FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 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.)
400 Herndon Parkway, Herndon, VA 20170
(Address, including zip code, of principal offices)
Registrant's telephone number, including area code: (703) 834-5710
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Common Stock outstanding as of February 10,
1999, was 7,467,102.
MLC HOLDINGS, INC. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements - Unaudited:
Condensed Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998 2
Condensed Consolidated Statements of Earnings, Three months
ended December 31, 1998 and 1997 3
Condensed Consolidated Statements of Earnings, Nine months
ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows, Nine months
ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information:
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
1
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
As of As of
December 31, 1998 March 31, 1998
---------------------------------------------------
ASSETS
Cash and cash equivalents $ 7,406,250 $ 18,683,796
Accounts receivable 28,515,436 16,383,314
Other receivables 6,612,903 3,801,808
Employee advances 25,136 53,582
Inventories 1,020,030 1,213,734
Investment in direct financing and sales type leases - net 75,080,815 32,495,594
Investment in operating lease equipment - net 5,618,214 7,295,721
Property and equipment - net 1,880,239 1,131,512
Other assets 11,561,170 2,136,554
===================================================
TOTAL ASSETS $ 137,720,193 $ 83,195,615
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 11,759,261 $ 6,865,419
Accounts payable - equipment 18,931,416 21,283,582
Salaries and commissions payable 544,085 390,081
Accrued expenses and other liabilities 5,356,077 3,560,181
Recourse notes payable 18,646,016 13,037,365
Nonrecourse notes payable 38,379,108 13,027,676
Deferred taxes 1,487,000 1,487,000
Income tax payable 744,789 -
---------------------------------------------------
Total Liabilities 95,847,752 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;
7,467,102 and 6,071,505 issued and outstanding at
December 31, 1998 and March 31, 1998, respectively 74,671 60,715
Additional paid-in capital 24,972,870 11,460,331
Retained earnings 16,824,900 12,023,265
---------------------------------------------------
Total Stockholders' Equity 41,872,441 23,544,311
===================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 137,720,193 $ 83,195,615
===================================================
See Notes to Condensed Consolidated Financial Statements.
2
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
Three months ended
December 31,
1998 1997
-------------------------------------------
REVENUES
Sales of equipment $ 25,635,591 $ 10,797,522
Sales of leased equipment 38,053,115 7,299,836
-------------------------------------------
63,688,706 18,097,358
Lease revenues 4,745,035 3,803,385
Fee and other income 1,512,952 1,662,666
-------------------------------------------
6,257,987 5,466,051
-------------------------------------------
TOTAL REVENUES 69,946,693 23,563,409
-------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 22,148,807 8,316,250
Cost of sales, leased equipment 37,476,294 7,308,896
-------------------------------------------
59,625,101 15,625,146
Direct lease costs 1,550,955 1,558,272
Professional and other fees 375,094 282,278
Salaries and benefits 3,106,179 2,630,773
General and administrative expenses 1,318,912 903,010
Interest and financing costs 1,140,617 396,756
Non-recurring acquisition costs - 39,103
-------------------------------------------
7,491,757 5,810,192
-------------------------------------------
TOTAL COSTS AND EXPENSES 67,116,858 21,435,338
-------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,829,835 2,128,071
-------------------------------------------
PROVISION FOR INCOME TAXES 1,131,934 850,584
-------------------------------------------
NET EARNINGS $ 1,697,901 $ 1,277,487
===========================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.21
===========================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.24 $ 0.21
===========================================
PRO FORMA NET EARNINGS (See Note 4) $ 1,697,901 $ 1,277,487
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.21
===========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.24 $ 0.21
===========================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,189,324 6,071,305
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 7,220,060 6,188,990
See Notes to Condensed Consolidated Financial Statements.
