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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
OR
- - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21695
MANCHESTER EQUIPMENT CO., INC.
(Exact name of Registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I. D. Number)
160 Oser Avenue 11788
Hauppauge, New York (Zip Code)
Address of principal executive offices)
Registrant's telephone number, including area code: (516) 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 21, 1997 was $15,194,231 (3,241,436 shares at a closing
sale price of $4.6875).
As of October 21, 1997, 8,525,000 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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MANCHESTER EQUIPMENT CO., INC.
FORM 10-K
YEAR ENDED JULY 31, 1997
TABLE OF CONTENTS
Page
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Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5 Market for the Registrant's Common Stock and Related Stockholder
Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 16
Item 9. Disagreements on Accounting and Financial Disclosures 16
Part III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures Chief Executive Officer, Chief Financial Officer, and Directors 40
PART I
This Report contains certain forward-looking statements that are based on
current expectations. The actual results of Manchester Equipment Co., Inc. (the
"Company") may differ materially from the results discussed herein as a result
of a number of unknown factors. Such factors include, but are not limited to ,
there being no assurance that the acquisition of Electrograph Systems, Inc. will
continue to add to the Company's profitability, the Company will be successful
in its efforts to focus on value-added services, the Company will be successful
in attracting and retaining highly skilled technical personnel and sales
representatives necessary to implement the Company's growth strategies, the
Company will be adversely affected by continued intense competition in the
computer industry, a lack of product availability or deterioration in
relationships with manufacturers, or a loss or decline in sales to any of its
major customers. See "Products" and "Competition" in Part I, Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this report for a discussion of important
factors that could affect the validity of any forward looking statements.
ITEM 1. Business
General
Manchester Equipment Co., Inc. ("Manchester" or the "Company") is a
systems integrator and reseller of computer hardware, software and networking
products, primarily for commercial customers. The Company offers its customers
single-source solutions customized to their information systems needs by
combining value-added services with hardware, software, networking products and
peripherals from leading vendors. Over the past 20 years, the Company has forged
long-standing relationships with both customers and suppliers and capitalized on
the rapid developments in the computer industry, including the shift toward
client/server-based platforms.
Manchester's 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.
The Company offers its customers a variety of value-added services,
such as consulting, integration and support services, together with a broad
range of computer and networking products from leading vendors. Consulting
services include systems design, performance analysis, and migration planning.
Integration services include product procurement, configuration, testing and
systems installation and implementation. Support services include network
management, "help-desk" support, and enhancement, maintenance and repair of
computer systems. Most of the Company's revenues are derived from sales to
customers located in the New York Metropolitan area, with approximately 90% of
the Company's revenues being generated from its Long Island and New York City
offices.
The Company was incorporated in New York in 1973 and has three 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; and Electrograph
Systems, Inc. a New York corporation which distributes microcomputer peripherals
throughout the United States.
Industry
Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Computer technology and related products are continuously evolving,
making predecessor technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant challenges
to companies.
Over the last several years, the increase in performance of personal
computers, the development of a variety of effective business productivity
software programs and the ability to interconnect personal computers in high
speed networks have led to an industry shift away from mainframe computer
systems to client/server systems based on personal computer technology. In such
systems, the client computer, in addition to its stand-alone capabilities, is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers. Recently, networked
applications such as electronic mail and work group productivity software,
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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 revenues 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. The Manchester 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. Manchester believes it provides state-of-the-art,
cost-effective information systems designed to meet its customers' particular
needs.
As a result of the Company's long-standing relationships with certain
suppliers and its large volume purchases, the Company is often able to obtain
significant purchase discounts which can result in cost-savings for its
customers. Manchester's relationships with its suppliers, its inventory
management system and industry knowledge generally enable it to procure desired
products on a timely basis and therefore to offer its customers timely product
delivery.
Strategy
The key elements of the Company's 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. The Company has increased its focus on
providing these services through a number of key strategies. The Company has and
continues to recruit additional technical personnel with broad-based knowledge
in systems design and specialized knowledge in different areas of systems
integration, including application software, inter-networking (including
bridges, routers and switches), database design and management. The Company
actively promotes the benefits of corporate intranets and has introduced
additional services, including remote network management services and fee-based
"help desk" services. The remote network management system consists of dedicated
servers and software located at the Company's Long Island headquarters. This
system allows the Company's specially trained engineers to solve their
customers' network systems problems from the Company's facilities. The fee-based
"help desk" services are available for end-users, regardless of whether they
purchase products or other services from the Company.
Increasing Marketing Focus on Companies Outside the Fortune 500.
Manchester has decided to increase its marketing focus on those companies
outside the Fortune 500 in order to increase its value-added services revenue.
Manchester's experience is that 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.
Manchester believes that it 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.
Introducing an Electronic Ordering System. Manchester has implemented
an electronic ordering system. This ordering system enables participating
customers to access the Company via the Internet, review various products,
systems and services offered by the Company and place their orders on-line.
Customers will also be 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 be granted access to this system
without prior credit clearance.
Increasing Sales Force Productivity. Manchester is addressing a variety
of strategies to increase sales force productivity. The Company is implementing
an electronic sales information system utilizing similar technology to the
electronic ordering system described above. The electronic sales information
system will allow the Company's sales representatives to obtain immediate
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customized information regarding products and services that meet the specific
system requirements of customers and the availability and related costs of such
products and services. The Company believes that this system will increase the
productivity of its sales representatives by enabling them to offer rapid and
comprehensive solutions to their customers' needs while reducing the possibility
of returns based on incompatible products.
Manchester also has upgraded its internal telecommunications system.
Through this enhanced system, installed in August, 1997, the Company intends to
institute a system whereby telephone calls can be automatically placed to a
targeted list of existing or potential customers and, upon connection, routed
automatically to available sales representatives with on-screen information
containing product and service data for current customers and market demographic
data for potential customers. The system also has the capability to route
automatically in-coming calls to available sales representatives in response to
a caller's answers to automated queries.
The Company provides training of its sales representatives in matters
relating to value-added services, such as consulting and integration services.
To facilitate such training, the Company constructed a dedicated training
facility located in one of its existing offices in Long Island.
Expanding New York Metropolitan Area Presence. The Company believes
that it has a strong presence and wide name recognition in the New York
Metropolitan area, where there is a growing corporate demand for computer
products and services. Manchester is seeking to expand its presence in this area
by enlarging its New York City office and increasing the sales and service
capabilities of such office, and expanding its sales, service and training
capabilities at its Long Island headquarters. The Company believes that these
steps will enable it to capture a greater percentage of the New York
Metropolitan area market. In fiscal 1997, the Company entered into a lease for
new office space in New York City which is approximately double the size of the
existing space.
Occupancy of the new space is anticipated in November 1997.
Expanding into Additional Business Centers. The Company has regional
offices in Newton, Massachusetts and Boca Raton and Tampa, Florida, from which
it derived approximately 10% of its revenues for the fiscal year ended July 31,
1997. The Company intends to continue to expand geographically into growing
business centers in the eastern half of the United States. It is anticipated
that each office would have the capability to perform a broad array of services
as well as engage in product sales.
Services and Products
The Company offers customized single-source solutions to its 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. The Company provides its services through a skilled
staff of engineers who are trained and certified in leading products and
technology, including Microsoft Windows NT, Novell NetWare and Cisco Systems
routers and switches.
Services. The Company's services include consulting, integration and
support services.
Consulting. The Company's staff of senior systems engineers provides
consulting services consisting of systems design, performance and security
analysis and migration planning services.
Systems design services include network, communications, applications
and custom solutions design. Network design services involve analysis of a
customer's overall network needs, including access to the Internet;
communications design services involve analysis and creation of enterprise-wide
networks, including corporate intranets; applications design services include
creation of relational databases meeting customers' specific business
requirements; and custom solutions design services include design of storage
systems, remote access systems and document retention through scanning
technology.
Performance analysis involves analyzing a customer's information
systems to assess potential points of failure, to determine where performance
could be increased and to prepare for change and growth. This service includes
the evaluation of applications and their interaction with the network in order
to maximize existing computer resources. Through this evaluation process, which
includes a detailed report to the end-user, a plan for the optimization of the
customer's existing system is created, as well as recommendations for
enhancements and future systems.
Security analysis involves working with customers to develop security
policies covering network security, as well as risk analysis. After a policy is
developed, a security strategy is planned and deployed using a variety of tools,
including physical firewalls, packet filtering, encryption and user
authentication.
Migration planning involves the performance of a detailed assessment of
existing mission critical systems, followed by an analysis of the end-user's
future requirements. Working closely with the customer, Manchester's consultants
develop a migration strategy using a defined project plan that encompasses
skills transfer and training, checking for data integrity, project management
and consolidation and reallocation of resources. The primary objective of this
service is to rapidly move the customer from a slow or expensive system to a
newer, more efficient and cost-effective solution.
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Integration. Integration services include product procurement,
configuration, testing, installation and implementation.
The Company maintains a sophisticated systems build and test area,
adjacent to its 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.
The Company's engineers prepare reports setting forth coordinated timetables
with respect to installing and integrating the customer's information systems.
Vendor management includes interfacing with the suppliers of computer products
in installing a project; facility management involves management of the labor
aspects of a project, including supervision of electricians and other tradesmen.
Support. The Company offers support services for its customers'
existing information systems, including network management, "help-desk"
services, and enhancement, maintenance and repair.
Network management consists of managing the compatibility of, and
communication between, the various components comprising a customer's
information system. The increased expense associated with the ownership of
information systems has encouraged customers to outsource the management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Currently, the Company's engineers provide network management services
on site at customers' facilities.
"Help-desk" services consist of providing customers with telephone
support. In addition, the Company's service call management system, which the
Company is in the process of enhancing, will enable the Company's "help-desk"
technicians to access an archive of prior service calls concerning similar
problems and their solutions, resulting in a more efficient response to
customers' calls.
Enhancement, maintenance and repair services range from broad on-site
coverage to less expensive, basic maintenance and repair of itemized hardware or
software, as well as enhancements such as upgrades of existing systems. Field
representatives are equipped with notebook computers to facilitate the exchange
of information with both the information systems at the Company's headquarters
and with technical databases available on the Internet. The Company maintains a
laboratory at its Long Island facilities where the Company prototypes customer
problems for quicker solutions without jeopardizing customers' information
systems.
