<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 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 0-21695
Manchester Equipment Co., Inc.
(Exact name of registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
160 Oser Avenue
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(516) 435-1199
(Registrant's telephone number, including area code)
Indicate by check mark whether the registration (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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
There were 8,525,000 outstanding shares of COMMON STOCK at February 28,
1997.
<PAGE>2
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
January 31, 1997 (unaudited) and July 31, 1996 3
Condensed Consolidated Statements of Income
Three months and six months ended
January 31, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows Six
months ended January 31, 1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 12 11
<PAGE>3
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
January 31, July 31,
1997 1996
(Unaudited)
----------- --------
Assets:
Cash and cash equivalents $ 14,746 $ 5,774
Accounts receivable, net 21,023 `19,068
Inventory 10,719 8,957
Deferred income taxes 334 334
Prepaid expenses and other current assets 284 197
------ ------
Total current assets 47,106 34,330
Property and equipment, net 2,247 2,244
Deferred income taxes 395 395
Other assets 583 792
--- ---
$50,331 $37,761
======= =======
Liabilities:
Current maturities under capital lease obligation $ 99 $ 99
Notes payable - bank - 6,500
Notes payable - shareholder 118 353
Accounts payable and accrued expenses 14,407 17,113
Deferred service revenue 126 129
Income taxes payable - 295
----- ---
Total current liabilities 14,750 24,489
Capital lease obligation, less current maturities 135 175
Deferred compensation payable 268 183
--- ---
Total liabilities 15,153 24,847
------ ------
Redeemable common stock - 4,739
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000
shares authorized, 8,525,000 and 6,200,000
shares issued and outstanding 85 62
Additional paid-in capital 20,391 -
Retained earnings 14,702 8,113
------ -----
Total shareholders' equity 35,178 8,175
------ -----
Total liabilities and shareholders' equity $50,331 $37,761
======= =======
See notes to condensed consolidated financial statements.
<PAGE>4
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
1997 1996 1997 1996
Unaudited Unaudited
--------- ---------
<S> <C> <C> <C> <C>
Revenues $44,684 46,994 $95,671 $90,500
Cost of revenues 38,383 40,405 82,191 77,968
------ ------ ------ ------
Gross profit 6,301 6,589 13,480 12,532
Selling, general and
administrative expenses 5,105 4,951 10,293 9,260
----- ----- ------ -----
Income from operations 1,196 1,638 3,187 3,272
Interest expense (71) (105) (191) (190)
Interest income 122 4 127 10
Other income (expense) 23 (6) 23 (7)
-- -- -- --
Income before income taxes 1,270 1,531 3,146 3,085
Provision for income taxes 521 616 1,296 1,241
--- --- ----- -----
Net income $ 749 $ 915 $1,850 $1,844
====== ======= ====== ======
Net Income per share $0.10 $ 0.15 $0.26 $0.29
===== ======= ===== =====
Weighted average
shares outstanding 7,867,935 6,262,626 7,033,968 6,262,626
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>5
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended January 31,
1997 1996
(Unaudited)
-----------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 1,850 $ 1,844
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization ............ 285 183
Allowance for doubtful accounts .......... 185 210
Deferred income taxes .................... -- (58)
Change in assets and liabilities:
Increase in accounts receivable ............... (2,140) (3,870)
(Increase) decrease in inventory .............. (1,762) 828
(Increase) decrease in prepaid expenses and
other current assets ...................... (87) 21
Decrease in other assets ..................... 209 8
Decrease in accounts payable and
accrued expenses .......................... (2,706) (242)
Decrease in deferred service contract revenue . (3) (34)
Increase (decrease) in income taxes payable . (295) 629
Increase in deferred compensation payable ..... 85 24
----- ----
Net cash used in operating activities ......... (4,379) (457)
------ ----
Cash flows from investing activities:
Capital expenditures .......................... (342) (197)
Proceeds from sale of assets .................. 54 18
---- ----
Net cash used in investing activities .... (288) (179)
---- ----
Cash flows from financing activities:
Net repayments of borrowings .................. (6,500) (600)
Payments on notes payable-shareholder ......... (235) --
Payments on capital lease obligation .......... (40) --
Net proceeds from initial public offering ..... 20,414 --
------ -----
Net cash (used in) provided by
financing activities .................... 13,639 (600)
------ ----
Net increase (decrease) in cash and cash equivalents ... 8,972 (1,236)
Cash and cash equivalents at beginning of period .. 5,774 1,834
----- -----
Cash and cash equivalents at end of period ............. $ 14,746 $ 598
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>6
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
Manchester Equipment Co., Inc. (the "Company") is a systems integrator and
reseller of computer hardware, software and networking products, primarily
for commercial customers. The Company offers its customers single-source
solutions customized to their information systems needs by combining
value-added services with hardware, software, networking products and
peripherals from leading vendors.
