Microsoft Word 10.0.2627;25
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
Manchester 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) Identification Number)
50 Marcus Boulevard
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(631) 951-8100
(Registrant's telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of June 3, 2005 there were 8,542,448 outstanding shares of the registrant's
Common Stock.
MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets as of
April 30, 2005 (unaudited) and July 31, 2004 3
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended
April 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 2005 and 2004 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 21
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 30, 2005 July 31, 2004
(Unaudited) -------------
Assets
------
Current assets:
Cash and cash equivalents $20,476 $16,881
Accounts receivable, net of allowance for
doubtful accounts of $1,525 and $2,848, respectively 15,799 15,530
Inventory 21,166 20,301
Deferred income taxes 1,212 1,212
Prepaid taxes 655 916
Prepaid expenses and other current assets 1,111 1,266
----- -----
Total current assets 60,419 56,106
Property and equipment, net 7,487 9,890
Goodwill, net 3,735 3,735
Deferred income taxes 1,728 1,728
Other assets 113 183
----- -------
Total assets $73,482 $71,642
====== ======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $20,899 $21,492
Current portion of capital lease obligations 213 246
------ --------
Total current liabilities 21,112 21,738
Deferred compensation payable 98 98
Capital lease obligations, net of current portion 5,836 7,683
----- -----
Total liabilities 27,046 29,519
------ ------
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, 8,542 and 8,163 shares issued
and outstanding 85 82
Additional paid-in capital 21,293 19,597
Retained earnings 25,058 22,444
------ ------
Total shareholders' equity 46,436 42,123
------ ------
Total liabilities and shareholders' equity $73,482 $71,642
====== ======
See notes to unaudited condensed consolidated financial statements.
3
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three months ended April 30, Nine months ended April 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue $41,902 $42,448 $128,072 $132,943
Cost of Revenue 36,649 38,509 111,906 119,712
------ ------ ------- -------
Gross profit 5,253 3,939 16,166 13,231
Selling, general and
administrative expenses 4,608 3,149 12,317 9,735
Loss on buy-out of capital lease 666 - 666 -
--- ---- --- ----
Income (loss) from operations (21) 790 3,183 3,496
Interest and other income (expense), net 46 (70) 179 (166)
-- ---- --- -----
Income from continuing operations
before income taxes 25 720 3,362 3,330
Income tax provision 11 288 1,345 1,312
-- ---- ----- -----
Income from continuing operations 14 432 2,017 2,018
-- ---- ----- -----
Discontinued operations
Income (loss) from operations of
discontinued component - (714) 995 (2,314)
Income tax (provision) benefit - 285 (398) 905
---- --- ---- ------
Income (loss) from discontinued operations - (429) 597 (1,409)
---- ----- --- -------
Net income $ 14 $ 3 $2,614 $ 609
=== ======= ===== =======
Income per share from continuing operations
Basic $0.00 $0.05 $0.24 $0.25
==== ==== ==== ====
Diluted $0.00 $0.05 $0.24 $0.24
==== ==== ==== ====
Income loss per share from discontinued operations
Basic $0.00 $(0.05) $0.07 $(0.18)
==== ===== ==== =====
Diluted $0.00 $(0.05) $0.07 $(0.17)
==== ===== ==== =====
Net income per share
Basic $0.00 $0.00 $0.32 $0.08
==== ==== ==== ====
Diluted $0.00 $0.00 $0.31 $0.07
==== ==== ==== ====
Weighted average
shares outstanding
Basic 8,486 8,070 8,289 8,017
===== ===== ===== =====
Diluted 8,772 8,533 8,519 8,364
===== ===== ===== =====
See notes to unaudited condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
April 30, April 30,
2005 2004
---- ----
Cash flows from operating activities:
Net income $2,614 $ 609
(Income) loss from discontinued operations (597) 1,409
----- -----
Income from continuing operations 2,017 2,018
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 777 1,315
Provision for doubtful accounts 305 489
Equity based compensation expense 53 24
Loss on buyout of capital lease 666 -
Tax benefit from exercise of stock options 290 -
Changes in assets and liabilities, net of effects of discontinued
operations:
Accounts receivable (3,389) 1,331
Inventory (865) (16,200)
Prepaid income taxes 261 1,662
Prepaid expenses and other current assets 155 6
Other assets 70 144
Accounts payable and accrued expenses 1,984 15,551
Deferred service contract revenue - (666)
-------- ----
Net cash provided by continuing operations 2,324 5,674
Net cash provided (used) by discontinued operations 835 (361)
------ ----
Net cash provided by operating activities 3,159 5,313
----- -----
Cash flows from investing activities:
Capital expenditures (190) (760)
------- -------
Net cash used in investing activities (190) (760)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,356 284
Payments for buyout of capital lease obligation (550) -
Payments on capital lease obligations (180) (149)
------- -------
Net cash provided by financing activities 626 135
------ -----
Net increase in cash and cash equivalents 3,595 4,688
Cash and cash equivalents at beginning of period 16,881 8,553
------ -----
Cash and cash equivalents at end of period $20,476 $13,241
====== ======
Income taxes paid during the period $ 93 $ 292
====== =======
Reduction of property and equipment from
termination of capital lease obligation $ 1,700 $ -
====== ========
See notes to unaudited condensed consolidated financial statements.