Products. Manchester offers a wide variety of personal computer and
networking products and peripherals, including:
Bridges and Routers Servers
Desktop Computers Software
Internet Access Products Storage Subsystems
Modems Switches
Monitors Supplies and Accessories
Network Equipment Teleconferencing Equipment
Notebook Computers Terminals
Printers Wireless Products
Scanners Workstations
The Company has long-standing relationships with many manufacturers,
which the Company believes assists it in procuring desired products on a timely
basis and on desirable financial terms. The Company sells products from most
major manufacturers, including:
AST Research, Inc. Motorola, Inc..
Bay Networks, Inc. NEC Technologies, Inc.
Cisco Systems, Inc. Novell, Inc.
Compaq Computer Corporation Philips Electronics N.V.
Epson America, Inc. Seagate Technology, Inc.
Hayes Microcomputer Products, Inc. Standard Microsystems Corporation
Hewlett-Packard Company Texas Instruments Inc.
Intel Corporation 3Com Corp.
Microsoft Corporation Toshiba America Information Systems,
Inc.
For the fiscal years ended July 31, 1997, 1996 and 1995, sales by the
Company of products manufactured by Toshiba, Hewlett-Packard, NEC and Compaq
collectively comprised approximately 56%, 53% and 52%, respectively, of the
Company's revenues. In these fiscal years, sales of products manufactured by
Toshiba accounted for approximately 26%, 23% and 24%, respectively, of the
Company's revenues, substantially all of which were sales of notebook computers
and related accessories. The total dollar volume of products purchased directly
from manufacturers, as opposed to distributors or resellers, was approximately
$103 million, $117 million and $118 million for the fiscal years ended July 31,
1997, 1996 and 1995, respectively, and as a percentage of total cost of products
sold was approximately 64%, 72% and 82%, respectively.
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The Company has entered into agreements with its principal suppliers that
include provisions providing for periodic renewals and permitting termination by
the vendor without cause, generally upon 30 to 90 days written notice, depending
upon the vendor. Toshiba, Hewlett-Packard, NEC and Compaq have regularly renewed
their respective agreements with the Company, although there can be no assurance
that the regular renewal of the Company's dealer agreements will continue. The
termination, or non-renewal, of any or all of these dealer agreements would
materially adversely affect the Company's business. The Company, however, is not
aware of any reason for the termination, or non-renewal, of any of those dealer
agreements and believes that its relationships with Toshiba, Hewlett-Packard,
NEC and Compaq are satisfactory.
The Company is dependent upon the continued supply of products from its
suppliers, particularly Toshiba, Hewlett-Packard, NEC and Compaq. Historically
certain suppliers occasionally experience shortages of select product that
render components unavailable or necessitate product allocations among
resellers. While certain shortages existed throughout fiscal 1997, the Company
believes that product availability issues are as a result of the present
dynamics of the personal computer industry as a whole, which include high
customer product demand, shortened product life cycles and increased frequency
of new product introductions into the marketplace. While there can be no
assurance that product unavailability or product allocation, or both, will not
increase in fiscal 1998, 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.
The Company seeks to obtain volume discounts for large customer orders
directly from manufacturers and through aggregators and distributors.
Customers
The Company believes that it benefits from its long-standing
relationships with many of its customers, providing opportunities for continued
sales and services. Manchester believes that its broad range of capabilities
with respect to both products and services is attractive to companies of all
sizes. Although Manchester is planning to target companies outside the Fortune
500 as one part of its strategy, it has sold, and anticipates that it will
continue to sell, to some of the largest companies in the United States. For the
fiscal years ended July 31, 1997, 1996 and 1995, approximately 15%, 16% and 22%
of the Company's total revenues, respectively, were derived from United Parcel
Service of America, Inc. Some of the Company's other significant commercial
customers currently include Barnes & Noble Inc., Cabletron Systems Inc., J&R
Music World, National Broadcasting Company Inc., Sterling Doubleday Enterprises
(New York Mets), Pfizer Inc., Reuters America Inc., SONY Theaters, Time Warner
Inc., United Nations International Children's Emergency Fund and the United
States Merchant Marine Academy.
The Company's return policy generally allows customers to return
hardware and unopened software, without restocking charges, within 30 days of
the original invoice date, subject to advance approval and certain other
conditions.
The Company grants credit to customers meeting specified criteria and
maintains a centralized credit department that reviews credit applications.
Accounts are regularly monitored for collectibility and appropriate action is
taken upon indication of risk.
Sales and Marketing
The Company's sales are generated primarily by its 65 person sales
force. These sales representatives generally are responsible for meeting all of
their 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 the Company's
facilities, at which the Company's new and existing product and service
offerings are discussed.
The Company's sales representatives are assisted by technical personnel
who support and supplement the sales efforts. The responsibilities of technical
support personnel include answering preliminary inquiries from customers
regarding systems design, and on-site visits to customers' facilities. At
customers' facilities, the technical personnel gather information necessary to
assist customers in making informed decisions regarding their information
systems. Such data include the nature of the customer's current information
systems, the existing hardware and networking environment, the customer's level
of expertise and its applications needs.
Manchester believes that its name is widely recognized for high
quality, competitively priced products and services. The Company promotes name
recognition and the sale of its products and services through regional business
directories, trade magazine advertisements, radio advertisements, direct
mailings to customers and participation in computer trade shows and special
events. The Company advertises at numerous sporting events in the New York
metropolitan region, including full page four-color advertisements in yearbooks
and/or program guides for sports teams such as the New York Mets, the New York
Knicks and the New York Rangers. The Company also promotes interest in its
products and services through its website on the Internet, and has expanded its
website information to provide an electronic catalog of its products and
services. Several manufacturers offer market development funds, cooperative
advertising and other promotional programs, on which the Company relies for many
of its advertising and promotional campaigns.
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Sales force training is an integral part of the Company's strategy to
increase its 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, the Company has expanded its training
capabilities at one of its 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 the Company's management
information systems. The Company utilizes its technical personnel to conduct
such seminars and may hire additional dedicated trainers as needed.
Management Information Systems
The Company currently uses an IBM AS/400 integrated management
information system, which is an on-line system enabling instantaneous access.
The Company maintains a proprietary inventory management system on its computer
system pursuant to which product purchases and sales are continually tracked and
analyzed. The Company's computer system is also used for accounting, billing and
invoicing.
The Company's information system assists management in maintaining
controls over the Company's inventory and receivables. Manchester's average
inventory turnover was 17, 18 and 16 times for the fiscal years ended July 31,
1997, 1996 and 1995, respectively, and Manchester experienced bad debt expense
of less than .3% of revenues in each of these years.
During the fiscal year ended July 31, 1997, the Company invested in its
management information systems, including upgrading and expanding the IBM AS/400
system, implementing a client/server-based management system to track services
rendered for customers, and upgrading servers and network infrastructures for
its headquarters. The Company utilizes experienced in-house technical personnel,
assisted by the Company's senior engineers, to upgrade and integrate additional
functions into the Company's management information systems.
Competition
The computer industry is characterized by intense competition primarily
in the area of price, product availability and breadth of product line. The
Company directly competes 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. While the Company's
competitors vary depending upon the particular market, some of the national and
regional competitors of the Company include Alphanet Solutions, Inc., CompuCom
Systems, Inc., Dataflex Corporation, Entex Information Services, Inc., Pomeroy
Computer Resources, Inc., and Vanstar Corporation. 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, the Company may face further competition from new
market entrants and possible alliances between existing competitors. Some of the
Company's competitors have, or may have, greater financial, marketing and other
resources, and may offer a broader range of products and services, than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services.
The Company's 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. The Company believes that gross
margins will continue to be reactive to industry-wide changes. Future
profitability will depend on the Company's ability to increase focus on
providing technical service and support to customers, competition, manufacturer
pricing strategies, as well as the Company's 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 the Company will be able to
attract and retain such skilled personnel and representatives. The loss of a
significant number of the Company's existing technical personnel or sales
representatives or difficulty in hiring or retaining additional technical
personnel or sales representatives or reclassification of the Company's sales
representatives as employees could have a material adverse effect on the
Company's business, results of operations and financial condition.
Recent Acquisition
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc. ("Electrograph"). Electrograph is a
specialized distributor of microcomputer peripherals, throughout the United
States. The purchase price and transaction costs aggregated approximately $2.6
million. The major categories of products presently distributed by Electrograph
include printers and monitors. Electrograph does not stock significant amounts
of inventory relative to the number of different products it carries. Most
products are stocked to provide a 30-day supply.
8
Electrograph provides technical assistance to customers through its
Hauppauge, New York office. Electrograph will ship returns of defective products
to the manufacturer or to an authorized repair center. Returns have historically
been approximately 3% of revenue. The Company does not believe that such a
breakdown or the dollar amounts of product returns is material, however, as
substantially all of these costs are reimbursed to Electrograph by its
suppliersthrough credits and replacements, and also through restocking charges
and resale. As a result, Electrograph's costs charged to operations for such
returns have been minimal.
Products are selected by Electrograph to minimize competition among
suppliers' products while maintaining some overlap to provide protection against
product shortages and discontinuations and to provide different price points for
certain items. Management believes Electrograph's relationships with its
suppliers are enhanced by providing feedback to suppliers on products, advising
suppliers of customer preferences, working with suppliers to develop marketing
programs, and offering suppliers the opportunity to provide seminars for
Electrograph's customers.
Like most of its competitors, Electrograph distributes products for
manufacturers throughout the United States on a non-exclusive basis without
geographic restrictions. Electrograph has supplier agreements with many of its
suppliers which it believes are in a form customarily used by each manufacturer.
These agreements usually contain provisions which allow termination without
cause, by the supplier generally upon 30 to 60 days notice.
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, by way
of credits, against price reductions by the supplier between the time of the
initial sale to Electrograph and the subsequent sale by Electrograph to its
customer. Additionally, most of Electrograph's suppliers accept defective
merchandise returned within 12 to 15 months after shipment to Electrograph. Some
suppliers permit Electrograph to rotate its inventory by returning slow moving
inventory for other inventory. Credits, refunds or other payments to which
Electrograph was entitled by reason of price protection, advertising allowances,
stock rotations and refunds for defective merchandise totaled approximately 1%
of revenue for fiscal 1997.
While Electrograph distributes products of more than 15 suppliers,
approximately 48% of Electrograph's revenue in fiscal 1997 was derived from
products manufactured by Mitsubishi, Electrograph's largest supplier.
Electrograph's distribution operations are currently conducted from two
distribution centers in Hauppauge, New York and Long Beach, California.
Electrograph also maintains sales offices in Baltimore, Maryland, Northville,
New York and Long Beach, California.
