18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 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 June 3,
1999.
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets
April 30, 1999 (unaudited) and July 31, 1998 3
Condensed Consolidated Statements of Income
Three months and nine months ended
April 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 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 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 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)
April 30, 1999 July 31, 1998
(Unaudited)
----------- -------------
Assets:
Cash and cash equivalents $ 11,951 $ 7,816
Investments - 1,501
Accounts receivable, net 25,788 26,296
Inventory 8,037 9,167
Deferred income taxes 482 482
Prepaid income taxes 159 -
Prepaid expenses and other current assets 196 290
--- ---
Total current assets 46,613 45,552
Property and equipment, net 6,182 5,975
Goodwill, net 4,997 4,325
Deferred income taxes 475 475
Other assets 306 567
--- ---
$58,573 $56,894
======= =======
Liabilities:
Current maturities under capital
lease obligation $ 8 $ 82
Accounts payable and accrued expenses 19,526 18,358
Deferred service revenue 574 775
Income taxes payable - 225
--- ---
Total current liabilities 20,108 19,440
Deferred compensation payable 109 109
--- ---
Total liabilities 20,217 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 18,820 18,767
Deferred compensation (44) (64)
Retained earnings 19,499 18,561
------ ------
Total shareholders' equity 38,356 37,345
------ ------
$58,573 $56,894
======= =======
See notes to condensed consolidated financial statements.
3
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
Three months ended April 30, Nine months ended April 30,
1999 1998 1999 1998
Revenue
Products $52,956 $52,655 $160,409 $147,071
Services 1,834 1,514 5,269 3,526
----- ----- ----- ------
54,790 54,169 165,678 150,597
------ ------ ------- -------
Cost of revenue
Products 45,053 45,026 138,501 126,292
Services 1,241 1,160 3,406 2,626
----- ----- ----- -----
46,294 46,186 141,907 128,918
------- ------ ------- -------
Gross profit 8,496 7,983 23,771 21,679
Selling, general and
administrative expenses 8,073 7,086 22,482 19,490
----- ----- ------ ------
Income from operations 423 897 1,289 2,189
Interest expense ( 2) ( 5) (7) (38)
Interest income 116 82 336 486
--- ------- --- ---
Income before income taxes 537 974 1,618 2,637
Provision for income taxes 240 387 680 1,057
--- --- --- -----
Net income $ 297 $587 $938 $1,580
===== ==== ==== ======
Net Income per share
Basic $0.04 $ 0.07 $0.12 $0.19
===== ======= ===== =====
Diluted $0.04 $ 0.07 $0.12 $0.19
===== ======= ===== =====
Weighted average
shares outstanding
Basic 8,097 8,542 8,097 8,533
===== ===== ===== =====
Diluted 8,097 8,548 8,097 8,535
===== ===== ===== =====
See notes to condensed consolidated financial statements.
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the nine months
ended April 30,
1999 1998
(Unaudited)
-------------
Cash flows from operating activities:
Net income $ 938 $1,580
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 1,325 900
Allowance for doubtful accounts 167 288
Stock compensation expense 73 44
Change in assets and liabilities net of
the effects of acquisition:
Decrease (increase) in accounts receivable 341 (4,063)
Decrease in inventory 1,130 5,424
Increase in prepaid expenses and
other current assets (65) (124)
Decrease in other assets 261 21
(Decrease) increase in accounts payable and
accrued expenses 1,168 (6,367)
(Decrease) increase in deferred service
contract revenue (201) 8
Decrease in income taxes payable (225) -
Sale of investments 1,501 1,907
------ -----
Net cash provided by (used in)operating activities 6,413 (382)
----- ---
Cash flows from investing activities:
Capital expenditures (1,333) (2,525)
Payment for acquisition, net of cash acquired (871) (2,921)
--- -----
Net cash used in investing activities (2,204) (5,446)
------ -----
Cash flows from financing activities:
Net repayments of borrowings - (1,274)
Payments on capital lease obligations (74) (77)
Purchase of treasury stock - (99)
Payments on notes payable - other - (481)
--- ---
Net cash used in financing activities (74) (1,931)
-- -----
Net increase (decrease) in cash and cash equivalents 4,135 (7,759)
Cash and cash equivalents at beginning of period 7,816 15,049
----- -----
Cash and cash equivalents at end of period $11,951 $7,290
======= ======
See notes to condensed consolidated financial statements.
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 an integrator and
reseller of computer hardware, software and networking products, primarily
for commercial customers. The Company offers its customers single-source
solutions customized to their information systems needs by 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 limited price protection in the event the vendor
reduces its prices.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting of
only normal and recurring accruals) necessary to present fairly the
financial position of the Company as of April 30, 1999 and the results of
operations for the three months and nine months ended April 30, 1999 and
1998 and cash flows for the nine months ended April 30, 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 at closing,
$871,000 paid on March 15, 1999, based upon Coastal meeting certain
targeted results for calendar 1998, plus a potential future contingent
payment. The future contingent payment of up to $1,050,000 for calendar
1999 will be determined based upon Coastal achieving certain agreed upon
increases in revenue and pretax income for calendar 1999 over calendar
1997 amounts. The cash payments were made from the Company's cash
balances. The contingent payment, if any, would be paid in cash (or, under
certain conditions, in Company common stock) on March 15, 2000. 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 nine months ended April 30, 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:
Nine months ended
April 30, 1998
(in thousands, except
per share amounts)
Revenue $154,172
Net income 1,605
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.
