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UNITED STATES
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, 2002
_ 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 TECHNOLOGIES, 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, Hauppauge, New York, 11788
(Address of principal executive offices and Zip Code)
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 common stock held by non-affiliates of the
Registrant as of October 15, 2002 was $5,014,577 (2,639,251 shares at a closing
sale price of $1.90).
As of October 15, 2002, 7,990,215 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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MANCHESTER TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED JULY 31, 2002
TABLE OF CONTENTS
Part I
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 Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 30
Signatures
Certifications
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PART I
This Report contains certain forward-looking statements that are based on
current expectations. The actual results of Manchester Technologies, 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., Learning Technology
Group, LLC, Donovan Consulting Group, Inc. and e.Track Solutions, Inc. will add
or 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 the slowdown in
technology related spending, 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. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
ITEM 1. Business
Our Company
Manchester Technologies, Inc. ("Manchester" "we," "us," "our," or the
"Company") is a single-source solutions provider specializing in hardware and
software procurement, custom networking, security, IP telephony, remote
management, application development/e-commerce, wireless, display technology,
storage, enterprise and Internet solutions. We offer our customers single-source
solutions customized to their information systems needs by integrating our
analysis, design and implementation services with hardware, software, networking
products and peripherals from leading vendors. Over the past 29 years, we have
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 and monitoring, "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 City Metropolitan area, with approximately 58%
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.
We have a corporate web site and electronic commerce system. The site,
located at www.e-manchester.com, allows existing customers, corporate shoppers
and others to find product specifications, compare products, check price and
availability and place and track orders quickly and easily, 24 hours a day, 7
days a week.
Manchester was incorporated in New York in 1973 and has eight 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
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 display technology
solutions and plasma display monitors throughout the United States; Coastal
Office Products, Inc., a Maryland corporation, which is an integrator and
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reseller of computer products in the Baltimore, Maryland and Washington, D.C.
areas; Texport Technology Group, Inc., a New York corporation, which is an
integrator and reseller of computer products in the Rochester, New York area;
Learning Technology Group, LLC, a New York limited liability company, which is
an integrator and reseller of computer products mainly to educational
institutions within New York State; Donovan Consulting Group, Inc., a Delaware
corporation, which delivers wireless LAN solutions to customers nationwide; and
e.Track Solutions, Inc., a New York corporation, which delivers business,
Internet and information technology solutions to customers nationwide.
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. 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 our 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
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 VoIP (Voice over
Internet Protocol), inter-networking (routers and switches security assessment,
wireless analysis), database design and management.
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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 our 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 sales force immediate access to
information regarding price and availability of products. In addition, we are
developing 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 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 strong corporate demand for computer products and services.
Manchester is seeking to expand its presence in this area through its 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.
Expanding into Additional Business Centers. We have regional offices in
Newton, Massachusetts; Baltimore, Maryland; Boca Raton, Florida; Lanham,
Maryland (Washington, D.C.); Long Beach, California; Timonium, Maryland; and
Rochester, New York, as well as other locations throughout the United States,
from which we derived approximately 42% of our revenues for the fiscal year
ended July 31, 2002.
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.
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
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 Hewlett Packard, Microsoft, Novell and Cisco Systems.
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 needs 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.
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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 costly 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, monitoring,
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"). Our engineers can provide network management services on site at
customers' facilities, and remotely.
"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.
We offer our customers a comprehensive remote monitoring and management
service called "TelstarR"(R). TelstarR provides our customers cost effective
24/7/365 network support that is fully integrated for servers, workstations and
routers. This remote management can improve company performance and identify and
respond to current and potential systems failures and other problems.
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
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.
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Products. We offer a wide variety of personal computer and networking
products, display technology solutions, and peripherals, including:
CRT Display Monitors Routers
Desktop Computers Scanners
Internet Access Products Servers
LCD Flat Panel Monitors Software
Modems Storage Systems
Monitors and Displays Switches
Network Equipment Supplies and Accessories
Notebook Computers Teleconferencing Equipment
Plasma Display Monitors Terminals
Power Protection Devices Wireless Products
Printers 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. Nortel Networks, Inc.
Computer Associates International, Inc. Novell, Inc.
Epson America, Inc. Panasonic
Hewlett-Packard Company Philips Electronics N.V.
Hitachi America, Ltd. Pioneer Corp.
Intel Corporation Seagate Technology, Inc.
Microsoft Corporation Sony Corporation
NEC Technologies, Inc. 3Com Corp.
NEC-Mitsubishi, Inc. Toshiba America Information
Systems, Inc.
For the fiscal year ended July 31, 2002, sales of products manufactured
by Compaq, (now part of Hewlett Packard) Pioneer and NEC comprised approximately
19%, 11% and 11%, respectively, of our revenue. For the fiscal year ended July
31, 2001, sales of products manufactured by Compaq and Toshiba comprised
approximately 20% and 11%, respectively, of our revenue. For the fiscal year
ended July 31, 2000, sales of products manufactured by Compaq and Toshiba
comprised approximately 13% and 19%, respectively, of our revenue.
We have entered into agreements with our principal suppliers that
include provisions providing for periodic renewals and permit termination by the
vendor without cause, generally upon 30 to 90 days written notice, depending
upon the vendor. While our principal suppliers have regularly renewed their
respective agreements with us, 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 our principal suppliers are satisfactory.
We are dependent upon the continued supply of products from our
manufacturers, particularly Hewlett-Packard, Pioneer, NEC 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 occur as a result of the present dynamics of the personal computer
industry as a whole, which include varied 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 2003, 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.
Many of our major product manufacturers provide stock balancing rights
and price protection for a limited time period, by way of credits or 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. There can
be no assurance that manufacturers will not further limit or eliminate price
protection and stock balancing rights in the future.
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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, 2002, 2001 and 2000, no
one customer accounted for more than 10% of our total revenue. Some of our
significant commercial customers currently include Quest Diagnostics, Inc.,
Citrix Systems, Inc., Rochester Gas and Electric Corp., Ann Taylor, Inc. and
Reuters America, 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, our ability to return the product to
our vendor and certain other conditions. We are generally able to return
defective merchandise returned from customers to the vendor for repair or
replacement.
Sales and Marketing
Our sales are generated primarily by our 68 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 includes 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. Our corporate logo includes the
phrase "Manchester, the Answer" to emphasize our position as a knowledgeable
resource for networking, computer and display technology solutions for our
customers. We promote name recognition and the sale of our products and services
through regional business directories, trade magazine advertisements, television
and 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 advertisements
in yearbooks and/or program guides for sports teams such as the New York Mets
and the New York Knicks, and often feature nationally recognized athletes in our
advertising campaigns. 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 we rely to partially fund many of our advertising
and promotional campaigns.
Sales force and customer training is an integral part of 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.
In addition, we built a storage lab in our New York City office for sales force
training and for customer demonstration and training. We utilize our technical
personnel to conduct such seminars and may hire additional dedicated trainers as
needed.
Management Information Systems
We currently use an IBM AS/400 and a Hewlett Packard storage area
network in our integrated management information system, which enable
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instantaneous access. We maintain proprietary management systems 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
our inventory and receivables. Manchester's average inventory turnover was 24,
33, and 34 times for the fiscal years ended July 31, 2002, 2001, and 2000,
respectively, and we experienced bad debt expense of less than 0.3% 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. During the fiscal year ended July 31,
2002, we further invested in our management information systems, which included
replacing all routers and switches, implementing a storage area network,
installing wireless access points and putting into service an IP telephony phone
system. 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 and possible alliances between existing
competitors. In addition, certain suppliers and manufacturers market products
directly through a direct sales force and/or the Internet rather than, or in
addition to, channel distribution, and also market services, such as repair and
configuration services, directly to end users. The number of suppliers and
manufacturers employing direct marketing may increase in the future. 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 a leading wholesale
distributor of plasma display monitors in the United States. Electrograph offers
a full range of display technology solutions for dealers and system integrators
throughout the U.S. 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 nationwide
distribution of display technology solutions, Electrograph also markets a
complete line of LCD flat panel and plasma display monitors under the
Electrograph brand name. Electrograph is headquartered in Hauppauge, New York,
with branch offices throughout the U.S.
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
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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. Some suppliers permit Electrograph to rotate its
inventory by returning slow moving inventory for other inventory.
While Electrograph distributes products of more than 30 suppliers,
approximately 32%, and 31% of Electrograph's purchases in fiscal 2002 were
derived from products manufactured by Pioneer and NEC, respectively.
Electrograph's distribution operations are currently conducted from
distribution centers in Hauppauge, New York and Long Beach, California.
Electrograph also maintains sales offices throughout the U.S.
Acquisitions
Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock
of Donovan Consulting Group, Inc. ("Donovan"), a Delaware corporation
headquartered near Atlanta, Georgia. Donovan is a technical services firm that
delivers Wireless LAN solutions to customers nationwide. The acquisition, which
has been accounted for as a purchase, consisted of a cash payment of $1,500,000
plus potential future contingent payments. Contingent payments of up to
$1,000,000 may be payable on each of November 2, 2002 and November 2, 2003 based
upon Donovan achieving certain agreed-upon increases in revenue and pre-tax
earnings. In connection with the acquisition, the Company assumed approximately
$435,000 of bank debt and $43,000 of other debt, which were subsequently repaid.
