<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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 XXXXXXXX
MLC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1817218
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11150 Sunset Hills Road, Suite 110, Reston, VA 20190-5321
(Address of principal executive offices) (Zip Code)
(703) 834-5710
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
The number of shares of Registrant's common stock outstanding December 31, 1996
was 5,150,000 shares.
<PAGE> 2
2
MLC HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets December 31, 1996
(Unaudited)and March 31, 1996
Condensed Consolidated Statements of Earnings Three month and
Nine month periods ended December 31, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Cash Flows Nine month
periods ended December 31, 1996 and 1995 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
<PAGE> 3
3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,252,684 $ 357,881
Accounts receivable 4,604,028 1,272,707
Notes receivable 294,964 91,857
Employee advances 72,749 76,349
Inventories 2,954,810 86,280
Investment in direct financing and sales-type leases - net 19,230,800 16,273,218
Investment in operating lease equipment - net 12,595,264 10,219,826
Property and equipment - net 269,072 280,468
Other assets 1,469,884 1,177,629
----------- -----------
TOTAL ASSETS 46,744,255 29,836,215
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable - equipment $ 8,323,658 $ 4,972,979
Accounts payable - trade 1,616,489 604,650
Salaries and commissions payable 166,148 61,910
Accrued expenses and other liabilities 1,105,955 935,315
Income taxes payable 683,195 6,332
Recourse notes payable 385,851 1,284,742
Nonrecourse notes payable 20,758,331 18,351,579
Loans from stockholders -- 275,000
Deferred taxes 490,000 469,000
----------- -----------
Total liabilities 33,529,627 26,961,507
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000 -- --
shares authorized; none issued or
outstanding
Common stock, $.01 par value - 10,000,000 shares 51,500 40,000
authorized; 5,150,000 and 4,000,000 shares
issued and outstanding at December 31, 1996 and
March 31, 1996, respectively
Additional paid-in capital 8,601,854 9,592
Retained earnings 4,561,274 2,825,116
----------- -----------
Total stockholders' equity 13,214,628 2,874,708
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 46,744,255 29,836,215
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 4
4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Sales
Sales of equipment $ 4,634,610 $ 6,013,763 $13,974,886 $13,429,106
Sales of leased equipment 3,800,011 2,068,896 13,507,407 9,775,434
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sales 8,434,621 8,082,659 27,482,293 23,204,540
----------- ----------- ----------- -----------
Lease revenues 2,990,124 1,791,814 6,900,727 4,016,436
Net margin on sales-type leases -- 317 -- 85,590
Fee and other income 375,360 607,954 2,017,699 1,736,343
----------- ----------- ----------- -----------
Total revenues 11,800,105 10,482,744 36,400,719 29,042,909
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales of equipment 3,907,478 5,642,737 12,460,182 11,912,582
Cost of sales of leased equipment 3,768,443 1,835,835 13,359,442 9,135,319
----------- ----------- ----------- -----------
Cost of sales 7,675,921 7,478,572 25,819,624 21,047,901
----------- ----------- ----------- -----------
Direct lease costs 1,454,202 909,711 3,150,945 1,611,454
Professional and other fees 120,338 150,792 329,704 479,790
Salaries and benefits 830,468 817,369 2,390,826 2,259,854
General and administrative expenses 310,442 287,642 843,088 715,556
Interest and financing costs 418,682 412,482 1,175,374 1,144,009
----------- ----------- ----------- -----------
Total costs and expenses 10,810,053 10,056,568 33,709,561 27,258,564
----------- ----------- ----------- -----------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 990,052 426,176 2,691,158 1,784,345
PROVISION FOR INCOME TAXES 349,000 153,000 955,000 633,000
----------- ----------- ----------- -----------
NET EARNINGS $ 641,052 $ 273,176 $ 1,736,158 $ 1,151,345
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE $ 0.14 $ 0.06 $ 0.42 $ 0.28
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 5
5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 1,736,158 $ 1,151,345
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation & amortization 2,189,179 1,193,712
Gain on sale of operating lease equipment (90,335) (252,248)
Adjustment of basis to FMV of early returned
operating lease equipment 299,403 --
Payments from lessees directly to lenders (1,245,583) (433,915)
(Gain)/loss on disposal of property and equipment (8,740) 2,449
