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 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 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 8,545,000 outstanding shares of COMMON STOCK at February 27,
1998.
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
January 31, 1998 (unaudited) and July 31, 1997 3
Condensed Consolidated Statements of Income
Three months and six months ended
January 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six months ended January 31, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports 16
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
January 31,
1998 July 31, 1997
---- -------------
(Unaudited)
Assets:
Cash and cash equivalents $ 10,412 $ 15,049
Investments - 4,408
Accounts receivable, net 26,271 21,473
Inventory 7,549 10,127
Deferred income taxes 440 440
Prepaid expenses and other current assets 993 248
--- ---
Total current assets 45,665 51,745
Property and equipment, net 5,328 4,073
Goodwill, net 4,438 1,524
Deferred income taxes 379 379
Other assets 737 487
--- ---
$56,547 $58,208
======= =======
Liabilities:
Current maturities under capital lease obligations $ 142 $ 99
Notes payable - bank - 1,274
Notes payable - other 66 264
Accounts payable and accrued expenses 17,708 19,283
Deferred service revenue 540 247
--- ---
Total current liabilities 18,456 21,167
Capital lease obligations, less current maturities 27 77
Deferred compensation payable 87 87
-- --
Total liabilities 18,570 21,331
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,545,000 and 8,525,000 issued
and outstanding 85 85
Additional paid-in capital 20,510 20,403
Retained earnings 17,382 16,389
------ ------
Total shareholders' equity 37,977 36,877
------ ------
------ ------
$56,547 $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)
Unaudited
Three months ended January 31, Six months ended January 31,
1998 1997 1998 1997
---- ---- ---- ----
Revenue
Products $48,308 $44,046 $94,416 $94,636
Services 1,064 638 2,012 1,035
----- --- ------- -----
49,372 44,684 96,428 95,671
------ ------ ------ ------
Cost of revenue
Products 41,665 38,112 81,266 81,649
Services 803 271 1,466 542
--- --- ----- ---
42,468 38,383 82,732 82,191
------ ------ ------ ------
Gross profit 6,904 6,301 13,696 13,480
Selling, general and
administrative expenses 6,705 5,105 12,404 10,293
----- ----- ------ ------
Income from operations 199 1,196 1,292 3,187
Interest expense (23) (71) (33) (191)
Interest income 203 122 404 127
Other income - 23 - 23
--- -- --- ---
Income before income taxes 379 1,270 1,663 3,146
Provision for income taxes 148 521 670 1,296
---- --- --- -----
Net income $ 231 $749 $ 993 $1,850
====== ==== ===== ======
Net Income per share
Basic $0.03 $ 0.10 $0.12 $0.26
===== ======= ===== =====
Diluted $0.03 $ 0.10 $0.12 $0.26
===== ======= ===== =====
Weighted average
shares outstanding 8,531,304 7,867,935 8,528,152 7,033,968
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the six months ended January 31,
1998 1997
(Unaudited)
----------------------------
Cash flows from operating activities:
Net income $ 993 $1,850
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 550 285
Allowance for doubtful accounts 192 185
Stock compensation expense 27 -
Change in assets and liabilities net of
the effects of the purchase of Coastal:
Increase in accounts receivable (4,522) (2,140)
Decrease (increase) in inventory 3,500 (1,762)
Increase in prepaid expenses and
other current assets (715) (87)
(Increase) decrease in other assets (90) 209
Decrease in accounts payable and
accrued expenses (2,647) (2,706)
Decrease in deferred service contract revenue (22) (3)
Decrease in income taxes payable - (295)
Increase in deferred compensation payable - 85
---- -----
Net cash used in operating activities (2,734) (4,379)
------ ------
Cash flows from investing activities:
Capital expenditures (1,648) (342)
Proceeds from sale of assets - 54
Proceeds from sale of investments 4,408 -
Payment for the purchase of Coastal,
net of cash acquired (2,921) -
------ ---
Net cash used in investing activities (161) (288)
---- ----
Cash flows from financing activities:
Net repayments of borrowings (1,274) (6,500)
Payments on notes payable-shareholder - (235)
Payments on capital lease obligations (53) (40)
Net proceeds from initial public offering - 20,414
Payments on notes payable - other ( 415) -
--- -----
Net cash (used in) provided by
financing activities (1,742) 13,639
------ ------
Net increase (decrease) in cash and cash equivalents (4,637) 8,972
Cash and cash equivalents at beginning of period 15,049 5,774
------ -----
Cash and cash equivalents at end of period $10,412 $14,746
======= =======
See notes to condensed consolidated financial statements.