Donovan was acquired in order to strengthen the Company's position in the
Wireless LAN arena. Donovan allows the Company to offer total Wireless LAN
solutions including state of the art products as well as the services necessary
to have those products operate optimally.
Operating results of Donovan are included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497,000 and $869,000,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $1,872,000. The
factors that contributed to the determination of the purchase price and the
resulting goodwill include the significant growth expected in this area due to
the combination of the Company's long history of strong customer relationships,
financial strength and stability coupled with Donovan's product offerings and
highly skilled technical staff. The $1,872,000 will not be amortized; however,
it will be subject to impairment testing in accordance with Statement No. 142,
"Goodwill and Other Intangible Assets."
e.Track Solutions, Inc.
On November 9, 2001, the Company acquired all of the outstanding stock
of e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of cash payments of $290,000 (including debt assumed and subsequently
repaid). e.Track was acquired in order to allow the Company to offer our
customers customized software solutions along with the products and services
that we have traditionally offered.
Operating results of e.Track are included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116,000 and $192,000,
respectively. The excess of aggregate purchase price over the estimated fair
value of the tangible net assets acquired was $291,000. The factors that
contributed to the determination of the purchase price and the resulting
goodwill include the expectation that the combination of e.Track's highly
skilled technical staff, coupled with the Company's financial strength and
customer base, will result in significant growth at e.Track going forward. The
$291,000 will not be amortized; however, it will be subject to impairment
testing in accordance with Statement No. 142, "Goodwill and Other Intangible
Assets."
10
Employees
On August 31, 2002, we had 330 full-time employees consisting of 50
sales and marketing representatives, 67 management and supervisory personnel,
107 technical personnel and 106 administrative and other personnel. In addition,
on August 31, 2002, we had 18 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.
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 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)
Headquarters Hauppauge, NY 30,000 - October 2005
Warehouse and 50 Marcus Blvd. (1)
Service Center Hauppauge, NY 10,000 30,000 January 2008
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 3,214 - December 2007
Baltimore, MD 3832 Falls Rd.
Sales Office Baltimore, MD 10,000 2,000 December 2002
Washington, D.C. 5001 Forbes Blvd.
Sales Office Lanham, MD 3,000 - February 2003
Rochester, NY 106 Despatch Dr.
Sales Office Rochester, NY 6,500 3,500 February 2004
Electrograph 40 Marcus Blvd. (1)
Corporate HQ Hauppauge, NY 10,000 13,000 May 2007
Electrograph,
Timonium, MD 1818 Pot Spring Rd.
Sales Office Timonium, MD 3,280 - November 2007
Donovan 510 Swanson Road
Corporate HQ Tyrone, GA 4,000 1,500 September 2006
e.Track 1169 Pittsford-Victor Rd
Corporate HQ Pittsford, NY 3,662 - October 2005
(1) Leased from entities controlled by or affiliated with certain of our
executive officers, directors and principal shareholders. The leases
with related parties provide terms comparable to those that could be
obtained from independent third parties.
11
ITEM 3. Legal Proceedings
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 fiscal 2002.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our Common Stock 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 2001 High Low
---------------- ---- ---
First Quarter 5.625 3.156
Second Quarter 4.000 2.000
Third Quarter 2.750 1.938
Fourth Quarter 2.850 2.060
Fiscal Year 2002
----------------
First Quarter 2.800 2.120
Second Quarter 2.790 2.150
Third Quarter 2.890 2.070
Fourth Quarter 2.740 2.050
On October 15, 2002, the closing sale price for the Company's Common
Stock was $1.90 per share. As of October 15, 2002 there were 46 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,
--------------------------
2002 2001 2000 1999 1998
----- ---- ---- ---- ----
Income Statement Data:
Revenue $262,010 $280,278 $300,073 $228,641 $202,530
Cost of revenue 225,602 242,925 260,236 195,423 171,930
------- ------- ------- ------- -------
Gross profit 36,408 37,353 39,837 33,218 30,600
Selling, general and
administrative expenses 35,050 35,485 33,539 29,849 27,414
------ ------ ------ ------ ------
Income from operations 1,358 1,868 6,298 3,369 3,186
Interest and other income, net 184 767 602 404 546
Provision for income taxes 600 908 2,800 1,590 1,560
--- --- ----- ----- -----
Net income $942 $1,727 $4,100 $2,183 $2,172
=== ===== ===== ===== =====
Net income per share:
Basic $0.12 $0.21 $0.51 $0.27 $0.26
==== ==== ==== ==== ====
Diluted $0.12 $0.21 $0.50 $0.27 $0.26
==== ==== ==== ==== ====
Weighted average shares of common stock outstanding:
Basic 7,990 8,036 8,108 8,096 8,494
===== ===== ===== ===== =====
Diluted 7,991 8,058 8,228 8,096 8,499
===== ===== ===== ===== =====
July 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $30,098 $31,972 $30,453 $27,461 $26,112
Total assets 70,661 61,783 74,573 61,778 56,894
Short-term debt - - 18 85 82
Shareholders' equity 46,512 45,555 44,263 39,586 37,345
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 the Company 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 statements are made
pursuant to the safe harbor provisions of The Private Securities Litigation
Reform Act of 1995. Forward looking statements are not historical facts, are
based on the Company's beliefs and expectations as of the date of this report,
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 and a distributor of
display technology solutions and plasma display monitors primarily to dealers
and system integrators. 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.
Certain Trends and Uncertainties
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a 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 cannot
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.
Geographic Issues. 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 cannot 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 revenues have 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 cannot 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.
On September 11, 2001, the World Trade Center in New York City and the
Pentagon in Washington, D.C. were the subject of terrorist attacks. A
significant part of our business is generated from our New York City and
Baltimore/Washington, D.C. offices and revenues for the month of September were
adversely impacted with declines in orders and shipments. We cannot predict the
impact that these or potential future attacks may have on our business, results
of operations and financial condition.
14
Personnel Issues. 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 cannot 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.
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 and possible alliances between
existing competitors. Moreover, additional 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.
Vendor Relationships and Product Availability. 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 product
shortages from time to time, because manufacturers have been unable to produce
sufficient quantities of certain products to meet demand. In addition, many
manufacturers have adopted "just in time" manufacturing principles that can
reduce the immediate availability of a wide range of products at any one time.
We cannot 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 cannot 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. On May 3, 2002, the
Hewlett-Packard Company and Compaq Computer Corporation merged. Manchester sold
the products of both companies and we believe that we had strong relationships
with both companies and continue to have a strong relationship with the merged
company. While we do not believe that there will be a material adverse effect on
our business, financial condition and results of operations as a result of this
merger, there can be no assurance that such a material adverse effect will not
occur.
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
increase 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
condition and results of operations.
Changing Technology; Inventory Risk. 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
15
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
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. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we cannot
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.
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 and peripherals. 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
continue to decline or that we will be able to offset declines in average
selling prices with increases in units shipped.
Acquisitions. Our strategy envisions that part of our future growth
will come from 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.
Quarterly Variations. 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, over
the last several years, 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.
Microsoft Litigation. 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.
Information Technology Systems. Our success is dependent in part on the
accuracy, proper utilization and continuing development of our information
technology systems, including our business application systems, Internet servers
and telephony system. The quality and our utilization of the information
generated by our information technology systems affects, among other things, our
ability to conduct business with our customers, manage our inventory and
accounts receivable, purchase, sell, ship and invoice our products efficiently
and on a timely basis and maintain cost-efficient operations. While we have
taken steps to protect our information technology systems from a variety of
threats, including computer viruses and malicious hackers, we cannot guarantee
that such steps will be effective. If there is a disruption to or an
infiltration of our information technology systems, it could significantly harm
our business and results of operations.
16
Stock Repurchase Program. The Company's Board of Directors has
authorized the Company to repurchase up to $1 million of its common stock, which
authorization is effective until the first Board of Directors meeting following
the close of our 2003 fiscal year, unless earlier terminated by the Board. The
extent to which the Company repurchases its stock and the timing of such
purchases will depend upon market conditions and other corporate considerations
to be evaluated by the Executive Committee of the Board. The repurchase program
does not obligate the Company to repurchase any specific number of shares, and
repurchases pursuant to the program may be suspended or resumed at any time or
from time to time without further notice or announcement. There can be no
assurance as to the effect, if any, that the adoption of the repurchase program
or the making of repurchases thereunder will have on the market price of our
common stock.
E-Commerce
We utilize a website and electronic commerce system. The 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.