5
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
1. Organization and Basis of Presentation
Manchester Technologies, Inc. and its subsidiaries ("the Company") is a
distributor of display technology solutions and plasma display monitors, through
its subsidiary Electrograph Systems, Inc. ("Electrograph Systems"), and computer
hardware primarily to dealers and system integrators. As discussed further in
Note 2, on May 28, 2004, the Company sold its end-user information technology
fulfillment and professional services business (the "IT Business"). Prior to
such sale, Manchester specialized in hardware and software procurement, display
technology, custom networking, security, IP telephony, remote management,
application development/e-commerce, storage, and enterprise and Internet
solutions, offering 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. Subsequent to such sale, the Company continued distributing
display technology solutions and plasma display monitors and computer hardware
and no longer provides any professional services. The Company operates in a
single segment.
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.
The accompanying financial information should be read in conjunction with
the financial statements, including the notes thereto, for the annual period
ended July 31, 2004. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair statement of results for the interim periods. In the opinion of management,
the accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Rule
10-01 of Regulation S-X. The results of operations for the three and nine month
periods ended April 30, 2005 are not necessarily indicative of the results to be
expected for future interim periods or the entire year.
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.
2. Definitive Merger Agreement
On April 17, 2005, the Company entered into a definitive merger agreement
under which entities associated with Caxton-Iseman Capital, Inc.
("Caxton-Iseman") will acquire all of the Company's outstanding shares in an all
cash transaction valued at approximately $55 million. Under the terms of the
agreement, which was unanimously approved by the Company's Board of Directors,
Manchester shareholders will receive $6.40 per share in cash for each share they
own at the effective time of the merger.
Consummation of the merger, which is expected to occur in the third quarter
of calendar year 2005, is subject to approval by the holders of two-thirds of
the shares of the Company's outstanding common stock, expiration or termination
of the applicable waiting period under the Hart-Scott-Rodino Act, completion of
debt financing by Caxton-Iseman and customary closing conditions. Barry R.
Steinberg, Chief Executive Officer of the Company, who holds approximately 55%
of the Company's outstanding shares, has agreed to vote his
6
shares in favor of the transaction. In connection with the merger, various
members of management will receive severance payments and other benefits. In
addition, non-management directors will receive bonuses in recognition of their
services in connection with the merger. If the merger agreement is terminated
under certain circumstances, the Company would be obligated to pay Caxton-Iseman
$2.5 million. Any stock options outstanding immediately prior to the completion
of the merger will be terminated and canceled immediately prior to the
completion of the merger. Each holder of a cancelled option that has an exercise
price per share less than $6.40 and that is vested immediately prior to the
completion of the merger, shall have the right to receive from the Company a
cash payment (less applicable federal, state and local withholding taxes) in an
amount equal to $6.40 minus the applicable exercise price per share of the
option, multiplied by the number of shares of common stock for which such option
was exercisable immediately prior to its cancellation. Each option that,
immediately prior to the completion of the merger, is not vested or that is
vested but has an exercise price greater than or equal to $6.40 will be
automatically cancelled without compensation at the completion of the merger.
3. Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc. ("ePlus"),
a leading provider of enterprise cost management, in an all cash transaction.
The transaction included the sale to ePlus of the customer list of the business
and certain related equipment, the assumption by ePlus of certain contracts and
liabilities pertaining to the business, and the hiring by ePlus of the majority
of the Company's employees involved in the business. The transaction did not
include, and the Company retained, the inventory and accounts receivable of the
IT Business.
As of April 30, 2005, all of the accrued liabilities related to the
discontinued operations were discharged by payments in amounts equal to the
accruals.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations of the end-user information
technology fulfillment and professional services business have been recorded as
discontinued operations in the accompanying condensed consolidated statements of
operations. The revenue from discontinued operations was $0 and $34,976 for the
three months ended April 30, 2005 and 2004, respectively. The pretax income
(loss) from operations of the discontinued component was $0 and $(714) for the
three months ended April 30, 2005 and 2004, respectively. The revenue from
discontinued operations was $0 and $98,975 for the nine months ended April 30,
2005 and 2004, respectively. The pretax income (loss) from operations of the
discontinued component was $995 and $(2,314) for the nine months ended April 30,
2005 and 2004, respectively. The 2005 pre-tax income resulted from recoveries of
previously written off accounts receivable related to the discontinued IT
Business. For the nine months ended April 30 2005, net cash provided by
discontinued operations of $835 was comprised of collections of accounts
receivable of $2,815 plus net income from discontinued operations of $597 less
payments of accounts payable and accrued expenses of $2,577, all of which were
related to the sold IT Business.
4. 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,
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. As of April 30, 2005 potentially dilutive common
stock equivalents consisting of 2,000 outstanding stock options were excluded
from the calculation of net income per share. The following table reconciles the
denominators of the basic and diluted per share computations. For each period,
the numerator is the net income from continuing operations as reported and the
per share amounts below represent income per share from continuing operations.
