<PAGE> 1
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___to___.
Commission file number: 0-28926
-------
MLC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1817218
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11150 SUNSET HILLS RD., SUITE 110, RESTON, VA 20190-5321
--------------------------------------------------------
(Address, including zip code, of principal offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 834-5710
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding as of August 12, 1998,
was 6,348,603.
<PAGE> 2
MLC HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1998 and
June 30, 1998 (Unaudited) 2
Condensed Consolidated Statements of Earnings, Three months
ended June 30, 1997 (Unaudited) and 1998 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows, Three months
ended June 30, 1997 (Unaudited) and 1998 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
1
<PAGE> 3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of March 31, 1998 As of June 30, 1998
(Unaudited)
-----------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,683,796 $ 6,675,262
Accounts receivable 16,383,314 15,555,292
Other receivables 3,801,808 15,572,848
Employee advances 53,582 51,549
Inventories 1,213,734 1,806,835
Investment in direct financing and sales type leases - net 32,495,594 48,990,849
Investment in operating lease equipment - net 7,295,721 6,105,244
Property and equipment - net 1,131,512 1,160,872
Other assets 2,136,554 3,018,968
-----------------------------------------------------
TOTAL ASSETS $ 83,195,615 $ 98,937,719
=====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable - trade $ 6,865,419 $ 4,171,959
Accounts payable - equipment 21,283,582 21,417,573
Salaries and commissions payable 390,081 186,561
Accrued expenses and other liabilities 3,560,181 3,139,517
Recourse notes payable 13,037,365 20,827,000
Nonrecourse notes payable 13,027,676 21,850,861
Deferred taxes 1,487,000 1,487,000
Income tax payable - 757,381
-----------------------------------------------------
Total Liabilities 59,651,304 73,837,852
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
6,071,505 and 6,082,005 issued and outstanding at
March 31, 1998 and June 30, 1998, respectively 60,715 60,820
Additional paid-in capital 11,460,331 11,552,101
Retained earnings 12,023,265 13,486,946
-----------------------------------------------------
Total Stockholders' Equity 23,544,311 25,099,867
-----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,195,615 $ 98,937,719
=====================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended
June 30,
1997 1998
(Unaudited) (Unaudited)
-------------------------------------------------
<S> <C> <C>
REVENUES
Sales of equipment $ 15,132,332 $ 10,274,435
Sales of leased equipment 20,140,240 24,910,646
-------------------------------------------------
35,272,572 35,185,081
Lease revenues 3,522,568 4,985,087
Fee and other income 1,350,880 1,412,634
-------------------------------------------------
4,873,448 6,397,721
-------------------------------------------------
TOTAL REVENUES 40,146,020 41,582,802
-------------------------------------------------
COSTS AND EXPENSES
Cost of sales, equipment 11,980,439 8,283,673
Cost of sales, leased equipment 19,912,017 24,813,066
-------------------------------------------------
31,892,456 33,096,739
Direct lease costs 1,390,755 1,991,828
Professional and other fees 214,590 196,965
Salaries and benefits 2,625,257 2,368,600
General and administrative expenses 932,923 987,872
Interest and financing costs 465,784 501,305
-------------------------------------------------
5,629,309 6,046,570
-------------------------------------------------
TOTAL COSTS AND EXPENSES 37,521,765 39,143,309
-------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 2,624,255 2,439,493
-------------------------------------------------
PROVISION FOR INCOME TAXES 460,313 975,797
-------------------------------------------------
NET EARNINGS $ 2,163,942 $ 1,463,696
=================================================
NET EARNINGS PER COMMON SHARE - BASIC $ 0.37 $ 0.24
=================================================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.36 $ 0.23
=================================================
PRO FORMA NET EARNINGS (See Note 4) $ 1,699,027 $ 1,463,696
=================================================
PRO FORMA NET EARNINGS PER COMMON SHARE - BASIC $ 0.29 $ 0.24
=================================================
PRO FORMA NET EARNINGS PER COMMON SHARE - DILUTED $ 0.28 $ 0.23
=================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,909,976 6,078,126
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,023,907 6,241,079
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1998
(Unaudited) (Unaudited)
------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,163,942 $ 1,463,696
Adjustments to reconcile net earnings to net cash used by
operating activities:
Depreciation and amortization 1,235,202 1,276,822
Provision for credit losses (30,000) 500,000
