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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MANCHESTER EQUIPMENT CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5045
NEW YORK 7379 11-2312854
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NO.)
160 OSER AVENUE
HAUPPAUGE, NEW YORK 11788
(516) 435-1199
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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BARRY R. STEINBERG
MANCHESTER EQUIPMENT CO., INC.
160 OSER AVENUE
HAUPPAUGE, NEW YORK 11788
(516) 435-1199
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
SETH I. TRUWIT, ESQ. BERNARD STEBEL, ESQ. RICHARD H. GILDEN, ESQ.
EPSTEIN BECKER & GREEN, P.C. STEBEL & PASELTINER, P.C. FULBRIGHT & JAWORSKI L.L.P.
250 PARK AVENUE 7600 JERICHO TURNPIKE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10177 WOODBURY, NEW YORK 11797 NEW YORK, NEW YORK 10103
(212) 351-4500 (516) 496-8117 (212) 318-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
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Common Stock, $.01 par value................ 2,875,000 $12.00 $34,500,000 $11,897
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(1) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 3, 1996
PROSPECTUS
2,500,000 SHARES
MANCHESTER EQUIPMENT CO., INC.
COMMON STOCK
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All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Manchester Equipment Co., Inc. ("Manchester" or the "Company").
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a trading market will develop after
the sale of shares offered hereby. It is currently estimated that the initial
public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" with respect to the method of determining the initial public
offering price. The Company has applied for quotation of the Common Stock on The
Nasdaq National Market under the symbol "MANC."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share......................................... $ $ $
Total(3).......................................... $ $ $
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(1) For information regarding indemnification of the Underwriters and certain
compensation payable to the Representative of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $825,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 375,000 additional shares of
Common Stock solely to cover over-allotments, if any, on the same terms and
conditions as the shares offered hereby. If such option is exercised in
full, the total "Price to Public," "Underwriting Discounts and Commissions"
and "Proceeds to Company" will be $ , $ and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the several Underwriters, subject to their
right to reject any order in whole or in part and to certain other conditions.
It is expected that delivery of the certificates representing the shares of
Common Stock will be made on or about , 1996 at the offices of
Ladenburg, Thalmann & Co. Inc., New York, New York.
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LADENBURG, THALMANN & CO. INC.
The date of this Prospectus is , 1996
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OFFERING CUSTOMERS SINGLE-SOURCE SOLUTIONS
TO THEIR INFORMATION SYSTEMS NEEDS
[INTERLOCKING JIGSAW PUZZLE PIECES DESCRIBING
THE COMPANY'S PRODUCT AND SERVICE OFFERINGS.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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The Company intends to furnish its shareholders with annual reports
containing audited financial statements reported on by independent auditors and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references to the Company's authorized, issued and
outstanding securities assume no exercise of the Underwriters' over-allotment
option. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of the factors
set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Manchester Equipment Co., Inc. is a systems integrator 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 has capitalized on the rapid developments in the
computer industry, including the shift toward client/server-based platforms.
Each year during this period, the Company has been profitable and has generated
growth in revenues.
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 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 and
integration services include systems design, performance analysis, security
analysis, migration planning, 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. The Company's customers include Barnes & Noble Inc., Cabletron
Systems Inc., Conde Nast Publications Inc., J&R Music World, National
Broadcasting Company Inc., Pfizer Inc., Reuters America Inc., Sotheby's Inc.,
Time Warner Inc., The Toronto Dominion Bank, United Parcel Service of America
Inc. and the United States Merchant Marine Academy. The Company offers services
and products from its headquarters in Long Island, New York, and its regional
offices in New York City, Needham (Boston), Massachusetts and Boca Raton and
Tampa, Florida.
The Company believes that a number of factors enable it to compete in a
highly competitive and rapidly changing market. Among other things, the Company
benefits from long-standing relationships with many of its customers, providing
opportunities for continued sales of products and services. The Company's long-
standing relationships with suppliers and its large volume purchases contribute
to the Company's ability to obtain significant purchase discounts and inventory
as needed. Manchester further believes that its name is widely recognized for
high quality, competitively priced products and value-added services. Manchester
also has developed efficient inventory and credit extension controls which have
historically resulted in rapid inventory turnover and minimal bad debt expense.
The Company's expansion to regional offices in the Northeast and Florida has
further contributed to the continued increase in its revenues.
Key elements of Manchester's strategy include (i) increasing its focus on
providing value-added services, such as consulting, integration and support,
(ii) expanding its marketing focus on companies outside the Fortune 500, (iii)
introducing an electronic sales ordering system (linked to automated inventory
and credit control systems) for its customers, (iv) increasing sales force
productivity through enhanced electronic access to product information,
increased training of sales representatives and use of telemarketing, (v)
expanding its presence in the New York Metropolitan area by enlarging both its
New York City and Long Island offices
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and (vi) expanding geographically into growing business centers in the eastern
half of the United States. In support of its strategy, during the past fiscal
year, the Company hired additional technical and administrative staff and
increased its investment in its management information systems.
The Company's executive offices are located at 160 Oser Avenue, Hauppauge,
New York 11788; its telephone number is (516) 435-1199.
THE OFFERING
Common Stock offered by the Company................... 2,500,000 shares
Common Stock to be outstanding after the
offering(1)......................................... 8,700,000 shares
Use of proceeds....................................... To repay short-term debt, to expand
its New York Metropolitan area
operations, to upgrade its
telecommunications system and for
working capital
Proposed Nasdaq National Market symbol................ MANC
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(1) Excluding 1,250,000 shares of Common Stock reserved for issuance under the
Company's stock option plan and 250,000 shares of Common Stock reserved for
issuance upon the exercise of warrants to be issued to the Representative of
the Underwriters and its designees exercisable at 120% of the public
offering price (the "Representative's Warrants"). See "Capitalization,"
"Management -- Stock Option Plan" and "Underwriting."
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table sets forth summary financial data of the Company and
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and other financial information included herein.
FISCAL YEAR ENDED JULY 31,
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1992 1993 1994 1995 1996
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INCOME STATEMENT DATA:
Revenues......................... $111,835 $118,898 $137,361 $170,818 $ 189,659
Gross profit..................... 19,101 18,452 20,684 24,948 27,003
Income from operations........... 1,285 1,787 2,604 3,215 3,933
Net income....................... 628 1,132 1,776(1) 1,663 2,138
PRO FORMA INCOME STATEMENT DATA
(UNAUDITED)(2):
Income from operations........... $ 1,285 $ 1,787 $ 2,604 $ 3,215 $ 3,933
Reduction in officers'
compensation.................. 2,415 372 463 3,465 2,809
Reduction in rent to related
parties....................... 39 57 75 93 304
Pro forma income from
operations.................... 3,739 2,216 3,142 6,773 7,046
Pro forma net income............. 2,100 1,389 2,099(1) 3,798 4,006
Pro forma net income per share... .64
Shares used in pro forma net
income
per share calculation............ 6,246,970
JULY 31, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Working capital................................................... $ 9,841 $ 32,183
Total assets...................................................... 37,761 55,873
Short-term debt, including current maturities of capital lease
obligation..................................................... 6,952 452
Shareholders' equity.............................................. 12,914 37,526
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(1) Includes a cumulative effect of a change in accounting for income taxes of
$386. See Notes 1 and 8 of Notes to Consolidated Financial Statements.
(2) Pro forma to reflect the assumed reduction in (i) officers' compensation to
amounts stipulated in agreements with the Company's Chief Executive Officer
and Executive Vice President without any diminished duties or
responsibilities, (ii) compensation from that paid to the former Chief
Financial Officer during each of the years in the five-year period ended
July 31, 1996 to the annual compensation currently payable to the present
Chief Financial Officer, and (iii) rent paid to related parties to amounts
stipulated in current leases for the respective portions of the five-year
period ended July 31, 1996 during which these leases (or their predecessors)
were in effect. See "Management" and "Certain Transactions."
(3) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth in the following risk factors and elsewhere in this
Prospectus.
ADVERSE INDUSTRY CONDITIONS; DECREASING OPERATING MARGINS IN SALES OF PRODUCTS
The computer industry is characterized by a number of potentially adverse
business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a potential decline in the rate of growth in
sales of personal computers. Heightened price competition among various hardware
manufacturers has resulted in reduced per unit revenue and declining gross
profit margins. As a result of the intense price competition within the
industry, the Company has experienced increasing pressure on its gross profit
and operating margins with respect to the sale of products. The Company's
inability to compete successfully on the pricing of products sold, or the
continuing decline in its gross margins of products sold due to adverse industry
conditions or competition, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH THE COMPANY'S STRATEGY
An integral part of the Company's strategy is to increase its value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires the Company,
among other things, to attract and retain highly skilled technical employees in
a competitive labor market, provide additional training to its sales
representatives and enhance its existing service management system. There can be
no assurance that the Company will be successful in increasing its focus on
providing value-added services, and the failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Strategy -- Emphasizing Value-added
Services."
Manchester's strategy also includes expanding its presence in the New York
Metropolitan area by increasing its sales and service capabilities in its New
York City office and enlarging its sales, service and training capabilities at
its Long Island headquarters as well as expanding geographically into growing
business centers in the eastern half of the United States. There can be no
assurance that the Company's expansion of its New York Metropolitan area
operations will increase profits generated by such operations, that the opening
of new offices will prove profitable, or that these expansion plans will not
substantially increase future capital or other expenditures. The failure of this
component of the Company's strategy could materially adversely affect its
business, results of operations and financial condition. See
"Business -- Strategy -- Expanding New York Metropolitan Area Presence" and
"-- Strategy -- Expanding into Additional Business Centers."
To date, Manchester's success has been based primarily upon sales in the
New York Metropolitan area. The Company's strategy, encompassing the expansion
of service offerings, the expansion of existing offices and the establishment of
new regional offices, is expected to challenge the Company's senior management
and infrastructure. There can be no assurance as to the Company's ability to
respond to these challenges. The failure of the Company to effectively manage
its planned growth could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Strategy."
In addition, the success of the Company's strategy will depend in large
part upon the Company's ability to attract and retain highly skilled technical
and sales personnel in a competitive labor market. There can be no assurance
that the Company will be able to attract and retain such skilled personnel. The
loss of a significant number of the Company's existing technical or sales
personnel or difficulty in hiring or retaining additional
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technical or sales personnel could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Services and Products" and "-- Employees."
COMPETITION
The computer industry is characterized by intense competition. 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. While the Company's
competitors vary depending upon the particular market, some of the national and
regional competitors of the Company include AmeriData Technologies, Inc.,
CompuCom Systems, Inc., Dataflex Corporation, Entex Information Services, Inc.,
Vanstar Corporation and Electronic Data Systems 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. There can be no assurance that the Company will be able to compete
successfully in the future with these or other competitors. See
"Business -- Competition."
DEPENDENCE ON KEY EXECUTIVES
The success of the Company is dependent on the services of Barry R.
Steinberg, the Company's founder, Chairman of the Board, President and Chief
Executive Officer, and Joel G. Stemple, Ph.D., the Company's Executive Vice
President. Mr. Steinberg, who has served the Company for in excess of 23 years,
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. In addition, Mr. Steinberg has long-standing
relationships with many of the Company's customers, providing opportunities for
continued sales of products and services. Dr. Stemple has served the Company for
in excess of 14 years and his management responsibilities include marketing and
advertising programs, review of contracts, monitoring the sales force and
inventory control. The loss of the services of either of Mr. Steinberg or Dr.
Stemple could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Management."