Recent Acquisitions
Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock
of Donovan, a Delaware corporation headquartered near Atlanta, Georgia. Donovan
is a technical services firm that delivers Wireless LAN solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $1,500,000 plus potential future contingent
payments. Contingent payments of up to $1,000,000 may be payable on each of
November 2, 2002 and November 2, 2003 based upon Donovan achieving certain
agreed-upon increases in revenue and pre-tax earnings. In connection with the
acquisition, the Company assumed approximately $435,000 of bank debt and $43,000
of other debt, which were subsequently repaid. Donovan was acquired in order to
strengthen the Company's position in the Wireless LAN arena. Donovan allows the
Company to offer total Wireless LAN solutions including state of the art
products as well as the services necessary to have those products operate
optimally.
Operating results of Donovan are included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497,000 and $869,000,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $1,872,000. The
factors that contributed to the determination of the purchase price and the
resulting goodwill include the significant growth expected in this area due to
the combination of the Company's long history of strong customer relationships,
financial strength and stability coupled with Donovan's product offerings and
highly skilled technical staff. The $1,872,000 will not be amortized; however,
it will be subject to impairment testing in accordance with Statement No. 142,
"Goodwill and Other Intangible Assets."
e.Track Solutions, Inc.
-----------------------
On November 9, 2001, the Company acquired all of the outstanding stock
of e.Track, a New York corporation headquartered in Pittsford, New York. e.Track
is a business and software services firm that delivers business, Internet and
information technology solutions to customers nationwide. The acquisition, which
has been accounted for as a purchase, consisted of cash payments of $290,000
(including debt assumed and subsequently repaid). e.Track was acquired in order
to allow the Company to offer our customers customized software solutions along
with the products and services that we have traditionally offered.
Operating results of e.Track are included in the consolidated statements of
income from the acquisition date. The estimated fair value of tangible assets
and liabilities acquired was $116,000 and $192,000, respectively. The excess of
aggregate purchase price over the estimated fair value of the tangible net
assets acquired was $291,000. The factors that contributed to the determination
of the purchase price and the resulting goodwill include the expectation that
the combination of e.Track's highly skilled technical staff, coupled with the
Company's financial strength and customer base, will result in significant
growth at e.Track going forward. The $291,000 will not be amortized; however, it
will be subject to impairment testing in accordance with Statement No. 142,
"Goodwill and Other Intangible Assets."
17
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, encourages all registrants, including the
Company, to include a discussion of "critical" accounting policies or methods
used in the preparation of financial statements. The preparation of financial
statements and related disclosures in conformity with accounting principles
generally accepted in the United States of America requires management to make
judgments, assumptions and estimates that affect the amounts reported in the
consolidated financial statements and accompanying notes. Note 1 to the
consolidated financial statements appearing elsewhere in this report describes
the significant accounting policies and methods used in the preparation of the
consolidated financial statements. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts, inventory allowances,
and goodwill impairments. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden or significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to increase
our inventory allowances and our gross margin could be adversely affected.
We perform goodwill impairment tests on an annual basis and between
annual tests in certain circumstances. In assessing the recoverability of the
Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
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 for
the Year Ended July 31,
2002 2001 2000
---- ---- ----
Revenue
Products 95.3% 97.0% 97.6%
Services 4.7 3.0 2.4
--- --- ---
100.0 100.0 100.0
----- ----- -----
Cost of revenue
Products 86.7 87.1 87.2
Services 74.6 71.8 66.0
---- ---- ---- -
86.1 86.7 86.7
---- ---- ----
Product gross profit 13.3 12.9 12.8
Services gross profit 25.4 28.2 34.0
---- ---- ----
Gross profit 13.9 13.3 13.3
Selling, general and administrative expenses 13.4 12.6 11.2
---- ---- ----
Income from operations 0.5 0.7 2.1
Interest and other income, net 0.1 0.2 0.2
--- --- ---
Income before income taxes 0.6 0.9 2.3
Provision for income taxes 0.2 0.3 0.9
--- --- ---
Net income 0.4% 0.6% 1.4%
=== === ===
18
Year Ended July 31, 2002 Compared to Year Ended July 31, 2001
Revenue. Revenue decreased by $18.3 million or 7% to $262.0 million for
the year ended July 31, 2002 or fiscal 2002 from $280.3 million for the year
ended July 31, 2001 or fiscal 2001. Revenue from the sale of products decreased
by $22.2 million or 8% while revenue from service offerings increased by $3.9
million or 48%. The decrease in product revenue is primarily a result of lower
sales of personal computers and peripherals as a result of the overall slowdown
in economic activity in general as well as the decline in corporate spending in
the technology industry in particular in fiscal 2002. This was partially offset
by increased sales of display monitors, primarily large screen flat panel
displays by our Electrograph subsidiary. The increase in service revenue is
primarily attributable to the Company's acquisitions of Donovan and e.Track in
fiscal 2002 as well as the growth in the sales of services to customers that are
delivered by manufacturers or vendors.
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 decreased by $0.9 million or 3%, from
$37.4 million in fiscal 2001 to $36.4 million in fiscal 2002. Gross profit from
product sales decreased by $1.7 million or 5% while gross profit from service
offerings increased by $0.8 million or 33%. As a percentage of revenue, gross
profit from the sale of products increased from 12.9% in fiscal 2001 to 13.3% in
fiscal 2002 primarily as a result of increased sales of higher margin products,
increased volume rebates received from manufacturers and certain large volume
product purchases for which the Company received discounts. As a percentage of
revenue, gross profit from the sale of services declined from 28.2% in fiscal
2001 to 25.4% in fiscal 2002 due primarily to lower utilization of technical
personnel as well as increased sales of lower margin services that are delivered
by manufacturers or vendors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $400,000, or 1% from $35.5 million in
fiscal 2001 to $35.1 million in fiscal 2002. The decrease is principally due to
lower salaries and personnel costs of approximately $400,000 reflecting the cost
reduction measures that have been instituted as a result of the of the overall
slowdown in economic activity and the reduction in revenue, decreased bad debt
expense of approximately $220,000, lower advertising costs of approximately
$240,000 and lower depreciation and amortization costs of $130,000. These
decreases were partially offset by higher telephone expenses of approximately
$250,000 and increased rent expenses of approximately $220,000 as a result of
the Company's acquisitions in fiscal 2002. As a percentage of revenue, selling,
general and administrative expenses increased from approximately 12.6% in fiscal
2001 to 13.4% in fiscal 2002.
Interest and Other Income. Interest and other income, net, declined by
$583,000 from $767,000 in fiscal 2001 to $184,000 in fiscal 2002. The decrease
in fiscal 2002 is a result of lower cash balances available for investment,
lower interest rates available in the marketplace and the Company's receipt of
insurance proceeds in fiscal 2001 not received in fiscal 2002. In fiscal 2001
the Company received approximately $505,000 of proceeds in connection with a
life insurance policy that it carried on a deceased employee, partially offset
by approximately $250,000 in compensation benefits paid to the deceased
employee's beneficiary principally under the terms of a deferred compensation
agreement with the employee.
Provision for income taxes. Our effective tax rate increased from 34.5%
of pre-tax income in fiscal 2001 to 38.9% of pre-tax income in fiscal 2002. This
increase in fiscal 2002 is primarily the result of the Company not having the
benefit of the nontaxable life insurance proceeds received in fiscal 2001 (as
discussed in Interest and Other Income above).
Year Ended July 31, 2001 Compared to Year Ended July 31, 2000
Revenue. Our revenue decreased to $280.3 million in fiscal 2001 from
$300.1 million for the year ended July 31, 2000 or fiscal 2000. The decline in
revenue was 16% and 27% in the third and fourth quarters of fiscal 2001,
compared to the same quarters a year ago, respectively, reflecting the overall
slowdown in economic activity in general as well as the decline in corporate
spending in the technology industry in particular. Revenue from product sales
decreased by $21.0 million, or 7.2%, as a result of lower selling prices for
personal computers partially offset by a 6% increase in the number of personal
computers sold as well as increased revenue from the sales of large screen
flat-panel displays by our Electrograph subsidiary. Service revenue increased by
$1.2 million, or 16.8%, due to our continued focus on developing and selling
value-added services to our customers including significant growth in the sales
of services to customers that are delivered by manufacturers or vendors.
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 decreased by $2.4 million or 6.2%, from
$39.8 million in fiscal 2000 to $37.4 million in fiscal 2001. This decrease is
primarily the result of the decline in revenue discussed above. As a percentage
19
of revenue, gross profit from the sale of products increased slightly from 12.8%
in fiscal 2000 to 12.9% in fiscal 2001. As a percentage of revenue, gross profit
from the sale of services declined from 34.0% in fiscal 2000 to 28.2% in fiscal
2001 primarily as a result of increased sales of lower margin services that are
delivered by manufacturers or vendors as well as reduced demand for higher
margin consulting and network design services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 5.8% from $33.5 million in
fiscal 2000 to $35.5 million in fiscal 2001. The increase is principally due to
higher bad debts and depreciation and amortization costs as well as costs from
our Rochester office, which was opened in connection with the acquisitions of
Texport and LTG on March 22, 2000. These increases were partially offset by
lower commission costs due to the lower revenue discussed above. In addition,
selling, general and administrative costs were lower in the third and fourth
quarters of fiscal 2001 when compared to the same quarters a year ago,
reflecting the cost cutting measures (principally personnel costs) that have
been instituted as a result of the reduction in revenue.