3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
Nine months ended
December 31,
1998 1997
------------------------------------------
REVENUES
Sales of equipment $ 55,740,476 $ 36,290,550
Sales of leased equipment 74,612,679 39,486,348
------------------------------------------
130,353,155 75,776,898
Lease revenues 14,994,505 11,021,736
Fee and other income 4,182,928 4,481,831
------------------------------------------
19,177,433 15,503,567
------------------------------------------
TOTAL REVENUES 149,530,588 91,280,465
------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 47,157,230 28,401,639
Cost of sales, leased equipment 73,630,008 38,888,847
------------------------------------------
120,787,238 67,290,486
Direct lease costs 5,221,414 4,889,244
Professional and other fees 894,587 723,152
Salaries and benefits 8,508,006 7,415,657
General and administrative expenses 3,618,588 3,057,796
Interest and financing costs 2,498,012 1,372,020
Non-recurring acquisition costs - 222,557
------------------------------------------
20,740,607 17,680,426
------------------------------------------
TOTAL COSTS AND EXPENSES 141,527,845 84,970,912
------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 8,002,743 6,309,553
------------------------------------------
PROVISION FOR INCOME TAXES 3,201,099 1,722,717
------------------------------------------
NET EARNINGS $ 4,801,644 $ 4,586,836
==========================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.73 $ 0.76
==========================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.72 $ 0.75
==========================================
PRO FORMA NET EARNINGS (See Note 4) $ 4,801,644 $ 3,973,575
==========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.73 $ 0.66
==========================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.72 $ 0.65
==========================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,540,359 6,017,920
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,648,754 6,127,933
See Notes to Condensed Consolidated Financial Statements.
4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended
December 31,
1998 1997
-------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 4,801,644 $ 4,586,836
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation and amortization 3,850,449 3,443,864
Provision for credit losses 500,000 (13,865)
Gain on sale of operating lease equipment (5,267) (92,800)
Loss on disposal of property and equipment 9,809 -
Adjustment of basis to fair market value of equipment and investments 268,506 -
Payments from lessees directly to lenders (771,465) (1,375,099)
Compensation to outside directors - stock options - 18,283
Changes in assets and liabilities, net of effects of purchase acquisition:
Accounts receivable (5,837,220) (2,311,932)
Other receivables (2,811,095) 368,656
Employee advances 26,630 (6,649)
Inventories 1,036,507 (181,764)
Other assets (2,764,961) (1,216,167)
Accounts payable - equipment (1,397,591) 5,581,535
Accounts payable - trade (2,032,538) (496,075)
Salaries and commissions payable, accrued
expenses and other liabilities 2,195,466 (399,557)
-------------------------------------
Net cash (used in) provided by operating activities (2,931,126) 7,905,266
-------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating lease equipment 22,151 609,722
Purchase of operating lease equipment (1,824,989) (1,987,058)
Increase in investment in direct financing and sales-type leases (66,557,986) (6,373,493)
Purchases of property and equipment (915,346) (428,952)
Proceeds from sale of property and equipment 2,000 -
Cash used in acquisition, net of cash acquired (3,485,279) -
Increase in other assets (709,216) (353,181)
-------------------------------------
Net cash used in investing activities (73,468,665) (8,532,962)
-------------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 53,236,003 3,587,039
Recourse 319,586 174,894
Repayments:
Nonrecourse (3,640,341) (3,364,608)
Recourse (136,833) (161,282)
Distributions to shareholders of combined companies
prior to business combination - (1,021,012)
Proceeds from issuance of capital stock, net of expenses 177,931 -
Proceeds from sale of stock, net of underwriting costs 9,725,742 2,000,000
Proceeds from lines of credit 5,440,157 362,000
-------------------------------------
Net cash provided by financing activities 65,122,245 1,577,031
-------------------------------------
5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED - Continued
Nine Months Ended
December 31,
1998 1997
-------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (11,277,546) 949,335
Cash and Cash Equivalents, Beginning of Period 18,683,796 6,654,209
-------------------------------------
Cash and Cash Equivalents, End of Period $ 7,406,250 $ 7,603,544
=====================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 990,676 $ 116,787
=====================================
Cash paid for income taxes $ 2,443,818 $ 257,137
=====================================
See Notes To Condensed Consolidated Financial Statements.