Credit is extended in most circumstances, and is generally limited to
30-day payment terms.
Employees
At August 31, 1997, the Company had 263 full-time employees consisting
of 23 sales representatives, 26 management personnel, 50 technical personnel and
123 distribution and clerical personnel. In addition, at August 31, 1997, the
Company had 36 independent sales representatives. The Company is not a party to
any collective bargaining agreements and believes its relations with its
employees are good.
Intellectual Property
The Company owns one federally registered service mark with respect to
its name and logo. Most of the Company's various dealer agreements permit the
Company to refer to itself as an "authorized dealer" of the products of those
manufacturers and to use their trademarks and trade names for marketing
purposes. The Company considers the use of these trademarks and trade names in
its marketing to be important to its business.
9
ITEM 2. Properties
Properties
The Company and Electrograph currently have nine 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 - July 2000
Warehouse and 40 and 50 Marcus Blvd.(1) October 2005 - 40
Service Center Hauppauge, NY 20,000 43,000 January 1998 - 50
Warehouse 125 Marcus Blvd. - 5,000 June 1998
Hauppauge, NY
Office 684 Broadway(1)
Massapequa, NY 500 - Month to month
New York City 469 Seventh Avenue(2)
Sales office New York, NY 13,000 January 1999
352 Seventh Avenue Fl 12A 7,000 - July 1999
New York, NY
Boca Raton 902 Clint Moore Road
Sales Office Boca Raton, FL 2,500 - July 1998
Boston 25-27 Christina Street(2) 3,000 - October 2002
Sales office Newton, MA
Tampa 6304 Benjamin Road
Sales office Tampa, FL 1,200 - December 1997
Electrograph 175 Commerce Drive
Corporate HQ Hauppauge, NY 5,000 5,000 June 2002
Baltimore 57 W. Timonium Rd. 650 - Month to month
Sales Office Timonium, MD
(1) Leased from entities controlled by or affiliated with certain of the
Company's executive officers, directors and principal shareholders. Effective
with the consummation of the Company's initial public offering in November 1996,
the leases with related parties were amended to provide terms comparable to
those that could be obtained from independent third parties.
(2) Lease signed during fiscal 1997, occupancy expected in the first quarter of
fiscal 1998.
10
ITEM 3. Legal Proceedings
On March 28, 1997 a complaint was filed by plaintiff Vincent Manngard in the
United States District Court for the Eastern District of New York against the
Company, its President and Chief Executive Officer, its Executive Vice President
and Secretary, and its Chief Financial Officer. The plaintiff claims to have
purchased shares in the Company's Offering and purports to sue on his own behalf
and on behalf of a class of persons who purchased the Company's common stock
either pursuant to the Offering or in the period from November 26, 1996 through
February 13, 1997. The Complaint asserts that the Company and the individual
defendants made false or misleading statements and omissions in connection with
the Offering in violation of Section 11, 12(a)(2) and 15 of the federal
Securities Act of 1933, and seeks damages on behalf of the putative class in an
unspecified amount and/or rescission, together with costs and expenses of
litigation. The Company believes that the allegations in the complaint are
entirely without merit and intends vigorously to defend this matter.
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended July 31, 1997.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock commenced trading on November 26, 1996 at $10.00 and
is traded on the Nasdaq National Market 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 1997 High Low
---- ---
Second Quarter (starting November 26, 1996) 10-1/2 6-1/4
Third Quarter 7 3-1/4
Fourth Quarter 4-1/2 3-3/8
On October 21, 1997 the closing sale price for the Company's Common Stock was
$4.6875 per share. As of October 21, 1997 there were 28 shareholders of record
of the Company's Common Stock.
Manchester has never declared or paid any dividends to shareholders. At this
time the Company intends to continue its policy of retaining earnings for the
continued development and expansion of its business.
Report on Sale of Securities and Uses of Proceeds Therefrom
Subsequent to the Company's initial public offering, effective November
25, 1996 (Registration No. 333-13345), and pursuant to the requirements of the
Securities Act of 1993, as amended and then in effect, the Company filed an
initial report on Form SR with the Securities and Exchange Commission on March
6, 1997.
The following table sets forth the amount of direct or indirect
payments to others from such effective date through July 31, 1997 which have
changed since the most recently filed report on Form SR.
USE OF PROCEEDS DIRECT OR INDIRECT PAYMENTS TO OTHERS
Construction of plant, building
and facilities $ 250,000
Purchase and installation
of machinery and equipment $ 500,000
Acquisition of other business(es) $2,600,000
Working capital $9,361,493
11
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share amounts)
The selected consolidated financial data presented below are derived
from the audited consolidated financial statements of the Company. The
Consolidated Financial Statements as of July 31, 1997 and 1996 and for each of
the years in the three-year period ended July 31, 1997 and the report thereon of
KPMG Peat Marwick LLP, independent auditors, are included elsewhere in this
Report. 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,
--------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Income Statement Data:
Revenue $187,801 $ 189,659 $ 170,818 $ 137,361 $ 118,898
Cost of revenue 161,186 163,128 146,323 117,377 101,046
------- --------- --------- --------- ---------
Gross profit 26,615 26,531 24,495 19,984 17,852
Selling, general and
administrative expenses 21,023 22,598 21,280 17,380 16,065
------ --------- --------- --------- ---------
Income from operations 5,592 3,933 3,215 2,604 1,787
Interest and other income
(expenses), net 395 (365) (392) (172) 34
Provision for income taxes 2,450 1,430(1) 1,160 1,042 689
Cumulative effect of change in
accounting for income taxes - - - 386 _____-
------- -------- -------- --------- -
Net income $3,537 $ 2,138(1) $ 1,663 $ 1,776 $ 1,132
===== ========= ========= ========= =========
Net income per share $0.45 $ .34(1) $ .27 $ .28 $ .18
==== ========= ========= ======== =========
Weighted average shares of
common stock outstanding 7,779,484 6,246,970 6,262,626 6,262,626 6,262,626
========= ========= ========= ========= =========
July 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $30,578 $ 9,841 $ 9,189 $ 7,701 $ 6,274
Total assets 58,208 37,761 31,635 25,879 22,002
Short-term debt, including
current maturities of
capital lease obligation 1,637 6,952 5,600 5,400 2,200
Capital lease obligation,
excluding current maturities 77 175 - - -
Redeemable common stock(2) - 4,739 5,210 5,210 5,210
Shareholders' equity 36,877 8,175 6,037 4,374 2,598
- ---------------------
(1) Pro forma provision for income taxes, pro forma net income and pro
forma net income per share for the fiscal year ended July 31, 1996
would have been $2,835, $4,246 and $.68 per share, respectively, after
giving effect to the assumed reduction of (i) $3,209 in officers'
compensation payable to the Company's Chief Executive Officer,
Executive Vice President and Chief Financial Officer to an aggregate of
$1,125, exclusive of fringe benefits, to reflect (A) the annual
compensation that the Company's Chief Executive Officer and Executive
Vice President have agreed to receive without any diminished duties or
responsibilities, and (B) the reduction from the amount of annual
compensation paid to the former Chief Financial Officer to the annual
compensation currently payable to the present Chief Financial Officer,
net of applicable income taxes, and (ii) $304 in rent paid to related
parties to amounts stipulated in current leases, net of applicable
income taxes. See "Management" and "Certain Transactions."
(2) Represents the aggregate amounts payable by the Company to redeem
shares of common stock under the shareholder put right and
shareholders' agreements between the Company and certain shareholders.
See Note 12 of notes to the consolidated financial statements.
12
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 the
Consolidated Financial Statements of the Company and Notes thereto appearing
elsewhere in this Report. The following discussion contains certain
forward-looking statements within the meaning of Securities Act of 1933 as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
which are not historical facts and involve risks and uncertainties that could
cause actual results to differ materially from the results anticipated in those
forward-looking statements. These risks and uncertainties include, but are not
limited to those set forth below and the risk factors described in the Company's
prospectus dated November 25, 1996.
General
Manchester is a systems integrator and reseller of computer hardware,
software and networking products, primarily for commercial customers. The
Company offers its customers single-source solutions customized to their
information systems needs by combining value-added services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of the Company's revenues have been derived from product sales. The Company
generally does not develop or sell software products. However, certain computer
hardware products sold by the Company are loaded with pre-packaged software
products.
As a result of intense price competition within the computer industry
as well as other industry conditions, the Company has experienced increasing
pressure on per unit prices as well as on its gross profit and operating margins
with respect to the sale of products. Manchester's strategy includes increasing
its focus on providing value-added services with operating margins that are
higher than those obtained with respect to the sale of products. The Company's
future performance will depend in part on its ability to manage successfully a
continuing shift in its operations towards value-added services.
The Company directly competes with local, regional and national systems
integrators, value-added resellers ("VARs") and distributors as well as with
certain computer manufacturers that market through direct sales forces. In the
future, the Company may face further competition from new market entrants and
possible alliances between existing competitors. In addition, certain suppliers
and manufacturers may choose to market products directly to end users through a
direct sales force rather than or in addition to channel distribution. Some of
the Company's competitors have, or may have, greater financial marketing and
other resources, and may offer a broader range of products and services, than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services. There
can be no assurance that the Company will be able to compete successfully in the
future with these or other current or potential future competitors.
The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. There can be no assurance that the
pricing and related terms offered by major manufacturers will not adversely
change in the future. The failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of the Company's relationship
with a major manufacturer or the Company's inability in the future to develop
new relationships with other manufacturers could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's largest customer accounted for approximately 15%, 16% and
22% of the Company's revenues for the fiscal years ended July 31, 1997, 1996 and
1995, respectively, substantially all of which revenues were derived from the
sale of hardware products. There can be no assurance that the Company will
continue to derive substantial revenues from this customer.
The Company's profitability has been enhanced by its ability to obtain
volume discounts from certain manufacturers, which has been dependent, in part,
upon Manchester's ability to sell large quantities of products to computer
resellers, including VARs. There can be no assurance that the Company will be
able to continue to sell products to resellers and thereby obtain the desired
discounts from manufacturers or that the Company will be able to increase sales
to end-users to offset the need to rely upon sales to resellers.