7
Three months ended April 30, Nine months ended April 30,
2005 2004 2005 2004
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ ------ ------
(shares in thousands)
Basic 8,486 $ - 8,070 $0.05 8,289 $0.24 8,017 $0.25
=== ===== ==== ====
Effect of
dilutive
options 286 463 230 347
--- --- --- ---
Diluted 8,772 $ - 8,533 $0.05 8,519 $0.24 8,364 $0.24
===== === ===== ==== ===== ==== ===== ====
5. Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations for stock
options and other stock-based awards and records compensation expense for
employee stock options if the market price of the underlying common 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" ("SFAS
123"). 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 as if such
method had been used to account for stock-based compensation cost as described
in SFAS No. 123.
The Company applies the intrinsic value method as outlined in APB 25 and
related interpretations in accounting for stock options granted. Under the
intrinsic value method, no compensation expense is recognized if the exercise
price of the Company's employee stock options equals or exceeds the market price
of the underlying stock on the date of grant. Since the Company has issued all
stock option grants at market value, no compensation cost has been recognized at
the time of the grant. SFAS 123 requires that the Company provide pro forma
information regarding net income and net income per share as if compensation
cost for the Company's stock option programs had been determined in accordance
with the fair value method prescribed therein. The following table illustrates
the effect on net income and net income per share if the Company had measured
the compensation cost for the Company's stock option programs under the fair
value method in each period presented.
8
Three Months Ended April 30, Nine Months Ended April 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $14 $3 $2,614 $609
Add (deduct): Stock-based compensation
expense (income) included in net income
net of related tax effects (33) 14 32 14
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (77) (119) (306) (405)
---- ----- ----- -----
Net income (loss) - pro forma $(96) $(102) $2,340 $218
==== ==== ===== ===
Net income (loss) per share:
Basic - as reported $0.00 $0.00 $0.32 $0.08
==== ==== ==== ====
Basic - pro forma $(0.01) $(0.01) $0.28 $0.03
====== ===== ==== =====
Diluted - as reported $0.00 $0.00 $0.31 $0.07
==== ==== ==== ====
Diluted - pro forma $(0.01) $(0.01) $0.27 $0.03
====== ===== ==== ====
6. Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." 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. 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. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
SFAS No. 142 requires that the Company, on an annual basis, test goodwill
and other intangible assets for impairment. To determine the fair value of these
intangible assets, there are many assumptions and estimates used that directly
impact the results of the testing. In making these assumptions and estimates,
the Company uses set criteria that are reviewed and approved by various levels
of management, and the Company estimates the fair value of its reporting unit by
using discounted cash flow analyses.
As of April 30, 2005 and July 31, 2004, the Company had no intangible
assets, other than goodwill.
7. Line of Credit
The Company has available a line of credit with a financial institution in
the aggregate amount of $15,000, which expires on January 31, 2008. At April 30,
2005, no amounts were outstanding under this line. The line of credit facility
requires the Company to maintain certain financial ratios and covenants. At
April 30, 2005, the Company was in compliance with all the financial ratios and
covenants that it is required to maintain.
9
8. Leases and Subleases
As part of the sale to ePlus of the Company's end-user information
technology fulfillment and professional services business in May 2004, ePlus
entered into sublease and lease assignment agreements with the Company for up to
a one year term with respect to certain of the Company's facilities. The Company
and ePlus agreed to extend one sublease agreement for an additional two months
for one of the Company's facilities. In addition, in August 2004 the Company
entered into a sublease agreement with an unrelated third party for its office
and warehouse space at 40 Marcus Boulevard. The terms of the sublease extend
through February 2018 and cover substantially all of the Company's required
payments under its lease.
On April 11, 2005, the Company terminated its lease for the fifth floor in
the building located at 469 Seventh Avenue, New York, NY. Pursuant to the
Surrender Agreement with 469 Owners, LLC (the "Landlord"), successors in
interest to First Willow, LLC, the lease terminated effective as of March 31,
2005 as compared to the prior termination date of October 31, 2007, resulting in
a reduction of approximately $1.1 million in rental obligations and other
payments otherwise due under the lease. The Surrender Agreement required the
Company to pay an early termination fee of $325,000 to the Landlord which is
included in selling, general and administrative expenses.
Effective April 19, 2005 Electrograph Systems assigned its lease for the
real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord.
Pursuant to the Assignment and Assumption Agreement entered into with the
landlord, Electrograph Systems assigned all right, title and interest in and to
the lease for the remainder of the lease term, whereupon Electrograph Systems
was released from any and all obligations and liabilities under the lease by the
landlord in exchange for a payment of $550,000. The lease buy-out resulted in a
decrease of property, plant and equipment, net, of approximately $1,816,000 and
a reduction of capital lease obligations of approximately $1,700,000. As a
result of the lease buy-out the Company recorded a loss of approximately
$666,000, including $116,000 for the write-down of capital improvements at this
location.
9. Major Vendors
The Company's top three vendors accounted for approximately 29%, 16%, and
16% of total product purchases from continuing operations for the nine months
ended April 30, 2005. The Company's top three vendors accounted for
approximately 33%, 16%, and 15% of total product purchases from continuing
operations for the nine months ended April 30, 2004. The Company's top three
vendors accounted for approximately 36%, 17% and 14% of total product purchases
from continuing operations for the three months ended April 30, 2005. The
Company's top three vendors accounted for approximately 37%, 17% and 16% of
total product purchases from continuing operations for the three months ended
April 30, 2004.