5
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Operations and Basis of Presentation
Manchester Equipment Co., Inc. (the "Company") is 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 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 January 31, 1998 and the results
of operations for the three months and six months ended January 31, 1998
and 1997 and cash flows for the six months ended January 31, 1998 and
1997. Although the Company believes that the disclosures herein are
adequate to make the information not misleading, these financial
statements should be read in conjunction with the audited financial
statements and the notes thereto for the year ended July 31, 1997,
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
2. Net Income Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("EPS") which the Company adopted
in the second quarter of fiscal 1998. It replaces the presentation of
primary EPS with the presentation of basic EPS and replaces fully diluted
EPS with diluted EPS. It also requires a dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerators
and denominators of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Net income per share of common stock for the three and six month
periods ended January 31, 1998 have been calculated according to the
guidelines of Statement No. 128 and prior periods' EPS data have been
restated to conform with Statement No. 128.
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net
income per share has been computed by dividing net income by the weighted
average number of common shares outstanding, plus the assumed exercise of
dilutive stock options and warrants, less the number of treasury shares
6
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. For the periods presented, stock options and warrants have been
excluded from the calculation of diluted net income per share since the
result would be antidilutive.
3. Initial Public Offering
On December 2, 1996, the Company completed an initial public offering
(the "Offering") of 2,325,000 shares of its common stock at an initial
public offering price of $10 per share. Net proceeds to the Company were
approximately $20.4 million, after deducting the underwriting discounts
and commissions and other costs associated with the Offering.
4. Acquisitions
Coastal Office Products Inc.:
On January 2, 1998, the Company acquired all of the outstanding shares
of Coastal Office Products, Inc. ("Coastal"), a Maryland corporation and a
reseller and provider of microcomputer services and peripherals to
companies in the greater Baltimore, Maryland area. The acquisition, which
has been accounted for as a purchase, consisted of a cash payment of $3.1
million plus potential future contingent payments. The cash payment was
made from the Company's cash balances. The amounts of the contingent
payments will be determined based upon achieving certain agreed upon
increases in revenues and pretax income over calendar 1997 amounts.
Contingent payments, if any, would be paid in cash (or, under certain
conditions, in Company common stock) on March 15, 1999 and March 15, 2000.
Operating results of Coastal are included in the Condensed
Consolidated Statements of Income from the date of acquisition. The
acquisition resulted in goodwill of $2,965,000 which is being amortized on
the straight-line basis over 20 years.
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 and six months ended January 31, 1998 and 1997 assume that
7
the Coastal and Electrograph acquisitions occurred on August 1, 1996 and
reflect the historical operations of the purchased businesses adjusted for
lower interest on invested funds, contractually revised officer
compensation and rent and increased amortization, net of applicable income
taxes resulting from the acquisitions:
Three months ended Six months ended
January 31, January 31,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
Revenues $50,802 $51,884 $100,003 $110,071
Net income 242 809 1,019 2,007
Net income per share $0.03 $0.10 $0.12 $0.28
The pro forma results of operations are not necessarily indicative of
the actual results that would have occurred had the acquisitions been made
at the beginning of the period, or of results which may occur in the
future.
5. Legal Proceedings
On January 12, 1998, the Company announced that it had reached an
agreement in principle settling the Shareholder Securities Class Action
("Lawsuit") filed against the Company and certain of its officers in March
1997. The proposed settlement, which is subject to court approval, would
result in the distribution of $1,350,000 minus approved attorney's fees
and related expenses, to purchasers of the Company's common stock in the
Company's initial public offering, and during the period of November 26,
1996 to February 13, 1997. The entire $1,350,000 cash settlement is to be
paid by the Company's insurance carrier.