Deferred taxes 21,000 --
Changes in:
Accounts receivable (3,331,321) 472,354
Notes receivable (203,106) 35,106
Employee advances 3,600 (68,629)
Inventories (2,755,685) (368,439)
Refundable income taxes -- 48,946
Other assets (423,287) (381,979)
Accounts payable - equipment 3,350,679 4,173,726
Accounts payable - trade 1,011,839 197,777
Salaries & commissions payable 104,238 (28,426)
Accrued expenses and other liabilities 170,640 1,196,560
Income taxes payable 676,864 421,580
------------ ------------
Net cash provided by operating activities 1,505,543 7,359,919
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating lease equipment 2,777,871 760,124
Purchase of operating lease equipment (16,763,745) (9,885,058)
Increase in investment in direct financing and sales-type leases (8,049,465) (16,175,204)
Proceeds from sale of property and equipment 8,740 9,083
Purchase of property and equipment (53,360) (183,113)
Decrease/(increase) in other assets 131,032 (176,664)
------------ ------------
Net cash used in investing activities (21,948,927) (25,650,832)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse 19,290,233 19,358,097
Recourse 205,517 --
Repayments:
Nonrecourse (1,381,918) (714,877)
Recourse (58,037) (46,910)
Repayments of loans from stockholders (275,000) (50,000)
(Repayments)/proceeds from lines of credit (1,046,370) 195,818
Net proceeds from public offering 8,603,762 --
------------ ------------
Net cash provided by financing activities 25,338,187 18,742,128
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,894,803 451,215
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 357,881 253,475
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 5,252,684 704,690
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 87,005 $ 140,140
============ ============
Income taxes paid $ 257,137 $ 162,444
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 6
6
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1996, and the
consolidated statements of earnings and consolidated statements of cash flows
for the three month and nine month periods ended December 31, 1996 and December
31, 1995 have been prepared by the Company, without audit.
The quarterly financial information is submitted in response to the
requirements of Form 10-Q and does not purport to be financial statements
prepared in accordance with generally accepted accounting principles. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. They therefore do not include all disclosures which might
be associated with such statements.
In the opinion of management such information includes all adjustments,
consisting only of normal recurring accruals, necessary to present fairly the
financial position at December 31, 1996, and for all periods presented.
For a summary of significant accounting principles, which have been continued
without change, refer to Note 1 to the financial statements for the year ended
March 31, 1996 included in the Prospectus dated November 14, 1996.
2. PUBLIC OFFERING OF COMMON STOCK AND RELATED MATTERS
On November 20, 1996, the Company closed a public stock offering of 1,000,000
shares of its common stock. The Company received net proceeds of $8,137,500
from the Offering, not including estimated expenses of $750,000. On December
13, 1996, an additional 150,000 shares were issued under an over-allotment
option exercised by the Company's underwriters. The Company received net
proceeds from these shares of $1,220,625. On November 20, 1996, the Board of
Directors of the Company was expanded, by vote of the existing Board, to elect
three outside directors, Carl J. Rickertsen, Terrence O'Donnell, and Jonathan
Ledecky. In connection with the election of these outside directors, the
Company entered into certain indemnification agreements and granted each
outside director options for the purchase of 10,000 shares of common stock of
the Company at a purchase price of $8.75 per share, pursuant to the 1996
Outside Directors Stock Option Plan. The election of the outside directors, the
indemnification agreements, and the stock options are all as described in the
Company's Registration Statement on Form S-1 relating to the Offering.
Effective December 18, 1996, the Board of Directors established an
outside Audit Committee composed of Carl J. Rickertsen and Terrence O'Donnell,
as outside directors, and Phillip G. Norton.
Effective November 19, 1996, the Company granted options for a total
of 60,000 shares of common stock of the Company at a purchase price of $8.75
per share, to employees of the Company other than officers and directors,
pursuant to the 1996 Incentive Stock Option Plan. These options were as
described in the Company's Registration Statement on Form S-1 concerning the
Offering.
