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, 2000
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)
(631) 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 8,166,465 outstanding shares of COMMON STOCK at May 15,
2000.
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets
April 30, 2000 (unaudited) and July 31, 1999 3
Condensed Consolidated Statements of Income
Three months and nine months ended
April 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 2000 and 1999 (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 2. Changes in Securities and Use of Proceeds` 14
Item 6. Exhibits and Reports 14
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share and per share amounts)
April 30, 2000 July 31, 1999
(Unaudited)
------------ ----------
Assets:
Cash and cash equivalents $14,667 $ 5,749
Accounts receivable, net 47,444 34,747
Inventory 14,834 8,245
Deferred income taxes 538 538
Prepaid expenses and other current assets 499 340
---- ---
Total current assets 77,982 49,619
Property and equipment, net 6,385 6,248
Goodwill, net 6,599 5,070
Deferred income taxes 560 560
Other assets 252 281
---- ---
$91,778 $61,778
======= =======
Liabilities:
Current maturities under capital
lease obligation $ 4 $ 85
Current maturities under notes payable 25 -
Accounts payable and accrued expenses 46,539 20,824
Deferred service revenue 575 581
Income taxes payable 898 668
--- ---
Total current liabilities 48,041 22,158
Deferred compensation payable 34 34
----- --
Total liabilities 48,075 22,192
------- ------
Shareholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000
shares authorized, 8,191,465 and
8,084,800 issued and outstanding 82 81
Additional paid-in capital 19,489 18,799
Deferred compensation (18) (38)
Retained earnings 24,150 20,744
------- ------
Total shareholders' equity 43,703 39,586
------ ------
$91,778 $61,778
======= =======
See notes to condensed consolidated financial statements.
3
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
Three months ended April 30, Nine months ended April 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenue
Products $80,424 $52,956 $212,788 $160,409
Services 1,443 1,834 5,286 5,269
----- ----- ------ -----
81,867 54,790 218,074 165,678
------ ------ ------- -------
Cost of revenue
Products 69,367 45,053 184,345 138,501
Services 1,249 1,241 3,765 3,406
----- ----- ------ -----
70,616 46,294 188,110 141,907
------ ------- ------- -------
Gross profit 11,251 8,496 29,964 23,771
Selling, general and
administrative expenses 8,860 8,073 24,606 22,482
----- ----- ------ ------
Income from operations 2,391 423 5,358 1,289
Interest expense (2) ( 2) (4) (7)
Interest income 211 116 482 336
--- --- --- ---
Income before income taxes 2,600 537 5,836 1,618
Provision for income taxes 1,105 240 2,430 680
----- --- ------ ---
Net income $1,495 $ 297 $3,406 $938
====== ===== ====== ====
Net income per share
Basic $0.18 $0.04 $0.42 $0.12
===== ===== ===== =====
Diluted $0.18 $0.04 $0.42 $0.12
===== ===== ===== =====
Weighted average shares outstanding
Basic 8,155 8,097 8,090 8,097
===== ===== ===== =====
Diluted 8,456 8,097 8,200 8,097
===== ===== ===== =====
See notes to condensed consolidated financial statements.
4
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the nine months
ended April 30,
2000 1999
(Unaudited)
------------------
Cash flows from operating activities:
Net income $3,406 $ 938
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,491 1,325
Allowance (recovery) for doubtful accounts (141) 167
Stock compensation expense 20 73
Change in assets and liabilities net of the effects of acquisition:
Decrease (increase) in accounts receivable (11,909) 341
Decrease (increase) in inventory (6,086) 1,130
Increase in prepaid expenses and
other current assets (139) (65)
Decrease in other assets 90 261
Increase in accounts payable and
accrued expenses 24,218 1,168
Decrease in deferred service revenue (6) (201)
(Decrease) increase in income taxes payable 246 (225)
Sale of investments - 1,501
------ ------
Net cash provided by operating activities 11,190 6,413
------ -----
Cash flows from investing activities:
Capital expenditures (1,192) (1,333)
Payments for acquisitions, net of cash acquired (240) (871)
---- ---
Net cash used in investing activities (1,432) (2,204)
------ ------
Cash flows from financing activities:
Net repayments of borrowings (648) -
Payments on capital lease obligations (81) (74)
Purchase and retirement of treasury stock (518) -
Issuance of common stock 409 -
Payments on notes payable - other (2) -
-- ---
Net cash used in financing activities (840) (74)
---- ---
Net increase in cash and cash equivalents 8,918 4,135
Cash and cash equivalents at beginning of period 5,749 7,816
----- -----
Cash and cash equivalents at end of period $14,667 $11,951
====== =======
See notes to condensed consolidated financial statements.