Sales of hardware, software and networking products comprise most of the
Company's revenues. Service revenues have not comprised a significant part
of revenues to date. The Company has entered into agreements with certain
suppliers and manufacturers which provide the Company favorable pricing
and price protection in the event the vendor reduces its prices.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal and recurring accruals) necessary to present fairly the
financial position of the Company as of January 31, 1997 and the results
of operations for the three and six months ended January 31, 1997 and 1996
and cash flows for the six months ended January 31, 1997 and 1996.
Although the Company believes that the disclosures herein are adequate to
make the information not misleading, these financial statements should be
read in conjunction with the audited financial statements and the notes
thereto for the year ended July 31, 1996, included in the Company's
Prospectus dated November 25, 1996 prepared in connection with the
Company's initial public offering.
2. Net Income Per Share
Net income per share is based upon the weighted average number of common
shares and common share equivalents outstanding during each period. Common
share equivalents include dilutive stock options and warrants, if any,
using the treasury stock method.
3. Initial Public Offering
On December 2, 1996, the Company completed an initial public offering (the
"Offering") of 2,325,000 shares of its common stock (including 200,000
overallotment shares) at an initial public offering price of $10 per
share. Net proceeds to the Company were approximately $20.4 million, after
deducting the underwriting discounts and commissions and other costs
associated with the Offering.
4. Redeemable Common Stock
Prior to the consummation of the Offering, the Company had an agreement
with a retired share-holder whereby the Company would be required to
redeem all of the shares held by the shareholder in accordance with terms
set forth in the agreement. In September 1996, among other provisions, the
retired shareholder agreed to terminate his option to sell his remaining
shares to the Company, subject to successful completion of the Offering.
As a result of the successful completion of the Offering, in the January
31, 1997 Condensed Consolidated Balance Sheet, the amounts which would
have been due under this agreement have been reclassified from redeemable
common stock to retained earnings.
<PAGE>7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and with the
Company's Prospectus dated November 25, 1996. This discussion and analysis
contains forward-looking statements within the meaning of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which are not historical facts, and involves risks and
uncertainties that could cause actual results to differ from those
expected and projected. These risks and uncertainties include, but are not
limited to, those set forth below and the risk factors described in the
Company's Prospectus.
GENERAL
Manchester is a systems integrator and reseller of computer hardware,
software and networking products, primarily for commercial customers. The
Company offers its customers single-source solutions customized to their
information systems needs by combining value-added services with hardware,
software, networking products and peripherals from leading vendors. To
date, most of the Company's revenues have been derived from product sales.
The Company generally does not develop or sell software products. However,
certain computer hardware products sold by the Company are loaded with
pre-packaged software products.
As a result of intense price competition within the computer industry
as well as other industry conditions, the Company has experienced
increasing pressure on its gross profit and operating margins with respect
to the sale of products. The Company's strategy includes increasing its
focus on providing value added services with operating margins that are
higher than those obtained with respect to the sale of products. The
Company's future performance will depend in part on its ability to manage
successfully a continuing shift in its operations to value-added services.
The Company's largest customer accounted for approximately 12% and
14% of the Company's revenues for the six months ended January 31, 1997
and 1996, respectively, substantially all of which revenues were derived
from the sale of hardware products. This customer accounted for 16% of
revenues for the fiscal year ended July 31, 1996. There can be no
assurance that the Company will continue to derive substantial revenues
from this customer.
The Company's profitability has been enhanced by its ability to
obtain volume discounts from certain manufacturers, which has been
dependent in part upon the Company's ability to sell products to computer
resellers, including VARs. There can be no assurance that the Company will
be able to continue to sell products to resellers and thereby obtain the
desired discounts from the manufacturers or that the Company will be able
to increase sales to end-users to offset the need to rely upon sales to
resellers.
<PAGE>8
The markets for the Company's products and services are characterized
by rapidly changing technology and frequent introductions of new hardware
and software products and services, which render many existing products
noncompetitive, less profitable or obsolete. The Company believes that its
inventory controls have contributed to its ability to respond effectively
to these technological changes. As of January 31, 1997 and 1996,
inventories represented 21% and 24%, respectively of total assets. For the
six months ended January 31, 1997 and 1996, annualized inventory turnover
was 15 and 18 times, respectively. Inventory turned 18 times in the fiscal
year ended July 31, 1996. The failure of the Company to anticipate
technology trends or to continue to effectively manage its inventory could
have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company believes its controls on accounts receivable have
contributed to its profitability. The Company's bad debt expense
represented .2% of total revenues in each of the six month periods ended
January 31, 1997 and 1996. For the fiscal year ended July 31, 1996, bad
debt expense represented .1% of total revenues.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to continue to do so in the
future. Quarterly revenues and operating results generally fluctuate as a
result of the demand for the Company's products and services, the
introduction of new hardware and software technologies with improved
features, the introduction of new services by the Company and its
competitors, changes in the level of the Company's operating expenses,
competitive conditions and economic conditions. In particular, the Company
currently is increasing its fixed operating expenses, including a
significant increase in personnel, as part of its strategy to increase its
focus on providing higher margin, value-added services. Accordingly, the
Company believes that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance.