DEPENDENCE UPON MAJOR CUSTOMER
The Company's largest customer accounted for approximately 14%, 22% and 16%
of the Company's revenues for the fiscal years ended July 31, 1994, 1995 and
1996, respectively, substantially all of such revenues being derived from the
sale of hardware products. The presence of this customer contributes to the
Company's ability to obtain volume discounts on the purchase of computer
hardware from certain of its vendors. Although this customer has been a customer
of the Company for approximately ten years, the Company has no long-term supply
contract with it, but rather ships products against purchase orders to meet the
customer's needs. The loss of this customer could have a material adverse effect
on the Company's revenues as well as its ability to obtain volume discounts from
certain vendors, either of which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Services and Products" and "-- Customers."
DEPENDENCE ON SALES TO COMPUTER RESELLERS AND VARS
The Company's profitability has been affected by its ability to obtain
volume discounts from certain manufacturers which has been dependent, in part,
upon the Company's ability to sell large quantities of products to computer
resellers, including VARs. Sales to resellers have been made at profit margins
generally less favorable than sales directly to commercial customers. For the
fiscal years ended July 31, 1994, 1995 and 1996, approximately 25%, 24% and 23%
of the Company's revenues, respectively, were derived from sales to
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computer resellers, including VARs. The Company's inability to continue to sell
products to computer resellers and thereby obtain the desired volume discounts
from manufacturers or to expand its sales to commercial customers sufficiently
to offset the need to rely on sales to computer resellers could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion of Financial Condition and Results of
Operations."
DEPENDENCE ON MAJOR MANUFACTURERS
The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. Combined sales of products manufactured
by Toshiba America Information Systems, Inc. ("Toshiba"), Hewlett-Packard
Company ("Hewlett-Packard"), NEC Technologies, Inc. ("NEC") and Compaq Computer
Corporation ("Compaq") during the fiscal years ended July 31, 1994, 1995 and
1996 comprised approximately 51%, 52% and 53%, respectively, of the Company's
revenues. Sales of products manufactured by Toshiba accounted for approximately
23%, 25% and 23%, respectively, of the Company's revenues, substantially all of
which sales were of notebook computers and related accessories. Many aspects of
the Company's business are affected by its relationships with major
manufacturers, including product availability, pricing and related terms, and
reseller authorizations. The increasing demand for personal computers and
ancillary equipment has resulted in significant product shortages from time to
time, because manufacturers have been unable to produce sufficient quantities of
certain products to meet demand. There can be no assurance that manufacturers
will maintain an adequate supply of these products to satisfy all the orders of
the Company's customers or that, during periods of increased demand,
manufacturers will provide products to the Company, even if available, or at
discounts previously offered to the Company. In addition, 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. See "Business -- Services and Products."
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. The Company relies on these funds for many of its
advertising and promotional campaigns. The dollar amounts of funds received by
the Company for the fiscal years ended July 31, 1994, 1995 and 1996 were $1.4
million, $863,000 and $943,000, respectively, representing 1.0%, .5% and .5% of
revenues, respectively. In recent years, manufacturers have generally reduced
their level of support with respect to these programs. The discontinuance or
material reduction of these programs would result in the Company having to spend
its own funds to obtain the same level of advertising and promotion, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General" and "Business -- Sales and
Marketing."
INVENTORY MANAGEMENT
The computer industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
Certain of Manchester's suppliers provide price protection to the Company, which
is intended to reduce the risk of inventory devaluation due to price reductions
on current products. Certain of the Company's suppliers also provide stock
balancing to the Company pursuant to which the Company is able to return unsold
inventory to a supplier as a partial credit against payment for new products.
There are often restrictions on the dollar amount of inventory that can be
returned at any one time. There can be no assurance that such price protection
or stock balancing will be available to the Company in the future, or that these
measures will provide complete protection against the risk of excess or obsolete
inventories. Although the Company maintains a sophisticated proprietary
inventory management system, there can be no assurance that the Company will
continue to successfully manage its existing and future inventory. Failure to
successfully manage its current or future inventory could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- Management Information Systems."
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RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products and services are characterized by
rapidly changing technology and frequent introduction of new hardware and
software products and services, which may render many existing products
noncompetitive, less profitable or obsolete. The Company's continued success
will depend on its ability to keep pace with the technological developments of
new products and services and to address increasingly sophisticated customer
requirements. The Company's success will also depend upon its abilities to
address the technical requirements of its customers arising from new generations
of computer technologies, to obtain these new products from present or future
suppliers and vendors at reasonable costs, to educate and train its employees as
well as its customers with respect to these new products or services and to
integrate effectively and efficiently these new products into both the Company's
internal systems and systems developed for the Company's customers. There can be
no assurance that the Company will be successful in identifying, developing and
marketing product and service developments or enhancements in response to these
technological changes. The failure of the Company to respond effectively to
these technological changes could have a material adverse effect on the
Company's business, results of operations and financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly revenues 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 its fixed operating expenses,
including a significant increase in personnel, as part of its strategy to
increase its focus on providing systems integration and other higher margin and
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.
CONCENTRATION OF OWNERSHIP AND CONTROL AND ANTI-TAKEOVER PROVISIONS
Based on the number of shares of Common Stock that will be outstanding upon
completion of this offering, Barry R. Steinberg, the Company's Chairman of the
Board, President and Chief Executive Officer, will beneficially own 57.6% of the
outstanding shares of Common Stock (approximately 55.2% if the Underwriters'
over-allotment option is exercised in full). As a result, Mr. Steinberg will
have sufficient voting power to elect all of the Company's directors. Mr.
Steinberg also will be able to veto any proposed sale of the Company, which
under New York law requires the affirmative vote of the holders of two-thirds of
the outstanding shares of Common Stock. See "Principal Shareholders."
The Company's principal shareholders and their families and affiliated
entities own a substantial portion of the real estate leased by the Company. The
Company believes that each of these leases, as amended to be effective with the
closing of this offering, is on terms comparable to those that the Company could
have obtained from independent third parties. However, there can be no assurance
that conflicts of interest may not arise out of such relationships. See
"Principal Shareholders" and "Certain Transactions."
The Company's Certificate of Incorporation provides that up to 5,000,000
shares of Preferred Stock may be issued by the Company from time to time in one
or more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to and imposed upon any wholly
unissued series of Preferred Stock and to fix the number of shares of any series
of Preferred Stock and the designation of any such series, without any vote or
action by the Company's shareholders. The Board of Directors may authorize and
issue Preferred Stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In
addition, the potential issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids of the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of the Common Stock. In
addition, the Company is subject to Section 912 of the
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New York Business Corporation Law which imposes certain restrictions and
requirements on a company's ability to engage in a "business combination" with
an "interested shareholder." See "Description of Capital Stock."
DISCRETIONARY USE OF PROCEEDS
Assuming an initial public offering price of $11.00 per share,
approximately $15.8 million of the net proceeds of this offering will be
utilized for general corporate purposes, including working capital. Accordingly,
the Board of Directors will have broad discretion as to the allocation of a
substantial portion of the net proceeds from this offering. See "Use of
Proceeds."
SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will incur an immediate and
substantial dilution of approximately $6.77 per share in net tangible book value
from the assumed $11.00 per share initial public offering price. See "Dilution."
NO PRIOR MARKET; STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Company's
Common Stock. Consequently, the initial public offering price will be determined
by negotiations between the Company and the Representative. There can be no
assurance that an active public market for the Common Stock will develop or be
sustained after this offering or that the market price of the Common Stock will
not decline below the initial public offering price. The trading price of the
Common Stock could be subject to wide fluctuations in response to quarter to
quarter variations in operating results, announcements of technological
innovations or new products or services by the Company or its competitors,
general conditions in the industry, changes in earnings estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology-related companies and which have often been unrelated to the
operating performance of such companies. The Company's revenue or operating
results in future quarters may be below the expectations of securities analysts
and investors. In such event, the price of the Company's Common Stock would
likely decline, perhaps substantially. These Company-specific factors or broad
market fluctuations may materially adversely affect the market price of the
Company's Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering or the prospect of such sales could adversely affect the market
price of the Common Stock and the Company's ability to raise capital necessary
to fund its future operations. In addition to the 2,500,000 shares of Common
Stock offered hereby, as of the date of this Prospectus (the "Effective Date"),
there will be approximately 6,200,000 shares of Common Stock outstanding, all of
which are deemed "restricted securities" under Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), and may be eligible for sale in the
public market in accordance with certain volume and other restrictions under
Rule 144 under the Securities Act beginning 90 days after the effective date of
this offering. Notwithstanding the ability to resell their shares under Rule
144, the current shareholders have agreed with the Representative not to offer,
sell or otherwise dispose of any shares of Common Stock without the prior
written consent of the Representative for a period of 180 days after the date of
this Prospectus. Sales of a substantial number of shares of Common Stock in the
public market following this offering, pursuant to Rule 144 or otherwise, could
materially adversely affect the market price of the Common Stock. In addition,
the Company intends to register under the Securities Act, following the closing
of this offering, 1,250,000 shares of Common Stock reserved for issuance under
the Company's stock option plan. See "Shares Eligible for Future Sale."
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Upon completion of this offering, the Company has agreed to issue to the
Representative and its designees warrants covering an aggregate of 250,000
shares of Common Stock exercisable for a four-year period commencing one year
from the date of this offering, at an exercise price equal to 120% of the
initial public offering price. The Company has agreed to grant certain demand
and piggyback registration rights to the holders of these warrants. The
existence or exercise of these warrants could materially adversely affect the
Company's ability to raise additional financing at a time when it may be
advantageous to do so. See "Underwriting."
ABSENCE OF DIVIDENDS
To date, the Company has not paid any cash dividends and does not presently
intend to pay cash dividends in the foreseeable future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $24,612,500 ($28,428,125 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $11.00 per share, and deducting underwriting discounts
and commissions and estimated offering expenses. The Company intends to repay
the entire balance outstanding under its line of credit with the net proceeds of
this offering. At July 31, 1996, approximately $6.5 million was outstanding
under the line of credit, of which $3.5 million bore interest at 7.69% per annum
and the balance bore interest at 8.25% per annum. Of the remaining net proceeds,
approximately $1.0 million will be used to relocate or expand the Company's New
York City office, approximately $770,000 will be used to expand training and
sales facilities in Long Island, and approximately $500,000 will be used to
upgrade the Company's internal telecommunications system. The approximately
$15.8 million balance (assuming $6.5 million is outstanding under the line of
credit as of the closing of this offering) will be added to working capital for
general corporate purposes. The retiring of indebtedness under the bank line of
credit will increase the availability of bank credit for general corporate
purposes. Exact allocation of the proceeds for working capital purposes, the
increased funds available under the bank line of credit and the timing of such
expenditures will depend upon various factors, including the availability of
strategic expansion opportunities. Although it is possible that the Company
might acquire businesses complementary to the current or future business of the
Company, the Company's ability to effect such an acquisition will depend upon a
number of factors, including the availability of acquisition candidates or other
business opportunities. The Company has no current plans for any acquisitions,
and no such acquisitions are being negotiated as of the date of this Prospectus.
There can be no assurance that any acquisition will be consummated or that, if
consummated, any acquisition will be successful.
Pending the use of the net proceeds of this offering, the Company will
invest the funds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Board of Directors currently intends to retain all future earnings,
if any, to fund the growth and development of the Company's business and,
accordingly, does not anticipate paying any cash dividends in the foreseeable
future.
