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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to .
Commission file number: 0-28926
MLC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Rd., Suite 110, Reston, VA 20190-5321
(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 November 11,
1998, was 7,467,102.
MLC HOLDINGS, INC. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1998
(Unaudited)and March 31, 1998 2
Condensed Consolidated Statements of Earnings, Three months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 3
Condensed Consolidated Statements of Earnings, Six months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows, Six months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
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 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
September 30, 1998 March 31, 1998
(Unaudited)
---------------------------------------------------
ASSETS
Cash and cash equivalents $ 5,223,316 $ 18,683,796
Accounts receivable 24,167,898 16,383,314
Other receivables 1,277,801 3,801,808
Employee advances 45,893 53,582
Inventories 6,234,888 1,213,734
Investment in direct financing and sales type leases - net 75,104,615 32,495,594
Investment in operating lease equipment - net 6,597,406 7,295,721
Property and equipment - net 1,407,566 1,131,512
Other assets 9,750,453 2,136,554
===================================================
TOTAL ASSETS $ 129,809,836 $ 83,195,615
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 8,050,299 $ 6,865,419
Accounts payable - equipment 28,123,867 21,283,582
Salaries and commissions payable 338,901 390,081
Accrued expenses and other liabilities 3,858,405 3,560,181
Recourse notes payable 31,879,007 13,037,365
Nonrecourse notes payable 24,738,407 13,027,676
Deferred taxes 1,487,000 1,487,000
Income tax payable 885,153 -
---------------------------------------------------
Total Liabilities 99,361,039 59,651,304
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;
6,355,991 and 6,071,505 issued and outstanding at
September 30, 1998 and March 31, 1998, respectively 63,560 60,715
Additional paid-in capital 15,258,225 11,460,331
Retained earnings 15,127,012 12,023,265
---------------------------------------------------
Total Stockholders' Equity 30,448,797 23,544,311
===================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,809,836 $ 83,195,615
===================================================
See Notes to Condensed Consolidated Financial Statements.
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
--------------------------------------------
REVENUES
Sales of equipment $ 19,830,451 $ 10,360,696
Sales of leased equipment 11,648,919 12,046,271
--------------------------------------------
31,479,370 22,406,967
Lease revenues 5,264,385 2,993,670
Fee and other income 1,257,340 1,468,285
--------------------------------------------
6,521,725 4,461,955
--------------------------------------------
TOTAL REVENUES 38,001,095 26,868,922
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 16,724,750 8,104,931
Cost of sales, leased equipment 11,340,648 11,667,934
--------------------------------------------
28,065,398 19,772,865
Direct lease costs 1,678,631 1,238,104
Professional and other fees 322,528 244,612
Salaries and benefits 3,033,226 2,399,029
General and administrative expenses 1,311,804 986,677
Interest and financing costs 856,089 509,480
Non-recurring acquisition costs - 183,453
--------------------------------------------
7,202,278 5,561,355
--------------------------------------------
TOTAL COSTS AND EXPENSES 35,267,676 25,334,220
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,733,419 1,534,702
--------------------------------------------
PROVISION FOR INCOME TAXES 1,093,368 411,820
--------------------------------------------
NET EARNINGS $ 1,640,051 $ 1,122,882
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.26 $ 0.19
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.25 $ 0.18
============================================
PRO FORMA NET EARNINGS (See Note 4) $ 1,640,051 $ 974,536
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.26 $ 0.16
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.25 $ 0.16
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,348,603 6,069,551
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,439,658 6,211,929
See Notes to Condensed Consolidated Financial Statements.