Interest and Other Income. Interest and other income, net, declined by
$90,000 from $602,000 in fiscal 2000 to $512,000 in fiscal 2001 principally due
to lower interest rates earned on short-term investments as well as lower cash
balances available for investment. Other income, net in fiscal 2001 consists of
approximately $505,000 proceeds received by the Company in connection with a
life insurance policy that it carried on a deceased employee, partially offset
by approximately $250,000 in compensation benefits paid to the deceased
employee's beneficiary principally under the terms of a deferred compensation
agreement with the employee.
Provision for income taxes. Our effective tax rate decreased from 40.6%
of pre-tax income in fiscal 2000 to 34.5% of pre-tax income in fiscal 2001. This
decrease is primarily the result of nontaxable life insurance proceeds received
in the fourth quarter of fiscal 2001 (as discussed in Interest and Other Income
above) partially offset by higher state and local income taxes.
Liquidity and Capital Resources
Our primary sources of cash and cash equivalents in fiscal 2002 have
been internally generated working capital from profitable operations.
The Company's working capital at July 31, 2002 and 2001 was
approximately $30.1 million and $32.0 million, respectively.
Operations for fiscal 2002, fiscal 2001 and fiscal 2000, after adding
back non-cash items, provided cash of approximately $3.7 million, $5.1 million
and $5.7 million, respectively. During such years, other changes in working
capital provided (used) cash of approximately ($4.4) million, ($4.1) million and
$7.6 million, respectively, resulting in cash being provided by (used in)
operating activities of approximately ($0.7) million, $0.9 million and $13.2
million, respectively. Our accounts receivable and accounts payable 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.
Investment activities for fiscal 2002, fiscal 2001 and fiscal 2000 used
cash of approximately $4.2 million, $2.0 million and $1.8 million, respectively.
These amounts include additions to property and equipment in fiscal 2002, fiscal
2001 and fiscal 2000 of approximately $2.6 million, $2.0 million and $1.7
million, respectively, and the payment for acquisitions, net of cash acquired of
approximately $1.6 million and $0.2 million in fiscal 2002 and 2000,
respectively.
Financing activities for fiscal 2002, fiscal 2001 and fiscal 2000 used
cash of approximately $0.6 million, $0.6 million and $1.0 million, respectively.
These amounts include (i) proceeds from the issuance of common stock in
connection with the exercise of stock options of approximately $6,000 and $0.4
million, in fiscal 2001 and 2000, respectively; (ii) net repayments of bank
loans, capitalized lease obligations and other debt of approximately $0.6
million, $18,000 and $0.7 million in fiscal 2002, 2001 and 2000, respectively;
and (iii) the purchase and retirement of the Company's common stock of
approximately $0.6 million and $0.7 million in fiscal 2001 and fiscal 2000,
respectively.
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At July 31, 2002, 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 line of
credit will be adequate to support current operating levels for the foreseeable
future, specifically through at least the end of fiscal 2003. We currently have
no material commitments for capital expenditures, other than operating leases
20
that the Company has committed to for its facilities and certain tangible
property. Future capital requirements of the Company include those for the
growth of working capital items such as accounts receivable and inventory, the
purchase of equipment, expansion of facilities, as well as the possible opening
of new offices, potential acquisitions and expansion of the Company's service
and e-commerce capabilities. In addition, there are no transactions,
arrangements and other relationships with unconsolidated entities or other
persons that are reasonably likely to affect liquidity or the availability of,
or requirements for, capital resources.
The following represents the Company's commitment under operating
leases for each of the next five years ended July 31 and thereafter:
2003 $1,729
2004 1,663
2005 1,710
2006 1,292
2007 1,175
Thereafter 607
---
$8,176
======
The Company regularly examines opportunities for strategic acquisitions
of other companies or lines of business and anticipates that it may issue debt
and/or equity securities either as direct consideration for such acquisitions or
to raise additional funds to be used (in whole or in part) in payment for
acquired securities or assets. The issuance of such securities could be expected
to have a dilutive impact on the Company's shareholders, and there can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated investment.
Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting
standard requiring the recording of the fair value of liabilities associated
with the retirement of long-lived assets in the period in which they are
incurred. The Company has adopted the provisions of SFAS 143 effective August 1,
2002. The adoption of SFAS 143 did not have a significant effect on the
Company's results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining
the fundamental recognition and measurement provisions of that statement. SFAS
144 requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spin-off to be considered held
and used until it is disposed of. However, SFAS 144 requires that management
consider revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of
SFAS No. 121 and, therefore, requires that discontinued operations no longer be
measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning
after December 15, 2001. The Company has adopted the provisions of SFAS 144 as
of August 1, 2002. The adoption of SFAS 144 did not have any material impact on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical
Corrections" ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements by rescinding Statement 4, which required all gains
and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will now be used to classify those gains and
losses. Additionally, the Statement requires that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. The Company has adopted
the provisions of SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did
not have any impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread
out the reporting of expenses related to restructurings initiated after 2002,
because commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a liability for the anticipated costs.
Instead, companies will record exit and disposal costs when they are "incurred"
and can be measured at fair value, and they will subsequently adjust the
recorded liability for changes in estimated cash flows. The Company is required
21
to adopt the provisions of SFAS 146 as of January 1, 2003. The Company does not
believe that the adoption of this statement will have any impact on the
Company's consolidated financial statements as no planned restructuring charges
currently exist.
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. The Company
primarily invests its cash in mutual funds consisting of U.S. Government and
Government Agency Securities, Municipal Bonds and Corporate Fixed Income
securities. Neither a 100 basis point increase nor decrease from current
interest rates would have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 8. Financial Statements and Supplementary Data
The information required by this item is contained in a separate section
of this Report beginning on page F-1. See Index to Consolidated Financial
Statements beginning on page F-1.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
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 60 Chairman of the Board, President, Chief
Executive Officer and Director
Joel G. Stemple, Ph.D 60 Executive Vice President, Secretary and Director
Elan Yaish 32 Chief Financial Officer and Assistant Secretary
Laura Fontana 47 Vice President - Technical Services
Joel Rothlein, Esq. 73 Director
Bert Rudofsky 69 Director
Michael E. Russell 55 Director
Julian Sandler 58 Director
Robert J. Valentine 52 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.
Elan Yaish has served as the Company's Chief Financial Officer and
Assistant Secretary since August 2002. From February 2000 until joining the
Company, Mr. Yaish served as Assistant Vice President of Finance for Comverse
Technology, Inc. From June 1996 until February 2000, Mr. Yaish was employed as
Vice President of Finance and Controller for Trans-Resources, Inc. Mr. Yaish is
a Certified Public Accountant, a member of the American Institute of Certified
Public Accountants and the New York State Society of Certified Public
Accountants.
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.
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 Walsh & Roth, LLC,
Massapequa, New York, where he has practiced law since 1955. Kressel Rothlein
Walsh & Roth, LLC and its predecessor firms have acted as outside general
counsel to the Company since the Company's inception.
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 (1987-1989),
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).
23
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.
Robert J. Valentine became a director on April 17, 2001. Mr. Valentine was
the Manager of the New York Mets Major League Baseball team from August 1996 to
September 2002. In addition, Mr. Valentine is the owner of a chain of
restaurants, a corporate spokesman and author.
Section 16(a) Beneficial Ownership 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, 2002, we believe that the Reporting Persons timely complied with all
applicable Section 16 filing requirements.
24
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, 2002, 2001, and
2000 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
Annual Compensation Common Stock
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation
Barry R. Steinberg, 2002 $650,000 - $ 49,429 (2) - -
President and Chief 2001 $650,000 - $63,954 (2) - -
Executive Officer 2000 $650,000 $485,248 $58,707 (2) - -
Joel G. Stemple, Executive 2002 $375,000 - $33,349 (3) - -
Vice President and 2001 $450,000 - $38,379 (3) - -
Secretary 2000 $450,000 $242,624 $31,375 (3) - -
Joseph Looney, Chief 2002 $245,000 - $24,340 (4) 10,000 -
Financial Officer, Vice 2001 $245,000 - $26,694 (4) 10,000 -
President, Finance and 2000 $220,000 $80,875 $11,025 (4) - -
Assistant Secretary(6)
Laura Fontana, Vice 2002 $196,794 $20,406 $35,744 (5) - -
President - Technical Services 2001 $203,782 $13,418 $31,438 (5) - -
2000 $169,254 $38,683 $17,848 (5) - -
Mark Glerum, Vice 2001 $154,041 - $7,800 - -
President - Sales(7) 2000 $128,830 $35,866 $ 6,675 9,000 -
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, 2002.
- ------------------
(1) Includes in fiscal 2002 employer matching contributions to the Company's
defined contribution plan of $6,000, $6,000, $5,153, and $6,000, for
Messrs. Steinberg, Stemple, and Looney and Ms. Fontana, respectively, in
fiscal 2001 employer matching contributions to the Company's defined
contribution plan of $5,100, $5,100, $5,100 and $5,100 for Messrs.
