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47
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- -
For the fiscal year ended July 31, 2000
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21695
MANCHESTER EQUIPMENT CO., INC.
(Exact name of Registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I. D. Number)
160 Oser Avenue 11788
Hauppauge, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 435-1199
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant (1) has filed all reports 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: YES __X__ NO _____ -
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 20, 2000 was $9,960,000 (2,700,651 shares at a closing
sale price of $3.688).
As of October 20, 2000, 8,054,315 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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MANCHESTER EQUIPMENT CO., INC.
FORM 10-K
YEAR ENDED JULY 31, 2000
TABLE OF CONTENTS
Part I
Page
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Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for the Registrant's Common Stock and 12
Related Stockholder Matters
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Change In and Disagreements with Accountants on Accounting 19
and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures Chief Executive Officer, Chief Financial Officer, and Directors 45
PART I
This Report contains certain forward-looking statements that are based on
current expectations. The actual results of Manchester Equipment Co., Inc. (the
"Company") may differ materially from the results discussed herein as a result
of a number of unknown factors. Such factors include, but are not limited to,
there being no assurance that the Company will be successful in expanding its
Internet presence, that the acquisitions of Electrograph Systems, Inc., Coastal
Office Products, Inc., Texport Technology Group, Inc. and Learning Technology
Group, LLC, will continue to add to the Company's profitability, that the
Company will be successful in its efforts to focus on value-added services, that
the Company will be successful in attracting and retaining highly skilled
technical personnel and sales representatives necessary to implement the
Company's growth strategies, that the Company will not be adversely affected by
continued intense competition in the computer industry, continued decreases in
average selling prices of personal computers, a lack of product availability or
deterioration in relationships with manufacturers, or a loss or decline in sales
to any of its major customers. See "Products" and "Competition" in Part I, Item
1 and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II, Item 7 of this report for a discussion of important
factors that could affect the validity of any forward looking statements.
ITEM 1. Business
Our Company
Manchester Equipment Co., Inc. ("Manchester" "we," "us," "our," or the
"Company") is an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions customized to their information systems needs by
integrating its analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. Over the
past 27 years, the Company has forged long-standing relationships with both
customers and suppliers and capitalized on the rapid developments in the
computer industry, including the shift toward client/server-based platforms.
Our marketing focus is on mid- to large-sized companies, which have
become increasingly dependent upon complex information systems in an effort to
gain competitive advantages. While many of these companies have the financial
resources to make the required capital investments in information systems, often
they do not have the necessary information technology personnel to design,
install or maintain complex systems or to incorporate the continuously evolving
technologies. As a result, these companies are turning to independent third
parties to procure, design, install, maintain and upgrade their information
systems.
We offer our customers a variety of value-added services, such as
consulting, integration and support services, together with a broad range of
computer and networking products from leading vendors. Consulting services
include systems design, performance analysis, and migration planning.
Integration services include product procurement, configuration, testing and
systems installation and implementation. Support services include network
management, "help-desk" support, and enhancement, maintenance and repair of
computer systems. Most of our revenues are derived from sales to customers
located in the New York Metropolitan area, with approximately 60% of our revenue
generated from our Long Island and New York City offices. As a result, our
business, financial condition and results of operations are susceptible to
regional economic downturns and other regional factors. In addition, as we
expand in our existing markets, opportunities for growth within these regions
may become more limited. There can be no assurance that we will grow enough in
other markets to lessen our regional geographic concentration.
On February 16, 2000, we launched our enhanced website and electronic
commerce system. This new site, located at www.e-manchester.com, allows both
existing customers, corporate shoppers and others to find product
specifications, compare products, check price and availability and place and
track orders quickly and easily, 24 hours a day, 7 days a week. In addition, on
June 25, 1999, we announced the launch of a new consumer products on-line super
store, Marketplace4U.com. This site offers products in categories such as
consumer electronics, automotive accessories, and outdoor and camping equipment
from its main and outlet stores. The main store offers top brand products at
competitive prices; the outlet store offers top name brand factory refurbished,
warranteed products at even greater savings.
Manchester was incorporated in New York in 1973 and has seven active
wholly-owned subsidiaries: Manchester International, Ltd., a New York
corporation, which sells computer hardware, software and networking products to
resellers domestically and internationally; ManTech Computer Services, Inc., a
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New York corporation, which identifies and provides temporary information
technology positions and solutions for commercial customers; Electrograph
Systems, Inc., a New York corporation, which distributes microcomputer
peripherals throughout the United States; Coastal Office Products, Inc., a
Maryland corporation, which is an integrator and reseller of computer products
in the Baltimore, Maryland area; Marketplace4U.com, Inc., a New York
corporation, which is an online superstore that offers a wide range of brand
name products to consumers, Texport Technology Group, Inc., a New York
corporation which is an integrator and reseller of computer products in the
Rochester, New York area; and Learning Technology Group, LLC, a New York limited
liability corporation which is an integrator and reseller of computer products
mainly to educational institutions within New York State.
Industry
Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Computer technology and related products are continuously evolving,
making predecessor technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant challenges
to companies.
Over the last several years, the increase in performance of personal
computers, the development of a variety of effective business productivity
software programs and the ability to interconnect personal computers in high
speed networks have led to an industry shift away from mainframe computer
systems to client/server systems based on personal computer technology. In such
systems, the client computer, in addition to its stand-alone capabilities, is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers. Recently, networked
applications such as electronic mail and work group productivity software,
coupled with widespread acceptance of Internet technologies, have led companies
to implement corporate intranets (networks that enable end-users (e.g.,
employees) to share information). The use of a corporate intranet allows a
company to warehouse valuable information, which may be "mined" or accessed by
employees or other authorized users through readily available Internet tools
such as Web browsers and other graphical user interfaces.
With these advances in information systems and networking, many
companies are reengineering their businesses using these technologies to enhance
their revenue and productivity. However, as the design of information systems
has become more complex to accommodate the proliferating network applications,
the configuration, selection and integration of the necessary hardware and
software products have become increasingly more difficult and complicated. While
many companies have the financial resources to make the required capital
investments, they often do not have the necessary information technology
personnel to design, install or maintain complex systems and may not be able to
provide appropriate or sufficient funding or internal management for the
maintenance of their information systems. As a result, such companies are
increasingly turning to independent third parties to procure, design, install,
maintain and upgrade their information systems. By utilizing the services of
such third parties, companies are able to acquire state-of-the-art equipment and
expertise on a cost-effective basis.
The Manchester Solution
Manchester offers its customers single-source solutions customized to
their information systems needs. Our solution includes a variety of value-added
services, including consulting, integration, network management, "help-desk"
support, and enhancement, maintenance and repair of computer systems, together
with a broad range of computer and networking products from leading vendors. We
believe we provide state-of-the-art, cost-effective information systems designed
to meet our customers' particular needs.
As a result of our long-standing relationships with certain suppliers
and our large volume purchases, we are often able to obtain significant purchase
discounts which can result in cost-savings for our customers. Our relationships
with our suppliers, our inventory management system and industry knowledge
generally enable us to procure desired products on a timely basis and therefore
to offer our customers timely product delivery.
Our Strategy
The key elements of our strategy include:
Emphasizing Value-added Services. Value-added services, such as
consulting, integration and support services, generally provide higher profit
margins than computer hardware sales. We have increased our focus on providing
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these services through a number of key strategies. We have recruited additional
technical personnel with broad-based knowledge in systems design and specialized
knowledge in different areas of systems integration, including application
software, inter-networking (including routers and switches), database design and
management.
Increasing Marketing Focus on Companies Outside the Fortune 500. We
have increased our marketing focus on those companies outside the Fortune 500 in
order to increase its value-added services revenue. Our experience is that those
companies are increasingly looking to third parties to provide a complete
solution to their information systems needs from both a service and product
standpoint. Such companies often do not have the necessary information
technology personnel to procure, design, install or maintain complex systems or
to incorporate continuously evolving technologies. We believe that we can
provide these companies with solutions to their information systems requirements
by providing a variety of value-added services together with a broad range of
computer and networking products.
Electronic Ordering System. We have implemented an electronic ordering
system. This ordering system enables participating customers to access us via
the Internet, review various products, systems and services offered by us and
place their orders on-line. Customers are also able to obtain immediate
customized information regarding products, systems and services that meet their
specific requirements. The ordering system produces a matrix of alternative
fully compatible packages, together with their availability and related costs,
based on parameters indicated by the customer. Customers are not granted access
to this system without prior credit clearance. (See "Expanding Internet
Presence").
Increasing Sales Force Productivity. We are addressing a variety of
strategies to increase sales force productivity. We have implemented
enhancements to our system allowing our salesforce immediate access to
information regarding price and availability of products. In addition, we are
planning enhancements that will allow sales representatives to obtain immediate
customized information regarding products and services that meet specific
requirements of customers. We believe that this system will increase the
productivity of our sales representatives by enabling them to offer rapid and
comprehensive solutions to their customers' needs.
We provide training of our sales representatives in matters relating to
value-added services, such as consulting and integration services. To facilitate
such training, we constructed dedicated training facilities in one of our Long
Island offices and in our New York City office.
Expanding New York Metropolitan Area Presence. We believe that we have
a strong presence and wide name recognition in the New York Metropolitan area,
where there is a growing corporate demand for computer products and services.
Manchester is seeking to expand its presence in this area through its enlarged
New York City office and increased sales and service capabilities. We believe
that these steps will enable us to capture a greater percentage of the New York
Metropolitan area market. In fiscal 1998, we relocated our New York City office
to space that is approximately double the size of the previous office location.
Expanding into Additional Business Centers. We have regional offices in
Newton, Massachusetts, Baltimore, Maryland, and Boca Raton, Florida, from which
we derived approximately 14% of our revenues for the fiscal year ended July 31,
2000. In addition, during fiscal 2000, we expanded into Rochester, New York
through the acquisition on March 22, 2000 of Texport Technology Group, Inc. and
Learning Technology Group, LLC, and into Washington, D.C. through opening an
office in Lanham, Maryland (see "Acquisitions").
Expanding Internet Presence. We have continuously upgraded and expanded
our electronic communication system. Our website, located at
www.e-manchester.com, allows existing customers, corporate shoppers and others
to find product specifications, compare products, check prices and availability
and place and track orders quickly and easily 24 hours a day, seven days a week.
We have made, and expect to continue to make, significant investments and
improvements in our e-commerce capabilities.
On June 25, 1999, we announced the launch of a new consumer products
on-line super store, Marketplace4U.com ("MP4U"). MP4U offers consumers great
selection, price and service as well as a choice for savings. MP4U offers
products in categories such as consumer electronics, automotive accessories,
outdoor and camping equipment from each of its three "on line" stores. During
the fiscal years ended July 31, 2000 and 1999 revenue from MP4U was not
material.
Our Services and Products
We offer customized single-source solutions to our customers'
information systems requirements, including consulting, integration and support
services, together with a broad range of computer and networking products from a
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variety of leading vendors. We provide our services through a skilled staff of
engineers who are trained and certified in leading products and technology,
including Microsoft Windows NT, Novell NetWare and Cisco Systems routers and
switches.
Services. Our services include consulting, integration and support
services.
Consulting. Our staff of senior systems engineers provides consulting
services consisting of systems design, performance and security analysis, and
migration planning services.
Systems design services include network, communications, applications
and custom solutions design. Network design services involve analysis of a
customer's overall network needs, including access to the Internet;
communications design services involve analysis and creation of enterprise-wide
networks, including corporate intranets; applications design services include
creation of relational databases meeting customers' specific business
requirements; and custom solutions design services include design of storage
systems, remote access systems and document retention through scanning
technology.
Performance analysis involves analyzing a customer's information
systems to assess potential points of failure, to determine where performance
could be increased and to prepare for change and growth. This service includes
the evaluation of applications and their interaction with the network in order
to maximize existing computer resources. Through this evaluation process, which
includes a detailed report to the end-user, a plan for the optimization of the
customer's existing system is created, as well as recommendations for
enhancements and future systems.
Security analysis involves working with customers to develop security
policies covering network security, as well as risk analysis. After a policy is
developed, a security strategy is planned and deployed using a variety of tools,
including physical firewalls, packet filtering, encryption and user
authentication.
Migration planning involves the performance of a detailed assessment of
existing mission critical systems, followed by an analysis of the end-user's
future requirements. Working closely with the customer, our consultants develop
a migration strategy using a defined project plan that encompasses skills
transfer and training, checking for data integrity, project management and
consolidation and reallocation of resources. The primary objective of this
service is to rapidly move the customer from a slow or expensive system to a
newer, more efficient and cost-effective solution.
Integration. Integration services include product procurement,
configuration, testing, installation and implementation.
