<PAGE> 1
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, 1997
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 (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 [X] No [ ]
The number of shares of Registrant's common stock outstanding December 31, 1997
was 6,071,305.
<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 as of December 31,
1997 (Unaudited) and March 31, 1997
3
Condensed Consolidated Statements of Earnings, Three month
periods ended December 31, 1997 (Unaudited) and 1996
(Unaudited)
4
Condensed Consolidated Statements of Earnings, Nine month
periods ended December 31, 1997 (Unaudited) and 1996
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows, Nine month
periods ended December 31, 1997 (Unaudited) and 1996
(Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
10
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 3
3
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
(UNAUDITED)
-------------------------- -------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,603,544 $ 6,654,209
Accounts receivable 11,154,642 8,846,426
Notes receivable 1,785,594 2,154,250
Employee advances 52,260 70,612
Inventories 1,599,655 1,253,694
Investment in direct financing and
sales-type leases - net 20,948,573 17,473,069
Investment in operating lease
equipment - net 8,339,890 11,065,159
Property and equipment - net 1,057,012 765,194
Other assets 2,346,465 740,925
-------------------------- -------------------------
TOTAL ASSETS $ 54,887,635 $ 49,023,538
========================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable - equipment $ 10,527,958 $ 4,946,422
Accounts payable - trade 2,367,862 2,152,841
Salaries and commissions payable 404,530 671,899
Accrued expenses and other
liabilities 3,125,626 2,256,884
Income taxes payable 67,655 930,587
Recourse notes payable 819,116 1,293,100
Non-recourse notes payable 14,990,284 19,705,060
Deferred taxes 590,000 590,000
-------------------------- -------------------------
Total liabilities 32,893,031 32,546,793
-------------------------- -------------------------
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 and 10,000,000 shares
authorized; 6,071,305 and 5,909,976
shares issued and outstanding at
December 31, 1997 and March 31,
1997, respectively 60,713 59,100
Additional paid-in capital 11,362,884 9,346,214
Retained earnings 10,571,007 7,071,431
-------------------------- -------------------------
Total stockholders' equity 21,994,604 16,476,745
-------------------------- -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 54,887,635 $ 49,023,538
========================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
4
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
(UNAUDITED) (UNAUDITED)
----------------------- -------------------------
<S> <C> <C>
REVENUES
Sales of equipment $ 10,797,522 $ 12,740,660
Sales of leased equipment 7,299,836 3,800,011
----------------------- -------------------------
Total sales 18,097,358 16,540,671
Lease revenues 3,803,385 2,990,124
Fee and other income 1,662,666 756,005
----------------------- -------------------------
Total other revenue 5,466,051 3,746,129
----------------------- -------------------------
TOTAL REVENUES 23,563,409 20,286,800
----------------------- -------------------------
COSTS AND EXPENSES
Cost of sales of equipment 8,316,250 10,619,515
Cost of sales of leased equipment 7,308,896 3,768,443
----------------------- -------------------------
Total cost of sales 15,625,146 14,387,958
Direct lease costs 1,558,272 1,454,202
Professional and other fees 282,278 128,043
Salaries and benefits 2,630,773 1,699,511
General and administrative expenses 903,010 810,516
Interest and financing costs 396,756 428,832
Non-recurring acquisition costs 39,103 -----
----------------------- -------------------------
Total expenses 5,810,192 4,521,104
----------------------- -------------------------
TOTAL COSTS AND EXPENSES 21,435,338 18,909,062
----------------------- -------------------------
EARNINGS BEFORE INCOME TAXES 2,128,071 1,377,738
Provision for income taxes 850,584 349,000
----------------------- -------------------------
NET EARNINGS $ 1,277,487 $ 1,028,738
======================= =========================
NET EARNINGS PER COMMON SHARE $ 0.21 $ 0.19
======================= =========================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.21 $ 0.19
======================= =========================
PRO FORMA NET EARNINGS (See Note 4) $ 1,277,487 $ 891,110
======================= =========================
PRO FORMA NET EARNINGS PER COMMON SHARE $ 0.21 $ 0.17
======================= =========================
PRO FORMA NET EARNINGS PER COMMON
SHARE - DILUTED $ 0.21 $ 0.17
======================= =========================
WEIGHTED AVERAGE COMMON SHARES 6,071,305 5,341,890