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
--------------------------------------------
REVENUES
Sales of equipment $ 30,104,885 $ 25,493,028
Sales of leased equipment 36,559,565 32,186,511
--------------------------------------------
66,664,450 57,679,539
Lease revenues 10,249,472 6,516,239
Fee and other income 2,669,974 2,819,166
--------------------------------------------
12,919,446 9,335,405
--------------------------------------------
TOTAL REVENUES 79,583,896 67,014,944
--------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 25,008,422 20,085,389
Cost of sales, leased equipment 36,153,714 31,579,951
--------------------------------------------
61,162,136 51,665,340
Direct lease costs 3,670,459 2,628,859
Professional and other fees 519,493 440,874
Salaries and benefits 5,401,827 4,784,885
General and administrative expenses 2,299,675 2,154,786
Interest and financing costs 1,357,394 975,264
Non-recurring acquisition costs - 183,453
--------------------------------------------
13,248,848 11,168,121
--------------------------------------------
TOTAL COSTS AND EXPENSES 74,410,984 62,833,461
--------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 5,172,912 4,181,483
--------------------------------------------
PROVISION FOR INCOME TAXES 2,069,165 872,133
--------------------------------------------
NET EARNINGS $ 3,103,747 $ 3,309,350
============================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.50 $ 0.55
============================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.49 $ 0.54
============================================
PRO FORMA NET EARNINGS (See Note 4) $ 3,103,745 $ 2,696,089
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.50 $ 0.45
============================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.49 $ 0.44
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,214,103 5,990,200
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,346,548 6,106,753
See Notes to Condensed Consolidated Financial Statements.
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
-------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 3,103,747 $ 3,309,350
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,652,979 2,328,955
Provision for credit losses 500,000 (30,000)
Gain on sale of operating lease equipment (3,689) (313,295)
Adjustment of basis to fair market value of equipment
and investments 268,506 231,000
Payments from lessees directly to lenders (563,025) (992,838)
Compensation to outside directors - stock options - 12,109
Changes in assets and liabilities, net of effects of
purchase acquisition:
Accounts receivable (1,544,834) (4,613,259)
Other receivables 2,524,007 (2,292,681)
Employee advances 14,194 (25,806)
Inventories (4,297,786) (351,452)
Other assets (1,166,603) (429,216)
Accounts payable - equipment 7,794,860 1,820,066
Accounts payable - trade (5,737,180) 1,435,326
Salaries and commissions payable, accrued
expenses and other liabilities 687,224 55,238
-------------------------------------
Net cash provided by operating activities 4,232,400 143,497
-------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 3,750 579,813
Purchase of operating lease equipment (1,678,067) (1,163,208)
Increase in investment in direct financing and sales-type leases (46,697,227) (3,166,666)
Purchases of property and equipment (281,398) (327,366)
Cash used in acquisition, net of cash acquired (3,485,279) -
Increase in other assets (437,809) (223,671)
-------------------------------------
Net cash used in investing activities (52,576,030) (4,301,098)
-------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 18,512,294 2,356,775
Recourse 258,316 109,972
Repayments:
Nonrecourse (2,650,333) (2,246,963)
Recourse (80,011) (110,812)
Distributions to shareholders of combined companies
prior to business combination - (1,087,270)
Proceeds from issuance of capital stock, net of expenses 177,931 -
Proceeds from sale of stock 2,000,000
Proceeds from lines of credit 18,664,953 4,321,000
-------------------------------------
Net cash provided by financing activities 34,883,150 5,342,702
-------------------------------------
Net(Decrease)Increase in Cash and Cash Equivalents (13,460,480) 1,185,101
Cash and Cash Equivalents, Beginning of Period 18,683,796 6,654,209
-------------------------------------
Cash and Cash Equivalents, End of Period $ 5,223,316 $ 7,839,310
=====================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 216,428 $ 206,266
=====================================
Cash paid for income taxes $ 324,446 $ 1,812,233
=====================================
See Notes To Condensed Consolidated Financial Statements.
