15
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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
Commission file number: 0-28926
MLC Holdings, 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 August 12, 1999, was
7,482,762.
MLC HOLDINGS, INC. AND SUBSIDIARIES
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1999 and
June 30, 1999 2
Condensed Consolidated Statements of Earnings, Three months
ended June 30, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows, Three months
ended June 30, 1998 and 1999 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
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 18
Signatures 19
-1-
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of March 31, 1999 As of June 30, 1999
----------------------------------------------------
ASSETS
Cash and cash equivalents $ 7,891,661 $ 5,946,043
Accounts receivable 44,090,101 67,868,089
Other receivables 547,011 209,057
Employee advances 20,078 70,508
Inventories 658,355 1,531,330
Investment in direct financing and sales type leases - net 83,370,950 100,716,270
Investment in operating lease equipment - net 3,530,179 2,870,496
Property and equipment - net 2,018,133 2,039,141
Other assets 12,232,130 15,245,375
====================================================
TOTAL ASSETS $ 154,358,598 $ 196,496,309
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 12,518,533 $ 16,671,048
Accounts payable - equipment 18,049,059 34,112,342
Salaries and commissions payable 535,876 503,469
Accrued expenses and other liabilities 4,638,708 4,775,748
Recourse notes payable 19,081,137 30,363,665
Nonrecourse notes payable 52,429,266 61,378,468
Deferred taxes 3,292,210 3,292,210
----------------------------------------------------
Total Liabilities 110,544,789 151,096,950
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;
7,470,595 and 7,482,762 issued and outstanding at
March 31, 1999 and June 30, 1999, respectively 74,706 74,828
Additional paid-in capital 24,999,371 25,082,344
Retained earnings 18,739,732 20,242,187
----------------------------------------------------
Total Stockholders' Equity 43,813,809 45,399,359
====================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,358,598 $ 196,496,309
====================================================
See Notes to Condensed Consolidated Financial Statements.
-2-
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended
June 30,
1998 1999
------------------------------------------------
REVENUES
Sales of equipment $ 10,274,435 $ 33,175,781
Sales of leased equipment 24,910,646 14,385,824
------------------------------------------------
35,185,081 47,561,605
Lease revenues 4,985,087 5,537,740
Fee and other income 1,412,634 1,264,338
------------------------------------------------
6,397,721 6,802,078
------------------------------------------------
TOTAL REVENUES 41,582,802 54,363,683
------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 8,283,673 29,799,418
Cost of sales, leased equipment 24,813,066 14,125,432
------------------------------------------------
33,096,739 43,924,850
Direct lease costs 1,991,828 949,010
Professional and other fees 196,965 423,671
Salaries and benefits 2,368,600 3,949,326
General and administrative expenses 987,872 1,294,373
Interest and financing costs 501,305 1,318,356
------------------------------------------------
6,046,570 7,934,736
------------------------------------------------
TOTAL COSTS AND EXPENSES 39,143,309 51,859,586
------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,439,493 2,504,097
------------------------------------------------
PROVISION FOR INCOME TAXES 975,797 1,001,642
------------------------------------------------
NET EARNINGS $ 1,463,696 $ 1,502,455
================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.24 $ 0.20
================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.23 $ 0.20
================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,078,126 7,477,532
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,241,079 7,492,780
See Notes to Condensed Consolidated Financial Statements.