10. Incentive Compensation Plan
On March 10, 2005, at the Company's annual meeting of shareholders, the
Company's shareholders approved the Company's 2005 Incentive Compensation Plan
(the "2005 Plan"). The 2005 Plan provides the Company with the flexibility to
grant other forms of compensation to its directors, officers, employees,
consultants, agents, advisors and third party service providers in addition to
that which was formerly available under the Company's Amended and Restated 1996
Incentive and Non-Incentive Stock Option Plan. The 2005 Plan permits the Company
to issue up to 1,000,000 shares of common stock for the grant of options, share
appreciation rights, restricted shares, restricted share units, performance
awards, annual incentive awards and other share based awards and cash-based
awards. The 2005 Plan is intended to comply with applicable securities law
requirements, permit the performance-based awards to qualify for deductibility
under Section 162(m) of the Internal Revenue Code and allow for the issuance of
incentive stock options.
10
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing elsewhere in this
report and with the Company's Annual Report on Form 10-K for the year ended July
31, 2004.
General
We are a distributor of display technology solutions and plasma display
monitors and computer hardware, primarily to dealers and system integrators.
Most of our revenues have been derived from product sales. We do not develop or
sell software products.
On April 17, 2005, the Company entered into a definitive merger agreement
under which entities associated with Caxton-Iseman Capital, Inc.
("Caxton-Iseman") will acquire all of the Company's outstanding shares in an all
cash transaction valued at approximately $55 million. Under the terms of the
agreement, which was unanimously approved by the Company's Board of Directors,
Manchester shareholders will receive $6.40 per share in cash for each share they
own at the effective time of the merger.
Consummation of the merger, which is expected to occur in the third quarter
of calendar year 2005, is subject to approval by the holders of two-thirds of
the shares of the Company's outstanding common stock, expiration or termination
of the applicable waiting period under the Hart-Scott-Rodino Act, completion of
debt financing by Caxton-Iseman and customary closing conditions. Barry R.
Steinberg, Chief Executive Officer of the Company, who holds approximately 55%
of the Company's outstanding shares, has agreed to vote his shares in favor of
the transaction. In connection with the merger, various members of management
will receive severance payments and other benefits. In addition, non-management
directors will receive bonuses in recognition of their services in connection
with the merger. If the merger agreement is terminated under certain
circumstances, the Company would be obligated to pay Caxton-Iseman $2.5 million.
Any stock options outstanding immediately prior to the completion of the merger
will be terminated and canceled immediately prior to the completion of the
merger. Each holder of a cancelled option that has an exercise price per share
less than $6.40 and that is vested immediately prior to the completion of the
merger, shall have the right to receive from the Company a cash payment (less
applicable federal, state and local withholding taxes) in an amount equal to
$6.40 minus the applicable exercise price per share of the option, multiplied by
the number of shares of common stock for which such option was exercisable
immediately prior to its cancellation. Each option that, immediately prior to
the completion of the merger, is not vested or that is vested but has an
exercise price greater than or equal to $6.40 will be automatically cancelled
without compensation at the completion of the merger.
In connection with the merger, the Company filed a preliminary proxy
statement with the Securities and Exchange Commission ("SEC") on May 24, 2005
and intends to file additional relevant material with the SEC, including a
definitive proxy statement. BECAUSE THOSE DOCUMENTS WILL CONTAIN IMPORTANT
INFORMATION, HOLDERS OF SHARES OF THE COMPANY'S COMMON STOCK ARE URGED TO READ
THEM, IF AND WHEN THEY BECOME AVAILABLE. When filed with the SEC, they will be
available for free (along with any other documents and reports filed by the
Company with the SEC) at its website, www.sec.gov, and the Company's
shareholders will receive information at an appropriate time on how to obtain
the definitive proxy statement for free from the Company. A special meeting of
the Company's shareholders will be convened as soon as practicable after the
filing of definitive proxy materials with the SEC.
On May 28, 2004, we sold our end-user information technology fulfillment
and professional services business ("IT Business") to ePlus, inc. ("ePlus") in
an all cash transaction. The transaction included the sale to ePlus of the
customer list of the business and certain related equipment, the assumption by
ePlus of certain contracts and liabilities pertaining to the business and the
hiring by ePlus of the majority of Manchester employees involved in the
11
business. The transaction did not include, and we retained, the inventory and
accounts receivable of the business.
Prior to this sale, we specialized in hardware and software procurement,
display technology, custom networking, security, IP telephony, remote
management, application development/e-commerce, storage, and enterprise and
Internet solutions. Subsequent to the sale, we have continued distributing
display technology solutions and plasma display monitors and computer hardware,
but no longer provide professional services.
E-Commerce
We utilize a website incorporating an electronic communication system. The
site, located at www.electrograph.com allows existing customers, corporate
shoppers and others to find product specifications, compare products, check
prices and purchase products 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.
Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, a leading
provider of enterprise cost management, in an all cash transaction. The proceeds
from the sale of the IT Business were $3,555,000 net of related expenses of
$1,445,000. The Company recorded a gain, included in loss from operations of
discontinued component in the fiscal 2004 (ended July 31, 2004) statement of
operations, of approximately $876,000 as a result of the transaction. This
amount represented the excess of the net proceeds over a payable to ePlus of
$469,000 for service contracts they assumed and the $2,210,000 carrying value of
the net assets sold, consisting of goodwill of $2,704,000, property and
equipment, net of $195,000 and deferred revenue of $689,000. The loss from the
operations of the discontinued IT Business was $8,492,000 in fiscal 2004, which
included the following charges in the fourth quarter of fiscal 2004:
Employee severance and other employee costs $1,016,000
Provision for doubtful accounts receivable 1,250,000
Fixed asset impairments 2,639,000
Other 50,000
---------
Total $4,955,000
==========
As of April 30, 2005, all of the accrued liabilities related to the
discontinued operations were discharged by payments in amounts equal to the
accruals.