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1998, the condensed
consolidated statements of earnings for the three months and six months ended
September 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six months ended September 30, 1998 and 1997 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,
1998, the results of operations for the three and six month periods ending
September 30, 1998 and 1997, and the cash flows for the six month periods ended
September 30, 1998 and 1997. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended March 31, 1998 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 financing and sales-type leases consists of the following components:
September 30, March 31,
1998 1998
------------------ ------------------
(In thousands)
Minimum lease payments $71,813 $ 29,968
Estimated unguaranteed residual value 12,133 7,084
Initial direct costs - net of amortization 1,391 760
Less: Unearned lease income (9,686) (5,270)
Reserve for credit losses (546) (46)
================== ==================
Investment in direct financing and sales type leases - net $75,105 $ 32,496
================== ==================
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
September 30, March 31,
1998 1998
----------------- ------------------
(In thousands)
Cost of equipment under operating leases $15,403 $ 13,990
Initial direct costs 29 51
Accumulated depreciation and amortization (8,835) (6,745)
----------------- ------------------
Investment in operating leases - net $ 6,597 $ 7,296
================= ==================
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
September 30, September 30,
1998 1997 1998 1997
(In thousands)
------------ -------------- ------------- ---------------
Net earnings before pro forma adjustment
$ 1,640 $ 1,123 $ 3,104 $ 3,309
Additional provision for income tax - 148 - 613
============ ============== ============= ==============
Pro forma net income $ 1,640 $ 975 $ 3,104 $ 2,696
============ ============== ============= ===============
5. NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and presentation of comprehensive income
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 adoption
were reported separately in shareholders' equity, to be included in other
comprehensive earnings. The Company currently has no items of other
comprehensive income to be reported.
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 included in the Company's
consolidated financial statements from July 1, 1998. The Company's other assets
include goodwill calculated as the excess of the purchase price over the fair
value of the net identifiable assets acquired of $6,045,330, and is being
amortized on a straight-line basis over 27.5 years.
The following unaudited pro forma financial information presents the combined
results of operations of PC Plus, Inc. as if the acquisition had occurred as of
the beginning of the six months ended September 30, 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, Inc. constituted a single
entity during such periods.
Six Months Ended September 30,
(in thousands)
1998 1997
-------------- --------------
Total Revenues 91,522 82,083
Net Earnings 3,323 3,735
Net Earnings per Common Share - Basic .52 .60
Net Earnings per Common Share - Diluted .51 .59
7. OTHER DEVELOPMENT
One of the Company's equipment sales and lease customers has filed for voluntary
bankruptcy protection. Allegheny Health, Education & Research Foundation
("AHERF") is a Pittsburgh based not-for-profit entity that owns multiple
hospitals, the largest of which include Hahnemann University Hospital, St.
Christopher's Hospital for Children, Medical College of Pennsylvania and
Graduate Hospital, all of which are located in Philadelphia, Pennsylvania. On
July 21, 1998, AHERF, and some but not all of its operating subsidiaries filed
for bankruptcy and agreed to sell its eight Philadelphia-area hospitals to
Vanguard Health Systems, Inc., a Tennessee based for-profit company, subject to
court approval. Since then, the bankruptcy court held an auction and Tenet
Healthcare, Inc. acquired AHERF's assets. As of September 30, 1998, the
Company's net book value of leases to AHERF is approximately $1,983,000 and
receivable balance is approximately $481,000. The Company believes that the fair
market value of the equipment may be below its current balances, and, depending
on the assumption or rejection of the leases by the Bankruptcy Trustee and the
creditor status and ultimate repayment schedule of other claims, upon disposal
of the equipment and disposition of its claims, the Company could incur a loss
with respect to its current balances. The amount and timing of such losses
cannot be accurately estimated by the Company at this time due to the recent
filing and unknown status of many of its claims. On September 21, 1998, the
bankruptcy court issued an order requiring AHERF to make lease payments to the
Company. The Company is vigorously pursuing all available remedies in bankruptcy
court. The Company believes that as of September 30, 1998, its reserves are
adequate to provide for the potential loss resulting from this customer.