6
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of MLC Holdings, Inc.
and subsidiaries (the "Company") included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
All adjustments made were normal, recurring accruals.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K (No. 0-28926) for the year ended March 31, 1998 (the "Company's
1998 Form 10-K"). Operating results for the interim periods are not necessarily
indicative of results for an entire year.
2. INVESTMENT IN DIRECT FINANCING AND SALES TYPE LEASES
The Company's investment in direct financing and sales type leases consists of
the following components:
December 31, March 31,
1998 1998
------------------ ------------------
(In thousands)
Minimum lease payments $ 69,079 $ 29,968
Estimated unguaranteed residual value 15,218 7,084
Initial direct costs - net of amortization 1,452 760
Less: Unearned lease income (10,122) (5,270)
Reserve for credit losses (546) (46)
================== ==================
Investment in direct financing and sales type leases - net $ 75,081 $ 32,496
================== ==================
7
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
December 31, March 31,
1998 1998
----------------- ------------------
(In thousands)
Cost of equipment under operating leases $ 14,808 $ 13,990
Initial direct costs 29 51
Accumulated depreciation and amortization (9,219) (6,745)
----------------- ------------------
Investment in operating leases - net $ 5,618 $ 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 Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
------------ -------------- ------------- ---------------
(In Thousands)
Net earnings before pro forma
adjustment $ 1,698 $ 1,277 $ 4,802 $ 4,587
Additional provision for income tax - - - 613
Pro forma net income ----------------------------------------------------
$ 1,698 $1,277 $ 4,802 $ 3,974
============ ============== ============= ===============
5. NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, 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.
8
6. BUSINESS COMBINATION
On July 1, 1998, the Company, through a new wholly owned subsidiary, MLC Network
Solutions of Virginia, Inc., issued 263,478 common shares, valued at $3,622,822,
and cash of $3,622,836 for all the outstanding common shares of PC Plus, Inc., a
value-added reseller of PC's , related network equipment and software products
and provider of various support services to its customers from its facility in
Reston, Virginia. Subsequent to the acquisition, MLC Network Solutions of
Virginia, Inc. changed its name to PC Plus, Inc. This business combination has
been accounted for using the purchase method of accounting, and accordingly, the
results of operations of PC Plus, Inc. have been 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 nine months ended December 31, 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.
Nine Months Ended December 31,
( in thousands)
1998 1997
--------------- -------------
Total Revenues $161,469 $116,506
Net Earnings 5,021 5,197
Net Earnings per Common Share - Basic .77 .83
Net Earnings per Common Share - Diluted .76 .81
7. OTHER DEVELOPMENT
The Company has two major customers who have filed for voluntary bankruptcy
protection. The largest is Allegheny Health, Education & Research Foundation
("AHERF") which is a Pittsburgh based not-for-profit hospital entity. The
bankruptcy court has held an auction and Tenet Healthcare, Inc. acquired AHERF's
assets. As of December 31, 1998, the Company's net book value of leases to AHERF
is approximately $1,874,000 and receivable balance is approximately $478,000.
The Company believes that the fair market value of the equipment is below its
current book balances. Depending on the decisions 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 will
probably sustain a loss, and has accordingly provided for such loss in the
statement of earnings for the nine month period ended December 31, 1998. The
amount and timing of such loss cannot be accurately estimated by the Company at
this time due to the recent filing and unknown status of many of its claims. The
Company has received a deposit on the purchase of the leased equipment from
Tenet Healthcare, Inc. which represents the total cash consideration for the
future transfer of title of the equipment once the bankruptcy court makes the
equipment available for liquidation. During the quarter ending December 31,
1998, PHP Healthcare, Inc. a lessee of the Company, was placed in receivership
by the New Jersey Insurance Commission which led to them filing for voluntary
9
bankruptcy protection. The Company has a net book value of assets totaling
approximately $359,000 at risk with this lessee. The remainder of the lease risk
is the financial responsibility of the non-recourse lenders. The Company is
vigorously pursuing all available remedies in bankruptcy court for all prior
claims against these bankrupt lessees. The Company believes that as of December
31, 1998, its reserves are adequate to provide for the potential losses
resulting from these customers.