4. Repurchase of Common Stock
On May 3, 1999, the Company announced that its Board of Directors
authorized the expenditure through April 2000 of up to $2.0 million to
repurchase its common stock. To date no repurchases have been made under
this program.
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
Manchester is an integrator and reseller of computer hardware,
software and networking products, primarily for commercial customers. The
Company offers its customers single-source solutions customized to their
information systems needs by 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 $12,692,000, and $11,355,000, respectively) of the Company's revenue
for each of the nine months ended April 30, 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 April 30, 1999 and 1998, inventories
represented 14% and 11%, respectively, of total assets. For the nine
months ended April 30, 1999 and 1998, annualized inventory turnover was 28
and 30 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 annualized bad debt
expense represented less than 0.2% of total revenue in each of the nine
month periods ended April 30, 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 that 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. Manchester's year 2000
project has been underway for over a year. This is aimed at ensuring that,
when the year 2000 arrives, all applications used on Manchester's AS/400
computer system are year 2000 compliant. As of May 3, 1999 the following
tasks have been completed:
o All programs containing date manipulations, calculations or comparison
routines have been identified.
o All of these programs have been modified to be year 2000 compliant.
o Physical database files and supporting logical views of these files
that contain date data and sequencing by date have been identified and
these files have been modified as required to be year 2000 compliant.
Manchester's communications, local, and wide area networks have been tested
or represented (by the manufacturers) to be year 2000 compliant, with a few
minor exceptions that should be resolved shortly. Our status as of May 3,
1999 is as follows:
o The local area network operations systems have been represented to be
year 2000 compliant by the manufactures/publishers.
o The network servers have been represented to be year 2000 compliant by
the manufacturers.
o An audit of all wide area network devices has been completed and the
recommended changes have been made.
o An audit has been completed assessing the compliance level of all
computers and recommended upgrades have been made.
o We continue to audit software applications on the local area network.
Products that are identified as non-compliant are either being
upgraded or removed.
o The telephone system has been represented by the manufacturer to be
year 2000 compliant.
o We have received assurances of compliance from vendors of other types
of equipment (e.g. alarm, HVAC), either via correspondence or from
information on their websites.
Testing and monitoring will be on going throughout the rest of the year.
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
10
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 reimbursed warranty programs.
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, indicates 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.
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
11
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 at closing,
$871,000 paid on March 15, 1999, based upon Coastal meeting certain
targeted results for calendar 1998, plus a potential future contingent
payment. The future contingent payment of up to $1,050,000 for calendar
1999 will be determined based upon Coastal achieving certain agreed upon
increases in revenue and pretax income for calendar 1999 over calendar 1997
amounts. The cash payments were made from the Company's cash balances. The
contingent payment, if any, would be paid in cash (or, under certain
conditions, in Company common stock) on March 15, 2000. 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.
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 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.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's Condensed Consolidated Statements of Income
expressed as a percentage of related revenue or total revenue.
Percentage of Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ----- ---- ----
Product sales 96.7% 97.2% 96.8% 97.7%
Services 3.3 2.8 3.2 2.3
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of product sales 85.1 85.6 86.3 85.9
Cost of services 67.7 76.6 64.6 74.5
---- ---- ---- ----
Cost of revenue 84.4 85.3 85.7 85.6
---- ---- ---- ----
Product gross profit 14.9 14.4 13.7 14.1
Services gross profit 32.3 23.4 35.4 25.5
---- ---- ---- ----
Gross profit 15.5 14.7 14.3 14.4
Selling, general and
administrative expenses 14.7 13.1 13.5 12.9
---- ---- ---- ----
Income from operations 0.8 1.6 0.8 1.5
Interest and other income, net 0.2 0.2 0.2 0.3
---- --- --- ---
Income before income taxes 1.0 1.8 1.0 1.8
Provision for income taxes 0.4 0.7 0.4 0.7
--- --- --- ---
Net income 0.6% 1.1% 0.6% 1.1%
=== === === ===
12
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30,
1998
Revenue. The Company's revenue increased slightly from $54.2 million
for the three months ended April 30, 1998 to $54.8 million for the three
months ended April 30, 1999. Product revenue increased by $301,000 (0.6%)
due primarily to increases in revenue generated from the Company's
Electrograph and Coastal subsidiaries, as well as higher average selling
prices for personal computers. These increases were partially offset by a
reduction in the number of personal computers sold during the quarter.