Gain on sale of operating lease equipment (113,952) (2,500)
Adjustment of basis to fair market value of equipment and investments 231,000 268,506
Payments from lesees directly to lenders (641,730) (282,225)
Compensation to outside directors - stock options 6,300 -
Changes in:
Accounts receivable (2,841,758) 1,033,285
Other receivables (9,324,654) (11,771,040)
Employee advances (15,806) 2,073
Inventories (1,425,770) (589,916)
Other assets (570,343) 286,701
Accounts payable - equipment 1,489,123 (82,439)
Accounts payable - trade 2,436,814 (3,198,540)
Salaries and commissions payable, accrued
expenses and other liabilities 968,657 359,133
------------------------------------------
Net cash used by operating activities (6,432,975) (10,736,444)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating equipment 353,762 2,500
Purchase of operating lease equipment (1,018,137) -
Increase in investment in direct financing and sales-type leases (2,997,485) (18,385,823)
Purchases of property and equipment - (128,341)
Decrease (Increase) in other assets 69,143 (1,138,719)
------------------------------------------
Net cash used in investing activities (3,592,717) (19,650,383)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse 2,004,927 11,608,867
Recourse 94,364 107,764
Repayments:
Nonrecourse (1,113,018) (1,112,890)
Recourse (246,236) (45,310)
Repayments of loans from stockholders (2,000) -
Distributions to shareholders of combined companies
prior to business combination (937,270) -
Proceeds from issuance of capital stock, net of expenses - 91,875
Proceeds from lines of credit 7,500,000 7,727,987
------------------------------------------
Net cash provided by financing activities 7,300,767 18,378,293
------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,724,925) (12,008,534)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,654,209 18,683,796
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,929,284 $ 6,675,262
==========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 41,167 $ 216,428
==========================================
Cash paid for income taxes $ 1,121,818 $ 324,446
==========================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 6
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated statement of earnings for the three month period
ended June 30, 1997, and the condensed consolidated statement of cash flows for
the three month period ended June 30, 1997 have been restated to include the
accounts and results of operations of the Company's two subsidiaries acquired
during the second quarter of fiscal 1998, which were accounted for under the
pooling-of-interests method. The condensed consolidated balance sheet as of June
30, 1998, the condensed consolidated statements of earnings for the three months
ended June 30, 1997 and 1998, and the condensed consolidated statements of cash
flows for the three months ended June 30, 1997 and 1998 have been prepared by
the Company without audit.
The quarterly financial information is submitted in response to the requirements
of Form 10-Q and does not purport to be financial statements prepared in
accordance with generally accepted accounting principles. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. They therefore do not include all disclosures which might be associated
with such statements.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, necessary
to present fairly the Company's financial position at March 31, 1998 and
June 30, 1998, the results of operations for the three month periods ending June
30, 1997 and 1998, and the cash flows for the three month periods ended June 30,
1997 and 1998. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto for the year
ended March 31, 1998 included in the Company's Annual Report on Form 10-K (No.
0-28926).
2. INVESTMENT IN DIRECT FINANCING AND SALES-TYPE LEASES
The Company's investment in direct financing and sales-type leases consists of
the following components:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
Minimum lease payments $ 29,968 $ 46,826
Estimated unguaranteed residual value 7,084 9,442
Initial direct costs - net of amortization 760 1,156
Less: Unearned lease income (5,270) (7,887)
Reserve for credit losses (46) (546)
------------------ -------------------
Investment in direct financing and sales type leases - net $ 32,496 $ 48,991
================== ===================
</TABLE>
5
<PAGE> 7
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
-------------------- --------------------
(In thousands)
<S> <C> <C>
Cost of equipment under operating leases $ 13,990 $ 13,715
Initial direct costs 51 29
Accumulated depreciation and amortization (6,745) (7,639)
-------------------- --------------------
Investment in operating leases - net $ 7,296 $ 6,105
==================== ====================
</TABLE>
4. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," as if the pooled companies, which were subchapter S
corporations prior to their business combinations with the Company, had been
subject to federal income taxes throughout the periods presented.
