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 JANUARY 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 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 March 9, 1998,
there were 1,719,758 shares of common stock outstanding.
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
JANUARY 31, OCTOBER 31,
1998 1997
(Unaudited)
CURRENT ASSETS:
Cash $ 135,589 $ 69,358
Accounts receivable, less allowance for doubtful
accounts of $18,303 at January 31, 1998 and
$16,803 at October 31, 1997, respectively 302,184 384,059
Inventories 246,148 228,583
Prepaid expenses and sundry receivables 5,989 49,754
Note receivable - Freedom Electronics Corporation 115,000 27,500
Restrictive covenant receivable 18,750 24,375
TOTAL CURRENT ASSETS 823,660 783,629
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation of $118,115 and $115,259 18,127 20,600
OTHER ASSETS:
Note receivable - over one year - 92,500
Security deposits 10,845 10,845
Other 93,601 93,601
TOTAL OTHER ASSETS 104,446 196,946
TOTAL ASSETS $ 946,233 $1,001,175
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,910 $ 8,331
Accounts payable 511,648 468,479
Accrued expenses 57,140 31,984
TOTAL CURRENT LIABILITIES 574,698 508,794
LONG-TERM DEBT, net of current portion - -
DEFERRED INCOME 18,750 24,375
TOTAL LIABILITIES 593,448 533,169
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 (1,450,455) (1,335,234)
Total 413,863 529,084
Less: Treasury stock at cost 61,078 61,078
TOTAL STOCKHOLDERS' EQUITY 352,785 468,006
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 946,233 $1,001,175
2
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
1998 1997
SALES $ 666,033 $ 801,697
OPERATING EXPENSES:
Cost of sales 498,773 610,160
Selling, shipping and general and administrative 286,321 231,964
Interest expense 854 599
Depreciation and amortization 2,473 2,856
TOTAL OPERATING EXPENSES 788,421 845,579
LOSS FROM OPERATIONS (122,388) (43,882)
OTHER INCOME:
Restrictive covenant 2,042 3,750
Interest income 5,625 2,975
TOTAL OTHER INCOME 7,667 6,725
LOSS BEFORE PROVISION FOR INCOME TAXES (114,721) (37,157)
PROVISION FOR INCOME TAXES 500 975
NET LOSS $ (115,221) $ (38,132)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 1,611,317 1,611,317
LOSS PER COMMON SHARE $ (.07)$ (.02)
CASH DIVIDEND PER COMMON SHARE $ .00 $ .00
3
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
COMMON STOCK
ADDITIONAL HELD IN
COMMON STOCK Paid-inAccumulated TREASURY AT COST
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
BALANCES - November 1, 1996 1,719,758 $171,976 $1,692,342 $(1,053,333) 108,441 $61,078
Net loss - - - (38,132) - -
BALANCES - January 31, 1997 1,719,758 $171,976 $1,692,342 $(1,091,465) 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 - - - (115,221) - -
BALANCES - January 31, 1998 1,719,758 $171,976 $1,692,342 $(1,450,455) 108,441 $61,078
4
FEDERATED PURCHASER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(115,221) $ (38,132)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 2,473 2,856
Allowance for doubtful accounts 1,500 1,500
(Increase) decrease in operating assets:
Accounts receivable 80,375 80,133
Inventories (17,565) 59,172
Prepaid expenses and sundry receivables 43,765 8,597
Increase (decrease) in operating liabilities:
Accounts payable 43,169 (104,361)
Accrued expenses 25,156 (10,521)
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 63,652 (756)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection on note receivable 5,000 5,000
Payments on notes payable and long-term debt (2,421) (2,655)
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,579 2,345
NET INCREASE IN CASH 66,231 1,589
CASH - beginning 69,358 95,918
CASH - end $ 135,589 $ 97,507
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 854 $ 599
5
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 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 JANUARY 31, 1998 AND THE RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JANUARY 31, 1998 AND 1997.
NOTE 2
THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1998
AND 1997 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED
FOR THE FULL YEAR.
6
ITEM 2.
FEDERATED PURCHASER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIODS ENDED JANUARY 31, 1998 AND 1997
RESULTS OF OPERATIONS
The Company recognized a loss of $115,221 on net sales of $666,033 for
the three months ended January 31, 1998, as compared to a loss of $38,132 on
net sales of $801,697 for the three months ended January 31, 1997. The current
period loss of $115,221 is $77,089 higher than the prior year for the same
three month period.
Net sales were $666,033 for the three months ended January 31, 1998,
compared to $801,697 for the three months ended January 31, 1997, for a
decrease of $135,664, or 16.9%, over the prior year. The decrease in net sales
for the current three month period ended January 31, 1998, as compared to the
three month period ended January 31, 1997, is due to intense competition,
particularly in the Northeast United States, and trends adversely affecting the
electronics industry as a whole. These competitive circumstances have
continued to reduce Federated's sales volume, which, along with gross margins,
must improve in the short-term and in the long-term for Federated 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
Federated'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 Federated's negative results of
operations.
Cost of sales were $498,773 for the three months ended January 31, 1998
as compared to $610,160 for the three months ended January 31, 1997, a decrease
of $111,387 or 18.3% over the prior year. The decrease is the result of the
decrease in sales volume for the three months ended January 31, 1998 as
compared to the three months ended January 31, 1997. The gross profit
percentage for the three months ended January 31, 1998 was 25.1% as compared to
23.9% of the three months ended January 31, 1997 or an increase of 1.2% over
the prior year. The increase in gross profit percentage is the result of
modest increases in sales prices to customers. There can be no assurances that
the minor 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
$286,321 for the three months ended January 31, 1998, as compared to $231,964
for the three months ended January 31, 1997, an increase of $54,357 over the
prior year. The increase is primarily the result of an increase of
approximately $14,000 in sales salaries and an increase of approximately
$38,000 in professional fees. Management anticipates that further reductions
in SSG&A expenses will be necessary to reverse Federated's negative results of
operations.