5
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 April 30, 2000 and the results of
operations for the three and nine months ended April 30, 2000 and 1999 and
cash flows for the nine months ended April 30, 2000 and 1999. 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 consolidated financial statements and the
notes thereto for the year ended July 31, 1999, included in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
2. Net Income Per Share
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
representing 250,000 and 1,099,600 shares for the three months ended April 30,
2000 and 1999, respectively, and 589,000 and 1,099,600 shares for the nine
months ended April 30, 2000 and 1999, respectively, are excluded from the
calculation of diluted net income per share when the result would be
antidilutive. The following table reconciles the denominators of the basic and
diluted per share computations. For each period, the numerator is the net income
as reported.
(shares in thousands)
Three months ended April 30, Nine months ended April 30,
2000 1999 2000 1999
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ -------------
Basic 8,155 $0.18 8,097 $0.04 8,090 $0.42 8,097 $0.12
===== ===== ===== =====
Effect of
dilutive
options 301 - 110 -
--- -- --- --
Diluted 8,456 $0.18 8,097 $0.04 8,200 $0.42 8,097 $0.12
===== ===== ===== ===== ===== ===== ===== =====
6
3. Acquisition of Texport Technology Group, Inc. and Learning Technology Group,
LLC.
On March 22, 2000, the Company acquired all of the outstanding
ownership interests of Texport Technology Group, Inc. ("Texport") and
Learning Technology Group, LLC ("LTG"), affiliated entities engaged in
reselling and providing of microcomputer services and peripherals to
companies in the greater Rochester, New York area. The acquisition, which
has been accounted for as a purchase, consisted of a cash payment of $0.4
million plus potential future contingent payments. Contingent payment of up
to $750,000 will be payable on each of March 22, 2001 and 2002 based upon
achieving certain agreed upon increases in revenue and pretax earnings for
each of the next two, one-year periods from the date of closing. The cash
payment was made from the Company's cash balances. The selling owners
received employment agreements that also provided for the issuance of
10,000 shares of common stock. The fair value of the common stock,
amounting to $61,250, was recorded as deferred compensation and is being
expensed over the three-year vesting period. In connection with the
acquisition, the Company assumed approximately $648,000 of bank debt, which
was subsequently repaid.
Operating results of Texport and LTG are included in the condensed
consolidated statements of income from the date of acquisition. The
estimated fair value of assets and liabilities acquired was $1.6 million
and $2.2 million, respectively. The excess of the aggregate purchase price
over the estimated fair value of the net assets acquired was approximately
$995,000, which is being amortized on a straight-line basis over 20 years.
The allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed are preliminary, subject to the final
determination of the fair value of such assets and liabilities. The pro
forma results of operations for Texport and LTG for the quarters ended
April 30, 2000 and 1999 have not been reflected as they are deemed to be
immaterial.
4. Statement of Cash Flow Information
Supplemental disclosure of cash flow information:
Nine months ended April 30,
2000 1999
---- ----
(in thousands)
Cash paid for income taxes $1,782 $636
====== ====
Supplemental schedule of non-cash investing activities
Nine months ended April 30,
2000 1999
---- ----
(in thousands)
Common stock issued in connection
with acquisition $861 -
==== ==
7
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, 1999, and those set forth in the Company's other filings
from time to time with the Securities and Exchange Commission.
General
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 integrating its analysis, design and
implementation 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. Manchester'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 an 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 towards 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 and/or the Internet. 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 and/or the Internet 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.
8
The Company's largest two customers accounted for approximately 4%
and 8%, and 7% and 3% of the Company's revenue for the nine months ended
April 30, 2000 and 1999, respectively, substantially all of such revenue
was derived from the sale of hardware products. These two customers
accounted for 7% and 3%, respectively, of revenue for the fiscal year
ended July 31, 1999. There can be no assurance that the Company will
continue to derive substantial revenue from these customers.
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 April 30, 2000 and July 31, 1999,
inventories represented 16% and 13%, respectively, of total assets. For
the nine months ended April 30, 2000 and 1999, annualized inventory
turnover was 22 and 28 times, respectively. Inventory turned 22 times in
the fiscal year ended July 31, 1999. 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 less than 0.2% of total revenues in each of the nine month
periods ended April 30, 2000 and 1999. For the fiscal year ended July 31,
1999, bad debt expense represented 0.1% 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, 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
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.
