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, 1999
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 8,096,600 outstanding shares of COMMON STOCK at March 12,
1999.
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
January 31, 1999 (unaudited) and July 31, 1998 3
Condensed Consolidated Statements of Income
Three months and six months ended
January 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six months ended January 31, 1999
and 1998 (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 5. Other information 15
Item 6. Exhibits and Reports 15
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, 1999 July 31, 1998
(Unaudited)
----------- -----------
Assets:
Cash and cash equivalents $ 7,431 $ 7,816
Investments - 1,501
Accounts receivable, net 26,388 26,296
Inventory 8,907 9,167
Deferred income taxes 482 482
Prepaid income taxes 245 -
Prepaid expenses and other current assets 283 290
--- ---
Total current assets 43,736 45,552
Property and equipment, net 6,071 5,975
Goodwill, net 5,065 4,325
Deferred income taxes 475 475
Other assets 541 567
--- ---
$55,888 $56,894
======= =======
Liabilities:
Current maturities under capital lease obligation $ 26 $ 82
Accounts payable and accrued expenses 17,119 18,358
Deferred service revenue 599 775
Income taxes payable - 225
-- ---
Total current liabilities 17,744 19,440
Deferred compensation payable 109 109
--- ---
Total liabilities 17,853 19,549
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000
shares authorized, 8,096,600 issued and outstanding 81 81
Additional paid-in capital 18,803 18,767
Deferred compensation (51) (64)
Retained earnings 19,202 18,561
------ ------
Total shareholders' equity 38,035 37,345
------ ------
$55,888 $56,894
======= =======
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,
1999 1998 1999 1998
---- ---- ---- -----
Revenue
Products $51,778 $48,308 $107,453 $94,416
Services 1,611 1,064 3,435 2,012
----- ----- ----- -----
53,389 49,372 110,888 96,428
------ ------ ------- ------
Cost of revenue
Products 45,066 41,665 93,448 81,266
Services 1,061 803 2,165 1,466
----- --- ----- -----
46,127 42,468 95,613 82,732
------ ------ ------ ------
Gross profit 7,262 6,904 15,275 13,696
Selling, general and
administrative expenses 7,224 6,705 14,409 12,404
----- ----- ------ ------
Income from operations 38 199 866 1,292
Interest expense (3) (23) (5) (33)
Interest income 105 203 220 404
---- ---- ---- ---
Income before income taxes 140 379 1,081 1,663
Provision for income taxes 67 148 440 670
-- ---- --- ---
Net income $73 $ 231 $641 $ 993
=== ====== ==== =====
Net Income per share
Basic $0.01 $0.03 $0.08 $0.12
===== ===== ===== =====
Diluted $0.01 $0.03 $0.08 $0.12
===== ===== ===== =====
Weighted average
shares outstanding
Basic 8,096,600 8,531,304 8,096,600 8,528,152
========= ========= ========= =========
Diluted 8,096,600 8,531,304 8,096,600 8,528,152
========= ========= ========= =========
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,
1999 1998
(Unaudited)
---------------------------
Cash flows from operating activities:
Net income $ 641 $993
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 877 550
Allowance for doubtful accounts 74 192
Non cash compensation and commission expense 49 27
Change in assets and liabilities net of the effects
of the purchase of Coastal:
Increase in accounts receivable (166) (4,522)
Decrease in inventory 260 3,500
Increase in prepaid income taxes (245) -
(Increase) decrease in prepaid expenses and
other current assets 7 (715)
(Increase) decrease in other assets 26 (90)
Decrease in accounts payable and
accrued expenses (2,110) (2,647)
Decrease in deferred service contract revenue (176) (22)
Decrease in income taxes payable (225) -
Sale of investments 1,501 4,408
----- -----
Net cash provided by operating activities 513 1,674
--- -----
Cash flows from investing activities:
Capital expenditures (842) (1,648)
Payment for the purchase of Coastal, net of cash acquired - (2,921)
--- -----
Net cash used in investing activities (842) (4,569)
--- -----
Cash flows from financing activities:
Net repayments of borrowings - (1,274)
Payments on capital lease obligation (56) (53)
Payments on notes payable - other - (415)
--- ----
Net cash used in financing activities (56) (1,742)
--- ------
Net decrease in cash and cash equivalents (385) (4,637)
Cash and cash equivalents at beginning of period 7,816 15,049
----- ------
Cash and cash equivalents at end of period $7,431 $10,412
====== =======
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 January 31, 1999 and the results
of operations for the three and six months ended January 31, 1999 and 1998
and cash flows for the six months ended January 31, 1999 and 1998.
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, 1998, 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 are excluded from the calculation of
diluted net income per share when the result would be antidilutive.
