FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to .
Commission file number: 0-28926
MLC Holdings,ePlus Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Common Stock outstanding as of February 10,
1999,January 11, 2000,
was 7,467,102.7,930,860.
EXPLANATORY NOTE
----------------
THIS FORM 10-Q/A IS BEING FILED TO INCLUDE A RESTATED CONDENSED
CONSOLIDATED BALANCE SHEET IN PART I, ITEM 1.
MLC HOLDINGS,ePLUS INC. AND SUBSIDIARIES
Page
----
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of December 31, 1998September 30, 1999 and
March 31, 19981999 2
Condensed Consolidated Statements of Earnings, Three months
ended December 31,September 30, 1999 and 1998 and 1997 3
Condensed Consolidated Statements of Earnings, NineSix months
ended December 31,September 30, 1999 and 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows, NineSix months
ended December 31,September 30, 1999 and 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 76
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 119
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1920
Part II. Other Information:
Item 1. Legal Proceedings 2021
Item 2. Changes in Securities and Use of Proceeds 2021
Item 3. Defaults Upon Senior Securities 2021
Item 4. Submission of Matters to a Vote of Security Holders 2021
Item 5. Other Information 2021
Item 6. Exhibits and Reports on Form 8-K 2122
Signatures 2223
1-1-
MLC HOLDINGS, INC.ePLUS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
As of As of
December 31, 1998September 30, 1999 March 31, 1998
---------------------------------------------------1999
----------------------------------------------
ASSETS
Cash and cash equivalents $ 7,406,25013,704,418 $ 18,683,7967,891,661
Accounts receivable 28,515,436 16,383,314
Other receivables 6,612,903 3,801,80869,749,592 44,090,101
Notes receivable 556,676 547,011
Employee advances 25,136 53,58299,741 20,078
Inventories 1,020,030 1,213,7346,802,438 658,355
Investment in direct financing and sales type leases - net 75,080,815 32,495,594191,163,216 83,370,950
Investment in operating lease equipment - net 5,618,214 7,295,72113,311,791 3,530,179
Property and equipment - net 1,880,239 1,131,5122,033,366 2,018,133
Other assets 11,561,170 2,136,554
===================================================24,787,445 12,232,130
===========================================
TOTAL ASSETS $ 137,720,193322,208,683 $ 83,195,615
===================================================154,358,598
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 11,759,26122,391,147 $ 6,865,41912,518,533
Accounts payable - equipment 18,931,416 21,283,58233,241,271 18,049,059
Salaries and commissions payable 544,085 390,081609,148 535,876
Accrued expenses and other liabilities 5,356,077 3,560,1814,804,574 4,638,708
Recourse notes payable 18,646,016 13,037,36536,250,950 19,081,137
Nonrecourse notes payable 38,379,108 13,027,676170,180,143 52,429,266
Deferred taxes 1,487,000 1,487,000
Income tax payable 744,789 -
---------------------------------------------------3,292,210 3,292,210
-------------------------------------------
Total Liabilities 95,847,752 59,651,304$ 270,769,443 110,544,789
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
7,467,1027,883,248 and 6,071,5057,470,595 issued and outstanding at
December 31, 1998September 30, 1999 and March 31, 1998,1999, respectively 74,671 60,71578,832 74,706
Additional paid-in capital 24,972,870 11,460,33129,028,943 24,999,371
Retained earnings 16,824,900 12,023,265
---------------------------------------------------22,331,465 18,739,732
-------------------------------------------
Total Stockholders' Equity 41,872,441 23,544,311
===================================================51,439,240 43,813,809
-------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 137,720,193322,208,683 $ 83,195,615
===================================================154,358,598
===========================================
See Notes to Condensed Consolidated Financial Statements.
2-2-
MLC HOLDINGS,ePLUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
Three months ended
December 31,September 30,
1999 1998
1997
-------------------------------------------------------------------------------------------
REVENUES
Sales of equipment $ 25,635,59138,485,685 $ 10,797,52219,830,451
Sales of leased equipment 38,053,115 7,299,836
-------------------------------------------
63,688,706 18,097,35814,135,588 11,648,919
------------------------------------------------
52,621,273 31,479,370
Lease revenues 4,745,035 3,803,3856,811,368 5,264,385
Fee and other income 1,512,952 1,662,666
-------------------------------------------
6,257,987 5,466,051
-------------------------------------------1,759,091 1,257,340
------------------------------------------------
8,570,459 6,521,725
------------------------------------------------
TOTAL REVENUES 69,946,693 23,563,409
-------------------------------------------61,191,732 38,001,095
------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 22,148,807 8,316,25034,243,741 16,724,750
Cost of sales, leased equipment 37,476,294 7,308,896
-------------------------------------------
59,625,101 15,625,14613,534,152 11,340,648
------------------------------------------------
47,777,893 28,065,398
Direct lease costs 1,550,955 1,558,2721,343,377 1,678,631
Professional and other fees 375,094 282,278398,292 322,528
Salaries and benefits 3,106,179 2,630,7734,585,530 3,033,226
General and administrative expenses 1,318,912 903,0101,729,939 1,311,804
Interest and financing costs 1,140,617 396,756
Non-recurring acquisition costs - 39,103
-------------------------------------------
7,491,757 5,810,192
-------------------------------------------1,874,540 856,089
------------------------------------------------
9,931,678 7,202,278
------------------------------------------------
TOTAL COSTS AND EXPENSES 67,116,858 21,435,338
-------------------------------------------57,709,571 35,267,676
------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,829,835 2,128,071
-------------------------------------------3,482,161 2,733,419
------------------------------------------------
PROVISION FOR INCOME TAXES 1,131,934 850,584
-------------------------------------------1,392,865 1,093,368
------------------------------------------------
NET EARNINGS $ 1,697,9012,089,296 $ 1,277,487
===========================================1,640,051
================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.240.28 $ 0.21
===========================================0.26
================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.240.28 $ 0.21
===========================================
PRO FORMA NET EARNINGS (See Note 4) $ 1,697,901 $ 1,277,487
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.21
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.24 $ 0.21
===========================================0.25
================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,189,324 6,071,3057,491,305 6,348,603
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 7,220,060 6,188,9907,570,015 6,439,658
See Notes to Condensed Consolidated Financial Statements.