WEIGHTED AVERAGE COMMON SHARES - DILUTED 6,188,990 5,364,600
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
5
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1996
(UNAUDITED) (UNAUDITED)
---------------------- ------------------------
<S> <C> <C>
REVENUES
Sales of equipment $ 36,290,550 $ 35,084,168
Sales of leased equipment 39,486,348 13,507,407
---------------------- ------------------------
Total sales 75,776,898 48,591,575
Lease revenues 11,021,736 6,900,727
Fee and other income 4,481,831 3,019,287
---------------------- ------------------------
Total other revenue 15,503,567 9,920,014
---------------------- ------------------------
TOTAL REVENUES 91,280,465 58,511,589
---------------------- ------------------------
COSTS AND EXPENSES
Cost of sales of equipment 28,401,639 29,384,224
Cost of sales of leased equipment 38,888,847 13,359,442
---------------------- ------------------------
Total cost of sales 67,290,486 42,743,666
Direct lease costs 4,889,244 3,150,945
Professional and other fees 723,152 359,832
Salaries and benefits 7,415,657 5,347,108
General and administrative expenses 3,057,796 2,225,928
Interest and financing costs 1,372,020 1,222,699
Non-recurring acquisition costs 222,557 -----
---------------------- ------------------------
Total expenses 17,680,426 12,306,512
---------------------- ------------------------
TOTAL COSTS AND EXPENSES 84,970,912 55,050,178
---------------------- ------------------------
EARNINGS BEFORE INCOME TAXES 6,309,553 3,461,411
Provision for income taxes 1,722,717 955,000
---------------------- ------------------------
NET EARNINGS $ 4,586,836 $ 2,506,411
====================== ========================
NET EARNINGS PER COMMON SHARE $ 0.76 $ 0.51
====================== ========================
NET EARNINGS PER COMMON SHARE - DILUTED $ 0.75 $ 0.51
====================== ========================
PRO FORMA NET EARNINGS (See Note 4) $ 3,973,575 $ 2,232,950
====================== ========================
PRO FORMA NET EARNINGS PER COMMON SHARE $ 0.66 $ 0.45
====================== ========================
PRO FORMA NET EARNINGS PER COMMON
SHARE - DILUTED $ 0.65 $ 0.45
====================== ========================
WEIGHTED AVERAGE COMMON SHARES 6,017,920 4,950,935
WEIGHTED AVERAGE COMMON SHARES - DILUTED 6,127,933 4,953,465
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
6
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1996
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 4,586,836 $ 2,506,411
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation & amortization 3,443,864 2,233,767
Decrease in provision for credit losses (13,865) -----
Gain on sale of operating lease equipment (92,800) (90,335)
Adjustment of basis to fair market value
of early returned operating lease
equipment ----- 299,403
Payments from lessees directly to lenders (1,375,099) (1,245,583)
Gain on disposal of property and equipment ----- (8,740)
Deferred taxes ----- 21,000
Compensation to outside directors-stock
options 18,283 -----
Changes in:
Accounts receivable (2,311,932) (5,115,327)
Notes receivable 368,656 (211,606)
Employee advances (6,649) 3,600
Inventories (181,764) (2,897,673)
Other assets (1,216,167) 70,343
Accounts payable - equipment 5,581,535 3,350,679
Accounts payable - trade (496,075) 2,678,582
Salaries and commissions payable,
accrued expenses and other
liabilities (399,557) 964,826
------------------ ------------------
Net cash provided by operating
activities $ 7,905,266 $ 2,559,347
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of operating lease
equipment $ 609,722 $ 2,777,871
Purchase of operating lease equipment (1,987,058) (16,763,745)
Increase in investment in direct financing and
sales-type leases (6,373,493) (8,049,465)
Proceeds from sale of property and equipment ----- 8,740
Purchase of property and equipment (428,952) (64,044)
(Increase)/decrease in other assets (353,181) 131,032
------------------ ------------------
Net cash used in investing
activities $ (8,532,962) $ (21,959,611)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings:
Nonrecourse $ 3,587,039 $ 19,290,233
Recourse 174,894 205,517
Repayments:
Nonrecourse (3,364,608) (1,381,918)
Recourse (161,282) (863,523)
Borrowings (Repayments) on lines of credit 362,000 (1,261,370)
Proceeds from sale of stock 2,000,000 8,603,762
Distributions to shareholders of combined
companies prior to business combination (1,021,012) (572,378)
------------------ ------------------
Net cash provided by financing
activities $ 1,577,031 $ 24,020,323
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 949,335 $ 4,620,059
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,654,209 651,149
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,603,544 $ 5,271,208
================== ==================