We maintain a sophisticated systems build and test area, adjacent to
our warehousing facilities, where computer systems are configured and tested
through the use of automated systems. Manchester manages the installation and
implementation of its customers' information systems, and provides critical path
analysis, vendor management and facility management services. Critical path
analysis involves the management and coordination of the various hardware and
software networking components of a systems design project. Our engineers
prepare reports setting forth coordinated timetables with respect to installing
and integrating the customer's information systems.
Support. We offer support services for customers' existing information
systems, including network management, "help-desk" services, enhancements,
maintenance and repair.
Network management consists of managing the compatibility of, and
communication between, the various components comprising a customer's
information system. The increased expense associated with the ownership of
information systems has encouraged customers to outsource the management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Currently, our engineers provide network management services on site
at customers' facilities.
"Help-desk" services consist of providing customers with telephone
support. In addition, our service call management system, which we are in the
process of enhancing, will enable our "help-desk" technicians to access an
archive of prior service calls concerning similar problems and their solutions,
resulting in a more efficient response to customers' calls.
Enhancement, maintenance and repair services range from broad on-site
coverage to less expensive, basic maintenance and repair of itemized hardware or
software, as well as enhancements such as upgrades of existing systems. Field
representatives are equipped with notebook computers to facilitate the exchange
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of information with both the information systems at the Company's headquarters
and with technical databases available on the Internet. We maintain a laboratory
at our Long Island facilities where we prototype customer problems for quicker
solutions without jeopardizing customers' information systems.
Products. We offer a wide variety of personal computer and networking
products and peripherals, including:
Desktop Computers Servers
Internet Access Products Software
Modems Storage Subsystems
Monitors Switches
Network Equipment Supplies and Accessories
Notebook Computers Teleconferencing Equipment
Printers Terminals
Routers Wireless Products
Scanners Workstations
We have long-standing relationships with many manufacturers, which we
believe assist us in procuring desired products on a timely basis and on
desirable financial terms. We sell products from most major manufacturers,
including:
Cisco Systems, Inc NEC Technologies, Inc.
Compaq Computer Corporation. Nortel Networks, Inc.
Computer Associates International, Inc Novell, Inc.
Epson America, Inc. Philips Electronics N.V.
Hewlett-Packard Company Seagate Technology, Inc.
Intel Corporation 3Com Corp.
Microsoft Corporation Toshiba America Information
Systems, Inc.
Viking Components, Inc.
For the fiscal years ended July 31, 2000, 1999 and 1998, sales of
products manufactured by Compaq, Hewlett-Packard and Toshiba collectively
comprised approximately 33%, 43% and 49%, respectively, of our revenues. In
fiscal years ended July 31, 2000, 1999 and 1998, sales of products manufactured
by Toshiba accounted for approximately 19%, 9%, and 18%, respectively, of
revenue, substantially all of which were sales of notebook computers and related
accessories. Also in these fiscal years, sales of products manufactured by
Compaq accounted for 13%, 25%, and 21%, respectively, of revenue. The total
dollar volume of products purchased directly from manufacturers, as opposed to
distributors or resellers, was approximately $122 million, $118 million, and $92
million for the fiscal years ended July 31, 2000, 1999, and 1998, respectively,
and as a percentage of total cost of products sold was approximately 48%, 61%,
and 55%, respectively.
We have entered into agreements with our principal suppliers that
include provisions providing for periodic renewals and permitting termination by
the vendor without cause, generally upon 30 to 90 days written notice, depending
upon the vendor. Compaq, Hewlett-Packard, and Toshiba have regularly renewed
their respective agreements us, although there can be no assurance that the
regular renewal of our dealer agreements will continue. The termination, or
non-renewal, of any or all of these dealer agreements would materially adversely
affect our business. We, however, are not aware of any reason for the
termination, or non-renewal, of any of those dealer agreements and believe that
our relationships with Compaq, Hewlett-Packard, and Toshiba are satisfactory.
We are dependent upon the continued supply of products from its
suppliers, particularly Compaq, Hewlett-Packard and Toshiba. Historically
certain suppliers occasionally experience shortages of select products that
render them unavailable or necessitate product allocations among resellers. Each
fiscal year, the Company has experienced product shortages, particularly related
to newer models. We believe that product availability issues are as a result of
the present dynamics of the personal computer industry as a whole, which include
high customer product demand, shortened product life cycles and increased
frequency of new product introductions into the marketplace. While there can be
no assurance that product unavailability or product allocation, or both, will
not increase in fiscal 2001, the impact of such an interruption is not expected
to be unduly troublesome due to the breadth of alternative product lines
available to the Company.
We seek to obtain volume discounts for large customer orders directly
from manufacturers and through aggregators and distributors.
Most of our major product manufacturers provide price protection for a
limited time period as well as stock balancing rights, by way of credits or
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refunds, against price reductions by the supplier between the time of the
initial sale to the Company and the subsequent sale by the Company to our
customers. During fiscal 2000 certain manufacturers reduced the period for which
they provide price protection and stock balancing rights. There can be no
assurance that manufacturers will not further limit or eliminate price
protection and stock balancing rights in the future.
Customers
We grant credit to customers meeting specified criteria and maintain a
centralized credit department that reviews credit applications. Accounts are
regularly monitored for collectibility and appropriate action is taken upon
indication of risk.
We believe that we benefit from our long-standing relationships with many
of our customers, providing opportunities for continued sales and services. We
believe that our broad range of capabilities with respect to both products and
services is attractive to companies of all sizes. Although we target companies
outside the Fortune 500 as one part of our strategy, we have sold, and
anticipate that we will continue to sell, to some of the largest companies in
the United States. For the fiscal years ended July 31, 2000, 1999 and 1998, no
one customer accounted for more than 10% of our total revenue. Some of our
significant commercial customers currently include Bysis Fund Services, Inc.,
Cabletron Systems Inc., Sterling Doubleday Enterprises (New York Mets), Reuters
America Inc., Vytra Choice Care, Inc., United Nations International Children's
Emergency Fund and the United Parcel Services, Inc.
Our return policy generally allows customers to return hardware and
unopened software, without restocking charges, within 30 days of the original
invoice date, subject to advance approval and certain other conditions. We are
generally able to return defective merchandise returned from customers to the
vendor.
Sales and Marketing
Our sales are generated primarily by our 77 person sales force. Our
sales representatives generally are responsible for meeting all of our
customers' product and service needs and are supervised by sales managers with
significant industry experience. The sales managers are responsible for
overseeing sales representative training, establishing sales objectives and
monitoring account management principles and procedures. Sales representatives
attend seminars conducted by manufacturers' representatives at our facilities,
at which our new and existing product and service offerings are discussed.
Our sales representatives are assisted by technical personnel who
support and supplement the sales efforts. The responsibilities of technical
support personnel include answering preliminary inquiries from customers
regarding systems design, and on-site visits to customers' facilities. At
customers' facilities, the technical personnel gather information necessary to
assist customers in making informed decisions regarding their information
systems. Such data include the nature of the customer's current information
systems, the existing hardware and networking environment, the customer's level
of expertise and its applications needs.
We believe that our name is widely recognized for high quality,
competitively priced products and services. In 1998 we adopted a new logo that
appears on all of our marketing materials and other corporate literature. The
logo includes the phrase "Manchester, the Answer" to emphasize our position as a
knowledgeable resource for networking and computer solutions for our customers.
We promote name recognition and the sale of our products and services through
regional business directories, trade magazine advertisements, radio
advertisements, direct mailings to customers and participation in computer trade
shows and special events. We advertise at numerous sporting events in the New
York metropolitan region, including full page four-color advertisements in
yearbooks and/or program guides for sports teams such as the New York Mets, the
New York Knicks and the New York Rangers. We also promote interest in our
products and services through our website on the Internet, and have expanded our
website information to provide an electronic catalog of our products and
services. Several manufacturers offer market development funds, cooperative
advertising and other promotional programs, on which the we rely to partially
fund many of our advertising and promotional campaigns.
Sales force training is an integral part of the our strategy to
increase our focus on providing value-added services. As client/server-based
systems, applications and network capabilities grow in complexity, the need for
technically knowledgeable sales personnel becomes critical to the sale of
value-added services. Accordingly, we have expanded our training capabilities at
one of our Long Island facilities to conduct seminars for sales representatives.
The seminars address such topics as general developments in the computer
industry, systems integration services and our management information systems.
We utilize our technical personnel to conduct such seminars and may hire
additional dedicated trainers as needed.
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Management Information Systems
We currently use an IBM AS/400 integrated management information
system, which is an on-line system enabling instantaneous access. We maintain a
proprietary inventory management system on our computer system pursuant to which
product purchases and sales are continually tracked and analyzed. Our computer
system is also used for accounting, billing and invoicing.
Our information system assists management in maintaining controls over
the our inventory and receivables. Manchester's average inventory turnover was
34, 22, and 17 times for the fiscal years ended July 31, 2000, 1999 and 1998,
respectively, and we experienced bad debt expense of less than .3% of revenue in
each of these years.
During the fiscal year ended July 31, 2000, we invested in our
management information systems, including upgrading and expanding the IBM AS/400
system, enhancing and modifying our client/server-based management system to
track services rendered for customers, and upgrading servers and network
infrastructures for our headquarters. We utilize experienced in-house technical
personnel, assisted by our senior engineers, to upgrade and integrate additional
functions into our management information systems.
Competition
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants, possible alliances between existing
competitors. In addition, certain suppliers and manufacturers may choose to
market products directly through a direct sales force and/or the Internet rather
than, or in addition to channel distribution, and may also choose to market
services, such as repair and configuration services, directly to end users. Some
of our competitors have, or may have, greater financial, marketing and other
resources, and may offer a broader range of products and services, than us. 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. We may not be able to compete
successfully in the future with these or other current or potential competitors.
Our ability to compete successfully depends on a number of factors such as
breadth of product and service offerings, sales and marketing efforts, product
and service pricing, and quality and reliability of services. In addition,
product margins may decline due to pricing to win new business and increasing
pricing pressures from competition. We believe that gross margins will continue
to be reactive to industry-wide changes. Future profitability will depend on our
ability to increase focus on providing technical service and support to
customers, competition, manufacturer pricing strategies, as well as our control
of operating expenses, product availability, and effective utilization of vendor
programs. It will also depend on the ability to attract and retain quality
service personnel and sales representatives while effectively managing the
utilization of such personnel and representatives. There can be no assurance
that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives or difficulty in hiring or retaining
additional technical personnel or sales representatives or reclassification of
our sales representatives as employees could have a material adverse effect on
our business, results of operations and financial condition.
Subsidiaries
Electrograph Systems, Inc.
Electrograph Systems, Inc., ("Electrograph") is a national value-added
wholesale distributor of display technology solutions, and the largest wholesale
distributor of plasma display monitors in the United States. Electrograph offers
a full range of display technology solutions for dealers and system integrators
through the U.S. and Europe. Products include LCD flat panel, CRT and plasma
display monitors, portable and fixed installation projectors, touch screen
monitors, and customer monitor integration solutions. In addition to
Electrograph's worldwide distribution of display technology solutions,
Electrograph also manufactures a complete line of LCD flat panel and plasma
display monitors. Electrograph is headquartered in Hauppauge, New York with
branch offices throughout the U.S. and in Europe.
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Products are selected by Electrograph to minimize competition among
suppliers' products while maintaining some overlap to provide protection against
product shortages and discontinuations and to provide different price points for
certain items. Management believes Electrograph's relationships with its
suppliers are enhanced by providing feedback to suppliers on products, advising
suppliers of customer preferences, working with suppliers to develop marketing
programs, and offering suppliers the opportunity to provide seminars for
Electrograph's customers.
None of Electrograph's material supplier agreements require the sale of
specified quantities of products or restrict Electrograph from selling similar
products manufactured by competitors. Electrograph, therefore, has the ability
to terminate or curtail sales of one product line in favor of another product
line as a result of technological change, pricing considerations, customer
demand or supplier distribution policy. Electrograph has never been terminated
by any of its suppliers.
Most of Electrograph's major suppliers provide price protection for a
limited time period, by way of credits, against price reductions by the supplier
between the time of the initial sale to Electrograph and the subsequent sale by
Electrograph to its customer. Additionally, most of Electrograph's suppliers
accept defective merchandise returned within 12 to 15 months after shipment to
Electrograph. Some suppliers permit Electrograph to rotate its inventory by
returning slow moving inventory for other inventory.
While Electrograph distributes products of more than 15 suppliers,
approximately 30%, 27%, 14% and 8% of Electrograph's purchases in fiscal 2000
were derived from products manufactured by Pioneer, NEC, Fujitsu and Mitsubishi,
respectively, Electrograph's largest suppliers.
Electrograph's distribution operations are currently conducted from two
distribution centers in Hauppauge, New York and Long Beach, California.