In addition, the results of any quarterly period are not indicative of
results to be expected for a full fiscal year.
As a result of rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, the
Company's product offerings change constantly. Prices of products change
with generally higher prices early in the life cycle of the product and
lower prices near the end of the product's life cycle. The Company
believes that the impact of price or volume changes of any particular
product or products is not material to the Company's Consolidated
Financial Statements.
The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he will receive $550,000 in
compensation, exclusive of fringe benefits, for each of the fiscal years
ending July 31, 1997 and 1998. In addition, the Company's Executive Vice
President has agreed to receive base compensation, exclusive of fringe
benefits, of $450,000 for the fiscal years ending July 31, 1997 and 1998.
These officers have agreed that they will not be entitled to any bonuses
for fiscal 1997 and that any bonus payable to either of these officers in
fiscal 1998 will require the approval of a majority of the independent
directors of the Company. The Company leases certain warehouse and offices
from entities that are owned or controlled by the Company's majority
shareholder. Each of the leases with related parties has been amended
effective with the closing of the Offering to reduce the rent payable
under that lease to then current market rates.
<PAGE>9
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's Condensed Consolidated Statements of Income
expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Percentage of Revenues
Three Months Ended Six Months Ended
January 31 January 31
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues .......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues .................. 85.9 86.0 85.9 86.2
---- ---- ---- ----
Gross profit ...................... 14.1 14.0 14.1 13.8
Selling, general and
administrative expenses ........ 11.4 10.5 10.8 10.2
---- ---- ---- ----
Income from operations ............ 2.7 3.5 3.3 3.6
Interest and other expenses, net .. .2 (.2) - (.2)
Income before income taxes ........ 2.9 3.3 3.3 3.4
--- --- --- ---
Provision for income taxes ........ 1.2 1.4 1.4 1.4
--- --- --- ---
Net income ........................ 1.7% 1.9% 1.9% 2.0%
=== === === ===
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS
ENDED JANUARY 31, 1996 REVENUES.
The Company's revenues decreased $2.3 million or 4.9% from
$47.0 million for the three months ended January 31, 1996 to $44.7 million for
the three months ended January 31, 1997 due to lack of product availability as
well as lower revenues from the Company's major customer. The decrease in
revenues occurred principally in November and December and is not specifically
related to any particular vendor or manufacturer.
GROSS PROFIT. Cost of revenues includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by certain market development funds provided by manufacturers.
All other operating costs are included in selling, general and administrative
expenses. Gross profit decreased $288,000 or 4.4% from $6.6 million for the
second quarter of fiscal 1996 to $6.3 million for the most recent fiscal
quarter. As a percentage of revenues, gross profit increased slightly from 14.0%
in fiscal 1996 to 14.1% in fiscal 1997. The decrease in gross profit dollars is
principally due to the decrease in revenues. Competitive pressures, changes in
the types of products or services sold and product availability result in
fluctuations in gross profit from period to period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $154,000 or 3.1% from $5.0 million in the
second quarter of fiscal 1996 to $5.1 million in the second quarter of fiscal
1997. This increase is principally a result of higher payroll and related costs
due to the hiring of additional technical and administrative staff in support of
the Company's strategy to increase its value-added services revenue partially
offset by lower commissions paid to the Company's sales force due to lower
revenues. Giving pro forma effect to the changes in officers compensation and
rents to related parties, described above and under General, the pro forma
selling, general and administrative expenses would have been approximately $4.9
million or 10.4% of revenues for the three months ended January 31, 1996.
<PAGE>10
INTEREST INCOME. Interest income increased from $4,000 in fiscal 1996 to
$122,000 in fiscal 1997 due to earnings on short term investments made with
certain of the proceeds from the Company's initial public offering.
PROVISION FOR INCOME TAXES. The effective income tax rate increased
slightly to 41% in the current quarter as compared to 40% for the three months
ended January 31, 1996.
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1996
REVENUES. The Company's revenues increased $5.2 million or 5.7% from $90.5
million for the six months ended January 31, 1996 to $95.7 million for the six
months ended January 31, 1997 due to increased revenues from both new and
existing customers. Many factors contributed to this increase, including new
product introductions, special product purchases and volume and price changes
with no one factor having any material effect on this increase.