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DILUTION
The net tangible book value of the Company at July 31, 1996, was
approximately $12,185,000, or $1.97 per share. Net tangible book value per share
is equal to the Company's total tangible assets less its total liabilities,
divided by the number of shares of Common Stock outstanding. After giving effect
to the sale by the Company of the 2,500,000 shares of Common Stock offered
hereby (at an assumed initial public offering price of $11.00 per share) and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company at July 31, 1996, would have been approximately
$36,797,000, or $4.23 per share. This represents an immediate increase in net
tangible book value of $2.26 per share to existing shareholders and an immediate
dilution in net tangible book value of $6.77 per share to purchasers of Common
Stock in this offering, as illustrated in the following table:
Assumed initial public offering price per share..................... $11.00
Net tangible book value per share as of July 31, 1996............. $1.97
Increase per share attributable to new investors in this 2.26
offering....................................................... -----
Pro forma net tangible book value per share after this offering..... 4.23
------
Dilution per share to new investors in this offering................ $ 6.77
======
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and the new investors (assuming an initial public offering price of
$11.00 per share and before deducting the underwriting discounts and commissions
and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
Existing shareholders......... 6,200,000 71.26% $ 4,600 .02% $ .00
New investors................. 2,500,000 28.74% $27,500,000 99.98% $ 11.00
--------- ------ ----------- ------
Total............... 8,700,000 100.00% $27,504,600 100.00%
========= ====== =========== ======
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CAPITALIZATION
The following table sets forth, as of July 31, 1996, the capitalization of
the Company and the as adjusted capitalization of the Company after giving
effect to the sale of the 2,500,000 shares of Common Stock offered hereby at an
assumed offering price of $11.00 per share and the application of the estimated
net proceeds therefrom after deducting underwriting discounts and commissions
and estimated offering expenses. The information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus.
JULY 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- -----------
Short-term debt, including current maturities of capital lease
obligation...................................................... $ 6,952,000 $ 452,000
=========== ===========
Capital lease obligation, excluding current maturities............ $ 175,000 $ 175,000
Shareholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized,
none issued and outstanding actual and as adjusted.............. -- --
Common Stock, $.01 par value; 25,000,000 shares authorized,
6,200,000 shares issued and outstanding, and 8,700,000 shares
issued and outstanding as adjusted(1)........................... 62,000 87,000
Additional paid-in capital........................................ -- 24,587,000
Retained earnings................................................. 12,852,000 12,852,000
----------- -----------
Total shareholders' equity........................................ 12,914,000 37,526,000
----------- -----------
Total capitalization.............................................. $13,089,000 $37,701,000
=========== ===========
- ---------------
(1) Excludes 1,250,000 shares of Common Stock reserved for issuance under the
Company's stock option plan and 250,000 shares of Common Stock reserved for
issuance upon exercise of the Representative's Warrants. See
"Management -- Stock Option Plan" and "Underwriting."
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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, 1995 and 1996 and for each of the years in
the three-year period ended July 31, 1996 and the report thereon of KPMG Peat
Marwick LLP, independent auditors, are included elsewhere in this Prospectus.
The consolidated financial data presented below as of July 31, 1992, 1993 and
1994 and for the years ended July 31, 1992 and 1993 are derived from
consolidated financial statements of the Company not appearing herein which were
audited by another independent auditor. 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 Prospectus.
FISCAL YEAR ENDED JULY 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ----------
INCOME STATEMENT DATA:
Revenues................................ $111,835 $118,898 $137,361 $170,818 $ 189,659
Cost of revenues........................ 92,734 100,446 116,677 145,870 162,656
-------- -------- -------- -------- --------
Gross profit............................ 19,101 18,452 20,684 24,948 27,003
Selling, general and administrative
expenses............................. 17,816 16,665 18,080 21,733 23,070
-------- -------- -------- -------- --------
Income from operations.................. 1,285 1,787 2,604 3,215 3,933
Interest and other expenses, net........ (47) 34 (172) (392) (365)
Provision for income taxes.............. 610 689 1,042 1,160 1,430
Cumulative effect of change in
accounting for income taxes.......... -- -- 386 -- --
-------- -------- -------- -------- --------
Net income.............................. $ 628 $ 1,132 $ 1,776 $ 1,663 $ 2,138
======== ======== ======== ======== ========
PRO FORMA INCOME STATEMENT DATA
(UNAUDITED):(1)
Reduction in officers'
compensation(2)...................... $ 2,415 $ 372 $ 463 $ 3,465 $ 2,809
Reduction in rents to related
parties(2)........................... 39 57 75 93 304
Pro forma income from operations........ 3,739 2,216 3,142 6,773 7,046
Pro forma provision for income taxes.... 1,592 861 1,257 2,583 2,675
Pro forma net income.................... 2,100 1,389 2,099 3,798 4,006
Pro forma net income per share.......... .64
Shares used in pro forma net income per
share calculation.................... 6,246,970
JULY 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital............................... $ 4,695 $ 6,274 $ 7,701 $ 9,189 $ 9,841
Total assets.................................. 21,662 22,002 25,879 31,635 37,761
Short-term debt, including current maturities
of capital lease obligation................ 3,500 2,200 5,400 5,600 6,952
Capital lease obligation, excluding current
maturities................................. -- -- -- -- 175
Shareholders' equity.......................... 6,676 7,808 9,584 11,247 12,914
- ---------------
(1) Pro forma to reflect the assumed reduction in (i) officers' compensation to
amounts stipulated in agreements with the Company's Chief Executive Officer
and Executive Vice President without any diminished duties or
responsibilities, (ii) compensation from that paid to the former Chief
Financial Officer during each of the years in the five-year period ended
July 31, 1996 to the annual compensation currently payable to the present
Chief Financial Officer, and (iii) rent paid to related parties to amounts
stipulated in current leases for the respective portions of the five-year
period ended July 31, 1996 during which these leases (or their predecessors)
were in effect. See "Management" and "Certain Transactions."
(2) After giving effect to these reductions, the pro forma selling, general and
administrative expenses were $15,362, $16,236, $17,542, $18,175 and $19,957
for the fiscal years ended July 31, 1992, 1993, 1994, 1995 and 1996,
respectively.
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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 Prospectus. The following discussion contains certain forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from the results anticipated in those forward-looking
statements as a result of certain of the factors set forth in the section of
this Prospectus entitled "Risk Factors" as well as elsewhere herein.
GENERAL
Manchester is a systems integrator 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.
As a result of intense price competition within the computer industry as
well as other industry conditions, the Company has experienced increasing
pressure 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's largest customer accounted for approximately 14%, 22% and 16%
of the Company's revenues for the fiscal years ended July 31, 1994, 1995 and
1996, 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, 1994, 1995 and 1996, inventories
represented 28%, 30% and 24% of total assets, respectively. During these same
fiscal years, the Company's average inventory turnover was 17, 16 and 18 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 .3%, .1% and
.1% of total revenues for the years ended July 31, 1994, 1995 and 1996,
respectively.
The Company's quarterly revenues 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 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
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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.
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. The percentages in the table, as well as the amounts and
percentages in the discussions presented below, are presented assuming the
reduction in (i) officers' compensation to amounts stipulated in agreements with
the Company's Chief Executive Officer and Executive Vice President without any
diminished duties or responsibilities, (ii) compensation from that paid to the
former Chief Financial Officer during each of the years in the three-year period
ended July 31, 1996 to the annual compensation currently payable to the present
Chief Financial Officer, and (iii) rent paid to related parties to amounts
stipulated in current leases for the respective portions of the five-year period
ended July 31, 1996 during which these leases (or their predecessors) were in
effect. See "Management," "Certain Transactions" and Note 12 of the Consolidated
Financial Statements.
PERCENTAGE OF REVENUES
FOR
THE YEAR ENDED JULY 31,
-------------------------
1994 1995 1996
----- ----- -----
Revenues.................................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 84.9 85.4 85.8
----- ----- -----
Gross profit.............................................. 15.1 14.6 14.2
Pro forma selling, general and administrative expenses.... 12.8 10.7 10.5
----- ----- -----
Pro forma income from operations.......................... 2.3 3.9 3.7
Interest and other expenses, net.......................... 0.1 0.2 0.2
----- ----- -----
Pro forma income before income taxes and cumulative effect
of change in accounting................................. 2.2 3.7 3.5
Pro forma provision for income taxes...................... 1.0 1.5 1.4
Cumulative effect of change in accounting for income
taxes................................................... .3 -- --
----- ----- -----
Pro forma net income...................................... 1.5% 2.2% 2.1%
===== ===== =====
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Revenues. The Company's revenues 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 any material effect on this
increase.
Gross Profit. Cost of revenues includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by manufacturers' market development funds. All other operating
costs are included in selling, general and administrative expenses. Gross profit
increased $2.1 million or 8.2% from $24.9 million in fiscal 1995 to $27.0
million in fiscal 1996 primarily as a result of the increase in revenues. Gross
profit as a percentage of revenues decreased from 14.6% to 14.2%. 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.
Pro Forma Selling, General and Administrative Expenses. Pro forma selling,
general and administrative expenses increased $1.8 million or 9.8% from $18.2
million in fiscal 1995 to $20.0 million in fiscal 1996. Approximately $917,000
of this increase related to higher payroll and related costs due primarily to
the hiring of additional technical and administrative staff in support of the
Company's strategy to increase its value-added services revenue. Rent and
occupancy costs also increased by approximately $197,000 due primarily to
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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.
Interest Expense, Net. Interest expense, net increased from $346,000 in
fiscal 1995 to $374,000 in fiscal 1996 primarily due to increased borrowings.
Pro Forma Provision for Income Taxes. The pro forma effective income tax
rate for fiscal 1995 and 1996 remained relatively constant at approximately 40%.
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994
Revenues. Revenues increased $33.5 million or 24.4% from $137.4 million in
fiscal 1994 to $170.8 million in fiscal 1995. This increase was due primarily to
the increased demand for pentium-based personal computers and notebook computers
and increased sales to the Company's largest customer.
Gross Profit. Gross profit increased $4.3 million or 20.6% from $20.7
million in fiscal 1994 to $24.9 million in fiscal 1995 principally as a result
of increased revenues. Gross profit as a percentage of revenues decreased from
15.1% in fiscal 1994 to 14.6% in fiscal 1995 as a result of changes in the mix
of products sold by the Company during the periods and increasing pricing
pressures prevalent in the industry.
Pro Forma Selling, General and Administrative Expenses. Pro forma selling,
general and administrative expenses increased $633,000 or 3.6% from $17.5
million in fiscal 1994 to $18.2 million in fiscal 1995. Such costs declined as a
percentage of revenues from 12.8% to 10.7% as a result of the 24.4% increase in
revenues and the relatively small increase in pro forma selling, general and
administrative expenses. The dollar increase was principally due to higher sales
commissions due to the increase in revenues in fiscal 1995 as well as higher
payroll and related costs partially offset by lower bad debt expense.
Interest Expense, Net. Interest expense, net increased from $236,000 in
fiscal 1994 to $346,000 in fiscal 1995, principally due to increased borrowings.
Pro Forma Provision for Income Taxes. The pro forma effective income tax
rate decreased from 42% in fiscal 1994 to 40% in fiscal 1995. This decrease was
primarily due to lower state income taxes in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of financing have been the internally
generated working capital from profitable operations and a line of credit from a
financial institution.
For the year ended July 31, 1996, cash provided by operations increased to
$4.2 million as compared to cash provided by operations of $1.6 million in
fiscal 1995 and cash used in operations of $4.1 million in fiscal 1994. The
increase in cash provided by operations in fiscal 1996 as compared to fiscal
1995 was primarily due to higher net income and reduced inventory levels. The
increase in cash provided by operations in fiscal 1995 as compared to fiscal
1994 was primarily due to increased balances 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 year end 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.
Cash used in investing activities increased from approximately $448,000 in
fiscal 1994 and $440,000 in fiscal 1995 to $1.0 million in fiscal 1996. In
addition, during fiscal 1996, the Company acquired $305,000 of computer
equipment through a capital lease obligation resulting in total fixed asset
additions for fiscal 1996 of $1.3 million. This increased level of spending
reflects the initial expenditures related to the Company's plans to expand its
operations and facilities to accommodate current and anticipated increases in
revenues.