The markets for the Company's products and services are characterized
by rapidly changing technology and frequent introductions of new hardware and
software products and services, which render many existing products
noncompetitive, less profitable or obsolete. The Company believes that its
inventory controls have contributed to its ability to respond effectively to
these technological changes. As of July 31, 1997, 1996 and 1995, inventories
represented 17%, 24% and 30% of total assets, respectively. During these same
fiscal years, the Company's average inventory turnover was 17, 18 and 16 times,
respectively. The failure of the Company to anticipate technology trends or to
continue to effectively manage its inventory could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company believes its controls on accounts receivable have
contributed to its profitability. The Company's bad debt expense represented
.2%, .1% and .1% of total revenues for the fiscal years ended July 31, 1997,
1996 and 1995, respectively.
13
The Company's quarterly revenue and operating results have varied
significantly in the past and are expected to continue to do so in the future.
Quarterly revenues and operating results generally fluctuate as a result of the
demand for the Company's products and services, the introduction of new hardware
and software technologies with improved features, the introduction of new
services by the Company and its competitors, changes in the level of the
Company's operating expenses, competitive conditions and economic conditions. In
particular, the Company currently is increasing certain of its fixed operating
expenses, including a significant increase in personnel, as part of its strategy
to increase its focus on providing higher margin, value-added services.
Accordingly, the Company believes that period-to-period comparisons of its
operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not indicative
of results to be expected for a full fiscal year.
As a result of the rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, the
Company's product offerings change constantly. Prices of products change with
generally higher prices early in the life cycle of the product and lower prices
near the end of the product's life cycle. The Company believes that the impact
of price or volume changes of any particular product or products is not material
to the Company's Consolidated Financial Statements.
The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he will receive $550,000 in compensation,
exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997
and 1998. In addition, the Company's Executive Vice President has agreed to
receive base compensation, exclusive of fringe benefits, of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled to any bonuses for fiscal 1997 and that any bonus payable
to either of these officers in fiscal 1998 will require the approval of a
majority of the independent directors of the Company. The Company leases certain
warehouses and offices from entities that are owned or controlled by the
Company's majority shareholder. Each of the leases with related parties has been
amended effective with the closing of the Company's initial public offering to
reduce the rent payable under that lease to then current market rates.
Recent Acquisition
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise
Designs, Inc. Electrograph is a specialized distributor of microcomputer
peripherals, primarily in the eastern United States. The purchase price and
transaction costs aggregated approximately $2.6 million. Included in the assumed
liabilities of Electrograph was debt with balances of $1,274,000 in notes
payable - bank and $264,000 in notes payable - other as of July 31, 1997.
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the consolidated statements of income
from the date of acquisition. The acquisition resulted in goodwill of
approximately $1,500,000 which is being amortized on the straight-line basis
over 20 years.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of income expressed as a
percentage of revenues.
Percentage of
Revenue for
the Year Ended July 31,
1997 1996 1995
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Cost of revenue 85.8 86.0 85.7
---- ---- -----
Gross profit 14.2 14.0 14.3
Selling, general and administrative expenses 11.2 11.9 12.4
---- ---- -----
Income from operations 3.0 2.1 1.9
Interest and other income (expenses), net .2 ( 0.2) ( 0.2)
---- ----- -----
Income before income taxes 3.2 1.9 1.7
Provision for income taxes 1.3 0.8 0.7
--- --- ---
Net income 1.9% 1.1% 1.0%
=== ==== ====
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Revenue. The Company's revenue decreased $1.9 million or 1.0% from
$189.7 million in fiscal 1996 to $187.8 in fiscal 1997. This decrease is due
primarily to lower shipments to the Company's major customer as well as
generally lower prices for personal computers, partially offset by increases in
units shipped and $5.1 million of revenue from the Company's Electrograph
subsidiary which was acquired on April 25, 1997.
Gross Profit. Cost of revenues includes direct costs of products sold,
freight and the personnel costs associated with providing technical services,
14
offset in part by certain market development funds provided by manufacturers.
All other operating costs are included in selling, general and administrative
expenses. Gross profit increased by $84,000 or 0.3% from $26.5 million in fiscal
1996 to $26.6 million in fiscal 1997. Gross profit as a percentage of revenues
increased from 14.0% in fiscal 1996 to 14.2% in fiscal 1997. The improvement in
gross profit as a percentage of revenue reflects a more favorable product mix.
Competitive pressures, changes in the types of products or services sold and
product availability result in fluctuations in gross profit from period to
period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.6 million or 7.0% from $22.6 million in
fiscal 1996 to $21.0 million in the most recent fiscal year. This decrease is
primarily due to lower officer salaries and rents paid to related parties due to
agreements that were entered into in connection with the Company's initial
public offering, partially offset by higher salaries, legal expenses, bad debts
and depreciation costs as well as additional operating expenses incurred as a
result of the acquisition of Electrograph Systems, Inc. on April 25, 1997.
Giving pro forma effect to the changes in officers' compensation and rents to
related parties, described below and under General, the pro forma selling,
general and administrative expenses would have been approximately $19.1 million
or 10.1% of revenues for the year ended July 31, 1996.
Interest Income. Interest income increased significantly in 1997 due to
earnings on short term investments made with certain of the proceeds from the
Company's initial public offering.
Provision For Income Taxes. The effective tax rate increased
slightly from 40.1% in fiscal 1996 to 40.9% in fiscal 1997.
Year Ended July 31, 1996 Compared to Year Ended July 31, 1995
Revenue. The Company's revenue increased $18.8 million or 11.0% from
$170.8 million in fiscal 1995 to $189.7 million in fiscal 1996 due to increased
revenues from both new and existing customers. Many factors contributed to this
increase, including new product introductions, special product purchases and
volume and price changes with no one factor having a material effect on this
increase.
Gross Profit. Gross profit increased $2.0 million or 8.3% from $24.5
million in fiscal 1995 to $26.5 million in fiscal 1996 primarily as a result of
the increase in revenue. Gross profit as a percentage of revenue decreased from
14.3% to 14.0%. The decrease in the gross profit percentage was due to changes
in product mix as well as increased pricing pressures prevalent within the
industry. Competitive pressures, changes in the types of products or services
sold and product availability result in fluctuations in gross profit from period
to period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million or 6.2% from $21.3 million in
fiscal 1995 to $22.6 million in fiscal 1996. Approximately $261,000 of this
increase related to higher payroll and related costs due primarily to a $917,000
increase associated with the hiring of additional technical and administrative
staff in support of the Company's strategy to increase its value-added services
revenue partially offset by a $656,000 reduction in officers' compensation from
approximately $5.0 million in fiscal 1995 to approximately $4.3 million in
fiscal 1996. Rent and occupancy costs increased by approximately $408,000 due
primarily to higher rent principally paid to related parties as well as the
leasing of an additional facility to meet the Company's current and future
needs. In addition, commissions paid to the Company's sales force increased
approximately $328,000 due to the increase in revenues in fiscal 1996.
The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he will receive $550,000 in compensation,
exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997
and 1998. In addition, the Company's Executive Vice President has agreed to
receive base compensation, exclusive of fringe benefits, of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled to any bonuses for fiscal 1997 and that any bonus payable
to either of these officers in fiscal 1998 will require the approval of a
majority of the independent directors of the Company. The compensation to be
paid to the Company's President and Executive Vice President in fiscal 1999 and
thereafter will be based upon agreements to be negotiated at the expiration of
their current respective employment agreements, which compensation the Company
believes will reflect the then fair value of the services to be rendered to the
Company by such individuals. If the revised compensation terms had been in
effect for the entire fiscal 1996 period, and had the Company's former Chief
Financial Officer been compensated at the annual compensation payable to the
current Chief Financial Officer, officers' compensation would have been reduced
by approximately $3.2 million. See "Management." Each of the leases with related
parties has been amended effective with the closing of this offering, to reduce
the rent payable under that lease to current market rates. If the revised leases
had been in effect for the entire fiscal 1996 period, rent expense would have
been reduced by $304,000 from the reported amount. Giving pro forma effect to
the foregoing reductions in officers' compensation and rents to related parties,
the pro forma selling, general and administrative expenses would have been
approximately $19.1 million or 10.1% of revenues in fiscal 1996.
Interest Expense, Net. Interest expense, net increased from
$346,000 in fiscal 1995 to $374,000 in fiscal 1996 primarily due to increased
borrowings.
15
Provision for Income Taxes. The effective income tax rate decreased
slightly from approximately 41% in fiscal 1995 to approximately 40% in fiscal
1996.
Liquidity and Capital Resources
The Company's primary sources of financing have been internally generated
working capital from profitable operations and a line of credit from a financial
institution.
For the year ended July 31, 1997, cash provided by operating activities
was $4.6 million consisting primarily of net income and a decrease in inventory,
offset by increases in accounts receivable net of an increase in accounts
payable and accrued expenses. The Company's accounts receivable and accounts
payable and accrued expenses balances as well as its investment in inventory can
fluctuate significantly from one period to the next due to the receipt of large
customer orders or payments or variations in product availability and vendor
shipping patterns at any particular date. Generally, the Company's experience is
that increases in accounts receivable, inventory and accounts payable and
accrued expenses will coincide with growth in revenue and increased operating
levels. In addition, during the year ended July 31, 1997 the Company used
approximately $2.4 million for capital expenditures, $1.9 million (net of cash
acquired) for the purchase of Electrograph Systems, Inc. and $4.4 million for
the purchase of marketable securities and generated $13.4 million in cash from
financing activities primarily from the net proceeds of the Company's initial
public offering (IPO) ($20.4 million) partially offset by the net repayments of
$7.0 million of debt.
The Company and a subsidiary have available lines of credit with a
financial institution in the aggregate amount of $10.0 million. All amounts
outstanding under this line at the completion of the IPO were repaid by the
Company with the proceeds from the IPO described below. At July 31, 1997, a
subsidiary of the Company had $1.3 million outstanding under its line of credit.
This outstanding balance was repaid in full in August 1997.
On December 2, 1996, the Company completed the IPO of 2,325,000 shares of
its common stock resulting in net proceeds to the Company, after deducting
underwriting discount and expenses, of approximately $20.4 million. The Company
utilized $7.7 million of the proceeds from the IPO to repay the balance
outstanding at that date under its line of credit with a financial institution.
In addition, the Company utilized $2.4 million for capital improvements and $1.9
million (net of cash acquired) for the purchase of Electrograph Systems, Inc.
The remaining net proceeds have been invested in short-term, interest bearing,
investment grade securities.