8. PRIVATE PLACEMENT OF EQUITY SUBSEQUENT TO QUARTER END
On October 23, 1998, 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 1,099,909 shares of common stock at an exercise price of
$11.00 per share. The warrant expires December 31, 2001.
Item 2. Management's Discussion and Analysis of RESULTS OF OPERATIONS, Financial
Condition
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report.
"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 re-marketing, the ability of the Company to
manage its growth, and other risks or uncertainties detailed in the Company's
Securities and Exchange Commission filings.
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.
RESULTS OF OPERATIONS - Three and Six Months Ended September 30, 1998
(Unaudited) Compared to Three and Six Months Ended September 30, 1997
(Unaudited)
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, 1998 and 1997.
Total revenues generated by the Company during the three month period ended
September 30, 1998 were $38,001,095, compared to revenues of $26,868,922 during
the comparable period in the prior fiscal year, an increase of 41.4%. During the
six month period ended September 30, total revenues were $79,583,896 and
$67,014,944 in 1998 and 1997, respectively, an increase of 18.8%. 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 40.5% to $31,479,370 during the three month period ended September 30,
1998, as compared to $22,406,967 in the corresponding period in the prior fiscal
year. For the six month period ended September 30 1998, sales increased 15.6% to
$66,664,450 over the corresponding period in the prior year.
During the three months ended September 30, 1998 and 1997, sales to MLC/CLC,
LLC, an institutional equity partner of the Company, accounted for 100% of sales
of leased equipment for both periods. During the six month periods ended
September 30, sales to MLC/CLC LLC accounted for 100% and 86.1% 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 added
reseller ("VAR") subsidiaries. Sales of equipment increased during the three
month period (91.4%) $9,469,755 compared to the corresponding period in the
prior fiscal year. For the fiscal year to date through September 30, equipment
sales increased 18.09% to $30,104,885. On a pro forma basis, had PC Plus, Inc.'s
equipment sales been included throughout the periods presented, equipment sales
would have increased 5.0% and 4.1% during the three and six month periods ended
September 30, 1998, as compared to the comparable periods in the prior fiscal
year. The Company's brokerage and re-marketing activities accounted for 3.6% and
18.0% of equipment sales during the three month period in 1998 and 1997,
respectively. During the six month periods ended September 30, brokerage and
re-marketing activities accounted for 4.1% and 15.8% of 1998 and 1997 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 15.7% and 16.9% for
the three and six month periods ended September 30, 1998, respectively, as
compared to a gross margin of 21.8% and 21.2% realized on sales of equipment
generated during the three and six 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 effected 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
September 30, 1998, the Company recognized a gross margin of $308,271 on equity
sales of $11,648,919, as compared to a gross margin of $378,337 on equity sales
of $12,046,271 during the same period in the prior fiscal year. For the fiscal
year to date through September 30, 1998, the Company recognized a gross margin
of $405,851 on equity sales of $36,559,565, as compared to a gross margin of
$606,560 on equity sales of $32,186,511 during the same period in the prior
fiscal year.
The Company's lease revenues increased 75.9% to $5,264,385 for the three-month
period ended September 30, 1998, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through September 30, lease
revenues increased 57.2% to $10,249,472 for the 1998 period compared to the same
period in 1997. This increase consists of increased lease earnings and rental
revenues reflecting a higher average investment in direct financing and
sales-type leases. The investment in direct financing and sales-type leases at
September 30, 1998 and March 31, 1998 were $75,104,615 and $32,495,594,
respectively. The September 30, 1998 balance represents an increase of
$42,609,021 or 131.1% over the balance as of March 31, 1998. 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," ("SFAS No. 125") which was effective beginning January 1, 1997.
