1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File Number 0-28926
MLC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1817218
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Road, Suite 110, Reston, VA
20190-5321 (Address of principal executive offices) (Zip Code)
(703) 834-5710
(Registrant's telephone number, including area code)
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 Registrant's common stock outstanding September 30, 1997
was 6,071,305.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
PAGE
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1997 (Unaudited) and March
31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Earnings,
Three month periods ended September 30, 1997
(Unaudited) and 1996 (Unaudited) 4
Condensed Consolidated Statements of Earnings, Six
month periods ended September 30, 1997 (Unaudited)
and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows,
Six month periods ended September 30, 1997
(Unaudited) and 1996 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1997 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
ASSETS
Cash and cash equivalents $ 7,839,310 $ 6,654,209
Accounts receivable 13,031,809 8,846,426
Notes receivable 4,446,931 2,154,250
Employee advances 95,918 70,612
Inventories 1,625,496 1,253,694
Investment in direct financing and
sales-type leases - net 18,590,416 17,473,069
Investment in operating lease
equipment - net 8,799,124 11,065,159
Property and equipment - net 1,029,857 765,194
Other assets 1,858,340 740,925
----------- -----------
TOTAL ASSETS $57,317,201 $49,023,538
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable - equipment $ 6,766,488 $ 4,946,422
Accounts payable - trade 4,237,264 2,152,841
Salaries and commissions payable 335,361 671,899
Accrued expenses and other
liabilities 3,779,240 2,256,884
Income taxes payable ----- 930,587
Recourse notes payable 4,763,664 1,293,100
Nonrecourse notes payable 16,134,240 19,705,060
Deferred taxes 590,000 590,000
----------- -----------
Total liabilities 36,606,257 32,546,793
----------- -----------
COMMITMENTS AND CONTINGENCIES ----- -----
Stockholder's 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;
6,071,305 and 5,909,976 shares
issued and outstanding at September
30, 1997 and March 31, 1997,
respectively 60,713 59,100
Additional paid-in capital 11,356,710 9,346,214
Retained earnings 9,293,521 7,071,431
----------- -----------
Total stockholders' equity 20,710,944 16,476,745
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $57,317,201 $49,023,538
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
September 30,
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUES:
Sales of equipment $10,360,696 $11,188,472
Sales of leased equipment 12,046,271 3,472,413
----------- -----------
Total sales 22,406,967 14,660,885
Lease revenues 3,378,087 2,119,145
Fee and other income 1,468,285 1,244,776
----------- -----------
Total other revenue 4,846,372 3,363,921
----------- -----------
TOTAL REVENUES 27,253,339 18,024,806
----------- -----------
COSTS AND EXPENSES:
Cost of sales of equipment 8,104,931 9,472,187
Cost of sales of leased equipment 11,667,934 3,340,522
----------- -----------
Total cost of sales 19,772,865 12,812,709
Direct lease costs 1,622,521 915,955
Professional and other fees 244,612 91,655
Salaries and benefits 2,399,029 1,883,871
General and administrative expenses 986,677 707,373
Interest and financing costs 509,480 406,792
Non-recurring acquisition costs 183,453 -----
----------- -----------
Total expenses 5,945,772 4,005,646
----------- -----------
TOTAL COSTS AND EXPENSES 25,718,637 16,818,355
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,534,702 1,206,451
Provision for income taxes 411,820 322,000
----------- -----------
NET EARNINGS $ 1,122,882 $ 884,451
=========== ===========
NET EARNINGS PER COMMON SHARE $ 0.19 $ 0.19
=========== ===========
PRO FORMA NET EARNINGS (See Note 4) $ 974,536 $ 776,338
=========== ===========
PRO FORMA NET EARNINGS PER COMMON SHARE $ 0.16 $ 0.16
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 6,069,551 4,754,390
See accompanying notes to condensed consolidated financial statements.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended
September 30,
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUES:
Sales of equipment $25,493,028 $22,343,509
Sales of leased equipment 32,186,511 9,707,396
----------- -----------
Total sales 57,679,539 32,050,905
Lease revenues 7,218,351 3,910,603
Fee and other income 2,819,166 2,263,282
----------- -----------
Total other revenue 10,037,517 6,173,885
----------- -----------
TOTAL REVENUES 67,717,056 38,224,790
----------- -----------
COSTS AND EXPENSES:
Cost of sales of equipment 20,085,389 18,764,709
Cost of sales of leased equipment 31,579,951 9,590,999
----------- -----------
Total cost of sales 51,665,340 28,355,708
Direct lease costs 3,330,971 1,696,743
Professional and other fees 440,874 231,789
Salaries and benefits 4,784,885 3,647,597
General and administrative expenses 2,154,786 1,415,412
Interest and financing costs 975,264 793,867
Non-recurring acquisition costs 183,453
----------- -----------