<TABLE>
<CAPTION>
Three months ended
June 30, 1997 June 30, 1998
-------------------- --------------------
(In thousands)
<S> <C> <C>
Net earnings before pro forma adjustment $ 2,164 $ 1,464
Additional provision for income tax (465) -
-------------------- --------------------
Pro forma net income $ 1,699 $ 1,464
==================== ====================
</TABLE>
5. NEW ACCOUNTING PRONOUCEMENT
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and presentation of comprehensive income
and its components in financial statements by requiring minimum pension
liability adjustments, unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive earnings. The Company currently has no items of other
comprehensive income to be reported.
6
<PAGE> 8
6. CONTINGENCY
One of the Company's equipment sales and lease customers has filed for voluntary
bankruptcy protection. Allegheny Health, Education & Research Foundation
("AHERF") is a Pittsburgh based not-for-profit entity that owns multiple
hospitals, the largest of which include Hahnemann University Hospital, St.
Christopher's Hospital for Children, Medical College of Pennsylvania and
Graduate Hospital, all of which are located in Philadelphia, Pennsylvania. On
July 21, 1998, AHERF, and some but not all of its operating subsidiaries filed
for bankruptcy and agreed to sell its eight Philadelphia-area hospitals to
Vanguard Health Systems, Inc., a Tennessee based for-profit company, subject to
court approval. As of August 12, 1998, the Company's net book value of leases to
AHERF is approximately $1.4 million and receivable balance is approximately
$500,000. The Company believes that the fair market value of the equipment may
be below its current balances, and, depending on the assumption or rejection of
the leases by the Bankruptcy Trustee and the creditor status and ultimate
repayment schedule of other claims, upon disposal of the equipment and
disposition of its claims, the Company could incur a loss with respect to its
current balances. The amount and timing of such losses cannot be accurately
estimated by the Company at this time due to the recent filing and unknown
status of many of its claims. The Company is vigorously pursuing all available
remedies in bankruptcy court. The Company believes that as of June 30, 1998, its
allowance for doubtful accounts, having been increased, is adequate to provide
for the potential loss resulting from this customer.
7. SUBSEQUENT EVENT
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 provides various support services to its customers from its facility in
Reston, Virginia. This business combination has been accounted for using the
purchase method of accounting.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
FINANCIAL CONDITION
The following discussion and analysis of results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this Report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, including, without
limitation, demand and competition for the Company's lease financing services
and the products to be leased by the Company, the continued availability to the
Company of adequate financing, the ability of the Company to recover its
investment in equipment through re-marketing, the ability of the Company to
manage its growth, and other risks or uncertainties detailed in the Company's
Securities and Exchange Commission filings.
The Company's results of operations are susceptible to fluctuations for a number
of reasons, including, without limitation, differences between estimated
residual values and actual amounts realized related to the equipment the Company
leases. Operating results could also fluctuate as a result of the sale by the
Company of equipment in its lease portfolio prior to the expiration of the lease
term to the lessee or to a third party. Such sales of leased equipment prior to
the expiration of the lease term may have the effect of increasing revenues and
net earnings during the period in which the sale occurs, and reducing revenues
and net earnings otherwise expected in subsequent periods.
RESULTS OF OPERATIONS - Three Months Ended June 30, 1998 (Unaudited) Compared to
Three Months Ended June 30, 1997 (Unaudited)
The following discussion and analysis of the Company's results of operations
should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements for the three month periods ended June 30,
1998 and 1997.
Total revenues generated by the Company during the three month period ended June
30, 1998 were $41,582,802, compared to revenues of $40,146,020 during the
comparable period in the fiscal prior year, an increase of 3.6%. 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,
decreased slightly to $35,185,081 during the three month period ended June 30,
1998, as compared to $35,272,572 in the corresponding period in the prior fiscal
year. Sales of leased equipment increased $4,770,406 during the three month
period ended June 30, 1998. During the three months ended June 30, 1998 and
1997, sales to MLC/CLC, LLC, an institutional equity partner of the Company,
accounted for 100% and 89.1% 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
8
<PAGE> 10
operations, and cash flows until other equity financing arrangements are
secured. Sales of equipment, both new and used, are generated through the
Company's equipment brokerage and re-marketing activities, and through its
valued added reseller ("VAR") subsidiaries acquired during the second quarter of
fiscal 1998. Sales of equipment decreased during the three month period
$4,857,897 compared to the corresponding period in the prior fiscal year due to
lower sales volume. The Company's brokerage and re-marketing activities
accounted for 5.22% and 14.33% of equipment sales during the three month period
in 1998 and 1997, 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 19.4% for the three
month period ended June 30, 1998 as compared to a gross margin of 20.8% realized
on sales of equipment generated during the same three month period in the prior
fiscal year. The Company's gross margin on sales of equipment can be effected by
the mix and volume of products sold.