Electrograph also maintains sales offices in Timonium, Maryland, Northville, New
York and Long Beach, California.
Acquisition
Texport Technology Group, Inc. and Learning Technology Group, LLC
On March 22, 2000, we acquired all of the outstanding ownership
interests of Texport Technology Group, Inc. ("Texport") and Learning Technology
Group, LLC ("LTG"), affiliated entities engaged in reselling and providing of
microcomputer services and peripherals to companies in the greater Rochester,
New York area. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $0.4 million plus potential future contingent
payments. Contingent payments of up to $750,000 will be payable on each of March
22, 2001 and 2002 based upon achieving certain agreed-upon increases in revenue
and pretax earnings for each of the next two, one-year periods from the date of
closing. The cash payment was made from our cash balances. The selling owners
received employment agreements that also provided for the issuance of 10,000
shares of common stock. The fair value of the common stock, amounting to
$61,250, was recorded as deferred compensation and is being expensed over the
three-year vesting period. In connection with the acquisition, we assumed
approximately $648,000 of bank debt, which was subsequently repaid.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
assets and liabilities acquired was $1.6 million and $2.2 million, respectively.
The excess of the aggregate purchase price over the estimated fair value of the
net assets acquired was approximately $995,000, which is being amortized on a
straight-line basis over 20 years.
Employees
At August 31, 2000, we had 363 full-time employees consisting of 55
sales representatives, 48 management personnel, 105 technical personnel and 155
distribution and clerical personnel. In addition, at August 31, 2000, we had 22
independent sales representatives. We are not a party to any collective
bargaining agreements and believe our relations with our employees are good.
The Company is highly dependent upon the services of the members of its
senior management team, particularly Barry R. Steinberg, the Company's founder,
Chairman of the Board, President and Chief Executive Officer, and Joel G.
Stemple, Ph.D., the Company's Executive Vice President. The loss of either
member of the Company's senior management team may have a material adverse
effect on its business.
10
Intellectual Property
We own, or have pending, several federally registered service marks
with respect to our name and logo. Most of our various dealer agreements permit
us to refer to ourselves as an "authorized dealer" of the products of those
manufacturers and to use their trademarks and trade names for marketing
purposes. We consider the use of these trademarks and trade names in our
marketing to be important to our business.
ITEM 2. Properties
Properties
We currently have ten sales branches nationwide including the corporate
headquarters located in Hauppauge, New York. The following table identifies the
principal leased facilities.
Approximate
Square Footage Lease
Facility Location Office Warehouse Expiration Date
Corporate 160 Oser Avenue (1)(2)
Headquarters Hauppauge, NY 30,000 - July 2000
Warehouse and 40 and 50 Marcus Blvd. (1) October 2005 (40)
Service Center Hauppauge, NY 20,000 43,000 January 2008 (50)
New York City 469 Seventh Avenue
Sales Office New York, NY 13,000 - October 2007
Boca Raton, FL 185 N.W. Spanish River Blvd.
Sales Office Boca Raton, FL 6,000 - November 2002
Boston 25-27 Christina Street
Sales Office Newton, MA 3,000 - October 2002
Baltimore, MD 3832 Falls Rd.
Sales office Baltimore, MD 8,000 2,000 January 2002
Washington, D.C. 5001 Forbes Blvd. 3,000 - February 2003
Sales office Lanham, MD
Rochester, NY 106 Despatch Dr. 3,500 6,500 February 2004
Sales office Rochester, NY
Electrograph 175 Commerce Drive
Corporate HQ Hauppauge, NY 5,000 5,000 June 2002
Electrograph,
Timonium, MD 57 W. Timonium Rd.
Sales Office Timonium, MD 650 - December 2000
(1) Leased from entities controlled by or affiliated with certain of our
executive officers, directors and principal shareholders. Effective with
the consummation of our initial public offering in November 1996, the
leases with related parties were amended to provide terms comparable to
those that could be obtained from independent third parties.
(2) The Company continues to occupy this space while negotiating the terms of a
lease renewal.
11
ITEM 3. Legal Proceedings
On January 12, 1998, we announced that we had reached an agreement in
principle settling the Shareholder Securities Class Action ("Lawsuit") filed
against the Company and certain of our officers in March 1997. The settlement,
which was approved by the Court on June 15, 1998, resulted 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 our initial public offering, and during the
period fromNovember 26, 1996 to February 13, 1997. The entire $1,350,000 cash
settlement was paid by our insurance carrier.
The settlement included 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. We agreed to the settlement solely to avoid the expense,
burdens and uncertainties of further litigation and continue to deny that we
have any liability on account of the matters asserted in the litigation or that
the Plaintiffs' claims have merit.
We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on advice from
its legal counsel, the ultimate disposition of these matters will not have a
material adverse effect.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended July 31, 2000.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our Common Stock commenced trading on November 26, 1996 and is traded
on the NASDAQ National Market(R) under the symbol MANC. The following table sets
forth the quarterly high and low sale prices for the Common Stock as reported by
the NASDAQ National Market.
Fiscal Year 1999 High Low
---------------- ---- ---
First Quarter 3-1/2 2-11/16
Second Quarter 9-1/4 2-1/2
Third Quarter 5-3/8 2-3/16
Fourth Quarter 3-3/4 2-7/16
Fiscal Year 2000
----------------
First Quarter 4-1/2 2-1/4
Second Quarter 8 3
Third Quarter 9-1/8 3-7/8
Fourth Quarter 6-15/16 3-1/8
On October 20, 2000, the closing sale price for the Company's Common Stock
was $3.688 per share. As of October 20, 2000 there were 45 shareholders of
record of the Company's Common Stock. The Company believes that there are in
excess of 500 beneficial holders of its common stock.
Manchester has never declared or paid any dividends to shareholders. At
this time we intend to continue our policy of retaining earnings for the
continued development and expansion of our business.
12
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The selected consolidated financial data presented below are derived
from our audited consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Fiscal Year Ended July 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Revenue $300,073 $228,641 $202,530 $187,801 $ 189,659
Cost of revenue 260,236 195,423 171,930 161,186 163,128
------- ------- ------- ------- ---------
Gross profit 39,837 33,218 30,600 26,615 26,531
Selling, general and
administrative expenses 33,539 29,849 27,414 21,023 22,598
------ ------ ------ ------ ---------
Income from operations 6,298 3,369 3,186 5,592 3,933
Interest and other income
(expenses), net 602 404 546 395 (365)
Provision for income taxes 2,800 1,590 1,560 2,450 1,430(1)
----- ----- ----- ----- -----
Net income $4,100 $2,183 $2,172 $3,537 $ 2,138(1)
===== ===== ===== ===== =========
Net income per share:
Basic $0.51 $0.27 $0.26 $0.45 $ 0 .34(1)
==== ==== ==== ==== ==========
Diluted $0.50 $0.27 $0.26 $0.45 $ 0 .34(1)
==== ==== ==== ==== ==========
Weighted average shares of common stock outstanding:
Basic 8,108 8,096 8,494 7,779 6,247
===== ===== ===== ===== =====
Diluted 8,228 8,096 8,499 7,779 6,247
===== ===== ===== ===== =====
July 31,
--------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $30,453 $27,461 $26,112 $30,578 $ 9,841
Total assets 74,573 61,778 56,894 58,208 37,761
Short-term debt, including
current maturities of
capital lease obligation 18 85 82 1,637 6,952
Capital lease obligation, excluding
current maturities - - - 77 175
Redeemable common stock(2) - - - - 4,739
Shareholders' equity 44,263 39,586 37,345 36,877 8,175
- ---------------
(1) Pro forma provision for income taxes, pro forma net income and pro
forma basic and diluted net income per share for the fiscal year ended
July 31, 1996 would have been $2,835, $4,246 and $.68 per share,
respectively, after giving effect to the assumed reduction of (i)
$3,209 in officers' compensation payable to the Company's Chief
Executive Officer, Executive Vice President and Chief Financial Officer
to an aggregate of $1,125, exclusive of fringe benefits, to reflect
adjustments commencing in fiscal 1997 to (A) the annual compensation
that the Company's Chief Executive Officer and Executive Vice President
have agreed to receive without any diminished duties or
responsibilities, and (B) the reduction from the amount of annual
compensation paid to the former Chief Financial Officer to the annual
compensation payable to the present Chief Financial Officer, net of
applicable income taxes, and (ii) $304 in rent paid to related parties
to amounts stipulated in leases, net of applicable income taxes. See
"Management" and "Certain Transactions."
(2) Represents the aggregate amounts payable by us to redeem shares of
common stock under the shareholder put right and shareholders'
agreements between the Company and certain shareholders. See note 11 of
notes to the consolidated financial statements.
13
ITEM 7. 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 Manchester should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. The following discussion contains certain forward-looking statements
within the meaning of Securities Act of 1933 as amended, and Section 21E of the
Securities and 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 and the risk factors described in the Company's other filings from time to
time with the Securities and Exchange Commission.
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions customized to their information systems needs by
integrating analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of our revenues have been derived from product sales. We generally do not
develop or sell software products. However, certain computer hardware products
sold by us are loaded with prepackaged software products.
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a potential decline in the rate of growth in
sales of personal computers. Heightened price competition among various hardware
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
An integral part of our strategy is to increase our value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires us, among
other things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We can't
predict whether we will be successful in increasing our focus on providing
value-added services, and the failure to do so may have a material adverse
effect on our business, results of operations and financial condition.
Our strategy also includes expanding our presence in the New York
metropolitan area by increasing our sales and service capabilities in our New
York City office and enlarging our sales, service and training capabilities at
our Long Island headquarters as well as expanding geographically into growing
business centers in the eastern half of the United States. We can't assure you
that the expansion of our New York metropolitan area operations will increase
profits generated by such operations, that the opening of new offices will prove
profitable, or that these expansion plans will not substantially increase future
capital expenditures or other expenditures. The failure of this component of our
strategy may materially adversely affect our business, results of operations and
financial condition.
To date, our success has been based primarily upon sales in the New
York Metropolitan area. Our strategy, encompassing the expansion of service
offerings, the expansion of existing offices and the establishment of new
regional offices, has challenged and will continue to challenge our senior
management and infrastructure. We can't predict our ability to respond to these
challenges. If we fail to effectively manage our planned growth, there may be a
material adverse effect on our business, results of operations and financial
condition.
In addition, the success of our strategy depends in large part upon our
ability to attract and retain highly skilled technical personnel and sales
representatives, including independent sales representatives, in a very
competitive labor market. Our ability to grow our service offerings has been
somewhat limited by a shortage of qualified personnel, and we can't assure you
that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives, difficulty in hiring or retaining additional
technical personnel or sales representatives, or reclassification of our sales
representatives as employees may have a material adverse effect on our business,
results of operations and financial condition.
14
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we 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, and may also choose
to market services, such as repair and configuration services, directly to end
users. Some of our competitors have or may have, greater financial, marketing
and other resources, and may offer a broader range of products and services,
than us. 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. We may
not be able to compete successfully in the future with these or other current or
potential competitors.
Our business is dependent upon our relationships with major
manufacturers and distributors in the computer industry. Many aspects of our
business are affected by our relationships with major manufacturers, including
product availability, pricing and related terms, and reseller authorizations.
The increasing demand for personal computers and ancillary equipment has
resulted in significant products shortages from time to time, because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. We can't predict that manufacturers will maintain an
adequate supply of these products to satisfy all the orders of our customers or
that, during periods of increased demand, manufacturers will provide products to
us, even if available, or at discounts previously offered to us. In addition, we
can't assure you that the pricing and related terms offered by major
manufacturers will not adversely change in the future. Our failure to obtain an
adequate supply of products, the loss of a major manufacturer, the deterioration
of our relationship with a major manufacturer or our inability in the future to
develop new relationships with other manufacturers may have a material adverse
effect on our business, financial condition and results of operations.
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. We rely on these funds for many of our advertising and
promotional campaigns. In recent years, manufacturers have generally reduced
their level of support with respect to these programs, which has required us to
increasing spending of our own funds to obtain the same level of advertising and
promotion. If manufacturers continue to reduce their level of support for these
programs, or discontinue them altogether, we would have to further increase our
advertising and promotion spending, which may have a material adverse effect on
our business, financial condition and results of operations.
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our sales to resellers have been made at profit
margins generally less favorable than our sales directly to commercial
customers. Our inability to sell products to computer resellers and thereby
obtain the desired volume discounts from manufacturers or to expand our sales to
commercial customers sufficiently to offset our need to rely on sales to
computer resellers may have a material adverse effect on our business, financial
conditions and results of operations.
The markets for our products and services are characterized by rapidly
changing technology and frequent introduction of new hardware and software
products and services. This may render many existing products and services
noncompetitive, less profitable or obsolete. Our continued success will depend
on our ability to keep pace with the technological developments of new products
and services and to address increasingly sophisticated customer requirements.