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 $115,221 for the
three months ended January 31, 1998. Moreover, the Company's liquidity
position may be 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, 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 operating costs and securing additional lines of credit
from outside lenders or entering into strategic alliances. There can be no
7
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 projection under the United States Bankruptcy Code.
Cash and cash equivalents increased by $66,231 for the three months ended
January 31, 1998 compared to an increase of $1,589 for the three months ended
January 31, 1997. For the three months ended January 31, 1998, the Company
provided cash from operating activities primarily from a decrease in accounts
receivable of $80,375, and increase of $68,325 in accounts payable and accrued
expenses and the loss from the quarter of $115,221. For the three months ended
January 31, 1997, the Company used net cash of $756 from operating activities
primarily as the result of the operating loss of $38,132, a decrease of $80,133
in accounts receivable, a decrease of $59,172 in inventories and a decrease of
$104,361 in accounts payable. The Company provided cash by financing
activities of $2,579 for the quarter ended January 31, 1998, primarily as a
result of a $5,000 collection for a note receivable and payments on long-term
debt of $2,421. For the three months ended January 31, 1997, the Company
provided cash from financing activities of $2,345, primarily for the $5,000
collection of a note receivable and payments on long-term debt of $2,655.
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 51% of its accounts payable are over
30 days old and 21% are over 60 days old as of January 31, 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 January 31, 1998, open trade accounts payable and accrued
expenses for unsecured creditors totaled $568,788. Secured creditors on long-
term debt, namely for the purchase of computer equipment totaled $5,910. 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; 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 $5,910 outstanding under an existing equipment
financing arrangement. While management continues to seek new sources of
financing from other financial institutions, no such arrangements has 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 its records on the accrual basis of accounting.
Income is recorded when earned and expenses are recorded with incurred.
Federated's accounting policies with respect to customer right of returns is to
require written authorization by Federated, except for special order items,
which are handled on a case by cash basis.
The Company's balance sheet at January 31, 1998 reflects working capital
of $248,962 as compared to $457,683 at January 31, 1997, which represents a
decrease of $208,721.
The Company's stockholders' equity amounted to $352,785 at January 31,
1998, equivalent to a book value per common share of $.21. As of January 31,
1997, stockholders' equity amounted to $711,784 equivalent to a book value per
common share of $.44.
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. from Martin L. Blaustein, in an exchange of stock (the
"Exchange") which will be accounted for as a purchase.
8
GOING CONCERN QUESTION
The Company is addressing the threat to its ability to continue as a
going concern primarily by pursuing the Exchange with Wise and Mr. Blaustein,
and by continuing its efforts to diminish costs and increase sales -- both of
which will be much easier to attain with the addition of Wise's resources. It
is estimated that $150,000 would constitute sufficient funds to overcome the
threat to Federated's ability to continue as a going concern. Under the
Exchange, neither Wise nor Blaustein have committed to provide these funds, and
it is doubtful that the Company will be able to raise these funds either
through results of operations or by other means. However, management believes
that as the two firms integrate their operations, the losses experienced by
Federated will be offset by the much stronger operations of Wise. The
combination of the two firms will also allow Federated to reduce certain of its
operating expenses by eliminating overlapping operations. Assuming
consummation of the Exchange, the Company's auditors have indicated that their
report for the year ending December 31, 1998 will not include any question
regarding Federated's ability to continue as a going concern.
PART II - OTHER INFORMATION
FEDERATED PURCHASER, INC.
OTHER INFORMATION
JANUARY 31, 1998 AND 1997
(UNAUDITED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NONE
(B) REPORTS ON FORM 8-K
ON OCTOBER 1, 1997, FEDERATED PURCHASER, INC. ("FEDERATED") ANNOUNCED
THAT IT SIGNED AN AGREEMENT WITH WISE COMPONENTS, INC. ("WISE"), AND ITS
CHAIRMAN AND SOLE SHAREHOLDER, MARTIN L. BLAUSTEIN ("BLAUSTEIN"), UNDER WHICH
FEDERATED WILL ISSUE APPROXIMATELY 4.5 MILLION SHARES OF ITS COMMON STOCK TO
BLAUSTEIN IN A TAX-FREE EXCHANGE FOR ALL OF THE OUTSTANDING SHARES OF WISE'S
COMMON STOCK. UPON CLOSING, WISE WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF
FEDERATED AND BLAUSTEIN WILL BECOME FEDERATED'S PRINCIPAL SHAREHOLDER, OWNING
APPROXIMATELY 74% OF FEDERATED'S COMMON STOCK. THE REMAINING 26% WILL CONTINUE
TO BE HELD BY CURRENT SHAREHOLDERS OF FEDERATED. THE TRANSACTION IS EXPECTED
TO CLOSE IN THE SECOND QUARTER OF FISCAL 1998.
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 THREE MONTHS ENDED JANUARY 31, 1998
OTHER THAN WHICH HAS BEEN REPORTED.
THERE WERE NO SECURITIES OF THE COMPANY SOLD BY THE COMPANY DURING THE
THREE MONTHS ENDED JANUARY 31, 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.
9
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
MARCH 10, 1997
Date
10