Disclosure Regarding Forward-Looking Statements
This report on Form 10-Q contains statements that may constitute
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on currently available information and represent the beliefs of our
management. These statements are subject to risks and uncertainties that could
cause actual results to differ materially, including, but not limited to, our
inability to attract and retain highly skilled sales representatives or
technical personnel necessary to maintain our current operations and implement
our growth strategies; our inability to maintain good relationships with our
vendors and customers; not being successful in our efforts to focus on
higher-margin products and services and not being able to rapidly respond to new
product offerings; not managing our inventory successfully; being adversely
affected by continued intense competition in the technology industry, including
competition from competitors with greater resources; being subject to
potentially adverse business conditions that our industry is subject to,
including, without limitation, pricing pressures involving distribution 12
channels, market consolidation, a potential short supply of products, continued
deterioration in average selling prices of personal computers and display
technologies, and a decrease in the growth of the display technology market; the
risk that our success is highly dependent upon a select group of senior
management and that our revenues and operating results are subject to
fluctuation from quarter to quarter; the failure of our information technology
systems to function properly; the failure of our actions to enhance shareholder
value; failure to consummate the merger; failure of the Company's shareholders
to adopt the merger agreement and the merger; the occurrence or existence of any
event, fact or set of circumstances that has had or would reasonably be expected
to have, individually or in the aggregate, a "company material adverse effect"
as such term is defined in the merger agreement; failure of the Company and the
acquiror to obtain the required consents and approvals under the
Hart-Scott-Rodino Act; the imposition of any government conditions to the
closing of the proposed transaction; the failure by the Company or the acquiror
to satisfy other conditions to the completion of the merger as set forth in the
merger agreement; the failure of the acquiror to obtain debt and equity
financing; the failure of the Company to collect from Caxton-Iseman the
termination fee of $2.5 million following an event that gives rise to an
obligation to pay such termination fee; or the Company's obligation to pay a
termination fee of $2.5 million to the acquiror following an event that gives
rise to an obligation to pay such termination fee. For further information on
certain of these risks and others affecting us, please see our Annual Report on
Form 10-K for the year ended July 31, 2004, and those set forth from time to
time in our other filings with the SEC. Each of these documents is on file with
the SEC and is available free of charge. Readers of this report are referred to
such filings. The forward-looking statements herein speak only as of the date of
this report. We do not undertake to update any forward-looking statement that
may be made from time to time by us or on our behalf.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. 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 in the Annual Report on Form 10-K for the fiscal year ended July 31,
2004 describes the significant accounting policies and methods used in the
preparation of the consolidated financial statements. The following critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the consolidated financial statements.
Revenue Recognition. Revenue from product sales is recognized when title
and risk of loss are passed to the customer, which is at the time of shipment to
the customer. The Company 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.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is
based on our assessment of the collectibility of specific customer accounts and
the aging of our 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. Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden and 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.
13
Goodwill. 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 condensed consolidated statements of income expressed
as a percentage of related revenue or total revenue.
Percentage of Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
2005 2004 2005 2004
---- ----- ---- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 87.5 90.7 87.4 90.0
---- ---- ---- ----
Gross profit 12.5 9.3 12.6 10.0
Selling, general and
administrative expenses 11.0 7.4 9.6 7.3
Loss on buy-out of capital lease 1.6 0.0 0.5 0.0
--- --- --- ---
Income (loss) from operations (0.1) 1.9 2.5 2.6
Interest and other income (expense), net 0.1 (0.2) 0.1 (0.1)
--- ---- --- ----
Income from continuing operations
before income taxes 0.1 1.7 2.6 2.5
Income tax provision 0.0 0.7 1.1 1.0
--- ---- --- ---
Income from continuing operations 0.0 1.0 1.6 1.5
--- ---- --- ---
Discontinued operations
Income (loss) from operations of
discontinued component 0.0 (1.7) 0.8 (1.7)
Income tax (provision) benefit 0.0 0.7 (0.3) 0.7
--- --- ----- ---
Income (loss) from discontinued operations 0.0 (1.0) 0.5 (1.1)
--- ----- --- -----
Net income 0.0% 0.0% 2.0% 0.5%
==== ===== ==== ====
Three Months Ended April 30, 2005 Compared with Three Months Ended April 30,
2004
Revenue. Revenue decreased by $0.5 million or 1% to $41.9 million for the
three months ended April 30, 2005 from $42.4 million for the three months ended
April 30, 2004. The decrease in revenue is primarily a result of decreased sales
of computer hardware to dealers and systems integrators. Such sales of computer
hardware decreased by approximately 38% compared to last year as a result of the
Company's inability to procure products at previous levels for this line of its
business. The decrease in computer hardware sales was partially offset by an
increase in sales of display technology solutions of approximately 4% compared
to last year resulting from the increase in unit sales of display technology
14
solutions, primarily large screen flat panel displays, partially offset by the
ongoing decline in average selling prices.