Steinberg, Stemple and Looney, and Ms. Fontana, respectively, and in
fiscal 2000 employer matching contributions of $5,100, $5,100, $5,100 and
$5,048 for Messrs. Steinberg, Stemple and Looney and Ms. Fontana,
respectively.
(2) Includes $34,575 in 2002, $50,000 in 2001, and $50,000 in 2000 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 $17,286 in 2002, $25,000 in 2001, and $25,000 in 2000, 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 2001 and 2000 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. Also includes $18,333 and
$15,569 in 2002 and 2001, respectively, representing the present value of
benefits earned under the Company's deferred compensation plan.
(5) Includes $1,943 in 2002 and $5,000 in each of 2001 and 2000 of premiums
paid by the Company 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. Also
includes $20,000 and $13,538 in 2002 and 2001, respectively, representing
the present value of benefits earned under the Company's deferred
compensation plan.
(6) Resigned his position with the Company in July 2002.
(7) Resigned his position with the Company in June 2001.
25
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,
2002. The Company has not granted any stock appreciation rights.
Option Grants During the Fiscal Year Ended July 31, 2002
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%
- ---- ---------- ----------- --------- ---- -- ---
Joseph Looney 10,000 12.2% $2.30 1/15/12(3) $14,465 $36,656
- -------------
(1) Grant consists of ten year incentive stock options (ISOs) granted under
the Option Plan, exercisable immediately.
(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.
(3) Employment terminated in July 2002. All options expire 90 days after
termination.
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, 2002. The Named Executive Officers did not
exercise any options during the fiscal year ended July 31, 2002. The Company has
not granted any stock appreciation rights.
Number of Securities Value of
Shares Underlying Unsecured Unexercised In-the-Money
Acquired Options/SAR's at Options/SAR's at
on Value July 31, 2002 July 31, 2001(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
Joseph Looney (2) - - 80,000/10,000 $ - /$ -
Laura Fontana - - 40,000/10,000 $ - /$ -
- --------
(1) Based on the closing sale price of common stock as of July 31, 2002 ($2.16
per share) minus the applicable exercise price.
(2) Employment terminated in July 2002. All options expire 90 days after
termination.
26
Compensation of Directors
Pursuant to the Company's compensation plan for its directors, all
non-employee directors receive a $20,000 annual stipend, payable in four
quarterly installments. In addition, each non-employee director is granted
annually on August 1, an option under the Company's Amended and Restated 1996
Incentive and Non Incentive Stock Option Plan to purchase 10,000 shares at an
exercise price equal to the fair market value of the common stock as of the
close of business on the last business day preceding such close. Such options
are for a term of five years and are exercisable immediately upon such grant. On
August 1, 2001, each of Joel Rothlein, Bert Rudofsky, Michael E. Russell and
Julian Sandler, who are non-employee directors, received non-incentive options
to purchase 10,000 shares at an exercise price of $2.80 per share (the fair
market value of the common stock on that date).
Employment Contracts
Mr. Steinberg. We do not have an employment agreement with Mr. Steinberg.
We continue to make available to Mr. Steinberg the auto 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 was terminated, he would not be precluded from competing with
us.
Dr. Stemple. We have an employment agreement with Joel G. Stemple, PhD,
which extends through fiscal 2004. Under the employment agreement, commencing
with fiscal 2003, Dr. Stemple receives a base salary of $225,000, and is
entitled to an automobile and certain deferred compensation benefits, as well as
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, he is entitled to severance equal to 12
months of his then current base salary and $62,000 per year for the next three
years plus medical benefits based upon his severance agreement with the Company.
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.
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
Walsh & Roth, LLC, which, with its predecessor firms, has acted as our outside
general counsel since our inception. We paid Kressel Rothlein Walsh & Roth, LLC
approximately $208,000, $215,000, and $177,000, for legal fees in the fiscal
years ended July 31, 2002, 2001 and 2000, respectively. In addition, during the
years ended July 31, 2002, 2001 and 2000, we recorded revenue of approximately
$45,000, $178,000, and $273,000, 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 him or to the other of
them.
27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 15,
2002 (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 58.7%
Joel G. Stemple(2) 626,263 7.8
Elan Yaish - *
Laura Fontana(4) 40,000 *
Joel Rothlein(4) (5) 73,500 *
Bert Rudofsky (4) 35,000 *
Michael E. Russell (4) 35,000 *
Julian Sandler(4) 41,000 *
Robert J. Valentine(4) 10,000 *
Dimensional Fund Advisors, Inc. (6) 611,600 7.7 (7)
1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401
All executive officers and directors as a group
(9 persons) (8) 5,550,964 67.8%
* Less than 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 options exercisable at or within 60
days listed in the footnotes hereto is assumed. For such purposes
8,190,215 shares of Common Stock are deemed to be outstanding.
(2) Address is 160 Oser Avenue, Hauppauge, New York 11788.
(3) Excludes 59,000 shares owned by Sheryl Steinberg, a daughter 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 and Sheryl Steinberg each disclaim beneficial
ownership of the common stock owned by the other.
(4) Includes options exercisable at or within 60 days to purchase 40,000 shares
(Ms. Fontana); 40,000 shares (Mr. Sandler); 35,000 shares (Mr. Rudofsky);
40,000 shares (Mr. Rothlein); 35,000 shares (Mr. Russell); and 10,000
shares (Mr. Valentine).
(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) Based upon a Schedule 13G filed with Securities and Exchange Commission as
of February 12, 2002.
(7) Based on 7,990,215 shares of common stock issued and outstanding on October
15, 2002.
(8) See Notes 1 through 5 above.
28
ITEM 13. Certain Relationships and Related Transactions
Our Hauppauge, New York facilities are leased from entities affiliated
with certain of our executive officers, directors or principal shareholders.
Each of the leases with related parties was amended effective with the closing
of our initial public offering in December 1996 to reduce the rent payable under
the lease to then current market rates. 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 former officer of the Company. For the fiscal years ended July
31, 2002, 2001, and 2000, we made lease payments of $202,000, $196,000, and
$190,000, 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, 2002, 2001, and, 2000, we made lease payments of $349,000,
$322,000, and $279,000, 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, 2002,
2001, and 2000, we made lease payments of $381,000, $366,000, and $360,000,
respectively, to such entity. See "Business--Properties."
Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein Walsh & Roth, LLC, which, with its predecessor firms, has acted as
outside general counsel to the Company since our inception. During fiscal 2002,
2001, and 2000, $208,000, $215,000, and $177,000, respectively, was paid to such
firm for legal fees.
During the years ended July 31, 2002, 2001, and 2000, we recorded
revenue of $45,000, $178,000, and $273,000, respectively, in connection with the
sale of computer equipment to a company controlled by Julian Sandler, a director
of the Company.
On May 20, 2002, the Company loaned Barry Steinberg $965,000 bearing an
interest rate of 2.00%. Mr. Steinberg repaid approximately $585,000 of the loan
on May 30, 2002. The remainder of the loan was repaid on July 18, 2002 plus
accrued interest.
The Company employs the services of Seth Collins as Director of Operations.
Mr. Collins is the son-in-law of Barry Steinberg. Mr. Collins receives a salary
of approximately $150,000 and is entitled to receive various other benefits,
such as the use of an automobile owned or leased by the Company as well as other
benefits generally offered by the Company to its employees.
The Company employs the services of Ilene Steinberg as Design Manager. Ms.
Steinberg is the daughter of Barry Steinberg. Ms. Steinberg receives a salary of
approximately $81,000 and is entitled to receive various other benefits such as
the use of an automobile owned or leased by the Company as well as other
benefits generally offered by the Company to its employees.
In the ordinary course of its business dealings with customers and
vendors, the Company utilizes a restaurant owned by Ilene Steinberg and Barry
Steinberg for such catering, dining and entertainment services. During the years
ended July 31, 2002, 2001 and 2000, the Company paid approximately $109,000,
$64,000 and $62,000, respectively, for such services.
29
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements (See Index to Consolidated Financial Statements
on page F-1 of this Report);
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits required by Securities and Exchange Commission Regulation
S-K, Item 601:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996.
3.1.d(11) Certificate of Amendment of Certificate of Incorporation filed
January 30, 2001.
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.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(10) Lease dated March 1, 2000 between ASP Washington LLC and
Coastal Office Products.
10.5.m(12) Lease dated April 5, 2001 between Emmatt Enterprises Inc., and
Donovan Consulting Group, Inc.
10.5.n(12) Lease dated July 31, 1995 between Registrant and Boatman's
Equities, LLC - f/k/a 160 Oser Avenue Associates, as amended.
30
10.5.o(13) Lease dated November 30, 2001 between Registrant and Kin
Properties, Inc. as agent.
10.5.p(14) Lease dated June 1, 2002 between Electrograph Systems, Inc. and
40 Marcus Realty Associates.
10.5.q(15) Lease dated September 9, 2002 between Electrograph Systems, Inc.
and Pot Spring Center Limited Partnership.
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.