</TABLE>
(Continued on next page)
<PAGE> 7
7
MLC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 225,209 $ 116,787
================= ================
Income taxes paid $ 2,510,649 $ 257,137
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 8
8
MLC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1997, the condensed
consolidated statements of earnings for the three and nine month periods ended
December 31, 1996, and the condensed consolidated statement of cash flows for
the nine month periods ended December 31, 1997 and 1996 have been restated to
include the accounts and results of operations of the Company's two
subsidiaries acquired during the second quarter of fiscal 1997, which were
accounted for under the pooling-of-interests method. Although the balance
sheet of the Company as of March 31, 1997 has been audited, the condensed
consolidated balance sheet as of December 31, 1997, the condensed consolidated
statements of earnings for the three and nine month periods ended December 31,
1997 and 1996, and the condensed consolidated statements of cash flows for the
nine months ended December 31, 1997 and 1996 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 December 31 and
March 31, 1997, the results of operations for the three and nine month periods
ending December 31, 1997 and 1996, and the cash flows for the nine month
periods ended December 31, 1997 and 1996. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended March 31, 1997 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 finance leases consists of the following
components:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------------- ------------
(In thousands)
<S> <C> <C>
Minimum lease payments $ 19,354 $ 18,752
Estimated unguaranteed residual value 4,390 1,271
Initial direct costs - net of amortization 705 1,237
Less: Unearned lease income (3,448) (3,721)
Reserve for credit losses (52) (66)
-------------- ------------
Investment in direct financing lease and
sales-type lease - net $ 20,949 $ 17,473
============== ============
</TABLE>
<PAGE> 9
9
3. INVESTMENT IN OPERATING LEASE EQUIPMENT
The components of the net investment in operating lease equipment are as
follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------------- ------------
(In thousands)
<S> <C> <C>
Cost of equipment under operating leases $ 14,046 $ 14,519
Initial direct costs 42 42
Accumulated depreciation and amortization (5,748) (3,496)
-------------- ------------
Investment in operating leases - net $ 8,340 $ 11,065
============== ============
</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 Nine months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Net income before pro forma
adjustment, per the
consolidated income
statement $ 1,277 $ 1,029 $ 4,587 $ 2,506
Additional provision for
income taxes --- 138 613 273
-------------------------------------------------------------------
Pro forma net income $ 1,277 $ 891 $ 3,974 $ 2,233
===================================================================
</TABLE>
5. NEW ACCOUNTING PRONOUCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 125 ("SFAS
No. 125"), Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities as of January 1, 1997. SFAS No. 125 has changed
the manner in which the Company determines and recognizes the gain recorded
upon the transfer of its interest in finance contracts subsequent to December
31, 1996. Additionally, SFAS No. 125 requires the Company to record gains or
losses with respect to transfers of its interest in leases previously accounted
for as direct finance leases. SFAS No. 125 has also altered the presentation in
the Company's consolidated financial statements of revenues, expenses and
certain assets and liabilities associated with finance contracts sold. As a
result, certain aspects of the Company's financial statements as of December
31, 1997, and for the three and nine month periods then ended, may not be
directly comparable to the prior period financial statements.
<PAGE> 10
10
MLC HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations relate to the accompanying condensed consolidated balance
sheets, statements of earnings, and statements of cash flow, as restated to
include the accounts and results of operations of the Company's two recently
acquired subsidiaries which were accounted for under the pooling-of-interests
method. Although the balance sheets of the Company as of March 31, 1997 have
been audited, the condensed consolidated balance sheets as of December 31,
1997, the condensed consolidated statements of earnings for the three and nine
month periods ended December 31, 1997 and 1996, and the condensed consolidated
statements of cash flows for the nine months ended December 31, 1997 and 1996
have been prepared by the Company, without audit.