9
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. Expenses in connection with remediating its systems were not
significant. The Company is not aware of any material problems resulting
from Year 2000 issues, either with its internal systems or the products
and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
E-Commerce
On February 16, 2000, the Company launched its enhanced website and
electronic commerce system. The new site, located at www.e-manchester.com
allows both existing customers, corporate shoppers and others to find
product specifications, compare products, check price and availability and
place and track orders quickly and easily 24 hours a day seven days a
week. The Company has made, and expects to continue to make, significant
investments and improvements in its e-commerce capabilities. There can be
no assurance that the Company will be successful in enhancing and
increasing its business through its expanded Internet presence.
On June 25, 1999, the Company announced the launch of a new consumer
products on-line super store, Marketplace4U.com ("MP4U"). MP4U offers
products in categories such as consumer electronics, automotive
accessories and outdoor and camping equipment from its main and outlet
stores. The main store offers top brand products at competitive prices;
the outlet store offers top name brand factory refurbished, warranteed
products at even greater savings. To date revenue from MP4U is immaterial.
There can be no assurance that MP4U will generate significant revenue or
that any of the Company's on-line stores will operate profitably.
10
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 Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ----- ---- ----
Product sales 98.2% 96.7% 97.6% 96.8%
Services 1.8 3.3 2.4 3.2
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of product sales 86.3 85.1 86.6 86.3
Cost of services 86.6 67.7 71.2 64.6
---- ---- ---- ----
Cost of revenue 86.3 84.4 86.3 85.7
---- ---- ---- ----
Product gross profit 13.7 14.9 13.4 13.7
Services gross profit 13.4 32.3 28.8 35.4
---- ---- ---- ----
Gross profit 13.7 15.5 13.7 14.3
Selling, general and
administrative expenses 10.8 14.7 11.2 13.5
---- ---- ---- ----
Income from operations 2.9 0.8 2.5 0.8
Interest and other income, net 0.3 0.2 0.2 0.2
--- ---- --- ---
Income before income taxes 3.2 1.0 2.7 1.0
Provision for income taxes 1.4 0.4 1.1 0.4
--- --- --- ---
Net income 1.8% 0.6% 1.6% 0.6%
=== === === ===
Three Months Ended April 30, 2000 Compared to Three Months Ended April 30,
1999
Revenue. The Company's revenue increased $27.1 million or 49.4% from
$54.8 million for the three months ended April 30, 1999 to $81.9 million
for the three months ended April 30, 2000. Product revenue increased by
$27.5 million (51.9%) due primarily to increases in shipments of personal
computers, servers and displays, as well as higher per unit prices for
personal computers. Service revenue decreased $391,000 (21.3%) principally
as a result of reduction in revenue from the Company's temporary staffing
business.
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 $2.8 million or 32.4%
from $8.5 million for the third quarter of fiscal 1999 to $11.3 million
for the most recent fiscal quarter. Gross profit from the sale of products
increased by $3.2 million while gross profit from the sale of services
decreased by $399,000. The changes in gross profit primarily result from
the changes in revenue discussed above, partially offset by lower margins
on products sold due to the very competitive marketplace. The reduction in
gross profits derived from services relates to the above mentioned
reduction in revenue from the Company's temporary staffing business. As a
11
percentage of revenue, gross profit decreased to 13.7% in the third quarter
of fiscal 2000 as compared to 15.5% in fiscal 1999. Competitive pressures,
changes in types of products or services sold and product availability
result in fluctuations in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $787,000 or 9.7% from $8.1 million in the
third quarter of fiscal 1999 to $8.9 million in the third quarter of fiscal
2000. This increase is principally a result of higher officers' salaries as
well as higher commissions partially offset by lower bad debts expense.
Interest Income. Interest income increased from $116,000 in the
third quarter of 1999 to $211,000 in the third quarter of 2000 due to
higher cash balances available for investment as well as higher interest
rates received on investments.
Provision for Income Taxes. The effective income tax rate
decreased to 42.5% in the current period compared to 44.7% of pre-tax
income in the prior year period principally as a result of the impact of
certain non deductible expenses, as a percentage of pre-tax income.
Nine Months Ended April 30, 2000 Compared to Nine Months Ended April 30,
1999
Revenue. The Company's revenue increased by $52.4 million or 31.6%
from $165.7 million for the nine months ended April 30, 1999 to $218.1
million for the nine months ended April 30, 2000. Revenue from the sale of
products increased by $52.4 million (32.7%) while revenue from service
offerings increased by $17,000 (0.3%). The increases in revenue were
largely attributable to growth in shipments of personal computers,
servers, displays and peripherals as well as higher average selling prices
for personal computers.