-3-
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
1998 1999
-------------------------------
Cash Flows From Operating Activities:
Net earnings $ 1,463,696 $ 1,502,455
Adjustments to reconcile net earnings to net cash used by
operating activities:
Depreciation and amortization 1,276,822 827,539
Provision for credit losses 500,000 100,000
Gain on sale of operating lease equipment (2,500) --
Adjustment of basis to fair market value of equipment 268,506 3,000
Payments from lesees directly to lenders (282,225) (184,444)
Changes in:
Accounts receivable 1,033,285 (23,812,675)
Other receivables (11,771,040) 245,836
Employee advances 2,073 (45,200)
Inventories (589,916) (806,920)
Other assets 286,701 (2,951,845)
Accounts payable - equipment (82,439) 16,063,283
Accounts payable - trade (3,198,540) 4,462,455
Salaries and commissions payable, accrued
expenses and other liabilities 359,133 61,336
-------------------------------
Net cash used by operating activities (10,736,444) (4,535,180)
-------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of operating equipment 2,500
Increase in investment in direct financing and sales-type (18,385,823) (23,612,530)
Purchases of property and equipment (128,341) (202,962)
Increase in other assets (1,138,719) (24,121)
-------------------------------
Net cash used in investing activities (19,650,383) (23,839,613)
-------------------------------
Cash Flows From Financing Activities:
Borrowings:
Nonrecourse 11,608,867 17,125,538
Recourse 107,764 321,599
Repayments:
Nonrecourse (1,112,890) (1,824,682)
Recourse (45,310) (426,253)
Proceeds from issuance of capital stock, net of expenses 91,875 83,094
Proceeds from lines of credit 7,727,987 11,149,879
-------------------------------
Net cash provided by financing activities 18,378,293 26,429,175
-------------------------------
Net Decrease in Cash and Cash Equivalents (12,008,534) (1,945,618)
Cash and Cash Equivalents, Beginning of Period 18,683,796 7,891,661
-------------------------------
Cash and Cash Equivalents, End of Period $ 6,675,262 $ 5,946,043
===============================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 216,428 $ 375,560
===============================
Cash paid for income taxes $ 324,446 $ 1,496,069
===============================
See Notes To Condensed Consolidated Financial Statements.
-4-
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, 1999 (the "Company's
1999 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 leases consists of the following
components:
March 31, June 30,
1999 1999
------------ -----------
(In thousands)
Minimum lease payments $75,449 $ 90,899
Estimated unguaranteed residual value 17,777 21,298
Initial direct costs - net of amortization 1,606 1,860
Less: Unearned lease income (10,915) (12,795)
Reserve for credit losses (546) (546)
============ ===========
Investment in direct financing and
sales type leases - net $83,371 $ 100,716
============ ===========
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
March 31, June 30,
1999 1999
------------ ----------
(In thousands)
Cost of equipment under operating leases $8,742 $ 8,647
Initial direct costs 21 20
Accumulated depreciation and amortization (5,233) (5,797)
------------ ----------
Investment in operating lease equipment - net $ 3,530 $ 2,870
============ ==========
-5-
4. 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 three months ended June 30, 1998, 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 period.
Three Months Ended June 30, 1998
(in thousands)
-----------------
Total Revenues $48,358
Net Earnings 1,598
Net Earnings per Common Share - Basic .25
Net Earnings per Common Share - Diluted .25
5. SEGMENT REPORTING
The Company manages its business segments on the basis of the products and
services offered. The Company's reportable segments consist of its lease
financing and value-added re-selling business units. The lease financing
business unit offers lease financing solutions to corporations and governmental
entities nationwide. The value-added re-selling business unit sells information
technology equipment and related services primarily to corporate customers in
the eastern United States. The Company's management evaluates segment
performance on the basis of segment earnings.
The accounting policies of the segments are the same as those described in Note
1, "Organization and Summary of Significant Accounting Policies." Corporate
overhead expenses are allocated on the basis of revenue volume, estimates of
actual time spent by corporate staff, and asset utilization, depending on the
type of expense.
-6-
Lease Value-added
Financing Re-selling Total
---------------- ----------------- ----------------
(In Thousands)
Three months ended and as of June 30, 1998
Revenues $ 31,377 $ 10,206 $ 41,583
Cost of sales 25,241 7,856 33,097
Selling, general and administrative
expenses 3,689 1,857 5,546
---------------- ----------------- ----------------
Segment earnings 2,447 493 2,940
Interest expense 501
----------------
Earnings before income taxes 2,439
Assets 90,848 8,090 98,938
Three months ended and as of June 30, 1999
Revenues 20,233 34,131 54,364
Cost of sales 14,240 29,685 43,925
Selling, general and administrative
expenses 3,414 3,203 6,617
---------------- ----------------- ----------------
Segment earnings 2,579 1,243 3,822
Interest expense 1,318
----------------
Earnings before income taxes 2,504
Assets 149,885 46,611 196,496
6. SUBSEQUENT EVENT
On July 12, 1999, the Company acquired certain assets and the sales operations
of Daghigh Software Company, Inc., which does business as International Computer
Networks and as ICN. The total consideration of $751,452 consisted of $251,452
in cash and the balance was a non-negotiable promissory note. The assets and
staff were merged into PC Plus, Inc. based in Herndon, Virginia upon
acquisition.