On January 8, 1997, the Incentive Compensation Committee of the Board
of Directors granted an additional 20,000 options to purchase an additional
20,000 shares of stock, 15,000 of which were granted to employees of the
Company other than
<PAGE> 7
7
officers and directors pursuant to the 1996 Incentive Stock Option Plan and
5,000 of which were granted to independent contractors pursuant to the 1996
Nonqualified Stock Option Plan.
3. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct finance leases consists of the
following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
<S> <C> <C>
Minimum lease payments receivable $ 21,421 $ 18,212
Estimated unguaranteed residual value 954 348
Initial direct costs - net 1,490 1,539
Less: Unearned lease income (4,634) (3,826)
Investment in direct financing lease and
sales-type leases - net $ 19,231 $ 16,273
</TABLE>
4. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
-------- --------
<S> <C> <C>
Cost of equipment under
operating leases $ 14,709 $ 11,411
Initial direct costs 272 54
Accumulated depreciation and
amortization (2,386) (1,245)
-------- --------
Investment in operating leases - net $ 12,595 $ 10,220
======== ========
</TABLE>
<PAGE> 8
8
MLC HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
DECEMBER 31, 1996.
RESULTS OF OPERATIONS
Revenues. Total revenues increased 12.6% to $11,800,105 and increased 25.3% to
$36,400,719 for the three and nine month p eriods ended December 31, 1996,
compared with the corresponding prior year period. The increases in revenue are
attributed to the increased volume of lease originations which increased Lease
Revenues and increases in Sales of Leased Equipment, and was offset by
decreases in Sales of Equipment and Fee and Other Income due to the variability
of timing of transactions originated or sold by the Company. Fluctuations
within revenue categories may continue in the future (See "POTENTIAL
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Sales. Sales increased 4.4% to $8,434,621 and increased 18.4% to $27,482,293,
for the three and nine month periods ended December 31, 1996, compared with the
corresponding prior year periods.
Sales of Equipment: Sales of Equipment decreased 22.9% to $4,634,610
and increased 4.1% to $13,974,886 for the three and nine month periods
ended December 31, 1996, respectively, compared with the corresponding
prior year period. The fluctuation in the Sales of Equipment is due to
the variability of timing of transactions originated or sold by the
Company.
Sales of Leased Equipment: Sales of Leased Equipment increased 83.7%
to $3,800,011 and increased 38.2% to $13,507,407 for the three and
nine month periods ended December 31, 1996, respectively, compared
with the corresponding prior year period. The fluctuation in Sales of
Leased Equipment is a result of fluctuations in the timing of the
sales to the Company's institutional equity partners, GATX Capital
Corporation, and Cargill Leasing Corporation. For the three and nine
month periods ended December 31, 1996, respectively, sales to MLC/GATX
represented $1,249,500 (32.9%) and $3,452,913 (25.6%) of Sales of
Leased Equipment. The MLC/GATX partnership acquires mostly mainframe
and mainframe related equipment, and the amount of Equipment sold to
the partnership may decline as measured both by revenue and as a
percentage of the whole, as the Company de-emphasizes the leasing of
mainframe and mainframe peripheral equipment. For the three and nine
month periods ended December 31, 1996, respectively, sales to MLC/CLC
represented $2,307,165 (60.7%) and $8,796,503 (65.1%) of Sales of
Leased Equipment. The LLC acquires mostly P.C. and related equipment
and sales to the LLC may increase, and increase as a percentage of
total Sales of Leased Equipment, as the Company continues to emphasize
leasing of this equipment category.
Lease Revenues. Lease revenues increased 66.9% to $2,990,124 and increased
71.8% to $6,900,727 or the three and nine month periods ended December 31,
1996, respectively. The increases in lease revenue reflect a higher average
investment in operating and direct finance leases, resulting from increases in
operating and direct finance leases originated by the Company over the past
year, and an increase in interim rents accrued, in the first three and nine
months of 1996, compared to the same periods of 1995.