Cash provided by financing activities in fiscal 1996 was approximately
$751,000 compared to $200,000 in fiscal 1995 and $3.2 million in fiscal 1994.
The change in cash provided by financing activities is primarily
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reflective of increases in borrowing by the Company under its line of credit
with a financial institution. Similar to the items discussed above, the
Company's level of borrowing will fluctuate significantly in order to provide
cash for operations and capital expenditures.
The Company's line of credit agreement with a financial institution
provides for a maximum of $9.5 million of borrowings and is due on demand.
Interest on borrowings is computed at the Company's option based on the
financial institution's prime rate (8.25% at July 31, 1996) or at LIBOR plus 2%
(7.69% at July 31, 1996). The line provides for a general security interest
first lien on all of the Company's assets, to the extent a first lien is
available. The line is guaranteed by Barry M. Steinberg, the Company's
President, Chief Executive Officer and majority shareholder. At July 31, 1996,
borrowings of $6.5 million were outstanding under the line of credit. A portion
of the net proceeds of this offering will be applied to repay the outstanding
indebtedness under the line. Following this offering, the Company expects to
maintain the line, may utilize it to fund operations and intends to eliminate
Mr. Steinberg's guarantee.
The Company believes that the net proceeds of this offering together with
current working capital, expected cash flows from operations and available
borrowings under the line of credit will be adequate to support current
operating levels for the foreseeable future, specifically through at least the
end of fiscal 1998. The Company currently has no major 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. The Company's ability to implement its expansion
strategy is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional funds through equity
or debt financings or from other sources, as may be required.
INFLATION
The Company does not believe that inflation has had a material effect on
the Company's operations.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 establishes financial accounting
and reporting standards for stock-based compensation plans. Statement 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. Statement 123 encourages a fair
value based method of accounting for employee stock options or other similar
equity instruments. Entities electing not to adopt a fair value method must make
pro forma disclosures of net income and earnings per share as if a fair value
based method had been applied. Statement 123 is effective for fiscal year 1997.
The Company has elected not to adopt a fair value based accounting method for
employee stock options and therefore does not expect that the adoption of
Statement 123 will have a material impact on its financial position or results
of operations. The Company will disclose, commencing in fiscal 1997, the pro
forma net income and earnings per share as if such method had been used to
account for stock-based compensation cost.
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BUSINESS
GENERAL
Manchester Equipment Co., Inc. is a systems integrator 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.
Each year during this period, the Company has been profitable and has generated
growth in revenues.
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 and
integration services include systems design, performance analysis, security
analysis, migration planning, 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. The Company's customers include Barnes & Noble Inc., Cabletron
Systems Inc., Conde Nast Publications Inc., J&R Music World, National
Broadcasting Company Inc., Pfizer Inc., Reuters America Inc., Sotheby's Inc.,
Time Warner Inc., The Toronto Dominion Bank, United Parcel Service of America
Inc. and the United States Merchant Marine Academy. The Company offers these
services and products from its headquarters in Long Island, New York, and its
regional offices in New York City, Needham, Massachusetts and Boca Raton and
Tampa, Florida.
The Company was incorporated in New York in 1973 and has one active
wholly-owned subsidiary, Manchester International, Ltd., a New York corporation
which sells computer hardware, software and networking products to resellers
domestically and internationally.
INDUSTRY
Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Computer technology and related products are continuously evolving,
making predecessor technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant challenges
to companies.
Over the last several years, the increase in performance of personal
computers, the development of a variety of effective business productivity
software programs and the ability to interconnect personal computers in high
speed networks have led to an industry shift away from mainframe computer
systems to client/server systems based on personal computer technology. In such
systems, the client computer, in addition to its stand-alone capabilities, is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers. Recently, networked
applications such as electronic mail and work group productivity software,
coupled with widespread acceptance of Internet technologies, have led companies
to implement corporate intranets (networks that enable end-users (e.g.,
employees) to share information). The use of a corporate intranet allows a
company to warehouse valuable information, which may be "mined" or accessed by
employees or other authorized users through readily available Internet tools
such as Web browsers and other graphical user interfaces.
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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 intends to increase its focus
on providing these services through a number of key strategies. The Company
plans 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 and security. The
Company plans to actively promote the benefits of corporate intranets and
intends to introduce additional services, including remote network management
services and fee-based "help desk" services. The remote network management
system is expected to consist of dedicated servers and software located at the
Company's Long Island headquarters. This system is intended to allow 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
anticipated to be 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 these companies are increasingly looking to
third parties to provide a complete solution to their information systems needs
from both a service and product standpoint. These 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 is in the process of
implementing an electronic ordering system. This ordering system will enable
customers to access the Company via the Internet, review
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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 will produce a matrix of alternative fully
compatible packages, together with their availability and related costs, based
on parameters indicated by the customer. Customers will 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 in the process
of 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 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 is upgrading its internal telecommunications system.
Through its enhanced system, anticipated to be implemented during the first
calendar quarter of 1997, telephone calls can be automatically placed to a
targeted list of existing or potential customers and, upon connection, will be
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 will have the
capability to route automatically in-coming calls to available sales
representatives in response to a caller's answers to automated queries.
The Company also intends to provide increased training of its sales
representatives in matters relating to value-added services, such as consulting
and integration services. To facilitate such training, the Company plans to
construct a dedicated training facility to be 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.
EXPANDING INTO ADDITIONAL BUSINESS CENTERS. The Company has regional
offices in Needham, Massachusetts and Boca Raton and Tampa, Florida, from which
it derived approximately 10% of its revenues for the fiscal year ended July 31,
1996. 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'
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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 and data 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.
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. The Company plans to expand these services by
enabling its specially trained engineers to solve many of their customers'
network systems problems on a remote basis from the Company's facilities.
"Help-desk" services consist of providing customers with telephone
support. The Company is in the process of expanding its "help-desk" capabilities
and intends to develop a fee-based "help-desk." 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.
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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. NEC Technologies, Inc.
Bay Networks, Inc. Novell, Inc.
Cisco Systems, Inc. Philips Electronics N.V.
Compaq Computer Corporation Seagate Technology, Inc.
Epson America, Inc. Standard Microsystems Corporation
Hayes Microcomputer Products, Inc. Texas Instruments Inc.
Hewlett-Packard Company 3Com Corp.
Intel Corporation Toshiba America Information Systems, Inc.
Microsoft Corporation U.S. Robotics Corporation
Motorola, Inc.
For the fiscal years ended July 31, 1994, 1995 and 1996, sales by the
Company of products manufactured by Toshiba, Hewlett-Packard, NEC and Compaq
collectively comprised approximately 51%, 52% and 53%, respectively, of the
Company's revenues. In these fiscal years, sales of products manufactured by
Toshiba accounted for approximately 23%, 25% and 23%, 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
$96 million, $124 million and $130 million for the fiscal years ended July 31,
1994, 1995 and 1996, respectively, and as a percentage of total cost of products
sold was approximately 83%, 86% and 81%, respectively.
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, 1994, 1995 and 1996, approximately 14%, 22% and 16% of the Company's
total revenues, respectively, were derived from United Parcel Service of
America, Inc. Some of the Company's other commercial customers include Barnes &
Noble Inc., Cabletron Systems Inc., Cablevision Systems Corp., Conde Nast
Publications Inc., J&R Music World, National Broadcasting Company Inc., Pfizer
Inc., Reuters America Inc., SONY Theaters, Sotheby's Inc., Time Warner Inc., The
Toronto Dominion Bank, United Nations International Children's Emergency Fund
and the United States Merchant Marine Academy.
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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 59 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, and has advertised on New York Mets and New
York Yankees tickets. The Company also promotes interest in its products and
services through its website on the Internet, and intends to expand 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. See "Risk Factors -- Dependence on Major
Manufacturers."
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 anticipates expanding its
training capabilities at one of its Long Island facilities to conduct seminars
for sales representatives. The seminars will address such topics as general
developments in the computer industry, systems integration services and the
Company's management information systems. The Company intends to utilize 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 a real-time, on-line system enabling instantaneous access and
processing. 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, 16 and 18 times for the fiscal years
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ended July 31, 1994, 1995 and 1996, 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, 1996, 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. 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 AmeriData Technologies, Inc.,
CompuCom Systems, Inc., Dataflex Corporation, Entex Information Services, Inc.,
Vanstar Corporation and Electronic Data Systems 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.
EMPLOYEES
At August 31, 1996, the Company had 222 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, 1996, 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.
PROPERTIES
The Company's main offices and warehouses are located in four buildings in
Hauppauge, New York, consisting of approximately 40,000 and 60,000 square feet
of office and warehouse space, respectively, under leases expiring between
January 1998 and October 2005, for aggregate annual lease payments of
approximately $1,040,000 in fiscal 1996. Three of these buildings are leased
from entities controlled by, or affiliated with, certain of the Company's
executive officers and principal shareholders. Effective with the closing of
this offering, the leases with related parties have been amended to provide
terms comparable to those that could be obtained from independent third parties.
Giving effect to these amended leases, the aggregate annual lease
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payments for all four buildings in Hauppauge, New York will be approximately
$778,000 in fiscal 1997. The Company leases an additional office in Massapequa,
Long Island for $10,572 per annum on a month-to-month basis from an entity of
which Messrs. Rothlein and Bivona own 25% and 50%, respectively. See "Certain
Transactions." The Company leases additional offices in New York City, Needham,
Massachusetts and Boca Raton and Tampa, Florida, under leases expiring in
January 1999, April 1997, July 1998 and December 1996, respectively, for
aggregate rental payments of approximately $146,000 and $148,000 in fiscal 1996
and fiscal 1997, respectively, with options to renew in Needham and Tampa. The
Company believes that its Hauppauge and regional offices and warehouse space are
well maintained and are adequate for present requirements. The Company intends
to relocate or expand its New York City office as part of its strategy. See
"Strategy -- Expanding New York Metropolitan Area Presence."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
----------------------------------- --- ----------------------------------------------------
Barry R. Steinberg................. 54 Chairman of the Board, President, Chief Executive
Officer and Director
Joel G. Stemple, Ph.D.............. 54 Executive Vice President, Secretary and Director
Joseph Looney...................... 39 Chief Financial Officer
William F. Scheibel, Jr............ 41 Chief Technology Officer
Joel Rothlein, Esq................. 67 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.
As a result of his managerial position, stock ownership and activities
relating to the organization of the Company, Barry R. Steinberg may be deemed a
"promoter" as that term is defined in the Securities Act.
Officers are elected annually and serve at the pleasure of the Board of
Directors, subject to rights, if any, under contracts of employment.
BOARD OF DIRECTORS
Independent Directors. No later than 90 days after the closing of this
offering, the Company will appoint two directors who are independent directors
within the meaning of the rules of the Nasdaq National Market. The failure of
the Company to appoint these directors could result in the delisting of the
Common Stock from the Nasdaq National Market.
Committees of the Board of Directors. No later than 90 days after the
closing of this offering, the Board of Directors will establish an Audit
Committee, a majority of whose members will be independent directors. It is
anticipated that the Audit Committee will be responsible for reviewing the
Company's internal accounting practices as well as the scope of the work
performed by the Company's independent auditors.
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No later than 90 days after the closing of this offering, the Board of
Directors also will establish a Compensation Committee comprised of three or
more non-employee directors. The Compensation Committee will review the
compensation paid by the Company, make recommendations on compensation matters
to the Board of Directors, and administer the Company's stock option plan.