3. Acquisition of Coastal Office Products, Inc.
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, which has been accounted for as
a purchase, consisted of a cash payment of $3.1 million plus potential
future contingent payments. Contingent payments of up to $1,050 for each
of calendar 1998 and 1999 will be determined based upon Coastal achieving
certain agreed upon increases in revenue and pretax income for calendar
1998 and 1999 over calendar 1997 amounts. The cash payment was made from
the Company's cash balances. 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. As of January 31, 1999, the Company has recorded
additional purchase price of $871,000, of which $800,000 represents a
contingent payment due on March 15, 1999. The selling shareholders
received employment agreements that also provided for the issuance of
20,000 shares of common stock. The fair value of the common stock,
amounting to $80,000 was recorded as deferred compensation and is being
expensed over the three-year vesting period.
Operating results of Coastal are included in the Condensed Consolidated
Statements of Income from the date of acquisition. The acquisition
resulted in goodwill of $3,836,000 which is being amortized on the
straight-line basis over 20 years.
6
The following unaudited pro forma consolidated results of operations
for the six months ended January 31, 1998 assume that the Coastal
acquisition occurred on August 1, 1997 and reflect the historical
operations of the purchased business adjusted for lower interest on
invested funds, contractually revised officer compensation and rent and
increased amortization, net of applicable income taxes, resulting from the
acquisition:
Six months ended
January 31, 1998
----------------
(in thousands,
except per share amounts)
Revenue $100,003
=======
Net income $1,019
======
Net income per share $0.12
====
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, 1998, and those set forth in the Company's other filings
from time to time with the Securities and Exchange Commission.
General
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. 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. 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 has experienced a significant 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 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 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 customer accounted for approximately 8% and 8%
(or $8,376,000 and $7,698,000, respectively) of the Company's revenue for
the six months ended January 31, 1999 and 1998, respectively,
substantially all of which revenue was derived from the sale of hardware
products. This customer accounted for 7% of revenue for the fiscal year
ended July 31, 1998. There can be no assurance that the Company will
continue to derive substantial revenue 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 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 January 31, 1999 and July 31, 1998,
inventories represented 16% of total assets. For the six months ended
January 31, 1999 and 1998, annualized inventory turnover was 21 and 15
times, respectively. Inventory turned 17 times in the fiscal year ended
July 31, 1998. 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 six month
periods ended January 31, 1999 and 1998. For the fiscal year ended July
31, 1998, bad debt expense represented 0.2% 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, 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.
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
Year 2000 Issue
Many existing computer systems, including certain of the Company's
internal systems as well as those that the Company sells to customers, use
only the last two digits to identify years in the date field. As a result,
those systems may not accurately distinguish years in the 21st century
from years in the 20th century, or may not function properly when faced
with years later than 1999. This problem is generally referred to as the
"Year 2000 Issue." Computer systems that are able to deal correctly with
dates after 1999 are referred to as "Year-2000-Compliant."
Year 2000 Readiness Disclosure
The Company has undertaken a complete and thorough review of all of
its operations to determine those aspects which involve or are dependent
upon a computer application. The Company is reviewing the software and
operating systems for each such application to determine if it is
Year-2000-Compliant. Any such system or application which is not
Year-2000-Compliant is being modified or upgraded to assure the Company's
continued ability to operate without interruption. This process has been
underway since before January 1, 1998 and is currently on schedule for
completion by March 31, 1999. The Company is in the process of obtaining
assurances regarding Year 2000 compliance from other companies upon which
it may rely for products or services.
The Company expects to implement successfully the systems and
programming changes necessary to address the Year 2000 Issue. The Company
expects to implement these changes using primarily internal information
technology and other personnel. Moreover, the Company does not expect the
costs associated with that implementation to be material to the Company's
financial position or results of operations.
With respect to products sold to customers, the Company does not
warrant any products sold as Year-2000-Compliant. Instead, the Company
refers customers to any warrantees provided by the product's
manufacturers.
The Company believes the most reasonably likely worst case Year 2000
scenario would include a combination of some or all of the following:
o Internal information technology modules or systems may fail to operate
or may give erroneous information. Such failure could result in
shipping delays, inability to generate or delays in generation of
financial reports and statements, inability of the Company to
communicate among its various offices, and computer network downtime
resulting in inefficiencies and higher payroll expenses.
o Components in HVAC, lighting, telephone, security and similar systems
might fail, causing such systems to fail.
o Communications with customers and vendors that the Company depends
upon may fail or give erroneous information. These types of problems
could result in such difficulties as the inability to receive or
process customer orders, shipping delays, or sale of products at
erroneous prices. Furthermore, customers may be unable to, or may
suffer delays, in remitting payments to the Company on a timely basis.
o The unavailability of products as a result of Year 2000 problems
experienced by one or more key vendors of the Company, or as a result
of changes in inventory levels at aggregators, VARs and similar
providers in response to an anticipated Year 2000 problem and/or the
inability of the Company to develop alternative sources for products
may result in the inability of the Company to obtain an adequate
supply of products.
o Products sold to some of the Company's customers could fail to perform
some or all of their intended functions. In such a situation, the
Company's maximum obligation would be to repair or replace the
defective products to the extent the Company is required to do so
under manufacturer warranty.
