FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[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 1-4310
FEDERATED PURCHASER, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 22-1589344
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
268 CLIFFWOOD AVENUE, CLIFFWOOD, NEW JERSEY 07721
(Address of principle executive offices)
(Zip Code)
(908) 290-2900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of May 27, 1998,
there are 1,719,758 shares of common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
<PAGE>
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
April 30, October 31,
1998 1997
(Unaudited)
CURRENT ASSETS:
Cash $ 76,229 $ 69,358
Accounts receivable, less allowance for doubtful
accounts of $19,803 at April 30, 1998 and $16,803
at October 31, 1997, respectively 386,532 384,059
Inventories 194,941 228,583
Prepaid expenses and sundry receivables 1,606 49,754
Note receivable - Freedom Electronics Corporation 107,500 27,500
Restrictive covenant receivable 15,000 24,375
TOTAL CURRENT ASSETS 781,808 783,629
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation of $131,347 and $126,687 15,941 20,600
OTHER ASSETS:
Note receivable, Freedom Electronics Corporation,
net of current portion - 92,500
Security deposits 10,845 10,845
Other 93,601 93,601
TOTAL OTHER ASSETS 104,446 196,946
TOTAL ASSETS $ 902,195 $1,001,175
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,254 $ 8,331
Accounts payable 613,686 468,479
Accrued expenses 36,772 31,984
TOTAL CURRENT LIABILITIES 653,712 508,794
DEFERRED INCOME 15,000 24,375
TOTAL LIABILITIES 668,712 533,169
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
Authorized, 5,000,000 shares,
Issued and outstanding, 1,719,758 shares 171,976 171,976
Additional paid-in capital 1,692,342 1,692,342
Accumulated deficit (1,569,757) (1,335,234)
Total 294,561 529,084
Less: Treasury stock at cost 61,078 61,078
TOTAL STOCKHOLDERS' EQUITY 233,483 468,006
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 902,195 $1,001,175
(1)
<PAGE>
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
APRIL 30, APRIL 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SALES $ 721,263 $ 876,689 $1,387,296 $1,678,386
OPERATING EXPENSES:
Cost of sales 547,181 672,835 1,045,954 1,282,995
Selling, shipping and general and administrative 296,843 266,710 583,164 498,674
Interest expense 840 708 1,694 1,307
Depreciation and amortization 2,188 3,290 4,661 6,146
TOTAL OPERATING EXPENSES 847,052 943,543 1,635,473 1,789,122
LOSS FROM OPERATIONS (125,789) (66,854) (248,177) (110,736)
OTHER INCOME:
Restrictive covenant 3,750 9,375 9,375 13,125
Interest income 1,298 3,908 3,340 6,883
Miscellaneous income 1,639 - 1,639 -
TOTAL OTHER INCOME 6,687 13,283 14,354 20,008
LOSS BEFORE PROVISION FOR
INCOME TAXES (119,102) (53,571) (233,823) (90,728)
PROVISION FOR INCOME TAXES 200 - 700 975
NET LOSS $ (119,302) $ (53,571) $ (234,523) $ (91,703)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,611,317 1,611,317 1,611,317 1,611,317
LOSS PER BASIC AND DILUTED
COMMON SHARE $ (.07) $ (.03) $ (.14) $ (.06)
CASH DIVIDEND PER COMMON SHARE $ .00 $ .00 $ .00 $ .00
</TABLE>
(2)
<PAGE>
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED APRIL 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
Held in
Additional Treasury
COMMON STOCK Paid-in Accumulated AT COST
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCES - November 1, 1996 1,719,758 $171,976 $1,692,342 $(1,053,333) 108,441 $61,078
Net loss - - - (91,703) - -
BALANCES - April 30, 1997 1,719,758 $171,976 $1,692,342 $(1,145,036) 108,441 $61,078
BALANCES - November 1, 1997 1,719,758 $171,976 $1,692,342 $(1,335,234) 108,441 $61,078
Net loss - - - (234,523) - -
BALANCES - April 30, 1998 1,719,758 $171,976 $1,692,342 $(1,569,757) 108,441 $61,078
</TABLE>
(3)
<PAGE>
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1998 AND 1997
(Unaudited)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (234,523) $ (91,703)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 4,661 6,146
Allowance for doubtful accounts 6,000 3,000
(Increase) decrease in operating assets:
Accounts receivable (8,475) 8,163
Inventories 33,642 25,148
Prepaid expenses and sundry receivables 48,148 6,960
Increase (decrease) in operating liabilities:
Accounts payable 145,207 80,871
Accrued expenses 4,788 (52,818)
NET CASH USED BY OPERATING ACTIVITIES (552) (14,233)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of note receivable 12,500 10,000
Increase in association membership costs - (2,273)
NET CASH PROVIDED BY INVESTING ACTIVITIES 12,500 7,727
CASH FLOWS USED BY FINANCING ACTIVITIES:
Payments on long-term debt (5,077) (5,312)
NET INCREASE (DECREASE) IN CASH 6,871 (11,818)
CASH - beginning 69,358 95,918
CASH - ending $ 76,229 $ 84,100
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,694 $ 1,307
(4)
<PAGE>
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
(Unaudited)
NOTE 1
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of April 30, 1998 and the
results of operations for the six months ended April 30, 1998 and 1997.