Director Compensation. Directors do not currently receive a fee for
attending Board of Directors' meetings, but are reimbursed for expenses incurred
in connection with the performance of their respective duties as directors of
the Company. However, the Board of Directors may in the future establish a
policy of compensating non-employee directors for attending Board of Directors'
or committee meetings. Additionally, directors may be granted options under the
Company's stock option plan. See "Stock Option Plan" below.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth a summary of the
compensation paid or accrued by the Company during the fiscal year ended July
31, 1996 to the Company's Chief Executive Officer and the other executive
officers whose compensation exceeded $100,000:
SUMMARY COMPENSATION TABLE
FISCAL 1996 ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- -------------------------------------------------------- -------- ---------- ------------
Barry R. Steinberg, Chief Executive Officer............. $271,800 $1,816,439 $ 54,210(1)
Joel G. Stemple, Executive Vice President............... $251,800 $1,669,193 $ 29,000(2)
Michael Bivona, Chief Financial Officer(3).............. $ 77,312 $ 216,463 $ 28,417(2)
- ---------------
(1) Includes $50,000 of premiums paid by the Company for a whole life insurance
policy in the name of Mr. Steinberg.
(2) Includes $25,000 of premiums paid by the Company for a whole life insurance
policy in the name of the executive officer.
(3) Resigned as Chief Financial Officer effective June 30, 1996 upon his
retirement.
The executive officers named in the Summary Compensation Table have not
been granted, and do not hold, options to purchase shares of Common Stock, nor
have they received any other long-term incentive compensation during the 1996
fiscal year.
Barry M. Steinberg has agreed with the Company that his annual salary for
services rendered to the Company in his current positions as President and Chief
Executive Officer shall be $950,000 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 bonuses in either fiscal 1997 or 1998. The Company will continue to make
available to him the car allowance and deferred compensation benefits that he is
currently receiving. See Note 5 of Notes to Consolidated Financial Statements.
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.
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 bonuses in either fiscal 1997 or 1998. 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
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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.
STOCK OPTION PLAN
Under the Company's 1996 Incentive and Non-Incentive Stock Option Plan (the
"Plan"), which was approved by the Company's shareholders in October 1996, an
aggregate of 1,250,000 shares of Common Stock are reserved for issuance upon
exercise of options thereunder. The Plan will be administered by the
Compensation Committee of the Board of Directors (the "Committee"). 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
Committee may determine. The Committee will also determine (i) the exercise
price of each option which must be 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, (ii)
the number of shares of Common Stock subject to each option, (iii) the term of
each stock option up to a maximum of 10 years (or, in the case of incentive
options, five years for certain employees) and (iv) the time or times when the
stock option becomes exercisable. Incentive stock options expire three months
from the date of the holder's termination of employment with the Company other
than by reason of death or disability, in which event the option may be
exercised during the 12-month period following the date of termination of
employment to the extent such option was exercisable on the date of termination
of employment but in no event beyond the term of such option. The maximum number
of shares of Common Stock underlying options which may be granted to any person
in any calendar year is 200,000. Options may be exercised in cash, Common Stock,
or any combination thereof. No options have been granted to date under the Plan.
In the event of a Change in Control (as defined below), all outstanding
options under the Plan shall accelerate and become immediately fully
exercisable. Under the Plan, a Change in Control means (i) the sale or other
disposition to a person, entity or group of 50% or more of the Company's
consolidated assets, (ii) the acquisition of 50% or more of the outstanding
shares by a person or group or (iii) if the majority of the Company's Board of
Directors consists of persons other than the Continuing Directors (as defined
below). The term "Continuing Director" shall mean any member of the Company's
Board of Directors on the effective date of the Plan and any other member of the
Board of Directors who shall be recommended or elected to succeed or become a
Continuing Director by a majority of the Continuing Directors who are then
members of the Board of Directors.
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31
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this Prospectus,
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to own beneficially five percent or more of
such Common Stock, (ii) each director of the Company, (iii) each person named in
the Summary Compensation Table and (iv) all executive officers and directors as
a group, together with their respective percentage ownership of such shares
before this offering and as adjusted to reflect the sale of the Common Stock
offered hereby:
PERCENTAGE OF
OUTSTANDING
SHARES OWNED
---------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
-------------------------------------------------- ------------------- -------- --------
Barry R. Steinberg(1)............................. 5,010,101 80.8% 57.6%
Joel G. Stemple(1)................................ 626,263 10.1 7.2
Michael Bivona(2)(3).............................. 563,636 9.1 6.5
Joel Rothlein..................................... -- -- --
All executive officers and directors as a group (5
persons)........................................ 5,636,364 90.9 64.8
- ---------------
(1) Address is 160 Oser Avenue, Hauppauge, New York 11788.
(2) Resigned as Chief Financial Officer and a director effective June 30, 1996
upon his retirement. See "Certain Transactions."
(3) Address is 9 Broadley Court, Dix Hills, New York 11747.
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CERTAIN TRANSACTIONS
Until August 1994, the Company was affiliated with Electrograph Systems,
Inc. ("Electrograph"), a value-added distributor of microcomputer peripherals,
components and accessories. 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.
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 year ended July 31, 1996,
the Company made lease payments of $216,000 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, 1994, 1995 and 1996, the Company
made lease payments of $244,000, $255,000 and $360,000, 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, 1994, 1995 and 1996, the Company made lease payments
of $399,000, $417,000 and $435,000, respectively, to such entity. Effective with
the closing of this offering, the leases with the affiliated parties with
respect to the leases of the Hauppauge, New York facilities have been amended to
provide terms comparable to those that could be obtained from independent third
parties. Giving effect to these amended leases, the rent for the properties
located at 40 Marcus Boulevard, 160 Oser Boulevard and 50 Marcus Boulevard will
be $170,375, $255,000 and $324,225, respectively, for fiscal 1997. The Company
leases an additional office in Massapequa, New York at $10,572 per annum on a
month-to-month basis from an entity of which Messrs. Rothlein and Bivona own 25%
and 50%, respectively. See "Business -- Properties."
Mr. Steinberg personally guarantees the Company's obligations under its
bank line of credit for which he receives no compensation. Following this
offering, the Company intends to eliminate Mr. Steinberg's guarantee. See Note 7
of Notes to Consolidated Financial Statements.
On May 7, 1996, following his retirement as the Company's Chief Financial
Officer which became effective June 30, 1996, Mr. Bivona elected, under an
agreement with the Company, to require the Company to purchase 62,626 shares of
Common Stock held by him for $471,000 payable in four equal quarterly
installments, without interest, commencing May 7, 1996. In September 1996, Mr.
Bivona agreed with the Company to terminate transfer restrictions previously
applicable to the balance of the shares of Common Stock owned by Mr. Bivona. In
connection therewith, Mr. Bivona terminated certain put rights he had with
respect to such shares, agreed to the 180-day lock-up required by the
Representative of the Underwriters and agreed to the volume and manner of sale
limitations applicable to an affiliate under Rule 144 under the Securities Act
with respect to the resale of shares of Common Stock owned by him. Pursuant to
the agreement, Mr. Bivona has certain piggyback registration rights in the event
of a subsequent registration of Common Stock in which Mr. Steinberg is a selling
shareholder. See "Shares Eligible For Future Sale."
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 $50,000 from the Company for legal services rendered to
the Company in the fiscal year ended July 31, 1996 and anticipates receiving
fees of approximately $350,000 from the Company for services to be rendered to
the Company in the fiscal year ending July 31, 1997.
31
33
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,700,000 shares of
Common Stock outstanding. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no assurance can be given that a significant public
market for the Common Stock can be developed or sustained after this offering.
Future sales of substantial amounts of Common Stock in the public market could
have a material adverse effect on the market price of the Common Stock from time
to time.
SALE OF RESTRICTED SHARES
The 6,200,000 shares of Common Stock not being sold in this offering are
deemed "restricted securities" under Rule 144 and may be eligible for sale in
the public market in accordance with certain volume and other restrictions under
Rule 144 beginning 90 days after the date of this Prospectus. Notwithstanding
the ability to resell their shares under Rule 144, the current shareholders have
executed lock-up agreements ("Lock-up Agreements") with the Representative
providing that such shareholders will not offer, sell or otherwise dispose of
any of their shares of Common Stock without the prior written consent of the
Representative, for a period of 180 days after the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately 87,000
shares immediately after this offering) and (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed,
provided certain requirements concerning the availability of public information,
manner of sale and notice of sale are satisfied. In addition, Affiliates must
comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
which are not restricted securities. Also, under Rule 144(k), a person who is
not an Affiliate and has not been an Affiliate for at least three months prior
to the sale and who has beneficially owned restricted securities for at least
three years may resell such shares without compliance with the foregoing
requirements. In meeting the two and three year holding periods described above,
a holder of restricted securities can include the holding periods of a prior
owner who was not an Affiliate. The Securities and Exchange Commission has
proposed an amendment to Rule 144 which would reduce the holding period required
for shares subject to Rule 144 to become eligible for sale in the public market
from two years to one year, and from three years to two years in the case of
Rule 144(k).
SHARES RESERVED FOR ISSUANCE
Options. The Company has reserved 1,250,000 shares of Common Stock for
issuance upon exercise of stock options granted under its stock option plan. No
options have been granted to date under the Plan. See "Management -- Stock
Option Plan."
The Company intends to file a Registration Statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable pursuant to the
Company's stock option plan. The Company expects to file such Registration
Statement 90 days following the closing of this offering, and such Registration
Statement is expected to become effective upon filing. Shares covered by such
Registration Statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations with respect to Affiliates.
Warrants. The Company has reserved 250,000 shares of Common Stock for
issuance upon exercise of the Representative's Warrants. The holders of the
Representative's Warrants have certain demand and piggyback registration rights.
See "Underwriting."
32
34
LOCK-UP AGREEMENTS
The Company and all of its officers, directors and current shareholders
have agreed, pursuant to the Lock-up Agreements, not to directly or indirectly,
without the prior written consent of the Representative, offer, sell, or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 180 days after the date of this Prospectus.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could materially
adversely affect the prevailing market prices for the Common Stock and could
impair the Company's future ability to obtain capital through an offering of
equity securities.
33
35
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$.01 par value, none of which is outstanding, and 25,000,000 shares of Common
Stock, $.01 par value, 6,200,000 of which are issued and outstanding and held by
three shareholders.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series and classes and with such dividend rights,
conversion rights, voting rights, redemption provisions, liquidation preferences
and other rights and restrictions as the Board of Directors may determine. The
issuance of the Preferred Stock permits the Board of Directors, without
shareholder approval, to utilize the Preferred Stock as an anti-takeover device
which could have an adverse effect on the market price of the Common Stock. The
Company has no present intention to issue any shares of Preferred Stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record. Subject to the rights of any holders of Preferred Stock which may be
issued in the future, the holders of outstanding shares of Common Stock are
entitled to share ratably on a share-for-share basis with respect to any
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in the assets
remaining after payment of all liabilities and liquidation preferences, if any.
Shares of Common Stock are not redeemable and have no preemptive or similar
rights to subscribe for additional shares. All outstanding shares of Common
Stock are, and the shares of Common Stock offered hereby will upon issuance and
payment be, fully paid and nonassessable.
LIMITED LIABILITY AND INDEMNIFICATION
As permitted by the New York Business Corporation Law ("BCL"), the
Company's Restated Certificate of Incorporation provides that, to the fullest
extent permitted by the BCL, no director of the Company shall be liable to the
Company or its shareholders for monetary damages for the breach of fiduciary
duty in such capacity. Such provision does not eliminate or limit the liability
of any director (i) if a judgment or other final adjudication adverse to such
director establishes that his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that he personally
gained in fact a material profit or other advantage to which he was not legally
entitled or that his acts violated Section 719 of the BCL, or (ii) for any act
or omission prior to the adoption of this provision. As a result of this
provision, the Company and its shareholders may be unable to obtain monetary
damages from a director for breach of his duty of care. Although shareholders
may continue to seek injunctive or other equitable relief for an alleged breach
of fiduciary duty by a director, shareholders may not have any effective remedy
against the challenged conduct if equitable remedies are unavailable. In
addition, under the Restated Certificate of Incorporation, the Company has
agreed to indemnify its officers, directors, employees and agents to the fullest
extent permitted by the BCL against actions that may arise against them in such
capacities, and to advance expenses in connection with any such actions.