Our success will also depend upon our abilities to address the technical
requirements of our customers arising from new generations of computer
technologies, to obtain these new products from present or future suppliers and
vendors at reasonable costs, to educate and train our employees as well as our
customers with respect to these new products or services and to integrate
effectively and efficiently these new products into both our internal systems
and systems developed for our customers. We may not be successful in
identifying, developing and marketing product and service developments or
enhancements in response to these technological changes. Our failure to respond
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
15
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. During fiscal 2000, certain manufacturers
reduced the period for which they provide price protection and stock balancing
rights. Although we maintain a sophisticated proprietary inventory management
system, we can't assure you that we will continue to successfully manage our
existing and future inventory. Our failure to successfully manage our current or
future inventory may have a material adverse effect on our business, financial
conditions and results of operations.
Our strategy envisions that part of our future growth will come from
making acquisitions consistent with our strategy. There can be no assurance that
we will be able to identify suitable acquisition candidates and, once
identified, to negotiate successfully their acquisition at a price or on terms
and conditions favorable to us, or to integrate the operations of such acquired
businesses with our operations. Certain of these acquisitions may be of
significant size and may include assets that are outside our geographic
territories or are ancillary to our core business strategy.
Our 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
our products and services, the introduction of new hardware and software
technologies with improved features, the introduction of new services by us and
our competitors, changes in the level of our operating expenses, competitive
conditions and economic conditions. In particular, we have increased certain of
our fixed operating expenses, including a significant increase in personnel, as
part of our strategy to increase our focus on providing systems integration and
other higher margin and value added services. As a result, we believe that
period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. In addition, the results of any
quarterly period are not necessarily indicative of results to be expected for a
full fiscal year.
As a result of the rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, our product
offerings change constantly. Prices of products change with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The computer industry has experienced rapid declines
in average selling prices of personal computers. In some instances, we have been
able to offset these price declines with increases in units shipped. There can
be no assurance that average selling prices will not decline or that we will be
able to offset declines in average selling prices with increases in units
shipped.
Most of the personal computers we sell utilize operating systems
developed by Microsoft Corporation. The United States Department of Justice has
brought a successful 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 our
business, results of operations and financial condition.
We lease certain warehouses and offices from entities that are owned or
controlled by our majority shareholder. Each of the leases with related parties
has been amended effective with the closing of our initial public offering in
December 1996 to reduce the rent payable under that lease to then current market
rates.
Impact of Year 2000
In prior years, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. Expenses in connection with
remediating our systems were not significant. We are not aware of any material
problems resulting from Year 2000 issues, either with our internal systems or
the products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
E-Commerce
On February 16, 2000, we launched our enhanced website and electronic
commerce system. The new site, located at www.e-manchester.com allows both
existing customers, corporate shoppers and others to find product
specifications, compare products, check price and availability and place and
track orders quickly and easily 24 hours a day seven days a week. We have made,
and expect to continue to make, significant investments and improvements in our
e-commerce capabilities. There can be no assurance that we will be successful in
enhancing and increasing our business through our expanded Internet presence.
16
On June 25, 1999, we announced the launch of a new consumer products
on-line super store, Marketplace4U.com ("MP4U"). MP4U offers products in
categories such as consumer electronics, automotive accessories and outdoor and
camping equipment from its main and outlet stores. The main store offers top
brand products at competitive prices; the outlet store offers top name brand
factory refurbished, warranteed products at even greater savings. To date
revenue from MP4U is immaterial. There can be no assurance that MP4U will
generate significant revenue or that any of the on-line stores will operate
profitably.
Recent Acquisition
On March 22, 2000, we acquired all of the outstanding ownership
interests of Texport Technology Group, Inc. ("Texport") and Learning Technology
Group, LLC ("LTG"), affiliated entities engaged in reselling and providing of
microcomputer services and peripherals to companies in the greater Rochester,
New York area. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $0.4 million plus potential future contingent
payments. Contingent payments of up to $750,000 will be payable on each of March
22, 2001 and 2002 based upon achieving certain agreed-upon increases in revenue
and pretax earnings for each of the next two, one-year periods from the date of
closing. The cash payment was made from our cash balances. The selling owners
received employment agreements that also provided for the issuance of 10,000
shares of common stock. The fair value of the common stock, amounting to
$61,250, was recorded as deferred compensation and is being expensed over the
three-year vesting period. In connection with the acquisition, we assumed
approximately $648,000 of bank debt, which was subsequently repaid.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
assets and liabilities acquired was $1.6 million and $2.2 million, respectively.
The excess of the aggregate purchase price over the estimated fair value of the
net assets acquired was approximately $995,000, which is being amortized on a
straight-line basis over 20 years.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of income expressed as a
percentage of related revenue or total revenue.
Percentage of Revenue
the Year Ended July 31,
2000 1999 1998
---- ---- ----
Revenue
Products 97.6% 97.0% 97.4%
Services 2.4 3.0 2.6
--- --- ---
100.0 100.0 100.0
----- ----- -----
Cost of revenue
Products 87.2 86.1 85.2
Services 66.0 65.3 72.1
---- ---- ----
86.7 85.5 84.9
---- ---- ----
Product gross profit 12.8 13.9 14.8
Services gross profit 34.0 34.7 27.9
---- ---- ----
Gross profit 13.3 14.5 15.1
Selling, general and administrative expenses 11.2 13.0 13.5
---- ---- ----
Income from operations 2.1 1.5 1.6
Interest and other income, net 0.2 0.2 0.3
--- --- ---
Income before income taxes 2.3 1.7 1.9
Provision for income taxes 0.9 0.7 0.8
--- --- ---
Net income 1.4% 1.0% 1.1%
=== === ===
17
Year Ended July 31, 2000 Compared to Year Ended July 31, 1999
Revenue. Our revenue increased $71.4 million or 31.2% from $228.6
million in fiscal 1999 to $300.1 million for fiscal 2000. Revenue from product
sales increased by $71.3 million (32.1%) primarily due to higher revenue
generated from the Company's wholly-owned subsidiaries, Electrograph Systems,
Inc. ("Electrograph") and Texport Technology Group, Inc. (Texport), which was
acquired on March 22, 2000, as well as increases in the number of personal
computers shipped and higher average selling prices for personal computers.
Services revenue increased by $180,000, or 2.6%, reflecting our continued
emphasis on providing 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 by $6.6 million or 19.9% from
$33.2 million for fiscal 1999 to $39.8 million for fiscal 2000. Gross profit
from the sale of products increased by $6.6 million or 21.4% due primarily to
increases in revenue partially offset by generally lower margins on products
resulting from the highly competitive environment for computer products. Gross
profit generated through service offerings increased by $15,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.7 million or 12.4% from $29.8 million in
fiscal 1999 to $33.5 million in fiscal 2000. This increase primarily relates to
higher operating and personnel costs at Electrograph and Coastal as well as
operating costs from Texport which was acquired on March 22, 2000. In addition,
we incurred higher advertising, depreciation and commission costs in fiscal 2000
partially offset by a recovery of bad debt expenses.
Other Income. Interest income increased due to higher cash balances
available for investment and higher interest rates.
Provision for Income Taxes. Our effective income tax rate decreased
from 42.1% in fiscal 1999 to 40.6% in fiscal 2000 primarily due to the lower
percentage of non-taxable interest income and the non-deductible amortization of
goodwill to the current year taxable income as compared to that of the prior
year.
Year Ended July 31, 1999 Compared to Year Ended July 31, 1998
Revenue. Our revenue increased $26.1 million or 12.9% from $202.5
million in fiscal 1998 to $228.6 million for fiscal 1999. Revenue from product
sales increased by $24.5 million (12.4%) primarily due to higher revenue
generated from our wholly-owned subsidiaries, Electrograph Systems, Inc.
("Electrograph") which was acquired on April 25, 1997 and Coastal Office
Products, Inc., which was acquired on January 2, 1998, as well as increases in
the number of personal computers shipped. These increases were partially offset
by lower average selling prices for personal computers. Services revenue
increased by $1.6 million, or 29.7%, reflecting the Company's continued emphasis
on providing services.
Gross Profit. Gross profit increased by $2.6 million or 8.6% from $30.6
million for fiscal 1998 to $33.2 million for fiscal 1999. Gross profit from the
sale of products increased by $1.7 million or 5.9% due primarily to increases in
revenue partially offset by less favorable mix of products sold. Gross profit
generated through service offerings increased by $911,000 or 61.2% reflecting
improved service revenue, as discussed above, as well as improved productivity
and utilization of personnel associated with providing technical services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.4 million or 8.9% from $27.4 million in
fiscal 1998 to $29.8 million in fiscal 1999. This increase primarily relates to
higher personnel costs associated with enhancing the Company's e-commerce
capabilities and building the infrastructure to provide Internet based solutions
to our customers. We also experienced higher operating costs at Electrograph and
Coastal as well as higher advertising, depreciation and rent expenses in fiscal
1999.
Other Income. Interest income decreased due to lower cash balances
available for investment.
Provision for Income Taxes. Our effective income tax rate increased
slightly from 41.8% in fiscal 1998 to 42.1% in fiscal 1999 primarily due to
non-deductible amortization of goodwill associated with the Coastal acquisition.
18
Liquidity and Capital Resources
Our primary sources of financing in fiscal 2000 have been internally
generated working capital from profitable operations and a line of credit from a
financial institution.
For the year ended July 31, 2000, cash provided by operating activities was
$13.2 million consisting primarily of net income and non cash charges
(principally depreciation and amortization), increases in accounts payable and
accrued expenses, a decrease in inventory, partially offset by an increase in
accounts receivable. Our accounts receivable and accounts payable and accrued
expenses balances, as well as our 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, our experience is that increases in
accounts receivable, and accounts payable and accrued expenses will coincide
with growth in revenue and increased operating levels. During the year ended
July 31, 2000, we used approximately $1.7 million for capital expenditures,
$179,000 (net of cash acquired of $221,000) for the purchase of Texport
Technology Group, Inc. and $742,000 for the repayment of debt. In addition,
$671,000 was used to purchase and retire common stock partially offset by
$414,000 received in connection with the exercise of employee stock options.
We have an available line of credit with financial institutions in the
aggregate amount of $15.0 million. At July 31, 2000, no amounts were outstanding
under this line.
We believe that our current balances in cash and cash equivalents,
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 2001. We currently have
no material commitments for capital expenditures. Future capital requirements
include those for the growth of working capital items such as accounts
receivable and inventory, the purchase of equipment and expansion of facilities,
potential contingent acquisition payments of $1,500,000, as well as the possible
opening of new offices and potential acquisitions.
Inflation
We do not believe that inflation has had a material effect on our
operations.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not exposed to significant market risk.
ITEM 8. Financial Statements and Supplementary Data
See Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table sets forth information concerning each of the
directors and executive officers of the Company:
Name Age Position
- ---- --- --------
Barry R. Steinberg 58 Chairman of the Board, President, Chief
Executive Officer and Director
Joel G. Stemple, Ph.D 58 Executive Vice President, Secretary and Director
Joseph Looney 43 Vice President, Finance, Chief Financial Officer
and Assistant Secretary
Laura Fontana 45 Vice President - Technical Services
Mark Glerum 42 Vice President - Sales
Joel Rothlein, Esq. 71 Director
Bert Rudofsky 66 Director
Michael E. Russell 53 Director
Julian Sandler 56 Director
Barry R. Steinberg, the founder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer and as a director since
Manchester's formation in 1973. Mr. Steinberg previously served as a systems
analyst for Sleepwater, Inc. and Henry Glass and Co.
Joel G. Stemple, Ph.D. has served as Executive Vice President since
September 1996 and as Vice President and as a director since August 1982. Dr.
Stemple previously performed consulting services for the Company and, from 1966
to 1982, served as Assistant and Associate Professor of Mathematics at Queens
College, City University of New York.
Joseph Looney has served as the Company's Vice President, Finance since
January 2000 and as the Company's Chief Financial Officer since May 1996 and as
Assistant Secretary since April 1999. From 1984 until joining the Company, Mr.
Looney served in various positions with KPMG LLP, including Senior Audit Manager
at the end of his tenure at such firm. Mr. Looney is a Certified Public
Accountant, a member of the AICPA, the New York State Society of Certified
Public Accountants and the Institute of Internal Auditors.
Laura Fontana has served as Vice President - Technical Services since
January 2000 and as Director of Technical Services since January 1999. A
twenty-year Manchester veteran, Ms. Fontana had previously managed the sales
organization and been largely responsible for the design of sales, product
information, and automated order-processing systems. She received her B.A. from
Dowling College.
Mark Glerum has served as Vice President - Sales since January 2000. Mr.