Total expenses 11,870,233 7,785,408
----------- -----------
TOTAL COSTS AND EXPENSES 63,535,573 36,141,116
----------- -----------
EARNINGS BEFORE INCOME TAXES 4,181,483 2,083,674
Provision for income taxes 872,133 606,000
----------- -----------
NET EARNINGS $ 3,309,350 $ 1,477,674
=========== ===========
NET EARNINGS PER COMMON SHARE $ 0.55 $ 0.31
=========== ===========
PRO FORMA NET EARNINGS (See Note 4) $ 2,696,089 $ 1,341,841
=========== ===========
PRO FORMA NET EARNINGS PER COMMON SHARE $ 0.45 $ 0.28
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 5,990,200 4,754,390
See accompanying notes to condensed consolidated financial statements.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
1997 1996
(UNAUDITED) (UNAUDITED)
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 3,309,350 $ 1,477,674
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation & amortization 2,328,955 1,111,827
Decrease in provision for credit losses (30,000) -----
Gain on sale of operating lease equipment (313,295) (44,172)
Adjustment of basis to fair market value
of early returned operating lease
equipment 231,000 299,403
Payments from lessees directly to lenders (992,838) (794,668)
Gain on disposal of property and equipment ----- (8,740)
Deferred taxes ----- 21,000
Compensation to outside directors-stock
options 12,109 -----
Changes in:
Accounts receivable (4,613,259) (3,167,299)
Notes receivable (2,292,681) (1,036,993)
Employee advances (25,806) (16,507)
Inventories (351,452) (757,017)
Other assets (429,216) 612,823
Accounts payable - equipment 1,820,066 6,985,881
Accounts payable - trade 1,435,326 (200,927)
Salaries & commissions payable (332,997) 87,365
Accrued expenses and other liabilities 1,328,335 239,807
Income taxes payable (940,100) 418,824
----------- ------------
Net cash provided by operating
activities $ 143,497 $ 5,228,281
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating lease
equipment $ 579,813 $ 1,290,311
Purchase of operating lease equipment (1,163,208) (10,653,298)
Increase in investment in direct financing and
sales-type leases (3,166,666) (3,515,521)
Proceeds from sale of property and equipment ----- 8,740
Purchase of property and equipment (327,366) (20,968)
(Increase)/decrease in other assets (223,671) 147,270
----------- ------------
Net cash used in investing
activities $(4,301,098) $(12,743,466)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse $ 2,356,775 $ 12,998,838
Recourse 109,972 -----
Repayments:
Nonrecourse (2,246,963) (597,629)
Recourse (110,812) (761,046)
Borrowings (Repayments) on lines of credit 4,321,000 (1,139,195)
Proceeds from sale of stock 2,000,000 -----
Distributions to shareholders of combined
companies prior to business combination (1,087,270) (308,938)
----------- ------------
Net cash provided by financing
activities $ 5,342,702 $ 10,192,030
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,185,101 $ 2,676,845
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,654,209 651,149
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,839,310 $ 3,327,994
=========== ============
(Continued on next page)
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MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 206,266 $ 15,439
========== ========
Income taxes paid $1,812,233 $108,176
========== ========
See accompanying notes to condensed consolidated financial statements.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1997, the condensed
consolidated statements of earnings for the three and six month periods ended
September 30, 1996, and the condensed consolidated statement of cash flows for
the six month period ended September 30, 1996 have been restated to include the
accounts and results of operations of the Company's two newly acquired
subsidiaries which were accounted for under the pooling-of-interests method.
Although the balance sheets of the Company as of March 31, 1997 (prior to
re-statement) and of ECCI as of March 31, 1997 have been audited, the condensed
consolidated balance sheets as of September 30 and March 31, 1997, the condensed
consolidated statements of earnings for the three and six month periods ended
September 30, 1997 and 1996, and the condensed consolidated statements of cash
flows for the six months ended September 30, 1997 and 1996 have been prepared by
the Company, without audit.
The quarterly financial information is submitted in response to the requirements
of Form 10-Q and does not purport to be financial statements prepared in
accordance with generally accepted accounting principles. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. They therefore do not include all disclosures which might be associated
with such statements.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, necessary
to present fairly the Company's financial position at September 30 and March 31,
1997, the results of operations for the three and six month periods ending
September 30, 1997 and 1996, and the cash flows for the six month periods ended
September 30, 1997 and 1996. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended March 31, 1997 included in the Company's Annual Report on
Form 10-K (No. 0-28926).