The Company believes that its current balances in cash and cash
equivalents and marketable securities, expected cash flows from operations and
available borrowings under the lines of credit will be adequate to support
current operating levels for the foreseeable future, specifically through at
least the end of fiscal 1998. The Company has entered into commitments for the
renovation and expansion of certain of its sales and service facilities which is
currently underway and expected to be completed in the next fiscal year. The
aggregate commitment for these projects is approximately $1.0 million which will
be paid out of the Company's available cash balances. The Company currently has
no other material commitments for capital expenditures. Future capital
requirements of the Company include those for the growth of working capital
items such as accounts receivable and inventory and the purchase of equipment
and expansion of facilities as well as the possible opening of new offices and
potential acquisitions.
Inflation
The Company does not believe that inflation has had a material effect on
the Company's operations.
New Accounting Standard
Net income per share is based on the weighted average number of shares of
Common Stock and dilutive common stock equivalents (stock options and warrants)
outstanding during the period.
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", is required to be adopted for interim and annual periods ending after
December 15, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and restate all prior
periods. Basic and diluted earnings per share will replace primary and fully
diluted earnings per share. The dilutive effect of stock options and other
common stock equivalents will be excluded from the calculation of basic earnings
per share, but will be reflected in diluted earnings per share. The
implementation of SFAS No. 128 would not have had an impact on fiscal 1997 net
income per share.
ITEM 8. Financial Statements and Supplementary Data
See Item 14.
ITEM 9. Changes and Disagreements with Accountants and Accounting and Financial
Disclosure
None.
16
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 55 Chairman of the Board, President,
Executive Chief Officer and Director
Joel G. Stemple, Ph.D 55 Executive Vice President, Secretary
and Director
Joseph Looney 40 Chief Financial Officer
William F. Scheibel, Jr. 42 Chief Technology Officer
Joel Rothlein, Esq. 68 Director
George Bagetakos 51 Director
Julian Sandler 53 Director
Barry R. Steinberg, the founder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer and as a director since
Manchester's formation in 1973. Mr. Steinberg previously served as a systems
analyst for Sleepwater, Inc. and Henry Glass and Co.
Joel G. Stemple, Ph.D. has served as Executive Vice President since
September 1996 and as Vice President and as a director since August 1982. Dr.
Stemple previously performed consulting services for the Company and, from 1966
to 1982, served as Assistant and Associate Professor of Mathematics at Queens
College, City University of New York.
Joseph Looney has served as the Company's Chief Financial Officer since May
1996. Prior to joining the Company, from 1984 to 1996, Mr. Looney served in
various positions with KPMG Peat Marwick LLP, including Senior Audit Manager at
the end of his tenure at such firm. Mr. Looney is a Certified Public Accountant,
a member of the AICPA, the New York State Society of Certified Public
Accountants and the Institute of Internal Auditors.
William F. Scheibel, Jr. has served as the Company's Chief Technology
Officer since September 1996 and served as Manager of Technical Services and
Support from September 1995 through August 1996. Before joining the Company,
from 1990 to 1995, Mr. Scheibel served in various positions with Bay Networks,
Inc., a manufacturer of computer networking equipment, including Director of
Field Support for North and South America at the end of his tenure at such firm.
Joel Rothlein, Esq. has been a director of the Company since October 1996.
Mr. Rothlein is a partner in the law firm of Kressel Rothlein & Roth, Esqs.,
Massapequa, New York, where he has practiced law since 1955. Kressel Rothlein &
Roth, Esqs. and its predecessor firms have acted as outside general counsel to
the Company since the Company's inception.
George Bagetakos became a director on December 2, 1996. Mr. Bagetakos
has been the Director of Sales, Major Accounts for Northern Telecom, Inc., a
supplier of telecommunications equipment products, since July 1995, and served
as Manager, National Accounts for Northern Telecom, Inc. from 1984 to June 1995.
Prior to joining Northern Telecom, Mr. Bagetakos was Corporate Vice President,
Telecommunications for American Express Company from 1979 to 1983.
17
Julian Sandler became a director on December 2, 1996. Mr. Sandler is
Chief Executive Officer of Rent-a-PC, Inc., a full-service provider of
short-term computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is
also the founder and was the President from 1974 to 1993 of Brookvale
Associates, a national organization specializing in the remarketing of hardware
manufactured by Digital Equipment Corporation. Mr. Sandler also co-founded and
from 1970 to 1973 was Vice President of Periphonics Corporation, a developer and
manufacturer of voice response systems.
Section 16(a) Beneficial Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of the Common Stock
(collectively, "Reporting Persons") file reports of their trading in the
Company's equity securities with the Securities and Exchange Commission. Based
on a review of Section 16 forms filed by the Reporting Persons during the last
fiscal year, (a) the Reporting Persons filed Form 3 two days late; b) Barry R.
Steinberg, a Reporting Person, filed his Form 4 reporting the acquisition of
additional shares of the Common Stock approximately two and one-half months
late; and (c) Julian Sandler, a Director of the Company, filed his Form 4
reporting the acquisition of shares of the Common Stock approximately ten months
late. Except as noted, the Company believes that the Reporting Persons timely
complied with all applicable Section 16 filing requirements.
ITEM 11. Summary Compensation.
The following table sets forth a summary of the compensation paid or
accrued by the Company during the fiscal years ended July 31, 1997 and 1996 to
the Company's Chief Executive Officer and the other executive officers whose
compensation exceeded $100,000:
Summary Compensation Table
Annual Compensation
-------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation(5)
- --------------------------- ---- ------ ----- ---------------
Barry R. Steinberg, Chief Executive Officer 1997 $550,000 - $59,252(1)
1996 $271,800 $1,816,439 $59,210(1)
Joel G. Stemple, Executive Vice President 1997 50,000 - $33,050(2)
1996 $251,800 $1,669,193 $29,000(2)
Joseph Looney, Chief Financial Officer(3) 1997 $125,489 $ 47,500 $ 7,610
1996 $ 31,250 $ 10,000 $1,275
William F. Scheibel, Jr., Chief Technology
Officer(4) 1997 $128,956 $ 22,500 $ 8,266
1996 $ 96,157 $ 17,500 $ 4,250
- ---------------------
(1) Includes $50,000 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.
(2) Includes $25,000 of premiums paid by the Company for a whole life
insurance policy in the name of the executive officer 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.
(3) Began employment with the Company on May 2, 1996.
(4) Began employment with the Company on September 7, 1995.
(5) Includes in fiscal 1997 employer matching contributions to the Company's
defined contribution plan of $6,252, $6,675, $2,510, and $3,166 for
Messrs. Steinberg, Stemple, Looney and Scheibel, respectively.
18
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, 1997.
Barry R. Steinberg has agreed with the Company that his annual base
salary for services rendered to the Company in his current positions as
President and Chief Executive Officer shall be $550,000 in each of the fiscal
years ending July 31, 1997 and 1998. Mr. Steinberg has agreed that he will not
be eligible to receive any bonus in fiscal 1997 and that any bonus payable for
fiscal 1998 will require the approval of a majority of the independent directors
of the Company. The Company will continue to make available to him the car
allowance and deferred compensation benefits that he is currently receiving. Mr.
Steinberg will also be able to participate in other benefits that the Company
makes generally available to its employees, such as medical and other insurance,
and Mr. Steinberg will be able to participate under the Company's stock option
plan. In the event Mr. Steinberg's employment with the Company were terminated,
he would not be precluded from competing with the Company.
The Company has an employment agreement with Joel G. Stemple, Ph.D.,
under which Dr. Stemple receives a base salary of $450,000 in each of the fiscal
years ending July 31, 1997 and 1998. Under the employment agreement, Dr. Stemple
is not eligible to receive any bonus in fiscal 1997 and any bonus payable to Dr.
Stemple for fiscal 1998 must be approved by a majority of the independent
directors of the Company. Under the employment agreement, the Company provides
Dr. Stemple with an automobile and certain deferred compensation benefits and
provides Dr. Stemple with medical and other benefits generally offered by the
Company to its employees. Dr. Stemple also is able to participate in the
Company's stock option plan. The employment agreement is terminable by either
party on 90 days' prior notice. In the event the Company so terminates Dr.
Stemple's employment, or the Company elects not to renew his employment
agreement, he is entitled to severance equal to 12 months of his then current
base salary. This severance will be payable in accordance with the Company's
customary payroll practices. Under the employment agreement, if Dr. Stemple
terminates his employment, or the Company terminates his employment for cause,
Dr. Stemple is prohibited, for a two-year period from such termination, from
competing with the Company in the eastern half of the United States.
Option Grants in the Last Fiscal Year
The following table sets forth the information with respect to grants of
stock options to purchase the Company's common stock, par value $0.01 per share
(the "Common Stock"), pursuant to the Company's Amended and Restated 1996
Incentive and Non-Incentive Stock Option Plan (the "Plan") granted to the Named
Executive Officers during the fiscal year ended July 31, 1997 and all options
outstanding to the named Executive Officers as of July 31, 1997.
Individual Grants
-----------------
Number of Percent of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Annual Rates of Stock
Options Employees in Exercise Expiration Price Appreciation
Granted Fiscal year Price Date For Option Term
------- ----------- ----- ---- ---------------
Name (#) ($/sh) 5% 10%
---- ---- ------- ---- -----
Joseph Looney 50,000(1) 6.3% $10.00 2/03/2007 $29,000 $343,000
20,000(2) 2.5% $ 5.00 3/26/2007 - $20,000
William F. Scheibel, Jr. 50,000(1) 6.3% $10.00 2/03/2007 $29,000 $343,000
20,000(2) 2.5% $ 5.00 3/26/2007 - $20,000
No options outstanding were exercised or exercisable during the fiscal
year ended July 31, 1997 or as of July 31, 1997. There were no in-the-money
exercisable or unexercisable options at July 31, 1997.
- --------------
(1) Exercisable cumulatively at the rate of 20% per annum commencing February 3,
1999.
(2) Exercisable cumulatively at the rate of 25% per annum commencing May 5,
1999.
19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 21,
1997 (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, the number of
shares of common stock beneficially owned by each director of the Company and
each 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 Percent
Beneficially of Shares
Name and Address Owned Outstanding
---------------- ----- -----------
Barry R. Steinberg(1)(3) 4,630,101 54.3%
Joel G. Stemple(1) 626,263 7.3
Joseph Looney(1) 4,700 *
William F. Scheibel, Jr.(1) -
Joel Rothlein(2) 16,500 *
George Bagetakos(1)(4) 2,500 *
Julian Sandler(1)(5) 3,500 *
All executive officers and
directors as a group
(6 persons) 5,283,564
(1) Address is 160 Oser Avenue, Hauppauge, New York 11788.
