-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B2Q0aVqyiuprvc8RzhSRIotVeM36i0cts9fs3aCLtzvHHHSI5k3XWal/h6B6f0p9 uVtVilE2PGHXTOHxqe06hg== 0000950133-98-000418.txt : 19980218 0000950133-98-000418.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950133-98-000418 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MLC HOLDINGS INC CENTRAL INDEX KEY: 0001022408 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 541817218 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28926 FILM NUMBER: 98538640 BUSINESS ADDRESS: STREET 1: 11150 SUNSET HILLS ROAD STREET 2: SUITE 110 CITY: RESTON STATE: VA ZIP: 20190-5321 BUSINESS PHONE: 7038345710 MAIL ADDRESS: STREET 1: 11150 SUNSEL HILLS ROAD STREET 2: SUITE 110 CITY: RESTON STATE: VA ZIP: 20190-5321 10-Q 1 MLC HOLDINGS, INC. FORM 10-Q 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. 2 2 MLC HOLDINGS, INC. AND SUBSIDIARIES
PAGE 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
3 3 MLC HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31, 1997 1997 (UNAUDITED) -------------------------- ------------------------- 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 ========================== =========================
See accompanying notes to condensed consolidated financial statements. 4 4 MLC HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended December 31, 1997 1996 (UNAUDITED) (UNAUDITED) ----------------------- ------------------------- 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
See accompanying notes to condensed consolidated financial statements. 5 5 MLC HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended December 31, 1997 1996 (UNAUDITED) (UNAUDITED) ---------------------- ------------------------ 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
See accompanying notes to condensed consolidated financial statements. 6 6 MLC HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 1997 1996 (UNAUDITED) (UNAUDITED) ------------------ ------------------ 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 ================== ==================
(Continued on next page) 7 7 MLC HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued from previous page) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 225,209 $ 116,787 ================= ================ Income taxes paid $ 2,510,649 $ 257,137 ================= ================
See accompanying notes to condensed consolidated financial statements. 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:
December 31, March 31, 1997 1997 -------------- ------------ (In thousands) 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 ============== ============
9 9 3. INVESTMENT IN OPERATING LEASE EQUIPMENT The components of the net investment in operating lease equipment are as follows:
December 31, March 31, 1997 1997 -------------- ------------ (In thousands) 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 ============== ============
4. UNAUDITED PRO FORMA INCOME TAX INFORMATION The following unaudited pro forma income tax information is presented in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," as if the pooled companies, which were subchapter S corporations prior to their business combinations with the Company, had been subject to federal income taxes throughout the periods presented.
Three months ended Nine months ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1997 1996 1997 1996 ------------------------------------------------------------------- (In Thousands) 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 ===================================================================
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. 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 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 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 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 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. 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 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. 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. 18 18 Item 6(a) Exhibits
EXHIBIT SEQUENTIAL NO. DESCRIPTION OF EXHIBIT PAGE NUMBER - ------------------------------------------------------------------------------------------------------------------- 27 Financial Data Schedule 20
Item 6(b) Reports on Form 8-K None filed during the quarter for which this report is filed 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 ------------------- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS 3-MOS 9-MOS MAR-31-1998 MAR-31-1998 MAR-31-1997 MAR-31-1997 OCT-01-1997 APR-01-1997 OCT-01-1996 APR-01-1996 DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996 7,603 7,603 6,654 6,654 0 0 0 0 12,940 12,940 11,001 11,001 0 0 0 0 1,600 1,600 1,254 1,254 0 0 0 0 1,057 1,057 765 765 0 0 0 0 54,888 54,888 49,024 49,024 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 61 61 59 59 21,934 21,934 16,418 16,418 54,888 54,888 49,024 49,024 18,097 75,777 16,541 48,592 25,563 91,280 20,287 58,512 15,625 67,290 14,388 42,744 0 0 0 0 5,810 17,680 4,521 12,307 0 0 0 0 397 1,372 429 1,223 2,128 6,310 1,378 3,461 851 1,723 349 955 1,277 4,587 1,029 2,506 0 0 0 0 0 0 0 0 0 0 0 0 1,277 4,587 1,029 2,506 0.21 0.76 0.19 0.51 0.21 0.75 0.19 0.51
-----END PRIVACY-ENHANCED MESSAGE-----