NOTE 2
The results of operations for the six months ended April 30, 1998 and 1997 are
not necessarily indicative of the results to be expected for the full year.
(5)
<PAGE>
Item 2.
FEDERATED PURCHASER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
The Company recognized a loss of $234,523 for the six months ended April 30,
1998 on net sales of $1,387,296 compared to a loss of $91,703 for the six
months ended April 30, 1997 on net sales of $1,678,386. The loss of $234,523
for the current six month period represents an increase of $142,820 in the loss
from the prior year to the current year. The net loss for the three months
ended April 30, 1998 was $119,302 compared to a net loss of $53,571 for the six
months ended April 30, 1997. The current three-month loss of $119,302 is
$65,731 higher than the prior year for the same three-month period. As a
result of negative cash flows associated with these losses, as of April 30,
1998, working capital had decreased to $128,096 and the Company had an
accumulated deficit of $1,569,757. Because the Company currently has no
access to any outside source of capital (except for an existing equipment
financing arrangement), management must meet its short-term capital
requirements solely from cash from operations (if any) and existing cash
reserves. At April 30, 1998, the Company's cash reserves were $76,229. There
can be no assurance that the Company's cash reserves will be sufficient to
satisfy the Company's capital requirements or that the Company's inability to
obtain capital from outside sources will not force the Company to seek
protection under the United States Bankruptcy Code.
Net sales were $1,387,296 for the six months ended April 30, 1998 as compared
to $1,678,386 for the six months ended April 30, 1997, a decrease of $291,090
or 17.3% under the prior year. Net sales were $721,263 for the three months
ended April 30, 1998 as compared to $876,689 for the six months ended April 30,
1997, a decrease of $155,426 or 17.7% under the prior year for the same three-
month period. This decrease in net sales is a result of intense competition
from larger competitors, as well as certain other industry trends which
negatively impact smaller electronics distributors such as the Company. These
competitive circumstances have continued to reduce the Company's sales volume,
which, along with gross margins, must improve in the short-term for the Company
to reverse its negative results of operations. The likelihood of achieving the
necessary increases in both sales volume and gross margins continues to be
compromised by several factors, including the loss of certain customers due to
the departure of key sales personnel, intense industry competition which has
resulted in management seeking additional sales volume through price
reductions, and certain other industry trends which adversely impact smaller
electronics distributors. These trends include the consolidation of other
small distributors, the increase in the use of technology (which Federated's
limited capital resources have not permitted it to acquire), the diminished
availability of capital within the business, marketplace changes favoring
value-added services, and the reduction of franchises by major vendors. While
management continues its effort to improve sales volume while preserving the
Company's current customer base, there can be no assurances that management
will succeed in achieving the sales increases, improved margins and cost
reductions which are necessary to reverse the Company's negative results of
operations.