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 Condensed
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this report, and the Company's 1999 Form 10-K.
Certain statements contained herein are not based on historical fact, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that may not occur. Actual events, transactions and results may
materially differ from the anticipated events, transactions, or results
described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
existence of demand for and acceptance of the Company's services, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the Company's
-7-
control. The Company undertakes no obligation and does not intend to update,
revise or otherwise publicly release the result of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
The Company's results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, differences between estimated
residual values and actual amounts realized related to the equipment the Company
leases. Operating results could also fluctuate as a result of the sale by the
Company of equipment in its lease portfolio prior to the expiration of the lease
term to the lessee or to a third party. Such sales of leased equipment prior to
the expiration of the lease term may have the effect of increasing revenues and
net earnings during the period in which the sale occurs, and reducing revenues
and net earnings otherwise expected in subsequent periods.
REVENUE RECOGNITION AND LEASE ACCOUNTING
The Company's principal line of business is the leasing, financing and sale of
equipment. The manner in which these lease finance transactions are
characterized and reported for accounting purposes has a major impact upon the
Company's reported revenue, net earnings and the resulting financial measures.
Lease accounting methods significant to the Company's business are discussed
below.
The Company classifies its lease transactions, as required by the Statement of
Financial Accounting Standards No. 13, Accounting for Leases ("FASB No. 13") as:
(i) direct financing; (ii) sales-type; or (iii) operating leases. Revenues and
expenses between accounting periods for each lease term will vary depending upon
the lease classification.
For financial statement purposes, the Company includes revenue from all three
classifications in lease revenues, and costs related to these leases in direct
lease costs.
Direct Financing and Sales-Type Leases. Direct financing and sales-type leases
transfer substantially all benefits and risks of equipment ownership to the
customer. A lease is a direct financing or sales-type lease if the
creditworthiness of the customer and the collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair market value of the leased equipment at inception of the lease.
Direct finance leases are recorded as investment in direct financing leases upon
acceptance of the equipment by the customer. At the inception of the lease,
unearned lease income is recorded which represents the amount by which the gross
lease payments receivable plus the estimated residual value of the equipment
exceeds the equipment cost. Unearned lease income is recognized, using the
interest method, as lease revenue over the lease term.
Sales-type leases include a dealer profit (or loss) which is recorded by the
lessor at the inception of the lease. The dealer's profit (or loss) represents
the difference, at the inception of the lease, between the fair value of the
leased property and its cost or carrying amount. The equipment subject to such
leases may be obtained in the secondary marketplace, but most frequently is the
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result of re-leasing the Company's own portfolio. This profit (or loss) which is
recognized at lease inception, is included in net margin on sales-type leases.
For equipment sold through the Company's value added re-seller subsidiaries, the
dealer margin is presented in equipment sales revenue and cost of equipment
sales. Interest earned on the present value of the lease payments and residual
value is recognized over the lease term using the interest method and is
included as part of the Company's lease revenues.
Operating Leases. All leases that do not meet the criteria to be classified as
direct financing or sales-type leases are accounted for as operating leases.
Rental amounts are accrued on a straight line basis over the lease term and are
recognized as lease revenue. The Company's cost of the leased equipment is
recorded on the balance sheet as investment in operating lease equipment and is
depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue, depreciation expense and the resulting
profit for operating leases are recorded evenly over the life of the lease.
As a result of these three classifications of leases for accounting purposes,
the revenues resulting from the "mix" of lease classifications during an
accounting period will affect the profit margin percentage for such period with
such profit margin percentage generally increasing as revenues from direct
financing and sales-type leases increase. Should a lease be financed, the
interest expense declines over the term of the financing as the principal is
reduced.
