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 October 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
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 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.
[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 8,096,600 outstanding shares of COMMON STOCK at December 7,
1998.
<PAGE>
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
October 31, 1998 (unaudited) and July 31, 1998 3
Condensed Consolidated Statements of Income
Three months ended October 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 14
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
-------------
(Unaudited)
-----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 9,802 $ 7,816
Investments 1,500 1,501
Accounts receivable, net 29,662 26,296
Inventory 9,742 9,167
Deferred income taxes 482 482
Prepaid expenses and other current assets 114 290
--- ---
Total current assets 51,302 45,552
Property and equipment, net 6,147 5,975
Goodwill, net 5,133 4,325
Deferred income taxes 475 475
Other assets 582 567
--- ---
$63,639 $56,894
======= =======
Liabilities:
Current maturities under capital lease
obligation $ 53 $ 82
Accounts payable and accrued expenses 24,503 18,358
Deferred service revenue 698 775
Income taxes payable 339 225
--- ---
Total current liabilities 25,593 19,440
Deferred compensation payable 109 109
--- ---
Total liabilities 25,702 19,549
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000
shares authorized, 8,096,600 issued and
outstanding 81 81
Additional paid-in capital 18,785 18,767
Deferred compensation (58) (64)
Retained earnings 19,129 18,561
------ ------
Total shareholders' equity 37,937 37,345
------ ------
$63,639 $56,894
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
1998 1997
---- ----
Unaudited
---------
<S> <C> <C>
Revenue
Products $55,675 $46,108
Services 1,824 948
----- ---
57,499 47,056
------ ------
Cost of revenue
Products 48,382 39,601
Services _1,104 663
49,486 40,264
------ ------
Gross profit 8,013 6,792
Selling, general and
administrative expenses 7,185 5,699
----- -----
Income from operations 828 1,093
Interest expense (2) (10)
Interest income 115 201
------- ------
Income before income taxes 941 1,284
Provision for income taxes 373 522
--- ---
Net income $ 568 $762
===== ====
Net Income per share - Basic $0.07 $0.09
===== =====
Net income per share - Diluted $0.07 $0.09
===== =====
Weighted average shares outstanding - Basic 8,096,600 8,525,000
========= =========
Weighted average shares outstanding - Diluted 8,096,600 8,525,000
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the three months ended October 31,
1998 1997
------------------------
(Unaudited)
<S> <C> <C>
-----------
Cash flows from operating activities:
Net income $ 568 $762
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 424 266
Allowance for doubtful accounts 87 96
Non cash compensation and commission
expense 24 15
Change in assets and liabilities:
Increase in accounts receivable (3,453) (1,177)
(Increase) decrease in inventory (575) 1,342
Decrease in prepaid expenses and
other current assets 176 138
Increase in other assets (15) (116)
Increase (decrease) in accounts payable and
accrued expenses 5,274 (2,090)
Decrease in deferred service contract revenue (77) (26)
Increase in income taxes payable 114 377
Sale of investments 1 1,903
---- -----
Net cash provided by operating activities 2,548 1,490
----- -----
Cash flows from investing activities:
Capital expenditures (533) (439)
----- ----
Net cash used by investing activities (533) (439)
--- ---
Cash flows from financing activities:
Net repayments of borrowings - (1,274)
Payments on capital lease obligation (29) (25)
Payments on notes payable - other - 99
- --
Net cash used in financing activities (29) (1,398)
--- ------
Net increase (decrease) in cash and cash equivalents 1,986 (347)
Cash and cash equivalents at beginning of period 7,816 15,049
----- ------
Cash and cash equivalents at end of period $9,802 $14,702
====== =======
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
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 network 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 the
majority of the Company's revenue. 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 October 31, 1998 and the results
of operations for the three months ended October 31, 1998 and 1997 and
cash flows for the three months ended October 31, 1998 and 1997. 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, 1998, included in the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission.