3-3-
MLC HOLDINGS,ePLUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
NineSix months ended
December 31,September 30,
1999 1998
1997
------------------------------------------------------------------------------------------
REVENUES
Sales of equipment $ 55,740,47671,661,466 $ 36,290,55030,104,885
Sales of leased equipment 74,612,679 39,486,348
------------------------------------------
130,353,155 75,776,89828,521,412 36,559,565
------------------------------------------------
100,182,878 66,664,450
Lease revenues 14,994,505 11,021,73612,349,107 10,249,472
Fee and other income 4,182,928 4,481,831
------------------------------------------
19,177,433 15,503,567
------------------------------------------3,030,867 2,669,974
------------------------------------------------
15,379,974 12,919,446
------------------------------------------------
TOTAL REVENUES 149,530,588 91,280,465
------------------------------------------115,562,852 79,583,896
------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 47,157,230 28,401,63964,047,989 25,008,422
Cost of sales, leased equipment 73,630,008 38,888,847
------------------------------------------
120,787,238 67,290,48627,659,584 36,153,714
------------------------------------------------
91,707,573 61,162,136
Direct lease costs 5,221,414 4,889,2442,292,387 3,670,459
Professional and other fees 894,587 723,152821,176 519,493
Salaries and benefits 8,508,006 7,415,6578,586,600 5,401,827
General and administrative expenses 3,618,588 3,057,7962,975,956 2,299,675
Interest and financing costs 2,498,012 1,372,020
Non-recurring acquisition costs - 222,557
------------------------------------------
20,740,607 17,680,426
------------------------------------------3,192,895 1,357,394
------------------------------------------------
17,869,014 13,248,848
------------------------------------------------
TOTAL COSTS AND EXPENSES 141,527,845 84,970,912
------------------------------------------109,576,587 74,410,984
------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 8,002,743 6,309,553
------------------------------------------5,986,265 5,172,912
------------------------------------------------
PROVISION FOR INCOME TAXES 3,201,099 1,722,717
------------------------------------------2,394,507 2,069,165
------------------------------------------------
NET EARNINGS $ 4,801,6443,591,758 $ 4,586,836
==========================================3,103,747
================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.730.48 $ 0.76
==========================================0.50
================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.720.48 $ 0.75
==========================================
PRO FORMA NET EARNINGS (See Note 4) $ 4,801,644 $ 3,973,575
==========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.73 $ 0.66
==========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.72 $ 0.65
==========================================0.49
================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,540,359 6,017,9207,484,456 6,214,103
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,648,754 6,127,9337,519,904 6,346,548
See Notes to Condensed Consolidated Financial Statements.
4
-4-
MLC HOLDINGS,ePLUS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NineSix Months Ended
December 31,September 30,
1999 1998 1997
-------------------------------------
Cash Flows From Operating Activities:Activities, net of effects of purchase
acquisitions:
Net earnings $ 4,801,6443,591,758 $ 4,586,8363,103,747
Adjustments to reconcile net earnings to net cash (used in) providedused by
operating activities:
Depreciation and amortization 3,850,449 3,443,8641,874,538 2,652,979
Provision for credit losses 330,000 500,000 (13,865)
Gain on sale of operating lease equipment (5,267) (92,800)
Loss on disposal of property and equipment 9,809 - (3,689)
Adjustment of basis to fair market value of equipment
and investments 6,000 268,506 -
Payments from lessees directly to lenders (771,465) (1,375,099)
Compensation to outside directors(343,416) (563,025)
Loss on disposal of property and equipment 166,251 - stock options - 18,283
Changes in assets and liabilities, net of effects of purchase acquisition:liabilities:
Accounts receivable (5,837,220) (2,311,932)(25,799,402) (1,544,834)
Other receivables (2,811,095) 368,656118,514 2,524,007
Employee advances 26,630 (6,649)(77,093) 14,194
Inventories 1,036,507 (181,764)(923,563) (4,297,786)
Other assets (2,764,961) (1,216,167)(4,474,800) (1,166,603)
Accounts payable - equipment (1,397,591) 5,581,53515,192,212 7,794,860
Accounts payable - trade (2,032,538) (496,075)7,876,895 (5,737,180)
Salaries and commissions payable, accrued
expenses and other liabilities 2,195,466 (399,557)
-------------------------------------(1,552,245) 687,224
-----------------------------------
Net cash (used in)(used) provided by operating activities (2,931,126) 7,905,266
-------------------------------------(4,014,351) 4,232,400
-----------------------------------
Cash Flows From Investing Activities:Activities, net of effects of purchase
acquisitions:
Proceeds from sale of operating lease equipment 22,151 609,722- 3,750
Purchase of operating lease equipment (1,824,989) (1,987,058)- (1,678,067)
Increase in investment in direct financing and sales-type leases (66,557,986) (6,373,493)(52,798,787) (46,697,227)
Purchases of property and equipment (915,346) (428,952)
Proceeds from sale of property and equipment 2,000 -(433,328) (281,398)
Cash used in acquisition,acquisitions, net of cash acquired (1,845,730) (3,485,279) -
Increase in other assets (709,216) (353,181)
-------------------------------------(58,649) (437,809)
-----------------------------------
Net cash used in investing activities (73,468,665) (8,532,962)
-------------------------------------(55,136,494) (52,576,030)
-----------------------------------
Cash Flows From Financing Activities:Activities, net of effects of purchase
acquisitions:
Borrowings:
Nonrecourse 53,236,003 3,587,03952,622,001 18,512,294
Recourse 319,586 174,894321,599 258,316
Repayments:
Nonrecourse (3,640,341) (3,364,608)(3,825,912) (2,650,333)
Recourse (136,833) (161,282)
Distributions to shareholders of combined companies
prior to business combination - (1,021,012)(438,405) (80,011)
Proceeds from issuance of capital stock, net of expenses 133,272 177,931 -
Proceeds from sale of stock, net of underwriting costs 9,725,742 2,000,000
Proceeds from lines of credit 5,440,157 362,000
-------------------------------------16,151,047 18,664,953
-----------------------------------
Net cash provided by financing activities 65,122,245 1,577,031
-------------------------------------
5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED - Continued
Nine Months Ended
December 31,
1998 1997
-------------------------------------
64,963,602 34,883,150
-----------------------------------
Net Increase (Decrease) Increase in Cash and Cash Equivalents (11,277,546) 949,3355,812,757 (13,460,480)
Cash and Cash Equivalents, Beginning of Period 7,891,661 18,683,796
6,654,209
------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 7,406,25013,704,418 $ 7,603,544
=====================================5,223,316
===================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 990,6761,133,455 $ 116,787
=====================================216,428
===================================
Cash paid for income taxes $ 2,443,8181,640,501 $ 257,137
=====================================324,446
===================================
See Notes To Condensed Consolidated Financial Statements.