10.15(9) Definitive Purchase Agreement dated March 22, 2000 between
Registrant and Texport Technology Group, Inc. and Learning
Technology Group, LLC.
10.16(12) Definitive Purchase Agreement dated August 29, 2001 between
Registrant and Donovan Consulting Group.
10.17(13) Definitive Purchase Agreement dated November 1, 2001 between
Registrant and e.Track Solutions, Inc.
10.18 Third Amendment to $15,000,000 Revolving Credit Facility
Agreement dated October 10, 2001 between Registrant and
Citibank, as Agent.
21 Subsidiaries of the Registrant
23 Independent auditors' consent.
(b) Reports on Form 8-K
Form 8-K filed June 6, 2002 disclosing Press Release dated June 5, 2002
reporting earnings for the third quarter ended April 30, 2002.
Form 8-K filed June 28, 2002 disclosing Press Release dated June 27,
2002 announcing the resignation of the registrant's Chief Financial
Officer.
- -----------------------
* Denotes management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
31
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 Registrant'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.
9. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2000 (Commission File No.
0-21695) and incorporated herein by reference thereto.
10. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 2000 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
11. Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K dated January 30, 2001 (Commission File No. 0-21695) and incorporated
herein by reference thereto.
12. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 2001 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
13. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 2001 (Commission File No.
0-21695) and incorporated herein by reference thereto.
14. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2002, (Commission File No.
0-21695) and incorporated herein by reference thereto.
15. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 2002. (Commission File No. 0-21695)
and incorporated herein by reference thereto.
32
Items 8 and 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors Report F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 2002 and 2001 F-3
Statements of Income for the years ended July 31, 2002,
2001, and 2000 F-4
Statements of Shareholders' Equity for the years ended
July 31, 2002, 2001, and 2000 F-5
Statements of Cash Flows for the years ended July 31, 2002,
2001, and 2000 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-19
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Manchester Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Manchester
Technologies, Inc. and subsidiaries as of July 31, 2002 and 2001 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, 2002. 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
Technologies, Inc. and subsidiaries at July 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended July 31, 2002, 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.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" as of August 1, 2001.
KPMG LLP
Melville, New York
September 25, 2002
F-2
Manchester Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 2002 and 2001
Assets 2002 2001
------ ---- ---- -
(in thousands, e per share amounts)
Current assets:
Cash and cash equivalents $ 8,963 $14,493
Accounts receivable, net of allowance for doubtful accounts
of $956 and $1,100, respectively 32,561 25,135
Inventory 11,165 7,546
Deferred income taxes 403 459
Prepaid income taxes 426 43
Prepaid expenses and other current assets 526 362
--- ---
Total current assets 54,044 48,038
Property and equipment, net 7,012 6,300
Goodwill, net 8,311 6,148
Deferred income taxes 803 842
Other assets 491 455
--- ---
Total assets $70,661 $61,783
====== ======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $23,078 $15,259
Deferred service contract revenue 868 807
--- ---
Total current liabilities 23,946 16,066
------ ------
Deferred compensation payable 203 162
--- ---
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 7,990 and 7,990 shares issued
and outstanding 80 80
Additional paid-in capital 18,942 18,942
Deferred compensation (23) (38)
Retained earnings 27,513 26,571
------ ------
Total shareholders' equity 46,512 45,555
------ ------
Total liabilities and shareholders' equity $70,661 $61,783
====== ======
See accompanying notes to consolidated financial statements.
F-3
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
(in thousands, except per share amounts)
Revenue
Products $249,768 $271,982 $292,971
Services 12,242 8,296 7,102
------ ----- -----
262,010 280,278 300,073
------- ------- -------
Cost of revenue
Products 216,471 236,970 255,549
Services 9,131 5,955 4,687
----- ----- -----
225,602 242,925 260,236
------- ------- -------
Gross profit 36,408 37,353 39,837
Selling, general and administrative expenses 35,050 35,485 33,539
------ ------ ------
Income from operations 1,358 1,868 6,298
Interest and other income, net 184 767 602
--- --- ---
Income before provision for income taxes 1,542 2,635 6,900
Provision for income taxes 600 908 2,800
--- --- -----
Net income $942 $1,727 $4,100
=== ===== =====
Net income per share
Basic $0.12 $0.21 $0.51
==== ==== ====
Diluted $0.12 $0.21 $0.50
===== ===== =====
Weighted average shares of common
stock and equivalents outstanding
Basic 7,990 8,036 8,108
===== ===== =====
Diluted 7,991 8,058 8,228
===== ===== =====
See accompanying notes to consolidated financial statements.
F-4
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended July 31, 2002, 2001 and 2000
Additional
Common Par Paid-in Deferred Retained
Shares Value Capital Compensation Earnings Total
------ ----- ------- ------------ -------- -----
(in thousands)
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
Purchase and retirement of stock (171) (2) (619) - - (621)
Stock option commission expense - - 10 - - 10
Stock award compensation expense - - - 27 - 27
Stock issued in connection with
exercise of stock options 2 - 6 - - 6
Tax benefit of stock option plan - - 143 - - 143
Net income - - - - 1,727 1,727
----- ----- ----- ------ ----- -----
Balance July 31, 2001 7,990 80 18,942 (38) 26,571 45,555
Stock award compensation expense - - - 15 - 15
Net income - - - - 942 942
--- ---- ---- --- --- ---
Balance July 31, 2002 7,990 $80 $18,942 $(23) $27,513 $46,512
===== == ====== ==== ====== ======
See accompanying notes to consolidated financial statements.
F-5
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $ 942 $1,727 $4,100
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 2,012 2,387 2,081
Provision for (recovery of) doubtful accounts 613 832 (366)
Non-cash compensation and commission expense 15 37 34
Deferred income taxes 95 (49) (154)
Tax benefit from exercise of options - 143 -
Change in assets and liabilities, net of the effects of
acquisitions:
Accounts receivable (7,773) 10,057 (264)
Inventory (3,482) (749) 1,951
Prepaid income taxes (383) 592 (620)
Prepaid expenses and other current assets (92) 176 (177)
Other assets (88) (147) (27)
Accounts payable and accrued expenses 7,298 (14,053) 6,991
Deferred service contract revenue 61 (139) 365
Income taxes payable - - (668)
Deferred compensation payable 41 128 -
-- --- -----
Net cash (used in) provided by operating activities (741) 942 13,246
----- --- ------
Cash flows from investing activities:
Capital expenditures (2,618) (1,972) (1,661)
Payment for acquisitions, net of cash acquired (1,613) - (179)
----- ------ -----
Net cash used in investing activities (4,231) (1,972) (1,840)
----- ------- -----
Cash flows from financing activities:
Net repayments of borrowings from bank (515) - (648)
Payments on capitalized lease obligations - - (85)
Payments on notes payable - other (43) (18) (9)
Issuance of common stock upon exercise of options - 6 414
Purchase and retirement of common stock - (621) (671)
---- ----- -----
Net cash used in financing activities (558) (633) (999)
----- --- ----
Net increase (decrease) in cash and cash equivalents (5,530) (1,663) 10,407
Cash and cash equivalents at beginning of year 14,493 16,156 5,749
------ ------ -----
Cash and cash equivalents at end of year $8,963 $14,493 $16,156
===== ====== ======
Cash paid during the year for:
Interest $ - $ - $ 4
==== ===== ==
Income taxes $723 $ 365 $4,205
=== ===== ======
Other noncash transactions:
Common stock issued in connection with acquisitions $ - $ - $861
===== ===== ====
See accompanying notes to consolidated financial statements.
F-6
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(1) Operations and Summary of Significant Accounting Policies
(a) The Company
Manchester Technologies, Inc. and its subsidiaries ("the Company") is a
single-source solutions provider specializing in hardware and software
procurement, custom networking, storage, enterprise and Internet
solutions. 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 that 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 $7,194 and $11,638 at July 31, 2002 and
2001, 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
installation. 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 and Advertising Costs
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 $1,118, $229, and $414, for the years ended July 31,
2002, 2001 and 2000, respectively.
The Company expenses all advertising costs as incurred.
(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.
F-7
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(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
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provision of SFAS No. 142. This pronouncement
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121.
The Company has adopted the provisions of SFAS Nos. 141 and 142 as of
August 1, 2001. The Company has evaluated its existing goodwill that was
acquired in prior purchase business combinations and has determined that an
adjustment or reclassification to intangible assets at August 1, 2001 was not
required in order to conform to the new criteria in SFAS No. 141 for recognition
apart from goodwill.
The Company was required to test goodwill for impairment in accordance
with the provisions of SFAS No. 142 by January 31, 2002. In accordance with SFAS
No. 142, goodwill is allocated to reporting units, which are either the
operating segment or one reporting level below the operating segment. The
Company determined that its reporting unit for purposes of applying the
provisions of SFAS 142 was its operating segment. The Company's initial
impairment review indicated that there was no impairment as of the date of
adoption. Fair value for goodwill was determined based on discounted cash flows.
