SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
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 8,525,000 outstanding shares of COMMON STOCK at December 8,
1997.
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
October 31, 1997 (unaudited) and July 31, 1997 3
Condensed Consolidated Statements of Income
Three months ended
October 31, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows Three
months ended October 31, 1997 and 1996 (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 13
Item 6. Exhibits and Reports 13
2
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
October 31, 1997 July 31, 1997
(Unaudited)
---------------- -------------
Assets:
Cash and cash equivalents $ 14,702 $ 15,049
Investments 2,505 4,408
Accounts receivable, net 22,554 21,473
Inventory 8,785 10,127
Deferred income taxes 440 440
Prepaid expenses and other current assets 110 248
--- ---
Total current assets 49,096 51,745
Property and equipment, net 4,266 4,073
Goodwill, net 1,504 1,524
Deferred income taxes 379 379
Other assets 603 487
--- ---
$55,848 $58,208
======= =======
Liabilities:
Current maturities under capital lease obligation $ 99 $ 99
Notes payable - bank - 1,274
Notes payable - other 165 264
Accounts payable and accrued expenses 17,193 19,283
Deferred service revenue 221 247
Income taxes payable 377 -
---- ----
Total current liabilities 18,055 21,167
Capital lease obligation, less current maturities 52 77
Deferred compensation payable 87 87
-- --
Total liabilities 18,194 21,331
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000
authorized, 8,525,000 issued and outstanding 85 85
Additional paid-in capital 20,418 20,403
Retained earnings 17,151 16,389
------ ------
Total shareholders' equity 37,654 36,877
------ ------
$55,848 $58,208
======= =======
See notes to condensed consolidated financial statements.
3
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except share and per share amounts)
Three months ended October 31,
1997 1996
(Unaudited)
-----------------------------
Revenue
Products $46,108 $50,590
Services 948 397
------ ------
47,056 50,987
------ ------
Cost of revenue
Products 39,601 43,537
Services 663 271
--- ---
40,264 43,808
------ ------
Gross profit 6,792 7,179
Selling, general and
administrative expenses 5,699 5,188
----- -----
Income from operations 1,093 1,991
Interest expense (10) (120)
Interest income 201 5
---- -----
Income before income taxes 1,284 1,876
Provision for income taxes 522 775
--- ---
Net income $ 762 $1,101
====== ======
Net Income per share $0.09 $ 0.18
===== ======
Weighted average
shares outstanding 8,525,000 6,200,000
========= =========
See notes to condensed consolidated financial statements.
4
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the three months
ended October 31,
1997 1996
(Unaudited)
---------------------
Cash flows from operating activities:
Net income $ 762 $1,101
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 266 150
Allowance for doubtful accounts 96 126
Stock options commission expense 15 -
Change in assets and liabilities:
Increase in accounts receivable (1,177) (2,893)
Decrease (increase) in inventory 1,342 (2,294)
Decrease (increase) in prepaid expenses and
other current assets 138 (202)
(Increase) decrease in other assets (116) 24
Decrease in accounts payable and
accrued expenses (2,090) (499)
Decrease in deferred service contract revenue (26) -
Increase in income taxes payable 377 539
Increase in deferred compensation payable - 85
---- -----
Net cash used in operating activities (413) (3,863)
--- ------
Cash flows from investing activities:
Capital expenditures (439) (45)
Proceeds from sale of assets - 54
Proceeds from sale of investments 1,903 -
----- --
Net cash provided by investing activities 1,464 9
----- --
Cash flows from financing activities:
Net repayments of borrowings (1,274) -
Payments on notes payable-shareholder - (118)
Payments on capital lease obligation (25) (16)
Payments on notes payable - other ( 99) -
-- --
Net cash used in financing activities (1,398) (134)
----- ----
Net decrease in cash and cash equivalents (347) (3,988)
Cash and cash equivalents at beginning of period 15,049 5,774
------ -----
Cash and cash equivalents at end of period $14,702 $1,786
======= ======
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 systems 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 most of
the Company's revenues. The Company has entered into agreements with
certain suppliers and manufacturers which provide the Company favorable
pricing and price protection in the event the vendor reduces its prices.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting of
only normal and recurring accruals) necessary to present fairly the
financial position of the Company as of October 31, 1997 and the results
of operations for the three months ended October 31, 1997 and 1996 and
cash flows for the three months ended October 31, 1997 and 1996. 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
--------------------
Net income per share is based on the weighted average number of common
shares and common share equivalents outstanding during each period. Common
share equivalents include dilutive stock options and warrants, if any,
using the treasury stock method.