65
MLC HOLDINGS,ePLUS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of MLC Holdings,ePlus Inc. and
subsidiaries (the "Company") included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
All adjustments made were normal, recurring accruals.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K (No. 0-28926) for the year ended March 31, 19981999 (the "Company's
19981999 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. INVESTMENT IN DIRECT FINANCING AND SALES TYPESALES-TYPE LEASES
The Company's investment in direct financing and sales type
The Company's investment in direct financing and sales-type leases consists of the following components:
December 31,September 30, March 31,
1998 19981999 1999
------------------ ------------------
(In thousands)
Minimum lease payments $185,082 $ 69,079 $ 29,96875,449
Estimated unguaranteed residual value 15,218 7,08427,956 17,777
Initial direct costs - net of amortization 1,452 7602,244 1,606
Less: Unearned lease income (10,122) (5,270)(23,573) (10,915)
Reserve for credit losses (546) (46)(546)
================== ==================
Investment in direct financing and sales type leases - net $191,163 $ 75,081 $ 32,49683,371
================== ==================
7
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease
equipment are as follows:
December 31,September 30, March 31,
1998 19981999 1999
----------------- ------------------
(In thousands)
Cost of equipment under operating leases $ 14,80829,087 $ 13,9908,742
Initial direct costs 29 5120 21
Accumulated depreciation and amortization (9,219) (6,745)(15,795) (5,233)
----------------- ------------------
Investment in operating leaseslease equipment - net $ 5,61813,312 $ 7,2963,530
================= ==================
-6-
4. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," as if the pooled companies, which were subchapter S
corporations prior to their business combinations withBUSINESS COMBINATIONS
On July 12, 1999, the Company had been
subject to federal income taxes throughoutpurchased certain assets and the periods presented.
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
------------ -------------- ------------- ---------------
(In Thousands)
Net earnings before pro forma
adjustment $ 1,698 $ 1,277 $ 4,802 $ 4,587
Additional provision for income tax - - - 613
Pro forma net income ----------------------------------------------------
$ 1,698 $1,277 $ 4,802 $ 3,974
============ ============== ============= ===============
5. NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998,sales operations
of Daghigh Software Company, Inc., which operated its value added re-seller
business as International Computer Networks and as ICN in the Company adopted Statementmetropolitan
Washington, DC area. The total consideration of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for$751,452 consisted of $251,452
in cash and the reportingbalance was a non-negotiable promissory note. The non-negotiable
promissory note of $500,000 matures on August 9, 2000 and presentationhas interest of comprehensive income8%
payable monthly. The assets and its components in financial statements by requiring minimum pension
liability adjustments, unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments, which prior to adoptionstaff were reported separately in shareholders' equity, to be included in other
comprehensive earnings. The Company currently has no itemsmerged into a wholly-owned subsidiary
of other
comprehensive income to be reported.
8
6. BUSINESS COMBINATION
On July 1, 1998, the Company, through a new wholly owned subsidiary, MLC Network
Solutions of Virginia, Inc., issued 263,478 common shares, valued at $3,622,822,
and cash of $3,622,836 for all the outstanding common shares of PC Plus, Inc., a
value-added reseller of PC's , related network equipment and software products
and provider of various support services to its customers from its facility in
Reston, Virginia. Subsequent to the acquisition, MLC Network Solutions of
Virginia, Inc. changed its name to PC Plus, Inc. This business combination has
been accounted for using the purchase method of accounting, and accordingly, the
results of operations of PC Plus, Inc. have been includedwhich is based in Herndon, Virginia, upon
acquisition. Goodwill in the Company's
consolidated financial statements from July 1, 1998. The Company's other assets
include goodwill calculated as the excessamount of the purchase price over the fair
value of the net identifiable assets acquired of $6,045,330, and is being$632,667 will be amortized on a
straight-line basis over 27.5 years.a fifteen-year period.
On September 30, 1999, the Company purchased all of the stock of CLG, Inc., a
technology equipment leasing business, from Centura Bank, a wholly-owned
subsidiary of Centura Banks, Inc. The acquisition added approximately 400
customers and $93 million of assets to the Company's leasing customer base in
the Raleigh and Charlotte, North Carolina, Greenville, South Carolina, and
southern Virginia commercial markets. Total consideration for the acquisition
was $36.5 million, paid by the issuance of 392,990 shares of ePlus common stock
valued at $3,900,425 (based on $9.925 per share), subordinated debt of
$3,064,574 with an annual interest rate of 11% payable monthly and the principal
repayment due on October 10, 2006 and can be prepaid at par in whole at anytime,
and $29,535,001 of cash. The cash portion was partially generated by a
non-recourse borrowing under an agreement with Fleet Business Credit
Corporation, a wholly owned subsidiary of Fleet Bank, that provided $27,799,499
of cash at 7.25% using some of the CLG, Inc. leases as collateral. The
transaction generated an initial goodwill amount of approximately $7,725,000
which will be amortized on a straight line basis over a fifteen year period. In
connection with the acquisition, CLG, Inc. was merged into MLC Group, Inc., a
wholly-owned subsidiary of ePlus Inc. on October 1, 1999.
The following unaudited pro formapro-forma financial information presents the combined
results of operations of PC Plus,CLG, Inc. as if the acquisition had occurred as of the
beginning of the ninesix months ended December 31,September 30, 1999 and 1998, and 1997, after giving
effect to certain adjustments, including amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and PC Plus,CLG, Inc. constituted a single
entity during such periods.
NineSix Months Ended December 31,
( inSeptember 30,
(in thousands)
1999 1998
1997
--------------- ----------------- ----
Total Revenues $161,469 $116,506131,562 105,836
Net Earnings 5,021 5,1973,372 3,293
Net Earnings per Common Share - Basic .77 .830.45 0.50
Net Earnings per Common Share - Diluted .76 .81
7. OTHER DEVELOPMENT0.45 0.49
-7-
5. SEGMENT REPORTING
The Company has two major customers who have filed for voluntary bankruptcy
protection. The largest is Allegheny Health, Education & Research Foundation
("AHERF") which is a Pittsburgh based not-for-profit hospital entity. The
bankruptcy court has held an auction and Tenet Healthcare, Inc. acquired AHERF's
assets. As of December 31, 1998,manages its business segments on the Company's net book value of leases to AHERF
is approximately $1,874,000 and receivable balance is approximately $478,000.
The Company believes that the fair market valuebasis of the products and
services offered. The Company's reportable segments consist of its lease
financing and value-added re-selling business units. The lease financing
business unit offers lease financing solutions to corporations and governmental
entities nationwide. The value-added re-selling business unit sells information
technology equipment is below its
current book balances. Dependingand related services primarily to corporate customers in
the eastern United States. The Company's management evaluates segment
performance on the decisions by the Bankruptcy Trustee and
the creditor status and ultimate repayment schedulebasis of other claims, upon
disposalsegment earnings.
The accounting policies of the equipmentsegments are the same as those described in Note
1, "Organization and dispositionSummary of its claims, the Company will
probably sustain a loss, and has accordingly provided for such loss in the
statement of earnings for the nine month period ended December 31, 1998. The
amount and timing of such loss cannot be accurately estimated by the Company at
this time due to the recent filing and unknown status of many of its claims. The
Company has received a depositSignificant Accounting Policies." Corporate
overhead expenses are allocated on the purchasebasis of revenue volume, estimates of
actual time spent by corporate staff, and asset utilization, depending on the
leased equipment from
Tenet Healthcare, Inc. which represents the total cash consideration for the
future transfertype of titleexpense.