Costs of sales were $1,045,954 for the six months ended April 30, 1998 compared
to $1,282,995 for the six months ended April 30, 1997. Costs of sales were
$547,181 for the three months ended April 30, 1998 compared to $672,835 for the
three months ended April 30, 1997. The decrease in cost of sales for both the
six months and three months ended April 30, 1998 is the result of the Company's
decrease in sales volume. The gross profit percentage for the six months ended
April 30, 1998 was 24.6% compared to 23.3% for the six months ended April 30,
1997. The increase in gross profit percentage is the result of modest
increases in sales prices to customers.
(6)
<PAGE>
The gross profit percentage for the three months ended April 30, 1998 was 24.1%
compared to 23.3% for the three months ended April 30, 1997. There can be no
assurances that the improvement in Federated's gross profit percentage can be
sustained, or that lower gross profits associated with the reduction in sales
volume will not force Federated to seek protection under the United States
Bankruptcy Code.
Selling, shipping and general and administrative ("SSG&A") expenses were
$583,164 for the six months ended April 30, 1998, compared to $498,674 for the
six months ended April 30, 1997, an increase of $84,490 or 16.9% over the prior
year. The increase is primarily the result of an increase of $5,000 in office
salaries and an increase of $80,000 in professional fees. For the three months
ended April 30, 1998, selling, shipping and general and administrative expenses
were $296,843 as compared to $266,710 for the six months ended April 30, 1997,
an increase of $30,133 over the prior year. The increase is primarily the
result of an increase of $42,000 in professional fees, and a decrease of
$10,000 in sales salaries. Management anticipates that further reductions in
SSG&A expenses will be necessary to reverse Federated's negative results of
operations.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
became effective for financial statements for periods ending after December 31,
1997, and requires presentation of two calculations of earnings per common
share. "Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings per
common share equals net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. The
Company's Basic and Diluted per share amounts are the same since there are no
outstanding common stock equivalents. The Company restated all prior period
amounts to reflect these calculations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position has been and continues to be adversely
affected by a variety of factors, including the operating loss of $281,901 for
the year ended October 31, 1997 and the operating loss of $243,523 for the six
months ended April 30, 1998. Moreover, the Company's liquidity position may be
further negatively impacted to the extent that certain trends, including
intense competition from larger competitors in the electronics industry and the
migration of certain customers, from smaller to larger distributors, continue
to decrease the Company's sales levels, gross profit margins, or both. The
Company's ability to satisfy its fixed costs of operations in the future will
depend upon management's success in increasing sales, improving gross margins,
reducing operations costs, securing additional lines of credit from outside
lenders or entering into strategic alliances. There can be no assurances that
the Company's liquidity position will not continue to be impaired both in the
short-term and in the future. Due to Federated's impaired liquidity position,
negative financial performance, reliance on cash to sustain operations and
certain other factors, Federated's independent auditors raised substantial
doubt regarding Federated's ability to continue as a going concern in
Federated's annual report for the year ended October 31, 1997. If Federated is
not successful in achieving any or all of its strategic objectives, it may have
to seek protection under the United States Bankruptcy Code.
Cash and cash equivalents increased by $6,871 for the six months ended April
30, 1998 compared to a decrease of $11,818 for the six months ended April 30,
1997. For the six months ended April 30, 1998, the Company used cash from
operating activities of $552 primarily from the loss of $234,523, an increase
of $149,995 in accounts payable and accrued expenses, a decrease of $33,642 in
inventories and a decrease of $48,148 in prepaid expenses. For the six months
ended April 30, 1997, the Company used net cash of $14,233 from operating
activities primarily as a result of the operating loss of $91,703, a decrease
of $25,148 in inventories, a decrease of $8,163 in accounts receivable, a
decrease of $52,818 in accrued expenses and an increase of $80,871 in accounts
payable. The Company provided cash of $12,500 from investing activities for
the six months ended April 30, 1998 by collections on a note receivable.
(7)
<PAGE>
The Company provided cash of $7,727 from investing activities for the six
months ended April 30, 1997 primarily from the $10,000 collection of a note
receivable. The Company used cash in financing activities for the six months
ended April 30, 1998 for reducing long-term debt for $5,077 and for the six
months ended April 30, 1997 for reducing long-term debt for $5,312.