8. PRIVATE PLACEMENT OF EQUITY
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 1,090,909 shares of common stock at an exercise price of
$11.00 per share. The warrant expires December 31, 2001.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis compares the consolidated results of
operations for the nine- and three-month periods ended December 31, 1998 to the
nine- and three-month periods ended December 31, 1997. The operating results of
these nine- and three-month periods are not necessarily indicative of operating
results in future periods. The following comparative information should be read
in conjunction with the Condensed Consolidated Financial Statements and
accompanying Notes, as well as the information presented elsewhere herein and in
the financial statements and related notes for the year ended March 31, 1998
included in the Company's 1998 Form 10-K.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this report 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 Nine Months Ended December 31, 1998, Compared
to Three and Nine Months Ended December 31, 1997
Total revenues generated by the Company during the three month period ended
December 31, 1998 were $69,946,693 compared to revenues of $23,563,409 during
the comparable period in the prior fiscal year, an increase of 196.84%. During
the nine month period ended December 31, total revenues were $149,530,588 and
$91,280,465 in 1998 and 1997, respectively, an increase of 63.81%. The Company's
revenues are composed of sales and other revenue, and may vary considerably from
period to period (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Sales revenue, which includes sales of equipment and sales of leased equipment,
increased 251.92% to $63,688,706 during the three month period ended December
31, 1998, as compared to $18,097,358 in the corresponding period in the prior
fiscal year. For the nine month period ended December 31, 1998, sales increased
72.02% to $130,353,155 over the corresponding period in the prior year.
11
During the three months ended December 31, 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 nine month periods ended December
31, sales to MLC/CLC LLC accounted for 100% and 85.9% of 1998 and 1997 sales of
leased equipment, respectively. Sales to the Company's equity joint ventures
require the consent of the relevant joint venture partner. While management
expects the continued availability of equity financing through this joint
venture, if such consent is withheld, or financing from this entity otherwise
becomes unavailable, it could have a material adverse effect upon the Company's
business, financial condition, results of operations and cash flows until other
equity financing arrangements are secured.
Sales of equipment, both new and used, are generated through the Company's
equipment brokerage and re-marketing activities, and through its valued added
reseller ("VAR") subsidiaries. Sales of equipment increased during the three
month period (137.42%) $14,836,069 compared to the corresponding period in the
prior fiscal year. For the fiscal year to date through December 31, equipment
sales increased 53.6% to $55,740,476. On a pro forma basis, had PC Plus, Inc.'s
equipment sales been included throughout the periods presented, equipment sales
would have increased 22.34% and 53.42% during the three and nine month periods
ended December 31, 1998 as compared to the comparable periods in the prior
fiscal year. The Company's brokerage and re-marketing activities accounted for
2.11% and 25.1% of equipment sales during the three month period in 1998 and
1997, respectively. During the nine month periods ended December 31, brokerage
and re-marketing activities accounted for 3.2% and 18.6% 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 13.6% and 15.4% for
the three and nine month periods ended December 31, 1998, respectively, as
compared to a gross margin of 23.0% and 21.7% realized on sales of equipment
generated during the three and nine month 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
December 31, 1998, the Company recognized a gross margin of $576,821 on equity
sales of $38,053,115 as compared to a net loss of $9,060 on equity sales of
$7,299,836 during the same period in the prior fiscal year. For the fiscal year
to date through December 31, 1998, the Company recognized a gross margin of
$982,671 on equity sales of $74,612,679, as compared to a gross margin of
$597,501 on equity sales of $39,486,348 during the same period in the prior
fiscal year.
12
The Company's lease revenues increased 24.76% to $4,745,035 for the three-month
period ended December 31, 1998, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through December 31, lease
revenues increased 36.04% to $14,994,505 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
December 31, 1998 and March 31, 1998 were $75,080,815 and $32,495,594,
respectively. The December 31, 1998 balance represents an increase of
$42,585,221 or 131.05% 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 Statement of Financial Accounting Standard No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," ("SFAS No. 125") which was effective beginning
January 1, 1997. During the three and nine month periods ending December 31,
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 nine months ended December 31, 1998, fee and other income
decreased 9.00% and 6.67%, 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 6.79% during the nine month periods
ended December 31, 1998 as compared to the same period in the prior fiscal year.