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct finance leases consists of the following
components:
September 30, March 31,
1997 1997
-------- --------
(In thousands)
Minimum lease payments $ 17,493 $ 18,752
Estimated unguaranteed residual value 3,482 1,271
Initial direct costs - net of amortization 846 1,237
Less: Unearned lease income (3,195) (3,721)
Reserve for credit losses (36) (66)
-------- --------
Investment in direct financing lease and
sales-type lease - net $ 18,590 $ 17,473
======== ========
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3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
September 30, March 31,
1997 1997
-------- --------
(In thousands)
Cost of equipment under operating leases $ 13,771 $ 14,519
Initial direct costs 42 42
Accumulated depreciation and amortization (5,014) (3,496)
-------- --------
Investment in operating leases - net $ 8,799 $ 11,065
======== ========
4. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," as if the pooled companies, which were subchapter S
corporations prior to their business combinations with the Company, had been
subject to federal income taxes throughout the periods presented.
Three months ended Six months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------------------------------------------------------------------
(In Thousands)
Net income before pro forma
adjustment, per the
consolidated income
statement $ 1,123 $ 884 $ 3,309 $ 1,478
Additional provision for
income taxes 148 108 613 136
-------------------------------------------------------------------
Pro forma net income $ 975 $ 776 $ 2,696 $ 1,342
===================================================================
5. BUSINESS COMBINATIONS
On July 24, 1997, the Company, through a new wholly owned subsidiary, MLC
Network Solutions, Inc., issued 260,978 common shares, valued at $3,384,564, in
exchange for all outstanding common shares of Compuventures of Pitt County, Inc.
("Compuventures"), a value-added reseller of PC's and related network equipment
and software products and provides various support services to its customers
from facilities located in Greenville, Raleigh and Wilmington, North Carolina.
On September 29, 1997, the Company issued 498,998 common shares, valued at
$7,092,000, in exchange for all outstanding common shares of Educational
Computer Concepts, Inc. (dba "ECC Integrated")("ECCI"), a network systems
integrator and computer reseller serving customers in eastern Pennsylvania, New
Jersey and Delaware.
These business combinations have been accounted for as pooling-of-interests, and
accordingly, the consolidated financial statements for periods prior to the
combinations have been restated to include the accounts and results of
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operations of the pooled companies. The results of operations previously
reported by the Company and the pooled companies and the combined amounts
presented in the accompanying unaudited consolidated financial statements are
presented below.
Three months ended Six months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-----------------------------------------------------------
(In Thousands)
Revenues:
MLC Holdings, Inc. $ 18,210 $ 11,705 $ 44,975 $ 24,601
Pooled companies 9,043 6,320 22,742 13,624
-----------------------------------------------------------
Combined $ 27,253 $ 18,025 $ 67,717 $ 38,225
===========================================================
Net Income:
MLC Holdings, Inc. $ 658 $ 580 $ 1,582 $ 1,095
Pooled companies 465 304 1,727 383
-----------------------------------------------------------
Combined $ 1,123 $ 884 $ 3,309 $ 1,478
===========================================================
6. NEW SUBSIDIARY
In September 1997, the Company established MLC Federal, Inc., a wholly owned
subsidiary of MLC Holdings, Inc. The new subsidiary will concentrate on the
origination of leases to federal, state, and local government entities.
7. PRIVATE PLACEMENT OF EQUITY
On July 1, 1997, the Company issued 161,329 shares of stock to a single investor
in a private placement for cash consideration of $2,000,000 (per share price at
$12.40). The stock was priced, per a Stock Purchase Agreement dated June 18,
1997, at a per share price equal to one-twentieth (1/20) of the sum of the
closing price per share of the Company's common stock as reported on the NASDAQ
National Market at the close of each of the last twenty business days
immediately prior to the closing date (June 4 to July 1), multiplied by (.95).
8. NEW ACCOUNTING PRONOUCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 125 ("SFAS
No. 125"), Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities as of January 1, 1997. SFAS No. 125 has changed
the manner in which the Company determines and recognizes the gain recorded upon
the transfer of its interest in finance contracts subsequent to December 31,
1996. Additionally, SFAS No. 125 requires the Company to record gains or losses
with respect to transfers of its interest in leases previously accounted for as
direct finance leases. SFAS No. 125 has also altered the presentation in the
Company's consolidated financial statements of revenues, expenses and certain
assets and liabilities associated with finance contracts sold. As a result,
certain aspects of the Company's financial statements as of September 30, 1997,
and for the three-month and six-month periods, may not be directly comparable to
the prior period financial statements.