NEW YORK BUSINESS COMBINATION STATUTE
Section 912 of the BCL prohibits a company from entering into a business
combination (e.g., a merger, consolidation, sale of 10% or more of a company's
assets, or issuance of securities with an aggregate market value of 5% or more
of the aggregate market value of all of the company's outstanding capital stock)
with a beneficial owner of 20% or more of a company's securities (a "20%
shareholder") for a period of five years following the date such beneficial
owner became a 20% shareholder (the "stock acquisition date"), unless, among
other things, such business combination or the purchase of stock resulting in
the 20% shareholder's beneficial ownership was approved by the company's board
of directors prior to the stock acquisition date or the business combination is
approved by the affirmative vote of the holders of a majority of the outstanding
34
36
voting stock exclusive of the stock beneficially owned by the 20% shareholder.
The applicability of this provision to the Company may discourage unsolicited
takeover bids by third parties.
TRANSFER AGENT
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005 is the transfer agent and registrar for the Common Stock.
35
37
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below have, severally and not
jointly, agreed, through Ladenburg, Thalmann & Co. Inc. (the "Representative"),
the representative of the Underwriters, to purchase from the Company, and the
Company has agreed to sell to the Underwriters, the aggregate number of shares
set forth opposite their respective names:
NAME OF UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Ladenburg, Thalmann & Co. Inc. ......................................
---------
Total...................................................... 2,500,000
=========
The Underwriters are committed to take and to pay for all of the shares of
Common Stock offered hereby, if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered hereby directly to the public initially at the
price set forth on the cover page of this Prospectus, that they may offer shares
to certain dealers at a price that represents a concession of not more than
$ per share, and that the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the commencement of this offering, the price to the public and
the concessions may be changed.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
375,000 shares of Common Stock at the same price per share as the initial
2,500,000 shares to be purchased by the Underwriters. The Underwriters may
exercise this option only to cover over-allotments, if any. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial 2,500,000 shares to be purchased by
that Underwriter.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed to issue to the Representative, for its own account,
warrants (the "Representative's Warrants") to purchase an aggregate of 250,000
shares of Common Stock, exercisable for a period of four years commencing one
year after the date hereof, at a price equal to 120% of the public offering
price, subject to adjustment in certain events. The Representative's Warrants
contain certain registration rights relating to the shares issuable thereunder.
For the life of the Representative's Warrants, the Representative will have the
opportunity to profit from a rise in the market price for the Common Stock.
The Company, its officers, directors and present shareholders have agreed
not to sell or otherwise dispose of any equity securities of the Company or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, equity securities of the Company for a period of 180 days after the
date of this Prospectus without the prior written consent of the Representative.
The Representative has informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the Underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have
36
38
expressed an interest in purchasing such shares of Common Stock in this
offering. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. The proposed initial offering price has been determined by negotiations
between the Representative and the Company. Among the factors considered in such
negotiations were the Company's results of operations and financial condition,
the prospects for the Company and for the industry in which the Company
operates, the Company's capital structure, and the general condition of the
securities market. The estimated offering price set forth on the cover of this
Prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Epstein Becker &
Green, P.C., New York, New York. Certain legal matters will be passed upon for
the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The consolidated financial statements of Manchester Equipment Co., Inc., as
of July 31, 1995 and 1996 and for each of the years in the three-year period
ended July 31, 1996, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "Commission"), Washington, D.C., in
accordance with the provisions of the Securities Act with respect to the Common
Stock offered hereby, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits filed as a part thereof. Statements
made in this Prospectus concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and the exhibits may be inspected, without charge at, or copies
thereof obtained at prescribed rates from, the Public Reference Section of the
Commission at Room 1024 at its principal office, located at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and also will be available for
inspection and copying at the regional offices of the Commission located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World
Trade Center, Suite 1300, New York, New York 10048. The Registration Statement
and the exhibits and schedules thereto can also be accessed through EDGAR
terminals located in the Commission's public reference rooms in Washington,
D.C., Chicago and New York or through the World Wide Web at http://www.sec.gov.
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of this offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information filed by the Company with
the Commission can be inspected, without charge, and copies may be obtained at
prescribed rates, at the offices of the Commission referenced above.
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39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.......................................................... F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 1995 and 1996......................................... F-3
Statements of Income for the years ended July 31, 1994, 1995 and 1996............... F-4
Statements of Shareholders' Equity for the years ended July 31, 1994, 1995 and F-5
1996.............................................................................
Statements of Cash Flows for the years ended July 31, 1994, 1995 and 1996........... F-6
Notes to Consolidated Financial Statements.......................................... F-7
F-1
40
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, 1996 and 1995 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, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in fiscal 1994.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
September 13, 1996, except as
to note 10, which is as of
October 1, 1996
F-2
41
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1995 AND 1996
JULY 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,834 $ 5,774
Accounts receivable, net of allowance for doubtful accounts of $718 and
$800, respectively.................................................. 17,500 19,068
Inventory.............................................................. 9,505 8,957
Deferred income taxes.................................................. 302 334
Prepaid expenses and other current assets.............................. 238 197
------ ------
Total current assets........................................... 29,379 34,330
Property and equipment, net.............................................. 1,430 2,244
Deferred income taxes.................................................... 341 395
Other assets............................................................. 485 792
------ ------
$31,635 $37,761
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities under capital lease obligation...................... $ -- $ 99
Notes payable -- bank.................................................. 5,600 6,500
Notes payable -- shareholder........................................... -- 353
Accounts payable and accrued expenses.................................. 14,398 17,113
Deferred service contract revenue...................................... 102 129
Income taxes payable................................................... 90 295
------ ------
Total current liabilities...................................... 20,190 24,489
Capital lease obligation, less current maturities........................ -- 175
Deferred compensation payable............................................ 198 183
Commitments and contingencies (note 6)
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued.............................................................. -- --
Common stock, $.01 par value; 25,000,000 shares authorized, 6,262,626
and 6,200,000 shares issued and outstanding in 1995 and 1996........ 63 62
Retained earnings...................................................... 11,184 12,852
------ ------
Total shareholders' equity..................................... 11,247 12,914
------ ------
$31,635 $37,761
====== ======
See accompanying notes to consolidated financial statements.
F-3
42
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 31, 1994, 1995 AND 1996
YEARS ENDED JULY 31,
--------------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS EXCEPT SHARE AND
PER SHARE AMOUNTS)
HISTORICAL:
Revenues............................................. $137,361 $170,818 $189,659
Cost of revenues..................................... 116,677 145,870 162,656
-------- -------- --------
Gross profit.................................... 20,684 24,948 27,003
Selling, general and administrative expenses......... 18,080 21,733 23,070
-------- -------- --------
Income from operations............................. 2,604 3,215 3,933
Other income (expense):
Interest, net...................................... (236) (346) (374)
Other.............................................. 64 (46) 9
-------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting for
income taxes.................................... 2,432 2,823 3,568
Provision for income taxes........................... 1,042 1,160 1,430
-------- -------- --------
Income before cumulative effect of change in
accounting for income taxes........................ 1,390 1,663 2,138
Cumulative effect of change in accounting for income
taxes (Notes 1 and 8).............................. 386 -- --
-------- -------- --------
Net income................................. $ 1,776 $ 1,663 $ 2,138
======== ======== ========
PRO FORMA (UNAUDITED) (NOTE 12):
Income before income taxes and cumulative effect of
change in accounting, as reported.................. $ 2,432 $ 2,823 $ 3,568
Reduction in officers' compensation.................. 463 3,465 2,809
Reduction in rent to related parties................. 75 93 304
-------- -------- --------
Pro forma income before income taxes and cumulative
effect of change in accounting..................... 2,970 6,381 6,681
Pro forma provision for income taxes................. 1,257 2,583 2,675
Cumulative effect of change in accounting............ 386 -- --
-------- -------- --------
Pro forma net income................................. $ 2,099 $ 3,798 $ 4,006
======== ======== ========
Pro forma net income per share....................... $ .64
========
Shares used in pro forma net income per share........ 6,246,970
========
See accompanying notes to consolidated financial statements.
F-4
43
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS)
PREFERRED COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
--------- ------ -------- -------
Balance July 31, 1993............................... $ -- $ 63 $ 7,745 $ 7,808
Net income.......................................... -- -- 1,776 1,776
--------- ------ -------- -------
Balance July 31, 1994............................... -- 63 9,521 9,584
Net income.......................................... -- -- 1,663 1,663
--------- ------ -------- -------
Balance July 31, 1995............................... -- 63 11,184 11,247
Net income.......................................... -- -- 2,138 2,138
Purchase and retirement of stock.................... -- (1) (470) (471)
--------- ------ -------- -------
Balance July 31, 1996............................... $ -- $ 62 $ 12,852 $12,914
======= ====== ======= =======
See accompanying notes to consolidated financial statements.
F-5
44
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS)
YEARS ENDED JULY 31,
-------------------------------
1994 1995 1996
------- ------- -------
Cash flows from operating activities:
Net income.................................................... $ 1,776 $ 1,663 $ 2,138
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization............................ 360 395 473
Bad debt expense......................................... 398 161 132
Cumulative effect of change in accounting................ (386) -- --
Deferred income taxes.................................... (118) (71) (86)
Loss (gain) on disposition of assets..................... -- 71 (9)
Change in assets and liabilities:
Increase in accounts receivable........................ (3,817) (1,954) (1,700)
(Increase) decrease in inventory....................... (1,362) (2,382) 548
(Increase) decrease in prepaid expenses and
other current assets................................ 182 (24) 41
Increase in other assets............................... (9) (113) (307)
Increase (decrease) in accounts payable and accrued
expenses............................................ (1,486) 4,371 2,715
(Decrease) increase in deferred service contract
revenue............................................. (52) (79) 27
Increase (decrease) in income taxes payable............ 440 (468) 205
Decrease in deferred compensation payable.............. -- -- (15)
------- ------- -------
Net cash (used in) provided by operating
activities........................................ (4,074) 1,570 4,162
------- ------- -------
Cash flows from investing activities:
Capital expenditures........................................ (448) (545) (1,028)
Proceeds from the sale of assets............................ -- 105 55
------- ------- -------
Net cash used in investing activities............... (448) (440) (973)
------- ------- -------
Cash flows from financing activities:
Net proceeds from borrowings................................ 3,200 200 900
Payments on note payable -- shareholder..................... -- -- (118)
Payments on capital lease obligation........................ -- -- (31)
------- ------- -------
Net cash provided by financing activities........... 3,200 200 751
------- ------- -------
Net (decrease) increase in cash and cash equivalents.......... (1,322) 1,330 3,940
Cash and cash equivalents at beginning of year.............. 1,826 504 1,834
------- ------- -------
Cash and cash equivalents at end of year...................... $ 504 $ 1,834 $ 5,774
======= ======= =======
Cash paid during the year for:
Interest.................................................... $ 189 $ 378 $ 399
======= ======= =======
Income taxes................................................ $ 494 $ 1,729 $ 1,290
======= ======= =======
Other noncash transactions:
Capital lease obligation for purchase of equipment.......... $ -- $ -- $ 305
======= ======= =======
Purchase of stock with note payable -- shareholder.......... $ -- $ -- $ 471
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
45
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Manchester Equipment Co., Inc. (the "Company") is a systems integrator 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. 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.