During the three and six month periods ending September 30, 1998, 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 six months ended September 30, 1998, fee and other income
decreased 14.4% and 5.3%, respectively, over the comparable period in the prior
fiscal year. This decrease is attributable to decreases 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 consumate 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 35.6% and 39.6% during the three and
six month periods ended September 30, 1998 as compared to the same periods in
the prior fiscal year. Although the largest component of direct lease costs is
depreciation on operating lease equipment, the increase is primarily
attributable to an increase in the allowance for doubtful accounts due to the
increased business volume of leases and retained lease portfolio, increased
amortization of initial direct costs.
Salaries and benefits expenses increased 26.4% during the three month period
ended September 30, 1998 over the same period in the prior year. For the fiscal
year to date through September 30, 1998, salaries and benefits had increased
12.9% over the prior year. These increases reflect both the higher commission
expenses in the value added reseller businesses the increased number of
personnel employed by the Company.
Interest and financing costs incurred by the Company for the three and six
months ended September 30, 1998 amounted to $856,089 and $1,357,394
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
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 six month periods in the current fiscal year as compared to the prior
fiscal year.
The Company's provision for income taxes increased to $1,093,368 for the three
months ended September 30, 1998 from $411,820 for the three months ended
September 30, 1997, reflecting effective income tax rates of 40.0% and 26.8%,
respectively. For the six months ended September 30, 1998, the Company's
provision for income tax was $2,069,165, as compared to $872,133 during the
comparable period in the prior year, reflecting effective income tax rates of
40.0% and 20.9%, respectively. The low effective income tax rate for September
30, 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 six months ended September 30, 1997,
would have increased the expense by approximately $148,000 and $613,000.
The foregoing resulted in a 68.3% and 15.1% increase in net earnings for the
three and six month periods ended September 30, 1998, respectively, as compared
to the same periods in the prior fiscal year after taking into consideration the
pro forma tax expense. Notwithstanding pro forma tax adjustments, net earnings
increased 46.1% and decreased 6.2% for the three and six month periods ended
September 30, 1998 as compared to the same periods in the prior fiscal year.
Basic and fully diluted earnings per common share were $.26 and $.25,
respectively, for the three months ended September 30, 1998, as compared to $.19
and .18, respectively, for the three months ended September 30, 1997, based on
weighted average common shares outstanding of 6,348,603 and 6,439,658,
respectively, for 1998, and 6,069,551 and 6,211,929, respectively, for 1997. For
the fiscal year to date through September 30, 1998, the Company's basic and
fully diluted earnings per common share were $.50 and $.49, respectively, as
compared to $.55 and $.54, respectively, for the same period in 1997, based on
weighted average common shares outstanding of 6,214,103 and 6,346,548,
respectively, for 1998, and 5,990,200 and 6,106,753, respectively, for 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended September 30, 1998, the Company generated cash
flows from operations of $4,232,400, and used cash flows from investing
activities of $52,576,030. Cash flows generated by financing activities amounted
to $34,883,150 during the same period. The net effect of these cash flows was to
decrease cash and cash equivalents by $13,460,480 during the six month period.
During the same period, the Company's total assets increased $46,614,221, or
56.0%, primarily the result of increases in direct financing leases and the
acquisition of PC Plus, Inc., a wholly owned subsidiary, on July 1, 1998. The
Company's net investment in operating lease equipment decreased during the
period, as the decrease in book value, primarily due to depreciation, outpaced
new investment in operating lease equipment.
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 September 30, 1998, the Company had
$28,123,867 of unpaid equipment cost, as compared to $21,283,582 at March 31,
1998.
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 First Union Facility with First Union National Bank,
N.A., which is available through December 19, 1998, and bears interest at
LIBOR+110 basis points, or, at the Company's option, Prime minus one percent. On
June 30, 1998, the Company's First Union Facility was increased to a maximum
limit of $35 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, 1998, the Company had an outstanding balance of $30,500,000
on the First Union Facility. The First Union facility is made to MLC Group,
Inc., and guaranteed by MLC Holdings, Inc. In addition, MLC Holdings, Inc. has
guaranteed the lines of credit made to the Company's recently acquired
subsidiaries. The Company expects to renew the First Union Facility at a
reasonable rate when it expires on December 19, 1998.