Lease Value-added
Financing Re-selling Total
--------- ---------- -----
(In Thousands)
Three months ended September 30, 1999
Revenues $ 21,291 $ 39,901 $ 61,192
Cost of the equipment once the bankruptcy court makes the
equipment available for liquidation. During the quarter ending December 31,sales 13,600 34,178 47,778
Selling, general and administrative
expenses 3,913 4,144 8,057
----- ----- -----
Segment earnings 3,778 1,579 5,357
----- -----
Interest expense 1,875
-----
Earnings before income taxes 3,482
=====
Assets $285,266 $ 36,943 $ 322,209
Three months ended September 30, 1998
PHP Healthcare, Inc. a lesseeRevenues $ 18,202 $ 19,799 $ 38,001
Cost of the Company, was placed in receivership
by the New Jersey Insurance Commission which led to them filing for voluntary
9sales 11,867 16,199 28,066
Selling, general and administrative
expenses 3,587 2,759 6,346
----- ----- -----
Segment earnings 2,748 841 3,589
----- ---
Interest expense 856
---
Earnings before income taxes 2,733
=====
Assets $108,210 $ 21,600 $ 129,810
-8-
bankruptcy protection. The Company has a net book valueLease Value-added
Financing Re-selling Total
--------- ---------- -----
(In Thousands)
Six months ended September 30, 1999
Revenues $ 41,524 $ 74,039 $ 115,563
Cost of assets totaling
approximately $359,000 at risk with this lessee. The remaindersales 27,840 63,868 91,708
Selling, general and administrative
expenses 7,327 7,349 14,676
----- ----- ------
Segment earnings 6,357 2,822 9,179
----- -----
Interest expense 3,193
-----
Earnings before income taxes 5,986
=====
Assets $ 285,266 $ 36,943 $ 322,209
Six months ended September 30, 1998
Revenues $ 49,579 $ 30,005 $ 79,584
Cost of the lease risk
is the financial responsibility of the non-recourse lenders. The Company is
vigorously pursuing all available remedies in bankruptcy court for all prior
claims against these bankrupt lessees. The Company believes that as of December
31, 1998, its reserves are adequate to provide for the potential losses
resulting from these customers.
8. PRIVATE PLACEMENT OF EQUITYsales 37,108 24,054 61,162
Selling, general and administrative
expenses 7,276 4,616 11,892
----- ----- ------
Segment earnings 5,195 1,335 6,530
----- -----
Interest expense 1,357
-----
Earnings before income taxes 5,173
=====
Assets $ 108,210 $ 21,600 $ 129,810
6. SUBSEQUENT EVENT
On October 23, 1998,25, 1999, MLC Holdings, Inc. issued a press release that announced
that it had changed its name to ePlus, Inc. and will be operating under the Company issued 1,111,111 shares of unregistered common
stock to a single investor in a private placement for cash consideration of
$10,000,000 (per share price of $9.00). The investor also received a warrant to
purchase an additional 1,090,909 shares of common stock at an exercise price of
$11.00 per share. The warrant expires December 31, 2001.
10
ITEMname
ePlus, effective November 1, 1999. ePlus will trade under the ticker symbol
"PLUS" on the NASDAQ national market.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, AND
FINANCIAL
CONDITION
The following discussion and analysis compares the consolidatedof results of operations forand financial
condition of the nine- and three-month periods ended December 31, 1998 to the
nine- and three-month periods ended December 31, 1997. The operating results of
these nine- and three-month periods are not necessarily indicative of operating
results in future periods. The following comparative informationCompany should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanyingthe related Notes as well as the information presentedthereto included
elsewhere herein and in
the financial statements and related notes for the year ended March 31, 1998
included in the Company's 1998 Form 10-K.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this report, whichand the Company's 1999 Form 10-K.
Certain statements contained herein are not based on historical facts may be
deemed to containfact, but are
forward-looking statements with respectthat are based upon numerous assumptions about future
conditions that may not occur. Actual events, transactions and results may
materially differ from the anticipated events, transactions, or results
described in such statements. The Company's ability to consummate such
transactions and achieve such events the
occurrence of which involveor results is subject to certain risks and
-9-
uncertainties. Such risks and uncertainties including, without
limitation,include, but are not limited to, the
existence of demand for and competition foracceptance of the Company's leaseservices, economic
conditions, the impact of competition and pricing, results of financing services
and the products to be leased by the Company, the continued availability to the
Company of adequate financing, the ability of the Company to recover its
investment in equipment through re-marketing, the ability of the Company to
manage its growth,efforts
and other risks or uncertainties detailed infactors affecting the Company's Securitiesbusiness that are beyond the Company's
control. The Company undertakes no obligation and Exchange Commission filings.does not intend to update,
revise or otherwise publicly release the result of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
The Company's results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, differences between estimated
residual values and actual amounts realized related to the equipment the Company
leases. Operating results could also fluctuate as a result of the sale by the
Company of equipment in its lease portfolio prior to the expiration of the lease
term to the lessee or to a third party. Such sales of leased equipment prior to
the expiration of the lease term may have the effect of increasing revenues and
net earnings during the period in which the sale occurs, and reducing revenues
and net earnings otherwise expected in subsequent periods.
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 financing 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
-10-
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 re-leasing the Company's own portfolio. This profit (or loss) which is
recognized at lease inception, is included in net margin on sales-type leases.
For equipment sold through the Company's value added re-seller subsidiaries, the
dealer margin is presented in equipment sales revenue and cost of equipment
sales. 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 revenues.
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 on a straight line basis 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 the resulting
profit for operating leases are recorded evenly over the life of the lease.
As a result of these three classifications of leases for accounting purposes,
the revenues resulting from the "mix" of lease classifications during an
accounting period will affect the profit margin percentage for such period with
such profit margin percentage generally increasing as revenues from direct
financing and sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
Residual Values. Residual values represent the Company's estimated value of the
equipment at the end of the initial lease term. The residual values for direct
financing and sales-type leases are recorded in investment in direct financing
and sales-type leases, on a net present value basis. The residual values for
operating leases are included in the leased equipment's net book value and are
recorded in investment in operating lease equipment. The estimated residual
values will vary, both in amount and as a percentage of the original equipment
cost, and depend 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 equipment sales revenues and cost of equipment 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 financing or operating leases are capitalized and recorded as
part of the net investment in direct financing leases, or net operating lease
equipment, and are amortized over the lease term.
-11-
Sales. Sales revenue includes the following types of transactions: (i) sales of
new and/or used equipment which is not subject to any type of lease; (ii) sales
of equipment subject to an existing lease, under which the Company is lessor,
including any underlying financing related to the lease; and (iii) sales of
off-lease equipment to either 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) re-marketing 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 statements of
earnings.
RESULTS OF OPERATIONS - Three and NineSix Months Ended December 31, 1998,September 30, 1999 Compared
to Three and NineSix Months Ended December 31, 1997September 30, 1998
The following discussion and analysis of the Company's results of operations
should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements for the three and six month periods ended
September 30, 1999 and 1998.