Accumulated amortization was approximately $1,116 at both July 31, 2002
and 2001. Goodwill amortization for the years ended July 31, 2002, 2001 and 2000
was approximately $0, $386 and $331, respectively. The following table shows the
results of operations as if SFAS No. 142 was applied to prior periods:
For the years ended July 31,
2002 2001 2000
---- ---- ----
Net income as reported $942 $1,727 $4,100
Add back: Goodwill amortization - 386 331
---- --- ---
Adjusted net income $942 $2,113 $4,431
=== ===== =====
Income per share - Basic
Net income, as reported $0.12 $0.21 $0.51
Goodwill amortization - 0.05 0.04
------- ------ ----
Adjusted net income $0.12 $0.26 $0.55
===== ==== ====
Income per share - Diluted
Net income, as reported $0.12 $0.21 $0.50
Goodwill amortization - 0.05 0.04
------ ---- ----
Adjusted net income $0.12 $0.26 $0.54
==== ==== ====
F-8
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(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 approximately 887,000, 899,000,
and 153,000, shares for the years ended July 31, 2002, 2001 and 2000,
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.
2002 2001 2000
---- ---- ----
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
Basic EPS 7,990,000 $0.12 8,036,000 $0.21 8,108,000 $0.51
==== ==== ====
Effect of dilutive
options 1,000 22,000 120,000
----- ------ -------
Diluted EPS 7,991,000 $0.12 8,058,000 $0.21 8,228,000 $0.50
========= ==== ========= ==== ========= ====
(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 accounting principles generally accepted in the United
States of America. Actual results could differ from those estimates.
(m) Fair Value of Financial Instruments
The fair values of accounts receivable, prepaid expenses, notes
payable, and accounts payable and accrued expenses are estimated to
approximate the carrying values at July 31, 2002 due to the short
maturities of such instruments.
F-9
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(n) Reclassifications
Certain prior year amounts have been reclassified to conform to the
manner of presentation in the current year.
(2) Property and Equipment
----------------------
Property and equipment at July 31, consist of the following:
2002 2001
---- ----
Furniture and fixtures $2,194 $3,088
Machinery and equipment 11,427 8,162
Transportation equipment 671 588
Leasehold improvements 3,204 2,934
----- -----
17,496 14,772
Less accumulated depreciation and amortization 10,484 8,472
------ -----
$7,012 $6,300
===== =====
Depreciation and amortization expense amounted to $2,012, $2,001, and
$1,750 for the years ended July 31, 2002, 2001 and 2000, respectively.
(3) Acquisitions
------------
Donovan Consulting Group, Inc.
------------------------------
On August 29, 2001, the Company acquired all of the outstanding stock
of Donovan Consulting Group, Inc. ("Donovan"), a Delaware corporation
headquartered near Atlanta, Georgia. Donovan is a technical services firm that
delivers Wireless LAN solutions to customers nationwide. The acquisition, which
has been accounted for as a purchase, consisted of a cash payment of $1,500 plus
potential future contingent payments. Contingent payments of up to $1,000 may be
payable on each of November 2, 2002 and November 2, 2003 based upon Donovan
achieving certain agreed-upon increases in revenue and pre-tax earnings. In
connection with the acquisition, the Company assumed approximately $435 of bank
debt and $43 of other debt, which were subsequently repaid. Donovan was acquired
in order to strengthen the Company's position in the Wireless LAN arena. Donovan
allows the Company to offer total Wireless LAN solutions including state of the
art products as well as the services necessary to have those products operate
optimally.
Operating results of Donovan are included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497 and $869, respectively. The
excess of the aggregate purchase price over the estimated fair value of the
tangible net assets acquired was approximately $1,872. The factors that
contributed to the determination of the purchase price and the resulting
goodwill include the significant growth expected in this area due to the
combination of the Company's long history of strong customer relationships,
financial strength and stability coupled with Donovan's product offerings and
highly skilled technical staff. The $1,872 will not be amortized; however, it
will be subject to impairment testing in accordance with Statement No. 142,
"Goodwill and Other Intangible Assets."
The presentation of supplemental pro forma financial information is
deemed immaterial.
F-10
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
e.Track Solutions, Inc.
- -----------------------
On November 9, 2001, the Company acquired all of the outstanding stock
of e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of cash payments of $290 (including debt assumed and subsequently
repaid). e.Track was acquired in order to allow the Company to offer our
customers customized software solutions along with the products and services
that we have traditionally offered.
Operating results of e.Track are included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116 and $192, respectively. The
excess of aggregate purchase price over the estimated fair value of the tangible
net assets acquired was $291. The factors that contributed to the determination
of the purchase price and the resulting goodwill include the expectation that
the combination of e.Track's highly skilled technical staff, coupled with the
Company's financial strength and customer base, will result in significant
growth at e.Track going forward. The $291 will not be amortized; however, it
will be subject to impairment testing in accordance with Statement No. 142,
"Goodwill and Other Intangible Assets."
The presentation of supplemental pro forma financial information is
deemed immaterial.
(4) Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
July 31,
2002 2001
---- ----
Accounts payable, trade $19,785 $11,759
Accrued salaries and wages 1,894 1,974
Customer deposits 554 711
Other accrued expenses 845 815
--- ---
$23,078 $15,259
====== ======
The Company has entered into financing agreements for the purchase of
inventory. These agreements are unsecured, generally allow for a 30-day
non-interest-bearing payment period and require the Company to maintain,
among other things, a certain minimum tangible net worth. In each of the
years in the three-year period ended July 31, 2002, the Company has repaid
all balances outstanding under these agreements within the non-interest-
bearing payment period. Accordingly, amounts outstanding under such
agreements of $2,884, $1,719, and $2,645, at July 31, 2002, 2001 and 2000,
respectively, are included in accounts payable and accrued expenses. As of
July 31, 2002, retained earnings available for dividends amounted to
approximately $15,500.
(5) 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
employees' compensation. The Company's contribution amounted to $346, $317,
and $250, for the years ended July 31, 2002, 2001, and 2000, respectively.
F-11
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
The Company also has two deferred compensation plans that are available
to certain eligible key employees. The first 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, a
participant becomes entitled to have ownership of the policy transferred to
him or her at termination of employment with the Company. The second plan
consists of a commitment by the Company to pay a monthly benefit to an
employee for a period of ten years commencing either ten or fifteen years
from such employee's entrance into the plan. The Company has chosen to
purchase life insurance policies to provide funding for these benefits. As
of July 31, 2002 and 2001, the Company has recorded an asset (included in
other assets) of $256 and $129, respectively, representing the cash
surrender value of policies owned by the Company and a liability of $203
and $162, respectively, relating to the unvested portion of benefits due
under these plans. For the years ended July 31, 2002, 2001 and 2000, the
Company recorded an expense of $212, $246, and $92, in connection with
these plans. During fiscal 2001, the Company received $505 in connection
with a life insurance policy that it carried on an employee who died, which
was partially offset by $250 in compensation benefits paid to the deceased
employee.
(6) Commitments and Contingencies
-----------------------------
Leases
------
The Company leases most of its executive offices and warehouse
facilities from landlords consisting primarily of related parties (note 9).
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 $1,973, $1,756, and $1,594, for the years ended
July 31, 2002, 2001 and 2000, respectively.
The following represents the Company's commitment under operating
leases for each of the next five years ended July 31 and thereafter:
2003 $1,729
2004 1,663
2005 1,710
2006 1,292
2007 1,175
Thereafter 607
---
$8,176
======
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.
(7) 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, 2002, there was no balance outstanding under this agreement,
which expires on January 31, 2005.
F-12
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(8) Income Taxes
------------
The provision for income taxes for the years ended July 31, 2002, 2001 and
2000 consists of the following:
2002 2001 2000
---- ---- ---- -
Current
Federal $325 $728 $2,242
State 180 229 712
--- --- ---
505 957 2,954
--- --- -----
Deferred
Federal 70 (38) (115)
State 25 (11) (39)
-- --- ---
95 (49) (154)
-- --- ----
$600 $908 $2,800
=== === =====
The difference between the Company's effective income tax rate and the
statutory rate is as follows, for the years ended July 31,:
2002 2001 2000
---- ---- ---- -
Income taxes at statutory rate $524 $896 $2,346
State taxes, net of federal benefit 114 144 444
Non deductible goodwill amortization - 85 85
Nontaxable life insurance proceeds - (172) -
Other (38) (45) (75)
--- --- ---
$600 $908 $2,800
=== === =====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at July 31, 2002 and 2001 were as
follows:
2002 2001
---- ----
Deferred tax assets (liabilities):
Allowance for doubtful accounts $383 $439
Deferred compensation 554 473
Depreciation 249 409
Other 20 (20)
-- ---
Net deferred tax asset $1,206 $1,301
===== =====
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.
F-13
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(9) 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 2005 through 2008. Lease terms generally include annual increases of
five percent. Rent expense for these facilities aggregated approximately
$932, $884, and $828, for the years ended July 31, 2002, 2001 and 2000,
respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to approximately $208, $215, and
$177, including disbursements, in the fiscal years ended July 31, 2002,
2001 and 2000, respectively.