10
The Company believes its plans for addressing the Year 2000 Issue as
outlined above are adequate to handle the most reasonably likely worst
case scenario. The Company does not believe it will incur a material
financial impact for the risk of failure, or from the costs associated
with assessing the risks of failure, arising from the Year 2000 Issue.
Consequently, the Company does not intend to create a contingency plan
other than as set forth above. In addition, if the Company's assessment of
its vendors, when completed, indicate that certain product shortages can
be anticipated, the Company may adjust its plans accordingly, although the
Company does believe that it has the capacity to maintain significant
levels of inventory.
The statements above describing the Company's plans and objectives
for handling the Year 2000 Issue and the expected impact of the Year 2000
Issue on the Company are forward-looking statements. Those statements
involve risks and uncertainties that could cause actual results to differ
materially from the results discussed above. Factors that might cause such
a difference include, but are not limited to, delays in executing the plan
outlined above and increased or unforeseen costs associated with the
implementation of the plan and any necessary changes to the Company's
systems. Any inability on the part of the Company to implement necessary
changes in a timely fashion could have an adverse effect on future results
of operations. Moreover, even if the Company successfully implements the
changes necessary to address the Year 2000 Issue, there can be no
assurance that the Company will not be adversely affected by the failure
of others to become Year-2000-Compliant.
Recent Acquisition
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 approximately $3.1 million plus potential future
contingent payments. The cash payment was made from the Company's cash
balances. Contingent payments of up to $1,050,000 in each of calendar 1998
and 1999 will be determined based upon Coastal achieving certain agreed
upon increases in revenues and pretax income for calendar 1998 and 1999
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
Consolidated Statements of Income from the date of acquisition. The
acquisition resulted in goodwill of $3,836,000, which is being amortized
on the straight-line basis over 20 years.
E-Commerce
On January 18, 1999 the Company officially launched its new website and
electronic commerce system. The new site, located at
www.manchesterequipment.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.
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,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Product Sales 97.0% 97.8% 96.9% 97.9%
Services 3.0 2.2 3.1 2.1
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of Product Sales 87.0 86.2 87.0 86.1
Cost of Services 65.9 75.5 63.0 72.9
---- ---- ---- ----
Cost of revenue 86.4 86.0 86.2 85.8
----- ----- ---- ----
Product Gross Profit 13.0 13.8 13.0 13.9
Services Gross Profit 34.1 24.5 37.1 27.1
---- ---- ---- ----
Gross Profit 13.6 14.0 13.8 14.2
---- ---- ---- ----
Selling, general and
administrative expenses 13.5 13.6 13.0 12.9
----- ---- ---- ----
Income from operations 0.1 0.4 0.8 1.3
Interest and other income, net 0.2 0.4 0.2 0.4
---- --- --- ----
Income before income taxes 0.3 0.8 1.0 1.7
Provision for income taxes 0.1 0.3 0.4 0.7
------ ---- --- ---
Net income 0.2% 0.5% 0.6% 1.0%
====== ===== === ===
Three Months Ended January 31, 1999 Compared to Three Months Ended January
31, 1998
Revenue. The Company's revenue increased $4.0 million or 8.1% from
$49.4 million for the three months ended January 31, 1998 to $53.4 million
for the three months ended January 31, 1999. Product revenue increased by
$3.5 million (7.2%) due primarily to increases in shipments of personal
computers and displays, as well as revenue generated by Coastal, partially
offset by lower per unit prices for personal computers. Service revenue
increased $547,000 (51.4%) 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 $358,000 or 5.2% from
$6.7 million for the second quarter of fiscal 1998 to $7.2 million for the
most recent fiscal quarter. Gross profit from the sale of products
increased by $69,000 while gross profit from the sale of services
increased by $289,000. The changes in gross profit primarily result from
the changes in revenue discussed above. As a percentage of revenue, gross
profit decreased to 13.6% in the second quarter of fiscal 1999 as compared
to 14.0% in fiscal 1998. 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 $519,000 or 7.7% from $6.7 million in
the second quarter of fiscal 1998 to $7.2 million in the second quarter of
fiscal 1999. This increase is principally a result of higher salaries and
12
personnel costs as well as higher depreciation and amortization costs. In
addition, the Company incurred higher operating costs associated with the
Company's new subsidiary, Coastal.