Gross Profit. Cost of revenue includes the direct costs of products sold
and freight. All other operating costs are included in selling, general and
administrative expenses. Gross profit increased by $1.3 million or 33%, from
$3.9 million for the three months ended April 30, 2004 to $5.3 million for the
three months ended April 30, 2005 and as a percentage of revenue, gross profit
increased from 9.3% for the three months ended April 30, 2004 to 12.5% for the
three months ended April 30, 2005. The increase in gross profit percentage is
primarily attributable to special product offerings received from manufacturers
with higher margins, volume discounts received from manufacturers and sales of
higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.5 million, or 46% from $3.1 million for
the three months ended April 30, 2004 to $4.6 million for the three months ended
April 30, 2005. The increase is principally due to an increase in salaries,
commissions and other personnel costs of approximately $328,000, reflecting the
increase in employee headcount and associated costs with respect to the
continuing growth of the display technology business, $325,000 of charges
related to obtaining a release from the rental obligation for the Company's
leased property in New York City, increased legal and professional costs of
approximately $280,000 primarily as a result of the increased legal costs
associated with the Company's entering into a definitive merger agreement and
the adoption of the Company's 2005 Incentive Compensation Plan approved by our
shareholders and an increase in bad debt expense of approximately $220,000
primarily due to a recovery in the prior year. As a percentage of revenue,
selling, general and administrative expenses increased from 7.4% for the three
months ended April 30, 2004 to 11.0% for the three months ended April 30, 2005.
Loss on Buy-Out of Capital Lease. Effective April 19, 2005 Electrograph
Systems, Inc., a subsidiary of the Company ("Electrograph Systems"), assigned
its lease for the real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to
the landlord. Pursuant to the Assignment and Assumption Agreement entered into
with the landlord, Electrograph Systems assigned all right, title and interest
in and to the lease for the remainder of the lease term, whereupon Electrograph
Systems was released from any and all obligations and liabilities under the
lease by the landlord in exchange for a payment of $550,000. As a result of the
lease buy-out, the Company recorded a loss of approximately $666,000, including
$116,000 for the write-down of capital improvements at this location.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by approximately $116,000 from an expense of
approximately $70,000 for the three months ended April 30, 2004 to income of
approximately $46,000 for the three months ended April 30, 2005. The amount for
the three months ended April 30, 2004 included approximately $85,000 of interest
expense related to the interest portion of the capital leases entered into by
the Company in March 2003 offset by interest income of approximately $15,000.
The amount for the three months ended April 30, 2005 included $84,000 of
interest expense related to the interest portion of the capital leases and
interest income of approximately $130,000 earned on the Company's cash
investments which had higher average balances than during the prior year period.
Income Tax Provision. Our effective tax rate was 42.4% for the three months
ended April 30, 2005 and 40.0% for the three months ended April 30, 2004.
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations in the accompanying consolidated
statements of income. The net income (loss) from discontinued operations was $0
and $(429,000) for the three months ended April 30, 2005 and 2004, respectively.
15
Nine Months Ended April 30, 2005 Compared to Nine Months Ended April 30, 2004
Revenue. Revenue decreased by $4.9 million or 4% to $128.1 million for the
nine months ended April 30, 2005 from $132.9 million for the nine months ended
April 30, 2004. The decrease in revenue is primarily a result of decreased sales
of computer hardware to dealers and systems integrators. Such sales of computer
hardware decreased by approximately 49% compared to last year as a result of the
Company's inability to procure products at previous levels for this line of its
business. The decrease in computer hardware sales was partially offset by an
increase in sales of display technology solutions of approximately 3% compared
to last year resulting from the increase in unit sales of display technology
solutions, primarily large screen flat panel displays, partially offset by the
ongoing decline in average selling prices.
Gross Profit. Gross profit increased by $2.9 million or 22%, from $13.2
million for the nine months ended April 30, 2004 to $16.2 million for the nine
months ended April 30, 2005 and as a percentage of revenue, gross profit
increased from 10.0% for the nine months ended April 30, 2004 to 12.6% for the
nine months ended April 30, 2005. The increase in gross profit percentage is
primarily attributable to special product offerings received from manufacturers
with higher margins, volume discounts received from manufacturers and sales of
higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.6 million, or 27% from
$9.7 million for the nine months ended April 30, 2004 to $12.3 million for the
nine months ended April 30, 2005. The increase is principally due to an increase
in salaries, commissions and other personnel costs of approximately $796,000,
reflecting the increase in employee headcount and associated costs with respect
to the continuing growth of the display technology business, $325,000 of charges
related to obtaining a release from the rental obligation for the Company's
leased property in New York City, increased legal and professional costs of
approximately $736,000 primarily as a result of the Company entering into a
definitive merger agreement and the increased legal costs associated with the
adoption of the Company's 2005 Incentive Compensation Plan approved by our
shareholders, increased sales personnel expenses of approximately $180,000 due
to the increased participation in trade shows and increased rent expense of
approximately $147,000. As a percentage of revenue, selling, general and
administrative expenses increased from 7.3% for the nine months ended April 30,
2004 to 9.6% for the nine months ended April 30, 2005.
