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 April 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
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 8,418,800 outstanding shares of COMMON STOCK at May 31,
1998.
<PAGE>
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
April 30, 1998 (unaudited) and July 31, 1997 3
Condensed Consolidated Statements of Income
Three months and nine months ended
April 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 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 1. Legal Proceedings 14
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)
April 30, 1998 July 31, 1997
(Unaudited)
----------- -------------
<TABLE>
<S> <C> <C>
Assets:
Cash and cash equivalents $ 7,290 $15,049
Investments 2,501 4,408
Accounts receivable, net 25,716 21,473
Inventory 5,625 10,127
Deferred income taxes 440 440
Prepaid expenses and other current assets 402 248
--- ---
Total current assets 41,974 51,745
Property and equipment, net 5,911 4,073
Goodwill, net 4,382 1,524
Deferred income taxes 379 379
Other assets 626 487
--- ---
$53,272 $58,208
======= =======
Current maturities under capital
lease obligations $ 145 $ 99
Notes payable - bank - 1,274
Notes payable - other - 264
Accounts payable and accrued expenses 13,988 19,283
Deferred service revenue 570 247
--- ---
Total current liabilities 14,703 21,167
Capital lease obligations, less current maturities - 77
Deferred compensation payable 87 87
-- --
Total liabilities 14,790 21,331
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,545,000 and 8,525,000 issued 85 85
Additional paid-in capital 20,527 20,403
Treasury stock (22,400 shares) (99) -
Retained earnings 17,969 16,389
------ ------
Total shareholders' equity 38,482 36,877
------ ------
$53,272 $58,208
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Products $52,655 $43,405 $147,071 $138,041
Services 1,514 765 3,526 1,800
----- --- ----- -----
54,169 44,170 150,597 139,841
------ ------ ------- -------
Cost of revenue
Products 45,026 37,385 126,292 119,039
Services 1,160 347 2,626 884
----- --- ----- ---
46,186 37,732 128,918 119,923
------ ------- ------- -------
Gross profit 7,983 6,438 21,679 19,918
Selling, general and
administrative expenses 7,086 5,194 19,490 15,487
----- ----- ------ ------
Income from operations 897 1,244 2,189 4,431
Interest expense ( 5) ( 2) (38) (193)
Interest income 82 217 486 344
Other income - - - 23
--- ----- ---- --
Income before income taxes 974 1,459 2,637 4,605
Provision for income taxes 387 589 1,057 1,885
--- --- ----- -----
Net income $ 587 $870 $1,580 $2,720
===== ==== ====== ======
Net Income per share
Basic $0.07 $ 0.10 $0.19 $0.36
===== ======= ===== =====
Diluted $0.07 $ 0.10 $0.19 $0.36
===== ======= ===== =====
Weighted average
shares outstanding
Basic 8,542 8,525 8,533 7,531
===== ===== ===== =====
Diluted 8,548 8,525 8,535 7,531
===== ===== ===== =====
</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 nine months ended April 30,
1998 1997
(Unaudited)
-----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,580 $2,720
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 900 450
Allowance for doubtful accounts 288 210
Stock compensation expense 44 6
Change in assets and liabilities net of the effects
of acquisitions:
Increase in accounts receivable (4,063) (1,606)
Decrease (increase) in inventory 5,424 (514)
Decrease (increase) in prepaid expenses and
other current assets (124) 128
Decrease (increase) in other assets 21 (168)
(Decrease) increase in accounts payable and
accrued expenses (6,367) 1,009
(Decrease) increase in deferred service contract revenue 8 (16)
Decrease in income taxes payable - (295)
Increase in deferred compensation payable - 85
Net cash provided by (used in) operating activities (2,289) 2,009
Cash flows from investing activities:
Capital expenditures (2,525) (881)
Proceeds from sale of assets - 54
Proceeds from sale of (payment for purchase of) investments 1,907 (2,947)
Payment for acquisitions, net of cash acquired (2,921) (1,857)
----- -----
Net cash used in investing activities (3,539) (5,631)
------ ------
Cash flows from financing activities:
Net repayments of borrowings (1,274) (6,500)
Payments on notes payable-shareholder - (353)
Payments on capital lease obligations (77) (64)
Net proceeds from initial public offering - 20,414
Purchase of treasury stock (99) -
Payments on notes payable - other (481) -
--- --------
Net cash (used in) provided by financing activities (1,931) 13,497
----- ------
Net increase (decrease) in cash and cash equivalents (7,759) 9,875
Cash and cash equivalents at beginning of period 15,049 5,774
------ -----
Cash and cash equivalents at end of period $7,290 $15,649
====== =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Operations and Basis of Presentation
Manchester Equipment Co., Inc. (the "Company") is an 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 April 30, 1998 and the results of
operations for the three months and nine months ended April 30, 1998 and
1997 and cash flows for the nine months ended April 30, 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, 1997, 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 and nine month
periods ended April 30, 1998 have 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. 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 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. Acquisitions
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
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. The cash payment was made from the Company's
cash balances. The amounts of the contingent payments will be determined
based upon achieving certain agreed upon increases in revenues and pretax
income 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 Condensed
Consolidated Statements of Income from the date of acquisition. The
acquisition resulted in goodwill of $2,965,000 which is being amortized on
the straight-line basis over 20 years.