Fee and Other Income. Fee and other income decreased 38.3% to $375,360 and
increased 16.2% to $2,017,699 for the three and nine month periods ended
December 31, 1996. The decline in the three month period as compared to the
previous year is due mostly to declines in fees relating to the remarketing of
equipment owned by others, fee income and broker fees, which are due to the
variability of timing of transactions originated, remarketed, or sold by
the Company.
<PAGE> 9
9
The increase for the nine month period is a result of a higher level of
interest income, remarketing fees, earnings from a prepay escrow fee, and
higher levels of management fee income earned from the equity joint ventures
with Cargill and GATX, and is offset by a decline in fee income and broker
fees, as compared to the same periods in 1995. Fluctuations of revenues in this
category may vary significantly from period to period due to the variability of
timing of transactions, interest rates, customer prepayment rates, and other
factors. (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS").
Expenses. Total expenses increased 7.5% to $10,810,053 and increased 23.7% to
$33,709,561 for the three and nine month periods ended December 31, 1996,
compared with the corresponding prior year periods.
Cost of Sales. Cost of sales increased 2.6% to $7,675,921 and increased 22.7%
to $25,819,624 for the three and nine month periods ended December 31, 1996,
respectively, as a result of an increase in sales activities for those periods.
The fluctuation in sales expenses can be attributed to the variability of
timing of transactions originated, or sold by the Company, and fluctuations may
continue in the future (See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS").
Cost of Sales of Equipment: The Cost of Sales of Equipment decreased
30.8% to $3,907,478 and increased 4.6% to $12,460,182 for the three
and nine month periods ended December 31, 1996, respectively, compared
with the corresponding prior year period reflecting decreases and
increases in related sales. Although the gross margin of this category
increased to 15.69% from 6.17% in the three month periods ended
December 31, 1996 and 1995, respectively, there can be no assurance
that the improved margin will continue. For the nine month periods
ended December 31, 1996 and 1995, respectively, the gross margin was
10.84% and 11.29%.
Cost of Sales of Leased Equipment: The Cost of Sales of Leased
Equipment increased 105.3% to $3,768,443 and increased 46.2% to
$13,359,442 for the three and nine month periods ended December 31,
1996, compared with the corresponding prior year periods. These
increases are a result of increasing lease origination which has been
sold to the Company's institutional equity partners, GATX Capital
Corporation and Cargill Leasing Corporation.
Direct Lease Costs. Direct lease costs increased 59.9% to $1,454,202 and
increased 95.5% to $3,150,945 for the three and nine month periods ended
December 31, 1996, compared with the corresponding prior year period. The
increase is due to the increase in the operating and direct finance lease base,
resulting from increases in operating and direct finance leases originated by
the Company over the past year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 0.4% to $1,261,248 and increased 3.1% to
$3,563,618, for the three and nine month periods ended December 31, 1996,
compared with the corresponding prior year period. The increase is primarily
attributable to increased compensation and benefit costs as a result of an
increase in the number of employees, increase in commissions paid as a result
of transaction profitability, a decrease in professional and other fees, and an
increase in general and administrative costs relating to the higher volume of
lease business.
Interest Expense. Interest expense increased 1.5% to $418,682 and increased
2.7% to $1,175,374, for the three and nine month periods ended December 31,
1996, compared with the corresponding prior year period.
Provision for Income Taxes. The provision for income taxes was 35.3% and 35.5%
for the three and nine months ended December 31, 1996 as compared to 35.9% and
35.5% for the corresponding prior year periods.
