------------------------------------------- ----------------- BALANCE SHEETS 1992 1993 1994 1995 1996 1995 1996 ------ ------ ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) (UNAUDITED) ASSETS: Cash and cash equivalents............... $ 834 $ 106 $ 929 $ 253 $ 358 $ 355 $ 446 Accounts receivable..................... 162 465 964 2,138 1,273 1,087 1,962 Notes receivable........................ -- 34 87 37 92 2 1,046 Inventories............................. 138 456 231 138 86 532 67 Net investment in direct financing and sales-type leases -- net.............. 1,302 2,577 10,146 12,124 16,273 12,129 14,372 Investment in operating lease equipment -- net...................... -- 2,104 164 1,874 10,220 2,599 8,239 Other assets............................ -- 40 334 548 1,178 935 1,046 All other assets........................ 55 82 383 369 356 336 343 ------ ------ ------- ------- ------- ------- ------- TOTAL ASSETS................................ $2,491 $5,864 $13,238 $17,481 $29,836 $17,975 $27,521 ====== ====== ======== ======== ======== ======== ======== LIABILITIES: Accounts payable -- equipment........... $ 441 $2,107 $ 1,091 $ 3,014 $ 4,973 $ 1,425 $ 3,392 Accounts payable -- trade............... 136 113 466 395 605 963 303 Salaries and commissions payable........ 125 122 131 118 62 200 131 Recourse notes payable.................. 828 634 2,144 1,815 1,285 1,419 1,485 Nonrecourse notes payable............... 600 1,917 8,116 10,162 18,351 11,255 16,564 All other liabilities................... 317 441 439 713 1,685 1,035 2,256 ------ ------ ------- ------- ------- ------- ------- Total liabilities.................. 2,447 5,334 12,387 16,217 26,961 16,297 24,131 ------ ------ ------- ------- ------- ------- ------- TOTAL STOCKHOLDERS' EQUITY.................. 44 530 851 1,264 2,875 1,678 3,390 ------ ------ ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $2,491 $5,864 $13,238 $17,481 $29,836 $17,975 $27,521 ====== ====== ======== ======== ======== ======== ========
24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus. REVENUE RECOGNITION AND LEASE ACCOUNTING The Company's principal line of business is the leasing, financing and sale of equipment. The manner in which these lease finance transactions are characterized and reported for accounting purposes has a major impact upon the Company's reported revenue, net earnings and the resulting financial measures. Lease accounting methods significant to the Company's business are discussed below. The Company classifies its lease transactions, as required by the Statement of Financial Accounting Standards No. 13, Accounting for Leases ("FASB No. 13") as: (i) direct financing; (ii) sales-type; or (iii) operating leases. Revenues and expenses between accounting periods for each lease term will vary depending upon the lease classification. For financial statement purposes, the Company includes revenue from all three classifications in lease revenues, and costs related to these leases in direct lease costs. Direct Financing and Sales-Type Leases. Direct financing and sales-type leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing or sales-type lease if the creditworthiness of the customer and the collectibility of lease payments are reasonably certain and it meets one of the following criteria: (i) the lease transfers ownership of the equipment to the customer by the end of the lease term; (ii) the lease contains a bargain purchase option; (iii) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (iv) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at inception of the lease. Direct finance leases are recorded as investment in direct finance leases upon acceptance of the equipment by the customer. At the inception of the lease, unearned lease income is recorded which represents the amount by which the gross lease payments receivable plus the estimated residual value of the equipment exceeds the equipment cost. Unearned lease income is recognized, using the interest method, as lease revenue over the lease term. Sales-type leases include a dealer profit (or loss) which is recorded by the lessor at the inception of the lease. The dealer's profit (or loss) represents the difference, at the inception of the lease, between the fair value of the leased property and its cost or carrying amount. The equipment subject to such leases may be obtained in the secondary marketplace, but most frequently is the result of releasing the Company's own portfolio. This profit (or loss) which is recognized at lease inception, is included in net margin on sales-type leases. Interest earned on the present value of the lease payments and residual value is recognized over the lease term using the interest method and is included as part of the Company's lease revenue. Operating Leases. All leases that do not meet the criteria to be classified as direct financing or sales-type leases are accounted for as operating leases. Rental amounts are accrued evenly over the lease term and are recognized as lease revenue. The Company's cost of the leased equipment is recorded on the balance sheet as investment in operating lease equipment and is depreciated on a straight-line basis over the lease term to the Company's estimate of residual value. Revenue, depreciation expense and resultant profit for operating leases are recorded evenly over the life of the lease. As a result of these three classifications of lease for accounting purposes, the revenues resulting from the "mix" of lease classifications during an accounting period will affect the profit margin percentage for such period with such profit margin percentage generally increasing as revenues from direct financing and sales-type leases increase. Should a lease be financed, the interest expense declines over the term of the financing as the principal is reduced. 25 27 Residual Values. Residual values represent the Company's estimated value of the equipment at the end of the initial lease term. The residual values for direct financing and sales-type leases are recorded in investment in direct financing and sales-type leases, on a net present value basis. The residual values for operating leases are included in the leased equipment's net book value and are recorded in investment in operating lease equipment. The estimated residual values will vary, both in amount and as a percentage of the original equipment cost, and are recorded in investment in operating lease equipment, depending upon several factors, including the equipment type, manufacturer's discount, market conditions and the term of the lease. The Company evaluates residual values on an ongoing basis and records any required changes in accordance with FASB No. 13. Residual values are affected by equipment supply and demand and by new product announcements and price changes by manufacturers. In accordance with generally accepted accounting principles, residual values can only be adjusted downward. The Company seeks to realize the estimated residual value at lease termination through: (i) renewal or extension of the original lease; (ii) sale of the equipment either to the lessee or the secondary market; or (iii) lease of the equipment to a new user. The difference between the proceeds of a sale and the remaining estimated residual value is recorded as a gain or loss in lease revenues when title is transferred to the lessee, or, if the equipment is sold on the secondary market, in sales revenues and cost of sales when title is transferred to the buyer. The proceeds from any subsequent lease are accounted for as lease revenues at the time such transaction is entered into. Initial Direct Costs. Initial direct costs related to the origination of sales-type, direct finance or operating leases, are capitalized and recorded as part of the investment in direct financing and sales-type leases, net or as operating lease equipment, net and are amortized over the lease term. Sales. Sales revenue includes the following types of transactions: (i) equipment sales to customers involve the sale to customers of new and/or used equipment that is not subject to any type of lease; (ii) leased equipment sales, to investors relate to equipment being leased for which, the Company is the lessor, and the transfer of any financing related to the specific lease or equipment; and (iii) sales of equipment which was previously leased involve sales are of equipment which the Company was the lessor whether to the original lessee or to a new user. Other Sources of Revenue. Fee and other income results from (i) income events that occur after the initial sale of a financial asset such as escrow/prepayment income, (ii) remarketing fees, (iii) brokerage fees earned for the placement of financing transactions and (iv) interest and other miscellaneous income. These revenues are included in fee and other income on the Company's statement of earnings. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1996 COMPARED TO THE QUARTER ENDED JUNE 30, 1995 Revenue. Total revenues increased 241.6% from $3.8 million in the fiscal year first quarter ended June 30, 1995 to $12.9 million in the fiscal year first quarter ended June 30, 1996 principally as a result of an increase in the leased equipment sales from $0 to $6.2 million. This increase was due to an increased volume in personal computer equipment leases, which is expected to continue and the sale to one of the Company's joint ventures, MLC/CLC LLC, which purchased approximately $4.8 million of the $6.2 million of leased equipment sold during the quarter. The Company expects to continue to sell leased equipment to its joint ventures and expects the level of the sales to increase from year to year, although not necessarily quarter to quarter (See "Risk Factors -- Dependence on Major Relationships," -- "Dependence on Availability of Financing," "The Company," and "Business -- Financing.") Excluding leased equipment sales, other revenues increased by 76.5%, including equipment sale revenue which increased 99.8% from $2.1 million to $4.2 million. Lease revenue was up 85% for the quarter from $968,074 to $1.8 million. This increase was primarily attributable to the increase in the Company's leasing activity and lease portfolio. The Company expects its leasing volume and size of its portfolio to continue to grow. Other revenues increased 8.1% from $640,630 to $692,468 and in the first quarter of the fiscal year 1997 includes $75,000 from a gain related to the settlement of a note payable at less than its recorded value. 26 28 Expenses. Total expenses increased from $3.1 million to $12.1 million as a result of increased costs related to the higher volumes of leased equipment sales and equipment sales. The cost of leased equipment sales increased from $0 to $6.2 million and the cost of equipment sales increased from $1.5 million to $3.6 million. Direct lease related expenses increased as a result of higher lease activity and the growth of the Company's lease assets which increased from $14.7 million to $22.6 million, or 53.5%. Depreciation related to the operating lease equipment portfolio increased from $217,854 to $491,394, or 125.6%. Non-transaction related expenses (general and administrative, salaries and benefits, business and travel, professional and other fees) decreased from $1.1 million to $1 million or 3.1%. Interest and financing costs increased from $308,118 to $370,238 or 20.2% due to higher levels of recourse and nonrecourse debt. Net Earnings. Net earnings increased from $413,376 to $515,199 for an increase of 24.6% for the period. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED MARCH 31, 1996 REVENUES Total revenues increased $13.2 million or 47.8%, from $27.6 million in fiscal year 1994 to $40.8 million in fiscal year 1995. In fiscal year 1996, total revenues increased $2 million, or 4.9% from fiscal year 1995, to $42.8 million. Lease revenue increased $1.4 million, or 88.2%, from $1.6 million in fiscal year 1994 to $3 million in fiscal year 1995, and $2.9 million, or 98.8%, to $5.9 million in fiscal year 1996, as a result of the increase of operating leases and direct financing leases originated or acquired by the Company during the periods. This trend is expected to continue as the Company increases its sales activity in the area of acquiring leased equipment. Sales revenue increased 49.5% from $24.7 million in fiscal year 1994 to $36.9 million in fiscal year 1995 as a result of a 43.1% increase in equipment sales from $18.8 million to $26.9 million and a 69.5% increase in leased equipment sales from $5.9 million to $10 million. Sales revenues declined 5.6% in fiscal year 1996 to $34.8 million as a result of a 31.2% decline in equipment sales to $18.5 million partially offset by a 63.9% increase in leased equipment sales to $16.3 million, leased equipment sales to MLC/GATX Limited Partnership I was $13.2 million of the total $16.3 million. As leasing volume grows, leased equipment sales are expected to grow as well. The decline in sales revenues in fiscal year 1996 is attributable to the Company's focus on higher margin transactions rather than on volume. Net margin on sales-type leases revenue decreased $103,758, or 27.3%, from $380,446 in fiscal year 1994 to $276,688 in fiscal year 1995, and $191,098, or 69.1%, to $85,590 in fiscal year 1996 as a result of a decrease in the origination of leases qualifying as sales-type leases. This downward trend is expected to continue as the Company decreases its emphasis in this area. Fee and Other Income. Fee and other income totaled $979,451 in fiscal year 1994 which consisted of several significant transactions including $298,500 from a fee relating to the brokerage of a municipal lease transaction and $155,000 from the settlement of a dispute. Fee and other income decreased $302,714, or 30.9%, from $979,451 in fiscal year 1994 to $676,737 in fiscal year 1995 and increased $1.3 million, or 191.7% to $2 million in fiscal year 1996. Fees earned in fiscal year 1996 included $440,570 from the financing of federal lease transactions and $327,627 from the brokerage of various municipal leases of lottery equipment. The Company expects that fee and other income will vary considerably due to the uncertainty of completion and the timing of specific transactions. See "-- Fluctuations in Quarterly Operating Results." EXPENSES Cost of Sales. Cost of sales increased $11.2 million or 48.4% from $23.2 million in fiscal year 1994 to $34.4 million in fiscal year 1995, and decreased $3.2 million or 9.2% to $31.2 million in fiscal year 1996. The increase in fiscal year 1995 and the decrease in fiscal year 1996 relate directly to the volume of sales in each of those years. 27 29 Depreciation and Operating Leases. Depreciation increased $398,576, or 295.4%, from $134,943 in fiscal year 1994 to $533,519 in fiscal year 1995, and $1.5 million, or 286%, to $2.1 million in fiscal year 1996. The increase in depreciation for both years is due to the increased level of operating leases originated and acquired by the Company and increases in the Company's operating lease assets over the three-year period. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $698,764, or 21.1%, from $3.3 million in fiscal year 1994 to $4 million in fiscal year 1995, and increased $645,295, or 16%, to $4.7 million in fiscal year 1996. The increases during the three-year period are due primarily to increased level of business and selling activity. Interest Expense. Interest and other financing expenses increased $578,921, or 140.7%, from $411,392 in fiscal year 1994 to $990,313 in fiscal year 1995, and increased $586,049 or 59.2%, to $1.6 million in fiscal year 1996. The increase in interest expense during the periods resulted from the Company's increased level of leasing and business activity, including an increase in recourse and nonrecourse debt from $10.3 million in fiscal year 1994 to $12 million in fiscal year 1995 to $19.6 million in fiscal year 1996. The weighted average interest rate for the Company's nonrecourse debt outstanding as of March 31, 1996 was 7.8% Income Taxes. The provision for taxes was 15.6%, 32.4% and 35.4% of earnings before income taxes for the fiscal years 1994, 1995 and 1996, respectively. The lower rate in fiscal year 1994 is attributable to a higher percentage of nontaxable items and lower percentage of nondeductible items in relation to earnings before taxes for that year. Net Earnings. On a consolidated basis, net earnings and net earnings per share increased in each of the fiscal years 1994, 1995 and 1996. Net earnings increased $93,022, or 29%, from $320,533 in fiscal year 1994 to $413,555 in fiscal year 1995. From fiscal year 1995 to fiscal year 1996, net earnings increased $1.2 million, or 288.9%, to $1.6 million. The increases result from the fluctuation in revenues and expenses discussed in the above paragraphs. Management of Interest Rate Expense. The Company manages interest rate expense by pricing its transactions based upon the market rates at the time of the transaction. Most transactions are funded with matching term debt thereby locking in the interest costs to match the cash flows from the lease over its term. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, differences between estimated residual values and actual amounts realized related to the equipment the Company leases. Quarterly operating results could also fluctuate as a result of the sale by the Company of equipment in its lease portfolio prior to the expiration of the lease term to the lessee or to a third party. Such sales of leased equipment prior to the expiration of the lease term may have the effect of increasing revenues and net earnings during the quarter in which the sale occurs, and reducing revenues and net earnings otherwise expected in subsequent quarters. FINANCIAL CONDITION At the start of fiscal year 1994 the Company's financial resources consisted of its stockholders' equity of $530,000 and lines of credit of $2 million. During fiscal year 1994 the Company entered into its partnership with GATX which gave it access to additional financial resources to finance the equity investment in its lease transactions. See "Risk Factors -- Dependence on Major Relationships," "-- Dependence on Availability of Financing," "The Company" and "Business -- Financing"). Through this partnership, the Company was able to compete on a larger volume of lease transactions than it could have without this facility. As a result of fiscal year 1994 net earnings of $321,000 stockholders' equity increased to $851,000 at the end of fiscal year 1994. During fiscal year 1995 the Company put into place an additional line of credit facility in the amount of $3 million giving the Company a total warehouse credit facility of $5 million. As a result of fiscal year 1995 net earnings of $414,000 stockholders' equity increased to $1.3 million at March 31, 1995. 28 30 During fiscal year 1996, the Company replaced its $3 million bank facility with the First Union Facility. The Company believes First Union, a larger bank, has a greater capacity to meet the Company's future needs. In fiscal year 1996, the Company also entered into an equity joint venture with Cargill Leasing Corporation, a transaction which positioned the Company to compete more effectively in the growing area of personal computer and network leasing. See "Risk Factors -- Dependence on Major Relationships," " -- Dependence on Availability of Capital," "The Company," and "Business -- Financing." As a result of fiscal year 1996 net earnings of $1.6 million, stockholders' equity increased to $2.9 million at March 31, 1996. During the three year period ended March 31, 1996, the Company increased its financial condition and available financial resources in the following ways: (i) available lines of credit increased from $2.0 million to $7 million; (ii) stockholders' equity increased from $530,000 to $2.9 million; and (iii) the Company entered into two equity joint ventures which substantially increased its ability to finance its lease transactions. All of the above factors have allowed the Company to be able to support the higher levels of sales and leasing activity reflected in its financial statements. LIQUIDITY AND CAPITAL RESOURCES Cash Flow from Operations. The Company generated cash flow from operating activities of $6.4 million for fiscal year 1996. Cash flow from operations in fiscal year 1996 was higher than net earnings of $1.6 million, primarily as a result of non-cash expenses, such as depreciation and amortization of $2.1 million, increase in accounts payable of $2.2 million, increase in accrued expenses of $547,093 and was offset by gain on sale of operating lease equipment of $323,422, payments from leases directly to lenders of $884,389 and other sources and uses of cash from operations totaling $1.1 million. In addition, cash flow used for investing activities primarily related to leases was $30.2 million. Financing activities produced $24 million for fiscal year 1996. The net result of all of the above activities was an increase in cash of $104,606 for fiscal year 1996. Cash Flow from Borrowings. To date, the financing necessary to support the Company's leasing and financing activities has been provided principally from nonrecourse borrowings, and to a lesser extent, recourse borrowings. The Company anticipates that future leasing and financing activities will be financed in a similar manner, as well as from the net proceeds of the Offering and cash flow from operations. Historically, the Company has obtained recourse and nonrecourse borrowings from money center banks, regional banks, insurance companies, finance companies and financial intermediaries. In order to take advantage of the most favorable long-term financing arrangements available to it, the Company often finances equipment purchases and the related leases on an interim basis with short-term, recourse debt, and accumulates such leases until it has a portfolio large enough (generally at least $1.0 million, based on the aggregate balance of periodic lease payments under such leases) to warrant obtaining long-term financing for such leases either through nonrecourse borrowings or a sales transactions. Such interim financing is usually obtained through secured, "warehouse" lines of credit, which generally have a term of one year. The Company's maximum available credit under such lines of credit totaled $7.0 million as of June 30, 1996. A brief description of each line of credit presently in place as of June 30, 1996 follows: (i) the NationsBank Facility is a $2.0 million revolving facility with NationsBank, N.A. ($1.4 million was outstanding as of June 30, 1996), expiring December 1, 1996. Borrowings under the NationsBank Facility bear interest at the bank's prime rate plus 1%; and (ii) the First Union Facility is a $5,000,000 revolving facility provided by First Union National Bank of Virginia (no amounts were outstanding as of June 30, 1996), with borrowing available through April 30, 1997, and repayments due 90 days after borrowing. Borrowings under the First Union Facility bear interest at LIBOR plus 275 basis points. Borrowings under the above-described lines of credit are generally secured by lease receivables and the underlying equipment financed under the facility. At June 30, 1996, the aggregate outstanding balance under these lines of credit was $1.4 million. The agreements for the lines of credit contain covenants regarding leverage (a maximum debt to net worth ratio of 6.5 to 1.0 and a minimum consolidated tangible net worth of $1,500,000 as well as interest coverage, minimum net worth and profitability and a limitation on the payment of dividends). At June 30, 1996, the Company had a recourse liabilities to equity ratio of 2.2 to 1.0 29 31 In July, 1996, the Company entered into the NationsBanc Leasing Facility, under which NationsBanc Leasing Corporation may lend up to $2.0 million in various notes of terms of up to 60 months. The facility, but not transactions financed thereunder, expires January 31, 1997. Borrowings under the facility bear interest at a fixed or floating basis, at the Company's option at the time of each borrowing, as follows: fixed, where the underlying lessee is investment grade, at U.S. Treasury Notes plus 250 basis points; fixed, where the underlying lessee is below investment grade, at U.S. Treasury Notes plus 295 basis points; floating, at the bank's prime rate plus 1%. The Company has borrowed $275,000 from two stockholders at a rate of 10% per annum. The loans are repayable at any time without premium or penalty and are due in full on or before March 1, 1998. It is anticipated that these borrowings will be paid off with a portion of the proceeds of the Offering. The Company obtains long-term, nonrecourse financing for individual significant lease transactions at the time it purchases the related equipment. The Company borrowed an aggregate of $5.1 million under such arrangements during the quarter ended June 30, 1996. An aggregate of $16.6 million remained outstanding under all such arrangements as of June 30, 1996. Payments under the Company's borrowings and the maturities of its long-term borrowings are typically structured to match the payments due under the leases securing the borrowings. The Company's nonrecourse debt financing activities typically provide a significant portion of the purchase price of the equipment purchased by the Company for lease to its customers. The balance of the purchase price (the Company's equity investment in equipment), is financed from a variety of sources. See "Business -- Financing." Although the Company believes that the credit quality of its lessees will continue to allow it to obtain such debt financing, no assurances can be given that such financing will be available at acceptable terms or at all. ADEQUACY OF CAPITAL RESOURCES The Company's current lines of credit, if renewed or replaced, and its expected access to the public and private debt securities markets (including financings for its equity investment in leases) and its estimated cash flow from operations are anticipated to provide adequate capital to fund the Company's operations, including acquisitions and financings under its relationships with vendors, for at least the next 12 months. Although no assurances can be given, the Company expects to be able to renew or replace its existing short-term lines of credit and to continue to have access to the public and private securities markets, both for debt and for equity financings. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," in March 1995, and SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. These standards will be effective for the Company beginning in fiscal year 1997 and are not expected to have a significant impact on the Company's financial statements. 30 32 BUSINESS GENERAL The Company specializes in leasing and financing information technology assets and providing asset management services to middle market commercial customers, select Fortune 1000 firms, federal, state and local governments and vendors. The assets leased by the Company include personal computers, client server systems, networks, mid-range and mainframe computer equipment, telecommunications equipment and software. The ten largest commercial customers of the Company by purchase price of the equipment leased by the Company, for fiscal year 1996, are, in alphabetical order: America Online, Inc.; Bakery and Confectionary Union and Industry International Health Benefits and Pension Fund; Cable & Wireless, Inc.; Corning Incorporated; Long Island Lighting Company; Lutheran Brotherhood; MCI Telecommunications Corporation; Nationwide Mutual Insurance Company; Progressive Casualty Insurance Company; and Strawbridge & Clothier. The three largest government customers, based upon purchase price of the equipment leased by the Company for fiscal year 1996, are, in alphabetical order: the City of Raleigh, North Carolina; the State of Missouri; and the United States Department of Transportation. None of the above customers constituted more than 10% of the Company's revenues for fiscal year 1996. Strawbridge & Clothier accounted for 2.9% of the Company's new commercial lease volume during fiscal year 1996 but was acquired during fiscal year 1997. Strawbridge & Clothier paid off all of its leases with the Company during the second quarter of fiscal year 1997. The Company does not anticipate any additional business from the successor to the business operations of Strawbridge & Clothier. The Company also leases and finances equipment, software and services through relationships with vendors, equipment manufacturers and systems integrators. These vendor clients represent a variety of high technology industries and include, among others, in alphabetical order: Cisco Systems, Inc.; EMC Corporation; Systems & Computer Technology Corporation; and Sterling Software, Inc. The Company has also provided financing for other vendors' customers for transactions ranging in size from $50,000 to $21.0 million based upon the purchase price of the assets. The Company seeks to differentiate itself from its competitors by offering its customers asset management services and asset trading capabilities, which may be customized to meet the client's desires. The Company believes that its ability and willingness to personalize its relationships and customize its services to meet the specific financial and managerial needs of each customer enable it to compete effectively against larger equipment leasing and finance companies. The Company further believes that, by providing asset management services and asset trading capabilities as well as other services to its customers, it has a competitive advantage over smaller competitors which lack the resources and expertise to provide such services. The Company's asset trading activity involves the purchase and resale of previously owned information technology equipment. By offering asset trading capabilities, the Company is able to develop and maintain knowledge of current market trends and values which enables the Company to predict more accurately residual values when pricing leasing transactions, dispose efficiently of off-lease equipment and offer customers a way to dispose of or acquire previously owned information technology equipment. Asset management services, which are offered primarily to enhance customer service, is a general term used to describe the provision of asset inventory and tracking services, software and record keeping programs to customers. The asset management services provided by the Company allow the customers to better track their information technology assets. The asset management services include a software system maintained by the Company which generates reports and allows customers to dial up and receive information on a real time basis, thus better utilizing their assets. The Company's management team is led by Phillip G. Norton, Chairman, Chief Executive Officer and President, and Bruce M. Bowen, a director, the Chief Financial Officer and Executive Vice President, each of whom has extensive experience in the leasing and finance industries, and who have worked together for three different companies over the past 20 years. Mr. Norton began his business career in 1970 with Memorex 31 33 Corporation, and started his leasing career in 1975 as National Sales Manager of Federal Leasing, Inc. Mr. Norton founded Systems Leasing Corporation in 1978, which grew to approximately $75 million in assets by the time it was sold to PacifiCorp Capital, Inc. in 1986. Mr. Norton served as President of PacifiCorp Capital, Inc. through 1990, ultimately managing approximately 225 employees and approximately $700 million in assets. Mr. Bowen began his leasing career in 1975 with Federal Leasing, Inc. where he worked until 1978. In 1982, Mr. Bowen joined Mr. Norton at Systems Leasing Corporation as Director of Finance and later became a Senior Vice President of PacifiCorp Capital, Inc., the successor to Systems Leasing Corporation. In 1990, Mr. Bowen left PacifiCorp Capital, Inc. and founded the Company. The extensive experience of the Company's management in leasing and financing information technology and equipment has enabled the Company to manage its residual portfolio to achieve superior returns. Since the Company's organization in November, 1990 through March 31, 1996, on matured leases, the Company has realized a return of 139% of the amount originally recorded as residual values for its equipment. As part of its underwriting and risk management efforts, the Company's management seeks to structure lease transactions so that they can be financed or sold to third parties on a nonrecourse basis, even if the Company ultimately retains an equity interest in the lease. The Company's underwriting approach has resulted in no credit losses in its leasing operations since its organization. The Company believes that its historical approach to estimating residuals, pricing and underwriting leases and managing relationships among vendors, customers and financial partners provides a foundation for the Company to grow and profitably deploy new capital. Completion of the Offering will substantially increase the Company's equity base, enabling the Company to service a larger volume of business. The proceeds of the Offering will also enable the Company to: (i) reduce its borrowing costs by decreasing the amounts outstanding and negotiating for lower interest rates and fees on its line-of-credit borrowings; (ii) reduce its reliance on joint ventures for certain transactions; and (iii) implement a securitization program for its lease receivables. The Company was founded in November, 1990. The Company has 39 full-time employees and eight part-time employees and operates through ten offices. The Company's principal executive offices are located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 20190-5321, and its telephone number is (703) 834-5710. INDUSTRY OVERVIEW The Company believes that its market is undergoing rapid changes and expansion which present significant opportunities for growth. The primary structural changes in the market are the result of customer end-user, technology and vendor marketing trends. Customer End-Users -- Commercial. The equipment leasing industry in the United States is a significant factor in financing capital expenditures of businesses. According to research by the Equipment Leasing Association of America ("ELA"), using United States Department of Commerce data, approximately $160.7 billion of the $571 billion spent on productive assets in 1995 was financed by means of leasing. The ELA estimates that 80% of all U.S. businesses use leasing or financing to acquire capital assets. Leasing enables a company to obtain the equipment it needs, while preserving cash flow and receiving favorable accounting and tax treatment. Leasing, particularly through operating leases, also provides a lessee with greater flexibility than ownership in the event it outgrows the equipment or requires upgrades of its equipment to higher performance levels. As more customers become aware of the economic benefits of leasing, they often turn to independent leasing companies. Independent lessors, such as the Company, offer tailored financing and can deliver financing for mixed systems from different vendors. Management believes the fastest growing market segment of the leasing industry is information technology leasing. These assets include computers, telecommunication equipment, software, integration services and client server equipment. According to the ELA, computers and telecommunications equipment accounted for 26% of the assets leased in 1995. Customer End-Users -- Government. According to G2 Research, Inc., in 1994, of $328.6 billion in total information technology spending, $27.3 billion was spent by the federal government and $34.5 billion was 32 34 spent by state and local governments, with the remainder spent by commercial customers. G2 Research, Inc. further estimated that this market segment will maintain a 10% growth rate through the year 2000 as governments convert to client server systems. As reported by G2 Research, Inc., state and local governments spent over $34 billion on information services and systems in 1994. The Company believes that state and local governments have realized that information technology can provide tremendous gains in productivity and a decrease in overall costs. However, state and local governments are increasingly limited by budgetary constraints in their efforts to acquire goods and services; therefore, leasing is more favorable since it allows the immediate use of the asset while the cost is incurred over the asset's useful life. Moreover, leasing may facilitate the timely acquisition of equipment when compared to the lengthy process and many levels of approval necessary for bond referendums. An additional obstacle facing state and local governments in the upcoming years is the shift in program responsibility from the federal government to the state and local governments. The Company believes that this shift will require more information technology investment by state and local governments. Technology Trends. A major trend toward using client server networks in corporate applications began in the late 1980s. This trend was driven by the proliferation of personal computers as personal computers changed from stand-alone units which accommodated one or two specialized functions to a multi-application unit and the development of networking applications that distribute computer power to the desktop. Client server computing provides an alternative to the highly centralized, mainframe and mini-computer systems that connect multiple terminals to a central processor and which were the mainstay of the computing world until this decade. The transition from the mainframe to the personal computer has enabled smaller corporations to utilize more extensively information technology and telecommunications equipment in the operation of their businesses. In addition, as technology increasingly changes, companies are more frequently acquiring and upgrading information technology and telecommunications equipment. The transition from the mainframe to the more complicated client server applications has also placed a premium on the efficient planning, tracking, procurement and disposal of each unit. The Gartner Group estimates that the average cost of a corporate customer acquiring, maintaining, supporting and disposing of the desktop asset is approximately $41,000 over a five-year period as compared to the average capital cost of each unit of $2,500. The above changes have increased the need for the specialized asset management services such as those provided by the Company because the procurement and management functions of many end-users are oriented to the acquisition of a high-priced, centralized unit and not to the management of numerous small-ticket items in multiple locations. Vendor Distribution and Marketing. As hardware manufacturers face increasing competition, many manufacturers have outsourced their distribution channels to other companies rather than rely solely on their own sales force. This has led many vendors to develop re-seller relationship with financiers such as the Company, and the Company intends to enter into or acquire value added re-seller relationships with selected vendors. The opening up of the distribution channels has forced vendors to support used equipment and sell parts and refurbishment services to end-users and third-party lessors such as the Company. This has created a more fluid and sustainable secondary market for certain equipment, which allows the Company to trade the equipment, make equity investments and compete more effectively with the vendor or vendor's captive financing companies. STRATEGY Based on industry trends and the Company's historical results, the Company will continue to implement and improve upon a three-pronged strategy designed to increase its customer base by: (i) providing continued superior customer service while marketing to middle market and select Fortune 1000 end-users of information technology equipment and assets; (ii) purchasing companies in key regional markets with pre-existing customer bases; and (iii) further developing vendor leasing programs. Through its marketing strategy, the Company emphasizes cross selling to the different groups of clients and attempts to reach the maximum number of potential end-users. 