The settlement will include a release of all claims that were asserted
or that could have been asserted in the Lawsuit against the Company and its
officers and directors. The Company agreed to the settlement solely to
avoid the expense, burdens and uncertainties of further litigation and
continues to deny that it has any liability on account of the matters
asserted in the litigation or that the Plaintiffs' claims have merit.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with
the condensed consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and with the Company's
Annual Report or Form 10-K. This discussion and analysis contains certain
forward-looking statements within the meaning of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which are not historical facts, and involve risks and
uncertainties that could cause actual results to differ materially from
the results anticipated in those forward-looking statements. These risks
and uncertainties include, but are not limited to, those set forth below,
those set forth in the Company's Annual Report on Form 10-K for the year
ended July 31, 1997, and those set forth in the Company's other filings
from time to time with the Securities and Exchange Commission.
General
Manchester is 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
9
purchasing economies, offer more aggressive hardware and service pricing
or devote greater resources to the promotion of their products and
services. There can be no assurance that the Company will be able to
compete successfully in the future with these or other current or
potential future competitors.
The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. There can be no assurance that the
pricing and related terms offered by major manufacturers will not
adversely change in the future. The failure to obtain an adequate supply
of products, the loss of a major manufacturer, the deterioration of the
Company's relationship with a major manufacturer or the Company's
inability in the future to develop new relationships with other
manufacturers could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's largest customer accounted for approximately 8% and 12%
(or $7,698,000, and $11,480,000, respectively) of the Company's revenues
for the six months ended January 31, 1998 and 1997, 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 January 31, 1998 and 1997,
inventories represented 13% and 17%, respectively, of total assets. For
the six months ended January 31, 1998 and 1997, annualized inventory
turnover was 22 and 15 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 six month periods ended
January 31, 1998 and 1997. 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
10
features, the introduction of new services by the Company and its
competitors, changes in the level of the Company's operating expenses, the
timely availability of product supply, competitive conditions and economic
conditions. In particular, the Company currently is increasing certain of
its fixed operating expenses, including a significant increase in
personnel, as part of its strategy to increase its focus on providing
higher margin, value-added services. Accordingly, the Company believes
that period-to-period comparisons of its operating results should not be
relied upon as an indication of future performance. In addition, the
results of any quarterly period are not indicative of results to be
expected for a full fiscal year.
As a result of rapid changes 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.
The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he receives annual compensation of
$550,000, exclusive of fringe benefits, through the end of fiscal 1998. In
addition, the Company's Executive Vice President has agreed to receive
annual base compensation, exclusive of fringe benefits, of $450,000 through
the end of fiscal 1998. These officers agreed not to, and did not, receive
any bonuses for fiscal 1997 and further agreed that any bonus payable to
either of these officers in fiscal 1998 will require the approval of a
majority of the independent directors of the Company. The Company leases
certain warehouse facilities and offices from entities that are owned or
controlled by the Company's majority shareholder. Each of the leases with
related parties was amended effective with the closing of the Company's
Initial Public Offering to reduce the rent payable under that lease to then
current market rates.
11
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 Six Months Ended
January 31, January 31,
1998 1997 1998 1997
---- ----- ---- ----
Product Sales 97.8% 98.6% 97.9% 98.9%
Services 2.2 1.4 2.1 1.1
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of Product Sales 86.2 86.5 86.1 86.3
Cost of Services 75.5 42.5 72.9 52.4
---- ---- ---- ----
Cost of revenue 86.0 85.9 85.8 85.9
----- ----- ---- ----
Product Gross Profit 13.8 13.5 13.9 13.7
Services Gross Profits 24.5 57.5 27.1 47.6
---- ---- ---- ----
Gross Profit 14.0 14.1 14.2 14.1
---- ---- ---- ----
Selling, general and
administrative expenses 13.6 11.4 12.9 10.8
----- ---- ---- ----
Income from operations 0.4 2.7 1.3 3.3
Interest and other income, net 0.4 0.1 0.4 .0
---- --- --- ----
Income before income taxes 0.8 2.8 1.7 3.3
Provision for income taxes 0.3 1.1 0.7 1.4
----- ---- --- ---
Net income 0.5% 1.7% 1.0% 1.9%
====== ===== === ===
Three Months Ended January 31, 1998 Compared to Three Months Ended October
31, 1997
Revenue. The Company's revenue increased $4.7 million or 10.5% from
$44.7 million for the three months ended January 31, 1997 to $49.4 million
for the three months ended January 31, 1998. Product revenue increased by
$4.3 million (9.7%) due primarily to revenue generated from the Company's
new wholly-owned subsidiaries, Electrograph Systems, Inc. ("Electrograph"),
which was acquired on April 25, 1997, and Coastal, which was acquired on
January 2, 1998, as well as increases in the numbers of personal computers
shipped. These increases were partially offset by lower shipments to the
Company's major customer and lower per unit prices for personal computers.