There was a slight decrease, less than 1%, in direct lease costs for the three
month period ended December 31, 1998 as compared to December 31, 1997. Although
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 and increased amortization of initial direct costs.
Salaries and benefits expenses increased 18.07% during the three month period
ended December 31, 1998 over the same period in the prior year. For the fiscal
year to date through December 31, 1998, salaries and benefits had increased
14.73% over the prior year. These increases reflect both the higher commission
expenses in the value added reseller businesses and the increased number of
personell employed by the Company.
Interest and financing costs incurred by the Company for the three and nine
months ended December 31, 1998 amounted to $1,140,617 and $2,498,012,
respectively, and relate to interest costs on the Company's lines of credit and
notes payable. Payment for interest costs on the majority of non-recourse and
13
certain recourse notes are typically remitted directly to the lender by the
lessee. The increase in interest and financing costs are primarily due to the
Company's increased utilization of its operating lines of credit during the
three and nine month periods in the current fiscal year as compared to the prior
fiscal year.
The Company's provision for income taxes increased to $1,131,934 for the three
months ended December 31, 1998 from $850,584 for the three months ended December
31, 1997, reflecting effective income tax rates of 40% for both periods. For the
nine months ended December 31, 1998, the Company's provision for income tax was
$3,201,099 as compared to $1,722,717 during the comparable period in the prior
year, reflecting effective income tax rates of 40% and 27.3%, respectively. The
low effective income tax rate for December 31, 1997 was primarily due to the
inclusion of the net earnings of businesses acquired by the Company, which prior
to their combination with the Company had elected subchapter S corporation
status, and as such, were not previously subject to federal income tax. Pro
forma tax expense, adjusted as if the Company's subsidiaries which were
previously subchapter S corporations had been subject to income tax for the
three and nine months ended December 31, 1997, would have increased the expense
by approximately $-0- and $613,261.
The foregoing resulted in a 32.91% and 4.68% increase in net earnings for the
three and nine month periods ended December 31, 1998, respectively, as compared
to the same periods in the prior fiscal year after taking into consideration the
pro forma tax expense.
Basic and fully diluted earnings per common share were $.24 for the three months
ended December 31, 1998, as compared to $.21 for the three months ended December
31, 1997, based on weighted average common shares outstanding of 7,189,324 and
7,220,060, respectively, for 1998, and 6,071,305 and 6,188,990, respectively,
for 1997. For the fiscal year to date through December 31, 1998, the Company's
basic and fully diluted earnings per common share were $.73 and $.72,
respectively, as compared to $.76 and $.75, respectively, for the same period in
1997, based on weighted average common shares outstanding of 6,540,359 and
6,648,754, respectively, for 1998, and 6,017,920 and 6,127,933 respectively, for
1997.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended December 31, 1998, the Company used cash
flows in operations of $2,931,126, and used cash flows from investing activities
of $73,468,665. Cash flows generated by financing activities amounted to
$65,122,245 during the same period. The net effect of these cash flows was a net
decrease in cash and cash equivalents of $11,277,546 during the nine month
period. During the same period, the Company's total assets increased
$54,524,577, or 65.54%, 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 December 31, 1998, the Company had
$18,931,416 of unpaid equipment cost, as compared to $21,283,582 at March 31,
1998.