33 35 While the Company is pursuing and intends to continue to pursue the forgoing strategies, there can be no assurance that the Company will be able to successfully implement such strategies. The Company's ability to implement these strategies may be limited by a number of factors. See "Risk Factors." End-User Marketing Focus. The Company's target customers include middle market and select Fortune 1000 firms which are significant users of information technology and telecommunications equipment and assets and which may need other services provided by the Company, such as asset management. By targeting a potential customer base that is broader than just the Fortune 1000 companies, the Company believes that there is less competition from the larger equipment finance companies, as their marketing forces are typically more focused on Fortune 1000 customers. The ability to identify and establish customer relationships with such firms will be critical to the Company's strategy. There can be no assurance that the Company will be able to successfully locate such customers. See "Risk Factors -- Dependence on Creditworthy Customers." Acquisition of Related Companies. The Company believes that significant opportunities to expand its target customer base in key regional markets can be realized through the acquisition of strategically selected companies in related lines of business. The Company's acquisition strategy will focus on acquiring new customers in the top 50 regional markets in the country. The Company believes that it can successfully acquire companies and maintain and expand customer relationships by providing acquired companies with a lower cost of capital, additional cross-selling opportunities and financial structuring expertise. In addition, the Company can provide the owners of privately-held companies with an opportunity to realize their company's value. The Company believes that decentralized marketing and centralized operations, along with other operating synergies, will make it successful in lowering the operational costs while expanding the customer base of each firm it acquires. The ability to identify and acquire such firms on prices and terms that are attractive to the Company and which avoid dilution of earnings for existing stockholders is crucial to the successful implementation of this strategy. In addition, after consummating any acquisition, the Company must be able to successfully integrate the acquired business with the Company to achieve the cost savings and marketing benefits sought by the Company. There is, however, no assurance that the Company will be able to successfully acquire such companies, or, if acquired, successfully implement the foregoing strategy. See "Risk Factors -- Potential Acquisitions" and "-- Management of Growth." Increasing Focus on Vendors. Over the last several years, major manufacturers of information technology and telecommunications equipment have moved away from providing financing to end-user customers through captive finance organizations and have increasingly outsourced this equipment financing function to independent leasing companies. From the perspective of the large end-user of information technology and telecommunications equipment, outsourcing equipment financing can simplify and centralize the financing of multiple products from different vendors, particularly as most captive finance organizations will service only their manufacturer's products. Through its participation in vendor marketing programs, the Company leverages its marketing efforts by utilizing the sales force of the vendor. The vendor's sales organization provides the Company access to an extensive and diversified end-user customer base while saving the Company the cost of establishing these independent customer relationships. The Company uses its relationships with these vendors and end-users to create new customer relationship to which other products and services of the Company can be marketed directly. The ability to successfully establish such vendor and end user relationships is essential to the successful implementation of this strategy. There can be, however, no assurance that the Company will be able to successfully establish such relationships. See "Risk Factors -- Dependence on Major Relationships." LEASING, FINANCING AND SALES ACTIVITIES The Company is in the business of leasing and financing equipment and assets. Although the majority of the transactions are leases, the use of the phrase "lease," "leases," "leasing" or "financing" may refer to transactions involving: equipment leases; conditional sales contracts; installments purchase contracts; software and services contracts; municipal and federal government contracts; notes; operating leases; customer agreements; direct financial leases; receivables; factoring; tax exempt leases; true leases; leases with option to purchase; leases to purchase; vendor agreements; sales-type leases; leveraged leases; computer leases; capital leases; private label agreements; financing agreements; or energy management contracts. 34 36 Business Development. The Company conducts its business development efforts through its marketing staff of both employees and independent representatives which includes 25 individuals located in nine regional offices and the Company's principal executive offices. The Company believes that one of its major strengths is its professional and dedicated sales organization and back office organization which gives it the ability to customize its programs to meet its customers' specific objectives. Products and Services. The information technology and communications equipment that the Company presently purchases for lease or re-sale includes: (i) personal computers; (ii) laser printers; (iii) telecommunication controllers; (iv) tape and disk products; (v) file servers; (vi) mainframe computers; and (vii) mid-range computers. The software and services financed by the Company include off-the-shelf products and applications, database products, utilities and specific application products. The manufacturers and vendors of the above assets include IBM, EMC Corporation, Hewlett-Packard Company, Toshiba, Cisco Systems, Inc., Digital Equipment Corporation, Gateway 2000, Inc., Compaq Computer Corporation, Microsoft Corporation, Amdahl Corporation, Dell Computer Corporation, Hitachi Data Systems Corporation, Sterling Software, Inc. and Systems & Computer Technology Corporation. The services and support provided by the Company include: (i) custom lease and financing payment streams and structures; (ii) asset sales and trade-ins; (iii) upgrade and add-on leasing and financing; (iv) renewal and re-marketing; (v) personalized invoicing; and (vi) asset management and reporting. Lease Terms and Conditions. Substantially all of the Company's lease transactions are net leases with a specified non-cancelable lease term. These noncancelable leases have a "hell-or-high-water" provision which requires the lessee to make all lease payments regardless of any lessee dissatisfaction with its equipment. A net lease requires the lessee to make the full lease payment and pay any other expenses associated with the use of equipment, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes. Re-marketing. In anticipation of the expiration of the initial term of a lease, the Company initiates the re-marketing process for the related equipment. The Company's goal is to maximize revenues by: (i) re-marketing the equipment in place either by (a) re-leasing it to the initial lessee, (b) renting on a month-to-month basis or (c) selling it to the initial lessee; (ii) selling or leasing the equipment to a different customer; or (iii) selling the equipment to equipment brokers or dealers. The results of the re-marketing process significantly impact the degree of profitability of a lease transaction. Procedures and obligations of the Company and its vendors with respect to re-marketing are defined through the Company's equipment purchase and re-marketing agreements with vendors. To assist the Company in its re-marketing efforts, the Company sometimes provides incentives to vendors and their sales personnel through payment of a re-marketing fee and a sharing of residual profits where appropriate. The re-marketing process is intended to enable the Company to recover its equity investment in the re-marketed equipment (i.e., the purchase price of the equipment, less the debt obtained to finance the purchase of such equipment) and enables the Company to receive additional proceeds. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or re-sell equipment on a timely basis. Among the factors are general market conditions, regulatory changes, variations in the supply or cost of comparable equipment and technological improvements that lead to the risk of technological obsolescence. In particular, the computer and telecommunications industries have been characterized by significant and rapid technological advances. The equipment owned and leased by the Company is subject to rapid technological obsolescence, which is typical of information technology and telecommunications equipment. Furthermore, decreases in the manufacturer's pricing for equipment may adversely affect the market value of such equipment under lease. Changes in values or systems and components may require the Company to liquidate its inventory of certain products at significant markdowns and write down the residual value of its leased assets, which may result in substantial losses. Further, the value of a particular used piece of equipment may vary greatly depending upon its condition and the degree to which any custom configuration of the equipment must be altered before reuse. 35 37 At the inception of each FMV lease, the Company has historically estimated a residual value for the leased equipment based on the terms of the related lease and which will permit the transaction to be financed or sold by means of external, generally nonrecourse, sources. This estimate is approved by the Company's investment committee, which acts by a signature process instead of conducting formal meetings. A decrease in the market value of such equipment at a rate greater than the rate expected by the Company, whether due to rapid technological obsolescence or other factors, would adversely affect the residual values of such equipment. Consequently, there can be no assurance that the Company's estimated residual value for equipment will be realized. PROCESS CONTROL AND ADMINISTRATIVE SYSTEMS The Company has developed and maintains an administration system and controls, featuring a series of checks and balances. The Company's system helps protect against entering into lease transactions that may have undesirable economics or unacceptable levels of risk, without impeding the flow of business activity or preventing its sales organization from being creative and responsive to the needs of vendors and customers. Due in part to the Company's strategy of focusing on a few equipment categories, the Company generally has extensive product knowledge, historical re-marketing information and experience. This knowledge assists the Company in setting and adjusting, on a timely basis, the residual values it assumes on each lease financing. Prior to the Company entering into any lease agreement, each transaction is evaluated based on the Company's pre-determined standards in each of the following areas: Residual Value. Residual value guidelines for the equipment leased by the Company are established and reviewed by the Company's investment committee, which also approves the residual value recorded for specific transactions. The investment committee typically acts by a signature process instead of conducting formal meetings. The investment committee also must approve the pricing, including residual values, for all transactions involving $100,000 or more in product value. The investment committee is composed of the Chief Executive Officer, the Chief Financial Officer and the Treasurer of the Company. Structure Review. Every transaction is reviewed by the Director of Contracts and the Treasurer of the Company in an effort to ensure that the transaction meets the minimum profit expectations of the Company and that the risks associated with any unusual aspects of the lease have been determined and factored into the economic analysis. Documentation Review. Once the Company commits to a lease transaction, its contract administrators initiate a process of systematically preparing and gathering relevant lease information and lease documentation. The contract administrators are also responsible for monitoring the documentation through the Company's home office documentation and review process. Every transaction into which the Company enters is reviewed by the Director of Contracts of the Company and if necessary, the Company's outside attorneys to identify any proposed lease modifications or other contractual provisions that may introduce risks in a transaction which the Company has not anticipated. Credit Review. Every transaction into which the Company enters is reviewed by the Treasurer of the Company to determine whether the lease payment stream can be financed on a nonrecourse basis, or must be financed through partial or total recourse borrowing, and that the financial condition of the lessee meets the Company's credit standards. FINANCING The business in which the Company is engaged is a capital intensive business. The Company's business involves both the leasing and the financing of assets. The leasing business is characterized by ownership of the assets residing with the Company or its assigns. The financing business is characterized by the beneficial ownership of assets residing with the asset user or customer. Several different types of financing, each of which is described below, are important to the conduct of the Company's leasing and financing business. The typical lease transaction requires both nonrecourse debt and an equity investment by the Company at the time the equipment is purchased. The typical financing transaction is dependent upon the nonrecourse 36 38 financing described below. The Company's equity investment in the typical lease transaction generally ranges between 5% and 20% of the equipment cost (but sometimes ranges as high as 35%). The balance of the equipment cost, or the nonrecourse debt portion, is typically financed with a lender on a nonrecourse basis to the Company. The Company's equity investment must come from: (i) equity investments from third parties (including MLC/GATX Limited Partnership I and MLC/CLC LLC); (ii) internally generated funds; (iii) the net proceeds of the sale of its securities; or (iv) recourse borrowings. Accordingly, the Company's ability to successfully execute its business strategy and to sustain its growth is dependent, in part, on its ability to obtain each of the foregoing types of financing for both senior debt and equity investment. Information relating to the sources of each of such sources of financing for equipment acquisitions are as follows: Nonrecourse Financing. The credit standing of the Company's customers must be of such a quality as to allow the Company to finance most of its leasing or financing transactions on a nonrecourse basis. Under a nonrecourse loan, the Company borrows an amount equal to the committed lease payments under the financed lease, discounted at a fixed interest rate. The lender is entitled to receive the payments under the financed lease in repayment of the loan, and takes a security interest in the related equipment but has no recourse against the Company. The Company retains ownership of such equipment, subject to the lender's security interest. Interest rates under this type of financing are negotiated on a transaction-by-transaction basis and reflect the financial condition of the lessee, the term of the lease and the amount of the loan. As of June 30, 1996, the Company had aggregate outstanding nonrecourse borrowings of approximately $16.6 million. The Company's objective is to enter into leasing or financing transactions with creditworthy customers whose credit standing will permit the Company to finance such leases with banks or other financial institutions on a nonrecourse basis to the Company. The Company's customers which do not have a credit rating of Baa or better generally are creditworthy non-rated companies that may be publicly or privately owned. The Company has had success in meeting this objective in the past, but there is no assurance that banks or other financial institutions will be willing or able to continue to finance the Company's lease transactions on a nonrecourse basis, that the Company will continue to be able to attract customers that meet the credit standards for nonrecourse financing required by the Company's financing sources or that those standards will not change in the future. The Company is not liable for the repayment of nonrecourse loans unless the Company breaches certain limited representations and warranties in the loan agreements. The lender assumes the credit risk of each such lease, and its only recourse, upon a default under a lease, is against the lessee and the equipment which is being leased thereunder. The Company's personnel in charge of the financing function are responsible for maintaining a diversified list of qualified nonrecourse debt sources so that the financing of transactions is not impaired by a lack of competitively-priced nonrecourse debt. The Company receives nonrecourse financing from many different sources, offering various terms and conditions. These debt sources include regional commercial banks, money-center banks, finance companies, insurance companies and financial intermediaries. Government Financing. The Company also originates tax-exempt state and local lease transactions in which the interest income is exempted from federal income taxes, and to some degree, certain state income taxes. The Company assigns its tax-exempt leases to institutional investors, banks and investment banks which can utilize tax-free income, and has a number of such entities which regularly purchase the transactions. Leasing Assignment Financing. Access to nonrecourse financing is also important to the Company's lease sales revenue and fee income. The Company enters into many transactions involving government leases which it immediately assigns, syndicates or sells, on a nonrecourse basis to third parties and books any gain from the transaction as sales or fee income. The Company plans to utilize the public debt securities market in the future to provide a portion of the nonrecourse debt it requires. The Company believes that its utilization of the public debt securities markets is likely to reduce the Company's effective interest cost for its nonrecourse debt and to provide for a more efficient financing arrangement, than is presently provided by its existing financing arrangements, to fund its 37 39 nonrecourse borrowing requirements. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." Equity Joint Ventures. Through MLC/GATX Limited Partnership I and MLC/CLC LLC, the Company has formal joint venture arrangements with two institutional investors which provide the equity investment financing for certain of the Company's transaction. GATX, an unaffiliated company which beneficially owns 90% of MLC/GATX Limited Partnership I, is a publicly listed company with stockholders' equity in excess of $332 million, as of June 30, 1996. Cargill Leasing Corporation, an unaffiliated investor which owns 95% of MLC/CLC LLC, is affiliated with Cargill, Inc., a privately held business that was reported by Forbes Magazine to have 1995 earnings in excess of $900 million. These joint venture arrangements enable the Company to invest in a significantly greater portfolio of business than the Company's limited capital base would otherwise allow. See "Risk Factors -- Dependence on Major Relationships." MLC/GATX and MLC/CLC LLC provide the majority of the Company's equity investment from third parties as referenced above. During fiscal year 1995, the Company's investment in MLC/GATX increased due to the Company's capital contributions for its share of the partnership's equity investment in leased equipment and partnership expenses. During fiscal year 1996, out of total leased equipment sales of approximately $16.3 million sales to MLC/GATX were $13.1 million or 80% and sales to MLC/CLC were approximately $1.3 million or 8%. For the quarter ending June 30, 1996, out of leased equipment sales of $6.2 million, MLC/GATX represented $850,000 or 14% and MLC/CLC represented $4.8 million or 77%. For fiscal year 1996, approximately 31% of the Company's total revenue was attributable to sales of lease transactions to MLC/GATX Limited Partnership I. Transactions involving the use or placement of equity from these joint ventures require the consent of the relevant joint venture partner, and if financing from those sources were to be withheld or were to become unavailable, it would limit the amount of equity available to the Company and have a material adverse effect upon the Company's business, financial condition and results of operations. Equity Capital and Internal Financing. Occasionally the Company finances leases and related equipment internally, rather than with financing provided by lenders. These internal lease financing typically occur in cases where the financed amounts are not sufficiently large to be attractive to lenders or where the credit rating of the lessee is not acceptable to lenders. The Company also temporarily finances selected leases internally, generally for less than 90 days, until permanent outside nonrecourse financing is obtained. The Company believes that the net proceeds from the Offering will substantially increase the Company's ability to finance lease transactions, either internally or with recourse borrowings. Recourse Financing. The Company relies on recourse borrowing in the form of revolving lines of credit, under the NationsBank Facility and the First Union Facility, for working capital to acquire equipment to be resold in its trading operation and to acquire equipment for leases and, to a lesser extent, the Company uses recourse financing for long term financing of leases. As of June 30, 1996, the Company had aggregate outstanding recourse borrowings of approximately $1.5 million of which approximately $1.4 million was borrowed under the NationsBank Facility and $135,165 was borrowed pursuant to long term recourse notes payable. In addition, the Company recently established a third line of credit, NationsBanc Leasing Facility, for borrowings up to $2 million. Availability under the revolving lines of credit may be limited by the asset value of equipment purchased by the Company and may be further limited by certain covenants and terms and conditions of the facilities. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." The debt under the First Union Facility bears interest at a rate of LIBOR plus two and three-quarters percent and, the NationsBank Facility bears interest at a floating rate of one percent above the NationsBank, N.A. "Prime Rate." Borrowings under the NationsBanc Leasing Facility bear interest at a fixed or floating basis, at the Company's option, at the time of each borrowing, as follows: fixed, at U.S. Treasury Notes plus 250 basis points where the underlying lessee is investment grade; fixed, at U.S. Treasury Notes plus 295 basis points, or where the underlying lessee is below investment grade; or floating, at the NationsBank, N.A. "Prime Rate" plus 1%. 38 40 DEFAULT AND LOSS EXPERIENCE From the organization of the Company in 1990 through June 30, 1996, the Company has not taken any write-offs due to credit losses with respect to lease transactions financed by the Company though no assurance can be given about what the Company's future credit loss experience will be. PROPERTIES The Company's principal executive offices are located in leased space of 4,517 square feet at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 20190-5321. The Company also leases office space for its regional offices in Philadelphia, Pennsylvania; Dallas, Texas; Stamford, Connecticut; Sacramento, California; Raleigh, North Carolina; Atlanta, Georgia; and San Diego, California. As of March 31, 1996, the aggregate monthly rent under all of the Company's office leases was approximately $12,000. The Company has an aggregate of approximately 9,147 square feet of office space under lease with an average remaining lease term of two years. COMPETITION The Company competes in the information technology and telecommunications equipment leasing and financing market with bank-affiliated lessors, captive lessors and other independent leasing or financing companies. The Company's product and market focus often limits direct competition with many of these types of companies. Bank affiliated lessors typically do not directly compete in the operating lease segment of the leasing industry. Captive leasing companies, such as IBM Credit Corporation, typically finance only their parent company's products. The Company competes directly with various independent leasing companies, such as El Camino Resources, Ltd., Comdisco, Inc., Leasing Solutions, Inc. and General Electric Capital Corporation. Many of the Company's competitors have substantially greater resources and capital and longer operating histories. The Company believes it competes on the basis of price, responsiveness to customer needs, flexibility in structuring lease transactions, relationships with its vendors and knowledge of its vendors' products. The Company has found it most effective to compete on the basis of providing a high level of customer service and by structuring custom relationships with vendors and lease transactions that meet the needs of its vendors and customers. Other important elements that affect the Company's competitiveness are the high degree of knowledge and competence of its key employees, specifically relating to information technology and telecommunications equipment and operating lease financing. Many of the Company's competitors are well established and have substantially greater financial, marketing, technical and sales support than the Company. See "Risk Factors -- Competition." EMPLOYEES As of June 30, 1996, the Company had 39 full time employees and eight part time employees. Of these, 27 worked in the Company's principal executive offices and the remaining 20 worked in the various regional offices of the Company. Regional offices are generally staffed with one or more account representatives who have daily contact with lessees and vendors. The Company has assigned its employees to the following functional areas, with the number of employees in each area indicated in parenthesis: administrative (1); sales and marketing (22); buy/sell (6); accounting (7); executive (2); finance (3); and operations (6). LITIGATION The Company is not involved in any legal proceedings, and is not aware of any pending or threatened legal proceedings that would have a material adverse effect upon the Company's business, financial condition or results of operations. 39 41 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The Board of Directors of the Company is divided into three classes: (i) Class I (initial term ending after 1997 annual stockholders meeting); (ii) Class II (initial term ending after 1998 annual stockholders meeting); and (iii) Class III (initial term ending after 1999 annual stockholders meeting). After his or her initial term, each director serves for a term ending after the third annual meeting following the annual meeting at which such director is elected and until his or her successor is elected. The following table sets forth the name, age and position with the Company of each person who is an executive officer, director or significant employee.
NAME AGE POSITION CLASS - ------------------------------------------------ --- ------------------------------------ ----- Phillip G. Norton............................... 52 Chairman of the Board, Chief III Executive Officer and President Bruce M. Bowen.................................. 45 Director, Chief Financial Officer III and Executive Vice President Jonathan J. Ledecky............................. 37 Future Director I Terrence O'Donnell.............................. 52 Future Director II Carl J. Rickersten.............................. 36 Future Director II Kleyton L. Parkhurst............................ 33 Secretary and Treasurer Barbara J. Simmonds............................. 36 Vice President and Controller Kevin M. Norton................................. 40 Vice President of Brokerage Operations William J. Slaton............................... 48 Vice President of Marketing Thomas K. McNamara.............................. 52 Vice President
Each individual named as a Future Director in the foregoing table has been elected as a Director of the Company effective upon the completion of the Offering and has consented to be named as such herein. The name and business experience during the past five years of each director and executive officer of the Company are described below. Phillip G. Norton joined the Company in March, 1993 and has served since then as its Chairman of the Board and Chief Executive Officer. Mr. Norton has also served as President of the Company since September 1, 1996. From October, 1990 through March, 1993, Mr. Norton was an investor and devoted the majority of his time to managing his personal investments. From October, 1992 to March, 1993, Mr. Norton served as a consultant to the Company and engaged in private investment activity. Prior to 1990, Mr. Norton was President and Chief Executive Officer of PacifiCorp Capital, Inc. (formerly Systems Leasing Corporation), a wholly owned indirect subsidiary of PacifiCorp, Inc., an information technology leasing company and an SEC reporting entity. Mr. Norton started his leasing career as the National Sales Manager at Federal Leasing, Inc. Mr. Norton is a 1966 graduate of the U. S. Naval Academy. Phillip G. Norton and Kevin M. Norton are brothers. Bruce M. Bowen founded the Company in 1990 and served as its President until September 1, 1996. Since September 1, 1996, Mr. Bowen has served as a director, the Chief Financial Officer and Executive Vice President of the Company. Mr. Bowen has been a director of the Company since it was formed. Prior to founding the Company, from 1986 through 1990, Mr. Bowen was Senior Vice President of PacifiCorp Capital, Inc. Prior to his tenure at PacifiCorp Capital Inc., Mr. Bowen was with Systems Leasing Corporation and Federal Leasing, Inc., where his leasing career started in 1975. Mr. Bowen is a past President of the Association of Government Leasing and Finance and currently serves as Vice-Chairman for the State and Local Public Enterprise Committee of the Information Technology Association of America. Mr. Bowen is a 1973 graduate of the University of Maryland and in 1978 received a Masters of Business Administration from the University of Maryland. 40 42 Jonathan J. Ledecky will join the Company's Board of Directors upon the completion of the Offering. Mr. Ledecky is the founder of U.S. Office Products Company, a Nasdaq National Market company and has served as Chairman and Chief Executive Officer of U.S. Office Products Company since its organization in October of 1994. Prior to founding U.S. Office Products Company, Mr. Ledecky served as the President of The Legacy Fund, Inc. from 1989 through 1994 and as President and Chief Executive Officer of Legacy Dealer Capital, Inc., a wholly owned subsidiary of Steelcase Inc., and the nation's largest manufacturer of office furniture products from 1991 through 1994. Prior to his tenure at The Legacy Fund, Inc., Mr. Ledecky was a partner at Adler and Company and a Senior Vice President at Allied Capital Corporation, a publicly traded investment management company. Mr. Ledecky is a 1979 graduate of Harvard College, and in 1983, received a Masters of Business Administration from Harvard Graduate School of Business Administration. Terrence O'Donnell will join the Company's Board of Directors upon the completion of the Offering. Mr. O'Donnell is a partner with the law firm of Williams & Connolly in Washington, D.C. Mr. O'Donnell has practiced law with Williams & Connolly since 1977, with the exception of the period from 1989 through 1992 when he served as general counsel to the U.S. Department of Defense. Prior to commencing his law practice, Mr. O'Donnell served as Special Assistant to President Ford from 1974 through 1976 and as Deputy Special Assistant to President Nixon from 1972 through 1974. Mr. O'Donnell presently also serves as a director of IGI, Inc., a Nasdaq National Market company. Mr. O'Donnell is a 1966 graduate of the U.S. Air Force Academy, and in 1971, received a Juris Doctor from Georgetown University Law Center. Carl J. Rickersten will join the Company's Board of Directors upon the completion of the Offering. Mr. Rickersten is a partner in Thayer Capital Partners, a $364 million institutional private equity fund based in Washington, D.C. Mr. Rickersten has been with Thayer Capital Partners since September 1994. Prior to his tenure at Thayer Capital Partners, Mr. Rickersten acted as a private financial consultant from 1993 through 1994 and was a partner of Hancock Park Associates, an institutional investment advisor, from 1989 through 1993. Prior to that, Mr. Rickersten was associated with Brentwood Associates from 1987 through 1989 and was a Financial Analyst with Morgan Stanley & Co., Incorporated from 1983 through 1985. Mr. Rickersten is a 1983 graduate of Stanford University and, in 1987, received a Masters of Business Administration from Harvard Graduate School of Business Administration. Kleyton L. Parkhurst joined the Company in 1991 as Director of Finance and, since September 1, 1996, has served as Secretary and Treasurer of the Company. Mr. Parkhurst is responsible for all of the Company's financing activities, credit review procedures and manages the Company's bank facilities. Mr. Parkhurst has syndication expertise in commercial nonrecourse debt, federal government leases, state and local taxable and tax-exempt leases, and computer lease equity placements. From 1988 through 1991, Mr. Parkhurst was an Assistant Vice President of PacifiCorp Capital, Inc. Mr. Parkhurst is a 1985 graduate of Middlebury College. Barbara J. Simmonds, a certified public accountant, joined the Company in 1992, has served since then as Controller and, since September 1, 1996, has served as a vice president of the Company. From 1982 through 1990, Ms. Simmonds was an Assistant Controller for PacifiCorp Capital, Inc. Ms. Simmonds is a 1982 graduate of the University of Virginia. Kevin M. Norton joined the Company in 1991 and has served since then as Vice President of Brokerage Operations. Mr. Norton is responsible for all of the Company's equipment brokerage activities. He has a wide variety of equipment experience including mainframes and peripheral equipment. Prior to joining the Company, he was employed in a similar capacity with PacifiCorp Capital, Inc. Mr. Norton is a 1979 graduate of the University of North Carolina. Kevin M. Norton and Phillip G. Norton are brothers. William J. Slaton joined the Company in 1991 and has served since then as Vice President of Marketing. His primary responsibility is the management of the Company's marketing of its public sector finance products. From 1986 through 1991 and from 1980 through 1986, Mr. Slaton held various marketing positions, specializing in technology financing for local and state government agencies, with PacifiCorp Capital, Inc. and Systems Leasing Corporation. From 1969 through 1977, Mr. Slaton held various marketing positions with IBM, also, focusing on state and local government customers in Texas and California. Mr. Slaton is a 1969 graduate of the University of Texas at Austin. 41 43 Thomas K. McNamara joined the Company in 1994 upon the acquisition by the Company of the business assets of Pilot Associates and serves as Vice President and Regional Manager of the Pilot Associates division. In 1989, Mr. McNamara co-founded and was responsible for sales at Pilot Associates. Prior to founding Pilot Associates, Mr. McNamara served as Sales Representative with Memorex Corporation from 1974 through 1989. Mr. McNamara was also previously with Computer Communication, Inc., from 1970 through 1974 and with Philco Ford, Inc. from 1966 through 1970. Mr. McNamara is a 1966 graduate of the Philco Technical Institute. COMMITTEES AND MEETINGS Audit Committee. Upon closing of the Offering, the Board of Directors will establish an audit committee (the "Audit Committee"). The Audit Committee will be responsible for making recommendations to the Board concerning the engagement of independent public accountants, monitoring and reviewing the quality and activities of the Company's internal and external audit functions and monitoring the adequacy of the Company's operating and internal controls as reported by management and the external or internal auditors. The members of the Audit Committee are anticipated to be Terrence O'Donnell, Jonathan J. Ledecky and Carl J. Rickersten. Compensation Committee. Upon closing of the Offering, the Board of Directors will establish a compensation committee (the "Compensation Committee"). The Compensation Committee will be responsible for reviewing the salaries, benefits and other compensation, excluding stock based compensation, of Mr. Norton and Mr. Bowen and will make recommendations to the Board based on its review. The members of the Compensation Committee are anticipated to be Terrence O'Donnell, Jonathan J. Ledecky and Carl J. Rickersten. Mr. Norton and Mr. Bowen, as directors, will not vote on any matters affecting their personal compensation. Mr. Bowen and Mr. Norton will be responsible for reviewing and establishing salaries, benefits and other compensation for other directors and all other employees. Stock Incentive Committee. Upon the closing of the Offering, the Board of Directors will establish a stock incentive committee (the "Stock Incentive Committee"). The Stock Incentive Committee will be authorized to issue stock, stock option and "phantom stock" or stock appreciation rights ("SARS") based compensation grants under the Company's 1996 Stock Incentive Plan. See "Management -- Executive Compensation and Other Arrangements -- 1996 Stock Incentive Plan." The initial members of the Stock Incentive Committee will be Phillip G. Norton and Bruce M. Bowen. Except for options granted to Mr. Norton and Mr. Bowen under the employment agreements described in this Prospectus, and grants that are approved by a majority of the disinterested members of the Board of Directors, no member of the Stock Incentive Committee is eligible to receive grants under the Stock Incentive Plan. DIRECTOR COMPENSATION Directors do not currently receive any compensation nor other services as members of the Board of Directors. The outside directors will receive $500 for each board meeting which they attend and $500 for each committee meeting which they attend. All directors will be reimbursed for their out-of-pocket expenses incurred to attend board or committee meetings. The Company has adopted the 1996 Outside Director Stock Option Plan, which provides for the award and exercise of certain options to nonemployee directors on a formula basis based upon length of service. Immediately prior to closing the Offering, under the 1996 Outside Director Stock Option Plan, the Company will grant options to its nonemployee directors to purchase an aggregate of 30,000 shares of Common Stock at an exercise price equal to the initial public offering price, 50% of which may be exercised after the first year of service and the remaining 50% of which may be exercised after the second year of service, provided they continue to serve as directors. The 1996 Outside Director Stock Option Plan also provides for the grant of options for shares to each nonemployee director (15,000 annually in the aggregate) on the second, third and fourth anniversary of service, at an exercise price equal to the market price as of the date of grant, with each option being exercisable as to 50% of the shares on the first anniversary of grant and the remaining 50% of the shares on the second anniversary of grant. See "Management -- Executive Compensation and Other Information -- 1996 Stock Incentive Plan" for a description of option grants to nonemployee directors. 42 44 EXECUTIVE COMPENSATION AND OTHER INFORMATION Summary Compensation Table. The following table provides certain summary information concerning the compensation earned, for services rendered in all capacities to the Company, by the Company's Chief Executive Officer and certain other executive officers (together with the Chief Executive Officer, the "Named Executive Officers") of the Company for the fiscal year ended March 31, 1996. Certain columns have been omitted from this summary compensation table as they are not applicable.