Service revenue increased $320,000 (21%) 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 $513,000 or 6.4% from
$8.0 million for the third quarter of fiscal 1998 to $8.5 million for the
most recent fiscal quarter. Gross profit from the sale of products
increased by $274,000 while gross profits from the service offerings
increased by $239,000. The changes in gross profit from the sale of
products primarily results from the changes in revenue discussed above. As
a percentage of revenue, gross profit increased to 15.5% in fiscal 1999 as
compared to 14.7% in fiscal 1998. 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 $987,000 or 13.9% from $7.1 million in
the third quarter of fiscal 1998 to $8.1 million in the third quarter of
fiscal 1999. This increase is principally a result of higher salaries and
personnel costs related to the Company's increased emphasis on providing
value-added services and enhancing its electronic commerce capabilities and
higher depreciation and amortization costs.
Interest Income. Interest income increased from $82,000 in fiscal 1998
to $116,000 in fiscal 1999 due to higher cash balances available for
investment.
Provision for Income Taxes. The effective income tax rate increased to
45% of income before income taxes as compared to 40% in the prior year
period principally as a result of certain non deductible expenses.
Nine Months Ended April 30, 1999 Compared To Nine Months Ended April 30,
1998
Revenue. The Company's revenue increased by $15.1 million (10.0%) from
$150.1 million for the first nine months of fiscal 1998 to $165.7 million
for the first nine months of fiscal 1999. The increase is due to increased
revenue from the Company's Electrograph and Coastal subsidiaries partially
offset by lower per unit prices for personal computers. Revenue from
services increased by 49% over service revenue for the prior nine month
fiscal period while product revenue increased by 9.1% from fiscal 1998
amounts.
Gross Profit. Gross profit increased $2.1 million (9.7%) from $21.7
million for the first nine months of fiscal 1998 to $23.8 million for the
most recent nine month period. Margins on product sales declined to 13.7%
versus 14.1% due to changes in product mix while margins on service
offerings improved from 25.5% to 35.4% primarily due to increased revenue
and improved personnel utilization in the technical services area.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.0 million (15.4%) from $19.5
million in fiscal 1998 to $22.5 in fiscal 1999. 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 and costs associated with enhancing the
Company's e-commerce capabilities, as well as higher depreciation and
amortization expenses.
Interest Income. Interest income decreased due to lower cash balances
available for investment.
13
Provision For Income Taxes. The effective income tax rate increased to
42% of pre tax income as compared to 40% in the prior year due to certain
non deductible expenses.
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 nine months ended April 30, 1999, cash generated from
operating activities was $6.4 million consisting primarily of net income,
non cash charges (principally depreciation and amortization) and the sale
of investments. Reductions in accounts receivable and inventory as well as
an increase in accounts payable and accrued expenses also contributed cash
generated from operations. The Company's accounts receivable and accounts
payable and accrued expenses balances as well as its investment in
inventory can fluctuate significantly from one period to the next due to
the receipt of large customer orders or payments or variations in product
availability and vendor shipping patterns at any particular date.
Generally, the Company's experience is that increases in accounts
receivable, inventory and accounts payable and accrued expenses will
coincide with growth in revenue and increased operating levels. In
addition, during the nine months ended April 30, 1999 the Company used
approximately $1.3 million for capital expenditures, and paid $871,000 in
contingent purchase price relating to the acquisition of Coastal.
The Company has available a line of credit with a financial
institution in the aggregate amount of $15.0 million. As of April 30, 1999,
no amounts are outstanding under this line.
The Company believes that its current balances in cash and cash
equivalents, expected cash flows from operations and available borrowings
under the line of credit will be adequate to support current operating
levels for the foreseeable future, specifically through at least the end of
fiscal 1999. On May 3, 1999, the Company announced that its Board of
Directors authorized the expenditure, through April, 2000, of up to $2.0
million to repurchase its common stock. To date, no repurchases have been
made under this program. 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 as well as the possible opening of new offices and potential
acquisitions.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On April 15, 1999 the Company held its Annual Meeting of
Shareholders to (1) elect six Directors to serve until the 2000 Annual
Meeting of Shareholders; and (2) ratify the reappointment of KPMG LLP as
independent auditors of the Company for the year ending July 31, 1999.
The results of the voting for the election of Directors were as
follows:
Broker
Nominee For Withheld Abstain Non-votes
-------------- --- -------- ------- ---------
Barry R. Steinberg 7,372,709 317,615 0 0
Joel G. Stemple 7,673,109 17,215 0 0
Joel Rothlein 7,673,109 17,215 0 0
Bert Rudofsky 7,673,109 17,215 0 0
Michael E. Russell 7,673,109 17,215 0 0
Julian Sandler 7,673,109 17,215 0 0
Accordingly, each of six nominees received a plurality of the total
votes that were cast.
The results of the voting on the ratification of the appointment of
KPMG LLP as the Company's independent auditors were as follows:
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
7,678,619 6,165 5,540 0
Accordingly, the number of shares voted for the ratification of the
appointment of KPMG LLP constituted a majority of the shares present in
person or represented by proxy.
Item 6. Exhibits and Reports
(a) Exhibits
Exhibit No. Description
----------- ------------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
15
MANCHESTER EQUIPMENT CO., INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANCHESTER EQUIPMENT CO., INC.
(Registrant)
DATE: June 7, 1999 /s/ Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: June 7, 1999 /s/ Joseph Looney
-----------------
Joseph Looney
Chief Financial Officer
16