Total revenues generated by the Company during the three month period ended
December 31, 1998September 30, 1999 were $69,946,693$61,191,732, compared to revenues of $23,563,409$38,001,095 during
the comparable period in the prior fiscal year, an increase of 196.84%61.0%. During the
ninesix month period ended December 31,September 30, total revenues were $149,530,588$115,562,852 and
$91,280,465$79,583,896 in 19981999 and 1997,1998, respectively, an increase of 63.81%45.2%. The Company's
revenues are composed of sales and other revenue, and may vary considerably from
period to period (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 251.92%67.2% to $63,688,706$52,621,273 during the three month period ended December
31,September 30,
1998, as compared to $18,097,358$31,479,370 in the corresponding period in the prior fiscal
year. For the ninesix month period ended December 31, 1998,September 30 1999, sales increased 72.02%50.3% to
$130,353,155$100,182,878 over the corresponding period in the prior year.
11
During the three months ended December 31,September 30, 1999 and 1998, and 1997, sales to MLC/CLC,
LLC, an institutional equity partner of the Company, accounted for 27.3% and
100% of sales of leased equipment, for both periods.respectively. During the ninesix month periods
ended December
31,September 30, sales to MLC/CLC LLC accounted for 31% and 100% of 1999 and
85.9% of 1998 and 1997 sales of leased equipment, respectively. Sales to the Company's equity
joint ventures require the consent of the relevant joint venture partner. While
management expects the continued availability of equity financing through this
joint venture, if such consent is withheld, or financing from this entity
otherwise becomes unavailable, it could have a material adverse effect upon the
Company's business, financial condition, results of operations and cash flows
until other equity financing arrangements are secured.
Sales of equipment, both new and used, are generated through the Company's
equipment brokerage and re-marketing activities, and through its valued addedvalue-added
reseller ("VAR") subsidiaries. Sales of equipment increased during the three
month period (137.42%(94.1%) $14,836,069$18,655,234 compared to the corresponding period in the
-12-
prior fiscal year. For the fiscal year to date through December 31,September 30, equipment
sales increased 53.6%138.0% to $55,740,476.$71,661,466. On a pro forma basis, had PC Plus,CLG, Inc.'s
equipment sales been included throughout the periods presented, equipment sales
would have increased 22.34%23.5% and 53.42%66.3% during the three and ninesix month periods
ended December 31, 1998September 30, 1999, respectively, as compared to the comparable periods in
the prior fiscal year. The Company's brokerage and re-marketing activities
accounted for 2.11%.17% and 25.1%3.6% of equipment sales during the three month period in
19981999 and 1997,1998, respectively. During the ninesix month periods ended December 31,September 30,
brokerage and re-marketing activities accounted for 3.2%.3% and 18.6%4.1% of 19981999 and
19971998 sales, respectively. Brokerage and re-marketing revenue can vary
significantly from period to period, depending on the volume and timing of
transactions, and the availability of equipment for sale. Sales of equipment
through the Company's VAR subsidiaries accounted for the remaining portion of
equipment sales.
The Company realized a gross margin on sales of equipment of 13.6%11.0% and 15.4%10.6% for
the three and ninesix month periods ended December 31, 1998,September 30, 1999, respectively, as
compared to a gross margin of 23.0%15.7% and 21.7%16.9% realized on sales of equipment
generated during the three and nine monthsix months periods, respectively, in the prior
fiscal year. This decrease in net margin percentage can be attributed to the
Company's July 1, 1998 acquisition of PC Plus, Inc., who has a concentration of
higher volume customers with lower gross margin percentages. The Company's gross
margin on sales of equipment can be effectedaffected by the mix and volume of products
sold.
The gross margin generated on sales of leased equipment represent the sale of
the equity portion of equipment placed under lease and can vary significantly
depending on the nature, and timing of the sale, as well as the timing of any
debt funding recognized in accordance with SFAS No. 125. For example, a lower
margin or a loss on the equity portion of a transaction is often offset by
higher lease earnings and/or a higher gain on the debt funding recognized under
SFAS No. 125. Additionally, leases which have been debt funded prior to their
equity sale will result in a lower sales and cost of sale figure, but the net
earnings from the transaction will be the same as had the deal been debt funded
subsequent to the sale of the equity. During the three month period ended
December 31, 1998,September 30, 1999, the Company recognized a gross margin of $576,821$601,436 on equity
sales of $38,053,115$14,135,588, as compared to a net lossgross margin of $9,060$308,271 on equity sales
of $7,299,836$11,648,919 during the same period in the prior fiscal year. For the fiscal
year to date through December 31, 1998,September 30, 1999, the Company recognized a gross margin
of $982,671$861,828 on equity sales of $74,612,679,$28,521,412, as compared to a gross margin of
$597,501$405,851 on equity sales of $39,486,348$36,559,565 during the same period in the prior
fiscal year.
12
The Company's lease revenues increased 24.76%29.4% to $4,745,035$6,811,368 for the three-month
period ended December 31, 1998,September 30, 1999, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through December 31,September 30, lease
revenues increased 36.04%20.5% to $14,994,505$12,349,107 for the 19981999 period compared to the same
period in 1997.1998. This increase consists of increased lease earnings and rental
revenues reflecting a higher average investment in direct financing and
sales typesales-type leases. The investment in direct financing and sales typesales-type leases at
December 31, 1998September 30, 1999 and March 31, 19981999 were $75,080,815$191,163,216 and $32,495,594,$83,370,950,
respectively. The December 31, 1998September 30, 1999 balance represents an increase of
$42,585,221$107,792,266 or 131.05%129.3% over the balance as of March 31, 1998.1999. $72 million of
this increase is attributable to the acquisition of CLG, Inc. on September 30,
1999 (see Note 4). In addition, lease revenue includes the gain or loss on the
sale of certain financial assets, as required under the provisions of Statement of Financial
Accounting Standard No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") which was
effective beginning January 1, 1997. During the three and ninesix month periods
-13-
ending December 31,
1998,September 30, 1999, fewer of the Company's debt funding transactions
qualified for gain on sale treatment prescribed under SFAS No. 125 as compared
to the comparable periods in the prior fiscal year.
For the three and ninesix months ended December 31, 1998,September 30, 1999, fee and other income
decreased 9.00%increased 40.0% and 6.67%13.5%, respectively, over the comparable period in the prior
fiscal year. This decreaseincrease is attributable to decreasesincreases in revenues from adjunct
services and fees, including broker fees, support fees, warranty reimbursements,
and learning center revenues generated by the Company's VAR subsidiaries.
Included in the Company's fee and other income are earnings from certain
transactions which are in the Company's normal course of business but there is
no guarantee that future transactions of the same nature, size or profitability
will occur. The Company's ability to consumateconsummate such transactions, and the
timing thereof, may depend largely upon factors outside the direct control of
management. The earnings from these types of transactions in a particular period
may not be indicative of the earnings that can be expected in future periods.