ANNUAL COMPENSATION -------------------------------------- OTHER BONUS/ ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY COMMISSION COMPENSATION COMPENSATION - ----------------------------------- ---- -------- ---------- ------------ ------------ Phillip G. Norton.................. 1996 $ 984 $ -- $ -- $120,000(1) Chairman, Chief Executive 1995 376 -- -- -- Officer and President 1994 -- -- 5,497(2) -- Bruce M. Bowen..................... 1996 120,000 40,000 13,206(3)(2) 1,000(4) Director, Chief Financial Officer and 1995 120,000 16,000 11,500(3)(2) 1,000(4) Executive Vice President 1994 120,000 25,000 11,500(3)(2) 250(4) Kevin M. Norton.................... 1996 -- 347,023 3,087(2) -- Vice President of 1995 -- 348,944 1,068(2) -- Brokerage Operations 1994 -- 227,993 1,368(2) -- Kleyton L. Parkhurst............... 1996 -- 169,352 1,356(2) -- Secretary and Treasurer 1995 -- 237,153 1,500(2) -- 1994 -- 189,505 1,137 -- Thomas K. McNamara................. 1996 42,000 98,257 3,234(2) -- Vice President 1995 42,000 335,699 1,500(2) -- 1994 -- -- -- --
- --------------- (1) Represents guarantee fees paid to Mr. Norton's spouse, Patricia Norton. See "Certain Transactions -- Guarantee Fees." (2) Employer 401(k) plan match (only annual amounts in excess of $10,000 of Mr. Bowen's compensation represents a 401(k) plan match). (3) Includes $10,000 of interest paid on loans by Mr. Bowen to the Company. (4) Represents the personal use of the Company's country club membership. Compensation Arrangements and Employment Agreements. The Company has entered into employment agreements with Phillip G. Norton, Bruce M. Bowen, Kleyton L. Parkhurst and William J. Slaton, each effective as of September 1, 1996. Each employment agreement provides for an initial term of three years, and is subject to an automatic one-year renewal at the expiration thereof unless the Company or the employee provides notice of an intention not to renew at least three months prior to expiration. Under each employment agreement, the employee will receive, commencing with the first day of the first calendar month after closing the Offering, an annual base salary ($200,000 in the case of Phillip G. Norton; $150,000 in the case of Bruce M. Bowen and $120,000 in the case of Kleyton L. Parkhurst and William J. Slaton) and will be eligible for commissions or performance bonuses. The performance bonus for Phillip G. Norton for each fiscal year will be equal to 5% of the increase in the Company's net income before taxes over net income before taxes for the preceding fiscal year, not to exceed $150,000 for any fiscal year. The performance bonus for Bruce M. Bowen for each fiscal year will be equal to 5% of the increase in the Company's net income before taxes over net income before taxes for the preceding fiscal year, not to exceed $100,000 for any fiscal year. The performance bonus for Kleyton L. Parkhurst and William J. Slaton will be paid based upon performance criteria established by Phillip G. Norton and Bruce M. Bowen, not to exceed $80,000 each per fiscal year. Pending closing of the Offering, Messrs. Norton, Bowen, Parkhurst and Slaton will continue to be compensated based on current arrangements. Thomas K. McNamara is compensated pursuant to the Company's commission program which is generally based on the profitability of business produced. 43 45 Under the employment agreements, each will receive certain other benefits including medical, insurance, death and long term disability benefits, 401(k), and reimbursement of employment related expenses. Mr. Bowen's country club dues are paid by the Company. The employment agreements of Messrs. Norton, Bowen and Slaton contain a covenant not to compete on the part of each, whereby in the event of a voluntary termination of employment, upon expiration of the term of the agreement or upon the termination of employment by the Company for cause, each will be subject to restrictions upon acquiring, consulting with or otherwise engaging in or assisting in the providing of capital needs for competing business activities or entities within the United States for a period of one year after the date of such termination or expiration of the term of the employment agreement. Under his employment agreement, Phillip G. Norton was granted options to acquire 130,000 shares of Common Stock at a price per share equal to the initial public offering price. These options have a ten year term, and will be exercisable and vest 25% immediately upon completion of the Offering, and the balance in 25% increments over three years beginning on the first anniversary of the closing date of the Offering, subject to acceleration upon certain conditions. The Company also pays a $120,000 annual guarantee fee payable in $10,000 monthly payments to Patricia A. Norton, wife of Phillip G. Norton, in consideration of providing certain guarantees and collateral for the NationsBank Facility. See "Certain Transactions -- Guarantee Fees." Under his employment agreement, Bruce M. Bowen was granted options to acquire 15,000 shares of Common Stock at a price equal to the initial public offering price. These options have a ten year term, and will be exercisable and vest 25% immediately upon completion of the Offering, and the balance in 25% increments over three years beginning on the first anniversary of the closing date of the Offering, subject to acceleration upon certain conditions. Under his employment agreement, Kleyton L. Parkhurst was granted options to acquire 100,000 shares of Common Stock at a price per share equal to $6.40 per share. These options have a ten year term, and will be exercisable and vest 25% immediately upon completion of the Offering, and the balance in 25% increments over three years beginning on the first anniversary of the closing date of the Offering, subject to acceleration upon certain conditions. The Company maintains key-man life insurance on Mr. Norton in the amount of $10 million and on Mr. Bowen in the amount of $1 million. The Company maintains key-man life insurance on Mr. Norton in the form of two separate policies, one with the Prudential Life Insurance Company and the second with TransAmerica Life Co., each in the amount of $5 million and on Mr. Bowen with CNA Insurance Company in the amount of $1 million. 1996 Stock Incentive Plan. The Company has established a stock incentive program (the "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 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 such as incentive stock options for employees under the 1996 Incentive Stock Option Plan, formula length of service based nonqualified options to nonemployee directors under the 1996 Outside Director Stock Plan, and nonqualified stock options under the 1996 Nonqualified Stock Option Plan, as well as other restrictive stock and performance based stock awards and programs which may be established by the Board of Directors. Currently, the Company has reserved a total of 400,000 shares of Common Stock for issuance upon exercise of options under: (i) the employment agreements with Messrs. Norton, Bowen and Parkhurst (under which options for an aggregate of 245,000 shares have been granted); (ii) the 1996 Outside Director Stock Plan (under which options for an aggregate of 75,000 shares of Common Stock are reserved for grant under a formula plan based upon length of service and for which 30,000 shares of Common Stock will be granted upon completion of the Offering); (iii) the 1996 Incentive Stock Option Plan (under which options for an aggregate of 60,000 shares will be granted immediately upon completion of the Offering); (iv) the 1996 Nonqualified Stock Option Plan (under which no options have been granted); and (v) 20,000 additional shares of Common Stock reserved for issuance under the 1996 Stock Incentive Plan. 44 46 The Stock Incentive Plan is to be administered by the Stock Incentive Committee, which will be authorized to select from among the eligible participants the individuals to whom options, restricted stock purchase rights and performance awards are to be granted and to determine the number of shares to be subject thereto and the terms and conditions thereof. The Stock Incentive Committee will also be authorized to adopt, amend and rescind the rules relating to the administration of the Stock Incentive Plan. Except for grants that are approved by a majority of the Company's Board of Directors, no member of the Stock Incentive Committee will be eligible to participate future in grants of options in the Stock Incentive Plan. Incentive stock options issued under the 1996 Incentive Stock Option Plan will be designed to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and will be subject to restrictions contained in the Code, including a requirement that exercise prices be equal to at least 100% of fair market value of the shares of Common Stock on the grant date and a ten-year restriction on the option term. The incentive stock options may be subsequently modified to disqualify them from treatment as incentive stock options. Under the Stock Incentive Plan and the Code, non-employee directors are not permitted to receive incentive stock options. The Company intends, upon closing of the Offering, to grant options totaling 60,000 shares of Common Stock to employees other than those receiving options under employment agreements or nonqualified stock options as described above. Each of the foregoing incentive stock option grants will be at the initial public offering price and will be exercisable in 20% increments over five years beginning on the first anniversary of the closing date of the Offering, subject to continued employment and subject to acceleration upon certain conditions. Nonqualified stock options issued under the 1996 Stock Incentive Plan, may be granted to directors, officers, independent contractors and employees and will provide for the right to purchase shares of Common Stock at a specified price which may be less than fair market value on the date of grant, and usually will become exercisable in installments after the grant date. Nonqualified stock options may be granted for any reasonable term. Under the 1996 Outside Director Stock Option Plan, each of the three nonemployee directors will be granted options, immediately upon the completion of the Offering to purchase an aggregate of 30,000 shares of Common Stock, 50% of which may be exercised after the first year of service and the remaining 50% of which may be exercised after the second year of service provided they continue to serve as directors. The 1996 Outside Director Stock Option Plan also provides for the grant of options for shares to each nonemployee director (15,000 annually in the aggregate) on the second, third and fourth anniversary of service, at an exercise price equal to the market price as of the date of grant, with each option being exercisable as to 50% of the shares on the first anniversary of grant and the remaining 50% of the shares as the second anniversary of grant. Options for 15,000 shares becoming exercisable after the second, third and fourth anniversaries of grants. Compensation Committee Interlocks and Insider Participation. For the year ended March 31, 1996, all decisions regarding executive compensation were made by Mr. Bowen as President. None of the executive officers of the Company currently serves on the Compensation Committee of another entity or any other committee of the board of directors of another entity performing similar functions. For a description of transactions between the Company and Mr. Bowen, see "Certain Transactions." LIMITATION OF LIABILITY AND INDEMNIFICATION Indemnification Agreements. Prior to the completion of the Offering, the Company will enter into separate but identical indemnification agreements (the "Indemnification Agreements") with each director and executive officer of the Company and expects to enter into Indemnification Agreements with persons who become directors or executive officers in the future. The Indemnification Agreements provide that the Company will indemnify the director or officer (the "Indemnitee") against any expenses or liabilities incurred by the Indemnitee in connection with any proceeding in which such Indemnitee may be involved as a party or otherwise, by reason of the fact that such Indemnitee is or was a director or officer of the Company or by reason of any action taken by or omitted to be taken by such Indemnitee while acting as an officer or director of the Company, provided that such indemnity shall only apply if (i) the Indemnitee was acting in good faith 45 47 and in a manner the Indemnitee reasonably believed to be in the best interests of the Company and, with respect to any criminal action, had no reasonable cause to believe the Indemnitee's conduct was unlawful, (ii) the claim was not made to recover profits made by such Indemnitee in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor statute, (iii) the claim was not initiated by the Indemnitee, (iv) the claim was not covered by applicable insurance, or (v) the claim was not for an act or omission of a director of the Company from which a director may not be relieved of liability under Section 102(b)(7) of the DGCL. Each Indemnitee will undertake to repay the Company for any costs or expenses paid by the Company if it shall ultimately be determined that such Indemnitee is not entitled to indemnification under the Indemnification Agreements. Provisions of Certificate of Incorporation. As allowed by the DGCL, the Company's Certificate of Incorporation provides for the limitation of the liability of the directors of the Company for monetary damages to the fullest extent permissible under Delaware law. This is intended to limit the personal liability of a director to monetary damages incurred in an action brought by or in the right of the Company for breach of a director's duties to the Company or its stockholders: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for any breach of the director's duty of loyalty to the Company or its stockholders; (iii) for any transaction from which a director has derived an improper personal benefit; and (iv) as expressly imposed by statute, for approval of certain improper distributions to stockholders or the wasting of Company assets. Bylaws. The Company's Bylaws also permit the Company to indemnify its officers and directors to the fullest extent permitted by law. Directors and Officers Insurance. The Company has obtained directors and officers liability and company reimbursement insurance pursuant to a policy in effect (the "D&O Policy") with the Lexington Insurance Company, a wholly owned subsidiary of the American International Group. Pursuant to the D&O Policy, Lexington will pay, on behalf of directors and officers of the Company, certain losses ("Losses") incurred as a result of a wrongful act (a "Wrongful Act") by such persons, for which they are not indemnified by the Company. In addition, Lexington will reimburse the Company for Losses over $100,000 incurred as a result of the Company's indemnification of an officer or director in connection with a Wrongful Act. The D&O Policy provides that Lexington's aggregate liability to the Company with respect to a single policy year shall not exceed $1.0 million and is subject to customary exclusions. 46 48 CERTAIN TRANSACTIONS GUARANTEES OF NATIONSBANK FACILITY The NationsBank Facility is presently guaranteed by Phillip G. Norton, Patricia A. Norton, Bruce M. Bowen, Elizabeth D. Bowen, William J. Slaton, Margaret Newton, Kevin M. Norton, Brianna Norton and Patrick J. Norton. In addition, this line is secured by a pledge of approximately $1.5 million of cash collateral pledged by Phillip G. Norton and his spouse Patricia A. Norton. See "Business -- Financing." Upon closing of the Offering, the Company intends to apply proceeds of the Offering towards repayment of the line. See "Use of Proceeds." The Company anticipates that after the closing of the Offering, the Company will pursue new or modified warehouse lines of credit and the NationsBank Facility will be either terminated or renegotiated in such a manner as to remove all stockholders' personal guarantees and release all stockholders' assets pledged as collateral for the NationsBank Facility. GUARANTEES OF FIRST UNION FACILITY The First Union Facility is presently guaranteed by Phillip G. Norton, Patricia A. Norton, Bruce M. Bowen, Elizabeth D. Bowen, William J. Slaton, Kevin M. Norton and Patrick J. Norton, each of whom is a beneficial owner of Common Stock. In addition, this line is secured by cash and securities having a value of approximately $1,200,000, pledged as collateral by Patricia A. Norton, as trustee for the Phillip G. Norton Jr. Trust, the Andrew L. Norton Trust and the Jeremiah O. Norton Trust. See "Business -- Financing." Upon closing of the Offering, the Company intends to apply proceeds of the Offering towards repayment of the line. See "Use of Proceeds." The Company anticipates that after closing of the Offering, the Company will pursue new or modified warehouse lines of credit and the First Union Facility will be either terminated or renegotiated in such a manner as to remove all personal guarantees by stockholders and release all assets pledged by stockholders as collateral for the First Union Facility. GUARANTEES OF NATIONSBANC LEASING FACILITY The NationsBanc Leasing Facility is presently guaranteed by Phillip G. Norton and Bruce M. Bowen. See "Business -- Financing." The Company anticipates that after closing of the Offering, the Company will pursue new or modified warehouse lines of credit and the NationsBanc Leasing Facility will be either terminated or renegotiated in such a manner as to remove all stockholder personal guarantees and release all stockholder assets pledged as collateral for the NationsBanc Leasing Facility. STOCKHOLDER LOANS The Company currently has a total of $275,000 in outstanding borrowings from stockholders; $175,000 from Bruce M. Bowen and $100,000 from William J. Slaton. Each of these loans is evidenced by a promissory note dated March 1, 1995, bearing interest at the rate of 10% per annum, and are due March 1, 1998. The Company paid $17,500 and $10,000 to Messrs. Bowen and Slaton, respectively, in interest for fiscal year 1996, and will pay interest monthly until these loans are repaid. The Company intends to repay these loans with a portion of the proceeds of the Offering. NEW ENERGY LEASING CORPORATION OBLIGATIONS The Company is a party to an agreement entered into in 1994 with New Energy Leasing Corporation ("New Energy"), of which Bruce M. Bowen is a 45% stockholder. Under that arrangement, the Company has sold leases to New Energy under which the Company remains obligated to manage the lease and to provide remarketing or asset disposition services upon expiration or other termination of the lease. The Company recognized revenue for such transactions of approximately $1.9 million and $1.3 million, for the years ended March 31, 1995 and 1996, respectively, and the basis of the equipment sold was approximately $1.3 million and $1.6 million, respectively. At June 30, 1996, the Company owed $31,337 to New Energy, had a $16,352 note receivable and a $57,380 equity investment resulting from transactions with New Energy. New Energy is entitled to the first $75,000 of proceeds from any remarketing or sale of the assets, with the Company being 47 49 entitled to 90% of any proceeds above that amount. This agreement and the lease transactions to which it relates are slated to expire in 1999. The Company will not enter into any further lease sale transactions with New Energy. GUARANTEE FEES From April 1, 1995 through June 30, 1996, the Company paid a total of $150,000 of guarantee fees, $10,000 per month, to Patricia A. Norton, the spouse of Phillip G. Norton, as consideration for her providing personal guarantees and pledging personal assets for the NationsBank Facility. Payment of these guarantee fees will continue until the release of Patricia A. Norton's guarantee and collateral. Upon the closing of the Offering, the Company intends to attempt to renegotiate the NationsBank Facility to obtain the release of the guarantee and collateral of Patricia A. Norton; however, there can be no assurance that the Company will be able to renegotiate successfully the NationsBank Facility. ADVANCES TO STOCKHOLDERS The Company has, in the past, provided non-interest bearing advances against anticipated sales commissions to certain stockholder employees, Kevin M. Norton and Patrick J. Norton. These advances, which are made when transactions are executed but the Company has not yet collected payment for such arrangements, are repayable from sales commissions earned by the stockholder employees on completion and collection of payment for successful sales or financing arrangements obtained on behalf of the Company. These advances totaled $77,759 as of June 30, 1996 and $76,349, $14,353 and $33,275 as of the end of fiscal year 1996, 1995 and 1994, respectively. The aggregate amount of these advances equals $49,275, $61,583 and $139,500 for fiscal years 1994, 1995 and 1996, respectively. Advances of $26,000, $80,505 and $82,612 were repaid for fiscal years 1994, 1995 and 1996, respectively. For Patrick J. Norton, the only advance was $3,204 in May, 1995 which was repaid in June, 1995. All other advances were paid to Kevin M. Norton. As of September 30, 1996, the amount of outstanding advances was $22,240, all of which were paid to Kevin M. Norton. This amount, which represents an advance repayable from sales commissions, will be repaid when the Company receives payment and the sales commission is earned. LOANS TO STOCKHOLDERS In 1994, the Company loaned $40,000 to Kevin M. Norton, a stockholder of the Company, pursuant to a promissory note dated February 15, 1994 bearing interest at 8% per annum and due July 31, 1995. Kevin M. Norton paid interest of $2,048 and $382 during fiscal years 1995 and 1996, respectively and made principal repayments of $25,505 and $14,495 during fiscal years 1995 and 1996, respectively. The Company's $40,000 loan to Kevin M. Norton was repaid in full during fiscal year 1996. In 1995, the Company loaned $74,115 to William J. Slaton, a stockholder of the Company, pursuant to a promissory note dated January 5, 1995 bearing no interest and due on demand. Mr. Slaton repaid this note in full in 1995. In 1995, the Company loaned $54,000 to Patrick J. Norton, a stockholder of the Company, pursuant to a promissory note dated November 17, 1995, bearing interest at 8% per annum. Patrick J. Norton paid interest of $1,608 and made principal repayments of $8,392 during fiscal year 1996. The Company's loan to Patrick J. Norton had a balance of $45,608, as of the end of fiscal year 1996, and a balance of $47,455 as of September 30, 1996. INDEMNIFICATION AGREEMENTS Prior to the completion of the Offering, the Company will enter into separate but identical indemnification agreements (the "Indemnification Agreements") with each director and execute officer of the Company and expects to enter into Indemnification Agreements with persons who become directors or executive officers in the future. The Indemnification Agreements provide that the Company will indemnify the director or officer (the "Indemnitee") against any expenses or liabilities in connection with any proceeding in which such Indemnitee may be involved as a party or otherwise, by reason of the fact that such Indemnitee is or was a 48 50 director or officer of the Corporation or by reason of any action taken by or omitted to betaken by such Indemnitee while acting as an officer or director of the Corporation, provided that such indemnity shall only apply if (i) the Indemnitee was acting in good faith and in a manner the Indemnitee reasonably believed to be in the best interests of the Corporation, and, with respect to any criminal action, had no reasonable cause to believe the Indemnitee's conduct was unlawful, (ii) the claim was not made to recover profits made by such Indemnitee in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor statute, (iii) the claim was not initiated by the Indemnitee, or (iv) the claim was not covered by applicable insurance, or (v) the claim was not for an act or omission of a director of the Company from which a director may not be relieved of liability under Section 103(b)(7) of the DGCL. Each Indemnitee has undertaken to repay the Company for any costs or expenses paid by the Company if it shall ultimately be determined that such Indemnitee is not entitled to indemnification under the Indemnification Agreements. For more information on director and officer liability see "Management -- Limitation of Liability and Indemnification." FUTURE TRANSACTIONS Certain of the transactions described above may be on terms more favorable to officers, directors and principal stockholders than they could obtain in a transaction with an unaffiliated party. The Company intends to adopt a policy requiring that all material transactions between the Company and its officers, directors or other affiliates must (i) be approved by a majority of the disinterested members of the Board of Directors of the Company, and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 49 51 PRINCIPAL STOCKHOLDERS GENERAL The following table sets forth certain information, as of June 30, 1996, regarding the beneficial ownership of the Common Stock, and the sale by the Company of the shares of Common Stock offered hereby, with respect to (i) each director of the Company, (ii) each person who is known by the Company to own beneficially 5% or more of the Common Stock, (iii) each of the named executive officers and (iv) all directors and executive officers of the Company as a group. The table also sets forth the number and percentage of the outstanding shares projected to be beneficially owned by each of such stockholders after adjustment for the Offering, assuming the sale in the Offering of 1,000,000 shares of Common Stock by the Company.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING OFFERING(2) ---------------------- ---------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT - ---------------------------------------------- --------- ------- --------- ------- Phillip G. Norton(3).......................... 2,825,500 70.0% 2,825,500 56.2% 1019 Basil Road McLean, Virginia 22101 Bruce M. and Elizabeth D. Bowen(4)............ 763,750 19.1 763,750 15.3 10895 Lake Windermere Drive Great Falls, Virginia 22066 William J. Slaton............................. 400,000 10.0 400,000 8.0 1850 Maple Glen Sacramento, California 95864 Kevin M. Norton(5)............................ 376,500 9.4 376,500 7.5 5920 Royal Palm Plano, Texas 75093 Patrick J. Norton(5).......................... 376,500 9.4 376,500 7.5 705 Brookfield Road Raleigh, North Carolina 27615 Kleyton L. Parkhurst(6)....................... 68,000 1.7 68,000 1.3 605 Abbott Lane Falls Church, Virginia 22046 All directors and executive officers as a group (8 individuals)....................... 4,057,250 100.0% 4,057,250 80.2%
- --------------- (1) Unless otherwise indicated and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned by such stockholder. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon exercise of options and warrants. Each beneficial owner's percentage ownership is determined by assuming options that are held by such person (but not those held by any other person) and that are exercisable within sixty days from the date of this Prospectus have been exercised. (2) Assumes no exercise of the Underwriters' over-allotment option and gives no effect to any purchases that may be made in the Offering. (3) Includes 2,040,000 shares held by J.A.P. Investment Group, L.P., a Virginia limited partnership, of which J.A.P., Inc., a Virginia corporation, is the sole general partner, and Patricia A. Norton, trustee for the benefit of Phillip G. Norton, Jr., u/a dated as of July 20, 1983, Patricia A. Norton, trustee for the benefit of Andrew L. Norton u/a dated as of July 20, 1983, Patricia A. Norton, trustee for the benefit of Jeremiah O. Norton u/a dated as of July 20, 1983, and Patricia A. Norton are the limited partners. Patricia A. Norton, spouse of Phillip G. Norton, is the sole stockholder of J.A.P., Inc. and Phillip G. Norton is the sole director and President of J.A.P., Inc. Phillip G. Norton holds sole voting rights as to all 50 52 of the shares of Common Stock and as to all shares of voting stock acquired in the future held by J.A.P. Investment Group, L.P., Kevin M. Norton and Patrick J. Norton, Jr. under the Irrevocable Proxy and Stock Rights Agreement. See "-- Irrevocable Proxy and Stock Rights Agreement." Also includes 32,500 shares of Common Stock that Phillip G. Norton has rights to acquire pursuant to options, which vest upon completion of the Offering and which are immediately exercisable upon completion of the Offering and excludes 97,500 options to acquire shares of Common Stock which are not vested and not immediately exercisable. See "-- Irrevocable Proxy and Stock Rights Agreement" and "Management -- Executive Compensation and Other Arrangements -- Compensation Arrangements and Employment Agreements." (4) Includes 600,000 shares held by Bruce M. And Elizabeth D. Bowen, as tenants by the entirety, and includes 160,000 shares held by Bowen Holdings L.C., a Virginia limited liability company composed of Bruce M. Bowen and three minor children, Daniel Bowen, Sarah Bowen and Margaret Bowen, of whom Bruce M. Bowen is legal guardian and for which Bruce M. Bowen serves as manager. Also includes 3,750 shares of Common Stock that Bruce M. Bowen has rights to acquire pursuant to options which vest upon completion of the Offering and which are immediately exercisable upon completion of the Offering and excludes 11,250 options to acquire Common Stock which are not vested and not immediately exercisable. See "Management -- Executive Compensation and Other Arrangements -- Compensation Arrangements and Employment Agreements." (5) Phillip G. Norton holds sole voting rights as to all of the foregoing shares of Common Stock under an Irrevocable Proxy and Stock Rights Agreement. See "-- Irrevocable Proxy and Stock Rights Agreement." (6) Includes 38,000 shares held by Kleyton L. Parkhurst, 30,000 shares held by three minor children of Kleyton L. Parkhurst, Charlotte A. Parkhurst, Madeline M. Parkhurst, and Kleyton L. Parkhurst, Jr., all of which are voted by Kleyton L. Parkhurst, Custodian, under the Virginia Uniform Gift to Minors Act and 25,000 shares of Common Stock that Kleyton L. Parkhurst has option rights to acquire, which vest upon completion of the Offering and which are immediately exercisable upon completion of the Offering and excludes 75,000 options to acquire Common Stock which are not vested and not immediately exercisable. See "Management -- Executive Compensation and Other Arrangements -- Compensation Arrangements and Employment Agreements." IRREVOCABLE PROXY AND STOCK RIGHTS AGREEMENT Phillip G. Norton and J.A.P. Investments Group, L.P., Kevin M. Norton and Patrick J. Norton have entered into an agreement entitled "Irrevocable Proxy and Stock Rights Agreement" pursuant to the terms of which (i) each of J.A.P. Investments, L.P., Kevin M. Norton and Patrick J. Norton have granted Phillip G. Norton an irrevocable proxy to vote their shares of Common Stock, which proxy terminates only upon the death or mental incapacity of Phillip G. Norton or in the event of his death or mental incapacity, then to Patricia A. Norton, if then living, or upon the sale or transfer to a third party of the shares of Common Stock and (ii) Kevin M. Norton or Patrick J. Norton have granted Phillip G. Norton a first right to buy their shares of Common Stock in the event they desire to sell or transfer any shares of Common Stock to a third party. The foregoing first right to buy is at 85% of the market value, or if sold for less, for a period of three years from the date of closing of the Offering and at 95% of the market value thereafter. Phillip G. Norton may assign his first right to buy to a third party, and if exercised, the terms of the Irrevocable Proxy and Stock Rights Agreement provide for a deferred purchase money note to finance the purchase. Any shares of Common Stock which Kevin M. Norton or Patrick J. Norton offers to Phillip G. Norton and which are subsequently sold or transferred to a third party after Phillip G. Norton's nonexercise of his first right to buy, will no longer be subject to the Irrevocable Proxy and Stock Rights Agreement. 51 53 DESCRIPTION OF CAPITAL STOCK The following summary description of the capital stock of the Company is qualified in its entirety by reference to applicable provisions of Delaware law and the Certificate of Incorporation and the Bylaws of the Company, which are exhibits to the Registration Statement on file with the Commission. COMMON STOCK The Company's Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of Common Stock. Each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore and in the event of dissolution, to share pro rata in any distribution of the Company's assets after payment or providing for the payments of the Company's liabilities. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of the stockholders. Holders of Common Stock have no preemptive rights to purchase or subscribe for any stock or other securities, and there are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock and the shares of Common Stock issued pursuant to the Offering will be, when issued, fully paid and non-assessable. PREFERRED STOCK The Certificate of Incorporation authorizes the Board of Directors of the Company to issue up to 2,000,000 shares of $.01 par value preferred stock of the Company (the "Preferred Stock"), in one or more series, having such rights and preferences including, without limitation, voting rights, as the Board of Directors may determine, in its sole discretion. No consent of the holders of Common Stock is required to authorize the issuance of any class of Preferred Stock. The rights of the holders of the Preferred Stock may be senior to the holders of the Common Stock. The Board of Directors currently has no plans to issue any class of Preferred Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of Delaware law and the Company's Certificate of Incorporation and Bylaws could make more difficult the acquisition of the Company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors. There has been a recent trend towards the accumulation of substantial stock positions in public companies by third parties as a prelude to proposing a takeover or a restructuring or sale of all or part of a company or other similar extraordinary corporate action. Such actions are often undertaken by the third party without advance notice to or consultation with management of the company. In many cases, the purchaser seeks representation on the company's board of directors in order to increase the likelihood that its proposal will be implemented by the company. If the company resists the efforts of the purchaser to obtain representation on the company's board, the purchaser may commence a proxy contest to have the purchaser or its nominees elected to the board in place of certain directors, or the entire board. The Board of Directors of the Company believes that an imminent threat of removal of the Company's management severely curtails its ability to negotiate effectively with such purchasers. Under such a threat, management is deprived of the time and information necessary to evaluate the takeover proposal, to study alternative proposals and to help ensure that the best price is obtained in any transaction which may ultimately be undertaken. Takeovers or changes in management of the Company which may be proposed and effected without prior consultation and negotiation with the Company's management would not be necessarily detrimental to the Company and its stockholders. However, the Board feels that the benefits of seeking to protect its ability to negotiate with the proponent of an unfriendly or unsolicited proposal to take over or restructure the Company outweigh the disadvantages of discouraging such proposals. The provisions of the Certificate of Incorporation and Bylaws described herein would make more difficult or discourage a proxy contest or the assumption of control by a holder of a substantial block of the Company's 52 54 Common Stock or the removal of the incumbent Board, and thus could have the effect of perpetuating the incumbent management. At the same time, the provisions would help ensure that the Board, if confronted by a surprise proposal from a third party who has recently acquired a block of the Company's voting stock, will have sufficient time to review the proposal and appropriate alternatives to the proposal and to seek a premium price for the stockholders. These provisions are thus intended to encourage persons seeking to acquire control of the Company to initiate such an acquisition through arms-length negotiations with the Company's management and Board of Directors. The provisions are permitted under Delaware law and are consistent with the rules of the Nasdaq National Market. These provisions are not in response to any efforts of which the Company is aware to accumulate the Company's voting stock or to obtain control of the Company. The Board of Directors does not presently contemplate recommending to the stockholders for their approval any further measures which would affect the ability of third parties to change control of the Company. The following discussion is a general summary of material provisions of the Company's Certificate of Incorporation and Bylaws, as currently in effect, and certain other regulatory provisions, which may be deemed to have an "anti-takeover" effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in the Company's Certificate of Incorporation and Bylaws, as currently in effect, reference should be made in each case to the document in question, each of which is part of the Registration Statement filed with the Commission. See "Available Information." Directors. Certain provisions of the Certificate of Incorporation and Bylaws will impede changes in majority control of the Board of Directors. The Company's Certificate of Incorporation provides that the Board of Directors of the Company are divided into three classes, with directors in each class elected for three-year staggered terms except for the initial directors. This classification of the Board of Directors could make it more difficult for a third party to acquire control of the Company, because it would require more than one annual meeting of stockholders to elect a majority of the directors. The Company's Bylaws provide that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a majority vote of the directors then in office. The number of directors constituting the Board will initially be five. Restrictions on Call of Special Meetings. The Bylaws provide that a special meeting of stockholders may be called only by the Board of Directors, the Chairman of the Board, the President, or the Executive Vice President, and for the transaction of any proper business. Holders of Common Stock, in their capacity as stockholders, are not authorized to call a special meeting. Absence of Cumulative Voting. The Certificate of Incorporation does not provide for cumulative voting rights in the election of directors. Authorization of Preferred Stock. The Certificate of Incorporation authorizes 2,000,000 shares of Preferred Stock. The Company is authorized to issue Preferred Stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, powers, preferences and rights of such share, including voting rights and conversion rights. In the event of a proposed merger, tender offer or other attempt to gain control of the Company that the Board of Directors does not approve, it might be possible for the Board of Directors to authorize the issuance of a series of Preferred Stock with rights and preferences that would impede the completion of such a transaction. An effect of the possible issuance of Preferred Stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any Preferred Stock, and does not intend to issue any Preferred Stock except on terms which the Board deems to be in the best interests of the Company and its stockholders. Amendment to Certificate of Incorporation and Bylaws. Amendments to the Certificate of Incorporation requires the approval by a majority vote of the Company's Board of Directors and also by a majority vote of the outstanding shares of the Company's stock entitled to vote thereon. The Bylaws may be amended by a majority vote of the Board of Directors or the affirmative vote of a majority of the outstanding shares of the Company's stock entitled to vote thereon. 53 55 Delaware Anti-Takeover Statute. Generally, Section 203 of the DGCL prevents an "interested stockholder" (defined generally as a person owning 15% or more of the outstanding voting stock of a Delaware corporation, such as the Company) from engaging in a "business combination" with such corporation for three years following the date that the person became an interested stockholder. However, the takeover can be completed if (i) the buyer, while acquiring the 15% interest, acquires at least 85% of the Company's outstanding stock (the 85% requirement excludes shares held by directors who are also officers and certain shares held under employee stock plans), or (ii) the takeover is approved by the target corporation's board of directors and two-thirds of the shares of outstanding stock of the Company (excluding shares held by the bidder). Section 203 could make it more difficult for a third party to acquire control of the Company. Section 203 does not apply to Delaware corporations which do not have a class of voting stock listed on a national exchange, authorized for quotation on an inter-dealer quotation system of a registered national securities association or held of record by more than 2,000 stockholders. The Company may exempt itself from the requirements of the statute by adopting an amendment to its Certificate of Incorporation or Bylaws electing not to be governed by this provision. At the present time, the Board of Directors does not intend to propose any such amendment. SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this Offering, the Company will have issued and outstanding 5,000,000 shares of Common Stock. Of these shares, the 1,000,000 shares sold in the Offering will be freely tradable without restriction under the Securities Act, unless such shares are held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 4,000,000 shares of Common Stock outstanding upon completion of the Offering will be "restricted securities" as that term is defined in Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if the sale transaction qualifies for an exemption from registration, such as that provided by Rule 144 under the Securities Act, which is summarized below. Sales of Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. All officers, directors and current stockholders of the Company have entered into contractual "lock-up" agreements providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock, any options or warrants to acquire shares of Common Stock or any securities exercisable for or convertible into the Company's Common Stock owned by them or acquired in the Offering for a period of 360 days from the date of this Prospectus, without the prior written consent of the Underwriters. As a result of these contractual restrictions, shares subject to lock-up agreements will not be saleable until such agreements expire or are waived by the Underwriters. All of the Restricted Shares will be available for sale in the public market 360 days after the date of this Prospectus, subject to the provisions of Rule 144. In general, unless an exemption applies, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years (including the holding period of any prior owner except an affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock in the Nasdaq National Market during the four calendar weeks preceding the filing of the date on which notice of such sale is filed. In addition, under Rule 144(k), a person who is not an affiliate and has not been an affiliate for at least three months prior to the sale and who has beneficially owned Restricted Shares for at least three years may sell such shares without compliance with the foregoing requirements. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Prior to the Offering, there has been no public market for the Common Stock of the Company and no predictions can be made as to the effect, if any, that future sales of shares of Common Stock will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. 54 56 Transfer Agent and Registrar. The transfer agent and registrar of the common stock is First Union National Bank. Reports to Stockholders. The Company will furnish each stockholder with annual reports containing financial statements audited by independent accountants and quarterly reports for the first three quarters of each year containing unaudited financial statements. 55 57 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters") through their Representative, have severally agreed to purchase from the Company the following respective number of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