Net Earnings. Net earnings increased 134.7% to $641,052 and increased 50.8% to
$1,736,158, for the three and nine month periods ended December 31, 1996,
compared with the corresponding prior year period, as a result of the changes
in the
<PAGE> 10
10
components of total revenues and total costs and expenses specifically
described above. Earnings per share increased 133.3% to $0.14 and increased
52.2% to $0.42 for the three and nine month periods. Net income per share for
the three and nine month periods are calculated using the weighted average
shares outstanding for the three and nine month periods ending December 31,
1996 of 4,485,870 and 4,162,545, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. The Company generated cash flow from operations of $1,505,543 during
the nine month period ended December 31, 1996, which was lower than same-period
net income of $1,736,158 as a result of increases in accounts receivable of
$3,331,321 (mostly due to increases in lease receivables for equipment which
has been paid for but not yet recorded as a lease--it is expected that the
leases will be booked in the quarter ending March 31, 1997), inventories of
$2,755,685 (mostly due to the purchase of equipment having a cost of
approximately $2,700,000 for a contracted sale but which sale was not
consummated until January, 1997), and Payments from Lessees Directly to Lenders
of $1,245,583, and other changes in assets of $423,287. Non-cash expenses which
increased cash flow included Depreciation and Amortization of $2,189,179
(mostly due to an increase in the amount of operating lease assets), Accounts
Payable - Equipment of $3,350,679 (mostly due to leased equipment purchased but
not yet paid for), Accounts Payable - Trade of $1,011,839, and Income Taxes
Payable of $676,864, Adjustment of Basis to FMV of Early Returned Operating
Lease Equipment of $299,403, (this was a result of the early termination of a
number of operating leases with one customer where the Company received a
termination fee which was in excess of the non-cash adjustment, resulting in
positive net fee income for the transaction as a whole) and changes in other
assets and liabilities of $299,478.
Investing activities, which are primarily related to investments in equipment
under lease, used $21,948,927 during the nine month period. Financing
activities in the nine month period generated $25,338,187 from the Company's
new borrowings of non-recourse debt totaling $19,290,233 and was offset by
repayment of recourse and non-recourse borrowings aggregating $1,439,955,
repayment of $1,046,370 to its lines of credit, and the termination of loans
from stockholders of $275,000. The net result of the above activity for the
nine month period was an increase in cash and cash equivalents of $4,894,803.
The financing necessary to support the Company's leasing activities has
principally been provided from nonrecourse and recourse borrowings.
Historically, the Company has obtained recourse and nonrecourse borrowings from
money center banks, regional banks, insurance companies, finance companies and
financial intermediaries.
Bank Lines of Credit. Prior to the permanent financing of its leases, interim
financing has been obtained through short-term, secured, recourse facilities.
The Company's available credit under its short-term, recourse facility
currently totals $5,000,000. The First Union Facility is a $5,000,000 revolving
facility provided by First Union National Bank of Virginia ($97,000 was
outstanding as of December 31, 1996), with borrowing available through April
30, 1997, and repayments due 90 days after borrowing. Borrowings under the
First Union Facility bear interest at LIBOR plus 275 basis points.
The Company previously had a $2,000,000 facility with NationsBank, N.A. which
expired December 1, 1996.
Equity Joint Ventures. Through MLC/GATX Limited Partnership I and MLC/CLC LLC,
the Company has formal joint venture arrangements with two institutional
investors which provide the equity investment financing for certain of the
Company's transactions. GATX, an unaffiliated company which beneficially owns
90% of MLC/GATX Limited Partnership I, is a publicly listed company with
stockholders' equity in excess of $332 million, as of June 30, 1996. The
MLC/GATX partnership acquires mostly mainframe and mainframe related equipment,
and the amount of Equipment sold to the partnership may decline as measured
both by revenue and as a percentage of total Sales of Leased Equipment, as the
Company de-emphasizes the leasing of mainframe and
<PAGE> 11
11
mainframe peripheral equipment. Cargill Leasing Corporation, an unaffiliated
investor which owns 95% of MLC/CLC LLC, is affiliated with Cargill, Inc., a
privately held business that was reported by Forbes Magazine to have 1995
earnings in excess of $900 million. The LLC acquires mostly P.C. and related
equipment and sales to the LLC may increase, and increase as a percentage of
total Sales of Leased Equipment, as the Company continues to emphasize leasing
of this equipment category. These joint venture arrangements enable the Company
to invest in a significantly greater portfolio of business than the Company's
limited capital base would otherwise allow.