14
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. From June 5, 1997
until December 18, 1998, the Company had entered into the First Union Facility
with First Union National Bank, N.A., for a maximum facility limit of $35
million which bore interest at LIBOR+110 basis points, or, at the Company's
option, prime minus one percent. On December 18, 1998, MLC Holdings, Inc., with
its two wholly-owned subsidiaries, MLC Group, Inc., and MLC Federal, Inc., as
co-borrowers finalized and executed documents establishing a $50,000,000
committed recourse line of credit with First Union National Bank. Under the
terms of the successor First Union Credit Facility, a maximum amount of $50
million is available to MLC, though each draw is subject to the availability of
sufficient collateral in the borrowing base. The First Union Credit Facility is
evidenced by a credit agreement, dated as of December 31, 1998, a security
agreement and a pledge agreement both dated as of December 18, 1998. Borrowings
under the First Union Credit Facility will bear interest at LIBOR + 150 basis
points, or, at the Company's option, prime minus one-half percent. The Credit
Facility is secured by certain of the three company's assets such as chattel
paper (including leases), receivables, inventory, and equipment. In addition,
MLC Holdings, Inc. has entered into pledge agreements to pledge the common stock
of each of its subsidiaries. The availability of the line is subject to a
borrowing base, which consists of inventory, receivables, purchased assets, and
leases. Availability under the revolving lines of credit may be limited by the
asset value of equipment purchased by MLC and may be further limited by certain
covenants and terms and conditions of the facilities. In the event that MLC is
unable to sell the equipment or unable to finance the equipment on a permanent
basis within a certain period of time, the availability of credit under the
lines could be diminished or eliminated. Furthermore, in the event that
receivables collateralizing the line are uncollectible, MLC would be responsible
for repayment of the lines of credit. The First Union Credit Facility contains a
number of covenants binding on MLC requiring, among other things, minimum
tangible net worth, cash flow coverage ratios, maximum debt to equity ratio,
maximum amount of guarantees of subsidiary obligations, mergers, acquisitions,
and asset sales. The Credit Facility is a full recourse facility, secured by
first-priority blanket liens on all of MLC's assets. Availability under the
revolving lines of credit may be limited by the asset value of equipment
purchased by the Company and may be further limited by certain covenants and
terms and conditions of the facilities. The new First Union Credit Facility
expires on December 18, 1999. Other participants in the First Union Credit
Facility, each for $7,000,000, are: Riggs Bank, N.A., Key Bank, N.A., Summit
Bank, N.A., Bank Leumi USA, and Wachovia Bank., N.A.
As of December 31, 1998, the Company had an outstanding balance of $17,000,000
on the First Union Facility.
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 December 31, 1998, MLC Network
Solutions, Inc., has floor planning availability of $2,600,000 through Deutsche
Financial, Inc. and $225,000 from IBM Credit Corporation. The outstanding
balances to these respective suppliers were $1,047,889 and $32,898 as of
December 31, 1998. MLC Integrated, Inc. has floor planning availability of
$3,000,000 from FINOVA Capital Corporation and $750,000 through IBM Credit
Corporation. The outstanding balances to these respective suppliers were
$2,045,545, and $197,640 as of December 31, 1998. In addition, MLC Integrated,
15
Inc. has a line of credit in place, expiring on July 31, 1999, 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 $1,179,000 as of December 31, 1998. PC Plus, Inc. has
floor planning availability of $6,000,000 through NationsCredit Commercial
Corporation as of December 31, 1998. This agreement expires October 1, 1999. The
outstanding balance to this supplier was $1,956,344 as of December 31, 1998.
Non-recourse debt and debt that is partially recourse is provided by various
lending institutions. The Company has formal programs with Heller Financial,
Inc., Key Corporate Capital, Inc., and Sanwa Business Credit Corporation. These
programs require that each transaction is specifically approved and done solely
at the lender's discretion.
Through MLC/CLC, LLC, the Company has a formal joint venture agreement which
provides the equity investment financing for certain of the Company's
transactions. Firstar Equipment Finance Company ("FEFCO"), formerly Cargill
Leasing Corporation, is an unaffiliated investor which owns 95% of MLC/CLC, LLC.
FEFCO's parent company, Firstar Corporation, is a $20 billion bank holding
company which is publicly traded on the New York Stock Exchange under the symbol
"FSR". This joint venture arrangement enables the Company to invest in a
significantly greater portfolio of business than its limited capital base would
otherwise allow. A significant portion of the Company's revenue generated by the
sale of leased equipment is attributable to sales to MLC/CLC, LLC. (See "RESULTS
OF OPERATIONS").
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flow from its
operations, the sale of the equipment lease to MLC/CLC,LLC , or other internal
means of financing. Although the Company expects that the credit quality of its
leases and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available, at
acceptable terms, or at all.