The gross margin generated on sales of leased equipment represent the sale of
the equity portion of equipment placed under lease and can vary significantly
depending on the nature and timing of the sale, as well as the timing of any
debt funding recognized in accordance with SFAS No. 125. For example, a lower
margin or a loss on the equity portion of a transaction is often offset by
higher lease earnings and/or a higher gain on the debt funding recognized under
SFAS No. 125. Additionally, leases which have been debt funded prior to their
equity sale will result in a lower sales and cost of sale figure, but the net
earnings from the transaction will be the same as had the deal been debt funded
subsequent to the sale of the equity. During the three month period ended June
30, 1998, the Company recognized a gross margin of $97,580 on equity sales of
$24,910,646, as compared to a gross margin of $228,223 on equity sales of
$20,140,240 during the same period in the prior fiscal year.
The Company's lease revenues increased 41.52% to $4,985,087 for the three month
period ended June 30, 1998, 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 and
sales-type leases. The investment in direct financing and sales-type leases at
June 30, 1998 and March 31, 1998 were $48,990,849 and $32,495,594, respectively.
The June 30, 1998 balance represents an increase of $16,495,255 or 50.8% over
the balance as of March 31, 1998. In addition, lease revenue includes the gain
or loss on the sale of certain financial assets, as required under the
provisions of Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which was
effective begining January 1, 1997.
For the three months ended June 30, 1998, fee and other income increased 4.6%
over the comparable period in the prior fiscal year. This increase is
attributable to increases in revenues from adjunct services and fees, including
broker fees, support fees, warranty reimbursements, and learning center revenues
generated by the Company's VAR subsidiaries. Included in the Company's fee and
other income are earnings from certain transactions which are in the Company's
normal course of business but there is no guarantee that future transactions of
the same nature, size or profitability will occur. The Company's ability to
consumate such transactions, and the timing thereof, may depend largely upon
factors outside the direct control of management. The earnings from these types
of transactions in a particular period may not be indicative of the earnings
that can be expected in future periods.
The Company's direct lease costs increased 43.2% during the three month period
ended June 30, 1998 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 increase is primarily attributable to an increase
in the allowance for doubtful accounts due to the increased business
9
<PAGE> 11
volume of leases and retained lease portfolio, increased amortization of initial
direct costs and to increased re-billable costs, including freight and
installation, which are re-billed to lessees.
Salaries and benefits expenses decreased 9.8% during the three month period
ended June 30, 1998 over the same period in the prior fiscal year which reflects
both the lower commission expenses in the value added reseller businesses and
the higher amount of capitalization under SFAS 13 of the initial direct costs in
generating the increased lease volume.
Interest and financing costs incurred by the Company for the three months ended
June 30, 1998 and 1997 amounted to $501,305 and $465,784, 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 lesee.
The Company's provision for income taxes increased to $975,797 for the three
months ended June 30, 1998 from $460,313 for the three months ended June 30,
1997, reflecting effective income tax rates of 40.0% and 17.5%, respectively.
The low effective income tax rate for June 30, 1997 was primarily due to the
inclusion of the net earnings of businesses acquired by the Company, which prior
to their combination with the Company had elected subchapter S corporation
status, and as such, were not previously subject to federal income tax. Pro
forma tax expense, adjusted as if the Company's subsidiaries which were
previously subchapter S corporations had been subject to income tax for the
three months ended June 30, 1997, would have increased the expense by
approximately $464,900.
The foregoing resulted in a 13.9% decrease in net earnings for the three month
period ended June 30, 1998 as compared to the same periods in the prior fiscal
year after taking into consideration the pro forma tax expense.
Basic and fully diluted earnings per common share were $.24 and $.23
respectively for the three months ended June 30, 1998 as compared to $.37 and
$.36 for the three months ended June 30, 1997, based on weighted average common
shares outstanding of 6,078,126 and 5,909,976 for basic earnings per share,
respectively, and fully diluted weighted average shares of 6,241,079 and
6,023,907.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended June 30, 1998, the Company used cash flows
from operations of $10,736,444, and cash flows from investing activities of
$19,650,383. Cash flows generated by financing activities amounted to
$18,378,293 during the same period. The net effect of these cash flows was to
decrease cash and cash equivalents by $12,008,534 during the three month period.