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," is required to be adopted for interim and annual periods ending
after December 15, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and restate
all prior periods. Basic and diluted earnings per share will replace
primary and fully diluted earnings per share. The dilutive effect of stock
options and other common stock equivalents will be excluded from the
calculation of basic earnings per share, but will be reflected in diluted
earnings per share. The implementation of SFAS No. 128 would not have had
an impact on net income per share for the three months ended October 31,
1997 and 1996.
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.
6
4. Acquisition of 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 three months ended October 31, 1996 assume that the Electrograph
acquisition occurred on August 1, 1996 and reflect the historical
operations of the purchased business adjusted for lower interest on
invested funds and increased amortization, net of applicable income taxes
resulting from the acquisition:
1996
(in thousands)
--------------
Revenues $55,534
Net income 827
Net income per share $0.19
The pro forma results of operations are not necessarily indicative of
the actual results that would have occurred had the acquisition been made
at the beginning of the period, or of results which may occur in the
future.
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, 1997, and those set forth in the Company's other filings
from time to time with the Securities and Exchange Commission.
General
Manchester is a systems 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 revenues have 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'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.
8
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 10% and
14% (or $4,502,000, and $7,303,000, respectively) of the Company's
revenues for the three months ended October 31, 1997 and 1996,
respectively, substantially all of which revenues were derived from the
sale of hardware products. This customer accounted for 15% of revenues for
the fiscal year ended July 31, 1997. There can be no assurance that the
Company will continue to derive substantial revenues from this customer.
The Company's profitability has been enhanced by its ability to
obtain volume discounts from certain manufacturers, which has been
dependent in part upon the Company's ability to sell products to computer
resellers, including VARs. There can be no assurance that the Company will
be able to continue to sell products to resellers and thereby obtain the
desired discounts from the manufacturers or that the Company will be able
to increase sales to end-users to offset the need to rely upon sales to
resellers.
The markets for the Company's products and services are characterized
by rapidly changing technology and frequent introductions of new hardware
and software products and services, which render many existing products
noncompetitive, less profitable or obsolete. The Company believes that its
inventory controls have contributed to its ability to respond effectively
to these technological changes. As of October 31, 1997 and 1996,
inventories represented 16% and 29%, respectively, of total assets. For
the three months ended October 31, 1997 and 1996, annualized inventory
turnover was 18 and 16 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 revenues in each of the three month periods
ended October 31, 1997 and 1996. For the fiscal year ended July 31, 1997,
bad debt expense represented 0.2% of total revenues.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to continue to do so in the
future. Quarterly revenues and operating results generally fluctuate as a
result of the demand for the Company's products and services, the
introduction of new hardware and software technologies with improved
features, the introduction of new services by the Company and its
competitors, changes in the level of the Company's operating expenses, the
timely availability of product supply, competitive conditions and economic
conditions. In particular, the Company currently is increasing certain of
its fixed operating expenses, including a significant increase in
personnel, as part of its strategy to increase its focus on providing
higher margin, value-added services. Accordingly, the Company believes
9
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. The Company
believes that the impact of price or volume changes of any particular
product or products is not material to the Company's Consolidated
Financial Statements.
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 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 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.