(2) Address is 684 Broadway, Massapequa, New York 11758; consists of 3,300
shares held by Kressel, Rothlein & Roth, Esqs., in which Mr. Rothlein is
a partner, and 13,200 shares held by the Kressel, Rothlein & Roth Profit
Sharing Plan. Mr. Rothlein disclaims beneficial ownership of the Common
Stock owned by Kressel Rothlein & Roth, Esq., except to the extent of his
equitable interest in the firm, and of the Common Stock owned by the
Kressel Rothlein & Roth Profit Sharing Plan, except to the extent of his
beneficial interest in such plan.
(3) Excludes 29,000 shares owned by Ilene Steinberg and 29,000 shares owned by
Sheryl Steinberg, daughters of Mr. Steinberg, which shares were purchased
with the proceeds of a loan from Mr. Steinberg. As reported on Schedule
13D filed on March 24, 1997, as amended, Mr. Steinberg, Ilene Steinberg,
and Sheryl Steinberg each disclaim beneficial ownership of the common
stock owned by the others.
(4) Consists of option exercisable on December 18, 1997.
(5) Includes option to purchase 2,500 shares exercisable on December 18, 1997.
* Represents less than one tenth of one percent of outstanding shares.
ITEM 13. Certain Relationships and Related Transactions
Until August 1994, the Company was affiliated with Electrograph
Systems, Inc. ("Electrograph"). Barry R. Steinberg, the Company's President and
Chief Executive Officer and its majority shareholder, served as Electrograph's
Chairman of the Board and Chief Financial Officer and had beneficial ownership
(directly and through shares held by his spouse and certain trusts, of which his
children are beneficiaries) of 35.5% of the outstanding shares of common stock
of Electrograph. During the fiscal years ended July 31, 1993 and 1994, the
Company paid approximately $322,000 and $385,000, respectively, to Electrograph
for the purchase of products. In August 1994, Bitwise Designs, Inc. ("Bitwise"),
a publicly-traded company engaged in the manufacture and distribution of
document imaging systems, personal and industrial computers and related
peripherals, acquired Electrograph through a stock-for-stock merger; Mr.
Steinberg acquired beneficial ownership of less than 1% of the outstanding
capital stock of Bitwise for the common stock of Electrograph in which he had a
direct or indirect beneficial interest. Mr. Steinberg served as a director of,
and provided consulting services to, Bitwise from August 1994 through September
17, 1996. On April 25, 1997, the Company purchased substantially all of the
assets of Electrograph Systems, Inc. See Item 1 - Business "Recent Acquisition".
20
Three of the Company's four Hauppauge, New York facilities are leased
from entities affiliated with certain of the Company's executive officers,
directors or principal shareholders. The property located at 40 Marcus
Boulevard, Hauppauge, New York is leased from a limited liability company owned
70% by Mr. Steinberg and his relatives, 20% by Joel G. Stemple, Ph.D., the
Company's Executive Vice President and a principal shareholder, and 10% by
Michael Bivona, a principal shareholder of the Company. For the fiscal years
ended July 31, 1997 and 1996, the Company made lease payments of $174,000 and
$216,000, respectfully, to such entity. The Company's 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, 1997, 1996 and 1995, the Company made lease payments
of $259,000, $360,000 and $255,000, 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,
1997, 1996 and 1995, the Company made lease payments of $329,000, $435,000 and
$417,000, respectively, to such entity. The Company leases an additional office
in Massapequa, New York at $300 per month ($881 per month through May 1997) on a
month-to-month basis from an entity of which Messrs. Rothlein and Bivona own 25%
and 50%, respectively. See "Business--Properties."
Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein & Roth, Esqs., which, with its predecessor firms, has acted as outside
general counsel to the Company since the Company's inception. Kressel Rothlein &
Roth, Esqs. was paid approximately $89,000 (exclusive of disbursements) from the
Company for legal fees in the fiscal year ended July 31, 1996 and received fees
of approximately $655,000 from the Company in the fiscal year ended July 31,
1997, which sum includes fees paid to special counsel ($286,000).
During the year ended July 31, 1997, the Company recorded revenue of
$130,000 in connection with the sale of computer equipment to a company
controlled by Julian Sandler.
21
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements included herein are filed as a part
of this Report.
Manchester Equipment Co., Inc.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 23
Consolidated Financial Statements:
Balance Sheets as of July 31, 1997 and 1996 24
Statements of Income for the years ended July 31, 1997,
1996 and 1995 25
Statements of Shareholders' Equity for the years
ended July 31, 1997, 1996 and 1995 26
Statements of Cash Flows for the years ended
July 31, 1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28
22
Independent Auditors' Report
The Board of Directors and Shareholders
Manchester Equipment Co., Inc.:
We have audited the accompanying consolidated balance sheets of Manchester
Equipment Co., Inc. and subsidiaries as of July 31, 1997 and 1996 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, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manchester Equipment
Co., Inc. and subsidiaries at July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Jericho, New York
September 24, 1997
23
Manchester Equipment Company, Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
(in thousands, except
share amounts)
Current assets:
Cash and cash equivalents $15,049 $ 5,774
Investments 4,408 -
Accounts receivable, net of allowance
for doubtful accounts
of $1,051 and $800, respectively 21,473 19,068
Inventory 10,127 8,957
Deferred income taxes 440 334
Prepaid expenses and other current assets 248 197
--- ---
Total current assets 51,745 34,330
Property and equipment, net 4,073 2,244
Goodwill, net 1,524 -
Deferred income taxes 379 395
Other assets 487 792
--- -------
$58,208 $37,761
======= ======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 99 $ 99
Notes payable-bank 1,274 6,500
Notes payable-shareholder - 353
Notes payable - other 264 -
Accounts payable and accrued expenses 19,283 17,113
Deferred service contract revenue 247 129
Income taxes payable - 295
----- ---
Total current liabilities 21,167 24,489
Long-term debt, less current maturities 77 175
Deferred compensation payable 87 183
Commitments and contingencies (note 8)
Redeemable common stock - 4,739
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,525,000 and 6,200,000 shares issued
and outstanding 85 62
Additional paid-in capital 20,403 -
Retained earnings 16,389 8,113
------ -----
Total shareholders' equity 36,877 8,175
------ -----
$58,208 $37,761
====== ======
See accompanying notes to consolidated financial statements.
24
Manchester Equipment Company, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 1997, 1996 and 1995
1997 1996 1995
(in thousands except share and per share amounts)
Revenue $187,801 $189,659 $170,818
Cost of revenue 161,186 163,128 146,323
------- ------- -------
Gross profit 26,615 26,531 24,495
Selling, general and administrative expenses 21,023 22,598 21,280
------ ------ ------
Income from operations 5,592 3,933 3,215
Other income (expense):
Interest expense (225) (399) (360)
Interest income 560 25 14
Other 60 9 (46)
----- ------- ---
Income before provision for income taxes 5,987 3,568 2,823
Provision for income taxes 2,450 1,430 1,160
----- ----- -----
Net income $3,537 $2,138 $1,663
====== ===== =====
Net income per share $0.45 $0.34 $0.27
===== ===== =====
Weighted average shares of common
stock outstanding 7,779,484 6,246,970 6,262,626
========= ========= =========
See accompanying notes to consolidated financial statements.
25
Manchester Equipment Company, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended July 31, 1997, 1996 and 1995
Additional
Common Par Paid-in Retained
Shares Value Capital earnings Total
(in thousands except share amounts)
Balance July 31, 1994 6,262,626 $63 $ - $4,311 $4,374
Net income - - - 1,663 1,663
-------- --- - ----- -----
Balance July 31, 1995 6,262,626 63 - 5,974 6,037
Net income - - - 2,138 2,138
Purchase and retirement of
stock (62,626) (1) - 1 -
------- ------- --- ------ ----
Balance July 31, 1996 6,200,000 62 - 8,113 8,175
Issuance of common stock 2,325,000 23 20,391 - 20,414
Stock option commission expense - - 12 - 12
Transfer of redeemable common stock - - - 4,739 4,739
Net income - - - 3,537 3,537
--------- --- ------ ----- -----
- - -
Balance July 31, 1997 8,525,000 $85 $20,403 $16,389 $36,877
========= == ====== ====== ======
See accompanying notes to consolidated financial statements.
Manchester Equipment Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $3,537 $2,138 $1,663
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 720 473 395
Allowance for doubtful accounts 210 132 161
Stock options commission expense 12 - -
Deferred income taxes (90) (86) (71)
(Gain) Loss on disposition of assets (37) (9) 71
Change in assets and liabilities; net of the
effects of the purchase of Electrograph:
Increase in accounts receivable (545) (1,700) (1,954)
(Increase) decrease in inventory 515 548 (2,382)
(Increase) decrease in prepaid expenses and
other current assets (44) 41 (24)
(Increase) decrease in other assets 342 (307) (113)
Increase in accounts payable and
accrued expenses 221 2,715 4,371
(Decrease) increase in deferred service
contract revenue 118 27 (79)
Increase (decrease) in income taxes payable (295) 205 (468)
Decrease in deferred compensation payable (96) (15) -
--- ---- ------
Net cash provided by operating activities 4,568 4,162 1,570
----- ----- -----
Cash flows from investing activities:
Capital expenditures (2,439) (1,028) (545)
Proceeds from the sale of assets - 55 105
Purchase of marketable securities (4,408) - -
Payment for purchase of Electrograph, net of
cash acquired (1,886) - -
------- --- ---
Net cash used in investing activities (8,733) (973) (440)
------ ---- ----
Cash flows from financing activities:
Net repayments of borrowings (6,490) 900 200
Payments on note payable shareholder (353) (118) -
Payments on capitalized lease obligation (98) (31) -
Payments on note payable - other (33) - -
Net proceeds from initial public offering 20,414 - -
------ ----- -----
Net cash provided by financing activities 13,440 751 200
------ ---- ---
Net increase in cash 9,275 3,940 1,330
Cash at beginning of year 5,774 1,834 504
----- ----- ---
Cash at end of year $15,049 $5,774 $1,834
====== ===== =====
Cash paid during the year for:
Interest $225 $399 $378
==== === ====
Income taxes $2,868 $1,290 $1,729
===== ===== =====
Other noncash transactions:
Capitalized lease obligation $ - $305 $ -
=== ==== =====
Purchase of stock for notes payable-shareholder $ - $471 $ -
=== === =====
See accompanying notes to consolidated financial statements.