MLC/GATX and MLC/CLC LLC provide the majority of the Company's equity
investment from third parties as referenced above. During fiscal year 1996
which ended March 31, 1996, out of total leased equipment sales of
approximately $16.3 million, sales to MLC/GATX were $13.1 million, or 80%, and
sales to MLC/CLC were approximately $1.3 million, or 8.0%. For the quarter
ended December 31, 1996, out of Sales of Leased Equipment of $3,800,011,
MLC/GATX represented $1,249,500, or 32.9%, and MLC/CLC represented 60.7%, or
$2,307,165. For the nine months ended December 31, 1996, out of Sale of Leased
Equipment of $13,507,407, MLC/GATX represented $3,452,913, or 25.6%, and
MLC/CLC represented 65.1%, or $8,796,503. For the three and nine month periods
ended December 31, 1996, approximately 19.6% and 24.2%, respectively, of the
Company's total revenue was attributable to sales of lease transactions to
MLC/CLC, and 10.6% and 9.5%, respectively, of the Company's total revenue was
attributable to sales of lease transactions to MLC/GATX Limited Partnership I.
Transactions involving the use or placement of equity from these joint ventures
require the consent of the relevant joint venture partner, and if financing
from those sources were to be withheld or were to become unavailable, it would
limit the amount of equity available to the Company and could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Warehouse Lines of Credit. In July, 1996, the Company entered into the
NationsBanc Leasing Facility, under which NationsBanc Leasing Corporation may
lend up to $2.0 million in various notes with terms of up to 60 months. The
facility, but not transactions financed thereunder, expires January 31, 1997.
Borrowings under the facility bear interest at a fixed or floating basis, at
the Company's option at the time of each borrowing, as follows: fixed, where
the underlying lessee is investment grade, at U.S. Treasury Notes plus 250
basis points; fixed, where the underlying lessee is below investment grade, at
U.S. Treasury Notes plus 295 basis points; floating, at the bank's prime rate
plus 1%. As of December 31, 1996, there were no borrowings under this facility.
In October, 1996, the Company was notified that a commitment for a $5.0 million
facility had been internally approved by Heller Financial Corporation subject
to documents, under which it may lend up to $5.0 million in various notes with
terms of up to 60 months. Borrowings under the facility will bear interest at
the 3 year treasury plus 175 to 300 basis points. The Company is currently
negotiating the loan documents, however, there can be no assurance that the
loan documents will be finalized.
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 equipment) must generally be financed by cash flow from its
operations, the sale of the equipment lease to one of its institutional
partnerships with GATX or Cargill, or subsequent to September 30, 1996, the
proceeds from the issuance of the Company's common stock. Although the Company
expects that the credit quality of its lessees 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's current lines of credit, if renewed or replaced, public and
private securities markets, both debt and equity, new lines of credit (both
short-term and long-term and recourse and non-recourse), long-term financing of
individual significant lease transactions, and its estimated cash flow from
operations, are anticipated to provide adequate capital to fund the Company's
operations, including
<PAGE> 12
12
acquisitions and financings under its vendor programs,
for the next twelve months. Although no assurances can be given, the Company
expects to be able to renew or timely replace its existing lines of credit, to
continue to have access to the public and private securities markets, both debt
and equity, and to be able to, as required, enter into new lines of credit and
individual financing transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market
in general, such shortfall could have an immediate and significant adverse
impact on the market price of the Company's stock. Any such adverse impact
could be greater if any such shortfall occurs near the time of any material
decrease in any widely followed stock index or in the market price of the stock
of one or more public equipment leasing companies or major customers or vendors
of the Company.
The Company's quarterly results of operations are susceptible to fluctuations
for a number of reasons, including, without limitation, the amount of sales by
the Company of equipment it leases to its customers. Such sales of leased
equipment, which are an ordinary but not predictable part of the Company's
business, will have the effect of increasing revenues, and, to the extent sales
proceeds exceed net book value, net income, during the quarter in which the
sale occurs. Furthermore, any such sale may result in the reduction of revenue,
and net income, otherwise expected in subsequent quarters, as the Company will
not receive lease revenue from the sold equipment in those quarters. Other
factors which could lead to a fluctuation in quarterly results include the
availability of and timing of equipment sales, fee placement transactions
(principally relating to vendor origination business), and remarketing
transactions, which could vary for a number of reasons, including, without
limitation, the availability of used equipment and interest rates.