UNDERWRITER NUMBER OF SHARES --------------------------------------------------------------------- ---------------- Friedman, Billings, Ramsey & Co., Inc................................ ---------------- Total...................................................... 1,000,000 =============
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the shares of the Common Stock offered hereby if any of such shares of Common Stock are purchased. The Company has been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the initial public offering price, concession, allowance and reallowance may be changed by the Representative. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 150,000 additional shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 1,000,000 and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 1,000,000 shares of Common Stock are being offered. Prior to the Offering, there has been no public trading market for the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market; however, there can be no assurance that an active trading market for the Common Stock will develop after the Offering, or if developed, that such a market will be sustained. See "Risk Factors -- Absence of Prior Public Market for Stock." The initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representative. Among the factors considered in determining the initial public offering price were prevailing market conditions, revenue and earnings of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, an assessment of the Company's management and the consideration of the above factors in relation to the market valuation of certain publicly traded companies in comparable lines of business. The executive officers, directors and all current stockholders of the Company have agreed that they will not offer, sell, contract to sell, or grant an option to purchase, loan, pledge or otherwise dispose of any shares of the Common Stock, options or warrants to acquire shares of Common Stock or any securities exercisable for or convertible into Common Stock owned by them or acquired in the Offering, in the open market or otherwise, for a period of 360 days from the date of this Prospectus, without the prior written consent of the Underwriters. The Company has agreed not to offer, sell or issue any shares of Common Stock, options or 56 58 warrants to acquire Common Stock or securities exercisable for or convertible into shares of Common Stock for a period of 360 days after the date of this Prospectus, without the prior written consent of the Underwriters, except that the Company may issue securities pursuant to the Company's stock option plans. See "Management -- Executive Compensation and Other Information." The Representative has informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company, Phillip G. Norton and Bruce M. Bowen have agreed to indemnify the Underwriters and controlling persons, if any, against certain losses, claims, damages or liabilities including liabilities under the Securities Act or will contribute to payments that the Underwriters or any such controlling persons may be required to make in respect thereof. However, the aggregate liability of Phillip G. Norton and Bruce M. Bowen may not exceed three million dollars. The Representative intends to make a market in the Common Stock on completion of the Offering, as permitted by applicable laws and regulations. The Representative, however, is not obligated to make a market in such shares, and any such market making may be discontinued at any time at the sole discretion of the Representative. LEGAL MATTERS The legality of the Common Stock being offered hereby has been passed upon for the Company by Hazel & Thomas, P.C., Falls Church, Virginia, counsel to the Company. Certain legal matters will be passed upon for the Underwriters by Alston & Bird, Washington, D.C., counsel to the Underwriters. EXPERTS The consolidated financial statements of the Company as of March 31, 1995 and 1996 and for each of the three years in the period ended March 31, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 57 59 MLC HOLDINGS, INC., AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report..................................................... F-2 Consolidated Balance Sheets as of March 31, 1995 and 1996, and June 30, 1996 (unaudited) ................................................................... F-3 Consolidated Statements of Earnings for the Years Ended March 31, 1994, 1995 and 1996, and for the Quarters Ended June 30, 1995 and 1996 (unaudited)............ F-4 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1994, 1995 and 1996, and for the Quarter Ended June 30, 1996 (unaudited)....... F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and 1996, and for the Quarters Ended June 30, 1995 and 1996 (unaudited)........ F-6 Notes to Consolidated Financial Statements....................................... F-7
F-1 60 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of MLC Holdings, Inc. Reston, Virginia We have audited the accompanying consolidated balance sheets of MLC Holdings, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MLC Holdings, Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Washington, D.C. September 1, 1996 F-2 61 MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, -------------------------- AS OF 1995 1996 JUNE 30, 1996 ----------- ----------- ------------- (UNAUDITED) ASSETS Cash and cash equivalents............................. $ 253,475 $ 357,881 $ 445,981 Accounts receivable................................... 2,137,829 1,272,707 1,962,353 Notes receivable...................................... 36,769 91,857 1,045,902 Employee advances..................................... 14,353 76,349 77,759 Inventories........................................... 137,765 86,280 67,267 Refundable income taxes............................... 48,946 -- -- Investment in direct financing and sales-type leases -- net....................................... 12,123,754 16,273,218 14,371,589 Investment in operating lease equipment -- net........ 1,874,354 10,219,826 8,238,558 Property and equipment -- net......................... 152,235 280,468 265,599 Deferred taxes........................................ 154,000 -- -- Other assets(1)....................................... 548,192 1,177,629 1,046,412 ----------- ----------- ------------- TOTAL ASSETS.......................................... $17,481,672 $29,836,215 $27,521,420 =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable -- equipment.................... $ 3,014,447 $ 4,972,979 $ 3,392,173 Accounts payable -- trade........................ 395,385 604,650 303,454 Salaries and commissions payable................. 117,706 61,910 131,091 Accrued expenses and other liabilities........... 388,222 935,315 1,271,825 Income taxes payable............................. -- 6,332 218,808 Recourse notes payable........................... 1,814,855 1,284,742 1,485,165 Nonrecourse notes payable........................ 10,161,758 18,351,579 16,563,997 Loans from stockholders.......................... 325,000 275,000 275,000 Deferred taxes................................... -- 469,000 490,000 ----------- ----------- ------------- Total liabilities........................... 16,217,373 26,961,507 24,131,513 COMMITMENTS AND CONTINGENCIES......................... -- -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value -- 2,000,000 shares authorized; none issued or outstanding.................................... -- -- -- Common stock, $.01 par value -- 10,000,000 shares authorized; 4,000,000 shares issued and outstanding.................................... 40,000 40,000 40,000 Additional paid-in capital....................... 9,592 9,592 9,592 Retained earnings................................ 1,214,707 2,825,116 3,340,315 ----------- ----------- ------------- Total stockholders' equity.................. 1,264,299 2,874,708 3,389,907 ----------- ----------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $17,481,672 $29,836,215 $27,521,420 =========== =========== ============
- --------------- (1) Includes amounts with related parties of $9,499 and $678,393 as of March 31, 1995 and 1996, and $525,950 as of June 30, 1996 (unaudited). See notes to consolidated financial statements. F-3 62 MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED MARCH 31, QUARTER ENDED JUNE 30, ----------------------------------------- ------------------------- 1994 1995 1996 1995 1996 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) REVENUES: Sales................................ $24,676,478 $36,897,774 $34,841,823 $2,090,708 $10,412,026 Lease revenues....................... 1,577,008 2,967,450 5,900,349 968,074 1,791,458 Net margin on sales-type leases...... 380,446 276,688 85,590 75,174 -- Fee and other income................. 979,451 676,737 1,972,439 640,630 692,468 ----------- ----------- ----------- ---------- ----------- Total revenues(1).................. 27,613,383 40,818,649 42,800,201 3,774,586 12,895,952 ----------- ----------- ----------- ---------- ----------- COSTS AND EXPENSES: Cost of sales........................ 23,154,569 34,353,344 31,202,228 1,453,788 9,894,315 Direct lease costs................... 344,326 841,345 2,862,815 285,979 780,788 Professional and other fees.......... 595,028 632,369 687,276 49,069 127,785 Salaries and benefits................ 1,733,988 2,630,660 2,962,177 845,784 665,078 General and administrative expenses........................... 994,312 759,063 1,017,934 191,472 258,549 Interest and financing costs......... 411,392 990,313 1,576,362 308,118 370,238 ----------- ----------- ----------- ---------- ----------- Total costs and expenses(2)........ 27,233,615 40,207,094 40,308,792 3,134,210 12,096,753 ----------- ----------- ----------- ---------- ----------- EARNINGS BEFORE PROVISION FOR INCOME TAXES................................ 379,768 611,555 2,491,409 640,376 799,199 PROVISION FOR INCOME TAXES............. 59,235 198,000 881,000 227,000 284,000 ----------- ----------- ----------- ---------- ----------- NET EARNINGS........................... $ 320,533 $ 413,555 $ 1,610,409 $ 413,376 $ 515,199 =========== =========== =========== ========== =========== NET EARNINGS PER COMMON SHARE.......... $ 0.08 $ 0.10 $ 0.40 $ 0.10 $ 0.13 =========== =========== =========== ========== ===========
- --------------- (1) Includes amounts from related parties of $1,901,192 and $15,758,510 for the fiscal years ended March 31, 1995 and 1996 and $5,693,653 for the quarter ended June 30, 1996 (unaudited). (2) Includes amounts to related parties of $281,709, $1,619,830 and $15,001,141 for the fiscal years ended March 31, 1994, 1995 and 1996, and $30,000 and $5,698,742 for the quarters ended June 30, 1995 and 1996 (unaudited). See notes to consolidated financial statements. F-4 63 MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1994, 1995, AND 1996 AND THE QUARTER ENDED JUNE 30, 1996 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- ---------------------- PAID-IN RETAINED SHARES PER VALUE SHARES PAR VALUE CAPITAL EARNINGS TOTAL --------- --------- --------- --------- ---------- ---------- ---------- Balance, April 1, 1993...... -- $ -- 4,000,000 $40,000 $9,592 $ 480,619 $ 530,211 Net earnings............ -- -- -- -- -- 320,533 320,533 --------- ------- --------- ------- ------- ---------- ---------- Balance, March 31, 1994..... -- -- 4,000,000 40,000 9,592 801,152 850,744 Net earnings............ -- -- -- -- -- 413,555 413,555 --------- ------- --------- ------- ------- ---------- ---------- Balance, March 31, 1995..... -- -- 4,000,000 40,000 9,592 1,214,707 1,264,229 Net earnings............ -- -- -- -- -- 1,610,409 1,610,409 --------- ------- --------- ------- ------- ---------- ---------- Balance, March 31, 1996..... -- -- 4,000,000 40,000 9,592 2,825,116 2,874,708 Net earnings (unaudited).......... -- -- -- -- -- 515,199 515,199 --------- ------- --------- ------- ------- ---------- ---------- Balance, June 30, 1996 (unaudited)............... -- $ -- 4,000,000 $40,000 $9,592 $3,340,315 $3,389,907 ========= ======= ========= ======= ======= ========== ==========
See notes to consolidated financial statements. F-5 64 MLC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, QUARTER ENDED JUNE 30, ------------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ----------- ------------ ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings....................................... $ 320,533 $ 413,555 $ 1,610,409 $ 413,376 $ 515,199 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization.................. 164,068 580,088 2,136,217 231,528 528,544 (Gain)/loss on sale of operating lease equipment(1)................................. (108,017) (48,235) (323,422) 545 17,180 Payments from lessees directly to lenders...... (38,034) (217,375) (884,389) (101,826) (388,623) Loss on disposal of property and equipment..... -- 974 4,489 -- -- Deferred taxes................................. (180,000) 26,000 623,000 -- 21,000 Changes in: Accounts receivable.......................... (499,122) (1,173,898) 865,122 1,051,148 (689,646) Notes receivable............................. (53,417) 50,150 (55,088) 34,611 (954,045) Employee advances............................ (23,275) 18,922 (61,996) (6,819) (1,410) Inventories.................................. 225,346 93,140 51,485 (393,967) 19,013 Refundable income taxes...................... (13,204) (35,742) -- 48,946 -- Other assets(2).............................. (135,413) (50,335) (299,866) (365,797) 38,284 Accounts payable -- equipment................ (1,015,293) 1,922,938 1,958,532 (1,589,146) (1,580,806) Accounts payable -- trade.................... 353,153 (71,001) 209,265 567,266 (301,196) Salaries and commissions payable............. 8,753 (12,845) (55,796) 82,340 69,181 Accrued expenses and other liabilities....... 56,454 198,766 547,093 190,611 336,510 Income taxes payable......................... (57,810) -- 55,278 131,380 212,476 ----------- ------------ ------------ ----------- ----------- Net cash provided by (used in) operating activities............................... (995,278) 1,695,102 6,380,333 294,196 (2,158,339) ----------- ------------ ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of operating lease equipment(3)..................................... 4,062,511 73,072 1,383,677 13,173 850,099 Purchase of operating lease equipment.............. (2,149,299) (2,268,792) (13,919,193) (957,744) (3,653,553) Increase in investment in direct financing and sales-type leases(4)............................. (5,118,266) (9,766,564) (17,169,201) (1,047,711) 27,844 Proceeds from sale of property and equipment....... -- 1,588 9,049 -- -- Purchases of property and equipment................ (114,843) (43,451) (207,150) (21,219) (6,240) Decrease (increase) in other assets(5)............. (158,808) (164,020) (329,571) (21,526) 92,934 ----------- ------------ ------------ ----------- ----------- Net cash used in investing activities...... (3,478,705) (12,168,167) (30,232,389) (2,035,027) (2,688,916) ----------- ------------ ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings: Nonrecourse...................................... 3,675,084 10,217,530 25,678,168 2,369,762 5,051,925 Recourse......................................... -- 184,359 67,103 -- -- Repayments: Nonrecourse...................................... -- (348,373) (1,144,023) (131,816) (316,991) Recourse......................................... -- (44,972) (62,688) (17,525) (16,541) Proceeds of loans from stockholders................ -- 75,000 -- -- -- Repayments of notes payable........................ (90,000) -- -- -- -- Repayments of loans from stockholder............... -- -- (50,000) -- -- Proceeds (repayments) from lines of credit......... 1,711,000 (285,532) (532,098) (378,270) 216,962 ----------- ------------ ------------ ----------- ----------- Net cash provided by financing activities............................... 5,296,084 9,798,012 23,956,462 1,842,151 4,935,355 ----------- ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 822,101 (675,053) 104,606 101,320 88,100 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 106,427 928,528 253,475 253,475 357,881 ----------- ------------ ------------ ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 928,528 $ 253,475 $ 357,881 $ 354,795 $ 445,981 =========== ============ ============ =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid...................................... $ 77,931 $ 161,667 $ 183,220 $ 58,614 $ 46,242 =========== ============ ============ =========== =========== Income taxes paid.................................. $ 310,249 $ 219,573 $ 202,864 $ 4,466 $ 50,523 =========== ============ ============ =========== ===========
- --------------- (1) Includes amounts provided by (used by) related parties of ($172,956) for the fiscal year ended March 31, 1996 and $21,644 for the quarter ended June 30, 1996 (unaudited). (2) Includes amounts provided by (used by) related parties of ($46,017), $234,090, ($398,034) for the fiscal years ended March 31, 1994, 1995 and 1996 and ($133,862) and $187,540 for the quarters ended June 30, 1995 and 1996 (unaudited). (3) Includes amounts provided by related parties of $3,981,919 for the fiscal year ended March 31, 1996 and $717,029 for the quarter ended June 30, 1996 (unaudited). (4) Includes amounts provided by (used by) related parties of ($235,180), $259,857 for the fiscal years ended March 31, 1995 and 1996 and $106,102 for the quarter ended June 30, 1996 (unaudited). (5) Includes amounts provided by (used by) related parties of ($30,824), ($153,826) and ($270,860) for the fiscal years ended March 31, 1994, 1995 and 1996 and ($21,771) and ($35,097) for the quarters ended June 30, 1995 and 1996 (unaudited). See notes to consolidated financial statements. F-6 65 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1996, 1995, AND 1994 AND THE QUARTERS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation -- Effective September 1, 1996, MLC Holdings, Inc., (incorporated August 27, 1996), became the holding company for MLC Group, Inc., and MLC Capital, Inc. (MLC Holdings, Inc. together with its subsidiaries collectively, "MLC" or "the Company"). The accompanying consolidated financial statements include the accounts of the wholly-owned subsidiary companies at historical amounts as if the combination had occurred on March 31, 1993, in a manner similar to a pooling of interests. MLC was formed on November 8, 1990, and is a dealer of information technology equipment, and a finance and leasing company serving federal, state, and local governments, as well as commercial customers. The Company specializes in financing information technology, equipment, software, and services. MLC also maintains an active presence in the secondary market for computer hardware. All significant intercompany balances and transactions have been eliminated. Revenue Recognition -- MLC sells information technology equipment to its customers and recognizes revenue from equipment sales at the time equipment is accepted by the customer. MLC is the lessor in a number of its transactions and these are accounted for in accordance with Financial Accounting Standards 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, MLC records the net investment in leases, which consists of the sum of the minimum lease payments, initial direct costs, and unguaranteed residual value (gross investment) less the unearned income. The difference between the gross investment and the cost of the leased equipment for direct finance leases is recorded as unearned income at the inception of the lease. The unearned income is amortized over the life of the lease using the interest method. Under sales-type leases the difference between the fair value and cost of the leased property (net margins) is recorded as revenue at the inception of the lease. Lease revenues consist of rentals due under operating leases and amortization of unearned income on direct financing and sales-type leases. Equipment under operating leases is recorded at cost and depreciated on a straight-line basis over the lease term to the Company's estimate of residual value. Management reviews lease receivables to determine the amount of allowance, if any, needed to provide for on problem accounts. Management considers various factors including age of receivable and loss experience. At such time an allowance is considered necessary, interest income will cease to be recognized. 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 MLC has completed its obligations at the assignment date and the Company retains no ownership interest in the equipment under lease. Cash and Cash Equivalents -- Cash and cash equivalents include short-term repurchase agreements with an original maturity of three months or less. Inventories -- Inventories are stated at the lower of cost (specific identification basis) or market. Property and Equipment -- Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Income Taxes -- Deferred income taxes are provided for in accordance with Financial Accounting Standards (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. F-7 66 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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. New Accounting Pronouncements -- The Financial Accounting Standards Boards issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March 1995, and SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. These standards will be effective for the Company beginning in fiscal year 1997 and are not expected to have a significant impact on the Company's financial statements. Interim Financial Statements (Unaudited) -- In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting on of various normal accruals) necessary to present fairly the Company's financial position, results of earnings and cash flows. The results of earnings for the quarter ended June 30, 1996 are not necessarily indicative of the results of earnings to be expected for the full year. Reclassifications -- Certain items have been reclassified in the March 31, 1994 and 1995 financial statements to conform to the March 31, 1996 presentation. 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, AS OF -------------------------- JUNE 30, 1995 1996 1996 ----------- ----------- ----------- Minimum lease payments........................ $13,674,866 $18,212,328 $15,972,246 Estimated unguaranteed residual value......... 154,710 347,811 317,846 Initial direct costs, net of amortization of $217,476 and $590,058, at March 31, 1995 and 1996, and $806,268 (unaudited) at June 30, 1996........................................ 203,397 1,538,756 1,545,561 Less: Unearned lease income................... (1,909,219) (3,825,677) (3,464,064) ----------- ----------- ----------- Investment in direct financing and sales-type leases -- net............................... $12,123,754 $16,273,218 $14,371,589 =========== =========== ===========
Future scheduled minimum lease rental payments, as of March 31, 1996, are as follows:
YEAR ENDING MARCH 31, --------------------- 1997.................................................. $ 6,953,688 1998.................................................. 5,055,287 1999.................................................. 3,394,892 2000.................................................. 1,785,775 2001 and thereafter................................... 1,022,686 ----------- Total............................................ $18,212,328 ===========
F-8 67 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES -- (CONTINUED) The Company's net investment in direct financing and sales-type leases is collateral for nonrecourse and recourse equipment notes (see Note 6). 3. SALES-TYPE LEASES The detail for the sales-type leases consists of the following:
YEAR ENDED MARCH 31, QUARTER ENDED JUNE 30, --------------------------------------- ------------------------ 1994 1995 1996 1995 1996 ----------- ----------- --------- --------- ----------- (UNAUDITED) Gross minimum lease payments................ $ 3,550,942 $ 3,451,993 $ 559,256 $ 440,600 $ -- Estimated unguaranteed residual value.......... -- 3,296 -- -- -- Gross cost of sales....... (2,598,056) (2,628,983) (375,287) (292,515) Unearned lease income..... (572,440) (549,618) (98,379) (72,911) -- -- ------------ ------------ ---------- ---------- -------- Net margin................ $ 380,446 $ 276,688 $ 85,590 $ 75,174 $ -- ============ ============ ========== ========== ========
4. INVESTMENT IN OPERATING LEASE EQUIPMENT Investment in operating leases represents primarily equipment leased for two to three years. The components of the net investment in operating lease equipment, are as follows:
AS OF MARCH 31, AS OF ------------------------- JUNE 30, 1995 1996 1996 ---------- ----------- ----------- (UNAUDITED) Cost of equipment under operating lease................................ $2,398,725 $11,411,105 $ 9,000,073 Initial direct costs................... 7,019 54,217 524,427 Accumulated depreciation and amortization......................... (531,390) (1,245,496) (1,285,942) ---------- ----------- ------------ Investment in operating leases -- net................... $1,874,354 $10,219,826 $ 8,238,558 ========== =========== ============
5. PROPERTY AND EQUIPMENT Property and equipment consists of:
AS OF MARCH 31, --------------------- 1995 1996 -------- --------- Furniture and equipment................................ $182,192 $ 241,859 Capitalized software................................... 35,399 158,666 Leasehold improvements................................. 14,613 14,613 -------- --------- 232,204 415,138 Accumulated depreciation............................... (79,969) (134,670) -------- --------- $152,235 $ 280,468 ======== =========
F-9 68 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. RECOURSE AND NONRECOURSE NOTES PAYABLE
AS OF MARCH 31, AS OF -------------------------- JUNE 30, 1995 1996 1996 ----------- ----------- ----------- (UNAUDITED) Revolving line of credit with a maximum balance of $250,000, bearing interest at the prime rate (8.25% at March 31, 1996) plus 1.5% payable on demand, secured by equipment purchases................................... $ 175,000 $ 175,000 $ -- Revolving line of credit with a maximum balance of $2,000,000, bearing interest at the prime rate (8.25% at March 31, 1996) plus 1%, and personally guaranteed by an employee/stockholder........................ 983,778 592,000 1,350,000 Revolving line of credit with a maximum balance of $5,000,000, bearing interest at the LIBOR rate (5.5% at March 31, 1996) plus 2.75%, secured by the Company's assets and personal guarantees from employees/stockholders...................... -- 360,000 -- Revolving line of credit with a maximum balance of $3,000,000, bearing interest at the prime rate plus 1.5%.................... 479,446 -- -- Recourse equipment notes with varying interest rates ranging from 7.5% to 8.53%, and 8.17% to 8.53%, respectively, secured by related investments in leases....................... 139,387 141,373 124,831 Noncollateralized recourse note bearing interest at 8.05%........................... 37,244 16,369 10,334 ----------- ----------- ----------- $ 1,814,855 $ 1,284,742 $ 1,485,165 ========== ========== ========== Nonrecourse equipment notes with varying interest rates ranging from 6.25% to 14.39%, and 5.85% to 14.39%, secured by related investments in leases....................... $10,161,758 $18,351,579 $16,563,997 ========== ========== ==========
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 servicing as collateral, and the borrower. Under nonrecourse financing, in the event of a default by a lessee, the lender generally only has recourse against the lessee, and the equipment serving as collateral, but not against the borrower. Borrowings under the $2,000,000 and $5,000,000 lines of credit above contain covenants regarding maximum recourse debt to worth ratio, minimum consolidated tangible net worth, fixed charge coverage ratio and prohibit the payment of dividends. Unaudited -- The lender of the $175,000 payable shown above was in receivership by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC sold the note to a third party and during the quarter ended June 30, 1996, the Company negotiated to settle the amount due of $175,000 plus accrued interest of $69,000 for $169,000. The gain of $75,000 is included in fee and other income in the accompanying consolidated statement of earnings for the quarter ended June 30, 1996. F-10 69 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. RECOURSE AND NONRECOURSE NOTES PAYABLE -- (CONTINUED) Recourse and nonrecourse notes payable, as of March 31, 1996, mature as follows:
NONRECOURSE RECOURSE NOTES PAYABLE NOTES PAYABLE ------------- ------------- 1997............................................... $ 7,024,397 $ 1,209,704 1998............................................... 5,900,895 33,889 1999............................................... 3,594,811 14,983 2000............................................... 1,296,557 16,160 2001............................................... 534,919 10,006 ----------- ---------- $ 18,351,579 $ 1,284,742 =========== ==========
7. RELATED PARTY TRANSACTIONS Loans From Stockholders/Officers:
AS OF MARCH 31, -------------------- 1995 1996 -------- -------- Note payable to stockholder bearing interest at 10%, maturing March 1, 1998................................ $175,000 $175,000 Note payable to stockholder bearing interest at 10%, maturing March 1, 1998................................ $150,000 $100,000 -------- -------- $325,000 $275,000 ======== ========
Other: MLC provided advances to employees/stockholders aggregating a total of $49,275, $61,583, and $139,500, for the years ended March 31, 1994, 1995, and 1996, respectively. Such balances are to be repaid, plus interest, from commissions earned by the employees/stockholders on successful sales or financing arrangements obtained on behalf of the Company. Repayments on these advances have been made as follows: - Advances of $26,000, $80,505, and $82,612 were repaid for the years ended March 31, 1994, 1995, and 1996, respectively. No interest was charged on these advances. - During the year ended March 31, 1996, an employee/stockholder repaid the entire amount due the Company under a promissory note with a maximum amount of $40,000 (loaned in 1994) bearing interest at a rate of 8%. In addition, the Company loaned a stockholder $54,000 pursuant to a promissory note bearing interest at a rate of 8%. Under the terms of the note interest and principal of $1,608 and $8,392, respectively, were paid to the Company during the year ended March 31, 1996. During the years ended March 31, 1995 and 1996, MLC sold leased equipment to a company in which an employee/stockholder has a 45% ownership interest. Revenue recognized from the sale was $1,855,010 and $1,300,448 respectively, and the basis of the equipment sold was $1,619,830 and $1,271,729 respectively. At March 31, 1996, accrued expenses and other liabilities include $26,575 due to the related company, notes receivable include $17,511 due from the company and other assets include $73,421 which represents MLC's investment in lease deals with the company. During the year ended March 31, 1996, MLC paid a stockholder $120,000 in exchange for the pledge of personal assets made to secure one of the Company's revolving line-of-credit agreements. F-11 70 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. RELATED PARTY TRANSACTIONS -- (CONTINUED) During the year ended March 31, 1994, the Company sold its 49% interest in MLC Federal. Subsequent to the sale, accounts receivable of $281,709 from MLC Federal were determined to be uncollectible. The related bad debt expense is included in general and administrative expenses in the accompanying statement of earnings for the year ended March 31, 1994. During the year ended March 31, 1996, the Company sold leased equipment to MLC/GATX Limited Partnership I (the "Partnership"), which amounted to 31% of the Company's revenues. The Company has a 9.5% limited partnership interest in the Partnership and owns a 50% interest in the corporation that owns a 1% general partnership interest in the Partnership. Revenue recognized from the sales was $13,079,433, and the basis of the equipment sold was $12,273,527. Other assets include $188,073 due to and $209,961 due from the Partnership for the years ended March 31, 1995 and 1996, respectively. The Company's investment balance in the Partnership, accounted for using the cost method, included in other assets is $197,572 and $380,757 at March 31, 1995 and 1996, respectively. In addition, the Company received $2,711, $46,182, and $122,111 for the years ended March 31, 1994, 1995, and 1996, respectively, for accounting and administrative services provided to the Partnership. During the year ended March 31, 1996, the Company sold leased equipment to MLC/CLC LLC, in which the Company has a 5% ownership interest. Revenue recognized from the sales was $1,256,518, and the basis of the equipment sold was $1,335,885. Other assets includes an investment of $14,254 accounted for using the cost method. 8. COMMITMENTS AND CONTINGENCIES MLC leases office space and a telephone system for the conduct of its business. As of March 31, 1996, the future minimum lease payments are due as follows:
YEAR ENDING MARCH 31, --------------------- 1997....................................................... $ 99,065 1998....................................................... 89,454 1999....................................................... 45,056 -------- $233,575 ========
As of March 31, 1996, the Company has guaranteed $172,565 of the residual value for equipment owned by another entity. F-12 71 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES A reconciliation of income tax computed at the statutory Federal rate to the provision for income tax included in the consolidated statements of earnings is as follows:
YEAR ENDED MARCH 31, -------------------------------- QUARTER ENDED 1994 1995 1996 JUNE 30, 1996 -------- -------- -------- ------------- (UNAUDITED) Statutory Federal income tax rate........ 34% 34% 34% 34% ========= ======== ======== ======== Income tax expense computed at the statutory Federal rate................. $129,121 $207,929 $847,079 $ 272,000 State income tax expense (benefit), net of Federal tax expense................. 3,797 6,115 24,643 32,000 Nontaxable interest income............... (73,683) (95,000) (79,342) (30,000) Nondeductible expenses................... -- 78,956 88,620 10,000 --------- -------- -------- -------- Provision for income taxes............... $ 59,235 $198,000 $881,000 $ 284,000 ========= ======== ======== ======== Effective tax rate....................... 15.6% 32.4% 35.4% 35.5% ========= ======== ======== ========
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31, --------------------------------- QUARTER ENDED 1994 1995 1996 JUNE 30, 1996 --------- -------- -------- ------------- (UNAUDITED) Current: Federal.................... $ 198,766 $154,000 $231,000 $ 201,000 State...................... 40,469 18,000 27,000 62,000 --------- -------- -------- ------------- 239,235 172,000 258,000 263,000 --------- -------- -------- ------------- Deferred: Federal.................... (170,000) 17,000 557,000 15,000 State...................... (10,000) 9,000 66,000 6,000 --------- -------- -------- ------------- (180,000) 26,000 623,000 21,000 --------- -------- -------- ------------- $ 59,235 $198,000 $881,000 $ 284,000 ========= ======== ======== ==========
The components of the deferred tax expense (benefit) resulting from net temporary differences are as follows:
YEAR ENDED MARCH 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Alternative minimum tax.................... $(229,000) $ 158,000 $ 200,000 Lease revenue recognition.................. 49,000 (132,000) (823,000) ---------- ------- -------- Total................................. $(180,000) $ 26,000 $ 623,000 ========== ======= ========
F-13 72 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES -- (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of items comprising the Company's deferred taxes consist of the following:
YEAR ENDED MARCH 31, ------------------------------------ 1994 1995 1996 -------- --------- ----------- Alternative minimum tax................... $230,000 $ 388,000 $ 619,000 Lease revenue recognition................. (50,000) (234,000) (1,088,000) -------- --------- ----------- Net deferred asset (liability)............ $180,000 $ 154,000 $ (469,000) ======== ========= ===========
10. NONCASH INVESTING AND FINANCING ACTIVITIES The Company recognized a reduction in recourse and nonrecourse notes payable (Note 6) associated with its deferred finance and operating lease activities from payments made directly by customers to the third-party lenders amounting to $1,608,023, $6,150,983, and $4,796,306 for the years ended March 31, 1994, 1995, and 1996, 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 $819,518, $1,855,010, and $11,550,446, for the years ended March 31, 1994, 1995, and 1996, respectively. On January 1, 1994, the assets and liabilities of Pilot Associates, Inc. (another leasing company) were acquired. The purchase price was $40,000 plus the assumption of certain leases and related debt which resulted in an increase in net investment in direct financing and sales type leases, and in nonrecourse debt of approximately $4.8 million The acquisition was recorded using the purchase method of accounting and the results of operations related to this acquisition are included in the accompanying financial statements beginning January 1, 1994. Proforma information as if the purchase had taken place April 1, 1993, has not been presented because the impact on operations would not have been significant. 11. PROFIT SHARING PLAN The Company provides its employees with a contributory 401(k) profit sharing plan which was adopted during the year ended March 31, 1995. All employees age 21 and older become eligible to participate in the plan as of the first day of the month after which a minimum of 20 hours of service per week, during a consecutive six-month period has been completed. Full vesting occurs after the fourth consecutive year of plan participation. Employer contribution percentages are to be determined by the Company and are discretionary each year. The Company's expense for the plan was $3,925, and $46,307, for the years ended March 31, 1995 and 1996, respectively. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of the Company's financial instruments is in accordance with the provisions of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The valuation methods used by the Company are set forth below. F-14 73 MLC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) The accuracy and usefulness of the fair value information disclosed herein is limited by the following factors: - These estimates are subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. - These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holding of a particular financial asset. - SFAS No. 107 excludes from its disclosure requirements lease contracts and various significant assets and liabilities that are not considered to be financial instruments. Because of these and other limitations, the aggregate fair value amounts presented in the following table do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
AS OF MARCH 31, 1996 AS OF JUNE 30, 1996 -------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (UNAUDITED) ASSETS: Cash......................... $ 357,881 $ 357,881 $ 445,981 $ 445,981 LIABILITIES: Nonrecourse notes payable.... $18,351,579 $18,406,230 $16,563,997 $16,592,093 Recourse notes payable....... 1,284,742 1,286,120 $ 1,485,165 $ 1,485,803
The following methods and assumptions were used by the Company in computing the estimated fair value in the above table: Cash -- The carrying amounts of these financial instruments approximated their fair value. Recourse and Nonrecourse Notes Payable -- The fair value of recourse and nonrecourse debt is based on the borrowing rates currently available to the Company for debt with similar terms and average maturities. 13. SUBSEQUENT EVENT During July 1996, the Company entered into a Credit Agreement with NationsBanc Leasing Corporation, (NationsBanc) an affiliate of NationsBank, N.A. Under the terms of the Agreement, NationsBanc may lend up to $2,000,000 in various notes of terms of up to sixty months. The facility, but not transactions financed thereunder, expires January 31, 1997. Borrowings under the facility bear interest on a fixed or floating basis at the Company's option. * * * * * * F-15 74 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------------- TABLE OF CONTENTS ---------------------------
PAGE ---- Available Information................. 2 Prospectus Summary.................... 3 Risk Factors.......................... 9 The Company........................... 19 Use of Proceeds....................... 19 Dividend Policy....................... 20 Capitalization........................ 21 Dilution.............................. 22 Selected Consolidated Financial Data................................ 23 Management's Discussion and Analysis of Results of Operations and Financial Condition................. 25 Business.............................. 31 Management............................ 40 Certain Transactions.................. 47 Principal Stockholders................ 50 Description of Capital Stock.......... 52 Underwriting.......................... 56 Legal Matters......................... 57 Experts............................... 57 Index to Consolidated Financial Statements.......................... F-1 UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION. - ------------------------------------------------------ - ------------------------------------------------------