The Company's direct lease costs increased 6.79%decreased 20.0% and 37.5% during the ninethree and
six month periods ended December 31, 1998September 30, 1999, as compared to the same periodperiods in
the prior fiscal year. There was a slight decrease, less than 1%, in direct lease costs for the three
month period ended December 31, 1998 as compared to December 31, 1997. Although
theThe largest component of direct lease costs is
depreciation on operating lease equipment, and the increasedecrease is primarily
attributable to an increasereduced depreciation on a smaller operating lease portfolio. In
addition, the decrease is attributable to a reduction in the allowanceprovision for
doubtful accounts due to the increased business volume of leases
and retained lease portfolio and increased amortization of initial direct costs.credit losses at September 30, 1999.
Salaries and benefits expenses increased 18.07%51.1% during the three month period
ended December 31, 1998September 30, 1999 over the same period in the prior year. For the fiscal
year to date through December 31, 1998,September 30, 1999, salaries and benefits had increased
14.73%59.0% over the prior year. These increases reflect both the higher commission
expenses in the value added reseller businesses and the increased number of
personellpersonnel employed by the Company.
Interest and financing costs incurred by the Company for the three and ninesix
months ended December 31, 1998September 30, 1999 amounted to $1,140,617$1,874,540 and $2,498,012,$3,192,895
respectively, and relate to interest costs on the Company's lines of credit and
notes payable. Payment for interest costs on the majority of non-recourse and
13
certain recourse notes are typically remitted directly to the lender by the
lessee. The increase in interest and financing costs are primarily due to the
Company's increased utilization of its operating lines of credit during the
three and ninesix month periods in the current fiscal year as compared to the prior
fiscal year.
The Company's provision for income taxes increased to $1,131,934$1,392,865 for the three
months ended December 31, 1998September 30, 1999 from $850,584$1,093,368 for the three months ended
December
31, 1997,September 30, 1998, reflecting an effective income tax ratesrate of 40%40.0% for both
periods. For the ninesix months ended December 31, 1998,September 30, 1999, the Company's provision
for income tax was $3,201,099$2,394,507, as compared to $1,722,717$2,069,165 during the comparable
period in the prior year, reflecting effective income tax rates of 40% and 27.3%, respectively. The
low effective income tax rate40.0% for
December 31, 1997 was primarily due to the
inclusion of the net earnings of businesses acquired by the Company, which prior
to their combination with the Company had elected subchapter S corporation
status, and as such, were not previously subject to federal income tax. Pro
forma tax expense, adjusted as if the Company's subsidiaries which were
previously subchapter S corporations had been subject to income tax for the
three and nine months ended December 31, 1997, would have increased the expense
by approximately $-0- and $613,261.both periods.
The foregoing resulted in a 32.91%27.4% and 4.68%15.7% increase in net earnings for the
three and ninesix month periods ended December 31, 1998,September 30, 1999, respectively, as compared
to the same periods in the prior fiscal year after taking into consideration the
pro forma tax expense.year.
Basic and fully diluted earnings per common share were $.24$.28, for the three
months ended December 31, 1998,September 30, 1999, as compared to $.21$.26 and .25, respectively, for
-14-
the three months ended December
31, 1997,September 30, 1998, based on weighted average common
shares outstanding of 7,189,3247,491,305 and 7,220,060,7,570,015, respectively, for 1998,1999, and
6,071,3056,348,603 and 6,188,990,6,439,658, respectively, for 1997.1998. For the fiscal year to date
through December 31, 1998,September 30, 1999, the Company's basic and fully diluted earnings per
common share were $.73 and $.72,
respectively,$.48, as compared to $.76$.50 and $.75,$.49, respectively, for the same
period in 1997,1998, based on weighted average common shares outstanding of 6,540,3597,484,456
and 6,648,754,7,519,904, respectively, for 1998,1999, and 6,017,9206,214,103 and 6,127,9336,346,548,
respectively, for 1997.1998.
LIQUIDITY AND CAPITAL RESOURCES
During the ninesix month period ended December 31, 1998,September 30, 1999, the Company used cash
flows infrom operations of $2,931,126,$4,014,351, and used cash flows from investing
activities of $73,468,665.$55,136,494. Cash flows generated by financing activities amounted
to $65,122,245$64,963,602 during the same period. The net effect of these cash flows was a net
decrease into
increase cash and cash equivalents of $11,277,546by $5,812,757 during the ninesix month period.
During the same period, the Company's total assets increased $54,524,577,$167,850,085, or
65.54%108.7%, primarily the result of increases in direct financing leases and the
acquisition of PC Plus,CLG, Inc., a wholly ownedwholly-owned subsidiary, on July
1, 1998.September 30, 1999. The
Company's net investment in operating lease equipment decreasedalso increased during the
period as a result of the decrease in book value, primarily due to depreciation,
outpaced new investment in operating lease equipment.CLG, Inc. acquisition.
The financing necessary to support the Company's leasing activities has
principally been provided from non-recourse and recourse borrowings.
Historically, the Company has obtained recourse and non-recourse borrowings from
money centers, regional banks, insurance companies, finance companies and
financial intermediaries.
The Company's "Accounts payable - equipment" represents equipment costs that
have been placed on a lease schedule, but for which the Company has not yet
paid. The balance of unpaid equipment cost can vary depending on vendor terms
and the timing of lease originations. As of December 31, 1998,September 30, 1999, the Company had
$18,931,416$33,241,271 of unpaid equipment cost, as compared to $21,283,582$18,049,059 at March 31,
1998.
14
1999.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. From June 5, 1997
until December 18, 1998, the Company had entered into the First Union Facility
withfacilities through First Union
National Bank, N.A., for a maximum facility limit of $35
million which bore interest at LIBOR+110 basis points, or, at the Company's
option, prime minus one percent. On December 18, 1998, MLC Holdings, ePlus Inc., with its two wholly-owned subsidiaries, MLC
Group, Inc., and MLC Federal, Inc., as co-borrowers, finalized and executed documents establishinghas established a
$50,000,000 committed recourse line of credit with First Union National Bank. Under the
terms of the successor First Union Credit Facility, a maximum amount of $50
million is available to MLC, though each drawwhich is subject to the
availability of sufficient collateral in the borrowing base.
The First Union Credit Facility, is
evidenced by a credit agreement, dated as of December 31, 1998, a security
agreement and a pledge agreement both datedwhich was effective as of December 18, 1998. Borrowings
under1998 has
the First Union Credit Facility will bearfollowing terms:
o interest at LIBOR + 150 basis points, or, at the Company'sour option, prime minus
one-half percent.percent; and
o each draw is subject to the availability of sufficient collateral as
provided in the borrowing base.
The First Union Credit Facility is secured by certain of the three company'sCompany's assets
such as chattel paper (including leases), receivables, inventory, and equipment.