<PAGE>
Electrograph Systems, Inc.:
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of
Bitwise Designs, Inc. Electrograph is a specialized distributor of
microcomputer peripherals, primarily in the eastern United States. The
purchase price and transaction costs aggregated approximately $2.6 million.
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the Condensed Consolidated
Statements of Income from the date of acquisition. The acquisition resulted
in goodwill of $1,543,000 which is being amortized on the straight-line
basis over 20 years.
The following unaudited pro forma consolidated results of operations
for the nine months ended April 30, 1998 and 1997 assume that the Coastal
and Electrograph acquisitions occurred on August 1, 1996 and reflect the
historical operations of the purchased businesses adjusted for lower
interest on invested funds, contractually revised officer compensation and
rent and increased amortization, net of applicable income taxes, resulting
from the acquisitions:
<TABLE>
<CAPTION>
Nine months ended
April 30,
1998 1997
(in thousands, except
per share amounts)
<S> <C> <C>
Revenue $154,172 $161,323
Net income 1,605 2,907
Net income per share $0.19 $0.39
</TABLE>
The pro forma results of operations are not necessarily indicative of
the actual results that would have occurred had the acquisitions been made
at the beginning of the period, or of results which may occur in the
future.
5. Legal Proceedings
On January 12, 1998, the Company announced that it had reached an
agreement in principle settling the Shareholder Securities Class Action
("Lawsuit") filed against the Company and certain of its officers in March
1997. The proposed settlement, which is subject to court approval, would
result in the distribution of $1,350,000 minus approved attorney's fees and
related expenses, to purchasers of the Company's common stock in the
Company's initial public offering, and during the period of November 26,
1996 to February 13, 1997. The entire $1,350,000 cash settlement is to be
paid by the Company's insurance carrier.
The settlement will include a release of all claims that were asserted
or that could have been asserted in the Lawsuit against the Company and its
officers and directors. The Company agreed to the settlement solely to
avoid the expense, burdens and uncertainties of further litigation and
continues to deny that it has any liability on account of the matters
asserted in the litigation or that the Plaintiffs' claims have merit.
<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 or 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, 1997, and those set forth in the Company's other filings from time
to time with the Securities and Exchange Commission.
General
Manchester is an 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 from 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 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 8% and 14%
(or $11,355,000, and $20,069,000, respectively) of the Company's revenue
for the nine months ended April 30, 1998 and 1997, respectively,
substantially all of which revenue was derived from the sale of hardware
products. This customer accounted for 15% of revenue for the fiscal year
ended July 31, 1997. There can be no assurance that the Company will
continue to derive substantial revenue from this customer.
<PAGE>
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.
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 April 30, 1998 and 1997, inventories
represented 11% and 19%, respectively, of total assets. For the nine months
ended April 30, 1998 and 1997, annualized inventory turnover was 30 and 14
times, respectively. Inventory turned 17 times in the fiscal year ended
July 31, 1997. 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 revenue in each of the nine month periods ended
April 30, 1998 and 1997. For the fiscal year ended July 31, 1997, 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 revenue 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 that 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
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.
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 our continued ability to operate
without interruption. This process has been underway since before January
1, 1998 and is currently on schedule for completion before January 1, 1999.