GROSS PROFIT. Gross profit increased $948,000 or 7.6% from $12.5 million
for the first six months of fiscal 1996 to $13.5 million for the most recent
fiscal six months. As a percentage of revenues, gross profit increased from
13.8% to 14.1%. The increase in gross profit dollars is principally due to the
increase in revenues while the increase in percentage is primarily due to
changes in product mix . Competitive pressures, changes in the types of products
or services sold and product availability result in fluctuations in gross profit
from period to period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million or 11.2% from $9.3 million in the
first six months of fiscal 1996 to $10.3 million in the first six months of
fiscal 1997. This increase is principally a result of higher payroll and related
costs due to the hiring of additional technical and administrative staff in
support of the Company's strategy to increase its value-added services revenue.
In addition, the Company incurred higher insurance, depreciation and
professional fees partially offset by lower rent. Giving pro forma effect to the
changes in officers compensation and rents to related parties, described above
and under General, the pro forma selling, general and administrative expenses
would have been virtually the same as actual results for the six months ended
January 31, 1996 principally due to the timing of payments of officers'
compensation during fiscal 1996.
INTEREST INCOME. Interest income increased from $10,000 for the first six
months of fiscal 1996 to $127,000 for the first six months of fiscal 1997 due to
the earnings on the short term investments made with certain of the proceeds
from the Company's initial public offering.
PROVISION FOR INCOME TAXES. The effective income tax rate increased
slightly from 40% for the six months ended January 31, 1996 to 41% for the six
months ended January 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of financing have been internally generated
working capital from profitable operations and a line of credit from a financial
institution.
<PAGE>11
For the six months ended January 31, 1997, cash used in operating
activities was $4.4 million consisting primarily of increases in accounts
receivable and inventory and a decrease in accounts payable and accrued
expenses. The Company's accounts receivable and accounts payable and accrued
expenses balances as well as its investment in inventory can fluctuate
significantly from one period to the next due to the receipt of large customer
orders or payments or variations in product availability and vendor shipping
patterns at any particular date. Generally, the Company's experience is that
increases in accounts receivable, inventory and accounts payable and accrued
expenses will coincide with growth in revenue and increased operating levels. In
addition, during the six months ended January 31, 1997 the Company used $288,000
in investing activities and generated $13.6 million in financing activities
primarily from the net proceeds of the Offering ($20.4 million) partially offset
by the net repayments of bank debt ($6.5 million).
The Company has available a line of credit with a financial institution in
the amount of $11.5 million. All amounts outstanding under this line were repaid
by the Company with the proceeds from the Offering described below.
On December 2, 1996, the Company completed an initial public offering (the
"Offering") of 2,325,000 shares (including 200,000 overallotment shares) of its
common stock resulting in net proceeds to the Company, after deducting
underwriting discount and expenses, of approximately $20.4 million. The Company
utilized $7.7 million of the proceeds from the Offering to repay the balance
outstanding at that date under its line of credit with a financial institution.
The remaining net proceeds have been invested in short-term, interest bearing,
investment grade securities.
The Company believes that the remaining net proceeds from the Offering
together with current working capital, expected cash flows from operations and
available borrowings under the line of credit will be adequate to support
current operating levels for the foreseeable future, specifically through at
least the end of fiscal 1998. The Company currently has no major commitments for
capital expenditures. Future capital requirements of the Company include those
for the growth of working capital items such as accounts receivable and
inventory and the purchase of equipment and expansion of facilities as well as
the possible opening of new offices and potential acquisitions.
<PAGE>12
Item 6. Exhibits and Reports
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
<PAGE>13
MANCHESTER EQUIPMENT CO., INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANCHESTER EQUIPMENT CO., INC.
------------------------------
(Registrant)
DATE: March 12, 1997 /s/ Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: March 12, 1997 /s/ Joseph Looney
-----------------------------
Joseph Looney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> NOV-1-1996
<PERIOD-END> JAN-31-1997
<CASH> 14,746
<SECURITIES> 0
<RECEIVABLES> 22,113
<ALLOWANCES> 1,090
<INVENTORY> 10,719
<CURRENT-ASSETS> 47,121
<PP&E> 5,776
<DEPRECIATION> 3,549
<TOTAL-ASSETS> 50,326
<CURRENT-LIABILITIES> 14,750
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 35,088
<TOTAL-LIABILITY-AND-EQUITY> 50,326
<SALES> 95,671
<TOTAL-REVENUES> 95,671
<CGS> 82,191
<TOTAL-COSTS> 82,191
<OTHER-EXPENSES> 10,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 3,126
<INCOME-TAX> 1,281
<INCOME-CONTINUING> 1,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,845
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