In addition, MLC Holdings,ePlus Inc. has entered into pledge agreements to pledge the common
stock of each of its subsidiaries. The availability of the line is subject to a
borrowing base, which consists of inventory, receivables, purchased assets, and
leases. Availability under the revolving lines of credit may be limited by the
15
asset value of equipment purchased by MLCePlus and may be further limited by
certain covenants and terms and conditions of the facilities. In the event that
MLCePlus is unable to sell the equipment or unable to finance the equipment on a
permanent basis within a certain period of time, the availability of credit
under the lines could be diminished or eliminated. Furthermore, in the event
that receivables collateralizing the line are uncollectible, MLCePlus would be
responsible for repayment of the lines of credit.
The First Union Credit Facility contains a number of covenants binding on MLCePlus,
requiring, among other things, minimum tangible net worth, cash flow coverage
ratios, maximum debt to equity ratio, maximum amount of guarantees of subsidiary
obligations, mergers, acquisitions, and asset sales. The Credit FacilityThis facility is a fullfully
recourse, facility, secured by first-priority blanket liens on all of MLC'sePlus's assets.
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. The newlatest First
Union Credit Facility expires on December 18, 1999. Other participants in the First Union Credit
Facility,National Bank,
N.A. has syndicated this facility to other participants each for $7,000,000, are:$7,000,000. The
other participants are Riggs Bank, N.A., Key Bank, N.A., Summit Bank, N.A., Bank
Leumi USA, and Wachovia Bank., N.A. As of December 31, 1998,September 30, 1999, the Company had an
outstanding balance of $17,000,000$33.5 million on the First Union Credit Facility.
The Company's subsidiaries,
MLC Network Solutions,("MLC Network Solutions") Educational Computer Concepts,
Inc. ("ECC, Inc.") and MLC Integrated,
Inc., and it's recently acquired subsidiary, PC Plus Inc., have separate credit sources to finance their
working capital requirements for inventories and accounts receivable. Their
traditional business as value-added resellers of PC's and related network
equipment and software products is financed through agreements known as "floor
planning" financing where interest expense for the first thirty to forty days is
not charged to us but is paid for by the supplier/distributor but not the
reseller.distributor. These floor plan
liabilities are recorded in our financial records under trade accounts payable
as they are normally repaid within the thirty to forty day time frame and
represent an assigned accounts payable originally generated with the
supplier/distributor. If the thirty to forty day obligation is not paid timely, liquidated,
interest is then assessed at stated contractual rates.
As of December 31, 1998,September 30, 1999, the floor planning agreements are as follows:
Balance at
Credit September 30,
Entity Floor Plan Supplier Limit 1999
------ ------------------- ----- ----
MLC Network Solutions Inc., has floor planning availability of $2,600,000 through Deutsche Financial, Inc. and $225,000 from$ 1,975,000 $ 1,503,484
Finova Capital Corporation $ 4,000,000 $ 156,873
IBM Credit Corporation. The outstanding
balances to these respective suppliers were $1,047,889 and $32,898 as of
December 31, 1998. MLC Integrated,Corporation $ 225,000 $ 314
ECC Inc. has floor planning availability of
$3,000,000 from FINOVAFinova Capital Corporation and $750,000 through$ 5,000,000 $ 3,115,376
IBM Credit Corporation. The outstanding balancesCorporation $ 750,000 $ 52,231
PC Plus Bank of America $ 11,000,000 $ 816,962
All of the above credit facility limits have been increased during the year to
these respective suppliers were
$2,045,545, and $197,640 as of December 31, 1998. In addition, MLC Integrated,
15
provide the credit capacity to increase our sales on account. ECC, Inc. also has
a line of credit in place expiring on July 31, 1999, with PNC Bank, N.A. to provide anwhich expires on
-16-
July 31, 2000. This asset based credit facility. The line has a maximum credit limit of $2,500,000
and interest is based oncharges are set at the bank's prime rate. The outstanding balance
was $1,179,000$544,000 as of December 31, 1998. PC Plus, Inc. has
floor planning availability of $6,000,000 through NationsCredit Commercial
Corporation as of December 31, 1998. This agreement expires October 1,September 30, 1999. The outstanding balancecredit facilities provided by Finova
Capital Corporation and PNC Banks, N.A., are required to this supplier was $1,956,344 as of December 31, 1998.be guaranteed by ePlus
Inc.
Non-recourse debt and debt that is partially recourse is provided by various
lending institutions. The Company has formal programs with Heller Financial,
Inc., Key Corporate Capital, Inc., and Sanwa Business Credit Corporation. These
programs require that each transaction is specifically approved and done solely
at the lender's discretion.
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 "Item 2,
Management's Discussion and Analysis of Results of Operations, Financial
Condition."
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
established a $10,000,000 credit facility agreement with Heller Financial, Inc.
("Heller"). Under the terms of the Heller Facility, a maximum amount of
$10,000,000 was available to borrow provided that each draw was subject to the
approval of Heller. On March 12, 1998, the formal commitment from Heller to fund
additional advances under the line was allowed to expire, however, we are still
transacting business as if the formal agreement terms are in place. The primary
purpose of the Heller Facility was for the permanent fixed-rate discounting of
rents for commercial leases of information technology assets with the Company's
middle-market customers. As of September 30, 1999, the balance on this account
was $3,099,356. Each advance under the facility bears interest at an annual rate
equal to the sum of the weekly average U.S. Treasury Constant Maturities for a
Treasury Note having approximately an equal term as the weighted average term of
the contracts subject to the advance, plus an index ranging from 1.75% to 3.00%,
depending on the amount of the advance and the credit rating (if any) of the
lessee. The Heller Facility contains a number of contractual covenants and is a
limited recourse facility, secured by a first-priority lien in the lease
contracts and chattel paper relating to each loan advance, the equipment under
the lease contracts, a 10% cross-collateralized first loss guarantee, and all
books, records and proceeds. The Heller Facility was made to MLC Group and is
guaranteed by ePlus. The Heller Facility is subject to their sole discretion,
and is further subject to MLC Group's compliance with certain conditions and
procedures.
Through MLC/CLC, LLC, the Company has a formal joint venture agreement which
provides the equity investment financing for certain of the Company's
transactions. Firstar Equipment Finance Company ("FEFCO"), formerly Cargill
Leasing Corporation, is an unaffiliated investor which owns 95% of MLC/CLC, LLC.
FEFCO's parent company, Firstar Corporation, is a $20 billion bank holding
company which is publicly traded on the New York Stock Exchange under the symbol
"FSR". This joint venture arrangement enables the Company to invest in a
significantly greater portfolio of business than its limited capital base would
otherwise allow. A significant portion of the Company's revenue generated by the
sale of leased equipment is attributable to sales to MLC/CLC,LLC. (See "RESULTS
OF OPERATIONS").
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flow from its
-17-
operations, the sale of the equipment lease to MLC/CLC,LLC , or other internal
means of financing. Although the Company expects that the credit quality of its
leases and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available, at
acceptable terms, or at all.