Based upon the Company's continuing losses, the Company has experienced periods
of declining cash balances, which have negatively impacted the accounts payable
balances of trade creditors. The Company has been slow in the payment of its
accounts payable and approximately 55% of its accounts payable are more than 30
days old and 32% are more than 60 days old as of April 30, 1998. On open trade
accounts payable for unsecured creditors, the Company has no knowledge of any
pending or threatened legal actions which would force the Company into
bankruptcy. As of April 30, 1998, open trade accounts payable and accrued
expenses for unsecured creditors totaled $650,458. Secured creditors on long-
term debt, namely for the purchase of computer equipment totaled $3,254. The
Company anticipates that the increased cash flow and greater efficiency
resulting from the Exchange will enable it to resume a current payment
schedule, and plans to do so as soon as it becomes practicable; although its
ability to do so quickly is limited by the fact that Federated is not receiving
cash under the Exchange
CAPITAL RESOURCES - WORKING CAPITAL REQUIREMENTS
Federated currently has no access to any outside source of capital, except for
approximately $3,254 outstanding under an existing equipment financing
arrangement. While management continues to seek new sources of financing from
other financial institutions, no such arrangements have yet been established.
As a result, management must meet substantially all of its short-term capital
requirements from cash from operations (if any) and existing cash reserves
which continue to deteriorate as a result of the Company's recurring operating
losses. There can be no assurances that the Company's current cash reserves
will be sufficient to satisfy the Company's financing requirements or that the
Company's inability to obtain capital from outside sources will not impair its
ability to continue future operations.
Federated maintains their records on the accrual basis of accounting. Income
is earned and recorded at the time of shipment which is when title passes.
Expenses are recorded when incurred. Any merchandise returned by customers in
the normal course of business must be pre-approved by management.
In conjunction with the sale of all the common stock of its wholly-owned
subsidiary, Freedom Electronics Corporation, on November 14, 1994, Federated
entered into a noncompete agreement with the purchases. The $90,000 noncompete
agreement is being recognized into income over the four-year term of the
agreement based upon monthly installments received.
The Company's balance sheet at April 30, 1998 reflects working capital of
$128,096 as compared to $405,597 at April 30, 1997, which represents a decrease
of $277,501.
The Company' stockholders' equity amounted to $233,483 at April 30, 1998,
equivalent to a book value per common share of $.14. As of April 30, 1997,
stockholders' equity amounted to $658,204 equivalent to a book value per common
share of $.41.
(8)
<PAGE>
On October 1, 1997, Federated Purchaser, Inc. signed an agreement whereby
Federated will acquire all of the outstanding shares of stock of Wise
Components, Inc. in an exchange of stock which will be accounted for as a
purchase (the "Exchange"). As noted at Part II, Item 4 below, on May 28, 1998,
the shareholders approved an amendment (the "Amendment") to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock. The Amendment permits the Company to issue sufficient shares
under the terms of the Exchange, which has not yet closed. The parties to the
Exchange are continuing to negotiate certain provisions regarding the closing,
and there can be no assurance that the Exchange will ultimately be consummated.
If the Company is not successful in consummating the Exchange, it may have to
seek protection under the United States Bankruptcy Code.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 28, 1998, a Special Meeting of Shareholders was held to approve an
amendment to the Company's Certificate of Incorporation to increase the number
of shares of Common Stock authorized from 5,000,000 to 10,000,000. 1,004,052
shares of Common Stock were voted in favor of the amendment, 25,127 were
opposed, and 3,045 abstained.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
The Company was not required to report any material, unusual charges or credits
to income pursuant to Item 10(a) or a change in independent accountants
pursuant to Item 12 of Form 8-K for the six months ended April 30, 1997 other
than which has been reported.
There were no securities of the Company sold by the Company during the six
months ended April 30, 1998, which were not registered under the Securities Act
of 1933, in reliance upon an exemption from registrations provided by Section
4(2) of the Act.
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.
FEDERATED PURCHASER, INC.
(Registrant)
/s/ Harry J. Fallon
_____________________________________
Harry J. Fallon, President and
Principal Accounting Officer
6/15/98
Date
(9)