2. Net Income Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("EPS") which the Company adopted
in the second quarter of fiscal 1998. It replaces the presentation of
primary EPS with the presentation of basic EPS and replaces fully diluted
EPS with diluted EPS. It also requires a dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerators
and denominators of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Net income per share of common stock for the three month periods ended
October 31, 1998 has been calculated according to the guidelines of
Statement No. 128 and prior periods EPS data have been restated to conform
with Statement No. 128.
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net
income per share has been computed by dividing net income by the weighted
average number of common shares outstanding, plus the assumed exercise of
dilutive stock options and warrants, less the number of treasury shares
assumed to be purchased from the proceeds of such exercises using the
average market price of the Company's common stock during each respective
period. Stock options and warrants are excluded from the calculation of
diluted net income per share when the result would be antidilutive.
3. Acquisition of Coastal Office Products, Inc.
On January 2, 1998, the Company acquired all of the outstanding shares
of Coastal Office Products, Inc. ("Coastal"), a reseller and provider of
<PAGE>
microcomputer services and peripherals to companies in the greater
Baltimore, Maryland area. The acquisition, which has been accounted for as
a purchase, consisted of a cash payment of $3.1 million plus potential
future contingent payments. Contingent payments of up to $1,050 in each of
calendar 1998 and 1999 will be determined based upon Coastal achieving
certain agreed upon increases in revenue and pretax income for calendar
1998 and 1999 over calendar 1997 amounts. The cash payment was made from
the Company's cash balances. Contingent payments, if any, would be paid in
cash (or, under certain conditions, in Company common stock) on March 15,
1999 and March 15, 2000. As of October 31, 1998, the Company has recorded
an additional purchase price of $871,000, of which $800,000 represents a
contingent payment due on March 15, 1999. The selling shareholders received
employment agreements that also provided for the issuance of 20,000 shares
of common stock. The fair value of the common stock, amounting to $80,000
was recorded as deferred compensation and is being expensed over the
three-year vesting period.
Operating results of Coastal are included in the Condensed Consolidated
Statement of Income from the date of acquisition. The acquisition resulted
in goodwill of $3,836,000 which is being amortized on the straight-line
basis over 20 years.
The following unaudited pro forma consolidated results of operations
for the three months ended October 31, 1997 assume that the Coastal
acquisition occurred on August 1, 1997 and reflect the historical
operations of the purchased business adjusted for lower interest on
invested funds, contractually revised officer compensation and rent and
increased amortization, net of applicable income taxes, resulting from the
acquisition:
Three months ended
October 31, 1997
(in thousands,
except per share amounts)
Revenue $49,090
======
Net income $848
====
Net income per share $0.10
====
The pro forma results of operations are not necessarily indicative of
the actual results that would have occurred had the acquisition been made
at the beginning of the period, or of results which may occur in the
future.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company 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
Annual Report on Form 10-K. This discussion and analysis contains certain
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 involve risks and
uncertainties that could cause actual results to differ materially from
the results anticipated in those forward-looking statements. These risks
and uncertainties include, but are not limited to, those set forth below,
those set forth in the Company's Annual Report on Form 10-K for the year
ended July 31, 1998, and those set forth in the Company's other filings
from time to time with the Securities and Exchange Commission.
General
The Company is a network 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 revenue has 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 per unit prices as well as 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 has experienced a significant increase
in selling, general and administrative expenses, primarily in the form of
increased personnel costs, in connection with the implementation of this
strategy. 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 directly competes with local, regional and national
systems integrators, value-added resellers ("VARs") and distributors as
well as with certain computer manufacturers that market through direct
sales forces. In the future, the Company may face further competition from
new market entrants and possible alliances between existing competitors.
In addition, certain suppliers and manufacturers may choose to market
products directly to end users through a direct sales force rather than or
in addition to channel distribution. Some of the Company's competitors
have, or may have, greater financial, marketing and other resources, and
may offer a broader range of products and services, than the Company. As a
result, they may be able to respond more quickly to new or emerging
technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing
or devote greater resources to the promotion of their products and
services. There can be no assurance that the Company will be able to
compete successfully in the future with these or other current or
potential future competitors.