Glerum joined Manchester in January 1999 as Manager of the New York City Sales
office. He became National Sales Manager in September 1999. Prior to joining
Manchester, Mr. Glerum spent twelve years at Toshiba America, Inc., most
recently as Regional Sales Manager. Mr. Glerum received his Bachelor's Degree in
Business Administration from Alfred University.
Joel Rothlein, Esq. has been a director of the Company since October 1996.
Mr. Rothlein is a partner in the law firm of Kressel Rothlein & Roth, Esqs.,
Massapequa, New York, where he has practiced law since 1955. Kressel Rothlein &
Roth, Esqs. and its predecessor firms have acted as outside general counsel to
the Company since the Company's inception.
20
Bert Rudofsky became a director on July 15, 1998. Mr. Rudofsky is the
founder and president of Bert Rudofsky and Associates, a management consulting
firm specializing in the computer industry. Mr. Rudofsky was a founder of MTI
Systems Corp., a leading edge, technical, value-added distribution company
specializing in computer and data communications products. Mr. Rudofsky was CEO
of MTI from 1968 until MTI was sold in 1990.
Michael E. Russell became a director on July 15, 1998. Mr. Russell is
presently a senior vice president at Prudential Securities Incorporated and has
held several distinguished positions as a member of the business community, as a
member of the New York State Metropolitan Transportation Authority (1997-1989),
as commissioner of the New York State Commission on Cable Television (1989-1991)
and as Special Assistant to the New York State Senate Majority Leader
(1991-1994).
Julian Sandler became a director on December 2, 1996. Mr. Sandler is
Chief Executive Officer of Rent-a-PC, Inc., a full-service provider of
short-term computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is
also the founder and was the President from 1974 to 1993 of Brookvale
Associates, a national organization specializing in the remarketing of hardware
manufactured by Digital Equipment Corporation. Mr. Sandler also co-founded and
from 1970 to 1973 was Vice President of Periphonics Corporation, a developer and
manufacturer of voice response systems.
Section 16(a) Beneficial Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of the Common Stock
(collectively, "Reporting Persons") file reports of their trading in our equity
securities with the Securities and Exchange Commission. Based on a review of
Section 16 forms filed by the Reporting Persons during the fiscal year ended
July 31, 2000, we believe that the Reporting Persons timely complied with all
applicable Section 16 filing requirements.
21
ITEM 11. Executive Compensation.
The following table sets forth a summary of the compensation paid or
accrued by the Company during the fiscal years ended July 31, 2000, 1999, and
1998 to the Company's Chief Executive Officer and the other executive officers
whose compensation exceeded $100,000 (collectively, the "Named Executive
Officers"):
Summary Compensation Table
Long Term
Compensation
------------
Common Stock
Annual Compensation Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation
- ------------------ ---- ------ ----- ----------------------- ------------
Barry R. Steinberg, 2000 $650,000 $485,248 $58,707(2) - -
President and Chief 1999 $650,000 - $23,806(2) - -
Executive Officer 1998 $550,000 - $37,031(2) - -
Joel G. Stemple, Executive 2000 $450,000 $242,624 $31,375 (3) - -
Vice President and 1999 $450,000 - $13,881 (3) - -
Secretary 1998 $450,000 - $22,194 (3) - -
Joseph Looney, Chief 2000 $220,000 $80,875 $11,025(4) - -
Financial Officer, Vice 1999 $200,000 $15,000 $15,061(4)
President, Finance and 1998 $140,394 $40,000 $13,677(4) 70,000(5) -
Assistant Secretary
Laura Fontana, Vice 2000 $169,254 $38,683 $17,848(6) - -
President - Technical Services
Mark Glerum, Vice 2000 $128,830 $35,866 $ 6,675 9,000(7) -
President - Sales
No restricted stock awards, stock appreciation rights or long-term incentive
plan awards (all as defined in the proxy regulations promulgated by the
Securities and Exchange Commission) were awarded to, earned by, or paid to the
Named Executive Officers during the fiscal year ended July 31, 2000.
- ------------------
(1) Includes in fiscal 2000 employer matching contributions to the Company's
defined contribution plan of $5,100, $5,100, $5,100, and $5,048, for Mr.
Steinberg, Mr. Stemple, Mr. Looney, and Ms. Fontana, respectively, fiscal
1999 employer matching contributions to the Company's defined contribution
plan of $4,800, $4,800 and $4,960 for Messrs. Steinberg, Stemple, and
Looney, respectively, fiscal 1998 employer matching contributions of
$4,950, $4,800 and $3,477 for Messrs. Steinberg, Stemple and Looney,
respectively.
(2) Includes $50,000 in 2000, $15,399 in 1999, and $32,081 in 1998 of premiums
paid by the Company for a whole life insurance policy in the name of Mr.
Steinberg having a face value of $2,600,000 and under which his daughters,
on the one hand, and the Company, on the other hand, are beneficiaries and
share equally in the death benefits payable under the policy.
(3) Includes $25,000 in 2000, $7,606 in 1999, and $17,394 in 1998 of premiums
paid by the Company for a whole life insurance policy in the name of Mr.
Stemple having a face value of $1,300,000 and under which his spouse and
the Company are beneficiaries and are entitled to $600,000 and $700,000,
respectively, of the death benefits payable under the policy.
(4) Includes $5,000 in each of 2000, 1999 and 1998 of premiums paid by the
Company for a whole life insurance policy in the name of Mr. Looney having
a face value of $345,000 and under which his spouse and the Company are
beneficiaries and are entitled to $100,000 and $245,000, respectively, of
the death benefits payable under the policy.
(5) The grant of 70,000 options during fiscal 1998 represents a repricing of
the 70,000 options granted to Mr. Looney during fiscal 1997.
(6) Includes $5,000 in 2000 of premiums paid by us for a whole life insurance
policy in the name of Ms. Fontana having a face value of $589,000 and
under which her minor child and the Company are beneficiaries and are
entitled to $200,000 and $389,000, respectively, of death benefits payable
under the policy.
(7) See option grant table below.
22
No bonus was paid for fiscal 1998 or 1999 to Mr. Steinberg. We continue
to make available to Mr. Steinberg the auto use and deferred compensation
benefits that he has historically received. Mr. Steinberg also participates in
other benefits that we make generally available to our employees, such as
medical and other insurance, and Mr. Steinberg is eligible to participate under
the Company's stock option plan. In the event Mr. Steinberg's employment with us
were terminated, he would not be precluded from competing with us.
We have an employment agreement with Joel G. Stemple, Ph.D., under
which Dr. Stemple received a base salary of $450,000. No bonus was paid for
fiscal 1998 or 1999. Under the employment agreement, we provide Dr. Stemple with
an automobile and certain deferred compensation benefits and provide Dr. Stemple
with medical and other benefits generally offered by us to our employees. Dr.
Stemple also is able to participate in our stock option plan. The employment
agreement is terminable by either party on 90 days' prior notice. In the event
we so terminate Dr. Stemple's employment, or we elect not to renew his
employment agreement, he is entitled to severance equal to 12 months of his then
current base salary. This severance will be payable in accordance with our
customary payroll practices. Under the employment agreement, if Dr. Stemple
terminates his employment, or we terminate his employment for cause, Dr. Stemple
is prohibited, for a two-year period from such termination, from competing with
us in the eastern half of the United States.
The Compensation Committee of our Board of Directors determines
compensation for our executive officers. Effective August 1, 2000, based upon
the recommendation of the Compensation Committee, the annual base salaries of
Mr. Steinberg, Mr. Stemple and Mr. Looney, Ms. Fontana and Mr. Glerum were set
at $650,000, $450,000 $245,000, $196,000, and $175,000, respectively.
Option/SAR Grants in the Last Fiscal Year
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended July 31,
2000. No stock appreciation rights have been granted by the Company.
Option Grants During the Fiscal Year Ended July 31, 2000
--------------------------------------------------------
Number of % of Total Potential Realizable Value
Securities Options at Assumed Annual Rates
Underlying Granted to Exercise of Stock Price Appreciation
Options Employees in Price Expiration for Option Term(2)
Name Granted(1) Fiscal Year Per Share Date 5% 10%
- ---- ---------- ----------- --------- ---- -- ---
Mark Glerum 9,000 4% $3.75 10/27/09 21,240 53,820
- -------------
(1) Grant consists of ten year ISOs granted under the Option Plan,
exercisable cumulatively at the annual rate of one third of the number
of underlying shares, generally commencing two years from the date of
grant.
(2) Amounts reported in this column represent hypothetical values that may
be realized upon exercise of the options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation of the common stock over the term of the options. These
numbers are calculated based on rules promulgated by the Securities and
Exchange Commission. Actual gains, if any, in option exercises are
dependent on the time of such exercise and the future performance of
the common stock.
Aggregated Options/SAR Exercises and Fiscal Year-end Options/SAR Value Table
The following table sets forth information with respect to the number
and value of exercisable and unexercisable options granted to the Named
Executive Officers as of July 31, 2000. No options were exercised by the Named
Executive Officers during the fiscal year ended July 31, 2000. No stock
appreciation rights have been granted by the Company.
23
Number of Securities Value of
Shares Underlying Unsecured Unexercised In-the-Money
Acquired Options/SAR's at Options/SAR's at
or Value July 31, 2000 July 31, 2000(1)
Name Exercised Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- --------- -------- ------------------------- -------------------------
Joseph Looney - - 30,000/40,000 $24,375/$32,500
Laura Fontana 20,000 $65,003 10,000/40,000 $8,125/$32,500
Mark Glerum - - -/9,000 -/$7,875
- --------
(1) Based on the closing sale price of common stock as of July 31, 2000 ($4.625
per share) minus the applicable exercise price.
Compensation of Directors
Prior to July 15, 1998, directors who were not full-time employees of
the Company were reimbursed for their expenses and received a fee of $500 per
Board and committee meeting attended. On July 15, 1998, the Board adopted the
following program with respect to non-employee director compensation:
a) Commencing August 1, 1998 each such director will be paid a fixed
annual stipend of $5,000 payable in four quarterly installments.
b) Commencing with the meeting of July 15, 1998, each such director will
receive a fee of $1,500 per Board meeting attended.
c) Commencing August 1, 1998, each such director will receive a fee of
$500 for each committee meeting attended, and the Chairman of each
committee will be paid a fixed annual stipend of $1,000, payable in
four quarterly installments.
d) Commencing August 1, 1998, and on each August 1 thereafter, each such
director who has served on the Board since the preceding August 1 will
be granted non-incentive options under the Plan to purchase 5,000
shares at an exercise price equal to the fair market value of the
common stock on the date of such grant. Such options will be for a
term of five years and will be exercisable immediately upon such
grant.
Effective July 12, 2000, the Board voted to change the directors'
compensation plan. Starting August 1, 2000, all non-employee directors will
receive a $10,000 annual stipend payable in four quarterly installments. In
addition, each non-employee director will be granted annually on August 1, an
option to purchase 10,000 shares at an exercise price equal to the fair market
value of the common stock on August 1 of each year. Such options will be for a
term of five years and will be exercisable immediately upon such grant.
On August 1, 1998, pursuant to and in accordance with the directors'
compensation program described above, the Board of Directors granted to each of
Joel Rothlein and Julian Sandler, who are non-employee directors, non-incentive
options under the Plan to purchase 5,000 shares at an exercise price of $3.25
per share (the fair market value of the common stock on August 1, 1998). On
August 1, 1999 pursuant to and in accordance with the directors compensation
program described above, the Board of Directors granted to each of Joel
Rothlein, Bert Rudofsky, Michael E. Russell and Julian Sandler, who are
non-employee directors, non-incentive options under the Plan to purchase 5,000
shares at on exercise price of $2.75 per share (the fair market value of the
common stock on August 2, 1999). In addition, on August 1, 2000 pursuant to and
in accordance with the directors compensation program described above, the Board
of Directors granted to each of Joel Rothlein, Bert Rudofsky, Michael E. Russell
and Julian Sandler, who are non-employee directors, non-incentive options under
the Plan to purchase 10,000 shares at an exercise price of $4.625 per share (the
fair market value of the common stock on August 1, 2000.)
On October 19, 1998, the Board of Directors appointed a Special
Committee ("Special Committee") consisting of Bert Rudofsky, Michael Russell and
Julian Sandler to explore possible strategies and methods of enhancing
shareholder value. As compensation for their work on the Special Committee
through December 31, 1999, each member of the Committee was paid $10,000 on
February 1, 1999 and $10,000 on August 1, 1999.
24
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are Joel Rothlein, Esq., Julian
Sandler, and Bert Rudofsky. Mr. Rothlein is a partner of Kressel Rothlein &
Roth, Esqs., which, with its predecessor firms, has acted as our outside general
counsel since our inception. We paid Kressel Rothlein & Roth, Esqs.
approximately $177,000, $213,000, and $217,000 for legal fees in the fiscal
years ended July 31, 2000, 1999 and 1998, respectively. In addition, during the
years ended July 31, 2000, 1999 and 1998, we recorded revenue of approximately
$273,000, $597,000 and $177,000 respectively, in connection with the sale of
computer equipment to a company controlled by Mr. Sandler.