During fiscal years ended July 31, 2002, 2001 and 2000 the Company
received approximately $45, $178, and $273, respectively, in revenue from
a company controlled by a director of the Company.
On May 20, 2002 the Company loaned its chief executive officer
approximately $965 bearing an interest rate of 2.00%. On May 30, 2002, the
Company's chief executive officer repaid $585 of the loan and the
remainder of the loan was repaid on July 18, 2002 plus accrued interest.
In the ordinary course of its business dealings with customers and
vendors, the Company utilizes a restaurant owned by the chief executive
officer and a member of his family for such catering, dining and
entertainment services. During the years ended July 31, 2002, 2001 and
2000 the Company paid approximately $109, $64, and $62, respectively, for
such services.
(10) 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 were exercisable at a price
of $12 per share and expired in December, 2001.
Stock Option Plan
-----------------
Under the Company's Amended and Restated 1996 Incentive and
Non-Incentive Stock Option Plan as amended, (the "Plan"), which was
approved by the Company's shareholders in October 1996, an aggregate of
2,600,000 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.
Generally, 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. The following
table summarizes stock option activity:
F-14
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
Weighted
Average
Exercise Exercise
Balance Price
------- -----
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
Granted 123,000 $3.74
Exercised (1,500) $3.8125
Cancelled (49,100) $4.19
------- -----
Balance July 31, 2001 899,084 $3.95
Granted 81,800 $2.55
Exercised - -
Cancelled (55,800) $4.07
------- -----
Balance July 31, 2002 925,084 $3.81
======= =====
At July 31, 2002, options with the following ranges of exercise prices
were outstanding:
Options Outstanding Options Currently Exercisable
------------------- -----------------------------
Range of
Exercise Weighted Average Weighted Average
Prices Number Exercise Price Remaining life Number Exercise Price
------ ------ -------------- -------------- ------ --------------
$2.30 - $3.75 214,800 $2.94 7 Yrs. 135,500 $3.07
$3.76 - $4.00 528,334 $3.83 5 Yrs. 461,666 $3.83
$4.01 - $5.69 181,950 $4.78 7 Yrs 109,808 $4.76
------- -------
$2.30 - $5.69 925,084 $3.81 6 Yrs. 706,974 $3.83
======= =======
All options granted expire ten years from the date of grant except for
options granted to directors, which expire five years from the date of
grant.
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 that have an exercise price equal to or greater than the fair
market value of the underlying stock on the date of grant. 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, 2002, 2001 and 2000
would approximate the pro forma amounts below:
F-15
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
2002 2001 2000
---- ---- ----
Net income:
As reported $942 $1,727 $4,100
Pro forma $577 $1,335 $3,813
Basic net income per share:
As reported $0.12 $0.21 $0.51
Pro forma $0.07 $0.17 $0.47
Diluted net income per share:
As reported $0.12 $0.21 $0.50
Pro forma $0.07 $0.17 $0.46
The pro forma effects on net income and diluted net income per share for
2002, 2001 and 2000 may not be representative of the pro forma effects in future
years.
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
2002 2001 2000
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock volatility 59% 55% 49%
Risk free interest rate 3% 5% 5%
Expected option term until exercise (years) 5.00 5.00 5.00
The per share weighted average fair value of stock options granted during
fiscal 2002, 2001 and 2000 was $1.79, $2.03, and $2.15, respectively.
Repurchase of Common Stock
--------------------------
During the years ended July 31, 2001 and 2000, the Company repurchased
171,000, and 150,600 shares of its common stock at an aggregate purchase price
of $621, and $671, respectively. Such shares were subsequently retired. No
shares were repurchased in fiscal 2002.
(11) Major Customer and Vendors and Concentration of Credit Risk
-----------------------------------------------------------
The Company sells and provides services to customers who are located
primarily in the eastern United States.
The Company's top five vendors accounted for approximately 15%, 14%, 14%,
14%, and 13%, respectively of total product purchases for the year ended July
31, 2002. The Company's top four vendors accounted for approximately 19%, 14%,
10%, and 10%, respectively, of total product purchases for the year ended July
31, 2001. 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.
At July 31, 2002 two customers accounted for 9% and 5%, respectively, of
the Company's accounts receivable. No customer accounted for more than 5% of the
Company's accounts receivable at July 31, 2001 and 2000. For the fiscal years
ended July 31, 2002, 2001 and 2000, no one customer accounted for more than 10%
of total revenue.
F-16
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(12) Impact of Recently Issued Accounting Standards
----------------------------------------------
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting
standard requiring the recording of the fair value of liabilities associated
with the retirement of long-lived assets in the period in which they are
incurred. The Company has adopted the provisions of SFAS 143 effective August 1,
2002. The adoption of SFAS 143 did not have a significant effect on the
Company's results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," while retaining the
fundamental recognition and measurement provisions of that statement. SFAS 144
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spin-off to be considered held
and used until it is disposed of. However, SFAS 144 requires that management
consider revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of
SFAS No. 121 and, therefore, requires that discontinued operations no longer be
measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning
after December 15, 2001. The Company has adopted the provisions of SFAS 144 as
of August 1, 2002. The adoption of SFAS 144 did not have any material impact on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical
Corrections" ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements by rescinding Statement 4, which required all gains
and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will now be used to classify those gains and
losses. Additionally, the Statement requires that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. The Company has adopted
the provisions of SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did
not have any impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread
out the reporting of expenses related to restructurings initiated after 2002,
because commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a liability for the anticipated costs.
Instead, companies will record exit and disposal costs when they are "incurred"
and can be measured at fair value, and they will subsequently adjust the
recorded liability for changes in estimated cash flows. The Company is required
to adopt the provisions of SFAS 146 as of January 1, 2003. The Company does not
believe that the adoption of this statement will have any impact on the
Company's consolidated financial statements as no planned restructuring charges
currently exist.
F-17
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
(13) Quarterly Results (unaudited)
-----------------------------
Oct. 31 Jan 31 Apr. 30 July 31 Year
------- ------ ------- ------- ----
2002
----
Revenue $61,566 $68,099 $65,131 $67,214 $262,010
Gross profit 8,494 10,067 9,041 8,806 36,408
Net income 104 433 364 41 942
Basic earnings per share 0.01 0.05 0.05 0.01 0.12
Diluted earnings per share 0.01 0.05 0.05 0.01 0.12
2001
----
Revenue $81,142 $70,888 $68,598 $59,650 $280,278
Gross profit 9,757 8,917 9,765 8,914 37,353
Net income 638 24 665 400 1,727
Basic earnings per share 0.08 0.00 0.08 0.05 0.21
Diluted earnings per share 0.08 0.00 0.08 0.05 0.21
Basic and diluted earnings per share for each of the quarters are based
on the weighted-average number of shares outstanding in each period.
Therefore, the sum of the quarters in a year may not necessarily equal the
year's earnings per share.
F-18
Manchester Technologies, Inc.
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
(dollars in thousands)
Column C-Additions
------------------
Column B- (1)- (2)- Column D- Column E-
Column A - Balance at Charged to Charged to Deductions- Balance at
Description beginning of costs and other (a) end of period
period expenses accounts (b)
------ -------- ------------ --------- -------------
Allowance for doubtful
accounts
Year ended:
July 31, 2000 $1,204 ($366) $61 - $899
July 31, 2001 $899 $832 - $631 $1,100
July 31, 2002 $1,100 $613 - $757 $956
(a) Write-off amounts against allowance provided.
(b) Recorded in connection with the acquisitions.
F-19
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 Technologies, Inc.
Date: October 22 , 2002 By: /S/ Barry R. Steinberg
--------------------
Barry R. Steinberg
President, Chief Executive Officer
Chairman of the Board and Director
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.
/S/ Barry R. Steinberg Date: October 22 , 2002
----------------------
Barry R. Steinberg
President, Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)
/S/ Joel G. Stemple Date: October 22 , 2002
----------------
Joel G. Stemple
Executive Vice President, Secretary and Director
/S/ Elan Yaish Date: October 22, 2002
-----------
Elan Yaish,
Chief Financial Officer and Assistant Secretary
(Principal Accounting Officer)
/S/ Joel Rothlein Date: October 22 , 2002
--------------
Joel Rothlein
Director
/S/ Michael E. Russell Date: October 22, 2002
------------------
Michael Russell
Director
/S/ Bert Rudofsky Date: October 22, 2002
-------------
Bert Rudofsky
Director
/S/ Julian Sandler Date: October 22, 2002
--------------
Julian Sandler
Director
/S/ Robert J. Valentine Date: October 22 , 2002
-------------------
Robert J. Valentine
Director
CERTIFICATIONS
I, Barry R. Steinberg, certify that:
1. I have reviewed this annual report on Form 10-K of Manchester Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 28, 2002
/S/ BARRY R. STEINBERG
- --------------------------
Barry R. Steinberg
Chief Executive Officer
I, Elan Yaish, certify that:
1. I have reviewed this annual report on Form 10-K of Manchester Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 28, 2002
/S/ ELAN YAISH
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Elan Yaish
Chief Financial Officer