Loss on Buy-Out of Capital Lease. Effective April 19, 2005 Electrograph
Systems assigned its lease for the real property known as 40 Marcus Boulevard,
Hauppauge, N.Y. to the landlord. Pursuant to the Assignment and Assumption
Agreement entered into with the landlord, Electrograph Systems assigned all
right, title and interest in and to the lease for the remainder of the lease
term, whereupon Electrograph Systems was released from any and all obligations
and liabilities under the lease by the landlord in exchange for a payment of
$550,000. As a result of the lease buy-out, the Company recorded a loss of
approximately $666,000, including $116,000 for the write-down of capital
improvements at this location.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by approximately $345,000 from an expense of
approximately $166,000 for the nine months ended April 30, 2004 to income of
approximately $179,000 for the nine months ended April 30, 2005. The amount for
the nine months ended April 30, 2004 included approximately $258,000 of interest
expense related to the interest portion of the capital leases entered into by
the Company in March 2003 offset by interest income of approximately $92,000.
The amount for the nine months ended April 30, 2005 included $252,000 of
interest expense related to the interest portion of the capital leases and
interest income of approximately $431,000 earned on the Company's cash
investments which had higher average balances than during the prior year period.
Income Tax Provision (Benefit). Our effective tax rate was 40.0% and 39.4%
for the nine months ended April 30, 2005 and April 30, 2004, respectively.
16
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations in the accompanying consolidated
statements of income. The net income (loss) from discontinued operations was
$597,000 and $(1.4) million for the nine months ended April 30, 2005 and 2004,
respectively. The income in the 2005 period resulted from a recovery of accounts
receivable related to the IT Business.
Liquidity and Capital Resources
Working Capital
Our primary source of cash and cash equivalents have been internally
generated working capital from profitable operations. The Company's working
capital at April 30, 2005 and July 31, 2004 was approximately $39.3 million and
$34.4 million, respectively.
Cash Flows
Operating activities for the nine months ended April 30, 2005 and 2004,
resulted in an increase in cash and cash equivalents of approximately $3.2
million and $5.3 million, respectively. Continuing operations provided
approximately $2.3 million of cash in the nine months ended April 30, 2005
primarily resulting from operating cash flows of $6.6 million principally
derived from net income and the increase in accounts payable and accrued
expenses exceeding an increase in accounts receivable and inventory of
approximately $4.3 million. Discontinued operations provided cash of
approximately $835,000 in the nine months ended April 30, 2005 primarily
resulting from the collection of retained receivables net of payments of
accounts payable of the IT Business. Our accounts receivable and accounts
payable balances, as well as our inventory balances, 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.
Investing activities for the nine months ended April 30, 2005 and 2004 used
cash of approximately $190,000 and $760,000, respectively. These amounts
consisted solely of additions to property and equipment.
Financing activities for the nine months ended April 30, 2005 and 2004
provided cash of approximately $626,000 and $135,000, respectively. For the nine
months ended April 30, 2005, this amount consisted of proceeds from the exercise
of stock options of approximately $1.4 million partially offset by $180,000 of
payments on capitalized lease obligations and a $550,000 payment to obtain a
release from one of our capital lease obligations. For the nine months ended
April 30, 2004 this amount consisted of proceeds from the exercise of stock
options of approximately $284,000 partially offset by $149,000 of payments on
capitalized lease obligations.
Line of Credit
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million, which expires on January 31, 2008. At April
30, 2005, no amounts were outstanding under this line. The line of credit
facility requires the Company to maintain certain financial ratios and
covenants. At April 30, 2005, the Company was in compliance with all the
financial ratios and covenants that it is required to maintain.
Financial Commitments
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 for at least the next twelve months. The only material commitments
for capital expenditures are operating and capital leases for the Company's
facilities and certain tangible property. Future capital requirements of the
Company include those for the growth of working capital items such as accounts
17
receivable and inventory, the purchase of equipment, expansion of facilities, as
well as the possible opening of new offices and potential acquisitions.
As part of the sale to ePlus of the Company's end-user information
technology fulfillment and professional services business in May 2004, ePlus,
inc. entered into sublease and lease assignment agreements with the Company for
up to a one year term with respect to certain of the Company's facilities. The
Company and ePlus agreed to extend one sublease agreement for an additional two
months for one of the Company's facilities. In addition, in August 2004 the
Company entered into a sublease agreement with an unrelated third party for its
office and warehouse space at 40 Marcus Boulevard, Hauppauge, N.Y. The terms of
the sublease extend through February 2018 and cover substantially all of the
Company's required payments under its lease, amounting to approximately $2.8
million.
On April 11, 2005, the Company terminated its lease for the fifth floor in
the building located at 469 Seventh Avenue, New York, NY. Pursuant to the
Surrender Agreement with 469 Owners, LLC (the "Landlord"), successors in
interest to First Willow, LLC, the lease terminated effective as of March 31,
2005 as compared to the prior termination date of October 31, 2007, resulting in
a reduction of approximately $1.1 million in rental obligations and other
payments otherwise due under the lease. The Surrender Agreement required the
Company to pay an early termination fee of $325,000 to the Landlord which is
included in selling, general and administrative expenses.
Effective April 19, 2005 Electrograph Systems assigned its lease for the
real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord.