In July 1996, the Company executed a letter of intent with an investment
banking firm for a proposed initial public offering ("IPO"). The terms of the
proposed IPO include the sale of 2,500,000 shares of Common Stock, plus an
option in favor of the underwriters for an additional 375,000 shares to provide
for potential over-allotments and warrants in favor of the representative of the
underwriters to purchase 250,000 shares of Common Stock. The net proceeds of the
IPO will be used to retire indebtedness under the bank line of credit, to
relocate or expand the Company's New York City office, for training and expanded
sales facilities in Long Island, to upgrade the Company's internal
telecommunications system and for working capital.
(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 have been 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) Revenue Recognition
Revenues from product sales are recognized at the time of shipment to the
customer. Revenues for services are recognized when the related services are
performed. Service contract fees are recognized as revenue ratably over the
period of the applicable contract or as the services are provided. Deferred
service contract revenue represents the unearned portion of service contract
fees.
(e) Market Development Funds
The Company receives various market development funds including cooperative
advertising funds from certain vendors, principally based on volume purchases of
products or pre-approved market development activities (i.e., training,
advertising, etc.). The Company records such amounts as a reduction of cost of
revenues.
(f) Inventory
Inventory, consisting of computer hardware and peripherals, software and
related supplies, is valued at the lower of cost (first-in, first-out) or market
value.
F-7
46
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the economic lives of the assets,
generally from five to seven years. Leasehold improvements are amortized over
the shorter of the underlying lease term or asset life.
(h) Income Taxes
Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("Statement
109"). Statement 109 requires the use of the asset and liability approach for
financial accounting and reporting of income taxes. Under this method, 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 tax 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. The Company previously accounted for income taxes
in conformity with APB No. 11. The adoption of Statement 109 resulted in a
cumulative effect adjustment in the Company's 1994 financial statements of $386
and prior years' financial statements were not restated.
(i) 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.
(j) Impairment of Long Lived Assets
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
("Statement 121") that establishes 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.
(k) 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.
(l) Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, prepaid
expenses, accounts payable and accrued expenses, capital lease obligation and
notes payable -- shareholder are estimated to be their carrying values at July
31, 1996 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.
F-8
47
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(m) Reclassifications
Certain reclassifications were made to prior year amounts to conform with
the fiscal 1996 presentation format.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JULY 31,
-----------------
1995 1996
------ ------
Furniture and fixtures........................................... $1,539 $1,824
Machinery and equipment.......................................... 1,358 1,668
Transportation equipment......................................... 382 361
Leasehold improvements........................................... 1,405 1,656
------ ------
4,684 5,509
Less accumulated depreciation and amortization................... 3,254 3,265
------ ------
$1,430 $2,244
====== ======
Depreciation and amortization expense amounted to $360, $395 and $473 for
the years ended July 31, 1994, 1995 and 1996, respectively.
(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
JULY 31,
-------------------
1995 1996
------- -------
Accounts payable, trade.......................................... $10,791 $12,973
Accrued salaries and wages....................................... 2,140 2,552
Customer deposits................................................ 502 629
Other accrued expenses........................................... 965 959
------- -------
$14,398 $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, 1996,
the Company has repaid all balances outstanding under these agreements within a
provided 30 day non-interest bearing payment period. Accordingly, amounts
outstanding under such agreements of $650 and $1,450 at July 31, 1995 and 1996,
respectively, are included within accounts payable and accrued expenses.
Pursuant to certain intercreditor agreements, these financing agreements are
subordinated to the Company's line of credit agreement except as to specific
inventory purchased under these financing agreements.
F-9
48
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) CAPITAL LEASE OBLIGATION
In January 1996, the Company entered into a capital lease obligation for
certain computer equipment. Future minimum payments required under such lease
are as follows:
Year ending July 31,
1997........................................................................ $109
1998........................................................................ 109
1999........................................................................ 74
----
Total minimum lease payments.................................................. 292
Less: Amount representing interest............................................ 18
----
Present value of minimum lease payments....................................... 274
Less: Current portion......................................................... 99
----
$175
====
(5) EMPLOYEE BENEFIT PLANS
The Company maintains a qualified defined contribution plan with a salary
deferral provision, commonly referred to as a 401(k) plan. The Company matches
50% of employee contributions up to three percent of each employee's
compensation. The Company's contribution amounted to $130, $125 and $124 for the
years ended July 31, 1994, 1995 and 1996, 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 after
ten years in the plan (three years for certain key executives), 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, 1995 and 1996, the
Company has recorded an asset (included in other assets) of $198 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 portion of
benefits due under this plan. For the years ended July 31, 1994, 1995 and 1996,
the Company recorded an expense of $93, $97 and $72, respectively, in connection
with this plan.
(6) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases most of its executive offices and warehouse facilities
from related parties (Note 9). In addition, the Company is obligated under lease
agreements for sales offices and additional warehouse space. Aggregate rent
expense under these leases amounted to $827, $849 and $1,212 for the years ended
July 31, 1994, 1995 and 1996, respectively.
F-10
49
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following represents the Company's commitment under all operating
leases for the years ending July 31:
1997........................................................................ $1,307
1998........................................................................ 1,100
1999........................................................................ 800
2000........................................................................ 783
2001........................................................................ 363
Thereafter.................................................................. 1,755
------
$6,108
======
Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on advice from
its legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's business, results of operations or
financial condition.
(7) LINE OF CREDIT
The Company has a line of credit agreement with a bank that provides for a
maximum of $9,500 of borrowings and is due on demand. Interest on borrowings is
computed at the Company's option based on the bank's prime rate (8.25% at July
31, 1996) or at LIBOR plus 2% (7.69% at July 31, 1996). The credit facility
provides for a general security interest first lien on all of the Company's
assets, to the extent one can be obtained. The line is personally guaranteed by
the Company's president and majority shareholder. At July 31, 1995 and 1996
amounts outstanding under the agreement totaled $5,600 and $6,500, respectively.
(8) INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
YEARS ENDED JULY 31,
----------------------------
1994 1995 1996
------ ------ ------
Current
Federal................................................ $ 873 $ 997 $1,166
State.................................................. 287 302 350
------ ------ ------
1,160 1,299 1,516
------ ------ ------
Deferred
Federal................................................ (101) (113) (73)
State.................................................. (17) (26) (13)
------ ------ ------
(118) (139) (86)
------ ------ ------
$1,042 $1,160 $1,430
====== ====== ======
F-11
50
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The difference between the provision for income taxes at the Company's
effective income tax rate and the Federal statutory rate of 34% is as follows:
YEARS ENDED JULY 31,
----------------------------
1994 1995 1996
------ ------ ------
Income taxes at statutory rate........................... $ 827 $ 960 $1,213
State taxes, net of Federal benefit...................... 178 182 222
Other.................................................... 37 18 (5)
------ ------ ------
Provision for income taxes............................... $1,042 $1,160 $1,430
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at July 31, 1995 and 1996 were as follows:
JULY 31,
---------------
1995 1996
---- ----
Allowance for doubtful accounts receivable.......................... $288 $321
Deferred compensation............................................... 288 317
Other............................................................... 67 91
---- ----
Deferred tax asset............................................. $643 $729
==== ====
A valuation allowance has not been provided in connection with the
Company's deferred tax assets since, based on historical pre-tax earnings and
expected taxable income in the future, the Company believes that it is more
likely than not that such deferred tax assets will be recovered.
As discussed in Note 1, the Company adopted Statement 109 as of August 1,
1993. The cumulative effect of the change in accounting for income taxes of $386
was determined as of August 1, 1993 and is reported separately in the
consolidated statement of income for the year ended July 31, 1994. The
cumulative effect adjustment related principally to the establishment under
Statement 109 of deferred tax assets arising due to the nondeductability of the
allowance for doubtful accounts and deferred compensation expenses.
(9) RELATED PARTY TRANSACTIONS
The Company leases executive offices and warehouse space as well as its
corporate offices and sales facilities from entities owned or controlled by
shareholders or officers 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 $654, $683 and $1,022 for the years ended July 31, 1994,
1995 and 1996, respectively.
During the year ended July 31, 1994, the Company was related, through
common ownership and control, to Electrograph Systems, Inc. ("Electrograph"), a
value-added distributor of microcomputer peripherals, components and
accessories. Purchases from Electrograph during this period were $385,
substantially all of which was paid by July 31, 1994. In August 1994,
Electrograph was acquired by an unrelated company.
(10) SHAREHOLDERS' EQUITY
Recapitalization
In connection with the planned IPO, on October 1, 1996, the Company
effected a recapitalization, which increased the authorized number of shares of
Common Stock from 5,000 to 25,000,000, authorized 5,000,000 shares of Preferred
Stock, effected a 6262.63 for one stock split for all outstanding shares of
Common Stock
F-12
51
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
on that date and established a $.01 per share par value for Common Stock. All
references in the accompanying consolidated financial statements and notes
thereto relating to per share and share data have been retroactively adjusted to
reflect the recapitalization.
Shareholders' Agreement
The Company is a party to an agreement among its shareholders whereby upon
termination, retirement, or death of either of the Company's two minority
shareholders, the Company is required to 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 agreements, payment for the
shareholder's interest in the Company (626,263 shares at that time) was fixed at
$4,710. One of these agreements provided this shareholder 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 these agreements, in May 1996 the Company purchased 62,626
shares of Common Stock from the retired shareholder. The purchase price was
$471, to be paid in four non-interest bearing equal quarterly installments
beginning on May 1, 1996. Such shares were subsequently retired.
In September 1996, among other provisions, the retired shareholder agreed
to terminate his option to sell his remaining shares to the Company, subject to
successful completion of the IPO. In addition, the Company's shareholders
entered into an agreement to terminate the shareholders' agreement upon the
effective date of the IPO.
New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The Statement also applies to transactions in which
an entity issues its equity instruments to acquire goods or services from
nonemployees. Statement 123 encourages a fair value based method of accounting
for employee stock options or similar equity instruments. Entities electing not
to adopt a fair value method must make pro forma disclosures of net income and
earnings per share as if a fair value based method had been applied. The
Statement is effective for fiscal year 1997. The Company has elected not to
adopt a fair value based accounting method for employee stock options and
therefore does not expect that the adoption of Statement 123 will have a
material impact on its financial position or results of operations. The Company
will disclose, commencing in fiscal 1997, the pro forma net income and income
per share as if such method had been used to account for stock-based
compensation costs.
Stock Option Plan
Under the Company's 1996 Incentive and Non-Incentive Stock Option Plan (the
"Plan"), which was approved by the Company's shareholders in October 1996, an
aggregate of 1,250,000 shares of Common Stock are reserved for issuance upon
exercise of options thereunder. Under the Plan, incentive stock options may be
granted to employees and non-incentive stock options may be granted to
employees, directors and such other persons as the Compensation Committee of the
Board of Directors (the "Committee") 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
Committee 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
F-13
52
MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
otherwise administer the Plan. Incentive stock options expire three months from
the date of the holder's termination of employment with the Company other than
by reason of death or disability. Options may be exercised with cash or Common
Stock previously owned for in excess of six months. No options have been granted
through October 1, 1996 under the Plan.
(11) MAJOR CUSTOMER AND VENDORS
The Company sells products and services to customers that are located
primarily in the eastern United States. One customer accounted for approximately
14%, 22% and 16% of total revenues for the years ended July 31, 1994, 1995 and
1996, respectively.
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. The Company's top two vendors accounted for 22% and 15% of total
product purchases for the year ended July 31, 1994.
(12) PRO FORMA INFORMATION (UNAUDITED)
The pro forma adjustment discussed below has been made to the historical
results of operations to make the presentations more comparable with respect to
future officer compensation expense and rent expense to related parties.