Residual Values. Residual values represent the Company's estimated value of the
equipment at the end of the initial lease term. The residual values for direct
financing and sales-type leases are recorded in investment in direct financing
and sales-type leases, on a net present value basis. The residual values for
operating leases are included in the leased equipment's net book value and are
recorded in investment in operating lease equipment. The estimated residual
values will vary, both in amount and as a percentage of the original equipment
cost, and depend upon several factors, including the equipment type,
manufacturer's discount, market conditions and the term of the lease.
The Company evaluates residual values on an ongoing basis and records any
required changes in accordance with FASB No. 13. Residual values are affected by
equipment supply and demand and by new product announcements and price changes
by manufacturers. In accordance with generally accepted accounting principles,
residual values can only be adjusted downward.
The Company seeks to realize the estimated residual value at lease termination
through: (i) renewal or extension of the original lease; (ii) sale of the
equipment either to the lessee or the secondary market; or (iii) lease of the
equipment to a new user. The difference between the proceeds of a sale and the
remaining estimated residual value is recorded as a gain or loss in lease
revenues when title is transferred to the lessee, or, if the equipment is sold
on the secondary market, in equipment sales revenues and cost of equipment sales
when title is transferred to the buyer. The proceeds from any subsequent lease
are accounted for as lease revenues at the time such transaction is entered
into.
Initial Direct Costs. Initial direct costs related to the origination of
sales-type, direct finance or operating leases are capitalized and recorded as
part of the net investment in direct financing and sales-type leases, or net
operating lease equipment, and are amortized over the lease term.
Sales. Sales revenue includes the following types of transactions: (i) sales of
new and/or used equipment which is not subject to any type of lease; (ii) sales
of equipment subject to an existing lease, under which the Company is lessor,
including any underlying financing related to the lease; and (iii) sales of
off-lease equipment to either the original lessee or to a new user.
-9-
Other Sources of Revenue. Fee and other income results from (i) income events
that occur after the initial sale of a financial asset such as escrow/prepayment
income, (ii) re-marketing fees, (iii) brokerage fees earned for the placement of
financing transactions and (iv) interest and other miscellaneous income. These
revenues are included in fee and other income on the Company's statements of
earnings.
RESULTS OF OPERATIONS - Three Months Ended June 30, 1999 (Unaudited) Compared to
Three Months Ended June 30, 1998 (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 month periods ended June 30,
1999 and 1998.
Total revenues generated by the Company during the three month period ended June
30, 1999 were $54,363,683 compared to revenues of $41,582,802 during the
comparable period in the fiscal prior year, an increase of 30.74%. 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 to $47,561,605 during the three month period ended June 30, 1999, as
compared to $35,185,081 in the corresponding period in the prior fiscal year.
Sales of leased equipment decreased $10,524,822 during the three month period
ended June 30, 1999. During the three months ended June 30, 1999 and 1998, sales
to MLC/CLC, LLC, an institutional equity partner of the Company, accounted for
34.58% and 100.00% of 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. The
remaining 65.42% of sales of leased equipment during the three months ended June
30, 1999 involved a new equity investor with which the Company has no joint
venture partner relationship. 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 $22,901,346 compared to the
corresponding period in the prior fiscal year due to higher sales volume and the
addition of PC Plus, Inc. in July, 1998. The Company's brokerage and
re-marketing activities accounted for .5% and 5.22% of equipment sales during
the three month period in 1999 and 1998, 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 10.2% for the three
month period ended June 30, 1999 as compared to a gross margin of 19.4% realized
on sales of equipment generated during the same three month period in the prior
fiscal year. The Company's gross margin percentage on sales of equipment is
affected by the mix and volume of products sold and was lowered due to the
addition of PC Plus, Inc. in July, 1998. PC Plus, Inc. sells to primarily large
customers at volumes that command lower margin percentages.
-10-
The gross margin generated on sales of leased equipment represents 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 June
30, 1999, the Company recognized a gross margin of $260,392 on equity sales of
$14,385,824, as compared to a gross margin of $97,580 on equity sales of
$24,910,646 during the same period in the prior fiscal year.
The Company's lease revenues increased 11.09% to $5,537,740 for the three month
period ended June 30, 1999, compared with the corresponding period in the prior
fiscal year. This increase consists of increased lease earnings and rental
revenues reflecting a higher average investment in direct financing leases. The
investment in direct financing leases at June 30, 1999 and March 31, 1999 was
$100,716,270 and $83,370,950, respectively. The June 30, 1999 balance represents
an increase of $17,345,320 or 20.8% over the balance as of March 31, 1999. 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".