The Company's subsidiaries, MLC Network Solutions, 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 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 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 timely liquidated, interest is then
assessed at stated contractual rates. As of September 30, 1998, MLC Network
Solutions, Inc., has floor planning availability of $1,350,000 through Deutsche
Financial, Inc. and $225,000 from IBM Credit Corporation. The outstanding
balances to these respective suppliers were $376,249 and $51,788 as of September
30, 1998. MLC Integrated, Inc. has floor planning availability of $1,500,000
from FINOVA Capital Corporation and $750,000 through IBM Credit Corporation. The
outstanding balances to these respective suppliers were $1,355,505, and $56,162
as of September 30, 1998. In addition, MLC Integrated, Inc. has a line of credit
in place, expiring on October 31, 1998, with PNC Bank, N.A. to provide an asset
based credit facility. The Company is currently negotiating an extension of this
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 $917,000 as of
September 30, 1998. PC Plus, Inc. has floor planning availability of $6,000,000
through Nations Credit as of September 30, 1998. This agreement expires October
1, 1998 and is subject to a one-year renewal. The outstanding balance to this
supplier was $1,942,083 as of September 30, 1998.
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, subject to the approval of Heller for
each draw. As of September 30, 1998, the principal balance due under the Heller
Facility was $3,476,124. Rates are negotiated at the time of each draw.
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 relationship with GATX, an unaffiliated company
which beneficially owns 90% of MLC/GATX Limited Partnership I, was effectively
terminated in August, 1998. This termination caused the Company to write off
approximately $154,500 in the current period representing its remaining joint
venture investment and miscellaneous receivables.
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 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.
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 two quarters of fiscal 1999.
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'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 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 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 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.
YEAR 2000 ISSUE
The Company has identified all significant internal software and hardware
applications that will require modifications to ensure Year 2000 compliance of
the Company's IT and non-IT systems. Internal and external resources are being
used to make the required modifications and test Year 2000 compliance. The
modification process of all significant internal applications and operational
systems is substantially complete. The Company plans on completing the process
of modifying all significant applications by December 31, 1998. The total cost
to the Company of these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position, results of operations or
cash flows in any given year.
The Company is aware of general risks to third parties with whom it deals on
financial transactions from such parties' failure to remediate their own year
2000 issues; however, due to the nature of the Company's business and
relationships, the Company believes that economy-wide year 2000 issues pose a
greater potential risk than issues arising from the specific nature of the
Company's business or relationships.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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 16, 1998, the Company held its Annual Meeting of
Stockholders.
1. At the Annual Meeting, Terrence O'Donnell 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
4,877,610 1,467,873
2. At the Annual Meeting, Carl J. Rickertson was elected to the Board of
Directors as a Class II director to hold office for three years until his
successor has been
For Withheld
4,877,610 1,467,873
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 approve and adopt the long-term incentive plan.
For Against Abstain Broker Non-Votes
4,458,649 48,000 0 1,838,834
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the Company's fiscal year ending March 31, 1999.
For Against Abstain Broker Non-Votes
4,877,610 0 0 1,467,873
Item 5. Other Information
Not Applicable
Item 6(a) Exhibits
Exhibit
Number Description Page
-------------- ---------------------------------------------------------
10.27 1998 Long Term Incentive Plan X
27.1 Financial Data Schedule X
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 June 30, 1998 and filed with the Commission on July 31,
1998, reporting interim information regarding the acquisition of PC
Plus, Inc. of Reston, Virginia. No financial statements were included.
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.
/s/ PHILLIP G. NORTON
By: Phillip G. Norton, Chairman of the Board,
President and Chief Executive Officer
Date: November 11, 1998
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: November 11, 1998