Interest Income. Interest income decreased from $203,000 in the second
quarter of 1998 to $105,000 in the second quarter of 1999 due to lower cash
balances available for investment.
Provision for Income Taxes. The effective income tax rate
increased to 48% in the current period compared to 39% of pre-tax income
in the prior year period principally as a result of certain non deductible
expenses.
Six Months Ended January 31, 1999 Compared to Six Months Ended January 31,
---------------------------------------------------------------------------
1998
----
Revenue. The Company's revenue increased by $14.5 million or 15.0%
from $96.4 million for the six months ended January 31, 1998 to $110.9
million for the six months ended January 31, 1999. Revenue from the sale
of products increased by $13.0 million (13.8%) while revenue from service
offerings increased by $1.4 million (70.7%). The increases in revenue were
largely attributable to growth at the Company's Electrograph and Coastal
subsidiaries. Coastal was acquired on January 2, 1998. The Company
continued to experience lower average selling prices for personal
computers offset partially by increases in units shipped.
Gross Profit.Gross profit increased by $1.6 million (11.5%) to
$15.3 million for the first six months of fiscal 1999 from $13.7 million
in the comparable period a year ago. Gross profit from product sales
increased by 6.5% ($855,000) from $13.1 million in the first six months of
fiscal 1998 to $14.0 million in the most recent six month period. Service
offerings generated $1.3 million of gross profit in the first six months
of fiscal 1999 versus $546,000 in gross profit generated in the comparable
period a year ago. The growth in gross profit dollars is principally due
to the increase in revenue discussed above. Gross margin percentages
declined in the recent period due to generally lower vendor incentives
including market development funds, co-op advertising, and rebate
programs.
Selling, General and Administrative Expenses. Selling general and
administrative expenses increased by $2.0 million or 16.2% from $12.4
million for the first six months of fiscal 1998 to $14.4 million for the
first six months of fiscal 1999. The increase is principally due to higher
salaries and personnel costs, higher advertising costs associated with the
Company's strategy of focusing on providing value added services and costs
associated with enhancing the Company's e-commerce capabilities.
Additionally, the Company incurred higher depreciation and amortization
costs and other operating costs associated with the Company's new
subsidiary, Coastal.
Interest Income. Interest income decreased due to lower cash balances
available for investment.
Provision for Income Taxes. The effective income tax rate
increased slightly from 40.3% for the first six months of fiscal 1998 to
40.7% in the most recent fiscal period.
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 six months ended January 31, 1999, cash provided by operating
activities was $513,000 consisting primarily of net income, depreciation
and amortization and the sale of investments, partially offset by a
decrease in accounts payable and accrued expenses. 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
13
accounts receivable, inventory and accounts payable and accrued expenses
will coincide with growth in revenue and increased operating levels. In
addition, during the six months ended January 31, 1999 the Company used
approximately $842,000 for capital expenditures.
The Company has available a line of credit with financial
institutions in the aggregate amount of $15.0 million. No amounts were
outstanding under this line as of January 31, 1999.
The Company believes that its current balances in cash and cash
equivalents and investments, 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 1999. The Company currently has no 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, the possible opening of new offices, potential
acquisitions, and expansion of the Company's e-commerce capabilities.
New Accounting Standards
------------------------
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which the Company has adopted
effective August 1, 1998. This statement establishes standards for
reporting information about operating segments, and related disclosures
about product and services, geographic areas and major customers. The
adoption of this statement did not have an impact on the Company's
financial statements.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in fiscal 2000. The Company believes that the
implementation of this new pronouncement will have no impact on the
financial position and results of operations of the Company.
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PART II - OTHER INFORMATION
Item 5. Other Information
As permitted by a recent amendment to the New York Business
Corporation Law, on March 12, 1999, the Board of Directors amended the
By-Laws to permit notices of meetings of shareholders to be given not less
than ten nor more than sixty days before the meeting, and to permit the
Board to set a record date for meetings of shareholders that is not more
than sixty nor less than ten days prior to the date of such meeting. In
each case, the prior outside date had been fifty days.
Item 6. Exhibits and Reports
(a) Exhibits
--- --------
Exhibit No. Description
----------- -----------
3(ii) Amended and Restated By-Laws
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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, 1999 s/s Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: March 12, 1999 s/s/ Joseph Looney
------------------------------
Joseph Looney
Chief Financial Officer
16