The Company intends to secure assurances regarding Year 2000 compliance
from other companies upon which we may rely for products or services.
Most of the personal computers shipped by the Company utilize
operating systems developed by Microsoft Corporation. Windows 98,
Microsoft's latest operating system, is expected to be available in June
1998. The United States Department of Justice has brought an antitrust
action against Microsoft, which could delay the introduction and
distribution of this, and other 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.
<PAGE>
The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he receives annual compensation of
$550,000, exclusive of fringe benefits, through the end of fiscal 1998. In
addition, the Company's Executive Vice President has agreed to receive
annual base compensation, exclusive of fringe benefits, of $450,000 through
the end of fiscal 1998. These officers agreed not to, and did not, receive
any bonuses for fiscal 1997 and further agreed 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 facilities and offices from entities that are owned or
controlled by the Company's majority shareholder. Each of the leases with
related parties was amended effective with the closing of the Company's
Initial Public Offering to reduce the rent payable under that lease to then
current market rates.
<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.
<TABLE>
<CAPTION>
Percentage of Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product Sales 97.2% 98.3% 97.7% 98.7%
Services 2.8 1.7 2.3 1.3
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of Product Sales 85.6 86.1 85.9 86.2
Cost of Services 76.6 45.4 74.5 49.1
---- ---- ---- ----
Cost of revenue 85.3 85.4 85.6 85.8
---- ----- ---- ----
Product Gross Profit 14.4 13.9 14.1 13.8
Services Gross Profit 23.4 54.6 25.5 50.9
---- ---- ---- ----
Gross Profit 14.7 14.6 14.4 14.2
Selling, general and
administrative expenses 13.1 11.8 12.9 11.0
---- ---- ---- ----
Income from operations 1.6 2.8 1.5 3.2
Interest and other income, net 0.2 0.5 0.3 0.1
--- --- --- ---
Income before income taxes 1.8 3.3 1.8 3.3
Provision for income taxes 0.7 1.3 0.7 1.4
--- --- --- ---
Net income 1.1% 2.0% 1.1% 1.9%
=== === === ===
</TABLE>
Three Months Ended April 30, 1998 Compared to Three Months Ended April 30, 1997
Revenue. The Company's revenue increased $10.0 million or 22.6% from $44.2
million for the three months ended April 30, 1997 to $54.2 million for the three
months ended April 30, 1998. Product revenue increased by $9.2 million (21.3%)
due primarily to revenue generated from the Company's new wholly-owned
subsidiaries, Electrograph Systems, Inc. ("Electrograph"), which was acquired on
April 25, 1997, and Coastal, which was acquired on January 2, 1998, as well as
increases in the number of personal computers shipped. These increases were
partially offset by lower shipments to the Company's major customer and lower
per unit prices for personal computers. Service revenue increased $749,000 (98%)
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 $1.5 million or 24.0% from $6.4 million for the
third quarter of fiscal 1997 to $8.0 million for the most recent fiscal quarter.
Gross profit from the sale of products increased by $1.6 million while gross
profit from the sale of services declined by $64,000. The changes in gross
profit from the sale of products primarily results from the changes in revenue
discussed above. The decline in gross profit from services is due to increases
in salaries and personnel involved in providing technical services, partially
<PAGE>
offset by higher revenue. The current quarter cost of services reflects the
costs of technical and engineering personnel added, principally in the previous
fiscal quarter, as a part of the Company's strategy to grow higher margin
service related business. As a percentage of revenue, gross profit increased to
14.7% in fiscal 1998 as compared to 14.6% in fiscal 1997. 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 $1.9 million or 36.4% from $5.2 million in the
third quarter of fiscal 1997 to $7.1 million in the second quarter of fiscal
1998. This increase is principally a result of higher salaries and personnel
costs related to the Company's increased emphasis on providing value-added
services as well as additional operating costs associated with the Company's new
subsidiaries, Electrograph and Coastal, which were acquired on April 25, 1997
and January 2, 1998, respectively, and higher depreciation and amortization,
training, and legal costs partially offset by lower advertising expenses.
Interest Income. Interest income decreased from $217,000 in fiscal 1997 to
$82,000 in fiscal 1998 due to lower cash balances available for investment.