In connection with the planned IPO, certain officers of the Company have
entered into agreements for the fiscal years ending July 31, 1997 and 1998. The
agreements provide for aggregate compensation of $1,400, exclusive of benefits,
in each year. Pro forma net income includes adjustments to increase net income
for the amounts by which aggregate officers' compensation, which includes the
former Chief Financial Officer's compensation, during each year in the three
years ended July 31, 1996 exceeded the total of the amounts to be paid under the
agreements plus the current annual salary of the Company's present Chief
Financial Officer as well as rents paid to related parties in excess of rents
that will be payable under current leases, as amended, net of applicable income
taxes. The weighted average number of shares outstanding used to determine pro
forma net income per share for the year ended July 31, 1996 was computed as
follows:
Shares of Common Stock outstanding during the entire year ended
July 31, 1996................................................... 6,200,000
Weighted average shares repurchased during fiscal 1996............ 46,970
---------
Weighted average shares outstanding for the year ended July 31,
1996............................................................ 6,246,970
=========
F-14
53
HELPING CUSTOMERS THROUGH THE USE OF TECHNOLOGY
[Diagram of a corporate intranet]
Manchester provides its customers with client/server solutions such as this
corporate intranet.
The use of intranets allows employees and other authorized users to access
information using readily
available Internet tools.
54
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Dividend Policy....................... 11
Dilution.............................. 12
Capitalization........................ 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 19
Management............................ 27
Principal Shareholders................ 30
Certain Transactions.................. 31
Shares Eligible for Future Sale....... 32
Description of Capital Stock.......... 34
Underwriting.......................... 36
Legal Matters......................... 37
Experts............................... 37
Available Information................. 37
Index to Consolidated Financial
Statements.......................... F-1
------------------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
===============================================================================
2,500,000 SHARES
MANCHESTER EQUIPMENT CO., INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
LADENBURG, THALMANN & CO. INC.
, 1996
===============================================================================
55
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering are as follows:
S.E.C. Registration Fee................................................... $ 11,897
N.A.S.D. Filing Fee....................................................... 3,950
Nasdaq National Market Qualification Fee.................................. 39,250
Accounting Fees........................................................... 120,000
Legal Fees and Expenses................................................... 500,000
Blue Sky Qualification Fees and Expenses.................................. 25,000
Printing and Engraving.................................................... 80,000
Transfer Agent's Fees and Expenses........................................ 10,000
Miscellaneous Expenses.................................................... 34,903
--------
Total........................................................... $ 825,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 722 of the New York Business Corporation Law grants corporations
the power to indemnify their directors, officers, employees and agents in
accordance with the provisions thereof. Article Ninth of Registrant's Restated
Certificate of Incorporation provides for indemnification of Registrant's
directors, officers, agents and employees to the full extent permissible under
Section 722 of the New York Business Corporation Law.
See also Section 10 of the Underwriting Agreement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS
(a) Exhibits:
*1 -- Form of Underwriting Agreement.
3.1.a -- Certificate of Incorporation of Registrant, filed August 21, 1973.
3.1.b -- Certificate of Amendment of Certificate of Incorporation filed January 29, 1985.
3.1.c -- Restated Certificate of Incorporation filed October 1, 1996.
3.2 -- Form of By-Laws of Registrant.
*4.1 -- Form of Specimen Common Stock Certificate of Registrant.
*4.2 -- Form of Representative's Warrants.
5 -- Opinion by Epstein Becker & Green, P.C., as to legality.
10.1 -- 1996 Incentive and Non-Incentive Stock Option Plan of Registrant.
10.2 -- Agreement dated September 24, 1996 between Registrant and Michael Bivona.
10.3 -- Compensation Agreement dated October 1, 1996 between Registrant and Barry
Steinberg.
10.4 -- Agreement of Employment dated September 30, 1996 between Registrant and Joel G.
Stemple.
10.5.a -- Lease dated October 1995 between Registrant and 40 Marcus Realty, LLC -- f/k/a 40
Marcus Realty Associates, as amended.
II-1
56
10.5.b -- Lease dated January 1988 between Registrant and Marcus Realty, as amended.
10.5.c -- Lease dated June 1995 between Registrant and Facilities Management.
10.5.d -- Lease dated July 31, 1995 between Registrant and Boatman's Equities, LLC -- f/k/a
160 Oser Avenue Associates, as amended.
10.5.e -- Lease dated January 15, 1992 between Registrant and 352 Seventh Avenue Associates.
10.5.f -- Lease dated April 16, 1990 between Registrant and Regent Holding Corporation, as
successor to Crow-Childress-Donner, Limited, as amended.
10.5.g -- Business Lease dated December 4, 1992 between Registrant and TRA Limited, as
amended.
10.5.h -- Lease dated February 26, 1992 between Registrant and E&S Associates.
10.6.a -- Promissory Note dated December 11, 1995 by Registrant to The Bank of New York.
10.6.b -- General Loan and Security Agreement dated December 2, 1993 by Registrant to The
Bank of New York.
10.6.c -- General Guarantee dated December 1, 1993 by Barry Steinberg to The Bank of New
York.
10.7.a -- Letter Agreement Regarding Inventory Financing dated December 7, 1993 between ITT
Commercial Finance Corp. and Registrant.
10.7.b -- Agreement for Wholesale Financing dated November 11, 1993 between ITT Commercial
Finance Corp. and Registrant.
10.7.c -- Intercreditor Agreement dated January 7, 1994 between The Bank of New York and ITT
Commercial Finance Corp.
10.8.a -- Letter Agreement Regarding Inventory Financing dated April 22, 1996 between AT&T
Capital Corporation and Registrant.
10.8.b -- Intercreditor Agreement dated May 18, 1994 between AT&T Commercial Finance
Corporation and The Bank of New York.
10.9 -- Reseller Agreement dated May 1, 1990 between Toshiba America Information Systems,
Inc. and Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP (contained on page II-5).
23.2 -- Consent of Epstein Becker & Green, P.C. (included in Exhibit 5).
24 -- Power of Attorney (included as part of signature page).
27 -- Financial Data Schedule.
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted for the reason that they are not
required or are not applicable or because the required information is included
in the Consolidated Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
Registrant hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of Registrant pursuant to the provisions of its Restated
Certificate of Incorporation, its By-Laws, or otherwise, Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities
II-2
57
(other than the payment by Registrant for expenses incurred or paid by a
director, officer or controlling person of Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
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58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Registration Statement or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Hauppauge,
State of New York, on the 30th day of September, 1996.
MANCHESTER EQUIPMENT CO., INC.
By: /s/ Barry R. Steinberg
------------------------------------
Barry R. Steinberg
President and Chief Executive
Officer
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint BARRY R. STEINBERG and JOEL G. STEMPLE,
and each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same, as fully, for all
intents and purposes, as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
/s/ Barry R. Steinberg President, Chief Executive September 30, 1996
- ------------------------------------------ Officer, Chairman of the Board
Barry R. Steinberg and Director (Principal
Executive Officer)
/s/ Joel G. Stemple Director September 30, 1996
- ------------------------------------------
Joel G. Stemple
/s/ Joseph Looney Chief Financial Officer September 30, 1996
- ------------------------------------------ (Principal Financial and
Joseph Looney Accounting Officer)
/s/ Joel Rothlein Director September 30, 1996
- ------------------------------------------
Joel Rothlein
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59
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors
Manchester Equipment Co., Inc.
The audits referred to in our report dated September 13, 1996, except as to
note 10 which is as of October 1, 1996, included the related financial statement
schedule for each of the years in the three-year period ended July 31, 1996,
included in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such 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.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated September 13, 1996, except as to note 10 which is as of
October 1, 1996, refers to a change, in 1994, in the Company's method of
accounting for income taxes.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Jericho, New York
October 1, 1996
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MANCHESTER EQUIPMENT CO., INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN C -- ADDITIONS
COLUMN B -------------------------
------------ (1) (2) COLUMN D COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO ------------ -------------
- -------------------------------- BEGINNING OF COSTS AND OTHER DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS (a) END OF PERIOD
- -------------------------------- ------------ ---------- ---------- ------------ -------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended:
July 31, 1994................. $366 $398 $166 $ 598
July 31, 1995................. $598 $161 $ 41 $ 718
July 31, 1996................. $718 $132 $ 50 $ 800
- ---------------
(a) Write-offs of amounts against allowance provided.
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61
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
*1 -- Form of Underwriting Agreement.........................................
3.1.a -- Certificate of Incorporation of Registrant, filed August 21, 1973......
3.1.b -- Certificate of Amendment of Certificate of Incorporation filed January
29, 1985...............................................................
3.1.c -- Restated Certificate of Incorporation filed October 1, 1996............
3.2 -- Form of By-Laws of Registrant..........................................
*4.1 -- Form of Specimen Common Stock Certificate of Registrant................
*4.2 -- Form of Representative's Warrants......................................
5 -- Opinion by Epstein Becker & Green, P.C., as to legality................
10.1 -- 1996 Incentive and Non-Incentive Stock Option Plan of Registrant.......
10.2 -- Agreement dated September 24, 1996 between Registrant and Michael
Bivona.................................................................
10.3 -- Compensation Agreement dated October 1, 1996 between Registrant and
Barry Steinberg........................................................
10.4 -- Agreement of Employment dated September 30, 1996 between Registrant and
Joel G. Stemple........................................................
10.5.a -- Lease dated October 1995 between Registrant and 40 Marcus Realty,
LLC -- f/k/a 40 Marcus Realty Associates, as amended...................
10.5.b -- Lease dated January 1988 between Registrant and Marcus Realty, as
amended................................................................
10.5.c -- Lease dated June 1995 between Registrant and Facilities Management.....
10.5.d -- Lease dated July 31, 1995 between Registrant and Boatman's Equities,
LLC -- f/k/a 160 Oser Avenue Associates, as amended....................
10.5.e -- Lease dated January 15, 1992 between Registrant and 352 Seventh Avenue
Associates.............................................................
10.5.f -- Lease dated April 16, 1990 between Registrant and Regent Holding
Corporation, as successor to Crow-Childress-Donner, Limited, as
amended................................................................
10.5.g -- Business Lease dated December 4, 1992 between Registrant and TRA
Limited, as amended....................................................
10.5.h -- Lease dated February 26, 1992 between Registrant and E&S Associates....
10.6.a -- Promissory Note dated December 11, 1995 by Registrant to The Bank of
New York...............................................................
10.6.b -- General Loan and Security Agreement dated December 2, 1993 by
Registrant to The Bank of New York.....................................
10.6.c -- General Guarantee dated December 1, 1993 by Barry Steinberg to The Bank
of New York............................................................
10.7.a -- Letter Agreement Regarding Inventory Financing dated December 7, 1993
between ITT Commercial Finance Corp. and Registrant....................
10.7.b -- Agreement for Wholesale Financing dated November 11, 1993 between ITT
Commercial Finance Corp. and Registrant................................
10.7.c -- Intercreditor Agreement dated January 7, 1994 between The Bank of New
York and ITT Commercial Finance Corp...................................
10.8.a -- Letter Agreement Regarding Inventory Financing dated April 22, 1996
between AT&T Capital Corporation and Registrant........................
62
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
10.8.b -- Intercreditor Agreement dated May 18, 1994 between AT&T Commercial
Finance Corporation and The Bank of New York...........................
10.9 -- Reseller Agreement dated May 1, 1990 between Toshiba America
Information Systems, Inc. and Registrant...............................
23.1 -- Consent of KPMG Peat Marwick LLP (contained on page II-5)..............
23.2 -- Consent of Epstein Becker & Green, P.C. (included in Exhibit 5)........
24 -- Power of Attorney (included as part of signature page).................
27 -- Financial Data Schedule................................................
- ---------------
* To be filed by amendment.