The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. There can be no assurance that the
pricing and related terms offered by major manufacturers will not
<PAGE>
adversely change in the future. The failure to obtain an adequate supply of
products, the loss of a major manufacturer, the deterioration of the
Company's relationship with a major manufacturer or the Company's inability
in the future to develop new relationships with other manufacturers could
have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's largest customer accounted for approximately 7% and 10%
(or $3,939,000, and $4,502,000, respectively) of the Company's revenue for
the three months ended October 31, 1998 and 1997, respectively,
substantially all of which revenue was derived from the sale of hardware
products. This customer accounted for 7% of revenue for the fiscal year
ended July 31, 1998. There can be no assurance that the Company will
continue to derive substantial revenue 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 large quantities of
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.
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 October 31, 1998 and July 31, 1998,
inventories represented 15% and 16%, respectively, of total assets. For
the three months ended October 31, 1998 and 1997, annualized inventory
turnover was 20 and 18 times, respectively. Inventory turned 17 times in
the fiscal year ended July 31, 1998. 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 0.2% of total revenues in each of the three month periods
ended October 31, 1998 and 1997. For the fiscal year ended July 31, 1998,
bad debt expense represented 0.2% of total revenues.
The Company's quarterly revenue 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, the
timely availability of product supply, competitive conditions and economic
conditions. In particular, the Company currently is increasing certain of
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. Recently the
computer industry has experienced rapid declines in average selling prices
of personal computers. In some instances, the Company has been able to
<PAGE>
offset these price declines with increases in units shipped. There can be
no assurance that average selling prices will not continue to decline or
that the Company will be able to offset declines in average selling prices
with increases in units shipped.
Most of the personal computers shipped by the Company utilize
operating systems developed by Microsoft Corporation. The United States
Department of Justice has brought an antitrust action against Microsoft,
which could delay the introduction and distribution of Microsoft products.
The potential unavailability of Microsoft products could have a material
adverse effect on the Company's business, results of operations and
financial condition.
Year 2000 Issue
Many existing computer systems, including certain of the Company's
internal systems as well as those that the Company sells to customers, use
only the last two digits to identify years in the date field. As a result,
those systems may not accurately distinguish years in the 21st century
from years in the 20th century, or may not function properly when faced
with years later than 1999. This problem is generally referred to as the
"Year 2000 Issue." Computer systems that are able to deal correctly with
dates after 1999 are referred to as "Year-2000-Compliant."
Year 2000 Readiness Disclosure
The Company has undertaken a complete and thorough review of all of
its operations to determine those aspects which involve or are dependent
upon a computer application. The Company is reviewing the software and
operating systems for each such application to determine if it is
Year-2000-Compliant. Any such system or application which is not
Year-2000-Compliant is being modified or upgraded to assure the Company's
continued ability to operate without interruption. This process has been
underway since before January 1, 1998 and is currently on schedule for
completion in the first calendar quarter of 1999. The Company is in the
process of obtaining assurances regarding Year 2000 compliance from other
companies upon which it may rely for products or services.
The Company expects to implement successfully the systems and
programming changes necessary to address the Year 2000 Issue. The Company
expects to implement these changes using primarily internal information
technology and other personnel. Moreover, the Company does not expect the
costs associated with that implementation to be material to the Company's
financial position or results of operations.
With respect to products sold to customers, the Company does not
warrant any products sold as Year-2000-Compliant. Instead, the Company
refers customers to warrantees provided by the product's manufacturers.
The Company believes the most reasonably likely worst case Year 2000
scenario would include a combination of some or all of the following:
- Internal information technology modules or systems may fail to operate
or may give erroneous information. Such failure could result in
shipping delays, inability to generate or delays in generation of
financial reports and statements, inability of the Company to
communicate among its various offices, and computer network downtime
resulting in inefficiencies and higher payroll expenses.