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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company completed its Initial Public Offering of 1,000,000 shares of common
stock on November 20, 1996, in a public offering subject to its Registration
Statement on Form S-1, Registration No. 333-11737. That Registration Statement
and the Prospectus, dated November 14, 1996, which is a part of it (the
"Prospectus"), include a section entitled "Risk Factors," which describes
certain factors that may affect future operating results of the Company. That
section is hereby incorporated by reference in this Report. Those factors
should be considered carefully in evaluating an investment in the Company's
Common Stock. If you do not have a copy of the Prospectus, you may obtain one
by requesting it from the Company's Investor Relations Department by phone, at
(703) 834-5710, or by mail at MLC Holdings, Inc. Suite 110, 11150 Sunset Hills
Road, Reston, VA 20190, Attn.: Investor Relations, or by sending an Email
request to [email protected].
STOCK OPTION PLANS
1996 Stock Incentive Plan. The Company has established a stock incentive
program (the "Stock Incentive Plan") to provide an opportunity for directors,
executive officers, independent contractors, key employees, and other employees
of the Company to participate in the ownership of the Company. The Stock
Incentive Plan provides for the award to eligible directors, employees, and
independent contractors of the Company, of a broad variety of stock-based
compensation alternatives such as incentive stock options for employees under
the 1996 Incentive Stock Option Plan, formula length of service based
nonqualified options to nonemployee directors under the 1996 Outside Director
Stock Plan, and nonqualified stock options under the 1996 Nonqualified Stock
Option Plan, as well as other restrictive stock and performance based stock
awards and programs which may be established by the Board of Directors.
<PAGE> 13
13
Currently, the Company has reserved a total of 400,000 shares of Common Stock
for issuance upon exercise of options under: (i) the employment agreements with
Messrs. Norton, Bowen and Parkhurst (under which options for an aggregate of
245,000 shares have been granted); (ii) the 1996 Outside Director Stock Plan
(under which options for 30,000 shares have been granted and an additional
45,000 shares have been reserved for future formula grant); (iii) the 1996
Incentive Stock Option Plan (under which options for an aggregate of 60,000
shares have been granted); (iv) the 1996 Nonqualified Stock Option Plan (under
which no options have been granted); and (v) 20,000 additional shares of Common
Stock reserved for issuance under the 1996 Stock Incentive Plan.
The Stock Incentive Plan is administered by the Stock Incentive
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The Stock Incentive
Committee is authorized to adopt, amend and rescind the rules relating to the
administration of the Stock Incentive Plan. Except for grants that are approved
by a majority of the Company's Board of Directors, no member of the Stock
Incentive Committee will be eligible to participate in future grants of options
in the Stock Incentive Plan.
Incentive stock options issued under the 1996 Incentive Stock Option
Plan are designed to comply with the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and are subject to restrictions contained in the
Code, including a requirement that exercise prices be equal to at least 100% of
fair market value of the shares of Common Stock on the grant date and a
ten-year restriction on the option term. The incentive stock options may be
subsequently modified to disqualify them from treatment as incentive stock
options. Under the Stock Incentive Plan and the Code, non-employee directors
are not permitted to receive incentive stock options. The Company granted in
November, 1996, options totaling 60,000 shares of Common Stock to employees
other than those receiving options under employment agreements or nonqualified
stock options as described above. Each of the foregoing incentive stock option
grants was at the initial public offering price and is exercisable in 20%
increments over five years, subject to continued employment and subject to
acceleration upon certain conditions.
Nonqualified stock options issued under the 1996 Stock Incentive Plan,
may be granted to directors, officers, independent contractors and employees
and will provide for the right to purchase shares of Common Stock at a
specified price which may be less than fair market value on the date of grant,
and usually will become exercisable in installments after the grant date.
Nonqualified stock options may be granted for any reasonable term.
Under the 1996 Outside Director Stock Option Plan, each of the three
nonemployee directors have been granted options to purchase an aggregate of
30,000 shares of Common Stock, 50% of which may be exercised after the first
year of service and the remaining 50% of which may be exercised after the
second year of service provided they continue to serve as directors. The 1996
Outside Director Stock Option Plan also provides for the grant of options for
shares to each nonemployee director (15,000 annually in the aggregate) on the
second, third and fourth anniversary of service, at an exercise price equal to
the market price as of the date of grant, with each option being exercisable as
to 50% of the shares on the first anniversary of grant and the remaining 50% of
the shares as the second anniversary of grant. Options for 15,000 shares become
exercisable after the second, third and fourth anniversaries of grants.