- ------------------------------------------------------ - ------------------------------------------------------ 1,000,000 SHARES MLC HOLDINGS, INC. COMMON STOCK -------------------- PROSPECTUS -------------------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the NASD filing fee. SEC registration fee.............................................. $ 3,569 NASD filing fee................................................... $ 1,535 Nasdaq listing fee................................................ $ 30,000 Transfer Agent fees and expenses.................................. $ 2,500 Printing and engraving expenses................................... $100,000 Legal fees and expenses........................................... $250,000 Blue Sky fees and expenses........................................ $ 15,000 Accounting fees and expenses...................................... $125,000 Directors and Officers insurance premiums......................... $100,000 Miscellaneous..................................................... $ 50,000 -------- Total................................................... $677,604 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article Ninth of the Certificate of Incorporation of the Registrant provides: "No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit." Article Tenth of the Certificate of Incorporation of the Registrant provides: "The Corporation shall indemnify, in the manner and to the fullest extent permitted by the Delaware General Corporation Law (and in the case of any amendment thereto, to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise including service with respect to an employee benefit plan. The Corporation may, to the fullest extent permitted by the Delaware General Corporation Law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. To the fullest extent permitted by the Delaware General Corporation Law, the indemnification provided herein may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and any such expenses may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person seeking indemnification to repay such amounts if it is ultimately determined that he or she is not entitled to be indemnified. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by the Delaware General Corporation Law, nor shall it be deemed exclusive of any other rights to which any person seeking II-1 76 indemnification from the Corporation may be entitled under any agreement, the Corporation's Bylaws, vote of stockholders or disinterested directors, or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. The Corporation may, but only to the extent that the Board of Directors may (but shall not be obligated to) authorize from time to time, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article Tenth as they apply to the indemnification and advancement of expenses of directors and officers of the Corporation." Section 145 of the Delaware General Corporation Law empowers the Registrant to indemnify its officers and directors under certain circumstances. The pertinent provisions of that statute read as follows: "(a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final deposition of such action, suit or proceeding upon receipt of an undertaking by or on II-2 77 behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employer or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees)." The Registrant has purchased a directors' and officers' liability insurance contract which provides, within stated limits, reimbursement either to a director or officer whose actions in his capacity result in liability, or to the Registrant, in the event it has indemnified the director or officer. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 12 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by director, officer, or controlling person of the Registrant in the II-3 78 successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant did not sell any securities which were not registered under the Securities Act during the three year period ended June 30, 1996. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------ ---------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement *3.1 Certificate of Incorporation of Registrant, as currently in effect *3.2 Bylaws of Registrant *4.1 Specimen Certificate of Common Stock of the Company *5.1 Opinion of Hazel & Thomas, P.C. regarding legality *10.1 1996 Stock Incentive Plan *10.2 1996 Outside Director Stock Option Plan *10.3 1996 Nonqualified Stock Option Plan *10.4 1996 Incentive Stock Option Plan *10.5 Form of Indemnification Agreement entered into between Registrant and its directors and officers *10.6 Lease dated July 14, 1993 for principal executive office located in Reston, Virginia, together with amendment thereto dated March 18, 1996 10.7 Form of Employment Agreement between the Registrant and Phillip G. Norton 10.8 Form of Employment Agreement between the Registrant and Bruce M. Bowen 10.9 Form of Employment Agreement between the Registrant and William J. Slaton 10.10 Form of Employment Agreement between the Registrant and Kleyton L. Parkhurst 10.11 Form of Irrevocable Proxy and Stock Rights Agreement *10.12 Commitment and Loan Agreement by and between the Company and NationsBank, N.A. *10.13 Credit Agreement by and between the Company and First Union Bank of Virginia *10.14 First Amended and Restated Business Loan and Security Agreement by and between the Company and NationsBanc Leasing Corporation 10.15 Loan Modification and Extension Agreement *21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP, independent auditors *23.2 Consent of Hazel & Thomas, P.C. (included in Exhibit 5.1) *24.1 Power of Attorney (see Page II-5) 27.1 Financial Data Schedule *99.1 Consent of Jonathan J. Ledecky (future director) *99.2 Consent of Terrence O'Donnell (future director) *99.3 Consent of Carl J. Rickersten (future director)
- --------------- * Previously submitted with the Registration Statement on Form S-1 filed on September 11, 1996. b. Financial Statement Schedules. II-4 79 All financial statement schedules are omitted because the information is not required, is not material or is otherwise included in the Consolidated Financial Statements and Notes thereto of the Company. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the Underwriters at the Closing, as specified in the Underwriting Agreement, certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-5 80 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment November 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunder authorized, in the County of Fairfax, Commonwealth of Virginia, on this 21st day of October, 1996. MLC HOLDINGS, INC. By: /s/ PHILLIP G. NORTON* ---------------------------- Phillip G. Norton, Chairman Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ------------------------------------------ ------------------------------- ----------------- /s/ PHILLIP G. NORTON* Chairman of the Board, Chief October 21, 1996 - ------------------------------------------ Executive Officer and President Phillip G. Norton (Principal Executive Officer) /s/ BRUCE M. BOWEN Director, Chief Financial October 21, 1996 - ------------------------------------------ Officer and Executive Vice Bruce M. Bowen President (Principal Financial Officer) /s/ BARBARA J. SIMMONDS* Controller October 21, 1996 - ------------------------------------------ (Vice President and Principal Barbara J. Simmonds Accounting Officer)
* Bruce M. Bowen, by signing his name hereto, does sign this document on behalf of the persons indicated above for whom he is attorney-in-fact pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission. By: /s/ BRUCE M. BOWEN --------------------------------- Bruce M. Bowen, Attorney-in-Fact II-6 81 REGISTRATION NO. 333-11737 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO PRE-EFFECTIVE AMENDMENT NUMBER 1 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MLC HOLDINGS, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 82 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - ------ ------------------------------------------------------------------------- ----------
1.1 Form of Underwriting Agreement........................................... *3.1 Certificate of Incorporation of Registrant, as currently in effect....... *3.2 Bylaws of Registrant..................................................... *4.1 Specimen Certificate of Common Stock of the Company...................... *5.1 Opinion of Hazel & Thomas, P.C. regarding legality....................... *10.1 1996 Stock Incentive Plan................................................ *10.2 1996 Outside Director Stock Option Plan.................................. *10.3 1996 Nonqualified Stock Option Plan...................................... *10.4 1996 Incentive Stock Option Plan......................................... *10.5 Form of Indemnification Agreement entered into between Registrant and its directors and officers................................................. *10.6 Lease dated July 14, 1993 for principal executive office located in Reston, Virginia, together with amendment thereto dated March 18, 1996................................................................... 10.7 Form of Employment Agreement between the Registrant and Phillip G. Norton................................................................. 10.8 Form of Employment Agreement between the Registrant and Bruce M. Bowen... 10.9 Form of Employment Agreement between the Registrant and William J. Slaton................................................................. 10.10 Form of Employment Agreement between the Registrant and Kleyton L. Parkhurst.............................................................. 10.11 Form of Irrevocable Proxy and Stock Rights Agreement..................... *10.12 Commitment and Loan Agreement by and between the Company and NationsBank, N.A. .................................................................. *10.13 Credit Agreement by and between the Company and First Union Bank of Virginia............................................................... *10.14 First Amended and Restated Business Loan and Security Agreement by and between the Company and NationsBanc Leasing Corporation................ 10.15 Loan Modification and Extension Agreement................................ *21.1 Subsidiaries of the Company.............................................. 23.1 Consent of Deloitte & Touche LLP, independent auditors................... *23.2 Consent of Hazel & Thomas, P.C. (included in Exhibit 5.1)................ *24.1 Power of Attorney (see Page II-5)........................................ 27.1 Financial Data Schedule.................................................. *99.1 Consent of Jonathan J. Ledecky (future director)......................... *99.2 Consent of Terrence O'Donnell (future director).......................... *99.3 Consent of Carl J. Rickersten (future director)..........................
- --------------- * Previously submitted with the Registration Statement on Form S-1 filed on September 11, 1996. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 MLC HOLDINGS, INC. _________ Shares(1) Common Stock UNDERWRITING AGREEMENT _______ __, 1996 FRIEDMAN, BILLINGS, RAMSEY & CO., INC. Potomac Tower 1001 Nineteenth Street North Arlington, Virginia 22209 As Representative of the Several Underwriters Dear Sirs: MLC Holdings, Inc., a Delaware corporation (the "Company") hereby confirms its agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representative (in such capacity, the "Representative"), as set forth below. If you are the only Underwriter, all references herein to the Representative shall be deemed to be to the Underwriters. All references herein to the Company and representations and warranties relating thereto give effect to formation of the Company through the share exchange between the shareholders of MLC Group, Inc., a Virginia corporation ("MLC Group"), for shares in the Company as a result of which MLC Group became a wholly-owned subsidiary of the Company, which share exchange was consummated on September 1, 1996. Accordingly, references to the Company herein at all times prior to the September 1, 1996 shall mean MLC Group and reference to the Company on and subsequent to the September 1, 1996 shall be deemed to include the Company and MLC Group and the Company's other subsidiaries. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the several Underwriters an aggregate of _________ shares (the "Firm Securities") of the Company's Common Stock, $0.01 par value per share (the "Common Stock"). The Company also proposes to issue and sell to the several Underwriters not more than _______ additional shares of Common Stock if requested by the Representative as provided in Section 3 of this Agreement. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such option are referred - ------------------------- (1) Plus an option to purchase from MLC Holdings, Inc. up to 150,000 additional shares to cover over-allotments. 2 to herein as the "Option Securities," the Firm Securities and any Option Securities are collectively referred to herein as the "Securities." 2. Representations and Warranties of the Company and the Stockholders. (a) The Company represents and warrants to, and agrees with, each of the several Underwriters that: (i) A registration statement on Form S-1 (File No. 333-11737) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence, as have been provided to and approved by the Representative prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representative prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Securities, which registration statement shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means - 2 - 3 each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (ii) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (A) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or any part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto contain such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (ii) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or - 3 - 4 supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative specifically for use therein. (iii) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (iv) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Schedule 2 hereto. The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified is not reasonably likely to result in a material adverse change in the condition (financial or otherwise), management, business, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). (v) The Company and each of its subsidiaries have full power (corporate and other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (vi) The issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. (vii) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing - 4 - 5 Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. At the Firm Closing Date or the Option Closing Date, no holders of outstanding shares of capital stock of the Company will be entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this Agreement. (viii) The capital stock of the Company conforms to the description thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (ix) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (x) The financial statements and schedules of the Company and its subsidiaries included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company and its consolidated subsidiaries and the results of operations and cash flows as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the captions "Capitalization" and "Selected Consolidated Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, in accordance with GAAP on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (xi) Deloitte & Touche LLP, who have audited certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. - 5 - 6 (xii) The execution and delivery of this Agreement have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to rights and remedies of creditors or by general equitable principles. (xiii) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), to the best of the Company's knowledge, and no such proceedings have been threatened against the Company or any of its subsidiaries or with respect to any of their respective properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. (xiv) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws, such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") and, if the Registration Statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (xv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor any of its subsidiaries has sustained any loss or interference with their respective - 6 - 7 businesses or properties which is reasonably likely to have or result in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any event, circumstance, or development that results in, or that the Company believes is reasonably likely to result in, a Material Adverse Effect, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xvi) The Company has not, directly or indirectly (except for the sale of Securities under this Agreement), (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (xvii) None of the Company, its subsidiaries or any employee of the Company or its subsidiaries has made any payment of funds of the Company or its subsidiaries prohibited by law and no funds of the Company or its subsidiaries have been set aside to be used for any payment prohibited by law. (xviii) (a) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses except where the failure to possess any such item is not reasonably likely to have a Material Adverse Effect, and (b) neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit that, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, is reasonably likely to have a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xix) The Company is not an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and this transaction will not cause the Company to become an investment company subject to registration under the 1940 Act. (xx) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file is reasonably likely to have a Material Adverse Effect) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing - 7 - 8 is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxi) Except for the shares of capital stock of each of the subsidiaries owned by the Company, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity. (xxii) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management's general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiii) Except as described in the Registration Statement and the Prospectus, no default exists, and no event has occurred that, with notice or lapse of time or both, is reasonably likely to constitute a default, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound or may be affected, in any respect that would have a Material Adverse Effect. (xxiv) The Company has not distributed and, prior to the later of (A) the Firm Closing Date or any Option Closing Date and (B) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or Term Sheet or any amendment or supplement thereto, or other materials, if any, permitted by the Act. (xxv) Neither the Company nor its subsidiaries own any items of real property, and each of them has marketable title to all personal property owned by each of them, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except as shown on the Company's financial statements set forth in the Registration Statement and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere - 8 - 9 with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxvi) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the Company's knowledge, is threatened or imminent that is reasonably likely to result in a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxvii) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling, or finding, is reasonably likely to have a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxviii) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that is reasonably likely to have a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxix) The exchange of stock by the shareholders of the Company of the shares of stock of MLC Group, in order to effect the transaction of the Company in Delaware (the "Share Exchange") was approved by all necessary corporate action on behalf of the Company and MLC Group and the exchange agreement and related certificates, in appropriate form to effect the Share Exchange and became effective at 8:00 A.M., Eastern Standard Time, on September 1, 1996. (b) Phillip G. Norton and Bruce M. Bowen in their individual capacities (the "Stockholders"), represent and warrant to, and agree with each of the several Underwriters that the Registration Statement as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended - 9 - 10 or supplemented as of the Firm Closing Date and as of Option Closing Date does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) Any certificate signed by (i) any officer of the Company or (ii) by the Stockholders and delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter, as to the matters covered thereby. 3. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $______ per share, the number of Firm Securities set forth opposite the name of such Underwriter in Schedule 1 hereto. One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representative request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to the Representative for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the aggregate purchase price therefor by wire transfer in same day funds (the "Wired Funds") to the account of the Company. Such delivery of and payment for the Firm Securities shall be made at the offices of Alston & Bird, 601 Pennsylvania Avenue, N.W., North Building, Suite 250, Washington, D.C. 20004 at 9:30 A.M., Eastern Standard Time, on __________, 1996, or at such other place, time or date as the Representative and the Company may agree upon or as the Representative may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date." The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representative at the offices in New York, New York of the Company's transfer agent or registrar at least 24 hours prior to the Firm Closing Date. (b) For the sole purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, the Company hereby grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 3. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within thirty days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the Nasdaq National Market is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option - 10 - 11 Securities prior to the exercise of such option. The Representative may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed within 24 hours in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representative but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representative and the Company may agree upon or as the Representative may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representative in such manner as it deems advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph 3(b), to refer to such Option Securities and Option Closing Date, respectively. (c) It is understood that you, individually and not as the Representative, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. (d) The Company hereby acknowledges that the wire transfer by or on behalf of the Underwriters of the purchase price for any Securities does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt (by facsimile or otherwise) for the Securities by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company. Furthermore, in the event that the Underwriters wire funds to the Company prior to the completion of the closing of a purchase of Securities, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Securities, by facsimile or otherwise, the Company will not be entitled to the wired funds and shall return the wired funds to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Securities is not completed and the wire funds are not returned by the Company to the Underwriters on the same day the wired funds were received by the Company, the Company agrees to pay to the Underwriters in respect of each day the wire funds are not returned by it, in same-day funds, interest at the Prime - 11 - 12 Rate as stated in the Wall Street Journal on the date hereof on the amount of such wire funds. 4. Offering by the Underwriters. Upon your authorization of the release of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 5. Covenants of the Company. The Company covenants and agrees with each of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the Prospectus, Term Sheet or the amendment referred to in the second sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representative shall not previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representative shall not have given its consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representative or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representative, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide to the Representative copies of each such filing. (b) The Company will advise the Representative, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding - 12 - 13 for any such purpose, or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representative may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representative thereof and, subject to Section 5(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e) The Company will, without charge, provide (i) to the Representative and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) and any Rule 462(b) Registration Statement, (ii) to each other Underwriter, a conformed copy of such registration statement and any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representative may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 8:00 P.M., Eastern Standard Time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., Eastern time, on such date or (B) 2:00 P.M., Eastern Standard Time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., Eastern Standard Time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representative may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. The Company will provide or cause to be provided to each of the Representative, and to each Underwriter that so requests in - 13 - 14 writing, a copy of each report on Form SR filed by the Company as required by Rule 463 under the Act. (f) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M., Eastern Standard Time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (g) The Company, as soon as practicable, will make generally available to its securityholders and to the Representative a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (h) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (i) The Company will not, directly or indirectly, without the prior written consent of the Representative, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except pursuant to this Agreement and except for the grant of options to purchase an aggregate of 420,000 shares of Common Stock as disclosed in the Prospectus, or issuances pursuant to the exercise of warrants or employee stock options outstanding on the date hereof. (j) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii)(A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (k) The Company will obtain the lockup agreements described in Section 7(i) hereof prior to the Firm Closing Date. (1) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a - 14 - 15 supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, your counsel and counsel to the Company responding to or commenting on such rumor, publication or event. (m) The Company will cause the Securities to be duly included for quotation on the Nasdaq National Market prior to the Firm Closing Date. The Company will use its best efforts to ensure that the Securities remain included for quotation on the Nasdaq National Market following the Firm Closing Date. 6. Expenses. The Company will pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the Registration Statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) the fees and disbursements of counsel for the Underwriters, (v) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (vi) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vii) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities and (viii) any quotation of the Securities on the Nasdaq National Market. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Representative upon demand for all reasonable out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by it in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Firm Securities shall be subject to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to - 15 - 16 the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: (a) If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment, and if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement, shall have been declared effective not later than the earlier of (i) 11:00 A.M., Eastern Standard Time, on the date on which the amendment to the Registration Statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission, and (ii) the time confirmations are sent or given as specified by Rule 462(b) or, with respect to the Original Registration Statement, such later time and date as shall have been consented to by the Representative; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representative, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representative shall have received an opinion, dated the Firm Closing Date, of Hazel & Thomas, P.C., counsel for the Company, to the effect that: (i) the Company and each of its U.S. subsidiaries listed in Schedule 2 hereto (the "Subsidiaries") have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified is not reasonably likely to have a Material Adverse Effect; (ii) the Company and each of the Subsidiaries have corporate power to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus, and the Company has corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the issued shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and - 16 - 17 are owned by the Company free and clear of any security interests, liens, encumbrances or claims; (iv) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to the best knowledge of such counsel after due inquiry, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; to the best knowledge of such counsel, no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; and, to the best knowledge of such counsel, no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (v) the statements set forth under the heading "Description of Capital Stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; (vi) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; (vii) to the best knowledge of such counsel, (A) no legal or governmental proceedings are pending to which the Company or any of the Subsidiaries is a party or to which the property of the Company or any of the Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties and (B) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (viii) to the knowledge of such counsel, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (1) the Company and its Subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; and (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, except - 17 - 18 in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (ix) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws and by the NASD, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument known to such counsel after due inquiry to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of the Subsidiaries, or, so far as it is known to such counsel after due inquiry, any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator having jurisdiction over the Company or any of the Subsidiaries, in each case, where such conflict, breach, violation or default is not reasonably likely to have a Material Adverse Effect; (x) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and within the time period required by Rules 434 and 424(b); and, to such counsel's best knowledge, no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission; (xi) the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and other financial and statistical information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder; (xii) if the Company elects to rely on Rule 434, the Prospectus is not "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A); - 18 - 19 (xiii) the Company is not, and the transactions contemplated by this Agreement will not cause the Company to become, an investment company subject to registration under the 1940 Act; (xiv) the specimen stock certificate of the Company filed as an exhibit to the Registration Statement is in due and proper form to evidence shares of Common Stock, has been duly authorized and approved by the Board of Directors of the Company and complies with all legal requirements applicable under the Delaware General Corporation Law; and Such counsel shall also state that they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except such counsel need express no view as to the financial statements and notes thereto, schedules and reports thereon, and other financial and statistical data included or incorporated by reference in the Registration Statement or Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem(s) proper, on certificates of responsible officers of the Company and public officials and opinions of such other counsel as are reasonably acceptable to the Representative. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) The Representative shall have received from Deloitte & Touche LLP a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance reasonably satisfactory to the Representative. In the event that the letters referred to above set forth any such changes, decreases or increases which, in the reasonable discretion of the Representative, are reasonably likely to result in a Material Adverse Effect, it shall be a further condition to the obligations of the Underwriters that such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representative deems such explanation unnecessary. References to the Registration Statement and the Prospectus in this paragraph (c) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. - 19 - 20 (d) The Representative shall have received a certificate, dated the Firm Closing Date, of Phillip G. Norton and Bruce M. Bowen in their capacities as the principal executive officer and the principal financial or accounting officer, respectively, of the Company to the effect that: (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission; and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any loss or interference with their respective businesses or properties reasonably likely to have or result in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any event, circumstance, or development that results in, or that the Company believes is reasonably likely to result in, a Material Adverse Effect, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (e) The Representative shall have received a certificate, dated the Firm Closing Date (or the Option Closing Date, as the case may be), of the Stockholders, to the effect that (i) the Registration Statement, as amended as of the Firm Closing Date (or the Option Closing Date, as the case may be), does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date (or the Option Closing Date, as the case may be), does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. - 20 - 21 (f) The Representative shall have received from each Stockholder and from each person who is a director or officer of the Company or who owns more than ____ shares of Common Stock (as calculated on the Firm Closing Date) an agreement to the effect that such person will not, except to the extent otherwise specifically permitted by the terms of each such person's agreement and in accordance with Rule 144 under the Act, directly or indirectly, without the prior written consent of the Representative, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 360 days after the date of this Agreement. (g) On or before the Firm Closing Date, the Representative and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h) Prior to the commencement of the offering of the Securities, the Securities shall have been included for trading on the Nasdaq National Market. (i) The Representative shall have received an opinion, dated the Firm Closing Date, of Alston & Bird, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and Prospectus, and such other related matters as the Representative may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representative and counsel for the Underwriters. The Company shall furnish to the Representative such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representative and counsel for the Underwriters shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) The Company and the Stockholders jointly and severally agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), against any losses, claims, - 21 - 22 damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon a breach or alleged breach by the Stockholders of Section 2(b) of this Agreement, and the Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company in Section 2(a) of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company or Stockholders filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials used in connection with the marketing of the Securities, including without limitation, slides, videos, films, tape recordings, and, such party or parties, as the case may be, will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company and Stockholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information - 22 - 23 furnished to the Company by any Underwriter through the Representative specifically for use therein; and provided, further, that neither the Company nor any of the Stockholders will be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5(d) and (e) of this Agreement. This indemnity agreement will be in addition to any liability that the Company and Stockholders may otherwise have. Neither the Company nor Stockholders will, without the prior written consent of the Representative, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any Underwriter or any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, Stockholders and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such director, officer of the Company, Stockholders or controlling person of the Company or Stockholders may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application, or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representative specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person or Stockholders in connection with investigating or defending any such loss, claim, damage, liability or any action in respect - 23 - 24 thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded or shall have been advised by its counsel that there may be one or more legal defenses available to it and/or other indemnified parties that conflict with those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representative in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified - 24 - 25 party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, Stockholders or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, Stockholders and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total amount of underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Representative's Agreement Among Underwriters. For the purposes of this paragraph 8(d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or Stockholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company or Stockholders, as the case may be. (e) In making a claim for indemnification under this Section 8, the indemnified parties may proceed against either (i) both the Company and the Stockholders jointly or (ii) the Company only, but may not proceed solely against the Stockholders. In - 25 - 26 the event that the indemnified parties are entitled to seek indemnity or contribution hereunder against any loss, liability, claim, damage and expense incurred with respect to a settlement or judgment from a trial court (the "First Judgment") then, as a precondition to any indemnified party obtaining indemnification or contribution from the Stockholders, the indemnified parties shall first obtain a judgment from a trial court that such indemnified parties are entitled to indemnity or contribution under this Agreement with respect to such loss, liability, claim, damage or expense (the "Final Judgment") from the Company and the Stockholders and shall seek to satisfy such Final Judgment in full from the Company by making a written demand upon the Company for such satisfaction. The indemnified parties may seek a Final Judgment either through a cross- or counter-claim in the action which results in the First Judgment, or they may bring a subsequent, separate action against the Company and the Stockholders for indemnification. Only in the event such Final Judgment shall remain unsatisfied in whole or in part 45 days following the date of receipt by the Company of such demand shall any indemnified party have the right to take action to satisfy such Final Judgment by making demand directly on the Stockholders (but only if and to the extent the Company has not already satisfied such Final Judgment, whether by settlement, release or otherwise). The indemnified party or parties may exercise this right to first seek to obtain payment from the Company and thereafter obtain payment from the Stockholders without regard to the pursuit by any party of its rights to the appeal of such Final Judgment. The indemnified party or parties shall, however, be relieved of their obligation to first obtain a Final Judgment, seek to obtain payment from the Company with respect to such Final Judgment or, having sought such payment, to wait such 45 days after failure by the Company to immediately satisfy any such Final Judgment if (i) the Company files a petition for relief under the United States Bankruptcy Code (the "Bankruptcy Code"), (ii) an order for relief is entered against the Company in an involuntary case under the Bankruptcy Code, (iii) the Company makes an assignment for the benefit of its creditors, or (iv) any court orders or approves the appointment of a receiver or custodian for the Company or a substantial portion of its assets. (f) Notwithstanding any other provision of this Agreement, the aggregate liability of the Stockholders under this Agreement, including this Section 8 hereof, shall not exceed the sum of three million dollars ($3,000,000). 9. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, then the other Underwriters may make arrangements satisfactory to the Representative for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representative), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more - 26 - 27 Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representative are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representative) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 10 hereof. In the event of any default by one or more Underwriters as described in this Section 9, the Representative shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers, Stockholders and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force arid effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, Stockholders, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representative by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company or the Stockholders shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or, with respect to the Company, such Option Closing Date, respectively, (i) the Company or any of its subsidiaries shall have, in the sole judgment of the Representative, sustained any loss or interference with their respective businesses or properties having or resulting in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any event, circumstance of development that results in, or that the Company believes would result in, a Material Adverse Effect, except in - 27 - 28 each case as, described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on either such exchange or market system; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representative, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 10 hereof. 12. Information Supplied by Underwriters. The statements set forth in (i) the last paragraph on the front cover page, (ii) under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on page 2 in any Preliminary Prospectus or the Prospectus pertaining to stabilization (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representative to the Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209, Attention: James Kleeblatt; and if sent to the Company, shall be delivered or sent by mail, telex or facsimile, transmission and confirmed in writing to the Company at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190-5321, Attention: Chief Executive Officer; and if sent to Stockholders, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Stockholders at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190-5321, Attention: Chief Executive Officer. 14. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company, Stockholders and their respective - 28 - 29 successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company and Stockholders contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement, Stockholders and any person or persons who control the Company or Stockholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without giving effect to any provisions relating to conflicts of laws. 16. Consent to Jurisdiction and Service of Process. All judicial proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the Commonwealth of Virginia, and by execution and delivery of this Agreement, the Company and Stockholders each accepts for itself and in connection with their respective properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agree to be bound by any judgment rendered thereby in connection with this Agreement. Stockholders designate and appoint Phillip G. Norton, and the Company designates and appoints Bruce M. Bowen and such other persons as may hereafter be selected by the Company or Stockholders irrevocably agreeing in writing to so serve, as their respective agents to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Company and Stockholders to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company and/or Stockholders at their respective addresses provided in Section 13 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company or Stockholders refuses to accept service, the Company and Stockholders each hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company or Stockholders in the Commonwealth of Virginia may be made by registered or certified mail, return receipt requested, to the Company and/or Stockholders, as applicable, at their respective addresses provided in Section 13 hereof, and Stockholders and the Company each hereby acknowledge that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner - 29 - 30 permitted by law or shall limit the right of any Underwriter to bring proceedings against the Company and Stockholders in the courts of any other jurisdiction. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company and each of the several Underwriters. Very truly yours, MLC HOLDINGS, INC. By -------------------------- Phillip G. Norton Chairman and Chief Executive Officer MLC GROUP, INC. By -------------------------- Phillip G. Norton Chairman and Chief Executive Officer - 30 - 31 Stockholders By: -------------------------------- By: -------------------------------- By: -------------------------------- The foregoing Agreement is hereby confirmed and accepted as of the date first above written. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. By: By: --------------------------- Name: Title: For itself and as the Representative. - 31 - 32 Schedule 1 UNDERWRITERS