Pursuant to the Assignment and Assumption Agreement entered into with the
landlord, Electrograph Systems assigned all right, title and interest in and to
the lease for the remainder of the lease term, whereupon Electrograph Systems
was released from any and all obligations and liabilities under the lease by the
landlord in exchange for a payment of $550,000. The lease buy-out resulted in a
decrease of property, plant and equipment, net, of approximately $1,816,000 and
a reduction of capital lease obligations of approximately $1,700,000. As a
result of the lease buy-out the Company recorded a loss of approximately
$666,000, including $116,000 for the write-down of capital improvements at this
location.
There are no other 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 table represents the Company's financial commitments as of
April 30, 2005 without taking into account any sublease rental income:
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
(in thousands)
Capital leases $6,049 $213 $ 834 $ 748 $4,254
Operating leases 1,869 404 1,148 317 -
----- ----- -------- ---- --------
Total $7,918 $617 $1,982 $1,065 $4,254
===== === ===== ===== =====
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.
18
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment"
("SFAS No. 123 (R)"). This statement replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB No. 25, "Accounting for Stock
Issued to Employees." SFAS 123 (R) requires all stock-based compensation to be
recognized as an expense in the financial statements and that such cost be
measured according to the grant-date fair value of stock options or other equity
instruments. SFAS 123 (R) will be effective for annual periods beginning after
June 15, 2005. While the Company currently provides the pro forma disclosures
required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," on a quarterly basis (see "Note 5 - Accounting for Stock-Based
Compensation"), it is currently evaluating the impact this statement will have
on its consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all
companies to recognize a current-period charge for abnormal amounts of idle
facility expense, freight, handling costs and wasted materials. This statement
also requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for fiscal years beginning after June 15, 2005. The
Company believes that this statement will have no effect on its consolidated
financial statements.
Inflation
We do not believe that inflation has had a material effect on our
operations.
ITEM 3. 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 primarily of short-term
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 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's
management conducted an evaluation, under the supervision and with the
participation of the principal executive officer and principal financial
officer, of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation,
the principal executive officer and principal financial officer concluded that,
as of the end of the period covered by this report, the Company's disclosure
controls and procedures are effective. Notwithstanding the foregoing, a control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in
the Company's periodic reports.
(b) Changes in Internal Controls
There was no change in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Shareholders held on March 10, 2005, the
following proposals were adopted by the margins indicated:
(1) Elect seven Directors to serve until the 2006 Annual Meeting of
Shareholders;
Broker
Nominee For Withheld Abstain Non-votes
-------------- --- -------- ------- ---------
Barry R. Steinberg 5,436,508 911,381 0 0
Seth Collins 5,435,708 912,181 0 0
Joel G. Stemple 5,437,458 910,431 0 0
Joel Rothlein 5,421,058 926,831 0 0
Michael E. Russell 5,772,885 575,004 0 0
Yacov A. Shamash 5,772,885 575,004 0 0
Jeffrey Melnick 5,776,035 571,854 0 0
(2) Vote on the approval of the Company's 2005 Incentive Compensation Plan.
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
5,372,633 969,578 5,678 0
(3) Vote on the ratification of the reappointment of KPMG LLP as
independent auditors of the Company for the year ending July 31,
2005.
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
6,345,388 801 1,700 0
No other items were voted on at the Annual Meeting of Shareholders or
during the quarter ended April 30, 2005.
ITEM 5. OTHER INFORMATION.
As of March 15, 2005, Electrograph Systems entered into a Lease Agreement
with Harsch Investment Properties - Nevada, LLC for office and warehouse space
at a building located at 470 Mirror Court, Suite 102-103 (the "Lease"). The
Lease commenced on April 1, 2005 and terminates on July 31, 2010. The Company is
a guarantor of Electrograph Systems' obligations under the Lease.
As of May 11, 2005, Electrograph Systems and Harsch Investment Properties -
Nevada, LLC entered into a first amendment to the Lease (the "First Amendment").
The First Amendment, among other things, increased the amount of space leased by
Electrograph Systems from approximately 26,431 square feet to approximately
37,072 square feet, and also increased the amount of monthly base rent to be
paid by Electrograph Systems by $5,465 per month for the period of June 2005
through April 2006, with additional increases thereafter.
Both the Lease and the First Amendment are attached hereto as Exhibits
10.1 and 10.2 respectively.
20
ITEM 6. EXHIBITS
Exhibits
10.1 - Lease Agreement, dated as of March 15, 2005, between Electrograph
Systems, Inc. and Harsch Investment Properties - Nevada, LLC.
10.2 - First Amendment to Lease, dated as of May 11, 2005, between
Electrograph Systems, Inc. and Harsch Investment Properties - Nevada,
LLC.
31.1 - Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
under the Securities and Exchange Act of 1934 and 18 U.S. C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
under the Securities and Exchange Act of 1934 and 18 U.S. C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
21
MANCHESTER TECHNOLOGIES, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANCHESTER TECHNOLOGIES, INC.
(Registrant)
DATE: June 10, 2005 /S/ Barry R. Steinberg
-------------------------------
Barry R. Steinberg
Chief Executive Officer
DATE: June 10, 2005 /S/ Elan Yaish
--------------------------------------------
Elan Yaish
Vice President Finance,
Chief Financial Officer and Assistant Secretary
22