Our stock option plan is administered by the Board of Directors. Barry
R. Steinberg is President and Chief Executive Officer and Joel G. Stemple is
Executive Vice President of the Company and each of them is a member of the
Board. As members of the Board, they could vote on executive compensation issues
before the Board pertaining to the granting of stock options. Although the issue
has not arisen to date, each of Messrs. Steinberg and Stemple has agreed to
abstain from voting on the grant of stock options to himself or to the other of
them.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 20, 2000
(except as otherwise indicated) with respect to the number of shares of the
Company's common stock beneficially owned by each person who is known to the
Company to beneficially own more than 5% of the common stock, together with
their respective addresses, the number of shares of common stock beneficially
owned by each director of the Company and each Named Executive Officer of the
Company, and the number of shares of common stock beneficially owned by all
executive officers and directors of the Company as a group. Except as otherwise
indicated, each such shareholder has sole voting and investment power with
respect to the shares beneficially owned by such shareholder.
Shares Beneficially Percent of Shares
Name and Address Owned(1) Outstanding
----------------------------------------------------------------------------------------
Barry R. Steinberg(2) (3) 4,690,201 57.6%
Joel G. Stemple(2) 626,263 7.7
Joseph Looney(4) 34,700 0.4
Laura Fontana 10,000 0.1
Joel Rothlein(4) (5) 51,500 0.6
Bert Rudofsky (4) 15,000 0.2
Michael E. Russell (4) 15,000 0.2
Julian Sandler(4) 23,500 0.3
Dimensional Fund Advisors, Inc. 583,000 7.2
1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401
All executive officers and directors as a group
(8 persons) (6) 5,466,164 67.1%
(1) For purposes of determining the aggregate amount and percentage of shares
deemed beneficially owned by directors and Named Executive Officers of the
Company individually and by all directors, nominees and Named Executive
Officers as a group, exercise of all currently exercisable options listed
in the footnotes hereto is assumed. For such purposes 8,144,315 shares of
Common Stock are deemed to be outstanding.
(2) Address is 160 Oser Avenue,
Hauppauge, New York 11788.
(3) Excludes 59,500 shares owned by Ilene Steinberg and 59,000 shares owned by
Sheryl Steinberg, daughters of Mr. Steinberg, which shares were purchased
with the proceeds of a loan from Mr. Steinberg. As reported on Schedule 13D
filed on March 24, 1997, as amended, Mr. Steinberg, Ilene Steinberg, and
Sheryl Steinberg each disclaim beneficial ownership of the common stock
owned by the others.
(4) Includes currently exercisable options to purchase 30,000 shares (Mr.
Looney); 22,500 shares (Mr. Sandler); 15,000 shares (Mr. Rudofsky); 20,000
shares (Mr. Rothlein); and 15,000 shares (Mr. Russell).
(5) Includes 31,500 shares held by the Kressel, Rothlein & Roth Profit Sharing
Plan. Mr. Rothlein disclaims beneficial ownership of the common stock owned
by the Kressel Rothlein & Roth Profit Sharing Plan, except to the extent of
his beneficial interest in such plan.
(6) See Notes 1 through 5 above.
25
ITEM 13. Certain Relationships and Related Transactions
Until August 1994, we were affiliated with Electrograph Systems, Inc.
("Electrograph"). Barry R. Steinberg, our President and Chief Executive Officer
and majority shareholder, served as Electrograph's Chairman of the Board and
Chief Financial Officer and had beneficial ownership (directly and through
shares held by his spouse and certain trusts, of which his children are
beneficiaries) of 35.5% of the outstanding shares of common stock of
Electrograph. During the fiscal years ended July 31, 1993 and 1994, we paid
approximately $322,000 and $385,000, respectively, to Electrograph for the
purchase of products. In August 1994, Bitwise Designs, Inc. ("Bitwise"), a
publicly-traded company engaged in the manufacture and distribution of document
imaging systems, personal and industrial computers and related peripherals,
acquired Electrograph through a stock-for-stock merger; Mr. Steinberg acquired
beneficial ownership of less than 1% of the outstanding capital stock of Bitwise
for the common stock of Electrograph in which he had a direct or indirect
beneficial interest. Mr. Steinberg served as a director of, and provided
consulting services to, Bitwise from August 1994 through September 17, 1996. On
April 25, 1997, we purchased substantially all of the assets of Electrograph
Systems, Inc.
Three of our four Hauppauge, New York facilities are leased from
entities affiliated with certain of our executive officers, directors or
principal shareholders. The property located at 40 Marcus Boulevard, Hauppauge,
New York is leased from a limited liability company owned 70% by Mr. Steinberg
and his relatives, 20% by Joel G. Stemple, Ph.D., the Company's Executive Vice
President and a principal shareholder, and 10% by Michael Bivona, a shareholder
and former officer of the Company. For the fiscal years ended July 31, 2000,
1999, and 1998, we made lease payments of $190,000, $186,000, and $179,000,
respectively, to such entity. Our offices at 160 Oser Avenue, Hauppauge, New
York are leased from a limited liability company owned 65% by Mr. Steinberg,
17.5% by Dr. Stemple and 17.5% by Mr. Bivona. For the fiscal years ended July
31, 2000, 1999, and 1998, we made lease payments of $279,000, $271,000, and
$263,000, respectively, to such entity. The property located at 50 Marcus
Boulevard, Hauppauge, New York is leased from Mr. Steinberg doing business in
the name of Marcus Realty. For the fiscal years ended July 31, 2000, 1999, and
1998, we made lease payments of $360,000, $344,000, and $340,000, respectively,
to such entity. See "Business--Properties."
Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein & Roth, Esqs., which, with its predecessor firms, has acted as outside
general counsel to the Company since our inception. During fiscal 2000, 1999 and
1998, $177,000, $213,000 and $217,000 respectively was paid to such firm for
legal fees.
During the year ended July 31, 2000, 1999, and 1998, we recorded
revenue of $273,000, $597,000, and $177,000, respectively in connection with the
sale of computer equipment to a company controlled by Julian Sandler, a director
of the Company.
26
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements included herein are filed as a part
of this Report.
Manchester Equipment Co., Inc.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 28
Consolidated Financial Statements:
Balance Sheets as of July 31, 2000 and 1999 29
Statements of Income for the years ended July 31, 2000,
1999, and 1998 30
Statements of Shareholders' Equity for the years
ended July 31, 2000, 1999, and 1998 31
Statements of Cash Flows for the years ended
July 31, 2000, 1999, and 1998 32
Notes to Consolidated Financial Statements 33
Schedule II - Valuation and Qualifying Accounts 46
27
Independent Auditors' Report
The Board of Directors and Shareholders
Manchester Equipment Co., Inc.:
We have audited the accompanying consolidated balance sheets of Manchester
Equipment Co., Inc. and subsidiaries as of July 31, 2000 and 1999 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended July 31, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manchester Equipment
Co., Inc. and subsidiaries at July 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Melville, New York
September 15, 2000
28
Manchester Equipment Co., Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 2000 and 1999
Assets 2000 1999
------ ---- ---- -
(in thousands except per share amounts)
Current assets:
Cash and cash equivalents $16,156 $5,749
Accounts receivable, net of allowance for doubtful accounts
of $899 and $1,204, respectively 36,024 34,747
Inventory 6,797 8,245
Deferred income taxes 579 538
Prepaid income taxes 635 -
Prepaid expenses and other current assets 538 340
--- ---
Total current assets 60,729 49,619
Property and equipment, net 6,329 6,248
Goodwill, net 6,534 5,070
Deferred income taxes 673 560
Other assets 308 281
--- ---
$74,573 $61,778
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $29,312 $20,824
Current maturities of long-term debt - 85
Notes payable 18 -
Deferred service contract revenue 946 581
Income taxes payable - 668
---- ---
Total current liabilities 30,276 22,158
Deferred compensation payable 34 34
Commitments and contingencies (note 7)
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 8,159 and 8,085 shares issued
and outstanding 82 81
Additional paid-in capital 19,402 18,799
Deferred compensation (65) (38)
Retained earnings 24,844 20,744
------ ------
Total shareholders' equity 44,263 39,586
------ ------
$74,573 $61,778
====== ======
See accompanying notes to consolidated financial statements.
29
Manchester Equipment Co., Inc. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ---- -
(in thousands except per share amounts)
Revenue
Products $292,971 $221,719 $197,194
Services 7,102 6,922 5,336
----- ----- -----
300,073 228,641 202,530
------- ------- -------
Cost of revenue
Products 255,549 190,901 168,083
Services 4,687 4,522 3,847
----- ----- -----
260,236 195,423 171,930
------- ------- -------
Gross profit 39,837 33,218 30,600
Selling, general and administrative expenses 33,539 29,849 27,414
------ ------ ------
Income from operations 6,298 3,369 3,186
Other income (expense):
Interest expense (4) (8) (41)
Interest and investment income 606 412 587
--- --- ---
Income before provision for income taxes 6,900 3,773 3,732
Provision for income taxes 2,800 1,590 1,560
----- ----- -----
Net income $4,100 $2,183 $2,172
===== ===== =====
Net income per share
Basic $0.51 $0.27 $0.26
==== ==== ====
Diluted $0.50 $0.27 $0.26
==== ==== ====
Weighted average shares of common
stock and equivalents outstanding
Basic 8,108 8,096 8,494
===== ===== =====
Diluted 8,228 8,096 8,499
===== ===== =====
See accompanying notes to consolidated financial statements.
30
Manchester Equipment Co., Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended July 31, 2000, 1999 and 1998
Additional
Common Par Paid-in Deferred Retained
Shares Value Capital Compensation Earnings Total
------ ----- ------- ------------ -------- -----
(in thousands)
Balance July 31, 1997 8,525 $ 85 $20,403 $ - $16,389 $36,877
Deferred compensation 20 - 80 (80) - -
Purchase and retirement of stock (448) (4) (1,781) - - (1,785)
Stock option commission expense - - 65 - - 65
Stock award compensation
expense - - - 16 - 16
Net income - - - - 2,172 2,172
---- -- ---- --- ----- -----
Balance July 31, 1998 8,097 81 18,767 (64) 18,561 37,345
Purchase and retirement of stock (12) - (33) - - (33)
Stock option commission expense - 65 - - 65
Stock award compensation expense - - 26 - 26
Net income - - - 2,183 2,183
---- --- -------- --- ----- -----
Balance July 31, 1999 8,085 81 18,799 (38) 20,744 39,586
Purchase and retirement of stock (151) (1) (670) - - (671)
Stock award compensation expense - - 34 - 34
Deferred compensation 10 - 61 (61) - -
Stock issued in connection with
exercise of stock options 109 1 413 - - 414
Stock issued in connection with
purchase acquisition 106 1 799 - - 800
Net income - - - 4,100 4,100
---- --- -------- --- ----- -----
Balance July 31, 2000 8,159 $82 $19,402 $(65) $24,844 $44,263
===== === ====== ===== ====== ======
See accompanying notes to consolidated financial statements.
31
Manchester Equipment Co., Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $4,100 $2,183 $2,172
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 2,081 1,835 1,340
Provision for (recovery of) doubtful accounts (366) 154 75
Non-cash compensation and commission expense 34 91 81
Deferred income taxes (154) (141) (138)
Change in assets and liabilities; net of the effects of
acquisitions:
Increase in accounts receivable (264) (8,605) (4,430)
(Increase) decrease in inventory 1,951 922 1,882
Increase in prepaid income taxes (620) - -
Increase in prepaid expenses and
other current assets (177) (50) (12)
(Increase) decrease in other assets (27) 287 -
(Decrease) increase in accounts payable and
accrued expenses 6,991 2,325 (1,997)
Increase (decrease) in deferred service contract revenue 365 (194) 213
Increase (decrease) in income taxes payable (668) 443 225
Increase (decrease) in deferred compensation payable - (75) 22
Sale of investments - 1,501 2,907
------ ----- -----
Net cash provided by operating activities 13,246 676 2,340
------ --- -----
Cash flows from investing activities:
Capital expenditures (1,661) (1,735) (2,972)
Payment for acquisitions, net of cash acquired (179) (871) (2,921)
----- ----- ------
Net cash used in investing activities (1,840) (2,606) (5,893)
----- ------- -----
Cash flows from financing activities:
Net repayments of borrowings from bank (648) - (1,274)
Payments on capitalized lease obligations (85) (104) (140)
Payments on notes payable - other (9) - (481)
Issuance of common stock upon exercise of options 414 - -
Purchase and retirement of common stock (671) (33) (1,785)
----- ---- ------
Net cash used in financing activities (999) (137) (3,680)
---- ----- -------
Net increase (decrease) in cash and cash equivalents 10,407 (2,067) (7,233)
Cash and cash equivalents at beginning of year 5,749 7,816 15,049
----- ----- ------
Cash and cash equivalents at end of year $16,156 $5,749 $7,816
====== ===== ======
Cash paid during the year for:
Interest $4 $5 $41
== == ===
Income taxes $4,205 $992 $1,428
====== === ======
Other noncash transactions:
Capitalized lease obligation $ - $107 $ -
===== ==== ====
Common stock issued in connection with acquisitions $861 $ - $ -
==== ====== ====
See accompanying notes to consolidated financial statements.