Number of Firm Underwriting Securities to be Purchased ------------ -------------------------- Friedman, Billings, Ramsey & Co., Inc. _________ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . _________ =========
- 32 - 33 Schedule 2 SUBSIDIARIES Name Jurisdiction of Incorporation ---- ----------------------------- MLC Group, Inc. Virginia MLC Capital, Inc. Virginia MLC/GATX Leasing Corporation Colorado
- 33 - EX-10.7 3 EMPLOYMENT AGREEMENT (PHILLIP G. NORTON) 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT (Phillip G. Norton) THIS EMPLOYMENT AGREEMENT is hereby made as of September 1, 1996, by and between PHILLIP G. NORTON, hereinafter referred to as the "Employee," and MLC HOLDINGS, INC., a Delaware corporation, whose principal place of business is located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190, hereinafter referred to as the "Employer." RECITALS: A. The Employer is engaged in the business of specialized asset financing with a focus on the leasing of information technology equipment and services. B. The Employee has substantial experience in the business of the Employer. C. The Employer desires to secure the services of the Employee, and the Employee is willing to be employed as President and Chief Executive Officer of the Employer and its subsidiaries, including without limitation MLC Group, Inc. and MLC GATX, Inc. (hereinafter, collectively, the "Company"), on the terms, covenants and conditions hereinafter set forth. THEREFORE, in consideration of the mutual promises and agreements hereinafter set out, the Employer and the Employee agree as follows: 1. Employment. The Employer hereby employs, engages, and hires the Employee, and the Employee hereby accepts employment with the Employer as President and Chief Executive Officer, to render such services for the Employer as determined by the Board of Directors of the Employer. The Employee accepts and agrees to such hiring, engagement and employment, subject to the general supervision and pursuant to the orders, advice and direction of the directors of the Employer. 2. Extent of Efforts; Other Employment. The Employee agrees that the Employee shall devote his entire productive time and attention to the business affairs of the Employer and, to the best of the Employee's ability, experience and talents, shall perform all of the duties that may be required of and from the Employee pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. The Employee shall not engage in any other employment duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any person or organization, whether for compensation or otherwise, without the prior written consent of the Employer's Board of Directors. This paragraph 2 shall not prohibit the making of passive, personal investments, nor the conduct to a reasonable extent of private business affairs if those activities do not interfere with the services required under this Agreement. [The Employer agrees to waive the corporate opportunity doctrine for any endeavor that might be brought to Employee except those which relate to the business of Employer.] 2 3. Term and Termination of Employment. A. Term - Subject to the provisions of Section 3(B), the "Term" of the Employee's employment shall be three (3) years, commencing on the date of closing of the initial public offering by the Employer (the "Effective Date"), and shall renew automatically for successive one (1) year periods unless a party hereto provides written notice to terminate to the other party prior to thirty (30) days before the end of the original period or any successive period. B. Termination - This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) The death of the Employee; (ii) The "Permanent Disability" (hereinafter defined) of the Employee; or (iii) Written notice from the Board of Directors to the Employee of his termination for "Cause" (hereinafter defined). As used herein, "Permanent Disability" means any mental or physical illness or disability continuing for a period of more than six (6) consecutive months which renders the Employee unable to perform his duties and services hereunder in a satisfactory manner. In the event of any disputes over the existence or commencement of such disability, the issue shall be determined by a qualified physician mutually agreed to by the Employer and the Employee , or, if applicable, the Employee's legal representative. The determination of such physician shall be conclusive and binding on the parties hereto. As used herein, "Cause" means: gross neglect of duty, prolonged absence from duty without the consent of the Employer, the acceptance by the Employee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of the Employee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of this Agreement by the Employee which has not been corrected by the Employee within (30) days after his receipt of notice of such breach from the Employer. 4. Compensation of the Employee. As the Employee's entire compensation (exclusive of director's fees, if any) for all services rendered to the Employer during the term of this Agreement, the Employee shall have and receive, subject to withholding and other applicable employment taxes: A. Commencing on the first day of the first month immediately following the Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate of Two Hundred Thousand and 00/100 Dollars ($200,000) per annum, payable in cash or good check, not less frequently than 2 3 monthly and not later than the last day of the month in question; provided, however, that the rate of such salary shall be reviewed by the Board of Directors of the Employer not less often than annually and may be increased (but not decreased) at each yearly renewal date. Prior to the Salary Commencement Date, the Employee shall continue to receive his basic salary as in effect on the date of this Agreement. B. Bonus compensation over and above the basic salary equal to five percent (5%) of increase of the net income before taxes (as defined on Exhibit A attached hereto) over net income before taxes for the preceding fiscal year, but not to exceed One Hundred Fifty Thousand and 00/100 Dollars ($150,000) for any fiscal year, as more particularly determined by the formula set forth on Exhibit A hereto and payable at such time or times as the Board of Directors in its discretion may from time to time determine. C. The right to receive an immediately exercisable grant of an option to acquire 130,000 shares in accordance with that certain Non-Qualified Stock Option Agreement by and between the Employer and the Employee, a copy of which is attached hereto as Exhibit B. D. The right to receive or participate in any additional "fringe" benefits, including but not limited to insurance programs and pension or profit-sharing plans, which may from time to time be made available to executives of the Employer. E. Upon termination of employment for any reason, the right to have any insurance policies that the Employer then owns on his life assigned to him without further consideration. F. Upon termination of employment, other than for cause, the right to receive the Washington Bullets basketball season tickets (for the then current and all future seasons) held by the Employer. 5. Facilities and Expenses. A. The Employer shall provide the Employee with a private office, office equipment, supplies and other facilities and services consistent with the current practices of the Employer, and suitable to the Employee's position and adequate for the performance of his duties. B. The Employee may be authorized from time to time to incur reasonable expenses for promoting the business of the corporation, including expenses for entertainment, travel, and similar items. The Employer will reimburse the Employee for all such authorized expenses upon the presentation by the Employee of an itemized account of such expenditures. The Employee shall provide the Employee's own personal transportation, except for such times as the Employee is using the Employer-owned vehicles for official business. 3 4 6. Reimbursement of Disallowed Expenses. If any salary payment, medical reimbursement, employee fringe benefit, expense allowance payment, or other expense incurred by the Employer for the benefit of the Employee is disallowed, in whole or in part, as a deductible expense of the Employer for federal income tax purposes, the Employee shall reimburse the Employer upon notice and demand, to the full extent of the disallowance. This legally enforceable obligation is in accordance with the provisions of Revenue Ruling 69-115 and is for the purpose of entitling the Employee to a business expense deduction for the taxable year in which the repayment is made to the Employer. 7. Vacation and Sick Leave. A. The Employee shall accrue four (4) weeks vacation each calendar year and may take such vacation at times to be determined in the manner most convenient to the business of the Employer. In addition, the Employee may take time off at such times as may be determined by the Board of Directors to attend such meetings and postgraduate courses as may directly benefit the Employer and the Employee. Unused days of vacation may not be carried over to future years. In addition, the Employee may take as holidays five (5) days of the Employee's choosing, so long as it is convenient to and approved by the Employer. B. The Employee shall accrue ___________ (__) days sick leave in each calendar month, not to exceed a total of thirty (30) days. Unused days of sick leave may not be carried over to future years. Any date used for the purpose of determining the date of permanent or partial disability under this Agreement shall be postponed until such time as all of the Employee's sick leave shall be exhausted. 8. Illness or Incapacity. If the Employee becomes unable to devote the Employee's full time to the business of the Employer because of illness or incapacity during the term of this Agreement, then during such period of illness or incapacity, the Employee's compensation shall be as follows: A. For the first six (6) months thereof--One Hundred percent (100%) of the compensation provided for by paragraph 4 of this Agreement. B. If the Employee shall not have resumed the Employee's duties within the six (6) month period specified above, then the Employee's compensation hereunder shall be terminated as of the end of the six (6) month period, and the Employer shall have no further financial obligation to the Employee. 9. Death During Employment. If the Employee dies during the term of the Employee's employment, the Employer shall pay to the estate of the Employee the basic salary which would otherwise be payable to the Employee up to the end of the month in which the Employee's death occurs, not including any bonuses. The Employer shall have no further financial obligations to the Employee or to the Employee's estate under the terms of this Agreement. 4 5 10. Non-Competition Agreement. During the duration of this Agreement and any extensions or renewals hereof and for a period of one (1) year after the later of (i) the date this Agreement is terminated by the Employer for cause or by voluntary termination by the Employee, or (ii) the expiration of this Agreement at the end of the initial or any renewal term or extensions thereof, the Employee agrees as follows: A. The Employee agrees that the Employee shall not: (i) in any capacity whatsoever, whether as a proprietor, partner, investor, corporate stockholder, director, officer, employee, consultant, independent contractor, co-venturer, employer, agent, representative, or otherwise, own, engage directly or indirectly in, or be interested in a business or business activities competing with the Employer in the United States; (ii) in any capacity whatsoever, whether as a lender, guarantor, accommodation party, financier, investor, or otherwise, assist or attempt to assist with respect to the providing of capital needs, borrowing needs, or credit needs of any person, persons or entities of every nature and description, other than the Employer, who or which shall be engaged in, or intend to be engaged in, a business or business activities competing with the Employer in the United States. B. The Employee hereby agrees that the Employee will not at any time disclose to any person, individual or entity, who or which is, or reasonably may be expected to be, in competition with the Employer in the United States, any confidential information or trade secrets of the Employer, the contents of any client lists of the Employer, or the general needs of any client or other contracting parties with the Employer; provided, however, the foregoing shall not prevent such Employee from responding to the request of a governmental agency or pursuant to a court order or as otherwise required by law. C. The Employee hereby agrees that the Employee shall not at any time after execution of this Agreement, interfere with, solicit, or disrupt the relationship, contractual or otherwise, between the Employer and its clients, suppliers, agents, consultants, officers or employees. D. The Employee acknowledges (i) that the foregoing provisions are reasonable as to time and areas as to which their activities are to be restricted, (ii) that the Employee understands the same and intends to be fully bound with respect thereto, and (iii) that such limitations upon the Employee's activities for the time and in the designated market area shall not prevent the Employee from earning a reasonable livelihood during the two year period following the termination or expiration of this Agreement. E. Recognizing that a breach of any covenant contained in Section 10 hereof would cause the Employer irreparable injury and that damages at law would be difficult to ascertain, the Employee hereby consents to the granting of equitable relief (without the posting of any bond by 5 6 the Employer) by way of a restraining order or temporary or permanent injunction by any court of competent jurisdiction to prohibit the breach or enforce the performance of any covenant contained in Section 10 hereof. Employee shall only be liable for actual monetary damages to the Company, and not any consequential or punitive damages for any breach of any covenant of Section 10 hereof. 11. Registration Rights. If the Employer at any time proposes to file a registration statement on Form S-3 or any successor thereto (or other applicable SEC registration form available for registering restricted stock), the Employer shall give written notice to Employee of its intention to do so. Upon the written request of Employee, received by the Employer within 30 days after the giving of any such notice by the Employer, to register any of Employee's shares of Employer stock, the Employee will use its best efforts to cause the stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Employer, all to the extent requisite to permit the sale or other disposition by the Employee of such stock so registered. 12. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid by any competent court, this contract shall be interpreted as if such invalid agreements or covenants were not contained herein. 13. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by certified or registered mail, return receipt requested, to the parties at the following addresses: TO THE EMPLOYER: MLC Group, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190 TO THE EMPLOYEE: Phillip G. Norton 1019 Basil Road McLean, Virginia 22101 14. Assignment. This Agreement is personal to each of the parties hereto and neither may assign or delegate any of the party's rights or obligations hereunder without first obtaining the written consent of the other party. 15. Miscellaneous. A. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. B. This Agreement shall be governed in all respects by the laws of or applicable to the State of Delaware. The paragraph headings in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. C. This contract contains the complete agreement concerning the employment arrangement between the parties and shall, as of the commencement of the term of employment hereunder, supersede all other agreements between the parties. The parties stipulate that neither of 6 7 them has made any representation with respect to the subject matter of this Agreement or any representations, including the execution and delivery hereof, except such representations as are specifically set forth herein, and each of the parties acknowledges that the party has relied on the party's own judgment in entering into this Agreement. D. The waiver by the Employer of a breach of any condition of this Agreement by the Employee shall not be construed as a waiver of any subsequent breach by the Employee. IN WITNESS WHEREOF, the parties have executed this Agreement as the date first above written. EMPLOYER: MLC HOLDINGS, INC., a Delaware corporation By: -------------------------------- Bruce M. Bowen, Executive Vice President EMPLOYEE: ----------------------------------- PHILLIP G. NORTON 7 8 EXHIBIT A Bonus Compensation Formula 8 9 EXHIBIT B Copy of Stock Option Agreement 9 10 EXHIBIT B TO EXHIBIT 10.7 NONQUALIFIED STOCK OPTION AGREEMENT (Phillip G. Norton) MLC Holdings, Inc. (the "Company"), in consideration of the value of the continuing services of Phillip G. Norton (hereinafter called "Optionee"), which continuing services the grant of this option is designed to secure, and in consideration of the undertakings made herein by Optionee, hereby grants to Optionee an option (the "Option"), evidenced by this option agreement ("Option Agreement"), exercisable for the period and upon the terms hereinafter set out, to purchase one hundred thirty thousand (130,000) shares of common stock of the Company ("Common Stock") at a price equal to one hundred percent (100%) of the opening price of the common stock of the Company in connection with the initial public offering by the Company (the "Offering") which becomes binding on the Company upon the completion of the Offering. 1. Term of Option. This Option is granted and dated on the date set forth next above the signature shown (sometimes hereinafter called the "Date of Grant") and will terminate and expire, to the extent not previously exercised, ten (10) years after the Date of Grant, or at such earlier time as may be specified in Section 4 hereof. Except as otherwise provided in this Option Agreement, this Option is exercisable as follows: (a) 32,500 shares at any time and from time to time after the Date of Grant and exercisable upon the completion of the Offering and prior to the termination of the Option; (b) 32,500 additional shares at any time and from time to time after the expiration of one year from the Date of Grant and prior to the termination of the Option; (c) 32,500 additional shares at any time and from time to time after the expiration of two years from the Date of Grant and prior to the termination of the Option; and (d) 32,500 additional shares at any time and from time to time after the expiration of three years from the Date of Grant and prior to the termination of the Option. 2. Non-Transferability. This Option is not assignable or transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by him. 3. Manner of Exercise. The Optionee (or other person entitled to exercise the Option) shall purchase shares of Common Stock subject hereto by the payment to the Company of the purchase price therefore in full. The Option may be exercised from time to time in multiples of 100 shares by written notice to the Company stating the full number of shares to be purchased and the time of deliver thereof, which shall be at least 15 days after the giving of notice unless an earlier date shall have been agreed upon between Optionee (or other person entitled to exercise the Option) and the Company, accompanied by full payment for the shares by certified check or the equivalent or otherwise acceptable to the Company. At the time of delivery, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise the Option) deliver at the principal office of the Company, or at such other place as shall be mutually agreed upon, a certificate or certificates for such shares; provided, however, that the time of delivery may be postponed by the Company for such period as may be required for it to comply with reasonable diligence with any requirements of law. If the Optionee (or other person entitled to exercise the Option) fails to accept delivery of all or any part of the number of shares specified in such notice upon tender of delivery thereof, Optionee's payment shall be returned and the right to exercise the Option with respect to such undelivered shares shall be thereupon terminated. 4.01. The Option shall terminate and may no longer be exercised if the Optionee ceases to be an employee of the Company, except that (i) if the Optionee dies while in the employ of 11 the Company, or within two (2) months after the termination of such employment, or within six (6) months if determined to be permanently disabled, such Option may be exercised on his behalf as set forth below; and (ii) if the Optionee's employment shall have been terminated for any reason other than his death, or permanent disability, he may at any time within a period of two (2) months after such termination exercise such Option to the extent that the Option was exercisable on the date of the termination of his employment; provided, however, that in the case of termination for cause by the Company of the employment of the Optionee, or if an employee shall terminate his employment in violation of any employment agreement with the Company, then the Option shall terminate and expire concurrently with the termination of his employment and shall not thereafter be exercisable to any extent. The definition of "cause" shall be as set forth in paragraph 4.03 below for each Optionee. 4.02 If the Optionee dies during the term of the Option while in the employ of the Company, or within the two (2) month period after the termination of employment, or within six (6) months if determined to be permanently disabled without having fully exercised the Option, the executor or administrator of his estate or the person who inherits the right to exercise the Option by bequest or inheritance shall have the right within twelve (12) months after the Optionee's death to purchase the number of shares which the deceased Optionee was entitled to purchase at the date of his death, after which time the Option shall lapse. 4.03 The term "cause" as used herein shall mean gross neglect of duty, prolonged absence from duty without the consent of the Company, the acceptance by Optionee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of Optionee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of an employment contract which has not been corrected by Optionee within (30) days after his receipt of notice of such breach from the Company. 5. Adjustments on Recapitalization. The number of shares of Common Stock subject hereto and the option price per share shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Common Stock resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the Date of Grant, or other decrease or increase in the shares of Common Stock outstanding effected without receipt of consideration by the Company; provided, however, that any option to purchase fractional shares resulting from such adjustments shall be eliminated. 6. Adjustments on Reorganization. If the Company shall at any time merge or consolidate with or into another corporation, the holder of this Option will thereafter receive, upon the exercise thereof, the securities and/or property to which a holder of the number of shares of Common Stock then deliverable upon the exercise of the Option would have been entitled upon such merger or consolidation, and the Company shall take such steps in connection with such merger or consolidation as may be necessary to assure that the provisions of this Agreement shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or property thereafter deliverable upon the exercise of such option; provided, however, that under no circumstances shall 2 12 any option exercise date be accelerated in contemplation of such action and the surviving entity following any such action shall at all times be entitled, in its sole discretion, to tender options on such terms and conditions as such surviving entity may deem appropriate. A sale of all or substantially all of the assets of the Company for a consideration (apart from the assumption of obligations) consisting primarily of securities shall be deemed a merger or consolidation for the foregoing purposes. IN WITNESS WHEREOF, this Option Agreement is executed as of the _____ day of September, 1996. MLC HOLDINGS, INC. By: -------------------------- Bruce M. Bowen Executive Vice President The undersigned Optionee hereby accepts the benefits of the foregoing Incentive Stock Option Agreement. - ------------------------- ------------------------------ Date Phillip G. Norton 3 EX-10.8 4 EMPLOYMENT AGREEMENT (BRUCE M. BOWEN) 1 EXHIBIT 10.8 EMPLOYMENT AGREEMENT (Bruce M. Bowen) THIS EMPLOYMENT AGREEMENT is hereby made as of September 1, 1996, by and between BRUCE M. BOWEN, hereinafter referred to as the "Employee," and MLC HOLDINGS, INC., a Delaware corporation, whose principal place of business is located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190, hereinafter referred to as the "Employer." RECITALS: A. The Employer is engaged in the business of specialized asset financing with a focus on the leasing of information technology equipment and services. B. The Employee has substantial experience in the business of the Employer. C. The Employer desires to secure the services of the Employee, and the Employee is willing to be employed as Executive Vice President and Chief Financial Officer of the Employer and its subsidiaries, including without limitation MLC Group, Inc. and MLC GATX, Inc. (hereinafter, collectively, the "Company"), on the terms, covenants and conditions hereinafter set forth. THEREFORE, in consideration of the mutual promises and agreements hereinafter set out, the Employer and the Employee agree as follows: 1. Employment. The Employer hereby employs, engages, and hires the Employee, and the Employee hereby accepts employment with the Employer as Executive Vice President and Chief Financial Officer, to render such services for the Employer as determined by the Board of Directors of the Employer. The Employee accepts and agrees to such hiring, engagement and employment, subject to the general supervision and pursuant to the orders, advice and direction of the directors of the Employer. 2. Extent of Efforts; Other Employment. The Employee agrees that the Employee shall devote his entire productive time and attention to the business affairs of the Employer and, to the best of the Employee's ability, experience and talents, shall perform all of the duties that may be required of and from the Employee pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. The Employee shall not engage in any other employment duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any person or organization, whether for compensation or otherwise, without the prior written consent of the Employer's Board of Directors. This paragraph 2 shall not prohibit the making of passive, personal investments, nor the conduct to a reasonable extent of private business affairs if those activities do not interfere with the services required under this Agreement. [The Employer agrees to waive the corporate opportunity doctrine for any endeavor that might be brought to Employee except those which relate to the business of Employer.] 2 3. Term and Termination of Employment. A. Term - Subject to the provisions of Section 3(B), the "Term" of the Employee's employment shall be three (3) years, commencing on the date of closing of the initial public offering by the Employer (the "Effective Date"), and shall renew automatically for successive one (1) year periods unless a party hereto provides written notice to terminate to the other party prior to thirty (30) days before the end of the original period or any successive period. B. Termination - This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) The death of the Employee; (ii) The "Permanent Disability" (hereinafter defined) of the Employee; or (iii) Written notice from the Board of Directors to the Employee of his termination for "Cause" (hereinafter defined). As used herein, "Permanent Disability" means any mental or physical illness or disability continuing for a period of more than six (6) consecutive months which renders the Employee unable to perform his duties and services hereunder in a satisfactory manner. In the event of any disputes over the existence or commencement of such disability, the issue shall be determined by a qualified physician mutually agreed to by the Employer and the Employee , or, if applicable, the Employee's legal representative. The determination of such physician shall be conclusive and binding on the parties hereto. As used herein, "Cause" means: gross neglect of duty, prolonged absence from duty without the consent of the Employer, the acceptance by the Employee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of the Employee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of this Agreement by the Employee which has not been corrected by the Employee within (30) days after his receipt of notice of such breach from the Employer. 4. Compensation of the Employee. As the Employee's entire compensation (exclusive of director's fees, if any) for all services rendered to the Employer during the term of this Agreement, the Employee shall have and receive, subject to withholding and other applicable employment taxes: A. Commencing on the first day of the first month immediately following the Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate of One Hundred Fifty Thousand and 00/100 Dollars ($150,000) per annum, payable in cash or good check, not less frequently than 2 3 monthly and not later than the last day of the month in question; provided, however, that the rate of such salary shall be reviewed by the Board of Directors of the Employer not less often than annually and may be increased (but not decreased) at each yearly renewal date. Prior to the Salary Commencement Date, the Employee shall continue to receive his basic salary as in effect on the date of this Agreement. B. Bonus compensation over and above the basic salary equal to five percent (5%) of increase of the net income before taxes (as defined on Exhibit A attached hereto) over net income before taxes for the preceding fiscal year, but not to exceed One Hundred Thousand and 00/100 Dollars ($100,000) for any fiscal year, as more particularly determined by the formula set forth on Exhibit A hereto and payable at such time or times as the Board of Directors in its discretion may from time to time determine. C. The right to receive an immediately exercisable grant of an option to acquire 15,000 shares in accordance with that certain Nonqualified Stock Option Agreement by and between the Employer and the Employee, a copy of which is attached hereto as Exhibit B. D. The right to receive or participate in any additional "fringe" benefits, including but not limited to insurance programs and pension or profit-sharing plans, which may from time to time be made available to executives of the Employer. E. Upon termination of employment, other than for cause, the right to receive the membership at Lowe's Island Golf Club held by the Employer. 5. Facilities and Expenses. A. The Employer shall provide the Employee with a private office, office equipment, supplies and other facilities and services consistent with the current practices of the Employer, and suitable to the Employee's position and adequate for the performance of his duties. B. The Employee may be authorized from time to time to incur reasonable expenses for promoting the business of the corporation, including expenses for entertainment, travel, and similar items. The Employer will reimburse the Employee for all such authorized expenses upon the presentation by the Employee of an itemized account of such expenditures. The Employee shall provide the Employee's own personal transportation, except for such times as the Employee is using the Employer-owned vehicles for official business. 6. Reimbursement of Disallowed Expenses. If any salary payment, medical reimbursement, employee fringe benefit, expense allowance payment, or other expense incurred by the Employer for the benefit of the Employee is disallowed, in whole or in part, as a deductible expense of the Employer for federal income tax purposes, the Employee shall reimburse the Employer upon notice and demand, to the full extent of the disallowance. This legally enforceable obligation 3 4 is in accordance with the provisions of Revenue Ruling 69-115 and is for the purpose of entitling the Employee to a business expense deduction for the taxable year in which the repayment is made to the Employer. 7. Vacation and Sick Leave. A. The Employee shall accrue four (4) weeks vacation each calendar year and may take such vacation at times to be determined in the manner most convenient to the business of the Employer. In addition, the Employee may take time off at such times as may be determined by the Board of Directors to attend such meetings and postgraduate courses as may directly benefit the Employer and the Employee. Unused days of vacation may not be carried over to future years. In addition, the Employee may take as holidays five (5) days of the Employee's choosing, so long as it is convenient to and approved by the Employer. B. The Employee shall accrue ___________ (__) days sick leave in each calendar month, not to exceed a total of thirty (30) days. Unused days of sick leave may not be carried over to future years. Any date used for the purpose of determining the date of permanent or partial disability under this Agreement shall be postponed until such time as all of the Employee's sick leave shall be exhausted. 8. Illness or Incapacity. If the Employee becomes unable to devote the Employee's full time to the business of the Employer because of illness or incapacity during the term of this Agreement, then during such period of illness or incapacity, the Employee's compensation shall be as follows: A. For the first six (6) months thereof--One Hundred percent (100%) of the compensation provided for by paragraph 4 of this Agreement. B. If the Employee shall not have resumed the Employee's duties within the six (6) month period specified above, then the Employee's compensation hereunder shall be terminated as of the end of the six (6) month period, and the Employer shall have no further financial obligation to the Employee. 9. Death During Employment. If the Employee dies during the term of the Employee's employment, the Employer shall pay to the estate of the Employee the basic salary which would otherwise be payable to the Employee up to the end of the month in which the Employee's death occurs, not including any bonuses. The Employer shall have no further financial obligations to the Employee or to the Employee's estate under the terms of this Agreement. 10. Non-Competition Agreement. During the duration of this Agreement and any extensions or renewals hereof and for a period of one (1) year after the later of (i) the date this Agreement is terminated by the 4 5 Employer for cause or by voluntary termination by the Employee, or (ii) the expiration of this Agreement at the end of the initial or any renewal term or extensions thereof, the Employee agrees as follows: A. The Employee agrees that the Employee shall not: (i) in any capacity whatsoever, whether as a proprietor, partner, investor, corporate stockholder, director, officer, employee, consultant, independent contractor, co-venturer, employer, agent, representative, or otherwise, own, engage directly or indirectly in, or be interested in a business or business activities competing with the Employer in the United States; (ii) in any capacity whatsoever, whether as a lender, guarantor, accommodation party, financier, investor, or otherwise, assist or attempt to assist with respect to the providing of capital needs, borrowing needs, or credit needs of any person, persons or entities of every nature and description, other than the Employer, who or which shall be engaged in, or intend to be engaged in, a business or business activities competing with the Employer in the United States. B. The Employee hereby agrees that the Employee will not at any time disclose to any person, individual or entity, who or which is, or reasonably may be expected to be, in competition with the Employer in the United States, any confidential information or trade secrets of the Employer, the contents of any client lists of the Employer, or the general needs of any client or other contracting parties with the Employer; provided, however, the foregoing shall not prevent such Employee from responding to the request of a governmental agency or pursuant to a court order or as otherwise required by law. C. The Employee hereby agrees that the Employee shall not at any time after execution of this Agreement, interfere with, solicit, or disrupt the relationship, contractual or otherwise, between the Employer and its clients, suppliers, agents, consultants, officers or employees. D. The Employee acknowledges (i) that the foregoing provisions are reasonable as to time and areas as to which their activities are to be restricted, (ii) that the Employee understands the same and intends to be fully bound with respect thereto, and (iii) that such limitations upon the Employee's activities for the time and in the designated market area shall not prevent the Employee from earning a reasonable livelihood during the two year period following the termination or expiration of this Agreement. E. Recognizing that a breach of any covenant contained in Section 10 hereof would cause the Employer irreparable injury and that damages at law would be difficult to ascertain, the Employee hereby consents to the granting of equitable relief (without the posting of any bond by the Employer) by way of a restraining order or temporary or permanent injunction by any court of competent jurisdiction to prohibit the breach or enforce the performance of any covenant contained in Section 10 hereof. Employee shall only be liable for actual monetary damages to the Company, and not any consequential or punitive damages for any breach of any covenant of Section 10 hereof. 5 6 11. Registration Rights. If the Employer at any time proposes to file a registration statement on Form S-3 or any successor thereto (or other applicable SEC registration form available for registering restricted stock), the Employer shall give written notice to Employee of its intention to do so. Upon the written request of Employee, received by the Employer within 30 days after the giving of any such notice by the Employer, to register any of Employee's shares of Employer stock, the Employee will use its best efforts to cause the stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Employer, all to the extent requisite to permit the sale or other disposition by the Employee of such stock so registered. 12. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid by any competent court, this contract shall be interpreted as if such invalid agreements or covenants were not contained herein. 13. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by certified or registered mail, return receipt requested, to the parties at the following addresses: TO THE EMPLOYER: MLC Group, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190 TO THE EMPLOYEE: Bruce M. Bowen 10895 Lake Windermere Drive Great Falls, VA 22066 14. Assignment. This Agreement is personal to each of the parties hereto and neither may assign or delegate any of the party's rights or obligations hereunder without first obtaining the written consent of the other party. 15. Miscellaneous. A. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. B. This Agreement shall be governed in all respects by the laws of or applicable to the State of Delaware. The paragraph headings in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. C. This contract contains the complete agreement concerning the employment arrangement between the parties and shall, as of the commencement of the term of employment hereunder, supersede all other agreements between the parties. The parties stipulate that neither of them has made any representation with respect to the subject matter of this Agreement or any representations, including the execution and delivery hereof, except such representations as are specifically set forth herein, and each of the parties acknowledges that the party has relied on the party's own judgment in entering into this Agreement. 