The Company anticipates that its current cash on hand, operations and additional
financing available under the Company's credit facilities will be sufficient to
meet the Company's liquidity requirements for its operations through the
remainder of the fiscal year. However, the Company intends to continue pursuing
additional acquisitions, which are expected to be funded through a combination
of cash and the issuance by the Company of shares of its common stock. To the
extent that the Company elects to pursue acquisitions involving the payment of
significant amounts of cash (to fund the purchase price of such acquisitions and
the repayment of assumed indebtedness), the Company is likely to require
additional sources of financing to fund such non-operating cash needs.
16
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the time of any material decrease in
any widely followed stock index or in the market price of the stock of one or
more public equipment leasing and financing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, any reduction of
expected residual values related to the equipment under the Company's leases,
timing of specific transactions and other factors. Quarterly operating results
could also fluctuate as a result of the sale by the Company of equipment in its
lease portfolio, at the expiration of a lease term or prior to such expiration,
to a lessee or to a third party. Such sales of equipment may have the effect of
increasing revenues and net income during the quarter in which the sale occurs,
and reducing revenues and net income otherwise expected in subsequent quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first threetwo quarters of fiscal 1999.2000.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
-18-
The Company's strategy depends upon acquisitions and organic growth to increase
its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and cross selling activities also could adversely
affect the Company's business, financial condition, results of operations and
cash flows.quarterly earnings.
In addition, there can be no assurance that acquisitions will occur at the same
pace as in prior periods or be available to the Company on favorable terms, if
at all. If the Company is unable to use the Company's common stock as
consideration in acquisitions, for example, because it believes that the market
price of the common stock is too low or because the owners of potential
acquisition targets conclude that the market price of the Company's common stock
is too volatile, the Company would need to use cash to make acquisitions, and,
therefore, would be unable to negotiate acquisitions that it would account for
under the pooling-of-interests method of accounting (which is available only for
all-stock acquisitions). This might adversely affect the pace of the Company's
acquisition program and the impact of acquisitions on the Company's business,
financial condition, results of operations and cash flows.quarterly
results. In addition, the consolidation of the equipment leasing business has
reduced the number of companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. The failure to acquire additional businesses or to acquire such
businesses on favorable terms in accordance with the Company's growth strategy
could have a material adverse impact on future sales and profitability.
17
There can be no assurance that companies that have been acquired or that may be
acquired in the future will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows,financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
The Company has increased the range of products and services it offers through
acquisitions of companies offering products and services that are complementary
to the core financing and equipment brokering services that the Company has
offered since it began operations. The Company's ability to manage an aggressive
consolidation program in markets other than domestic equipment financing has not
yet been fully tested. The Company's efforts to sell additional products and
services to existing customers are in their early stages and there can be no
assurance that such efforts will be successful. In addition, the Company expects
that certain of its products and services will not be easily cross-sold and may
be marketed and sold independently of other products and services.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management administration. The various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. There can be no assurance that the Company's executive
-19-
management group can continue to oversee the Company and effectively implement
its operating or growth strategies in each of the markets that it serves. In
addition, there can be no assurance that the pace of the Company's acquisitions,
or the diversification of its business outside of its core leasing operations,
will not adversely affect the Company's efforts to implement its cost-savings
and integration strategies and to manage its acquisitions profitability.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic and
product markets, and other competitors may choose to enter the Company's
geographic and product markets in the future. No assurances can be give that
competition will not have an adverse effect on the Company's business.
18
YEAR 2000 ISSUE
The Company has identified all significant hardware and software applications,
both IT and non-IT based, that will require upgrade or modification to ensure
Year 2000 compliance. The upgrade and/or modification of the majority of these
systems is substantially complete. The Company plans onanticipates completing the
process of modifying and/or upgrading its remaining systems by MarchDecember 31,
1999. The total cost of these Year 2000 compliance activities has not been, nor
is it anticipated to become, material to the Company's financial position,
results of operations or cash flows in any given year.
The Company recognizes the risks surrounding its own Year 2000 readiness, for
which it believes it has adequately addressed, as well as the risks arising from
the failure of third parties with whom it has a material relationship to
remediate their own Year 2000 issues. While the risks of third party
non-compliance may temporarily affect the ability of a third party to transact
business with the Company, the Company believes such risks are adequately
mitigated by its own contingency plans.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
19Although a substantial portion of the Company's liabilities are non-recourse,
fixed interest rate instruments, the Company is reliant upon lines of credit and
other financing facilities which are subject to fluctuations in interest rates.
Should interest rates significantly increase, the Company would incur higher
interest expense, and to the extent that the Company is unable to recover these
higher costs, which could potentially lower earnings.
-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Under Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On September 13, 1999, the Company held its Annual Meeting of Stockholders.
1. At the Annual Meeting, Phillip G. Norton was elected to the Board of
Directors as a Class II director to hold office for three years until
his successor has been duly elected and shall qualify, with votes cast
and withheld as follows:
For Withheld
-----------------------------
6,496,677 986,085
2. At the Annual Meeting, Bruce M. Bowen was elected to the Board of
Directors as a Class II director to hold office for three years until
his successor has been duly elected and shall qualify, with votes cast
and withheld as follows:
For Withheld
-------------------------------
6,496,677 986,085
In addition, the Company's stockholders approved the following
proposals at the Annual Meeting, with votes for and against,
abstentions and broker non-votes follow:
3. To change the Company's name to ePlus, Inc.
For Against Broker Non-Votes
-------------------------------------------------------
6,493,778 3,049 985,935
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the Company's fiscal year ending March 31,
2000.
For Against Broker Non-Votes
-------------------------------------------------------
6,495,703 150 986,909
Item 5. OTHER INFORMATION
Not Applicable
Item 5. Other Information
Not Applicable
20-21-
Item 6(a) Exhibits
Exhibit
Number Description Page
-------------- ---------------------------------------------------------------
10.28 Sublease by and between Cisco Systems ("Tenant")
and MLC Holdings, Inc. ("Subtenant")
27---------------------------------------------------------
27.1 Financial Data Schedule 24
Item 6(b) Reports on Form 8-K
During the thirdsecond fiscal quarter covered by this report, the Company
filed the ollowingfollowing Current Reports on formForm 8-K:
Form 8-K dated October 23, 1998September 10, 1999 and filed with the Commission on
November 13, 1998,September 14, 1999, reporting interim information regarding the
issuanceacquisition of 1,111,111 sharesCLG, Inc. of common stock in a private placement.Raleigh, North Carolina. No financial
statements were included.
Form 8-K dated December 18, 1998 and filed with the Commission on
December 31, 1998, reporting the establishment of a $50,000,000 line
of credit with First Union National Bank. No financial statements were
included.
21-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
MLC Holdings, Inc.ePLUS INC.
---------------------------------
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: February 10, 1999January 20, 2000
---------------------------------
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: February 10, 1999
22January 20, 2000
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