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 Revenues
Three Months Ended
October 31,
1997 1996
---- ----
Product Sales 98.0% 99.2%
Services 2.0 .8
--- --
Total revenue 100.0 100.0
----- -----
Cost of Product Sales 85.9 86.1
Cost of Services 69.9 68.3
---- ----
Cost of revenue 85.6 85.9
---- ----
Product Gross Profit 14.1 13.9
Services Gross Profits 30.1 31.7
---- ----
Gross Profit 14.4 14.1
---- ----
Selling, general and
administrative expenses 12.1 10.2
---- ----
Income from operations 2.3 3.9
Interest and other income, net .4 ( .2)
--- ----
Income before income taxes 2.7 3.7
Provision for income taxes 1.1 1.5
--- ---
Net income 1.6% 2.2%
==== ====
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1996
REVENUE. The Company's revenue decreased $3.9 million or 7.7% from
$51.0 million for the three months ended October 31, 1996 to $47.1 million
for the three months ended October 31, 1997. Product revenue declined by
$4.5 million (8.9%) due primarily to lower shipments to the Company's major
customer as well as lower per unit prices for personal computers partially
offset by revenues generated from Electrograph Systems, Inc.
("Electrograph") a wholly-owned subsidiary of the Company that was acquired
on April 25, 1997. Service revenue increased $551,000 (139%) as a result of
the Company's continued emphasis on providing value-added services.
GROSS PROFIT. Cost of revenues 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 decreased $387,000 or 5.4% from
$7.2 million for the first quarter of fiscal 1996 to $6.8 million for the
11
recent fiscal quarter. Gross profits from the sale of products declined by
$546,000 while gross profit from the sale of services increased by
$159,000. The changes in gross profits primarily results from the changes
in revenue discussed above. As a percentage of revenue, gross profit
increased to 14.4% in fiscal 1997 as compared to 14.1% in fiscal 1996.
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 $511,000 or 9.8% from $5.2 million in the
first quarter of fiscal 1996 to $5.7 million in the first quarter of fiscal
1997. This increase is principally a result of overhead associated with the
Company's new subsidiary, Electrograph, which was acquired on April 25,
1997 as well as higher salaries and depreciation costs partially offset by
lower advertising and commissions.
INTEREST INCOME. Interest income increased from $5,000 in fiscal 1996
to $201,000 in fiscal 1997 due to earnings on short term investments made
with certain of the proceeds from the Company's initial public offering.
PROVISION FOR INCOME TAXES. The effective income tax rate remained
constant at 41% of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of financing have been internally
generated working capital from profitable operations and a line of credit
from a financial institution.
For the three months ended October 31, 1997, cash used in operating
activities was $413,000 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 three months ended October 31, 1997 the Company used
approximately $439,000 for capital expenditures, $1.4 million to repay
indebtedness and generated $1.9 million from the sale of investments.
The Company and a subsidiary have available lines of credit with a
financial institution in the aggregate amount of $10.0 million. No amounts
are currently outstanding under these lines.
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. Remaining net proceeds have been
invested in short-term, interest bearing, investment grade securities.
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. 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 $1.0 million 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.
12
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds
Report on Sale of Securities and Uses of Proceeds Therefrom
Subsequent to the Company's initial public offering, effective
November 25, 1996 (Registration No. 333-13345), and pursuant to the
requirements of the Securities Act of 1933, as amended and then in effect,
the Company filed an initial report on Form SR with the Securities and
Exchange Commission on March 6, 1997.
The following table sets forth the amount of direct or indirect
payments to others from such effective date through October 31, 1997 which
have changed from those amounts set forth in the Company's Annual Report
on Form 10-K for the year ended July 31, 1997.
USE OF PROCEEDS DIRECT OR INDIRECT PAYMENTS TO OTHERS
Construction of plant,
buildings and facilities $ 250,000
Purchase and installation of
machinery and equipment $ 900,000
Acquisition of other business(es) $2,600,000
Working capital $8,961,493
Item 6. Exhibits and Reports
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
MANCHESTER EQUIPMENT CO., INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANCHESTER EQUIPMENT CO., INC.
------------------------------
(Registrant)
DATE: December 10, 1997 /s/ Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: December 10, 1997 /s/ Joseph Looney
------------------
Joseph Looney
Chief Financial Officer
14