The Company anticipates that its current cash on hand, operations and additional
financing available under the Company's credit facilities will be sufficient to
meet the Company's liquidity requirements for its operations through the
remainder of the fiscal year. However, the Company intends to continue pursuing
additional acquisitions, which are expected to be funded through a combination
of cash and the issuance by the Company of shares of its common stock. To the
extent that the Company elects to pursue acquisitions involving the payment of
significant amounts of cash (to fund the purchase price of such acquisitions and
the repayment of assumed indebtedness), the Company is likely to require
additional sources of financing to fund such non-operating cash needs.
16
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's stock. Any such adverse impact could be
greater if any such shortfall occurs near the time of any material decrease in
any widely followed stock index or in the market price of the stock of one or
more public equipment leasing and financing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, any reduction of
expected residual values related to the equipment under the Company's leases,
timing of specific transactions and other factors. Quarterly operating results
could also fluctuate as a result of the sale by the Company of equipment in its
lease portfolio, at the expiration of a lease term or prior to such expiration,
to a lessee or to a third party. Such sales of equipment may have the effect of
increasing revenues and net income during the quarter in which the sale occurs,
and reducing revenues and net income otherwise expected in subsequent quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first three 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 business, financial condition, results of operations and
cash flows.
In addition, there can be no assurance that acquisitions will occur at the same
pace as in prior periods or be available to the Company on favorable terms, if
at all. If the Company is unable to use the Company's common stock as
consideration in acquisitions, for example, because it believes that the market
price of the common stock is too low or because the owners of potential
acquisition targets conclude that the market price of the Company's common stock
is too volatile, the Company would need to use cash to make acquisitions, and,
therefore, would be unable to negotiate acquisitions that it would account for
under the pooling-of-interests method of accounting (which is available only for
all-stock acquisitions). This might adversely affect the pace of the Company's
acquisition program and the impact of acquisitions on the Company's business,
financial condition, results of operations and cash flows. In addition, the
consolidation of the equipment leasing business has reduced the number of
companies available for sale, which could lead to higher prices being paid for
the acquisition of the remaining domestic, independent companies. The failure to
acquire additional businesses or to acquire such businesses on favorable terms
in accordance with the Company's growth strategy could have a material adverse
impact on future sales and profitability.
17
There can be no assurance that companies that have been acquired or that may be
acquired in the future will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows, 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.
18
YEAR 2000 ISSUE
The Company has identified all significant hardware and software applications,
both IT and non-IT based, that will require upgrade or modification to ensure
Year 2000 compliance. The upgrade and/or modification of the majority of these
systems is substantially complete. The Company plans on completing the process
of modifying and/or upgrading its remaining systems by March 31, 1999. The total
cost of these Year 2000 compliance activities has not been, nor is it
anticipated to become, material to the Company's financial position, results of
operations or cash flows in any given year.
The Company recognizes the risks surrounding its own Year 2000 readiness, for
which it believes it has adequately addressed, as well as the risks arising from
the failure of third parties with whom it has a material relationship to
remediate their own Year 2000 issues. While the risks of third party
non-compliance may temporarily affect the ability of a third party to transact
business with the Company, the Company believes such risks are adequately
mitigated by its own contingency plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
19
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
Not Applicable
Item 5. Other Information
Not Applicable
20
Item 6(a) Exhibits
Exhibit
Number Description Page
-------------- ---------------------------------------------------------------
10.28 Sublease by and between Cisco Systems ("Tenant")
and MLC Holdings, Inc. ("Subtenant")
27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
During the third fiscal quarter covered by this report, the Company
filed the ollowing Current Reports on form 8-K:
Form 8-K dated October 23, 1998 and filed with the Commission on
November 13, 1998, reporting interim information regarding the issuance
of 1,111,111 shares of common stock in a private placement. No financial
statements were included.
Form 8-K dated December 18, 1998 and filed with the Commission on
December 31, 1998, reporting the establishment of a $50,000,000 line
of credit with First Union National Bank. No financial statements were
included.
21
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: February 10, 1999
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: February 10, 1999
22