RESULTS OF OPERATIONS - Three and Nine Months Ended December 31, 1997
(Unaudited) Compared to Three and Nine Months Ended December 31, 1996
(Unaudited)
The following discussion and analysis of the Company's results of operations
should be read in conjunction with the accompanying unaudited condensed
consolidated statements of earnings for the three and nine month periods ended
December 31, 1997 and 1996, as restated.
Total revenues generated by the Company during the three month period ended
December 31, 1997 were $23,563,409, compared to revenues of $20,286,800 during
the comparable period in the fiscal prior year, an increase of 16.2%. During
the nine month period ended December 31, total revenues were $91,280,465 and
$58,511,589 in 1997 and 1996, respectively, an increase of 56.0%. 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 9.41% to $18,097,358 during the three month period ended December 31,
1997, as compared to the corresponding period in the prior fiscal year. For
the nine month period ended December 31, 1997 sales increased 56.0% to
$75,776,898 over the corresponding period in the prior fiscal year. These
increases are largely attributable to the 92.1% and 192.3% increases (three
month and nine months, respectively) in sales of leased equipment.
Historically, the majority of sales of leased equipment have been to one of the
Company's two institutional equity partners. During the three months ended
December 31, 1997 and 1996 sales to MLC/CLC, LLC, an institutional equity
partner of the Company, accounted for 84.8% and 60.7% of sales of leased
equipment, respectively. During the nine month periods ended December 31,
sales to MLC/CLC, LCC accounted for 85.9% and 65.1% of 1997 and 1996 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 these joint
ventures, if such consent is withheld, or financing from these entities
otherwise becomes unavailable, it could have a material adverse effect upon the
Company's business, financial condition and results of operations 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. For the three months ended December 31, equipment sales decreased 15.3%
to $10,797,522, while for the fiscal year to date through December 31,
equipment sales increased 3.4% to $36,290,550. The Company's brokerage and
re-marketing activities accounted for 25.1% and 36.4% of equipment sales during
the three month period in 1997 and 1996, respectively. During the nine month
periods ended December 31, 1997 and 1996, brokerage and re-marketing
<PAGE> 11
11
activities generated 18.6% and 39.8% of equipment sales revenue, 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's lease revenues increased 27.2% to $3,803,385 for the three month
period ended December 31, 1997, compared with the corresponding period in the
prior fiscal year. For the fiscal year to date through December 31, lease
revenues increased 59.7% to $11,021,736 for the 1997 period compared to the
same period in 1996. These increases consist of increased lease earnings and
rental revenues reflecting a higher average investment direct financing leases
and in operating lease equipment. 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 required to be in effect as of January 1, 1997.
For the three and nine months ended December 31, 1997, fee and other income
increased 119.9% and 48.4%, respectively, over the comparable periods in the
prior fiscal year. These increases are 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 acquired during the second quarter of fiscal 1998. 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 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 threreof,
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 realized a gross margin on sales of equipment of 23.0% for the
three month period ended December 31, 1997, as compared to a gross margin of
16.6% realized on sales of equipment generated during the same three month
period in the prior fiscal year. For the nine months ended December 31, 1997,
the Company's gross margin on sales of equipment was 21.7%, as compared to a
gross margin of 16.2% during the same 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
December 31, 1997, the Company recognized a net loss of $9,060 on equity sales
of $7,299,836, as compared to a gross margin of $31,568 on equity sales of
$3,800,011 during the same period in the prior fiscal year. Fiscal year to
date, through December 31, 1997, the Company recognized a gross margin of
$597,501 (1.5%) on equity sales of $39,486,348, as compared to a gross margin
of $147,965 (1.1%) on equity sales of $13,507,407 during the same period in the
prior fiscal year.
The Company's direct lease costs increased 7.2% and 55.2% during the three and
nine month periods ended December 31, 1997, as compared to the same periods in
the prior fiscal year. Although the largest component of direct lease costs is
depreciation on operating lease equipment, the increase is primarily
attributable to increased re-billable costs, including frieght and
installation, which are re-billed to lessees.
Professional and other fees incurred by the Company during the three and nine
<PAGE> 12
12
month periods ended December 31, 1997 were $282,278 and $723,152, reflecting
increases of 120.5% and 101.0% over the comparable periods in the prior fiscal
year, respectively. These increases are attributable to increases in the
volume of broker fees which the Company pays on certain transactions, and the
increased legal and professional fees associated with the Company's securities
being publicly traded.