27
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
(1) Operations and Summary of Significant Accounting Policies
(a) The Company
Manchester Equipment Company, Inc. (the Company) is a systems
integrator and reseller of computer hardware, software and networking
products, primarily for commercial customers. The Company offers its
customers single-source solutions customized to their information systems
needs by combining value-added services with hardware, software,
networking products and peripherals from leading vendors.
Sales of hardware, software and networking products comprise most of
the Company's revenues. Service revenues have not comprised a significant
part of revenues to date. The Company has entered into agreements with
certain suppliers and manufacturers which provide the Company favorable
pricing and price protection in the event the vendor reduces its prices.
(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.
(d) Investments
The Company classifies its marketable debt and equity securities in one
of three categories: trading, available for sale, or held to maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of shareholders' equity until realized. Transfers
of securities between categories are recorded at fair value at the date of
transfer. Unrealized holding gains and losses are recognized in earnings
for transfers into trading securities.
Dividend and interest income are recognized when earned. Cost is
maintained on a specific identification basis for purposes of determining
realized gains and losses on sales of investments.
(e) Revenue Recognition
Revenue from product sales is recognized at the time of shipment to the
customer. Revenue for services is recognized when the related services are
performed. When product sales and services are bundled, revenue is
recognized upon completion of the installation. Service contract fees are
recognized as revenue ratably over the period of the applicable contract
or as the services are provided. Deferred service contract
28
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
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.
(f) Market Development Funds
The Company receives various market development funds including
cooperative advertising funds from certain vendors, principally based on
volume purchases of products. The Company records such amounts related to
volume purchases as purchase discounts which reduce cost of revenue and
other incentives that require specific incremental action on the part of
the Company, such as training, advertising or other pre-approved market
development activities as an offset to the related costs included in
selling general and administrative expenses. Total market development
funds amounted to $521, $943 and $906 for the years ended July 31, 1997,
1996 and 1995, respectively.
(g) Inventory
Inventory, consisting of computer hardware, software and related
supplies, is valued at the lower of cost (first-in first-out) or market
value.
(h) 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.
(i) Goodwill
Goodwill related to the acquisition of Electrograph Systems, Inc.
represents the excess of cost over the fair value of net assets acquired.
Goodwill is amortized on a straight-line basis over twenty years. The
Company reviews the significant assumptions that underlie the twenty-year
amortization period on a quarterly basis and will shorten the amortization
period if considered necessary. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
projected undiscounted future cash flows. Accumulated amortization was
approximately $19 at July 31, 1997. Amortization expense of $19 for the
year ended July 31, 1997 is included in selling general and administrative
expenses in the consolidated statement of income.
(j) 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.
(k) Net Income Per Share
Net income per share is based on the weighted average number of shares
of Common Stock and dilutive common stock equivalents (stock options and
warrants) outstanding during the period. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", is required to be adopted for
interim and annual periods ending after December 15, 1997. At that time,
the Company will be required to change the
29
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
method currently used to compute earnings per share and restate all prior
periods. Basic and diluted earnings per share will replace primary and
fully diluted earnings per share. The dilutive effect of stock options and
other common stock equivalents will be excluded from the calculation of
basic earnings per share, but will be reflected in diluted earnings per
share. The implementation of SFAS No. 128 would not have had an impact on
fiscal 1997 net income per share.
(l) Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 (Statement 121) that established accounting standards for the
impairment of long-lived assets, certain intangibles, and goodwill related
to those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. In conformity with Statement
121, it is the Company's policy to evaluate and recognize an impairment if
it is probable that the recorded amounts are in excess of anticipated
undiscounted future cash flows. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
assets, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds the fair value.
(m) 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 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.
(n) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(o) Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable,
prepaid expenses, accounts payable and accrued expenses, long-term debt
and notes payable - other are estimated to be the carrying values at July
31, 1997 due to the short maturity of such instruments. The book value of
notes payable - bank approximated fair value since those instruments carry
prime or LIBOR based interest rates that are adjusted for market rate
fluctuations.
(p) Reclassifications
Certain reclassifications were made to prior year amounts to conform
with the fiscal 1997 presentation format.
(2) Investments
The Company classified all its investments at July 31, 1997 as trading
securities. Fair value of U.S. government obligations and other securities are
based on quoted market prices. The gross unrealized holding gains and fair
values of investments by major type at July 31, 1997 were as follows:
30
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
Gross Unrealized Fair Value
Holding Gain of Investment
U.S. government obligation $ 2 $1,007
Corporate commercial instruments - 3,401
- -----
$ 2 $4,408
==== =====
At July 31, 1997 all investments had maturities of less than one year.
(3) Property and Equipment
----------------------
Property and equipment at July 31, consist of the following:
1997 1996
---- ----
Furniture and fixtures $2,096 $1,824
Machinery and equipment 3,401 1,668
Transportation equipment 281 361
Leasehold improvements 2,168 1,656
----- -----
7,946 5,509
Less accumulated depreciation and amortization 3,873 3,265
----- -----
$4,073 $2,244
===== =====
Depreciation and amortization expense amounted to $701, $473, and $395 for
the years ended July 31, 1997, 1996 and 1995, respectively.
(4) Acquisition of Electrograph Systems, Inc.
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise
Designs, Inc. Electrograph is a specialized distributor of microcomputer
peripherals, primarily in the eastern United States. The purchase price and
transaction costs aggregated approximately $2,600. Included in the liabilities
assumed were notes payable-bank and notes payable-other with balances of $1,274
and $264, respectively, at July 31, 1997.
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the consolidated statements of income
from the date of acquisition. The acquisition resulted in goodwill of $1,543
which is being amortized on the straight-line basis over 20 years.
The following unaudited pro forma consolidated results of operations
for the years ended July 31, 1997 and 1996 assume that the Electrograph
acquisition occurred on August 1, 1995 and reflect the historical operations of
the purchased business adjusted for lower interest on investments and increased
amortization, net of applicable income taxes resulting from the acquisition:
1997 1996
---- ----
Revenues $203,368 $205,786
Net income $ 3,557 $ 2,231
Net income per share $0.46 $0.36
The pro forma results of operations are not necessarily indicative of
the actual results that would have occurred had the acquisition been made at the
beginning of the period, or of results which may occur in the future.
31
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 31,
1997 1996
-------------------
Accounts payable, trade $15,783 $12,973
Accrued salaries and wages 1,630 2,552
Customer deposits 740 629
Other accrued expenses 1,130 959
----- ---
$19,283 $17,113
------- -------
The Company has entered into financing agreements for the
purchase of inventory. These agreements are secured by the related
inventory and/or accounts receivables. In each of the years in the
three-year period ended July 31, 1997, the Company has repaid all balances
outstanding under these agreements within the 30 day non-interest bearing
payment period. Accordingly, amounts outstanding under such agreements of
$5,184 and $1,450 at July 31, 1997 and 1996, respectively, are included in
accounts payable and accrued expenses. Prior to December 1996, pursuant to
certain intercreditor agreements, these financing agreements were
subordinated to the Company's line of credit agreement except as to
specific inventory purchased under these financing agreements. In August
1997, the Company entered into a new financing agreement for the purchase
of inventory. The agreement provides a maximum of $10,000 in credit for
purchases of inventory from certain specified manufacturers. The new
agreement is unsecured, allows for a 30 day non-interest bearing payment
period and requires the Company to maintain, among other things, a certain
minimum tangible net worth. As of July 31, 1997, retained earnings
available for dividends amounts to approximately $14,500.
(6) Long-Term Debt
In January 1996, the Company entered into a capitalized lease
obligation for certain computer equipment. Future minimum payments required
under such lease are as follows:
Year ending July 31,
1998 $109
1999 74
-----
Total minimum lease payments 183
Less: amounts representing interest 7
-----
Present value of minimum lease payments 176
Less: Current portion 99
---
$77
---
(7) Employee Benefit Plans
The Company maintains a qualified defined contribution plan with a
salary deferral provision, commonly referred to as a 401(k) plan. The
Company matches 50% of employee contributions up to three percent of the
employees' compensation. The Company's contribution amounted to $161, $124
and $125 for the years ended July 31, 1997, 1996 and 1995, respectively.
The Company also has a deferred compensation plan which is available to
certain eligible key employees. The plan consists of life insurance
policies purchased by the Company for the participants. Upon vesting, which
occurs at various times from three to ten years, the participant becomes
entitled to have ownership of the policy transferred to him or her at
termination of employment with the Company. As of July 31, 1997 and 1996,
the Company has recorded an asset (included with other assets) of $87 and
$183, respectively, representing the cash surrender value of policies owned
by the Company and a liability of the same amount relating to the unvested
32
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
portion of benefits due under this plan. For the years ended July 31, 1997,
1996 and 1995, the Company recorded an expense of $110, $72 and $97 in
connection with this plan.
(8) Commitments and Contingencies
Leases
The Company leases most of its executive offices and warehouse
facilities primarily from related parties (Note 11). 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 $1,073, $1,212 and $849 for the years ended July 31, 1997, 1996
and 1995.
The following represents the Company's commitment under operating
leases for the next five years ended July 31:
1998 $1,209
1999 1,184
2000 1,169
2001 900
2002 917
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 March 28, 1997 a complaint was filed in the United States District
Court for the Eastern District of New York against the Company, its
President and Chief Executive Officer, its Executive Vice President and
Secretary, and its Chief Financial Officer. The plaintiff claims to have
purchased common shares in the Company's initial public offering and
purports to sue on his own behalf and on behalf of a class of persons who
purchased the Company's common stock either pursuant to the initial public
offering or in the period from November 26, 1996 through February 13, 1997.
The complaint asserts that the Company and the individual defendants made
false or misleading statements and omissions in connection with the initial
public offering in violation of Section 11, 12(a)(2) and 15 of the federal
Securities Act of 1933, and seeks damages on behalf of the putative class
in an unspecified amount and/or rescission, together with costs and
expenses of litigation. The Company believes that the allegations in the
complaint are entirely without merit and intends vigorously to defend this
matter.
(9) Line of Credit
The Company has unsecured lines of credit agreements with a bank that
provide for a maximum of $10,000 of borrowings and is due on demand.
Interest on borrowings is computed at the Company's option based on the
bank's prime rate (8.50% at July 31, 1997) or LIBOR plus 2%. (7.63% at July
31, 1997). At July 31, 1997 and 1996 amounts outstanding under the
agreements totaled $1,274, and $6,500, respectively. The balance
outstanding at July 31, 1997 was repaid in August 1997.