Provision for Income Taxes. The effective income tax rate remained
relatively constant at approximately 40% of income before income taxes.
Nine Months Ended April 30, 1998 Compared To Nine Months Ended April 30, 1997
Revenue. The Company's revenue increased by $10.8 million (7.7%) from
$139.8 million for the first nine months of fiscal 1997 to $150.6 million for
the first nine months of fiscal 1998. The increase is due to revenue from newly
acquired subsidiaries partially offset by lower shipments to the Company's major
customer and lower per unit prices for personal computers. Revenue from services
increased by 96% over service revenue for the prior nine month fiscal period
while product revenue increased by 6.5% from fiscal 1997 amounts.
Gross Profit. Gross profit increased $1.8 million (8.8%) from $19.9 million
for the first nine months of fiscal 1997 to $21.7 million for the most recent
nine month period. Margins on product sales improved to 14.1% versus 13.8% due
to better product mix while margins on service offerings declined from 50.9% to
25.5% primarily due to higher salaries and additions to personnel in the
technical services area.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.0 million (25.8%) from $15.5 million in
fiscal 1997 to $19.5 in fiscal 1998. This increase is primarily due to increases
in the personnel infrastructure as the Company continues to build its sales and
service organization and increase its emphasis on providing value added
services. Furthermore, selling, general and administrative expenses increased
due to the addition of the two new subsidiaries that were not a part of the
Company in the comparable period a year ago, as well as higher depreciation and
amortization, training and legal expenses partially offset by lower advertising
costs.
Interest Income. Interest income increased due to earnings on investments
made with the proceeds from the Company's initial public offering.
Provisions For Income Taxes. The effective income tax rate remained
relatively constant at approximately 40% of income before income taxes.
<PAGE>
Liquidity and Capital Resources
Historically, 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.
For the nine months ended April 30, 1998, cash used in operating activities
was $2.3 million consisting primarily of an increase in accounts receivable and
a decrease in accounts payable and accrued expenses, partially offset by net
income and a decrease in 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 nine months ended April 30,
1998 the Company used approximately $2.5 million for capital expenditures, $1.8
million to repay indebtedness and $2.9 million (net of cash acquired) to acquire
Coastal and generated $1.9 million from the sale of investments. On December 2,
1996, the Company completed an initial public offering (the "Offering") of
2,325,000 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 and a subsidiary have available lines of credit with a
financial institution in the aggregate amount of $10.0 million. As of April 30,
1998, no amounts are outstanding under these lines.
The Company believes that its current balances in cash and cash equivalents
and investments, expected cash flows from operations and available borrowings
under the lines of credit will be adequate to support current operating levels
for the foreseeable future, specifically through at least the end of fiscal
1998. On March 10, 1998, the Company announced that its Board of Directors
authorized the expenditure, through February 28, 1999, of up to $1.8 million to
repurchase its common stock. As of May 19, 1998, approximately $1.3 million
remains available for repurchases under the program. The Company has entered
into commitments for the renovation and expansion of certain of its sales and
service facilities. The aggregate remaining commitment for these projects is
approximately $500,000, which will be paid out of the Company's available cash
balances. The Company currently has no other 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 12, 1998, the Company announced that it had reached an
agreement in principle settling the Shareholder Securities Class Action
("Lawsuit") filed against the Company and certain of its officers in March
1997. The proposed settlement, which is subject to court approval, would
result in the distribution of $1,350,000 minus approved attorney's fees
and related expenses, to purchasers of the Company's common stock in the
Company's initial public offering, and during the period of November 26,
1996 to February 13, 1997. The entire $1,350,000 cash settlement is to be
paid by the Company's insurance carrier.
The settlement will include a release of all claims that were
asserted or that could have been asserted in the Lawsuit against the
Company and its officers and directors. The Company agreed to the
settlement solely to avoid the expense, burdens and uncertainties of
further litigation and continues to deny that it has any liability on
account of the matters asserted in the litigation or that the Plaintiffs'
claims have merit.
Item 2. Changes in Securities
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: June 10, 1998 ss: Barry Steinberg
---------------
Barry Steinberg
President and Chief Executive Officer
DATE: June 10, 1998 ss: Joseph Looney
-------------
Joseph Looney
Chief Financial Officer
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