9. SUBSEQUENT EVENT
On October 22, 1997, the Company formed MLC Leasing, S.A. de C.V., a wholly
owned subsidiary of MLC Group, Inc. and MLC Network Solutions, Inc., based in
Mexico City, Mexico. To date, no business has been conducted through the new
subsidiary.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations relate to the accompanying condensed consolidated balance
sheets, statements of earnings, and statements of cash flow, as restated to
include the accounts and results of operations of the Company's two newly
acquired subsidiaries which were accounted for under the pooling-of-interests
method. Although the condensed and consolidated balance sheets of the Company as
of March 31, 1997 (prior to re-statement) and of ECCI as of March 31, 1997 have
been audited, the condensed consolidated balance sheets as of September 30 and
March 31, 1997, as restated, the condensed consolidated statements of earnings
for the three and six month periods ended September 30, 1997 and 1996, as
restated, and the condensed consolidated statements of cash flows for the six
months ended September 30, 1997 and 1996, as restated, have been prepared by the
Company, without audit.
RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 1997
(Unaudited) Compared to Three and Six Months Ended September 30, 1996
(Unaudited)
The following discussion and analysis of the Company's results of operations
should be read in conjunction with the accompanying unaudited condensed
consolidated statements of earnings for the three and six month periods ended
September 30, 1997 and 1996, as restated.
Total revenues generated by the Company during the three month period ended
September 30, 1997 were, $27,253,339, compared to revenues of $18,024,806 during
the comparable period in the prior year, an increase of 51.2%. During the six
month period ended September 30, total revenues were $67,717,056 and $38,224,790
in 1997 and 1996, respectively, an increase of 77.2%. 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" and Note 8
of the Notes to Condensed Consolidated Financial Statements).
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 52.8% to $22,406,967 during the three month period in 1997, as
compared to the corresponding 1996 period. For the six month period ended
September 30, 1997 sales increased 80.0% to $57,679,539 over the corresponding
period in the prior year. These increases are largely attributable to the 246.9%
and 231.6% increases (three month and six months, respectively) in sales of
leased equipment. Historically, the majority of sales of leased equipment have
been to one of the Company's two institutional equity partners. During the three
months ended September 30, 1997 and 1996 sales to MLC/CLC, LLC, an institutional
equity partner of the Company, accounted for 81.2% and 48.7% of sales of leased
equipment, respectively. During the six month periods ended September 30, sales
to MLC/CLC, LCC accounted for 86.1% and 66.9% of 1997 and 1996 sales of leased
equipment, respectively. Sales to these entities require the consent of the
relevant joint venture partner. While management expects the continued
availability of equity financing through these joint ventures, if such consent
is withheld, or financing from these entities otherwise becomes unavailable, it
could have a material adverse effect upon the Company's business, financial
condition and results of operations 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 newly acquired
valued added-reseller ("VAR") subsidiaries. For the three months ended September
30, equipment sales decreased slightly (7.4%) to $10,360,696, while for the
fiscal year to date through September 30, equipment sales increased 14.1% to
$25,493,028. The Company's brokerage and re-marketing activities accounted for
18.0% and 46.2% of equipment sales during the three month period in 1997 and
1996, respectively. During the six month periods
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ended September 30, 1997 and 1996, brokerage and re-marketing activities
generated 15.8% and 41.8% of equipment sales revenue, 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. VAR sales accounted for the remaining portion of equipment sales.
The Company's lease revenues increased 59.4% to $3,378,087 for the three month
period ended September 30, 1997, compared with the corresponding period in 1996.
For the fiscal year to date through September 30, lease revenues increased 84.6%
to $7,218,351 for the 1997 period compared to the same period in 1996. These
increases reflect increased rental revenues due to a higher average investment
in operating lease equipment. In addition, lease revenue includes the gain or
loss on the sale of certain financial assets, as required under the provisions
of Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which was
required to be in effect as of January 1, 1997.
For the three and six months ended September 30, 1997, fee and other income
increased 18.0% and 24.6% over the comparable periods in the prior year. These
increases are attributable to increases in revenues from adjunct services and
fees, including support fees, warranty reimbursements, and learning center
revenues, generated by the Company's VAR subsidiaries.