For the three months ended June 30, 1999, fee and other income decreased 10.5%
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 for which 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 decreased 52.35% during the three month period
ended June 30, 1999 as compared to the same period in the prior fiscal year.
Although the largest component of direct lease costs is depreciation on
operating lease equipment, the decrease is primarily attributable to a decrease
in the additions to the allowance for doubtful accounts at June 30, 1999
compared to the same period in 1998.
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Salaries and benefits expenses increased 66.74% during the three month period
ended June 30, 1999 over the same period in the prior fiscal year, which
reflects both higher commission expenses and an increase in the number of
employees in the value added reselling business segment.
Interest and financing costs incurred by the Company for the three months ended
June 30, 1999 and 1998 amounted to $1,318,356 and $501,305, 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 Company's provision for income taxes increased to $1,001,642 for the three
months ended June 30, 1999 from $975,797 for the three months ended June 30,
1998, reflecting effective income tax rates of 40% for both periods.
The foregoing resulted in a 2.65% increase in net earnings for the three month
period ended June 30, 1999 as compared to the same periods in the prior fiscal
year.
Basic and fully diluted earnings per common share were $.20 for three months
ended June 30, 1999 as compared to $.24 and $.23 for the three months ended June
30, 1998, based on weighted average common shares outstanding of 7,477,532 and
6,078,126 for basic earnings per share, respectively, and fully diluted weighted
average shares of 7,492,780 and 6,241,079, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended June 30, 1999, the Company used cash flows
from operations of $4,535,180, and cash flows from investing activities of
$23,839,613. Cash flows generated by financing activities amounted to
$26,429,175 during the same period. The net effect of these cash flows was to
decrease cash and cash equivalents by $1,945,618 during the three month period.
During the same period, the Company's total assets increased $42,137,711, or
27%, primarily the result of increases in direct financing leases and accounts
receivable arising from equipment purchased on behalf of lessees but not yet
placed under an equipment schedule. 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 June 30, 1999, the Company had
$34,112,342 of unpaid equipment cost, as compared to $18,049,059 at March 31,
1999.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities through First Union
National Bank, N.A. MLC Holdings, Inc., with its two wholly-owned subsidiaries,
MLC Group, Inc., and MLC Federal, Inc., as co-borrowers, has established a
$50,000,000 committed recourse line of credit which is subject to the
availability of sufficient collateral in the borrowing base.
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The First Union Credit Facility, which was effective as of December 18, 1998 has
the following terms:
o interest at LIBOR + 150 basis points, or, at our option, prime minus
one-half percent; and
o each draw is subject to the availability of sufficient collateral as
provided in the borrowing base.
The First Union Credit Facility is secured by certain of the 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. This facility is fully
recourse, 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 latest First
Union Credit Facility expires on December 18, 1999. First Union National Bank,
N.A. has syndicated this facility to other participants each for $7,000,000. The
other participants are Riggs Bank, N.A., Key Bank, N.A., Summit Bank, N.A., Bank
Leumi USA, and Wachovia Bank, N.A. As of June 30, 1999, the Company had an
outstanding balance of $29.5 million on the First Union Credit Facility.
MLC Network Solutions, MLC Integrated and PC Plus have separate credit sources
to finance their working capital requirements for inventories and accounts
receivable. Their traditional business as value-added resellers of PC's and
related network equipment and software products is financed through agreements
known as "floor planning" financing where interest expense for the first thirty
to forty days is not charged to us but is paid for by the supplier/distributor.
These floor plan liabilities are recorded in our financial records under trade
accounts payable as they are normally repaid within the thirty to forty day time
frame and represent an assigned accounts payable originally generated with the
supplier/distributor. If the thirty to forty day obligation is not paid timely,
interest is then assessed at stated contractual rates.