Salaries and benefits and general and administrative ("G&A") costs increased
54.8% and 11.41%, during the three month period ended December 31, 1997 over
the same period in prior fiscal year. For the fiscal year to date through
December 31, 1997, salaries and G&A costs have increased 38.7% and 37.4% over
the prior fiscal year, respectively. These increases are the result of
additional personnel and administrative costs associated with the increased
volume of leasing transactions the Company has generated in comparison to the
corresponding periods in the prior fiscal year.
Interest and financing costs incurred by the Company for the three and nine
months ended December 31, 1997 amounted to $396,756 and $1,372,020,
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 remited directly to the lender by the
leasee.
The Company recognized non-recurring acquisition costs of $39,103 and $222,557
during the three and nine months ended December 31, 1997, respectively, related
to the acquisition of companies which will be accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting and legal fees, and various other acquisition related costs.
Generally accepted accounting principles require the Company to expense all
acquisition costs (both those paid by the Company and those paid by the sellers
of the acquired companies) related to business combinations accounted for under
the pooling-of-interests method. The Company expects to incur similar costs in
the future, as the Company anticipates completing additional acquisitions
accounted for under the pooling-of-interests method. (See "FACTORS THAT MAY
AFFECT FUTURE OPERATING RESULTS").
The Company's provision for income taxes increased to $850,584 for the three
months ended December 31, 1997 from $349,000 for the three months ended
December 31, 1996, reflecting effective income tax rates of 40.0% and 25.3%,
respectively. For the nine months ended December 31, 1997, the Company's
provision for income tax was $1,722,717, as compared to $955,000 during the
comparable period in prior fiscal year, reflecting effective income tax rates
of 27.3% and 27.6%, respectively. The low effective income tax rates, compared
to the federal statutory rate of 35.0%, were 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 net
earnings adjusted as if the Company's subsidiaries which were previously
subchapter S corporations had been subject to income tax throughout the periods
presented were $1,277,487 and $891,110 for the three months ended December 31,
1997. For the nine months ended December 31, 1997, pro forma net earnings were
$3,973,575 and $2,232,950.
The foregoing resulted in a 24.2% and 83.0% increase in net earnings for the
three and nine month periods ended December 31, 1997, respectively, as compared
to the same periods in the prior fiscal year. Basic and fully diluted earnings
per common share were $.21 for the three months ended December 31, 1997 as
compared to $.19 for the three months ended December 31, 1996, based on
weighted average common shares outstanding of 6,071,305 and 5,341,890,
respectively, and fully diluted weighted average shares of 6,188,990 and
5,364,600. For the fiscal year to date through December 31, 1997 the Company's
basic and fully diluted earnings per share were $.76 and $.75, respectively, in
1997, as compared to $.51 and $.51, respectively, in 1996, based on weighted
average common shares outstanding of 6,017,920 and 4,950,935, respectively and
fully diluted weighted average shares of 6,127,933 and 4,953,465.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE> 13
13
During the nine month period ended December 31, 1997, the Company generated
cash flows from operations of $7,905,266, and cash flows from financing
activities of $1,577,031. Cash used in investing activities amounted to
$8,532,962 during the same period. The net effect of these cash flows was to
increase cash and cash equivalents by $949,335 during the nine month period.
During the same period, the Company's total assets increased $5,864,097, or
12.0%, 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 non-recourse notes payable decreased
23.9%, primarily due to principal repayments made by lessees.
The Company's "Accounts payable - equipment" represents equipment costs that
have been placed on a lease schedule, but for which the Company has not yet
paid. The balance of unpaid equipment cost can vary depending on vendor terms
and the timing of lease originations. As of December 31, 1997, the Company had
$10,527,958 of unpaid equipment cost, as compared to $4,946,422 at March 31,
1997.
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 CoreStates Facility, which is available through
June 5, 1998, and bears interest at LIBOR+110 basis points, or, at the
Company's option, Prime minus one percent. On September 5, 1997, the Company's
CoreStates Facility was increased to a maximum limit of $25 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 December
31, 1997, the Company had no outstanding balance on the CoreStates Facility.
The CoreStates 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 newly acquired subsidiaries.