- Components in HVAC, lighting, telephone, security and similar systems
might fail, causing such systems to fail.
- Communications with customers and vendors that the Company depends
upon may fail or give erroneous information. These types of problems
could result in such difficulties as the inability to receive or
process customer orders, shipping delays, or sale of products at
erroneous prices. Furthermore, customers may be unable to, or may
suffer delays, in remitting payments to the Company on timely basis.
<PAGE>
- The unavailability of products as a result of Year 2000 problems
experienced by one or more key vendors of the Company, or as a result
of changes in inventory levels at aggregators, VARs and similar
providers in response to an anticipated Year 2000 problem and/or the
inability of the Company to develop alternative sources for products.
- Products sold to some of the Company's customers could fail to perform
some or all of their intended functions. In such a situation, the
Company's maximum obligation would be to repair or replace the
defective products to the extent the Company is required to do so
under manufacturer warranty.
The Company believes its plans for addressing the Year 2000 Issue as
outlined above are adequate to handle the most reasonably likely worst
case scenario. The Company does not believe it will incur a material
financial impact for the risk of failure, or from the costs associated
with assessing the risks of failure, arising from the Year 2000 Issue.
Consequently, the Company does not intend to create a contingency plan
other than as set forth above. In addition, if the Company's assessment of
its vendors, when completed, indicate that certain product shortages can
be anticipated, the Company may adjust its plans accordingly, although the
Company does believe that it has the capacity to maintain significant
levels of inventory.
The statements above describing the Company's plans and objectives
for handling the Year 2000 Issue and the expected impact of the Year 2000
Issue on the Company are forward-looking statements. Those statements
involve risks and uncertainties that could cause actual results to differ
materially from the results discussed above. Factors that might cause such
a difference include, but are not limited to, delays in executing the plan
outlined above and increased or unforeseen costs associated with the
implementation of the plan and any necessary changes to the Company's
systems. Any inability on the part of the Company to implement necessary
changes in a timely fashion could have an adverse effect on future results
of operations. Moreover, even if the Company successfully implements the
changes necessary to address the Year 2000 Issue, there can be no
assurance that the Company will not be adversely affected by the failure
of others to become Year-2000-Compliant.
Recent Acquisition
On January 2, 1998, the Company acquired all of the outstanding
shares of Coastal Office Products, Inc. ("Coastal"), a Maryland
corporation and a reseller and provider of microcomputer services and
peripherals to companies in the greater Baltimore, Maryland area. The
acquisition, which has been accounted for as a purchase, consisted of a
cash payment of approximately $3.1 million plus potential future
contingent payments. The cash payment was made from the Company's cash
balances. Contingent payments of up to $1,050,000 in each of calendar 1998
and 1999 will be determined based upon Coastal achieving certain agreed
upon increases in revenues and pretax income for calendar 1998 and 1999
over calendar 1997 amounts. Contingent payments, if any, would be paid in
cash (or, under certain conditions, in Company common stock) on March 15,
1999 and March 15, 2000. Operating results of Coastal are included in the
Consolidated Statements of Income from the date of acquisition. The
acquisition resulted in goodwill of $3,836,000, which is being amortized
on the straight-line basis over 20 years.
<PAGE>
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 related revenue or total revenue.