Service revenue increased $426,000 (67%) as a result of the Company's
continued emphasis on providing value-added services.
Gross Profit. Cost of revenue includes the direct costs of products
sold, freight and the personnel costs associated with providing technical
services, offset in part by certain market development funds provided by
manufacturers. All other operating costs are included in selling, general
and administrative expenses. Gross profit increased $603,000 or 9.6% from
$6.3 million for the second quarter of fiscal 1997 to $6.9 million for the
most recent fiscal quarter. Gross profits from the sale of products
increased by $709,000 while gross profit from the sale of services
declined by $106,000. The changes in gross profits from the sale of
products primarily results from the changes in revenue discussed above.
The decline in gross profit from service offerings is due to increases in
salaries and personnel involved in providing technical services. The
12
Company continues to add technical and engineering personnel as a means of
growing service related business. As a percentage of revenue, gross profit
decreased to 14.0% in fiscal 1998 as compared to 14.1% in fiscal 1997.
Competitive pressures, changes in types of products or services sold and
product availability result in fluctuation in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,600,000 or 31.3% from $5.1 million in
the second quarter of fiscal 1997 to $6.7 million in the second quarter of
fiscal 1998. This increase is principally a result of additional personnel
and higher salaries related to the Company's increased emphasis on
providing value-added services as well as additional operating costs
associated with the Company's new subsidiaries, Electrograph and Coastal,
which were acquired on April 25, 1997 and January 2, 1998, respectively,
and higher depreciation and amortization, training, and legal costs
partially offset by lower advertising expenses.
Interest Income. Interest income increased from $122,000 in fiscal
1997 to $203,000 in fiscal 1998 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
relatively constant at approximately 40% of income before income taxes.
Six Months Ended January 31, 1998 Compared To Six Months Ended January 31,
1997
Revenue. The Company's revenue increased by $757,000 (0.8%) from $95.7
million for the first six months of fiscal 1997 to $96.4 million for the
first six months of fiscal 1998. The increase is due to revenue from newly
acquired subsidiaries partially offset by lower shipments to the Company's
major customer and lower per unit prices for personal computers. Revenue
from service offerings increased by 94% over service revenue for the prior
year fiscal period while product revenue declined by 0.2% from fiscal 1997
amounts.
Gross Profit. Gross profit increased $216,000 (1.6%) from $13.5
million for the first six months of fiscal 1997 to $13.7 million for the
most recent six month period. Margins on product sales improved to 13.9%
versus 13.7% due to better product mix while margins on service offerings
declined from 47.6% to 27.1% primarily due to higher salaries and
additions to personnel in the technical services area.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.1 million (20.5%) from $10.3
million in fiscal 1997 to $12.4 in fiscal 1998. This increase is primarily
due to increases in the personnel infrastructure as the Company continues
to build its sales and service organization and increase its emphasis on
providing value added services. Furthermore, selling, general and
administrative expenses increased due to the addition of the two new
subsidiaries that were not a part of the Company in the comparable period
a year ago, as well as higher depreciation, training and legal expenses
partially offset by lower advertising costs.
Interest Income. Interest income increased due to earnings on
investments made with the proceeds from the Company's initial public
offering.
Provisions For Income Taxes. The effective income tax rate remained
relatively constant at approximately 40% of income before income taxes.
13
Liquidity and Capital Resources
Historically, the Company's primary sources of financing have been
internally generated working capital from profitable operations and a line
of credit from a financial institution.
For the six months ended January 31, 1998, cash used in operating
activities was $2.7 million consisting primarily of an increase in accounts
receivable and a decrease in accounts payable and accrued expenses,
partially offset by net income and a decrease in inventory. The Company's
accounts receivable and accounts payable and accrued expenses balances as
well as its investment in inventory can fluctuate significantly from one
period to the next due to the receipt of large customer orders or payments
or variations in product availability and vendor shipping patterns at any
particular date. Generally, the Company's experience is that increases in
accounts receivable, inventory and accounts payable and accrued expenses
will coincide with growth in revenue and increased operating levels. In
addition, during the three months ended January 31, 1998 the Company used
approximately $1.6 million for capital expenditures, $1.7 million to repay
indebtedness and $2.9 million (net of cash acquired) to acquire Coastal and
generated $4.4 million from the sale of investments. On December 2, 1996,
the Company completed an initial public offering (the "Offering") of
2,325,000 shares of its common stock resulting in net proceeds to the
Company, after deducting underwriting discount and expenses, of
approximately $20.4 million.