33
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
(10) Income Taxes
The provision for income taxes for the years ended July 31, 1997, 1996 and
1995 consists of the following:
1997 1996 1995
---- ---- ----
Current
Federal $1,938 $1,166 $ 997
State 602 350 302
--- --- ---
2,540 1,516 $1,299
----- ----- -----
Deferred
Federal (68) (73) (113)
State (22) (13) (26)
---- ---- ----
(90) (86) (139)
--- ---- -----
$2,450 $1,430 $1,160
====== ===== =====
The difference between the Company's effective income tax rate and the
statutory rate is as follows, for the years ended July 31, 1997, 1996 and
1995:
1997 1996 1995
---- ---- ----
Income taxes at statutory rate $2,036 $1,213 $ 960
State taxes, net of
federal benefit 383 222 182
Other 31 (5) 18
-- --- --
$2,450 $1,430 $1,160
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at July 31, 1997 and 1996 were as
follows:
1997 1996
---- ----
Deferred tax assets:
Allowance for doubtful accounts $410 $321
Deferred compensation 270 317
Other 139 91
--- --
Deferred tax asset $819 $729
==== ===
A valuation allowance has not been provided in connection with the
deferred tax assets since the Company believes that it is more likely than
not that such deferred tax assets will be recovered as an offset to taxes
due on future taxable income.
34
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
(11) 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 1998 through 2005. Lease terms generally include annual increases of
five percent. Rent expense for these facilities aggregated $771, $1,022,
and $683 for the years ended July 31, 1997, 1996 and 1995, respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to $655, $383, and $66, including
disbursements, in the fiscal years ended July 31, 1997, 1996, and 1995
respectively.
During fiscal 1997, the Company received approximately $130 in revenue
from a company controlled by a director of the Company.
(12) Shareholders' Equity
Initial Public Offering
On December 2, 1996, the Company completed an initial public offering
(IPO) of 2,325,000 shares of its common stock at an initial public
offering price of $10 per share. Net proceeds to the Company were $20,414
after deducting the underwriting discounts and commissions and other costs
associated with the IPO. In connection with the IPO, the Company issued to
the underwriter warrants to purchase an aggregate of 250,000 shares of
common stock. The warrants expire five years from the date of issuance and
are exercisable commencing one year after issuance at a price of $12 per
share.
Redeemable Common Stock
Prior to the IPO, the Company was a party to an agreement among its
shareholders whereby each of the Company's two minority shareholders had
the right to demand that upon termination, retirement, or death, the
Company redeem his interest at differing values stated in the agreement.
The Company maintains term life insurance with a face value of $1,500 to
be used towards the purchase of the shares in the event of the death of
each shareholder. One of the minority shareholders retired in fiscal 1996
and based upon the terms of the agreement and a subsequent agreement
entered into in May 1996, payment was fixed at $4,710 for the
shareholder's interest in the Company (626,263 shares at the time of the
agreement). The shareholder had an annual option to redeem one-tenth of
his shares commencing in fiscal 1996, at an annual price of $471 to be
paid in equal quarterly installments over the following year. In
connection with such agreements, in May 1996 the Company purchased 62,626
shares of common stock from the retired minority shareholder. The purchase
price was $471, which was paid in four non-interest bearing equal
quarterly installments beginning on May 1, 1996. At July 31, 1996 notes
payable- shareholder of $353 related to this acquisition. Such shares were
subsequently retired.
The aggregate amounts payable by the Company to redeem outstanding shares
of common stock under these agreements, $4,739 at July 31, 1996, was
classified as redeemable common stock.
In September 1996, among other provisions, the shareholder agreed to
terminate his put options to sell his remaining shares to the Company upon
the effective date of the Company's IPO. In addition, the shareholders'
agreement terminated upon the effective date of the Company's IPO. As a
result of the successful completion of the IPO, the amounts which would
have been due under the agreements have been reclassified from redeemable
common stock to retained earnings.
35
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
Stock Option Plan
Under the Company's Amended and Restated 1996 Incentive and
Non-Incentive Stock Option Plan (the "Plan"), which was approved by the
Company's shareholders in October 1996, an aggregate of 1,100,000 shares of
common stock are reserved for issuance upon exercise of options thereunder.
Under the Plan, incentive stock options, as defined in section 422 of the
Internal Revenue Code of 1986, as amended, may be granted to employees and
non-incentive stock options may be granted to employees, directors and such
other persons as the Board of Directors may determine, at exercise prices
equal to at least 100% (with respect to incentive stock options) and at
least 85% (with respect to non-incentive stock options ) of the fair market
value of the Common Stock on the date of grant. In addition to selecting
the optionees, the Board of Directors will determine the number of shares
of Common Stock subject to each option, the term of each stock option up to
a maximum of ten years (five years for certain employees for incentive
stock options), the time or times when the stock option becomes
exercisable, and otherwise administer the Plan. Incentive stock options
expire three months from the date of the holder's termination of employment
with the Co. other than by reason of death or disability. Options may be
exercised with cash or common stock previously owned for in excess of six
months. During fiscal 1997, 742,350 and 60,000 options have been granted at
$10 and $5, respectively, per share. Such exercise prices were greater than
or equal to the market value on the date of grant. Vesting commences one or
two years from the date of grant and ranges from one to seven years. At
July 31, 1997, no options were exercisable and all options granted expire
ten 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 which have an exercise price equal to or greater than the fair
value of the stock on the date of grant. The Company has recognized $108 in
deferred commission expense representing the value of stock options granted
to non employee sales representatives. Such cost is expensed over the
vesting period, amounting to $12 in fiscal 1997. 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 year ended July 31, 1997 would approximate the pro
forma amounts below:
Net Income:
As reported $3,537
Pro forma 3,464
Net income per share:
As reported $0.45
Pro forma $0.45
The pro forma effects on net income and net income per share for 1997 may
not be representative of the pro forma effect in future years.
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
Expected dividend yield 0%
Expected stock volatility 29%
Risk free interest rate 5%
Expected option term until exercise (years) 4.27
The per share weighted average fair value of stock options granted during
fiscal 1997 was $1.05.
36
Manchester Equipment Company, Inc. and Subsidiaries
Notes to Financial Statements
July 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
(13) Major Customer and Vendor and Concentration of Credit Risk
The Company sells and services customers that are located primarily in
the eastern United States. One customer accounted for approximately 15%,
16% and 22% of total revenues for the years ended July 31, 1997, 1996 and
1995, respectively.
The Company's top two vendors accounted for approximately 17%, and 15%
of total purchases for the year ended July 31, 1997. The Company's top
four vendors accounted for 20%, 12%, 11% and 10% of total product
purchases for the year ended July 31, 1996. The Company's top two vendors
accounted for 22% and 16% of total product purchases for the year ended
July 31, 1995.
One customer accounted for 10% of the Company's accounts receivable at
July 31, 1997.
37
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports
on Form 8-K (Continued)
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits:
3.1.a(1) Certificate of Incorporation of Registrant, filed August 21, 1973.
3.1.b(1) Certificate of Amendment of Certificate of Incorporation filed
January 29, 1985.
3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996.
3.2(1) Bylaws of Registrant.
4.2(1) Form of Representative's Warrants.
10.1(1) 1996 Incentive and Non-Incentive Stock Option Plan of Registrant.
10.2(1) Agreement dated September 24, 1996 between Registrant and Michael
Bivona.
10.3(1)* Compensation Agreement dated November 6, 1996 between Registrant
and. Joel G. Stemple.
10.4(1)* Agreement of Employment dated September 30, 1996 between Registrant
and Barry Steinberg
10.4.a(1)* Amendment dated November 6, 1996 to Agreement of Employment dated
September 30, 1996 between Registrant and Joel G. Stemple.
10.5.a(1) Lease dated October 1995 between Registrant and 40 Marcus Realty,
LLC - f/k/a 40 Marcus Realty Associates, as amended.
10.5.b(1) Lease dated January 1988 between Registrant and Marcus Realty,
as amended.
10.5.c(1) Lease dated June 1995 between Registrant and Facilities Management.
10.5.d(1) Lease dated July 31, 1995 between Registrant and Boatman's Equities,
LLC - f/k/a 160 Oser Avenue Associates, as amended.
10.5.e(1) Lease dated January 15, 1992 between Registrant and 352 Seventh
Avenue Associates.
10.5.f(1) Lease dated April 16, 1990 between Registrant and Regent Holding
Corporation, as successor to Crow-Childress-Donner, Limited, as
amended.
10.5.g(1) Business Lease dated December 4, 1992 between Registrant and TRA
Limited, as amended.
10.5.h Lease dated June 23, 1997 between Registrant and First Willow, LLC
10.5.i Lease dated June 30, 1997 between Registrant and Angela C. Maffeo,
Trustee Under the Will of John Capobianco.
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.
38
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 among Electrograph Systems, Inc., Bitwise
Designs, Inc., Electrograph Acquisition, Inc. and Manchester
Equipment Co., Inc., April 15, 1997.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none were required.
- -----------------------
* Denotes management contract or compensatory plan or arrangement required to
be filed as an Exhibit to this Annual Report on Form 10-K.
1 Filed as the same numbered Exhibit to the Company's Registration Statement
on Form S-1 (File No. 333- 13345)
and incorporated herein by reference thereto.
2 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1996 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
3 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunder duly authorized.
Manchester Equipment Co., Inc.
Date: October 23, 1997 By: ss: Barry R. Steinberg
----------------------
Barry R. Steinberg
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of this Registrant and
in the capacities and on the dates indicated.
ss: Barry Steinberg Date: October 23, 1997
- --------------------
Barry R. Steinberg
President, Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)
ss: Joel G. Stemple Date: October 23, 1997
- -------------------
Joel G. Stemple
Executive Vice President and Director
ss: Joseph Looney Date: October 23, 1997
- ------------------
Joseph Looney
Chief Financial Officer (Principal Accounting Officer)
ss: Joel Rothlein Date: October 23, 1997
- -----------------
Joel Rothlein
Director
ss: Julian Sandler Date: October 23, 1997
- -------------------
Julian Sandler
Director
ss: George Bagetakos Date: October 25, 1997
- ---------------------
George Bagetakos
Director
40
Manchester Equipment Co., 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, 1995 $598 $161 $ 41 $718
July 31, 1996 $718 $132 $ 50 $800
July 31, 1997 $800 $339 $40 $128 $1,051
(a) Write-of amounts against allowance provided.
(b) Recorded in connection with the acquisition of Electrograph Systems, Inc.
41