Percentage of Revenues
Three Months Ended
October 31,
1998 1997
---- ----
Product Sales 96.8% 98.0%
Services 3.2 2.0
--- ---
Total revenue 100.0 100.0
----- -----
Cost of Product Sales 86.9 85.9
Cost of Services 60.5 69.9
---- ----
Cost of revenue 86.1 85.6
---- -----
Product Gross Profit 13.1 14.1
Services Gross Profits 39.5 30.1
---- ----
Gross Profit 13.9 14.4
---- ----
Selling, general and
administrative expenses 12.5 12.1
---- -----
Income from operations 1.4 2.3
Interest and other income, net .2 .4
-- ---
Income before income taxes 1.6 2.7
Provision for income taxes .6 1.1
-- ------
Net income 1.0% 1.6%
=== ======
Three Months Ended October 31, 1998 Compared to Three Months Ended October
31, 1997
Revenue. The Company's revenue increased $10.4 million or 22.2% from
$47.1 million for the three months ended October 31, 1997 to $57.5 million
for the three months ended October 31, 1998. Product revenue increased by
$9.6 million (20.7%) due primarily to increases in shipments of personal
computers and monitors, as well as revenue generated by Coastal, partially
offset by lower shipments to the Company's major customer as well as lower
per unit prices for personal computers. Service revenue increased $876,000
(92.4%) as a result of the Company's continued emphasis on providing
value-added services.
Gross Profit. Cost of revenue 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 increased $1.2 million or 18.0%
from $6.8 million for the first quarter of fiscal 1998 to $8.0 million for
the most recent fiscal quarter. Gross profits from the sale of products
increased by $786,000 while gross profit from the sale of services
increased by $435,000. The changes in gross profits primarily results from
the changes in revenue discussed above. As a percentage of revenue, gross
profit decreased to 13.9% in the first quarter of fiscal 1999 as compared
to 14.4% in fiscal 1998. Competitive pressures, changes in types of
products or services sold and product availability result in fluctuation
in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.5 million or 26.1% from $5.7 million
<PAGE>
in the first quarter of fiscal 1998 to $7.2 million in the first quarter of
fiscal 1999. This increase is principally a result of higher salaries and
personnel costs as well as higher advertising and depreciation and
amortization costs resulting from the Company strategy of focusing on
providing value added services. In addition, the Company incurred higher
operating costs associated with the Company's new subsidiary, Coastal
Office Products, Inc.
Interest Income. Interest income decreased from $201,000 in the
first fiscal quarter of 1998 to $115,000 in the first fiscal quarter of
1999 due to lower cash balance availability for investment.
Provision for Income Taxes. The effective income tax rate dropped
slightly to 40% in the current period compared to 41% of pre-tax income in
prior year period.
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 financial institutions.
For the three months ended October 31, 1998, cash provided by
operating activities was $2.5 million consisting primarily of net income
and an increase in accounts payable and accrued expenses, partially offset
by an increase in accounts receivable and inventory. 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 three months ended October 31, 1998 the Company used
approximately $533,000 for capital expenditures.
The Company has available a line of credit with financial
institutions in the aggregate amount of $15.0 million. No amounts were
outstanding under this line as of October 31, 1998.
The Company believes that its current balances in cash and cash
equivalents and investments, 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 1999. The Company currently has no material
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.
New Accounting Standards
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which the Company has adopted
effective August 1, 1998. This statement establishes standards for
reporting information about operating segments, and related disclosures
about product and services, geographic areas and major customers. The
adoption of this statement did not have an impact on the financial
position or results of operations of the Company.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in fiscal 2000. The Company believes that the
implementation of this new pronouncement will have no impact on the
financial position and results of operations of the Company.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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: December 9, 1998 /s/ Barry Steinberg
----------------------
Barry Steinberg
President and Chief Executive Officer
DATE: December 9, 1998 /s/ Joseph Looney
-----------------
Joseph Looney
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 9,802
<SECURITIES> 1,500
<RECEIVABLES> 30,846
<ALLOWANCES> 1,184
<INVENTORY> 9,742
<CURRENT-ASSETS> 51,302
<PP&E> 9,859
<DEPRECIATION> 3,711
<TOTAL-ASSETS> 63,639
<CURRENT-LIABILITIES> 25,593
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 37,856
<TOTAL-LIABILITY-AND-EQUITY> 63,639
<SALES> 57,499
<TOTAL-REVENUES> 57,499
<CGS> 49,486
<TOTAL-COSTS> 49,486
<OTHER-EXPENSES> 7,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> 941
<INCOME-TAX> 373
<INCOME-CONTINUING> 568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 568
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