The Company's cost of sales have increased approximately in proportion with the
increase in total revenues. In comparing the three and six month periods ended
September 30, 1997, cost of sales increased 54.3% and 82.2%, respectively, while
total revenues increased 51.2% and 77.2%, respectively, during the same periods.
The Company's direct lease costs increased 77.1% and 96.3% during the three and
six month periods ended September 30, 1997, as compared to the same periods in
the prior year. The largest component of direct lease costs is depreciation on
operating lease equipment. The increase in direct lease costs is consistent with
the Company's higher average investment in operating lease equipment for the
three and six month periods in 1997 as compared to the same periods in prior
year.
Professional and other fees incurred by the Company during the three and six
month periods ended September 30, 1997 were $244,612 and $440,874, reflecting
increases of 166.9% and 90.2% over the comparable periods in 1996, respectively.
These increases are attributable to increases in the volume of broker fees which
the Company pays on certain transactions, and the increased legal and
professional fees associated with the Company's securities being publicly
traded.
Salaries and benefits and general and administrative ("G&A") costs increased
27.4% and 39.5%, during the three month period in 1997 over the same period in
prior year. For the fiscal year to date through September 30, 1997, salaries and
G&A costs had increased 31.2% and 52.2% over the prior year, respectively. These
increases are the result of additional personnel and administrative costs
associated with the increased volume of leasing transactions the Company has
generated in comparison to the corresponding periods in the prior year.
Interest and financing costs incurred by the Company for the three and six
months ended September 30, 1997 amounted to $509,480 and $975,264, respectively,
and relate to interest costs on the Company's lines of credit and notes payable.
Interest costs on the majority of non-recourse and certain recourse notes are
typically remited directly to the lender by the leasee.
The Company recognized non-recurring acquisition costs of $183,453 during the
three months ended September 30, 1997 in conjunction with business combinations
accounted for under the pooling-of-interests method. These non-recurring
acquisition costs included accounting and legal fees, and various other
acquisition related costs. Generally accepted accounting principles require the
Company to expense all acquisition costs (both those paid by the Company and
those paid by the sellers of the acquired companies) related to business
combinations accounted for under the pooling-of-interests method. The
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Company expects to incur similar non-recurring costs in the future, as the
Company anticipates completing additional acquisitions accounted for under the
pooling-of-interests method.
The Company's provision for income taxes increased to $411,820 for the three
months ended September 30, 1997 from $322,000 for the three months ended
September 30, 1996, reflecting effective income tax rates of 26.8% and 26.7%,
respectively. For the six months ended September 30, 1997, the Company's
provision for income tax was $872,133, as compared to $606,000 during the
comparable period in prior year, reflecting effective income tax rates of 20.9%
and 29.1%, respectively. The low effective income tax rates, compared to the
federal statutory rate of 35.0%, 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.
The foregoing resulted in a 27.0% and 124.0% increase in net earnings for the
three and six month periods ended September 30, 1997, respectively, as compared
to the same periods in prior year. Earnings per common share were $.19 for the
three months ended September 30, 1997 as well as the three months ended
September 30, 1996, based on weighted average common shares outstanding of
6,069,551 and 4,754,390, respectively. For the fiscal year to date through
September 30, the Company's earnings per share were $.55 in 1997, as compared to
$.31 in 1996, based on weighted average common shares outstanding of 5,990,200
and 4,754,390, respectively.
LIQUIDITY AND CAPITAL RESOURCES - September 30, 1997 (Unaudited) Compared to
March 31, 1997 (Unaudited)
During the six month period ended September 30, 1997, the Company generated cash
flows from operations of $143,497, and cash flows from financing activities of
$5,342,702. Cash used in investing activities amounted to $4,301,098 during the
same period. The net effect of these cash flows was to increase cash and cash
equivalents by $1,185,101 during the six month period. During the same period,
the Company's total assets increased $8,293,663, or 16.9%, primarily the result
of increases in accounts receivable arising from equipment purchased on behalf
of leasees but not yet placed under an equipment schedule, and notes receivable
arising from the equity sale of unfunded leases to MLC/CLC, LLC.
The financing necessary to support the Company's leasing activities has
principally been provided from nonrecourse and recourse borrowings.
Historically, the Company has obtained recourse and nonrecourse borrowings from
money centers, regional banks, insurance companies, finance companies and
financial intermediaries.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. On June 5, 1997, the
Company entered into the CoreStates Facility, which is available through June 5,
1998, bears interest at LIBOR+110 basis points, or, at the Company's option,
Prime minus one percent. On September 5, 1997, the Company's CoreStates Facility
was increased to a maximum limit of $25 million. Availability under the
revolving lines of credit may be limited by the asset value of equipment
purchased by the Company and may be further limited by certain covenants and
terms and conditions of the facilities. As of September 30, 1997, the Company
had an outstanding balance on the CoreStates Facility of $3.5 million. The
CoreStates facility is made to MLC Group, Inc., and guaranteed by MLC Holdings,
Inc.