6 7 D. The waiver by the Employer of a breach of any condition of this Agreement by the Employee shall not be construed as a waiver of any subsequent breach by the Employee. IN WITNESS WHEREOF, the parties have executed this Agreement as the date first above written. EMPLOYER: MLC HOLDINGS, INC., a Delaware corporation By: ----------------------------- Phillip G. Norton, President EMPLOYEE: -------------------------------- BRUCE M. BOWEN 7 8 EXHIBIT A Bonus Compensation Formula 8 9 EXHIBIT B Copy of Stock Option Agreement 9 10 EXHIBIT B TO EXHIBIT 10.8 NONQUALIFIED STOCK OPTION AGREEMENT (Bruce M. Bowen) MLC Holdings, Inc. (the "Company"), in consideration of the value of the continuing services of Bruce M. Bowen (hereinafter called "Optionee"), which continuing services the grant of this option is designed to secure, and in consideration of the undertakings made herein by Optionee, hereby grants to Optionee an option (the "Option"), evidenced by this option agreement ("Option Agreement"), exercisable for the period and upon the terms hereinafter set out, to purchase fifteen thousand (15,000) shares of common stock of the Company ("Common Stock") at a price equal to one hundred percent (100%) of the opening price of the common stock of the Company in connection with the initial public offering by the Company (the "Offering") which becomes binding on the Company upon the completion of the Offering. 1. Term of Option. This Option is granted and dated on the date set forth next above the signature shown (sometimes hereinafter called the "Date of Grant") and will terminate and expire, to the extent not previously exercised, ten (10) years after the Date of Grant, or at such earlier time as may be specified in Section 4 hereof. Except as otherwise provided in this Option Agreement, this Option is exercisable as follows: (a) 3,750 shares at any time and from time to time after the Date of Grant and exercisable upon the completion of the Offering and prior to the termination of the Option; (b) 3,750 additional shares at any time and from time to time after the expiration of one year from the Date of Grant and prior to the termination of the Option; (c) 3,750 additional shares at any time and from time to time after the expiration of two years from the Date of Grant and prior to the termination of the Option; and (d) 3,750 additional shares at any time and from time to time after the expiration of three years from the Date of Grant and prior to the termination of the Option. 2. Non-Transferability. This Option is not assignable or transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by him. 3. Manner of Exercise. The Optionee (or other person entitled to exercise the Option) shall purchase shares of Common Stock subject hereto by the payment to the Company of the purchase price therefore in full. The Option may be exercised from time to time in multiples of 100 shares by written notice to the Company stating the full number of shares to be purchased and the time of deliver thereof, which shall be at least 15 days after the giving of notice unless an earlier date shall have been agreed upon between Optionee (or other person entitled to exercise the Option) and the Company, accompanied by full payment for the shares by certified check or the equivalent as contemplated or otherwise acceptable to the Company. At the time of delivery, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise the Option) deliver at the principal office of the Company, or at such other place as shall be mutually agreed upon, a certificate or certificates for such shares; provided, however, that the time of delivery may be postponed by the Company for such period as may be required for it to comply with reasonable diligence with any requirements of law. If the Optionee (or other person entitled to exercise the Option) fails to accept delivery of all or any part of the number of shares specified in such notice upon tender of delivery thereof, Optionee's payment shall be returned and the right to exercise the option with respect to such undelivered shares shall be thereupon terminated. 4.01 The Option shall terminate and may no longer be exercised if the Optionee ceases to be an employee of the Company, except that (i) if the Optionee dies while in the employ of 11 the Company, or within two (2) months after the termination of such employment, or within six (6) months if determined to be permanently disabled, the Option may be exercised on his behalf as set forth below; and (ii) if the Optionee's employment shall have been terminated for any reason other than his death, or permanent disability, he may at any time within a period of two (2) months after such termination exercise such Option to the extent that the Option was exercisable on the date of the termination of his employment; provided, however, that in the case of termination for cause by the Company of the employment of the Optionee, or if an employee shall terminate his employment in violation of any employment agreement with the Company, then the Option shall terminate and expire concurrently with the termination of his employment and shall not thereafter be exercisable to any extent. The definition of "cause" shall be as set forth in paragraph 4.03 below for each Optionee. 4.02 If the Optionee dies during the term of the Option while in the employ of the Company, or within the two (2) month period after the termination of employment, or within six (6) months if determined to be permanently disabled without having fully exercised the Option, the executor or administrator of his estate or the person who inherits the right to exercise the Option by bequest or inheritance shall have the right within twelve (12) months after the Optionee's death to purchase the number of shares which the deceased Optionee was entitled to purchase at the date of his death, after which time the Option shall lapse. 4.03 The term "cause" as used herein shall mean gross neglect of duty, prolonged absence from duty without the consent of the Company, the acceptance by Optionee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of Optionee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of an employment contract which has not been corrected by Optionee within (30) days after his receipt of notice of such breach from the Company. 5. Adjustments on Recapitalization. The number of shares of Common Stock subject hereto and the option price per share shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Common Stock resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the Date of Grant, or other decrease or increase in the shares of Common Stock outstanding effected without receipt of consideration by the Company; provided, however, that any option to purchase fractional shares resulting from such adjustments shall be eliminated. 6. Adjustments on Reorganization. If the Company shall at any time merge or consolidate with or into another corporation, the holder of this Option will thereafter receive, upon the exercise thereof, the securities and/or property to which a holder of the number of shares of Common Stock then deliverable upon the exercise of the Option would have been entitled upon such merger or consolidation, and the Company shall take such steps in connection with such merger or consolidation as may be necessary to assure that the provisions of this Agreement shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or property thereafter deliverable upon the exercise of such option; provided, however, that under no circumstances shall 2 12 any option exercise date be accelerated in contemplation of such action and the surviving entity following any such action shall at all times be entitled, in its sole discretion, to tender options on such terms and conditions as such surviving entity may deem appropriate. A sale of all or substantially all of the assets of the Company for a consideration (apart from the assumption of obligations) consisting primarily of securities shall be deemed a merger or consolidation for the foregoing purposes. IN WITNESS WHEREOF, this Option Agreement is executed as of the _____ day of September, 1996. MLC HOLDINGS, INC. By: --------------------------- Philip G. Norton, Chief Executive Officer The undersigned Optionee hereby accepts the benefits of the foregoing Incentive Stock Option Agreement. - -------------------------- ---------------------------- Date Bruce M. Bowen 3 EX-10.9 5 EMPLOYMENT AGREEMENT (WILLIAM J. SLATON) 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT (William J. Slaton) THIS EMPLOYMENT AGREEMENT is hereby made as of September 1, 1996, by and between WILLIAM J. SLATON, hereinafter referred to as the "Employee," and MLC HOLDINGS, INC., a Delaware corporation, whose principal place of business is located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190, hereinafter referred to as the "Employer." RECITALS: A. The Employer is engaged in the business of specialized asset financing with a focus on the leasing of information technology equipment and services. B. The Employee has substantial experience in the business of the Employer. C. The Employer desires to secure the services of the Employee, and the Employee is willing to be employed as Vice President of Marketing of the Employer and its subsidiaries, including without limitation MLC Group, Inc. and MLC GATX, Inc. (hereinafter, collectively, the "Company"), on the terms, covenants and conditions hereinafter set forth. THEREFORE, in consideration of the mutual promises and agreements hereinafter set out, the Employer and the Employee agree as follows: 1. Employment. The Employer hereby employs, engages, and hires the Employee, and the Employee hereby accepts employment with the Employer as Vice President of Marketing to render such services for the Employer as determined by the Board of Directors of the Employer. The Employee accepts and agrees to such hiring, engagement and employment, subject to the general supervision and pursuant to the orders, advice and direction of the directors of the Employer. 2. Extent of Efforts; Other Employment. The Employee agrees that the Employee shall devote his entire productive time and attention to the business affairs of the Employer and, to the best of the Employee's ability, experience and talents, shall perform all of the duties that may be required of and from the Employee pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. The Employee shall not engage in any other employment duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any person or organization, whether for compensation or otherwise, without the prior written consent of the Employer's Board of Directors. This paragraph 2 shall not prohibit the making of passive, personal investments, nor the conduct to a reasonable extent of private business affairs if those activities do not interfere with the services required under this Agreement. [The Employer agrees to waive the corporate opportunity doctrine for any endeavor that might be brought to Employee except those which relate to the business of Employer.] 3. Term and Termination of Employment. A. Term - Subject to the provisions of Section 3(B), the "Term" of the Employee's employment shall be three (3) years, commencing on the date of closing of the initial 2 public offering by the Employer (the "Effective Date"), and shall renew automatically for successive one (1) year periods unless a party hereto provides written notice to terminate to the other party prior to thirty (30) days before the end of the original period or any successive period. B. Termination - This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) The death of the Employee; (ii) The "Permanent Disability" (hereinafter defined) of the Employee; or (iii) Written notice from the Board of Directors to the Employee of his termination for "Cause" (hereinafter defined). As used herein, "Permanent Disability" means any mental or physical illness or disability continuing for a period of more than six (6) consecutive months which renders the Employee unable to perform his duties and services hereunder in a satisfactory manner. In the event of any disputes over the existence or commencement of such disability, the issue shall be determined by a qualified physician mutually agreed to by the Employer and the Employee , or, if applicable, the Employee's legal representative. The determination of such physician shall be conclusive and binding on the parties hereto. As used herein, "Cause" means: gross neglect of duty, prolonged absence from duty without the consent of the Employer, the acceptance by the Employee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of the Employee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of this Agreement by the Employee which has not been corrected by the Employee within (30) days after his receipt of notice of such breach from the Employer. 4. Compensation of the Employee. As the Employee's entire compensation (exclusive of director's fees, if any) for all services rendered to the Employer during the term of this Agreement, the Employee shall have and receive, subject to withholding and other applicable employment taxes: A. Commencing on the first day of the first month immediately following the Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate of One Hundred Twenty Thousand and 00/100 Dollars ($120,000) per annum, payable in cash or good check, not less frequently than monthly and not later than the last day of the month in question; provided, however, that the rate of such salary shall be reviewed by the Board of Directors of the Employer not less often than annually and may be increased (but not decreased) at each yearly renewal date. Prior to the 2 3 Salary Commencement Date, the Employee shall continue to receive his basic salary as in effect on the date of this Agreement. B. Bonus compensation over and above the basic salary in such amount and pursuant to such criteria as shall be determined by Philip G. Norton and Bruce M. Bowen in their sole and absolute discretion, but not to exceed Eighty Thousand and 00/100 Dollars ($80,000) for any fiscal year. C. The right to receive or participate in any additional "fringe" benefits, including but not limited to insurance programs and pension or profit-sharing plans, which may from time to time be made available to executives of the Employer. 5. Facilities and Expenses. A. The Employer shall provide the Employee with a private office, office equipment, supplies and other facilities and services consistent with the current practices of the Employer, and suitable to the Employee's position and adequate for the performance of his duties. B. The Employee may be authorized from time to time to incur reasonable expenses for promoting the business of the corporation, including expenses for entertainment, travel, and similar items. The Employer will reimburse the Employee for all such authorized expenses upon the presentation by the Employee of an itemized account of such expenditures. The Employee shall provide the Employee's own personal transportation, except for such times as the Employee is using the Employer-owned vehicles for official business. 6. Reimbursement of Disallowed Expenses. If any salary payment, medical reimbursement, employee fringe benefit, expense allowance payment, or other expense incurred by the Employer for the benefit of the Employee is disallowed, in whole or in part, as a deductible expense of the Employer for federal income tax purposes, the Employee shall reimburse the Employer upon notice and demand, to the full extent of the disallowance. This legally enforceable obligation is in accordance with the provisions of Revenue Ruling 69-115 and is for the purpose of entitling the Employee to a business expense deduction for the taxable year in which the repayment is made to the Employer. 7. Vacation and Sick Leave. A. The Employee shall accrue four (4) weeks vacation each calendar year and may take such vacation at times to be determined in the manner most convenient to the business of the Employer. In addition, the Employee may take time off at such times as may be determined by the Board of Directors to attend such meetings and postgraduate courses as may directly benefit the Employer and the Employee. Unused days of vacation may not be carried over to future years. In 3 4 addition, the Employee may take as holidays five (5) days of the Employee's choosing, so long as it is convenient to and approved by the Employer. B. The Employee shall accrue ___________ (__) days sick leave in each calendar month, not to exceed a total of thirty (30) days. Unused days of sick leave may not be carried over to future years. Any date used for the purpose of determining the date of permanent or partial disability under this Agreement shall be postponed until such time as all of the Employee's sick leave shall be exhausted. 8. Illness or Incapacity. If the Employee becomes unable to devote the Employee's full time to the business of the Employer because of illness or incapacity during the term of this Agreement, then during such period of illness or incapacity, the Employee's compensation shall be as follows: A. For the first six (6) months thereof--One Hundred percent (100%) of the compensation provided for by paragraph 4 of this Agreement. B. If the Employee shall not have resumed the Employee's duties within the six (6) month period specified above, then the Employee's compensation hereunder shall be terminated as of the end of the six (6) month period, and the Employer shall have no further financial obligation to the Employee. 9. Death During Employment. If the Employee dies during the term of the Employee's employment, the Employer shall pay to the estate of the Employee the basic salary which would otherwise be payable to the Employee up to the end of the month in which the Employee's death occurs, not including any bonuses. The Employer shall have no further financial obligations to the Employee or to the Employee's estate under the terms of this Agreement. 10. Non-Competition Agreement. During the duration of this Agreement and any extensions or renewals hereof and for a period of one (1) year after the later of (i) the date this Agreement is terminated by the Employer for cause or by voluntary termination by the Employee, or (ii) the expiration of this Agreement at the end of the initial or any renewal term or extensions thereof, the Employee agrees as follows: A. The Employee agrees that the Employee shall not: (i) in any capacity whatsoever, whether as a proprietor, partner, investor, corporate stockholder, director, officer, employee, consultant, independent contractor, co-venturer, employer, agent, representative, or otherwise, own, engage directly or indirectly in, or be interested in a business or business activities competing with the Employer in the United States; 4 5 (ii) in any capacity whatsoever, whether as a lender, guarantor, accommodation party, financier, investor, or otherwise, assist or attempt to assist with respect to the providing of capital needs, borrowing needs, or credit needs of any person, persons or entities of every nature and description, other than the Employer, who or which shall be engaged in, or intend to be engaged in, a business or business activities competing with the Employer in the United States. B. The Employee hereby agrees that the Employee will not at any time disclose to any person, individual or entity, who or which is, or reasonably may be expected to be, in competition with the Employer in the United States, any confidential information or trade secrets of the Employer, the contents of any client lists of the Employer, or the general needs of any client or other contracting parties with the Employer; provided, however, the foregoing shall not prevent such Employee from responding to the request of a governmental agency or pursuant to a court order or as otherwise required by law. C. The Employee hereby agrees that the Employee shall not at any time after execution of this Agreement, interfere with, solicit, or disrupt the relationship, contractual or otherwise, between the Employer and its clients, suppliers, agents, consultants, officers or employees. D. The Employee acknowledges (i) that the foregoing provisions are reasonable as to time and areas as to which their activities are to be restricted, (ii) that the Employee understands the same and intends to be fully bound with respect thereto, and (iii) that such limitations upon the Employee's activities for the time and in the designated market area shall not prevent the Employee from earning a reasonable livelihood during the two year period following the termination or expiration of this Agreement. E. Recognizing that a breach of any covenant contained in Section 10 hereof would cause the Employer irreparable injury and that damages at law would be difficult to ascertain, the Employee hereby consents to the granting of equitable relief (without the posting of any bond by the Employer) by way of a restraining order or temporary or permanent injunction by any court of competent jurisdiction to prohibit the breach or enforce the performance of any covenant contained in Section 10 hereof. Employee shall only be liable for actual monetary damages to the Company, and not any consequential or punitive damages for any breach of any covenant of Section 10 hereof. 11. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid by any competent court, this contract shall be interpreted as if such invalid agreements or covenants were not contained herein. 12. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by certified or registered mail, return receipt requested, to the parties at the following addresses: 5 6 TO THE EMPLOYER: MLC Group, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190 TO THE EMPLOYEE: William J. Slaton ---------------------------------- ---------------------------------- ---------------------------------- 13. Assignment. This Agreement is personal to each of the parties hereto and neither may assign or delegate any of the party's rights or obligations hereunder without first obtaining the written consent of the other party. 14. Miscellaneous. A. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. B. This Agreement shall be governed in all respects by the laws of or applicable to the State of Delaware. The paragraph headings in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. C. This contract contains the complete agreement concerning the employment arrangement between the parties and shall, as of the commencement of the term of employment hereunder, supersede all other agreements between the parties. The parties stipulate that neither of them has made any representation with respect to the subject matter of this Agreement or any representations, including the execution and delivery hereof, except such representations as are specifically set forth herein, and each of the parties acknowledges that the party has relied on the party's own judgment in entering into this Agreement. D. The waiver by the Employer of a breach of any condition of this Agreement by the Employee shall not be construed as a waiver of any subsequent breach by the Employee. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement as the date first above written. EMPLOYER: MLC HOLDINGS, INC., a Delaware corporation By: ------------------------------------- Phillip G. Norton, President EMPLOYEE: ---------------------------------------- WILLIAM J. SLATON 7 8 EXHIBIT A Bonus Compensation Formula 8 EX-10.10 6 EMPLOYMENT AGREEMENT (KLEYTON L. PARKHURST) 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT (Kleyton L. Parkhurst) THIS EMPLOYMENT AGREEMENT is hereby made as of September 1, 1996, by and between KLEYTON L. PARKHURST, hereinafter referred to as the "Employee," and MLC HOLDINGS, INC., a Delaware corporation, whose principal place of business is located at 11150 Sunset Hills Road, Suite 110, Reston, Virginia 22190, hereinafter referred to as the "Employer." RECITALS: A. The Employer is engaged in the business of specialized asset financing with a focus on the leasing of information technology equipment and services. B. The Employee has substantial experience in the business of the Employer. C. The Employer desires to secure the services of the Employee, and the Employee is willing to be employed as Secretary and Treasurer of the Employer and its subsidiaries, including without limitation MLC Group, Inc. and MLC GATX, Inc. (hereinafter, collectively, the "Company"), on the terms, covenants and conditions hereinafter set forth. THEREFORE, in consideration of the mutual promises and agreements hereinafter set out, the Employer and the Employee agree as follows: 1. Employment. The Employer hereby employs, engages, and hires the Employee, and the Employee hereby accepts employment with the Employer as Secretary and Treasurer, to render such services for the Employer as determined by the Board of Directors of the Employer. The Employee accepts and agrees to such hiring, engagement and employment, subject to the general supervision and pursuant to the orders, advice and direction of the directors of the Employer. 2. Extent of Efforts; Other Employment. The Employee agrees that the Employee shall devote his entire productive time and attention to the business affairs of the Employer and, to the best of the Employee's ability, experience and talents, shall perform all of the duties that may be required of and from the Employee pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. The Employee shall not engage in any other employment duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any person or organization, whether for compensation or otherwise, without the prior written consent of the Employer's Board of Directors. This paragraph 2 shall not prohibit the making of passive, personal investments, nor the conduct to a reasonable extent of private business affairs if those activities do not interfere with the services required under this Agreement. [The Employer agrees to waive the corporate opportunity doctrine for any endeavor that might be brought to Employee except those which relate to the business of Employer.] 3. Term and Termination of Employment. A. Term - Subject to the provisions of Section 3(B), the "Term" of the Employee's employment shall be three (3) years, commencing on the date of closing of the initial 2 public offering by the Employer (the "Effective Date"), and shall renew automatically for successive one (1) year periods unless a party hereto provides written notice to terminate to the other party prior to thirty (30) days before the end of the original period or any successive period. B. Termination - This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) The death of the Employee; (ii) The "Permanent Disability" (hereinafter defined) of the Employee; or (iii) Written notice from the Board of Directors to the Employee of his termination for "Cause" (hereinafter defined). As used herein, "Permanent Disability" means any mental or physical illness or disability continuing for a period of more than six (6) consecutive months which renders the Employee unable to perform his duties and services hereunder in a satisfactory manner. In the event of any disputes over the existence or commencement of such disability, the issue shall be determined by a qualified physician mutually agreed to by the Employer and the Employee , or, if applicable, the Employee's legal representative. The determination of such physician shall be conclusive and binding on the parties hereto. As used herein, "Cause" means: gross neglect of duty, prolonged absence from duty without the consent of the Employer, the acceptance by the Employee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of the Employee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of this Agreement by the Employee which has not been corrected by the Employee within (30) days after his receipt of notice of such breach from the Employer. 4. Compensation of the Employee. As the Employee's entire compensation (exclusive of director's fees, if any) for all services rendered to the Employer during the term of this Agreement, the Employee shall have and receive, subject to withholding and other applicable employment taxes: A. Commencing on the first day of the first month immediately following the Effective Date (the "Salary Commencement Date"), a "basic salary" at the rate of One Hundred Twenty Thousand and 00/100 Dollars ($120,000) per annum, payable in cash or good check, not less frequently than monthly and not later than the last day of the month in question; provided, however, that the rate of such salary shall be reviewed by the Board of Directors of the Employer not less often than annually and may be increased (but not decreased) at each yearly renewal date. Prior to the 2 3 Salary Commencement Date, the Employee shall continue to receive his basic salary as in effect on the date of this Agreement. B. Bonus compensation over and above the basic salary equal to five percent (5%) of increase of the net income before taxes (as defined on Exhibit A attached hereto) over net income before taxes for the preceding fiscal year, but not to exceed Eighty Thousand and 00/100 Dollars ($80,000) for any fiscal year, as more particularly determined by the formula set forth on Exhibit A hereto and payable at such time or times as the Board of Directors in its discretion may from time to time determine. C. The right to receive an immediately exercisable grant of an option to acquire 100,000 shares in accordance with that certain Nonqualified Stock Option Agreement by and between the Employer and the Employee, a copy of which is attached hereto as Exhibit B. D. The right to receive or participate in any additional "fringe" benefits, including but not limited to insurance programs and pension or profit-sharing plans, which may from time to time be made available to executives of the Employer. 5. Facilities and Expenses. A. The Employer shall provide the Employee with a private office, office equipment, supplies and other facilities and services consistent with the current practices of the Employer, and suitable to the Employee's position and adequate for the performance of his duties. B. The Employee may be authorized from time to time to incur reasonable expenses for promoting the business of the corporation, including expenses for entertainment, travel, and similar items. The Employer will reimburse the Employee for all such authorized expenses upon the presentation by the Employee of an itemized account of such expenditures. The Employee shall provide the Employee's own personal transportation, except for such times as the Employee is using the Employer-owned vehicles for official business. 6. Reimbursement of Disallowed Expenses. If any salary payment, medical reimbursement, employee fringe benefit, expense allowance payment, or other expense incurred by the Employer for the benefit of the Employee is disallowed, in whole or in part, as a deductible expense of the Employer for federal income tax purposes, the Employee shall reimburse the Employer upon notice and demand, to the full extent of the disallowance. This legally enforceable obligation is in accordance with the provisions of Revenue Ruling 69-115 and is for the purpose of entitling the Employee to a business expense deduction for the taxable year in which the repayment is made to the Employer. 3 4 7. Vacation and Sick Leave. A. The Employee shall accrue four (4) weeks vacation each calendar year and may take such vacation at times to be determined in the manner most convenient to the business of the Employer. In addition, the Employee may take time off at such times as may be determined by the Board of Directors to attend such meetings and postgraduate courses as may directly benefit the Employer and the Employee. Unused days of vacation may not be carried over to future years. In addition, the Employee may take as holidays five (5) days of the Employee's choosing, so long as it is convenient to and approved by the Employer. B. The Employee shall accrue ___________ (__) days sick leave in each calendar month, not to exceed a total of thirty (30) days. Unused days of sick leave may not be carried over to future years. Any date used for the purpose of determining the date of permanent or partial disability under this Agreement shall be postponed until such time as all of the Employee's sick leave shall be exhausted. 8. Illness or Incapacity. If the Employee becomes unable to devote the Employee's full time to the business of the Employer because of illness or incapacity during the term of this Agreement, then during such period of illness or incapacity, the Employee's compensation shall be as follows: A. For the first six (6) months thereof--One Hundred percent (100%) of the compensation provided for by paragraph 4 of this Agreement. B. If the Employee shall not have resumed the Employee's duties within the six (6) month period specified above, then the Employee's compensation hereunder shall be terminated as of the end of the six (6) month period, and the Employer shall have no further financial obligation to the Employee. 9. Death During Employment. If the Employee dies during the term of the Employee's employment, the Employer shall pay to the estate of the Employee the basic salary which would otherwise be payable to the Employee up to the end of the month in which the Employee's death occurs, not including any bonuses. The Employer shall have no further financial obligations to the Employee or to the Employee's estate under the terms of this Agreement. 4 5 10. Registration Rights. If the Employer at any time proposes to file a registration statement on Form S-3 or any successor thereto (or other applicable SEC registration form available for registering restricted stock), the Employer shall give written notice to Employee of its intention to do so. Upon the written request of Employee, received by the Employer within 30 days after the giving of any such notice by the Employer, to register any of Employee's shares of Employer stock, the Employee will use its best efforts to cause the stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Employer, all to the extent requisite to permit the sale or other disposition by the Employee of such stock so registered. 11. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid by any competent court, this contract shall be interpreted as if such invalid agreements or covenants were not contained herein. 5 6 12. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by certified or registered mail, return receipt requested, to the parties at the following addresses: TO THE EMPLOYER: MLC Group, Inc. 11150 Sunset Hills Road Suite 110 Reston, Virginia 22190 TO THE EMPLOYEE: Kleyton L. Parkhurst 605 Abbott Lane Falls Church, VA 22046 13. Assignment. This Agreement is personal to each of the parties hereto and neither may assign or delegate any of the party's rights or obligations hereunder without first obtaining the written consent of the other party. 14. Miscellaneous. A. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. B. This Agreement shall be governed in all respects by the laws of or applicable to the State of Delaware. The paragraph headings in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. C. This contract contains the complete agreement concerning the employment arrangement between the parties and shall, as of the commencement of the term of employment hereunder, supersede all other agreements between the parties. The parties stipulate that neither of them has made any representation with respect to the subject matter of this Agreement or any representations, including the execution and delivery hereof, except such representations as are specifically set forth herein, and each of the parties acknowledges that the party has relied on the party's own judgment in entering into this Agreement. D. The waiver by the Employer of a breach of any condition of this Agreement by the Employee shall not be construed as a waiver of any subsequent breach by the Employee. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement as the date first above written. EMPLOYER: MLC HOLDINGS, INC., a Delaware corporation By: --------------------------------------- Phillip G. Norton, President EMPLOYEE: ------------------------------------------ KLEYTON L. PARKHURST 7 8 EXHIBIT A Bonus Compensation Formula 8 9 EXHIBIT B Copy of Stock Option Agreement 9 10 EXHIBIT B TO EXHIBIT 10.10 NONQUALIFIED STOCK OPTION AGREEMENT (Kleyton L. Parkhurst) MLC Holdings, Inc. (the "Company"), in consideration of the value of the continuing services of Kleyton L. Parkhurst (hereinafter called "Optionee"), which continuing services the grant of this option is designed to secure, and in consideration of the undertakings made herein by Optionee, hereby grants to Optionee an option (the "Option"), evidenced by this option agreement ("Option Agreement"), exercisable for the period and upon the terms hereinafter set out, to purchase one hundred thousand (100,000) shares of common stock of the Company ("Common Stock") for a purchase price equal to Six and 40/100 Dollars ($6.40) per share. 1. Term of Option. This Option is granted and dated on the date set forth next above the signature shown (sometimes hereinafter called the "Date of Grant") and will terminate and expire, to the extent not previously exercised, ten (10) years after the Date of Grant, or at such earlier time as may be specified in Section 4 hereof. Except as otherwise provided in this Option Agreement, this Option is exercisable as follows: (a) 25,000 shares at any time on or after the completion of the Offering and from time to time thereafter and prior to the termination of the Option; (b) 25,000 additional shares at any time and from time to time after the expiration of one year from the Date of Grant and prior to the termination of the Option; (c) 25,000 additional shares at any time and from time to time after the expiration of two years from the Date of Grant and prior to the termination of the Option; and (d) 25,000 additional shares at any time and from time to time after the expiration of three years from the Date of Grant and prior to the termination of the Option. 2. Non-Transferability. This Option is not assignable or transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by him. 3. Manner of Exercise. The Optionee (or other person entitled to exercise the Option) shall purchase shares of Common Stock subject hereto by the payment to the Company of the purchase price therefore in full. The Option may be exercised from time to time in multiples of 100 shares by written notice to the Company stating the full number of shares to be purchased and the time of deliver thereof, which shall be at least 15 days after the giving of notice unless an earlier date shall have been agreed upon between Optionee (or other person entitled to exercise the Option) and the Company, accompanied by full payment for the shares by certified check or the equivalent or otherwise acceptable to the Company. At the time of delivery, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise the Option) deliver at the principal office of the Company, or at such other place as shall be mutually agreed upon, a certificate or 11 certificates for such shares; provided, however, that the time of delivery may be postponed by the Company for such period as may be required for it to comply with reasonable diligence with any requirements of law. If the Optionee (or other person entitled to exercise the Option) fails to accept delivery of all or any part of the number of shares specified in such notice upon tender of delivery thereof, Optionee's payment shall be returned and the right to exercise the Option with respect to such undelivered shares shall be thereupon terminated. 4.01 The Option shall terminate and may no longer be exercised if the Optionee ceases to be an employee of the Company, except that (i) if the Optionee dies while in the employ of the Company, or within two (2) months after the termination of such employment, or within six (6) months if determined to be permanently disabled, the Option may be exercised on his behalf as set forth below; and (ii) if the Optionee's employment shall have been terminated for any reason other than his death, or permanent disability, he may at any time within a period of two (2) months after such termination exercise such Option to the extent that the Option was exercisable on the date of the termination of his employment; provided, however, that in the case of termination for cause by the Company of the employment of the Optionee, or if an employee shall terminate his employment in violation of any employment agreement with the Company, then the Option shall terminate and expire concurrently with the termination of his employment and shall not thereafter be exercisable to any extent. The definition of "cause" shall be as set forth in paragraph 4.03 below for each Optionee. 4.02 If the Optionee dies during the term of the Option while in the employ of the Company, or within the two (2) month period after the termination of employment, or within six (6) months if determined to be permanently disabled without having fully exercised the Option, the executor or administrator of his estate or the person who inherits the right to exercise the Option by bequest or inheritance shall have the right within twelve (12) months after the Optionee's death to purchase the number of shares which the deceased Optionee was entitled to purchase at the date of his death, after which time the Option shall lapse. 4.03 The term "cause" as used herein shall mean gross neglect of duty, prolonged absence from duty without the consent of the Company, the acceptance by Optionee of a position with another employer without consent, intentionally engaging in any activity which is in conflict with or adverse to the business or other interests of the Company, willful misconduct on the part of Optionee, misfeasance or malfeasance of duty causing a violation of any law which is reasonably determined to be detrimental to the Company, breach of a fiduciary duty owed to the Company or any material breach of an employment contract which has not been corrected by Optionee within (30) days after his receipt of notice of such breach from the Company. 5. Adjustments on Recapitalization. The number of shares of Common Stock subject hereto and the option price per share shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Common Stock resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the Date of Grant, or other decrease or increase in the shares of Common Stock outstanding effected without receipt of consideration by the Company; provided, however, that any option to purchase fractional shares resulting from such adjustments shall be eliminated. 2 12 6. Adjustments on Reorganization. If the Company shall at any time merge or consolidate with or into another corporation, the holder of this Option will thereafter receive, upon the exercise thereof, the securities and/or property to which a holder of the number of shares of Common Stock then deliverable upon the exercise of the Option would have been entitled upon such merger or consolidation, and the Company shall take such steps in connection with such merger or consolidation as may be necessary to assure that the provisions of this Agreement shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or property thereafter deliverable upon the exercise of such option; provided, however, that under no circumstances shall any option exercise date be accelerated in contemplation of such action and the surviving entity following any such action shall at all times be entitled, in its sole discretion, to tender options on such terms and conditions as such surviving entity may deem appropriate. A sale of all or substantially all of the assets of the Company for a consideration (apart from the assumption of obligations) consisting primarily of securities shall be deemed a merger or consolidation for the foregoing purposes. IN WITNESS WHEREOF, this Option Agreement is executed as of the _____ day of September, 1996. MLC HOLDINGS, INC. By: -------------------------- Philip G. Norton Chief Executive Officder The undersigned Optionee hereby accepts the benefits of the foregoing Incentive Stock Option Agreement. - ------------------------- ------------------------------ Date Kleyton L. Parkhurst 3 EX-10.11 7 PROXY & STOCK RIGHTS AGREEMENT 1 EXHIBIT 10.11 IRREVOCABLE PROXY AND STOCK RIGHTS AGREEMENT THIS IRREVOCABLE PROXY AND STOCK RIGHTS AGREEMENT (this "Agreement") is made as of the ____ day of September, 1996, by and among (i) PHILLIP G. NORTON (hereinafter sometimes referred to as "Proxy") and (ii) KEVIN M. NORTON (hereinafter sometimes referred to as "K. Norton"), PATRICK J. NORTON, JR. (hereinafter sometimes referred to as "P. Norton") and J.A.P. Investment Group, L.P., a Virginia limited partnership ("J.A.P.") [K. Norton, P. Norton and J.A.P. being hereinafter sometimes together referred to as the "Norton Family Stockholders" and being hereinafter sometimes each individually referred to as a "Norton Family Stockholder"]. WHEREAS, MLC Holdings, Inc., a Delaware Corporation ("the Corporation") has authorized common stock consisting of ten million (10,000,000) shares with a par value of $0.01 per share (which common stock is hereinafter sometimes referred to as the "Stock"); WHEREAS, the Norton Family Stockholders are the legal and beneficial owners of certain of the issued and outstanding shares of Stock as follows:
Number of Shares Stockholder of Common Stock ----------- --------------- K. Norton 376,500 P. Norton 376,500 J.A.P. 2,040,000 ---------- Total 2,793,000
WHEREAS, the parties hereto believe it is in the best interests of the Corporation and of the Norton Family Stockholders to make provision for future dispositions of shares of Stock and certain other matters; and WHEREAS, the parties hereto desire to set forth in writing their understandings and agreements. NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 RESTRICTIONS ON STOCK 1.1. Agreement Binding Upon Transferees. In the event that at any time or from time to time, any shares of Stock are transferred to any party (other than the Corporation or any other Norton Family Stockholder) pursuant to and in compliance with all provisions hereof, including, but not limited to the first right to purchase under Article 3 hereof, the transferee shall take such shares of Stock 2 free and clear of all provisions, conditions and covenants of this Agreement. 1.2. Endorsement on Stock Certificates. Each certificate, if any, representing shares of Stock of the Corporation now or hereafter held by a Norton Family Stockholder shall bear any legend or legends required by applicable securities laws and, in addition thereto, shall bear a statement in substantially the following form: The voluntary or involuntary encumbering, transfer or other disposition(including, without limitation, any disposition pursuant to the laws of bankruptcy, intestacy, descent and distribution or succession) of the shares of stock evidenced by the within Certificate is subjected under the terms of a Proxy and Stock Rights Agreement, dated September, 1996, by and among Phillip G. Norton, Kevin M. Norton, Patrick J. Norton, Jr. and J.A.P. Investment Group, L.P., a copy of which Agreement is on file at the principal office of the Corporation. Upon written request of a stockholder of the Corporation, the Corporation shall furnish, without charge to such stockholder, a copy of such Agreement. ARTICLE 2 APPOINTMENT OF IRREVOCABLE PROXY 2.1. Each Norton Family Stockholder does hereby irrevocably constitute and appoint Phillip G. Norton or in the event of his death, then Patricia A. Norton, if then living, attorney and proxy for such Norton Family Stockholder with power of substitution for and in the name of such Norton Family Stockholder to vote all shares of voting stock of the Corporation now owned or hereafter acquired (whether by purchase, dividend, stock split, reclassification or otherwise) by such Norton Family Stockholder in the Corporation at any meeting of the stockholders of the Corporation and to execute a consent, in lieu of voting said shares at a meeting, to any action that is required to be taken or may be taken at a stockholder meeting, and gives or grants unto said attorney and proxy the right to exercise all powers, rights and privileges which such Norton Family Stockholder would possess; and ratifies and approves all that said attorney and proxy shall lawfully do or cause to be done, hereby revoking any proxy or proxies heretofore given to any person or persons to vote said shares. It is understood and agreed that each appointment and proxy hereunder is irrevocable and coupled with an interest, and shall terminate only upon the earlier to occur of (i) the death or formally adjudicated mental incapacity of Phillip G. Norton or (ii) the sale or transfer of such Norton Family Stockholder's voting stock to a third party. 2 3 ARTICLE 3 FIRST RIGHT TO PURCHASE STOCK 3.1. First Right to Purchase Shares of K. Norton and P. Norton. (a) In the event that either K. Norton or P. Norton ("Seller") desires to sell or transfer the Seller's shares of Stock for any reason, the Seller shall deliver to Proxy a written notice of intent to sell and first offer to purchase (the "Notice"), and the Proxy shall have the right, exercisable within thirty (30) days after receipt of the Notice, to require the Seller to sell to Proxy that number of shares of Stock owned by Seller that Seller desires to sell as hereinafter provided in this Article 3. (b) If Proxy does not exercise his option to purchase the Stock of the Seller, as provided in paragraph (a) above, the Seller shall be entitled to sell his Stock without the restrictions proposed by this Article 3. (c) The first right to purchase granted in this Article 3 shall be assignable by Proxy in Proxy's sole discretion. 3.2. Settlement. Settlement shall be held on the purchase of shares of Stock under Section 3.1 (a) at the principal office of the Corporation within ninety (90) days after the receipt by Proxy of the Notice. At settlement on a purchase of shares of Stock by Proxy, under this Article 3, the Seller shall resign as a director and/or officer of the Corporation (if and to the extent that the Seller shall be a director and/or officer of the Corporation as of the date of such settlement) and shall deliver to the Proxy the shares of Stock owned by the Seller and the Proxy shall execute and deliver to the Seller a negotiable promissory note in substantially the same form as the promissory note attached hereto as Exhibit A and made a part hereof representing the purchase price). The note shall provide for five equal annual installments of principal and interest which shall be computed in accordance with the applicable federal rate of interest under Section 1274 of the Internal Revenue Code of 1986, as amended. 3.3. Purchase Price. The purchase price of the shares of Stock to be sold under this Article 3 shall be as follows: (a) If the purchase and sale occurs on or before the three (3) year anniversary date of the Effective Date of this Agreement, the purchase price per share shall be the lesser of (i) the purchase price at which Seller is willing to sell such shares to a third party or (ii) 85% of the fair market value of the Stock as determined under paragraph (c) below; or (b) If the purchase and sale occurs after the three (3) year anniversary date of the Effective Date of this Agreement, the purchase price per share shall be the lesser of (i) the purchase price at which Seller is willing to sell such shares to a third party or (ii) 95% of the fair market value of the Stock as determined under paragraph (c) below. 3 4 (c) For purposes of this Section 3.3, the fair market value of the Stock, on a purchase basis, shall mean the mean of the closing high bid and low asked prices per share in the over-the-counter market, or the closing price if the Company's Stock is listed as the NASDAQ National Market System for the last (10) trading days immediately preceding the date of settlement. ARTICLE 4 GENERAL PROVISIONS REGARDING PURCHASES 4.1. Delivery of Stock and Documents. Upon the closing of any purchase of any shares of Stock pursuant to this Agreement, the Seller shall deliver to the purchaser the following: The certificate or certificates representing the shares of Stock being sold, duly endorsed for transfer and bearing such documentary stamps, if any, as are necessary, and such assignments, certificates of authority, tax releases, consents to transfer, instruments and evidences of title of the Seller and of his compliance with this Agreement as may be reasonably required by the purchaser (or by counsel for the purchaser). 4.2. Remedy for Failure to Transfer Shares. In the event that a Seller shall become obligated to sell his shares of Stock pursuant to any provision hereof, and in the further event that such Seller is unable to, or for any reason does not, deliver the certificate or certificates evidencing such shares to the person who, or entity which, is (or desires) to purchase such shares, in accordance with the applicable provisions of this Agreement, the purchaser of such shares may deposit the purchase price for such shares (by good check, promissory note or both, as the case may be under the applicable provisions of this Agreement) with any bank doing business within fifty (50) miles of the Corporation's principal office, or with the Corporation's certified public accountants, as agent or trustee, or in escrow, for such Seller, to be held by such bank or accountant until withdrawn by such Seller. Upon such deposit by the purchaser of such shares and upon notice to the Seller who was required to sell, the shares of Stock of such Seller to be sold pursuant to the applicable provisions of this Agreement shall at such time be deemed to have been sold, assigned, transferred and convoyed to such purchaser, such Seller shall have no further rights thereto and the Corporation shall record such transfer in its stock transfer book. ARTICLE 5 MISCELLANEOUS 5.1. Notices. Any and all notices, requests or other communications hereunder provided for herein shall be given in writing and sent by hand delivery or by registered or certified mail, return receipt requested, with first-class postage prepaid; and such notices shall be addressed: (i) if to Proxy, to Phillip G. Norton, 1019 Basil Road McLean, Virginia 22101; and (ii) if to a Norton Family Stockholder, to the address of such Norton Family Stockholder as reflected in the stock records of the Corporation, unless notice of a change of address is furnished to all parties in the manner provided in this Section 5.1. Any notice which is required to be made within a stated period of time shall be considered timely if delivered or mailed before midnight of the last day of such period. 4 5 5.2. Invalid or Unenforceable Provisions. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 5.3. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their legatees, distributees, estates, executors, administrators personal representatives, successors and assigns, and other legal representatives. 5.4. Gender. The use of any gender herein shall be deemed to be or include the other genders and the use of the singular herein shall be deemed to be or include the plural (and vice versa), wherever appropriate. 5.5. Changes: Waiver. No change or modification of this Agreement shall be valid unless the same is in writing and signed by all the parties hereto. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the person against whom sought to be enforced. The failure of any party at any time to insist upon strict performance of any condition, promise, agreement or understanding set forth herein shall not be construed as a waiver or relinquishment of the right to insist upon strict performance of the same or any other condition, promise, agreement or understanding at a future time. 5.6. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations among the parties hereto with respect to the shares of Stock owned by the Norton Family Stockholders and any other matters set forth herein, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, among them with respect to such shares or such other matters except as set forth herein. Any and all prior agreements among the parties hereto with respect to the shares of Stock owned by the Norton Family Stockholders are hereby revoked. This Agreement is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, by and among the parties with respect to the shares of Stock. 5.7. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the of State of Delaware. 5.8. Headings. The headings, subheadings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 5.9. Term of Agreement. This Agreement shall be effective as of the date first hereinabove set forth and shall terminate at such time as such Norton Family Stockholder shall sell or transfer all of his shares of Stock to the Proxy or to, with respect to a Selling Norton Family Stockholder, another Norton Family Stockholder or third party pursuant to any provision of this Agreement or otherwise. Notwithstanding the foregoing, certain Sections of this Agreement may terminate prior to the aforesaid termination if such Sections so provide. 5 6 5.10. Specific Performance. Strict compliance shall be required with each and every provision of this Agreement and particularly with the procedures set forth in the provisions of Articles 1, 2 and 3 hereof. The parties hereto agree that the shares of Stock are unique, that failure to perform the obligations provided by this Agreement shall result in irreparable damage and that specific performance of these obligations may be obtained by suit in equity. IN WITNESS WHEREOF, Proxy and each Norton Family Stockholder have executed this Agreement, all as of the day and year first above written. PROXY: ----- ------------------------------------------ PHILLIP G. NORTON STOCKHOLDERS: ------------ ------------------------------------------ KEVIN M. NORTON ------------------------------------------ PATRICK J. NORTON, JR. J.A.P. INVESTMENT GROUP, L.P. By: J.A.P., Inc., General Partner By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 6 7 The Corporation, by its duly authorized officer, hereby sets forth its signature to evidence its agreement, for and on behalf of itself and its successors and assigns, that: A. It hereby consents to this Agreement. B. All certificates representing shares of Stock issued by the Corporation and held by either Stockholder shall bear an endorsement in substantially the form specified in Section 1.2 hereof. MLC HOLDINGS, INC. By: ---------------------------- Bruce M. Bowen, Executive Vice President COMMONWEALTH OF VIRGINIA ) ) To wit: CITY/COUNTY OF ) ---------- The foregoing instrument was duly acknowledged before me this ______ day of September, 1996 by Kevin M. Norton. ------------------------------------- Notary Public My Commission expires: ---------- COMMONWEALTH OF VIRGINIA ) ) To wit: CITY/COUNTY OF ) ---------- The foregoing instrument was duly acknowledged before me this ______ day of September, 1996 by Patrick J. Norton, Jr. ------------------------------------- Notary Public My Commission expires: ---------- 7 8 COMMONWEALTH OF VIRGINIA ) ) To wit: CITY/COUNTY OF ) ---------- The foregoing instrument was duly acknowledged before me this ______ day of September, 1996 by ________, ___________ of J.A.P., Inc., as general partner of J.A.P. Investment Group, L.P. ------------------------------------- Notary Public My Commission expires: ---------- 8 9 EXHIBIT A PROMISSORY NOTE $ ------------------- ----------------, , 19 ---------------- --- FOR VALUE RECEIVED, the undersigned, Phillip G. Norton (hereinafter referred to as "Maker"), hereby promises to pay to [insert name of terminated stockholder] ("Payee"), at ______________________________________, ________, or at such other place as the holder hereof may from time to time designate in writing, the principal sum of ___________ Dollars ($_________), in three (3) equal annual installments of ____________________ Dollars ($____), such installments due on ___________, 19___ and on _______ of each year thereafter, together with interest from and after the date hereof at the rate of ___ percent (___%) per annum computed on the unpaid principal balance and payable at the same time as an installment of principal hereunder is due. Maker shall have the right to prepay in part or in full, without penalty, this promissory note (together with accrued interest to the date of prepayment on the amount of principal thus prepaid) at any time or times in the inverse order of maturity. In the event of any failure to pay when due any installment of interest hereunder or any installment of the principal sum hereof, and the continuance of such failure to pay for a period of ten (10) days after written notice (by certified or registered mail or by hand delivery) of such failure, this promissory note shall be considered to be in default and the entire unpaid principal sum hereof, together with accrued interest, shall at the option of the holder hereof become immediately due and payable in full. Except as set forth herein, Maker waives presentment, demand and presentation for payment, notice of nonpayment and dishonor, protest and notice of protest and expressly agrees that this promissory note or any payment hereunder may be extended from time to time without in any way affecting the liability of Maker. In the event of default and the placement of this promissory note in the hands of an attorney for collection, Maker agrees to pay all collection costs and expenses, including attorneys' fees equal to fifteen percent (15%) of the amount then due hereunder. The validity and construction of this promissory note and all matters pertaining hereto are to be determined in accordance with the laws of the _________________ of __________________________. 10 IN WITNESS WHEREOF, Maker, has executed this promissory note on this ___ day of ___________, 19___. By: ---------------------------- PHILLIP G. NORTON 2 EX-10.15 8 LOAN MODIFICATION AND EXTENSION AGREEMENT 1 EXHIBIT 10.15 LOAN MODIFICATION AND EXTENSION AGREEMENT THIS LOAN MODIFICATION AND EXTENSION AGREEMENT (this "Agreement") is effective the 17th day of October, 1996, among MLC GROUP, INC., a Virginia corporation (the "Borrower"), PHILLIP G. NORTON, PATRICIA A. NORTON, individually and as trustee for the Phillip G. Norton, Jr. Trust, the Andrew L. Norton Trust, and the Jeremiah O. Norton Trust, ELIZABETH BOWEN, BRUCE M. BOWEN, WILLIAM J. SLATON, KEVIN NORTON, PATRICK J. NORTON, JR. and FIRST UNION NATIONAL BANK OF VIRGINIA (the "Lender"). RECITALS A. The Borrower is obligated to the Lender under a Commercial Promissory Note dated September 28, 1995 from the Borrower in the original principal amount of $5,000,000 (the "Note"). B. On September 28, 1995, the Borrower and the Lender executed a Business Loan and Security Agreement of the same date (the "Original Loan Agreement"), setting forth the terms and conditions of the $5,000,000 secured line of credit evidenced by the Note. The Original Loan Agreement was amended by the parties pursuant to a First Amended and Restated Business Loan and Security Agreement between the Borrower and the Lender dated October 6, 1995 (the "Restated Loan Agreement"). The Original Loan Agreement, as amended and restated by the Restated Loan Agreement, is hereinafter referred to as the "Loan Agreement". C. Pursuant to the Loan Agreement, repayment of the Note is secured by a lien on and security interest in certain personal property of the Borrower (the "Collateral"). The Lender's lien on and security interest in the Collateral is perfected by the financing statements identified on Exhibit A attached to this Agreement (the "Financing Statements"). D. Repayment of the last $3,000,000.00 due under the Note, plus interest related to the $3,000,000.00, plus all expenses, is guaranteed pursuant to an Unconditional Guaranty (Limited) from Kevin Norton dated September 26, 1995, an Unconditional Guaranty (Limited) . IMPORTANT NOTICE THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE. 2 from Bruce M. Bowen and Elizabeth Bowen dated September 26, 1995, an Unconditional Guaranty (Limited) from Patrick J. Norton, Jr. dated September 26, 1995, an Unconditional Guaranty (Limited) from William J. Slaton dated September 26, 1995, and an Unconditional Guaranty (Limited) from Phillip G. Norton and Patricia A. Norton dated October 6, 1995 (collectively, the "Guaranties"). Kevin Norton, Bruce M. Bowen, Elizabeth Bowen, Patrick J. Norton, Jr., William J. Slaton, Phillip G. Norton and Patricia A. Norton are hereinafter collectively referred to as the "Guarantors". E. Pursuant to a Security Agreement dated September 28, 1995 (the "Security Agreement") by and between the Lender and Patricia A. Norton as trustee for the Phillip G. Norton, Jr. Trust, the Andrew L. Norton Trust, and the Jeremiah O. Norton Trust (collectively, the "Norton Trustee"), the Note is also secured by a lien on and security interest in all of the Norton Trustee's present and future right, title and interest in, to, and under 46,500 shares in Nations Virginia Intermediate Municipal Bond Fund-A represented by Certificate No. NBK 31, 46,500 shares in Nations Virginia Intermediate Municipal Bond Fund-A represented by Certificate No. NBK 32, 46,500 shares in Nations Virginia Intermediate Municipal Bond Fund-A represented by Certificate No. NBK 33 (collectively, the "Securities"), Account Nos. 54-6209096, 54-6209097, and 54-6209098 maintained with Nations Fund Trust and/or Nations Fund, Inc. by the Norton Trustee, together with all proceeds and products of the foregoing (collectively, the "Accounts", and together with the Securities, the "Additional Collateral"). In connection with the Security Agreement, the Norton Trustee also executed three Irrevocable Stock Powers dated September 28, 1995 (collectively, the "Stock Powers")pursuant to which the Norton Trustee sold, assigned and transferred the Securities to the Lender, subject to the Security Agreement. F. The Note, the Financing Statements, the Loan Agreement, the Guaranties, the Security Agreement, and the Stock Powers are collectively referred to as the "Loan Documents". The Borrower, the Guarantors and the Norton Trustee are collectively referred to as the "Obligors". G. The Note matures on October 31, 1996. As of October 17, 1996, there was due on the Note principal of $322,000.00, interest of $567.83(-), plus attorneys' fees and expenses. H. The Borrower has requested that the Lender modify the Note and the Lender is agreeable to doing so subject to the terms and conditions set forth in this Agreement. NOW THEREFORE, for valuable consideration, the parties agree, acknowledge, stipulate, covenant, represent, and warrant as follows: 1. Recitals. The recitals set forth above are a material part of this Agreement. The Obligors acknowledge and affirm the accuracy of the recitals set forth above. 2. Closing. The date by which all parties execute this Agreement and deliver all documents and instruments required hereunder to be delivered shall constitute the Closing Date. 3. Delivery of Documents. On or before the Closing Date, the Borrower shall deliver - 2 - 3 to the Lender, in form and substance satisfactory to the Lender, a written opinion of counsel to Borrower, dated as of the Closing Date and addressed to Bank, relating to such matters in connection with the transactions contemplated hereby as may be required by Bank. 4. Modification of Note. The Loan Documents are hereby modified as follows: a. Maturity Date. The maturity date of the Note is hereby changed to April 30, 1997 (the "Maturity Date"). b. No Other Terms Modified. All other terms and conditions of the Note shall remain the same. 5. Attorneys' Fees and Costs. At Closing, the Borrower shall pay to the Lender all expenses, including actual and reasonable attorneys' fees and expenses paid or incurred by the Lender relating to the Loan Documents, as of the Closing. 6. Extension Fee. At Closing, the Borrower shall pay to the Lender an extension fee of $12,500.00 which the Lender shall credit against any extension/modification fee relating to the subsequent modification/extension of the Loan Documents. 7. Representations and Warranties by Borrower. To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender as follows: (a) Good Standing. Borrower is a corporation duly organized, legally existing and in good standing under the laws of the State of its incorporation, has the power to own its property and to carry on its business and is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. (b) Authority. Borrower has full power and authority to enter into this Agreement, to execute and deliver all documents and instruments required hereunder, and to incur and perform the obligations provided for herein, all of which have been duly authorized by all necessary corporate and other action, and no consent or approval of any person, including, without limitation, its stockholders, and any governmental authority, which has not been obtained, is required as a condition to the validity or enforceability hereof. (c) Binding Agreements. This Agreement has been duly executed and delivered by Borrower and constitutes and will continue to constitute the valid and legally binding obligation of Borrower, and is, and will continue to be, fully enforceable against Borrower in accordance with its terms, subject to bankruptcy and other laws affecting the rights of creditors generally. (d) No Conflicting Agreements. The execution, delivery and performance by Borrower of this Agreement and the borrowings hereunder will not violate (i) any provision of law - 3 - 4 or any order, rule or regulation of any court or governmental authority, (ii) the corporate charter or bylaws of Borrower, or (iii) any instrument, contract, agreement, indenture, mortgage, deed of trust or other document or obligation to which Borrower is a party or by which it or its property is bound. (e) Litigation. There are no judgments, injunctions or similar orders or decrees, claims, actions, suits or proceedings pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or any property of Borrower, at law or in equity, by or before any court or any federal, State, county, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which could result in any material adverse change in the business, operations, prospects, properties or in the condition, financial or otherwise, of Borrower, and Borrower is not, to Borrower's knowledge, in default with respect to any judgment, order, writ, injunction, decree, rule or regulation of any court or any federal, State, county, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which could have a material adverse effect on Borrower. (f) Financial Condition. (i) Borrower is not insolvent (as defined in Section 101(31) of the United States Bankruptcy Code), unable to pay its debts as they mature or engaged in business for which its property is an unreasonably small capital. (ii) Borrower is not the subject of any bankruptcy, reorganization, insolvency, readjustment of debt, trusteeship, receivership, dissolution or liquidation law, statute or proceeding. (g) Taxes. Borrower has paid or caused to be paid all federal, State, local and foreign taxes to the extent that such taxes have become due and has filed or caused to be filed all federal, State, local and foreign tax returns which are required to be filed by Borrower. (h) Financial Information. All financial statements, schedules, reports and other information supplied to Lender by or on behalf of the Borrower heretofore and hereafter are and will be true and complete. (i) Outstanding Indebtedness, Defaults. Borrower is not in default under any instrument, contract, agreement, indenture, mortgage, deed of trust or other document or obligation to which Borrower is a party or by which it or its property is bound. (j) Compliance With Laws. Borrower is not in violation of, or under investigation with respect to or threatened to be charged or given notice of a violation of, any applicable law, rule, regulation, order or judgment relating to any of its businesses, properties or operations, including, without limitation, ERISA, any law, rule, regulation or order regarding the collection, payment and deposit of employees' income, unemployment and social security taxes or of sales, use or excise taxes, any environmental laws, any laws pertaining to occupational safety and health or any laws relating to public health. - 4 - 5 8. Representations and Warranties by the Guarantors. To induce the Lender to enter into this Agreement, each of the Guarantors represent and warrant to the Lender as follows: (a) Financial Information. All financial statements, schedules, reports and other information supplied to Lender by them or on their behalf heretofore and hereafter are and will be true and complete. (b) Free Act and Will. They are not entering into this Agreement in reliance upon any statement, representation or warranty of any nature whatsoever made by the Lender, or any other person or entity whatsoever, which is not expressly stated herein, and they have entered into this Agreement entirely of their own free act and will. 9. Representations and Warranties by the Norton Trustee. To induce the Lender to enter into this Agreement, the Norton Trustee represents and warrants to the Lender as follows: (a) Financial Information. All financial statements, schedules, reports and other information supplied to Lender by her or on her behalf heretofore and hereafter are and will be true and complete. (b) Free Act and Will. She is not entering into this Agreement in reliance upon any statement, representation or warranty of any nature whatsoever made by the Lender, or any other person or entity whatsoever, which is not expressly stated herein, and she has entered into this Agreement entirely of her own free act and will. 10. Event of Default. If any Obligor shall fail to comply with or perform as and when required any of the terms, conditions or covenants of this Agreement, or if any representation or warranty made in this Agreement, in any of the documents executed in connection with this Agreement, or in any report, certificate, financial statement or other instrument furnished in connection with this Agreement, shall prove to have been materially false or misleading on the date as of which it was made, the Borrower shall be in default under the Loan Documents, and an Event of Default under the Loan Documents shall have occurred. 11. Further Assurances and Corrective Instruments. The Obligors will execute, acknowledge and deliver, from time to time, such supplements hereto and such further instruments and documents, as the Lender may require in its discretion to evidence any obligation of any of the Obligors to the Lender or to protect, perfect and enforce the Lender's interest in any collateral security for such obligations or to facilitate the carrying out of the intentions of the parties to this Agreement. 12. Release. Each Obligor hereby releases and forever waives and relinquishes all claims, demands, obligations, liabilities and causes of action of whatsoever kind or nature, whether known or unknown, which he has, may have, or might have or assert now or in the future against the Lender - 5 - 6 and its directors, officers, employees, attorneys, agents, successors, predecessors and assigns and any affiliates, subsidiaries or related entities of the Lender and their directors, officers, employees, attorneys, agents, successors, predecessors and assigns, directly or indirectly, arising out of, based upon, or in any manner connected with any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or begun before the execution of this Agreement and occurred, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of any of the terms of all or any of the Loan Documents, or which was related or connected in any manner, directly or indirectly, to the obligations evidenced by the Loan Documents, or any part thereof. 13. Waiver of Jury Trial. Each party to this Agreement agrees that any suit, action or proceeding brought or instituted by any party hereto or any successor or assign of any party on or with respect to this Agreement, any of the documents executed in connection with this Agreement, or any of the Loan Documents or which in any way relates, directly or indirectly, to the Note or any event, transaction or occurrence arising out of or in any way connected with the Note, or the dealings of the parties with respect thereto, shall be tried only by a court and not a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. Each Obligor acknowledges and agrees that this provision is a specific and material aspect of this Agreement between the parties. 14. Miscellaneous. (a) Confirmation and Ratification of Documents; Consent to this Agreement. The Obligors agree that the Note, the Guaranties, the Security Agreement and the other Loan Documents are in full force and effect and shall remain in full force and effect except as modified and amended in accordance with this Agreement. The Borrower ratifies and confirms its obligations under the Note and the Loan Agreement and the existence and validity of the Lender's lien on and security interest in the Collateral. The Guarantors ratify and confirm their respective obligations under the Guaranties and the Loan Agreement. The Norton Trustee ratifies and confirms her obligations under the Security Agreement and the existence and validity of the Lender's lien on and security interest in the Additional Collateral. (b) Waivers by the Lender. Neither any failure nor any delay on the part of the Lender in exercising any right, power or remedy under this Agreement, any documents executed in connection with this Agreement, the Loan Documents, or under applicable law shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercises thereof or the exercise of any other right, power or remedy. No waiver or forbearance by the Lender as to the Borrower shall waive or release any rights or claims which the Lender may now have or hereafter have against any other person, firm or individual. The Lender reserves all rights except to the extent expressly provided herein. (c) Modifications. No modification or waiver of any provision of this Agreement, any documents executed in connection with this Agreement, or the Loan Documents, and no consent - 6 - 7 by the Lender to any departure by the Borrower therefrom shall in any event be effective unless the modification, waiver or consent shall be in writing. Any such waiver or consent shall be effective only in the specific instance or for the purpose for which given. No notice to, or demand upon the Borrower in any case shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstances. (d) No Release or Discharge. Nothing set forth in this Agreement is intended to or shall act to nullify, discharge or release any of the obligations of the Borrower, nor shall this Agreement or any document executed in connection herewith be deemed or considered to operate as a novation of any of the Loan Documents or any of the obligations thereunder. Except to the extent of any express conflict with this Agreement or any of the documents executed in connection with this Agreement, each and all of the terms and conditions of the Loan Documents shall remain in full force and effect. Nothing in this Agreement or the documents executed in connection with this Agreement shall be construed to release or discharge the parties from any of their obligations to the Lender arising out of the Loan Documents. (e) No Intent to Supersede. Nothing contained in this Agreement or the documents executed in connection with this Agreement is intended to supersede the terms and conditions of the Loan Documents, except to the extent that the terms and conditions of this Agreement or the documents executed in connection with this Agreement are inconsistent with the terms and conditions of the Loan Documents. (f) Applicable Law. The performance, construction and enforcement of this Agreement and each of the documents executed in connection with this Agreement shall be governed by the laws of the Commonwealth of Virginia (exclusive of principles of conflicts of laws). (g) Survival; Successors and Assigns. All covenants, agreements, representations and warranties made herein, in the documents executed in connection with this Agreement and in the Loan Documents shall continue in full force and effect except as specifically amended by this Agreement. Whenever in this Agreement any of the parties is referred to, such reference shall be deemed to include the successors and assigns of such party. All covenants, agreements, representations and warranties by or on behalf of any Obligor which are contained in this Agreement, or any of the documents executed in connection with this Agreement and the Loan Documents, shall inure to the benefit of the Lender and its successors and assigns. None of the Obligors may assign this Agreement or any of its, his or her rights hereunder. (h) Severability. If any term, provision or condition, or any part thereof, of this Agreement, any of the documents executed in connection with this Agreement or of the Loan Documents shall for any reason be found or held to be invalid or unenforceable by any court or governmental agency of competent jurisdiction, such invalidity or enforceability shall not affect the remainder of such term, provision or condition or any other term, provision or condition, and this Agreement, any documents executed in connection with this Agreement and any Loan Document shall survive and be construed as if such invalid or unenforceable term, provision or condition had not - 7 - 8 been contained therein. (i) Merger and Integration. This Agreement, the documents executed in connection with this Agreement, the Loan Documents, and any documents or instruments to be delivered in accordance with this Agreement contain the entire agreement of the parties hereto with respect to the matters covered and the transactions contemplated hereby and thereby, and no other agreement, statement or promise made by any party hereto, or any employee, officer, agent or attorney of any party hereto, shall be valid or binding. (j) Headings. The headings and subheadings contained in the titling of this Agreement are intended to be used for convenience only and shall not be used or deemed to limit or diminish any of the provisions hereof. (k) Gender, Singular. All references made (a) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, and (b) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. (l) Time of Essence. Time is of the essence of this Agreement. 15. Notices. Any notices required or permitted by this Agreement shall be in writing and shall be deemed delivered if hand delivered or delivered by certified mail, postage prepaid, return receipt requested, or by telecopy or telegraph as follows, unless such address is changed by written notice hereunder: If to the Borrower, MLC Group, Inc. any Guarantor, or 11150 Sunset Hills Road the Norton Trustee Reston, Virginia 22090 Attention: Kley Parkhurst - 8 - 9 with a copy to: Michael Geltner, Esquire Geltner & Associates No. 10 E Street, S.E. Washington, D.C. 20003 If to the Bank: David N. Ryder Vice President First Union National Bank of Virginia 1970 Chain Bridge Road, 7th Floor McLean, Virginia 22102 with a copy to: David S. Musgrave, Esquire Piper & Marbury L.L.P. 36 South Charles Street Baltimore, Maryland 21201 16. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed, or caused to be executed, this Loan Modification and Extension Agreement under seal effective as of the date first written above.
WITNESS/ATTEST: MLC GROUP, INC. By: /s/ PHILLIP G. NORTON (SEAL) - -------------------------------------------- --------------------------------- Phillip G. Norton Chairman, President & CEO WITNESS/ATTEST: GUARANTORS: /s/ PHILLIP G. NORTON (SEAL) - ------------------------------- ---------------------------------- Phillip G. Norton (SEAL) - ------------------------------- ---------------------------------- Patricia A. Norton, individually
(signatures continued on next page) - 9 - 10 (SEAL) - ------------------------------- ---------------------------------- Elizabeth Bowen /s/ KLEYTON L. PARKHURST /s/ BRUCE M. BOWEN (SEAL) - ------------------------------- ---------------------------------- Bruce M. Bowen, individually (SEAL) - ------------------------------- ---------------------------------- William J. Slaton /s/ KEVIN NORTON (SEAL) - ------------------------------- ---------------------------------- Kevin Norton /s/ KAREN C. NORTON /s/ PATRICK J. NORTON (SEAL) - ------------------------------- ---------------------------------- Patrick J. Norton, Jr.
- 10 - 11 LENDER: FIRST UNION NATIONAL BANK OF VIRGINIA, a national banking association By: /s/ DAVID N. RYDER (SEAL) - ------------------------------- -------------------------------- David N. Ryder Vice President
- 11 - 12 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Bruce M. Bowen, as president of MLC Group, Inc., and that he executed the foregoing instrument as president of such corporation for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 12 - 13 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Phillip G. Norton, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 13 - 14 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Patricia A. Norton, and that she executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 14 - 15 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Elizabeth Bowen, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 15 - 16 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Bruce M. Bowen, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 16 - 17 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared William J. Slaton, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Kevin Norton, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 17 - 18 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Patrick J. Norton, Jr. and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 18 - 19 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared Patricia A. Norton, as trustee for the Phillip G. Norton, Jr. Trust, the Andrew L. Norton Trust, and the Jeremiah O. Norton Trust, and that she executed the foregoing instrument as trustee for such trusts for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 19 - 20 COMMONWEALTH OF VIRGINIA) ) ss: COUNTY OF FAIRFAX ) I HEREBY CERTIFY that on this _____ day of October, 1996, before me, the subscriber, a Notary Public in and for the aforesaid State and County, personally appeared David N. Ryder, a Vice President of First Union National Bank of Virginia, and that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. [Notarial Seal] ---------------------------------------- Notary Public My Commission expires: - 20 - EX-23.1 9 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-Effective Amendment Number 1 to Registration Statement No. 333-11737 of MLC Holdings, Inc. of our report dated September 1, 1996, appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Washington, D.C. October 21, 1996 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 YEAR 3-MOS MAR-31-1996 MAR-31-1997 MAR-31-1996 JUN-30-1996 357,881 445,981 0 0 1,364,564 3,008,255 0 0 86,280 67,267 0 0 415,138 419,182 (134,670) (153,583) 29,836,215 27,521,420 0 0 0 0 0 0 0 0 40,000 40,000 0 0 29,836,215 27,521,420 34,841,823 10,412,026 42,800,201 12,895,952 31,202,228 9,894,315 40,308,792 12,096,753 0 0 0 0 0 0 2,491,409 799,199 881,000 245,000 1,610,409 554,199 0 0 0 0 0 0 1,610,409 554,199 0.40 0.14 0.40 0.14
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