32
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
(1) Operations and Summary of Significant Accounting Policies
---------------------------------------------------------
(a) The Company
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 integrating its
analysis, design and implementation services with hardware, software,
networking products and peripherals from leading vendors. The Company
operates in a single segment.
Sales of hardware, software and networking products comprise the
majority of the Company's revenues. The Company has entered into
agreements with certain suppliers and manufacturers which may provide the
Company favorable pricing and price protection in the event the vendor
reduces its prices.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances are eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
equivalents. Cash equivalents of $12,178 and $3,486 at July 31, 2000 and
1999, respectively, consisted of money market mutual funds.
(d) Revenue Recognition
Revenue from product sales is recognized at the time of shipment to the
customer. Revenue from services is recognized when the related services
are performed. When product sales and services are bundled, revenue is
recognized upon delivery of the product and completion of the services.
Service contract fees are recognized as revenue ratably over the period of
the applicable contract. Deferred service contract revenue represents the
unearned portion of service contract fees. The Company generally does not
develop or sell software products. However, certain computer hardware
products sold by the Company are loaded with prepackaged software
products. The net impact on the Company's financial statements of product
returns, primarily for defective products has been insignificant.
(e) Market Development Funds
The Company receives various market development funds including
cooperative advertising funds from certain vendors, principally based on
volume purchases of products. The Company records such amounts related to
volume purchases as purchase discounts which reduce cost of revenue and
other incentives that require specific incremental action on the part of
the Company, such as training, advertising or other pre-approved market
development activities as an offset to the related costs included in
selling, general and administrative expenses. Total market development
funds amounted to $414, $380, and $623 for the years ended July 31, 2000,
1999, and 1998, respectively.
(f) Inventory
Inventory, consisting of computer hardware, software and related
supplies, is valued at the lower of cost (first-in first-out) or market
value.
33
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the economic lives of the
assets, generally from five to seven years. Leasehold improvements are
amortized over the shorter of the underlying lease term or asset life.
(h) Goodwill
Goodwill related to acquisitions represents the excess of cost over the
fair value of net assets acquired. Goodwill is amortized on a
straight-line basis over twenty years. The Company reviews the significant
assumptions that underlie the twenty-year amortization period on a
quarterly basis and will shorten the amortization period if considered
necessary. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through projected undiscounted future
cash flows. Accumulated amortization was approximately $780 and $449 at
July 31, 2000 and 1999, respectively. Amortization expense of $331, $266,
and $164 for the years ended July 31, 2000, 1999, and 1998 is included in
selling, general and administrative expenses in the consolidated
statements of income.
The Company evaluates its long-lived assets, certain intangibles, and
goodwill related to those assets to be held and used, and long-lived
assets and certain identifiable intangibles to be disposed of and
recognizes an impairment if it is probable that the recorded amounts are
in excess of anticipated undiscounted future cash flows. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the assets, an impairment loss is recognized as the
amount by which the carrying amount of the asset exceeds the fair value.
(i) Income Taxes
Deferred taxes are recognized for the future tax consequences
attributable to temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and income tax
purposes using enacted rates expected to be in effect when such amounts
are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(j) 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. Options and warrants representing 153,000, 1,065,000, and 380,000
shares for the years ended July 31, 2000, 1999, and 1998, respectively,
were not included in the computation of diluted EPS because to do so would
have been antidilutive. The following table reconciles the denominators of
the basic and diluted per share computations. For each year, the numerator
is the net income as reported.
2000 1999 1998
---- ---- ----
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS 8,108,000 $0.51 8,096,000 $0.27 8,494,000 $0.26
==== ===== =====
Effect of dilutive
options 120,000 - 5,000
------- --------- --------
Diluted EPS 8,228,000 $0.50 8,096,000 $0.27 8,499,000 $0.26
========= ==== ========= ==== ========= =====
34
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
(k) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options if
the current market price of the underlying stock exceeds the exercise
price on the date of the grant. On August 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has
elected not to implement the fair value based accounting method for
employee stock options, but has elected to disclose the pro forma net
income and net income per share for employee stock option grants made
beginning in fiscal 1996 as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
(l) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(m) Fair Value of Financial Instruments
The fair values of accounts receivable, prepaid expenses, notes
payable, accounts payable and accrued expenses are estimated to be the
carrying values at July 31, 2000 due to the short maturity of such
instruments.
(2) Property and Equipment
Property and equipment at July 31, consist of the following:
2000 1999
---- ----
Furniture and fixtures $2,619 $2,464
Machinery and equipment 6,971 5,500
Transportation equipment 483 454
Leasehold improvements 2,834 2,667
----- -----
12,907 11,085
Less accumulated depreciation and amortization 6,578 4,837
----- -----
$6,329 $6,248
===== =====
Depreciation and amortization expense amounted to $1,750, $1,569, and
$1,176, for the years ended July 31, 2000, 1999 and 1998, respectively.
(3) Acquisitions
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. ("Electrograph"). Electrograph is a
specialized distributor of microcomputer peripherals, primarily in the eastern
United States. The purchase price and transaction costs aggregated approximately
$2,600, plus liabilities assumed. Included in the liabilities assumed were notes
payable-bank and notes payable-other with balances of $1,274 and $264,
respectively, at July 31, 1997 which were repaid in fiscal 1998.
35
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the consolidated statements of income
from the date of acquisition. The acquisition resulted in goodwill of $1,543,
which is being amortized on the straight-line basis over 20 years.
Coastal Office Products, Inc.
On January 2, 1998, the Company acquired all of the outstanding shares
of Coastal Office Products, Inc. ("Coastal"), a value added 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 cash payments of approximately $3,971 (including a
contingent payment of $871 made on March 15, 1999). A contingent payment of $800
was made on March 15, 2000 through the issuance of 105,786 shares of the
Company's common stock. The cash payments were made from the Company's cash
balances. 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 was recorded as deferred compensation and is
being expensed over the three year vesting period.
Operating results of Coastal are included in the consolidated
statements of income from the date of acquisition. The acquisition resulted in
goodwill of $4,776, which is being amortized on the straight-line basis over 20
years.
Texport Technology Group, Inc. and Learning Technology Group, LLC
On March 22, 2000, the Company acquired all of the outstanding
ownership interests of Texport Technology Group, Inc. ("Texport") and Learning
Technology Group, LLC ("LTG"), affiliated entities engaged in reselling and
providing of microcomputer services and peripherals to companies in the greater
Rochester, New York area. The acquisition, which has been accounted for as a
purchase, consisted of a cash payment of $400 plus potential future contingent
payments. Contingent payments of up to $750,will be payable on each of March 22,
2001 and 2002 based upon achieving certain agreed-upon increases in revenue and
pretax earnings for each of the next two, one-year periods from the date of
closing. The cash payment was made from the Company's cash balances. The selling
owners received employment agreements that also provided for the issuance of
10,000 shares of common stock. The fair value of the common stock, amounting to
$61, was recorded as deferred compensation and is being expensed over the
three-year vesting period. In connection with the acquisition, the Company
assumed approximately $648 of bank debt, which was subsequently repaid, and
assumed notes payable to the former shareholders amounting to $27 which has a
remaining balance of $18 at July 31, 2000.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
assets and liabilities acquired was $1,600 and $2,200, respectively. The excess
of the aggregate purchase price over the estimated fair value of the net assets
acquired was approximately $995, which is being amortized on a straight-line
basis over 20 years.
The following unaudited pro forma consolidated results of operations for
the years ended July 31, 2000 and 1999 assume that the acquisitions occurred on
August 1, 1998 and reflect the historical operations of the purchased businesses
adjusted for lower interest on invested funds, contractually revised officer
compensation and increased amortization, net of applicable income taxes,
resulting from the acquisition:
Year ended July 31,
2000 1999
---- ----
Revenue $306,056 $242,166
Net income $3,773 $2,094
Diluted net income per share $0.46 $0.26
36
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
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.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 31,
2000 1999
---- ----
Accounts payable, trade $25,005 $17,193
Accrued salaries and wages 2,535 2,182
Customer deposits 628 715
Other accrued expenses 1,144 734
------- ---
$29,312 $20,824
====== ======
The Company has entered into financing agreements for the purchase of
inventory. These agreements are secured by the related inventory and/or
accounts receivables. In each of the years in the three-year period ended
July 31, 2000, the Company has repaid all balances outstanding under these
agreements within the non-interest bearing payment period. Accordingly,
amounts outstanding under such agreements of $2,645, $2,944 and $2,372 and
at July 31, 2000, 1999 and 1998, respectively, are included in accounts
payable and accrued expenses. In August 1997, the Company entered into a
new financing agreement for the purchase of inventory. The agreement
provides a maximum of $10,000 in credit for purchases of inventory from
certain specified manufacturers. The agreement is unsecured, generally
allows for a 30 day non-interest bearing payment period and requires the
Company to maintain, among other things, a certain minimum tangible net
worth. As of July 31, 2000, retained earnings available for dividends
amounted to approximately $14,800.
(5) Long-Term Debt
The Company entered into capitalized lease obligations for certain
computer equipment. No amounts were outstanding at July 31, 2000.
(6) Employee Benefit Plans
The Company maintains a qualified defined contribution plan with a
salary deferral provision, commonly referred to as a 401(k) plan. The
Company matches 50% of employee contributions up to three percent of the
employees' compensation. The Company's contribution amounted to $250, $273,
and $205 for the years ended July 31, 2000, 1999 and 1998, respectively.
The Company also has a deferred compensation plan which is available to
certain eligible key employees. The plan consists of life insurance
policies purchased by the Company for the participants. Upon vesting, which
occurs at various times from three to ten years, the participant becomes
entitled to have ownership of the policy transferred to him or her at
termination of employment with the Company. As of July 31, 2000 and 1999,
the Company has recorded an asset (included with other assets) of $34
representing the cash surrender value of policies owned by the Company and
a liability of the same amount relating to the unvested portion of benefits
due under this plan. For the years ended July 31, 2000, 1999 and 1998, the
Company recorded an expense of $92, $51, and $105 in connection with this
plan.
37
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
(7) Commitments and Contingencies
Leases
The Company leases most of its executive offices and warehouse
facilities primarily from related parties (note 10). In addition, the
Company is obligated under lease agreements for sales offices and
additional warehouse space. Aggregate rent expense under all these leases
amounted to $1,594, $1,539, and $1,255 for the years ended July 31, 2000,
1999 and 1998.
The following represents the Company's commitment under operating
leases for the next five years ended July 31:
2001 $1,289
2002 $1,331
2003 $1,044
2004 $1,010
2005 $1,034
Litigation
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, based on
advice from its legal counsel, the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial position
or results of operations.
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 settlement resulted in the distribution of $1,350 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 cash settlement
was paid by the Company's insurance carrier.
The settlement included 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 had merit.
(8) Line of Credit
In July 1998, the Company entered into a revolving credit facility with
its banks which was revised in June, 1999 to change participating banks.
Under the terms of the facility, the Company may borrow up to a maximum of
$15,000. Borrowings under the facility bear interest at variable interest
rates based upon several options available to the Company. The facility
requires the Company to maintain certain financial ratios and covenants. As
of July 31, 2000, there was no balance outstanding under this agreement,
which expires on April 2, 2002.
38
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999, and 1998
(in thousands, except share and per share data)
(9) Income Taxes
The provision for income taxes for the years ended July 31, 2000, 1999 and
1998 consists of the following:
2000 1999 1998
---- ---- ----
Current
Federal $2,242 $1,351 $1,300
State 712 380 398
--- --- ---
2,954 1,731 1,698
----- ----- -----
Deferred
Federal (115) (106) (105)
State (39) (35) (33)
------ --- ----
(154) (141) (138)
---- ---- ----
$2,800 $1,590 $1,560
===== ===== =====
The difference between the Company's effective income tax rate and the
statutory rate is as follows, for the years ended July 31, 2000, 1999, and
1998 :
2000 1999 1998
---- ---- ----
Income taxes at statutory rate $2,346 $1,283 $1,269
State taxes, net of federal benefit 444 228 241
Non deductible goodwill amortization 85 64 29
Other (75) 15 21
---- -- --
$2,800 $1,590 $1,560
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at July 31, 2000 and 1999 were as
follows:
2000 1999
---- ----
Deferred tax assets:
Allowance for doubtful accounts $359 $488
Deferred compensation 375 330
Depreciation 328 250
Other 190 30
--- --
Deferred tax asset $1,252 $1,098
===== =====
A valuation allowance has not been provided in connection with the
deferred tax assets since the Company believes, based upon its long
history of profitable operations, that it is more likely than not that
such deferred tax assets will be realized.