"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
<PAGE> 14
14
ability of the Company to recover its investment in equipment through
remarketing, the ability of the Company to manage its growth, and other risks or
uncertainties detailed in the Company's Securities and Exchange Commission
filings, including the Prospectus.
<PAGE> 15
15
MLC HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
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. Exhibits and reports on Form 8-K
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
<S> <C> <C>
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company *
4.1 Specimen certificate of Common Stock of the Company *
10.1 Material Contracts -- 1996 Stock Incentive Plan *
10.2 Material Contracts --1996 Outside Directors Stock Option Plan *
10.3 Material Contracts --1996 Nonqualified Stock Option Plan *
10.4 Material Contracts --1996 Incentive Stock Option Plan *
10.5 Material Contracts -- Form of Indemnification Agreement entered into between the *
Company and its directors and officers.
10.7 Material Contracts -- Form of Employment Agreement between the Company and Phillip G. *
Norton
10.8 Material Contracts -- Form of Employment Agreement between the Company and Bruce M. *
Bowen
10.9 Material Contracts -- Form of Employment Agreement between the Company and William J. *
Slaton
10.10 Material Contracts -- Form of Employment Agreement between the Company and Kleyton L. *
Parkhurst
10.11 Form of Irrevocable Proxy and Stock Rights Agreement *
10.12 First Amended and Restated Business Loan and Security Agreement by and between the *
Company and First Union Bank of Virginia, N.A.
10.13 Loan Modification and Extension Agreement by and between the Company and First Union *
National Bank of Virginia, N.A.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None Filed during the quarter for which this report is filed.
* Incorporated by reference from the Company's Registration Statement on Form
S-1, Commission File No. 333-11737.
<PAGE> 16
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MLC HOLDINGS, INC.
By: /s/ Phillip G. Norton
-------------------------
Phillip G. Norton
Chairman, President and Chief Executive Officer
By: /s/ Bruce M. Bowen
-------------------------
Bruce M. Bowen
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
DATE:
----------------------
<PAGE> 17
17
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
<S> <C> <C>
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company *
4.1 Specimen certificate of Common Stock of the Company *
10.1 Material Contracts -- 1996 Stock Incentive Plan *
10.2 Material Contracts --1996 Outside Directors Stock Option Plan *
10.3 Material Contracts --1996 Nonqualified Stock Option Plan *
10.4 Material Contracts --1996 Incentive Stock Option Plan *
10.5 Material Contracts -- Form of Indemnification Agreement entered into between the *
Company and its directors and officers.
10.7 Material Contracts -- Form of Employment Agreement between the Company and Phillip G. *
Norton
10.8 Material Contracts -- Form of Employment Agreement between the Company and Bruce M. *
Bowen
10.9 Material Contracts -- Form of Employment Agreement between the Company and William J. *
Slaton
10.10 Material Contracts -- Form of Employment Agreement between the Company and Kleyton L. *
Parkhurst
10.11 Form of Irrevocable Proxy and Stock Rights Agreement *
10.12 First Amended and Restated Business Loan and Security Agreement by and between the *
Company and First Union Bank of Virginia, N.A.
10.13 Loan Modification and Extension Agreement by and between the Company and First Union *
National Bank of Virginia, N.A.
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,253
<SECURITIES> 0
<RECEIVABLES> 4,899
<ALLOWANCES> 0
<INVENTORY> 2,955
<CURRENT-ASSETS> 0
<PP&E> 269
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,744
<CURRENT-LIABILITIES> 0
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0
0
<COMMON> 52
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,744
<SALES> 27,482
<TOTAL-REVENUES> 36,401
<CGS> 25,820
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,175
<INCOME-PRETAX> 2,691
<INCOME-TAX> 955
<INCOME-CONTINUING> 1,736
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<EPS-PRIMARY> 0.42
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