During the same period, the Company's total assets increased $15,742,104, or
18.9%, 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.
10
<PAGE> 12
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, 1998, the Company had
$21,417,573 of unpaid equipment cost, as compared to $21,283,582 at March 31,
1998.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. On June 5, 1997, the
Company entered into the First Union Facility with First Union National Bank,
N.A., which is available through December 19, 1998, and bears interest at
LIBOR+110 basis points, or, at the Company's option, Prime minus one percent. On
June 30, 1998, the Company's First Union Facility was increased to a maximum
limit of $35 million. Availability under the revolving lines of credit may be
limited by the asset value of equipment purchased by the Company and may be
further limited by certain covenants and terms and conditions of the facilities.
As of June 30, 1998, the Company had an outstanding balance of $20,000,000 on
the First Union Facility. The First Union facility is made to MLC Group, Inc.,
and guaranteed by MLC Holdings, Inc. In addition, MLC Holdings, Inc. has
guaranteed the lines of credit made to the Company's recently acquired
subsidiaries.
The Company's recently acquired subsidiaries, MLC Network Solutions, Inc. and
MLC Integrated, Inc., both have separate credit sources to finance their working
capital requirements for inventories and accounts receivable. Their traditional
business as value-added resellers of PC's and related network equipment and
software products is financed through agreements known as "floor planning"
financing where interest expense for the first thirty to forty days is charged
to the supplier/distributor but not the reseller. These floor plan liabilities
are recorded under accounts payable as they are normally repaid within the
thirty to forty day time frame and represent an assigned accounts payable
originally generated with the supplier/distributor. If the thirty to forty day
obligation is not timely liquidated, interest is then assessed at stated
contractual rates. As of June 30, 1998, MLC Network Solutions, Inc., has floor
planning availability of $1,350,000 through Deutsche Financial, Inc. and
$225,000 from IBM Credit Corporation. The outstanding balances to these
respective suppliers were $538,964 and $20,248 as of June 30, 1998. MLC
Integrated, Inc. has floor planning availability of $1,500,000 from FINOVA
Capital Corporation and $750,000 through IBM Credit Corporation. The outstanding
balances to these respective suppliers were $1,347,317 and $592,224 as of June
30, 1998. In addition, MLC Integrated, Inc. has a line of credit in place,
expiring on September 30, 1998, with PNC Bank, N.A. to provide an asset based
credit facility. The Company is currently negotiating an extension of this
credit facility. The line has a maximum credit limit of $2,500,000 and interest
is based on the bank's prime rate. The outstanding balance was $479,000 as of
June 30,1998.
In March 1997, the Company established the Heller Facility, a $10,000,000
partial recourse credit facility agreement, with Heller Financial, Inc., Vendor
Finance Division. Under the terms of the Heller Facility, a maximum amount of
$10 million is available to the Company subject to the approval of Heller for
each draw. As of June 30, 1998, the principal balance due under the Heller
Facility was $2,105,786.
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. 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 1997 earnings in excess of $800
million. On June 4, 1998, Firstar Corporation and Cargill, Inc. jointly
11
<PAGE> 13
announced that they had signed a definitive agreement for Firstar Corporation to
purchase 100% of the common stock of Cargill Leasing Corporation. The
transaction is expected to close in the third quarter of calendar year 1998,
subject to regulatory approval. Firstar Corporation is a $20 billion bank
holding company which is publicly traded on the New York Stock Exchange under
the symbol "FSR". This joint venture arrangement enables the Company to invest
in a significantly greater portfolio of business than its limited capital base
would otherwise allow. A significant portion of the Company's revenue generated
by the sale of leased equipment is attributable to sales to MLC/CLC, LLC. (See
"RESULTS OF OPERATIONS"). The Company's relationship with GATX, an unaffiliated
company which beneficially owns 90% of MLC/GATX Limited Partnership I, was
effectively terminated in August, 1998. This termination caused the Company to
write off approximately $154,500 in the current period representing its
remaining joint venture investment and miscellaneous receivables.