As of June 30, 1999, the floor planning agreements are as follows:
Credit Balance at
Entity Floor Plan Supplier Limit June 30, 1999
------------------------------- -------------------------------- ----------- ----------------
MLC Network Solutions Deutsche Financial, Inc. $2,600,000 $1,108,014
IBM Credit Corporation $ 225,000 76,807
MLC Integrated Finova Capital Corporation $5,293,853 $5,293,853
IBM Credit Corporation $ 750,000 $ 62,679
PC Plus NationsCredit Corporation $8,000,000 $ 248,749
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All of the above credit facility limits have been increased during the year to
provide the credit capacity to increase our sales on account. MLC Integrated,
Inc. also has a line of credit in place with PNC Bank, N.A. which expires on
July 31, 2000. This asset based line has a maximum credit limit of $2,500,000
and interest charges are set at the bank's prime rate. The outstanding balance
was $87,000 as of June 30, 1999. The credit facilities provided by Finova
Capital Corporation and PNC Banks, N.A., are required to be guaranteed by MLC
Holdings, Inc.
Non-recourse debt and debt that is partially recourse is provided by various
lending institutions. The Company has formal programs with Heller Financial,
Inc., Key Corporate Capital, Inc., and Sanwa Business Credit Corporation. These
programs require that each transaction is specifically approved and done solely
at the lender's discretion.
Availability under the revolving lines of credit may be limited by the asset
value of equipment purchased by the Company and may be further limited by
certain covenants and terms and conditions of the facilities. See "Item 2,
Management's Discussion and Analysis of Results of Operations, Financial
Condition".
Partial Recourse Borrowing Facilities. On March 12, 1997, the Company
established a $10,000,000 credit facility agreement with Heller Financial, Inc.
("Heller"). Under the terms of the Heller Facility, a maximum amount of
$10,000,000 was available to borrow provided that each draw was subject to the
approval of Heller. On March 12, 1998, the formal commitment from Heller to fund
additional advances under the line was allowed to expire, however, we are still
transacting business as if the formal agreement terms are in place. The primary
purpose of the Heller Facility was for the permanent fixed-rate discounting of
rents for commercial leases of information technology assets with the Company's
middle-market customers. As of June 30, 1999, the balance on this account was
$3,040,675. Each advance under the facility bears interest at an annual rate
equal to the sum of the weekly average U.S. Treasury Constant Maturities for a
Treasury Note having approximately an equal term as the weighted average term of
the contracts subject to the advance, plus an index ranging from 1.75% to 3.00%,
depending on the amount of the advance and the credit rating (if any) of the
lessee. The Heller Facility contains a number of contractual covenants and is a
limited recourse facility, secured by a first-priority lien in the lease
contracts and chattel paper relating to each loan advance, the equipment under
the lease contracts, a 10% cross-collateralized first loss guarantee, and all
books, records and proceeds. The Heller Facility was made to MLC Group and is
guaranteed by MLC Holdings. The Heller Facility is subject to their sole
discretion, and is further subject to MLC Group's compliance with certain
conditions and procedures.
Through MLC/CLC, LLC, the Company has a formal joint venture agreement which
provides the equity investment financing for certain of the Company's
transactions. Firstar Equipment Finance Company ("FEFCO"), formerly Cargill
Leasing Corporation, is an unaffiliated investor which owns 95% of MLC/CLC, LLC.
FEFCO's parent company, Firstar Corporation, is a $20 billion bank holding
company which is publicly traded on the New York Stock Exchange under the symbol
-14-
"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 is currently, and 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.
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INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first quarter of fiscal 2000.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
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.
-16-
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 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 anticipates completing the
process of modifying and/or upgrading its remaining systems by September 30,
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 2. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although a substantial portion of the Company's liabilities are non-recourse,
fixed interest rate instruments, the Company is reliant upon lines of credit and
other financing facilities which are subject to fluctuations in interest rates.
Should interest rates significantly increase, the Company would incur higher
interest expense, and to the extent that the Company is unable to recover these
higher costs, potentially lower earnings.
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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
Item 6(a) Exhibits
Exhibit
Number Description Page
--------- -------------------------------------------------------------
27.1 Financial Data Schedule 20
Item 6(b) Reports on Form 8-K
Not Applicable
-18-
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: August 16, 1999
/s/ STEVEN J. MENCARINI
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: August 16, 1999
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