The Company's newly acquired subsidiaries, MLC Network Solutions, Inc. and ECCI,
both have separate credit sources to finance their working capital
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requirements for inventories and accounts receivable, which the Company has
guaranteed. 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
days is charged to the supplier/distributor but not the reseller. These floor
plan liabilities are recorded under accounts payable as they are normally repaid
within the 30 day time frame as they represent an assigned accounts payable
originally generated with the supplier/distributor. If the 30 day obligation is
not timely liquidated, interest is then assessed at stated contractual rates. As
of September 30, 1997 MLC Network Solutions, Inc., has floor planning
availability of $1,400,000 through Deutsche Financial, Inc. and $300,000 from
IBM Credit Corporation. The outstanding balances to these respective suppliers
were $595,033 and $25,786 as of September 30, 1997. ECCI has floor planning
availability of $1,500,000 from AT&T Credit Corporation, $1,000,000 through IBM
Credit Corporation, and $100,000 through Deutsche Financial, Inc. The
outstanding balances to these respective suppliers were $522,713, $470,454 and
$6,048 as of September 30, 1997. ECCI additionally has a line of credit in
place, expiring on April 30, 1998, with PNC Bank, N.A. to provide an asset based
credit facility. The line has a maximum credit limit of $2,500,000 and interest
is based on the bank's prime rate. The outstanding balance was $931,000 as of
September 30, 1997.
In March 1997, the Company established the Heller Facility, a $10,000,000
partial recourse credit facility agreement, with Heller Financial, Inc., Vendor
Finance Division. Under the terms of the Heller Facility, a maximum amount of
$10 million is available to the Company, provided, that each draw is subject to
the approval of Heller. As of September 30, 1997, the principal balance due
under the Heller Facility was $941,187.
Through MLC/GATX Limited Partnership I and MLC/CLC, LLC, the Company has formal
joint venture agreements 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 held company with stockholders' equity in excess of $774
million, as of December 31, 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 ventures arrangements enable 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 either MLC/CLC, LLC or MLC/GATX Limited Partnership I (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
operations, the sale of the equipment lease to one of its institutional
partnerships with GATX or Cargill, 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, cash flow from 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 is currently, and
intends to continue, pursuing additional acquisitions, which are expected to be
funded through a combination of cash and the issuance by
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the Company of shares of its common stock. To the extent that the Company elects
to pursue acquisitions involving the payment of significant amounts of cash (to
fund the purchase price of such acquisitions and the repayment of assumed
indebtedness), the Company is likely to require additional sources of financing
to fund such non-operating cash needs.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the time of any material decrease in
any widely followed stock index or in the market price of the stock of one or
more public equipment leasing 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, as a result of sales by
the Company of equipment it leases to its customers. Such sales of leased
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceed net book value, net income, during the quarter in which the sale
occurs. Furthermore, any such sale may result in the reduction of revenue, and
net income, otherwise expected in subsequent quarters, as the Company will not
receive lease revenue from the sold equipment in those quarters.
In addition, the Company's business is subject to seasonal influences. As the
Company's mix of businesses evolves through future acquisitions, these seasonal
fluctuations may continue to change. Quarterly results also may be materially
affected by the timing of acquisitions, the timing and magnitude of costs
related to such acquisitions, variations in the prices paid by the Company for
the products it sells, the mix of products sold, general economic conditions,
and the retroactive restatement of the Company's consolidated financial
statements for acquisitions accounted for under the pooling-of-interests method.
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 first two quarters of fiscal 1998.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
The Company strategy depends upon acquisitions and organic growth to increase
its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and cross selling activities also could adversely
affect the Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will occur at the
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same pace as in prior periods or be available to the Company on favorable terms,
if at all. If the Company is unable to use the Company's common stock as
consideration in acquisitions, for example, because it believes that the market
price of the common stock is too low or because the owners of potential
acquisition targets conclude that the market price of the Company's common stock
is too volatile, the Company would need to use cash to make acquisitions, and,
therefore, would be unable to negotiate acquisitions that it would account for
under the pooling-of-interests method of accounting (which is available only for
all-stock acquisitions). This might adversely affect the pace of the Company's
acquisition program and the impact of acquisitions on the Company's quarterly
results. In addition, the consolidation of the equipment leasing business has
reduced the number of companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. The failure to acquire additional businesses or to acquire such
businesses on favorable terms in accordance with the Company's growth strategy
could have a material adverse impact on future sales and profitability.