Gross Profit. Gross profit increased by $6.2 million (26.1%) to $30.0
million for the first nine months of fiscal 2000 from $23.8 million in the
comparable period a year ago. Gross profit from product sales increased by
29.8% ($6.5 million) from $21.9 million in the first nine months of fiscal
1999 to $28.4 million in the most recent nine month period. Service
offerings generated $1.5 million of gross profit in the first nine months
of fiscal 2000 as compared to $1.9 million generated in the first nine
months of fiscal 1999, and 1999. The growth in gross profit dollars is
principally due to the increase in revenue discussed above. Gross margin
percentages on product sales declined in the recent period due to generally
lower vendor incentives and the highly competitive marketplace for computer
products. Margins on service offerings declined due to lower revenue for
the most recent quarter from the Company's temporary staffing business.
Selling, General and Administrative Expenses. Selling general and
administrative expenses increased by $2.1 million or 9.4% from $22.5
million for the first nine months of fiscal 1999 to $24.6 million for the
first nine months of fiscal 2000. The increase is principally due to higher
salaries, commissions, depreciation and amortization and consulting costs,
as well as higher advertising costs primarily relating to the Company's new
retail consumer on-line store, MP4U, partially offset by lower insurance
and bad debts expenses.
Interest Income. Interest income increased due to higher cash balances
available for investment as well as higher interest rates.
Provision for Income Taxes. The effective income tax rate decreased
slightly from 42.0% for the first nine months of fiscal 1999 to 41.6% in
the most recent fiscal period.
12
Liquidity and Capital Resources
The Company's primary sources of financing have been internally
generated working capital from operations and a line of credit from
financial institutions.
For the nine months ended April 30, 2000, cash provided by operating
activities was $11.1 million consisting primarily of net income and
depreciation and amortization, and an increase in accounts payable and
accrued expenses, partially offset by increases 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 nine
months ended April 30, 2000 the Company used approximately $1.2 million
for capital expenditures, $518,000 to repurchase and retire its common
stock, and $729,000 to repay debt (primarily related to the acquisition of
Texport and LTG). The Company received $409,000 in proceeds from the
exercise of options to purchase its common stock during February and March
of 2000. The contingent purchase payment due to the former owners of the
Company's Coastal subsidiary was paid through the issuance of 105,786
shares of the Company's common stock on March 15, 2000.
The Company has available a line of credit with financial
institutions in the aggregate amount of $15 million. No amounts were
outstanding under this line as of April 30, 2000.
The Company believes that its current balances in cash and cash
equivalents, 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 2000. The Company currently has no material commitments for
capital expenditures. The Company has contingent purchase payments that
may be due to the former owner of its Texport and LTG subsidiaries. These
payments could amount to as much as $750,000 on each of March 22, 2001 and
2002. These payments are expected to be paid from the Company's available
cash balances. 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, the
possible opening of new offices, potential acquisitions, and expansion of
the Company's e-commerce capabilities.
13
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) 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 had an aggregate purchase price of $4.8 million,
consisting of a cash payment of $3.1 million plus performance based payments of
$871,000 (paid in cash on March 15, 1999) and $800,000 (to be paid on March 15,
2000, in cash or, under certain circumstances, shares of the Company's common
stock, as determined by the Company). On March 15, 2000, the Company issued an
aggregate of 105,786 shares of its common stock to the former shareholders of
Coastal (the "Former Coastal Shareholders"). No underwriter or placement agent
was involved with this transaction, nor the Company engage in any general
solicitation in connection therewith. The issuance of the shares was exempt from
the registration requirements under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) of the Securities Act. Pursuant to
its agreement with the Former Coastal Shareholders, the Company is required to
register the shares by September 15, 2000.
The following table sets forth the name of each Former Coastal
Shareholder and the number of shares of common stock issued to each such
Shareholder by the Company:
Shares Issued by
Name the Company
- -------------------------------------------------------------
Bruce Clasing.........................................52,893
Harold Clasing........................................52,893
Item 6. Exhibits and Reports
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
--------------------
None
14
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 9, 2000 ss/ Barry Steinberg
----------------------
Barry Steinberg
President and Chief Executive Officer
DATE: June 9, 2000 ss/ Joseph Looney
-----------------
Joseph Looney
Vice President of Finance and
Chief Financial Officer
15