39
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
(10) Related Party Transactions
The Company leases its warehouse and distribution center as well as its
corporate offices and certain sales facilities from entities owned or
controlled by shareholders, officers, or directors of the Company. The
leases generally cover a period of ten years and expire at various times
from 2000 through 2005. Lease terms generally include annual increases of
five percent. Rent expense for these facilities aggregated $828, $801, and
$782, for the years ended July 31, 2000, 1999, and 1998, respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to $177, $213, and $217,
including disbursements, in the fiscal years ended July 31, 2000, 1999,
and 1998 respectively.
During fiscal years ended July 31, 2000, 1999, and 1998 the Company
received approximately $273, $597, and $177, respectively, in revenue from
a company controlled by a director of the Company.
(11) Shareholders' Equity
Warrants
In connection with its Initial Public Offering (IPO) in December 1996,
the Company issued to the underwriter warrants to purchase an aggregate of
250,000 shares of common stock. The warrants are exercisable at a price of
$12 per share and expire in December, 2001.
Stock Option Plan
Under the Company's Amended and Restated 1996 Incentive and
Non-Incentive Stock Option Plan (the "Plan"), which was approved by the
Company's shareholders in October 1996, an aggregate of 1,100,000 shares
of common stock are reserved for issuance upon exercise of options
thereunder. Under the Plan, incentive stock options, as defined in section
422 of the Internal Revenue Code of 1986, as amended, may be granted to
employees and non-incentive stock options may be granted to employees,
directors and such other persons as the Board of Directors may determine,
at exercise prices equal to at least 100% (with respect to incentive stock
options) and at least 85% (with respect to non-incentive stock options) of
the fair market value of the common stock on the date of grant. In
addition to selecting the optionees, the Board of Directors will determine
the number of shares of common stock subject to each option, the term of
each stock option up to a maximum of ten years (five years for certain
employees for incentive stock options), the time or times when the stock
option becomes exercisable, and otherwise administer the Plan. Incentive
stock options expire three months from the date of the holder's
termination of employment with the Company other than by reason of death
or disability. Options may be exercised with cash or common stock
previously owned for in excess of six months. During fiscal 1997, 742,350
and 60,000 options were granted at $10 and $5, respectively, per share.
Such exercise prices were greater than or equal to the fair market value
of the common stock on the date of grant. Vesting commences immediately or
up to two years from the date of grant and ranges from one to seven years.
On December 22, 1997, the exercise price of all then outstanding options
was reduced to $3.8125 per share, which was the closing market price of
the Company's common stock on that date. The following table summarizes
stock option activity to date:
40
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
Weighted
Average
Exercise Exercise
Balance Price
------- -----
Balance July 31, 1997 802,350 $9.63
Granted 220,000 $4.24
Cancelled (172,750) $3.8125
--------- ------
Balance July 31, 1998 849,600 $3.92
Granted 19,000 $3.52
Cancelled (53,500) $3.8125
-------
Balance July 31, 1999 815,100 $3.93
Granted 253,250 $4.37
Exercised (109,416) $3.8125
Cancelled (132,250) $4.50
--------
Balance July 31, 2000 826,684 $4.00
======= =====
At July 31, 2000, approximately 306,067 options exercisable at prices
ranging from $2.75 to $4.875 per share were exercisable and all options
granted expire ten years from the date of grant. The range of exercise
prices for options outstanding at July 31, 2000 was $2.75 - $5.69 with a
weighted average remaining life of approximately seven years.
The Company has adopted the pro forma disclosure provision of SFAS No.
123, "Accounting for Stock Based Compensation". Accordingly, the Company
does not record compensation cost in the financial statements for its stock
options which have an exercise price equal to or greater than the fair
market value of the underlying stock on the date of grant. The Company has
recognized a total of $142 in deferred commission expense representing the
value of stock options granted to non-employee sales representatives. Such
cost is expensed over the vesting period, amounting to $65 and $65 in
fiscal 1999 and 1998, respectively. No expense was recognized in fiscal
2000. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant date under SFAS No. 123,
the Company's net income and net income per share for the years ended July
31, 2000, 1999 and 1998 would approximate the pro forma amounts below:
2000 1999 1998
---- ---- ----
Net income:
As reported $4,100 $2,183 $2,172
Pro forma $3,813 $1,940 $1,992
Basic net income per share:
As reported $0.51 $0.27 $0.26
Pro forma $0.47 $0.24 $0.23
Diluted net income per share:
As reported $0.50 $0.27 $0.26
Pro forma $0.46 $0.24 $0.23
The pro forma effects on net income and diluted net income per share for 2000,
1999 and 1998 may not be representative of the pro forma effects in future years
41
Manchester Equipment Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000, 1999 and 1998
(in thousands, except share and per share data)
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
2000 1999 1998
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock volatility 49% 43% 27%
Risk free interest rate 5% 5% 5%
Expected option term until exercise (years) 5.00 5.00 4.70
The per share weighted average fair value of stock options granted during
fiscal 2000, 1999 and 1998 was $2.15, $1.40, and $1.09, respectively.
Repurchase of Common Stock
During the years ended July 31, 2000, 1999 and 1998, the Company
repurchased 150,600, 11,800 and 448,400 shares of its common stock at an
aggregate purchase price of $671, $33 and $1,785, respectively. Such shares were
subsequently retired.
(12) Major Customer and Vendors and Concentration of Credit Risk
The Company sells and services customers that are located primarily in the
eastern United States.
The Company's top three vendors accounted for approximately 16%, 14%, and 10%,
respectively of total product purchases for the year ended July 31, 2000. The
Company's top two vendors accounted for approximately, 21%, and 10%,
respectively of total product purchases for the year ended July 31, 1999. The
Company's top three vendors accounted for approximately 24%, 13% and 11% of
total product purchases for the year ended July 31, 1998.
No customer accounted for more than 5% of the Company's accounts receivable
at July 31, 2000. One customer accounted for 9% of the Company's accounts
receivable at July 31, 1999.
42
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports
on Form 8-K (Continued)
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits:
3.1.a(1) Certificate of Incorporation of Registrant filed August 21, 1973.
3.1.b(1) Certificate of Amendment of Certificate of Incorporation filed
January 29, 1985.
3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996.
3.2(1) Bylaws of Registrant.
4.2(1) Form of Representative's Warrants.
10.1(1) 1996 Incentive and Non-Incentive Stock Option Plan of Registrant.
10.2(1) Agreement dated September 24, 1996 between Registrant and Michael
Bivona
10.3(1) * Compensation Agreement dated November 6, 1996 between Registrant
and Joel G. Stemple.
10.4(1) * Agreement of Employment dated September 30, 1996 between Registrant
and Barry Steinberg
10.4.a(1)* Amendment dated November 6, 1996 to Agreement of Employment dated
September 30, 1996 between Registrant and Joel G. Stemple.
10.5.a(1) Lease dated October 1995 between Registrant and 40 Marcus Realty,
LLC - f/k/a 40 Marcus Realty Associates, as amended.
10.5.b(1) Lease dated January 1988 between Registrant and Marcus Realty,
as amended.
10.5.c(1) Lease dated June 1995 between Registrant and Facilities Management.
10.5.d(1) Lease dated July 31, 1995 between Registrant and Boatman's
Equities, LLC - f/k/a 160 Oser Avenue Associates, as amended.
10.5.e(1) Lease dated January 15, 1992 between Registrant and 352 Seventh
Avenue Associates.
10.5.f(1) Lease dated April 16, 1990 between Registrant and Regent Holding
Corporation, as successor to Crow-Childress-Donner, Limited, as
amended.
10.5.g(1) Business Lease dated December 4, 1992 between Registrant and TRA
Limited, as amended.
10.5.h(5) Lease dated June 23, 1997 between Registrant and First Willow, LLC.
10.5.i(5) Lease dated June 30, 1997 between Registrant and Angela C. Maffeo,
Trustee Under the Will of John Capobianco.
10.5.j(6) Lease dated October 1, 1997 between Registrant and Spanish River
Executive Plaza, Ltd. A/k/a Century Financial Plaza.
10.5.k(4) Lease dated January 2, 1998 between Coastal Office Products, Inc.
and BC & HC Properties, LLC
10.5.l Lease dated March 1, 2000 between ASP Washington LLC and Coastal
Office Products.
43
10.6(2) Promissory Note dated October 15, 1996 between Registrant and The
Bank of New York
10.7.a(1) Letter Agreement Regarding Inventory Financing dated December 7,
1993 between ITT Commercial Finance Corp. and Registrant.
10.7.b(1) Agreement for Wholesale Financing dated November 11, 1993 between
ITT Commercial Finance Corp. and Registrant.
10.7.c(1) Intercreditor Agreement dated May 18, 1994 between ITT Commercial
Finance Corp. and The Bank of New York.
10.8.a(1) Letter Agreement Regarding Inventory Financing dated April 22,
1996 between AT&T Capital Corporation and Registrant.
10.8.b(1) Intercreditor Agreement dated May 18, 1994 between AT&T Commercial
Finance Corporation and The Bank of New York.
10.9(1) Reseller Agreement dated May 1, 1990 between Toshiba America
Information Systems, Inc. and Registrant.
10.10(1) Agreement for Authorized Resellers dated March 1, 1996 between
Hewlett-Packard Company and Registrant.
10.11(3) Asset Purchase Agreement dated April 15, 1997 among Electrograph
Systems, Inc., Bitwise Designs, Inc., Electrograph Acquisition,
Inc. and Registrant.
10.12(4) Definitive Purchase Agreement and Indemnity Agreement dated January
2, 1998 between Registrant and Coastal Office Products, Inc.
10.13(7) $15,000,000 Revolving Credit Facility Agreement dated July 21, 1998
between Registrant and Bank of New York, as Agent.
10.14(8) $15,000,000 Revolving Credit Facility Agreement dated June 25, 1999
between Registrant and EAB, as Agent.
23.1 Independent auditors consent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
last quarter of the period covered by this report, and none were
required.
- -----------------------
* Denotes management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
1. Filed as the same numbered Exhibit to the Company's Registration Statement
on Form S-1 (File No. 333- 13345) and incorporated herein by reference
thereto.
2. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1996 (Commission File No.
0-21695) and incorporated herein by reference thereto.
3. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1997 (Commission File No.
0-21695) and incorporated herein by reference thereto.
4. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998 (Commission File No.
0-21695) and incorporated herein by reference thereto.
5. Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
6. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997 (Commission File No.
0-21695) and incorporated herein by reference thereto.
7. Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1998 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
8. Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1999 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunder duly authorized.
Manchester Equipment Co., Inc.
Date: October 27,2000 By: ss/ Barry R. Steinberg_
--------------------
Barry R. Steinberg
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of this Registrant and
in the capacities and on the dates indicated.
ss/ Barry R. Steinberg Date: October 27,2000
----------------------
Barry R. Steinberg
President, Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)
ss/ Joel G. Stemple Date: October 27,2000
- -------------------
Joel G. Stemple
Executive Vice President and Director
ss/ Joseph Looney Date: October 27,2000
--------------
Joseph Looney
Vice President - Finance,
Chief Financial Officer (Principal Accounting Officer)
ss/ Joel Rothlein Date: October 27,2000
--------------
Joel Rothlein
Director
ss/ Julian Sandler Date: October 27,2000
--------------
Julian Sandler
Director
ss/ Michael Russell Date: October 27,2000
---------------
Michael Russell
Director
ss/ Bert Rudofsky Date: October 27,2000
-------------
Bert Rudofsky
Director
Manchester Equipment Co., Inc.
Schedule II - Valuation and Qualifying Accounts
(dollars in thousands)
Column C-Additions
------------------
Column B- (1)- (2)-
Column A - Balance at Charged to Charged to Column D- Column E-
Description beginning of costs and other Deductions- Balance at
period expenses accounts (b) (a) end of period
------ -------- ------------ --------- -------------
Allowance for doubtful
accounts
Year ended:
July 31, 1998 $1,051 $351 $25 $277 $1,150
July 31, 1999 $1,150 $154 - $100 $1,204
July 31, 2000 $1,204 ($366) $61 - $899
(a) Write-off amounts against allowance provided.
(b) Recorded in connection with the acquisitions.