There can be no assurance that companies that have been acquired or that may be
acquired in the future will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
The Company has increased the range of products and services it offers through
acquisitions of companies offering products and services that are complementary
to the core financing and equipment brokering services that the Company has
offered since it began operations. The Company's ability to manage an aggressive
consolidation program in markets other than domestic equipment financing has not
yet been fully tested. The Company's efforts to sell additional products and
services to existing customers are in their early stages and there can be no
assurance that such efforts will be successful. In addition, the Company expects
that certain of its products and services will not be easily cross-sold and may
be marketed and sold independently of other products and services.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management administration. The various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. There can be no assurance that the Company's executive
management group can continue to oversee the Company and effectively implement
its operating or growth strategies in each of the markets that it serves. In
addition, there can be no assurance that the pace of the Company's acquisitions,
or the diversification of its business outside of its core leasing operations,
will not adversely affect the Company's efforts to implement its cost-savings
and integration strategies and to manage its acquisitions profitability.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic
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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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this Report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, including, without
limitation, demand and competition for the Company's lease financing services
and the products to be leased by the Company, the continued availability to the
Company of adequate financing, the ability of the Company to recover its
investment in equipment through remarketing, the ability of the Company to
manage its growth, and other risks or uncertainties detailed in the Company's
Securities and Exchange Commission filings, including the Prospectus.
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MLC HOLDINGS, INC. AND SUBSIDIARIES
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 30, 1997, the Company held its Annual Meeting of
Stockholders.
1. At the Annual Meeting, Jonathan J. Ledecky was elected to the
Board of Directors as a Class I director to hold office for three
years and until his successor has been duly elected and shall
qualify, with votes cast and withheld as follows:
For Withheld
------------------------
5,188,647 383,660
In addition, the Company's stockholders approved the following
proposals at the Annual Meeting, with votes for and against,
abstentions and broker non-votes as follows:
2. To approve and adopt an amendment to the Company's Certificate
of Incorporation to increase the number of shares of authorized
stock of the Company from 12 million shares (10 million shares of
common stock, par value $0.01, and 2 million preferred shares) to
27 million shares (25 million shares of common stock, par value
$0.01, and 2 million preferred shares).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
5,146,547 42,100 0 383,660
3. To approve amendments to the MLC Holdings, Inc. Master Stock
Incentive Plan (formerly the 1996 Stock Incentive Plan).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
4,311,931 0 0 1,260,376
4. To approve adoption of the MLC Holdings, Inc. Employee Stock
Purchase Plan (a component plan of the Master Stock Incentive
Plan).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
4,311,931 0 0 1,260,376
5. To approve amendments to the MLC Holdings, Inc. Amended and
Restated Outside Director Stock Plan (formerly the 1996 Outside
Director Stock Option Plan).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
4,310,631 1,300 0 1,260,376
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6. To approve amendments to the MLC Holdings, Inc. Amended and
Restated Incentive Stock Option Plan (formerly the 1996 Incentive
Stock Option Plan).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
4,310,631 1,300 0 1,260,376
7. To approve amendments to the MLC Holdings, Inc. Amended and
Restated Nonqualified Stock Option Plan (formerly the 1996
Nonqualified Stock Option Plan).
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
4,310,631 1,300 0 1,260,376
8. To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the Company's fiscal year ending
March 31, 1998.
For Against Abstain Broker Non-Votes
-------------------------------------------------------------
5,188,647 0 0 383,660
Item 5. Other Information.
Educational Computer Concepts, Inc. Acquisition
Effective September 29, 1997 (the "Closing Date"), MLC Holdings, Inc.
(the "Company") acquired Educational Computer Concepts, Inc. ("ECCI").
The acquisition was effected through the merger of MLC Acquisition
Corp. ("MAC"), a wholly-owned subsidiary of the Company, with and into
ECCI, pursuant to an Agreement and Plan of Merger dated September 29,
1997 (the "Merger Agreement") among the Company, MAC, ECCI and the
shareholders of ECCI (the "Shareholders"). ECCI is network systems
integrator and computer reseller which was founded in 1986.