The Company's debt financing activities typically provide approximately 80% to
100% of the purchase price of the equipment purchased by the Company for lease
to its customers. Any balance of the purchase price (the Company's equity
investment in the equipment) must generally be financed by cash flow from its
operations, the sale of the equipment lease to MLC/CLC,LLC, or other internal
means of financing. Although the Company expects that the credit quality of its
leases and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available, at
acceptable terms, or at all.
The Company anticipates that its current cash on hand, operations and additional
financing available under the Company's credit facilities will be sufficient to
meet the Company's liquidity requirements for its operations through the
remainder of the fiscal year. However, the Company 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.
12
<PAGE> 14
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the first quarter of fiscal 1999.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
The Company's strategy depends upon acquisitions and organic growth to increase
its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and cross selling activities also could adversely
affect the Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will occur at the same
pace as in prior periods or be available to the Company on favorable terms, if
at all. If the Company is unable to use the Company's common stock as
consideration in acquisitions, for example, because it believes that the market
price of the common stock is too low or because the owners of potential
acquisition targets conclude that the market price of the Company's common stock
is too volatile, the Company would need to use cash to make acquisitions, and,
therefore, would be unable to negotiate acquisitions that it would account for
under the pooling-of-interests method of accounting (which is available only for
all-stock acquisitions). This might adversely affect the pace of the Company's
acquisition program and the impact of acquisitions on the Company's quarterly
results. In addition, the consolidation of the equipment leasing business has
reduced the number of companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. The failure to acquire additional businesses or to acquire such
businesses on favorable terms in accordance with the Company's growth strategy
could have a material adverse impact on future sales and profitability.
There can be no assurance that companies that have been acquired or that may be
acquired in the future will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
The Company has increased the range of products and services it offers through
acquisitions of companies offering products and services that are complementary
to the core financing and equipment brokering services that the Company has
offered since it began operations. The
13
<PAGE> 15
Company's ability to manage an aggressive consolidation program in markets other
than domestic equipment financing has not yet been fully tested. The Company's
efforts to sell additional products and services to existing customers are in
their early stages and there can be no assurance that such efforts will be
successful. In addition, the Company expects that certain of its products and
services will not be easily cross-sold and may be marketed and sold
independently of other products and services.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management administration. The various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. There can be no assurance that the Company's executive
management group can continue to oversee the Company and effectively implement
its operating or growth strategies in each of the markets that it serves. In
addition, there can be no assurance that the pace of the Company's acquisitions,
or the diversification of its business outside of its core leasing operations,
will not adversely affect the Company's efforts to implement its cost-savings
and integration strategies and to manage its acquisitions profitability.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic and
product markets, and other competitors may choose to enter the Company's
geographic and product markets in the future. No assurances can be give that
competition will not have an adverse effect on the Company's business.
THE YEAR 2000 ISSUE
The Company has identified all significant internal software and hardware
applications that will require modifications to ensure Year 2000 compliance of
the Company's IT and non-IT systems. Internal and external resources are being
used to make the required modifications and test Year 2000 compliance. The
modification process of all significant internal applications and operational
systems is substantially complete. The Company plans on completing the process
of modifying all significant applications by December 31, 1998. The total cost
to the Company of these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position, results of operations or
cash flows in any given year.
The Company is aware of general risks to third parties with whom it deals on
financial transactions from such parties' failure to remediate their own year
2000 issues; however, due to the nature of the Company's business and
relationships, the Company believes that economy-wide year 2000 issues pose a
greater potential risk than issues arising from the specific nature of the
Company's business or relationships.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
14
<PAGE> 16
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
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------------------------------------------------------------------------------------------
<S> <C> <C>
27.1 Financial Data Schedule 17
</TABLE>
Item 6(b) Reports on Form 8-K
Not Applicable
15
<PAGE> 17
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 13, 1998
/s/ STEVEN J. MENCARINI
----------------------------------------------
By: Steven J. Mencarini, Senior Vice President
and Chief Financial Officer
Date: August 13, 1998
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,675
<SECURITIES> 0
<RECEIVABLES> 31,128
<ALLOWANCES> 0
<INVENTORY> 1,806
<CURRENT-ASSETS> 0
<PP&E> 1,161
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,938
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 98,938
<SALES> 35,185
<TOTAL-REVENUES> 41,583
<CGS> 33,097
<TOTAL-COSTS> 5,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 501
<INCOME-PRETAX> 2,439
<INCOME-TAX> 975
<INCOME-CONTINUING> 1,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,464
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