The Company and a subsidiary have available lines of credit with a
financial institution in the aggregate amount of $10.0 million. No amounts
are currently outstanding under these lines.
The Company believes that its current balances in cash and cash
equivalents and investments, expected cash flows from operations and
available borrowings under the lines of credit will be adequate to support
current operating levels for the foreseeable future, specifically through
at least the end of fiscal 1998. 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 $750,000, which will be paid out of the Company's available
cash balances. The Company currently has no other material commitments for
capital expenditures. Future capital requirements of the Company include
those for the growth of working capital items such as accounts receivable
and inventory and the purchase of equipment and expansion of facilities as
well as the possible opening of new offices and potential acquisitions.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 12, 1998, the Company announced that it had reached an
agreement in principle settling the Shareholder Securities Class Action
("Lawsuit") filed against the Company and certain of its officers in March
1997. The proposed settlement, which is subject to court approval, would
result in the distribution of $1,350,000 minus approved attorney's fees
and related expenses, to purchasers of the Company's common stock in the
Company's initial public offering, and during the period of November 26,
1996 to February 13, 1997. The entire $1,350,000 cash settlement is to be
paid by the Company's insurance carrier.
The settlement will include a release of all claims that were
asserted or that could have been asserted in the Lawsuit against
Manchester Equipment and its officers and directors. The Company has
agreed to the settlement solely to avoid the expense, burdens and
uncertainties of further litigation and continues to deny that it has any
liability on account of the matters asserted in the litigation or that the
Plaintiffs' claims have merit.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In connection with employment agreements entered into with the two
former shareholders of Coastal, on January 2, 1998 the Company issued to
each such shareholder 10,000 shares of its common stock. Such shares are
unregistered, were issued under Section 4(2) of the Securities Act of 1933,
as amended, and are restricted in that they vest ratably over a three year
period commencing on the date of issuance, with all unvested shares being
forfeited and canceled if the individual's employment is voluntarily
terminated or terminated for cause (as defined in the employment
agreement). The individuals acquired the shares for investment and the
stock certificates representing the shares were duly legended.
Item 4. Submission of Matters to a Vote of Security Holders
On January 14, 1998 the Company held its Annual Meeting of
Shareholders to (1) elect five Directors to serve until the 1999 Annual
Meeting of Shareholders; and (2) ratify the reappointment of KPMG Peat
Marwick LLP as independent auditors of the Company for the year ending
July 31, 1998.
The results of the voting for the election of Directors were as
follows:
Broker
Nominee For Withheld Abstain Non-votes
---------------------------------------------------------------
Barry R. Steinberg 7,780,145 225,400 0 0
Joel G. Stemple 7,780,145 225,400 0 0
Joel Rothlein 7,781,145 224,400 0 0
George Bagetakos 7,781,145 224,400 0 0
Julian Sandler 7,781,145 224,400 0 0
15
Accordingly, each of the five nominees received a plurality of the
total votes that were cast.
The results of the voting on the ratification of the appointment of
KPMG Peat Marwick LLP as the Company's independent auditors were as
follows:
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
7,973,645 6,400 25,500 0
Accordingly, the number of shares voted for the ratification of the
appointment of KPMG Peat Marwick constituted a majority of the shares
present in person or represented by proxy.
Item 6. Exhibits and Reports
(a) Exhibits
----------------
Exhibit No. Description
----------- -----------
10.5.j Lease dated October 1, 1997 between Registrant and
Spanish River Executive Plaza, Ltd. a/k/a Century
Financial Plaza
10.5.k Lease dated January 2, 1998 between Coastal Office
Products, Inc. and BC & HC Properties, LLC
10.12 Definitive Purchase Agreement and Indemnity Agreement
between Registrant and Coastal Office Products, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
---------------------------
None
16
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: March 12, 1998 s/s Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: March 12, 1998 s/s Joseph Looney
-----------------
Joseph Looney
Chief Financial Officer
17