In accordance with the Merger Agreement, consideration in the amount
of $7,092,000 was paid to the Shareholders in the form of 499,085
shares of the Company's common stock valued at $14.21 per share. The
per share value was based on the price of a share of the Company's
common stock, rounded to the nearest cent, which was the average
closing price for a share of the Company's common stock as reported on
the Nasdaq National Market over the 15 trading days immediately
preceding the Closing Date. Of the shares issued, 49,900 have been
deposited in escrow pursuant to an Escrow Agreement to fund
indemnification for any breach of representation and warranty or
non-fulfillment of or failure to perform any of the covenants,
agreements or undertakings of the Stockholders or ECCI.
The amount and nature of such consideration was based on arms-length
negotiations between the parties. There were no material relationships
between ECCI and any of the Shareholders and the Company or any of its
affiliates, any officers or directors of the Company or MAC or any
associate of any such director or officer prior to the occurrence or
consummation of the transactions reported herein.
On September 29, 1997, the Company entered into a three year
Employment Agreement with Vince Marino, the founder, President and a
principal shareholder of ECCI. The employment agreement provides that
the Company or its subsidiaries will employ Mr. Marino at a salary
commensurate with his positions and duties, and contains non-compete
and confidentiality provisions.
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The foregoing is only a summary of the terms of the Merger Agreement
and related transaction documents, and is subject to, and supplemented
and qualified by, the text of such agreement which is attached hereto
as Exhibit 2.2, and incorporated herein by this reference.
Amendment to CoreStates Credit Agreement
On September 5, 1997, MLC Group, Inc. ("MLC"), a wholly-owned
subsidiary of the Company, entered into Amendment No. 1 (the
"Amendment") dated September 5, 1997 to Credit Agreement (the "Credit
Agreement") dated June 5, 1997 between it and CoreStates Bank, N.A.
("CoreStates"). The Amendment increases the Loan Commitment from
$15,000,000 to $25,000,000 and increases the amount of Investment
Grade Paper which may qualify as Eligible Leases from $10,000,000 to
$15,000,000 (as such terms are defined in the Credit Agreement). In
connection with the Amendment, MLC made and delivered to CoreStates a
$25,000,000 note (the "Note") dated September 5, 1997 to replace the
$15,000,000 note existing under the Credit Agreement.
The foregoing is only a summary of certain terms of the Amendment and
is subject to, and supplemented and qualified by, the copy of the text
of the Amendment which is attached hereto as Exhibit 10.26 and
incorporated herein by this reference, and the copy of the text of the
Credit Agreement which is attached as Exhibit 10.18 to the Company's
annual report on Form 10-K for the fiscal year ended March 31, 1997
filed as of June 30, 1997 with the Securities and Exchange Commission
and incorporated herein by this reference.
Sprint Corporation Selection of MLC Group, Inc.
Subsequent to September 30, 1997, MLC Group, Inc. was notified of its
selection to continue and expand its asset management and PC/desktop
equipment leasing services to Sprint's domestic local and long
distance companies. MLC Group, Inc. has been providing such services
over the last fourteen months to a limited number of Sprint operating
companies, and this service period may continue for an additional
thirty six months. However, there are no guaranteed volumes under this
award.
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Item 6(a) Exhibits
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ------------------------------------------------------------------------- ---------------
2.2 Agreement and Plan of Merger dated September 29, 1997 by and among MLC
Holdings, Inc., MLC Acquisition Corp., Educational Computer Concepts,
Inc. and the Stockholders of Educational Computer Concepts, Inc.
3.1 Certificate of Incorporation of the Company, as amended
10.21 Material Contracts - MLC Master Stock Incentive Plan
10.22 Material Contracts - Amended and Restated Incentive Stock Option Plan
10.23 Material Contracts - Amended and Restated Outside Director Stock Option Plan
10.24 Material Contracts - Amended and Restated Nonqualified Stock Option Plan
10.25 Material Contracts - 1997 Employee Stock Purchase Plan
10.26 Amendment No. 1 dated September 5, 1997 to Credit Agreement dated June
5, 1997 between MLC Group, Inc. and CoreStates Bank, N.A.
27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
During the second fiscal quarter covered by this report, the Company
filed the following Current Reports on Form 8-K:
Form 8-K Dated July 24, 1997 and filed with the Commission on August
8, 1997, reporting information regarding the acquisition of
Compuventures of Pitt County. No financial statements were included.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MLC HOLDINGS, INC.
By: /s/ Phillip G. Norton
-------------------------
Phillip G. Norton
Chairman, President and Chief Executive Officer
By: /s/ Steven J. Mencarini
-------------------------
Steven J. Mencarini
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
DATE: November 13, 1997
----------------------