The Company's newly acquired subsidiaries, MLC Network Solutions, Inc. and
ECCI, 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 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 30 day
time frame and represent an assigned accounts payable originally generated with
the supplier/distributor. If the 30 day obligation is not timely liquidated,
interest is then assessed at stated contractual rates. As of December 31, 1997
MLC Network Solutions, Inc., has floor planning availability of $1,400,000
through Deutsche Financial, Inc. and $300,000 from IBM Credit Corporation. The
outstanding balances to these respective suppliers were $345,590 and $11,681 as
of December 31, 1997. ECCI has floor planning availability of $1,500,000 from
AT&T Credit Corporation, $1,000,000 through IBM Credit Corporation, and
$100,000 through Deutsche Financial, Inc. The outstanding balances to these
respective suppliers were $490,640, $299,455 and $2,318 as of December 31,
1997. In Addition, ECCI has a line of
<PAGE> 14
14
credit in place, expiring on April 30, 1998, with PNC Bank, N.A. to provide an
asset based credit facility. The line has a maximum credit limit of $2,500,000
and interest is based on the bank's prime rate. The outstanding balance was
$472,000 as of December 31, 1997.
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, provided, that each draw is subject to
the approval of Heller. As of December 31, 1997, the principal balance due
under the Heller Facility was $1,478,620.
Through MLC/GATX Limited Partnership I and MLC/CLC, LLC, the Company has formal
joint venture agreements 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 held company with stockholders' equity in excess
of $804 million, as of June 30, 1997. 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. These joint ventures
arrangements enable 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 either MLC/CLC, LLC or MLC/GATX Limited Partnership I
(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 one of its institutional
partnerships with Cargill or GATX, 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, cash flow from
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.
<PAGE> 15
15
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 of the Company's leases,
timing of specific transactions and other factors. Quarterly operating results
could also fluctuate as a result of the sale by the Company of equipment in its
lease portfolio, at the expiration of a lease term or prior to such expiration,
to a lessee or to a third party. Such sales of equipment may have the effect
of increasing revenues and net income during the quarter in which the sale
occurs, and reducing revenues and net income otherwise expected in subsequent
quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding quarters
are not necessarily meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during first three quarters of fiscal 1998.
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 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
<PAGE> 16
16
associated with unanticipated problems or legal liabilities; and amortization
of acquired intangible assets.
The Company has increased the range of products and services it offers through
acquisitions of companies offering products and services that are complementary
to the core financing and equipment brokering services that the Company has
offered since it began operations. The Company's ability to manage an
aggressive consolidation program in markets other than domestic equipment
financing has not yet been fully tested. The Company's efforts to sell
additional products and services to existing customers are in their early
stages and there can be no assurance that such efforts will be successful. In
addition, the Company expects that certain of its products and services will
not be easily cross-sold and may be marketed and sold independently of other
products and services.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management administration. The various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. There can be no assurance that the Company's executive
management group can continue to oversee the Company and effectively implement
its operating or growth strategies in each of the markets that it serves. In
addition, there can be no assurance that the pace of the Company's
acquisitions, or the diversification of its business outside of its core
leasing operations, will not adversely affect the Company's efforts to
implement its cost-savings and integration strategies and to manage its
acquisitions profitability.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic and
product markets, and other competitors may choose to enter the Company's
geographic and product markets in the future. No assurances can be give that
competition will not have an adverse effect on the Company's business.
"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, including the Prospectus.
<PAGE> 17
17
MLC HOLDINGS, INC. AND SUBSIDIARIES
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
On February 11, 1998 the Securities and Exchange Commission declared
the Company's Registration Statement on Form S-1 effective. The
Registration Statement was filed to register 2,000,000 shares of
Common Stock for use in future acquisitions which the Company may
engage in from time to time and to register 964,305 shares of issued
and outstanding Common Stock on behalf of certain selling
shareholders.
<PAGE> 18
18
Item 6(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule 20
</TABLE>
Item 6(b) Reports on Form 8-K
None filed during the quarter for which this report is filed
<PAGE> 19
19
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/ Steven J. Mencarini
-------------------------
Steven J. Mencarini
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
DATE: February 12, 1998
-------------------
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<PERIOD-START> OCT-01-1997 APR-01-1997 OCT-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996
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<RECEIVABLES> 12,940 12,940 11,001 11,001
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<PP&E> 1,057 1,057 765 765
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<INCOME-TAX> 851 1,723 349 955
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