UNITED STATES
.. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -
ACT OF 1934
..
For the fiscal year ended July 31, 2004
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21695
MANCHESTER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I. D. Number)
160 Oser Avenue, Hauppauge, New York, 11788
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (631) 951-8100
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
------------------
Indicate by check mark whether Registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES __X__ NO _____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the common stock held by non-affiliates of
Registrant as of January 31, 2004 was $11,052,486 (2,600,585 shares at a closing
sale price of $4.25).
As of October 14, 2004, 8,263,584 shares of Common Stock ($.01 par value) of
Registrant were issued and outstanding.
-------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
Explanatory Note
Manchester Technologies, Inc. (the "Company") is filing this Amendment No.
1 to its Form 10-K for the year ended July 31, 2004 to amend the Annual Report
on Form 10-K for the year ended July 31, 2004 previously filed by the Company
(the "Original July 31, 2004 Form 10-K"), in order to reflect the Company's
decision to exclude separate disclosure of cash flows pertaining to discontinued
operations in the fiscal 2004 cash flow statement, presented in our Consolidated
Statements of Cash Flows. The reclassification of the fiscal 2004 cash flow
statement will have no impact on the statements of operations or the balance
sheet of the Company in any period presented.
Because of the changes to our fiscal 2004 cash flow statement presented in
our Consolidated Statements of Cash Flows, we are amending the Original July 31,
2004 Form 10-K to:
o Revise Part II Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations. We have revised the first and second
paragraphs in "Cash Flows" under the heading "Liquidity and Capital Resources."
o Revise Part IV Item 15: Exhibits, Financial Statement Schedules and Reports on
Form 8-K. We have inserted the conformed signature to the accountants report of
KPMG LLP, the independent registered public accounting firm of the Company,
which was inadvertently omitted from the Original July 31, 2004 Form 10-K. We
have also revised the Financial Statement Schedules. The revisions appear in:
- - The Report of the Independent Registered Public Accounting Firm.
- - The statement of cash flows for the year ended July 31, 2004 included in
the Company's Consolidated Statements of Cash Flows.
- - Note 1 Part (o) to the Consolidated Financial Statements
"Reclassifications."
- - Note 2 to the Consolidated Financial Statements in the last paragraph of
"Discontinued Operations."
As part of this Amendment No. 1, the Company is also filing a new auditors
consent (Exhibit 23) and new certifications from our Chief Executive Officer and
Chief Financial Officer (Exhibits 31.1, 31.2, and 32.1).
No attempt has been made in this Form 10-K/A to update other disclosures
presented in the original Form 10-K, except as described above. This Form 10-K/A
does not reflect events occurring after the filing of the original Form 10-K or
modify or update those disclosures, except as described above. Accordingly, this
Form 10-K/A should be read in conjunction with our filings made with the
Securities and Exchange Commission subsequent to the filing of the original Form
10-K, including any amendments to those filings.
2
MANCHESTER TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED JULY 31, 2004
TABLE OF CONTENTS
Part I
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Item 9A Controls and Procedures 19
Item 9B Other Information 19
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
Item 13. Certain Relationships and Related Transactions 25
Item 14. Principal Accounting Fees and Services 25
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures
Certifications
3
PART I
ITEM 1. Business
Our Company
Manchester Technologies, Inc., a New York corporation ("Manchester" "we,"
"us," "our," or the "Company"), is a distributor of display technology solutions
and plasma display monitors through its wholly-owned subsidiary, Electrograph
Systems, Inc., a New York corporation ("Electrograph"). Manchester also
distributes computer hardware, primarily to dealers and system integrators. We
offer our customers solutions, customized to their display technology needs, by
offering a complete line of products and peripherals for our customers' display
technology requirements. We have forged long-standing relationships with
customers, manufacturers and suppliers and capitalized on the rapid developments
in the technology industry.
On May 28, 2004, the Company sold its end-user information technology
fulfillment and professional services business (the "IT Business") to ePlus,
inc. ("ePlus"), a leading provider of Enterprise Cost Management, in an all cash
transaction. The transaction included the sale to ePlus of the customer list of
the business and certain related equipment, the assumption by ePlus of certain
contracts and liabilities pertaining to the business and the hiring by ePlus of
the majority of Manchester employees involved in the business. The transaction
did not include, and Manchester retained, the inventory and accounts receivable
of the IT Business.
Prior to the sale of the IT Business, Manchester specialized in hardware
and software procurement, display technology, custom networking, security, IP
telephony, remote management, application development/e-commerce, storage, and
enterprise and Internet solutions, offering its customers single-source
solutions customized to their information systems needs by integrating its
analysis, design and implementation services with hardware, software, networking
products and peripherals from leading vendors. Subsequent to such sale, the
Company has continued distributing display technology solutions and plasma
display monitors and computer hardware, but no longer provides professional
services.
Manchester was incorporated in New York in 1973 and has two active
wholly-owned subsidiaries: Electrograph Systems and Manchester International,
Ltd., a New York corporation, which sells computer hardware, software and
networking products to resellers domestically and internationally.
Industry
The display industry, as a whole, has experienced tremendous growth over
the past decade. Specific products included in this market include Liquid
Crystal Display ("LCD") Projectors, LCD Flat panel displays and plasma display
panels. Specifically, the flat panel display market is currently experiencing
accelerated growth, including growth in the consumer market.
The display market has moved from the early adopter stage of the product
cycle and has moved and continues to move into both the consumer and commercial
markets. The flat panel display market covers numerous markets including home
theater, professional audio-visual and information technology. The total
worldwide plasma display panel market is expected to continue to grow as market
acceptance increases. Industry-wide sales of flat panel display products and
projectors are expected to be in the hundreds of thousands of units over the
next few years.
Our Mission
With our display technology solutions, we are committed to the
multi-faceted support of our reseller partners. Our mission is to deliver
value-added technical product support and customization that differentiates the
Company from the competition, which will allow our reseller partners to be more
competitive and ultimately more profitable. Our VAP (Value-Added Plus) extended
warranty program offers the reseller channel an extensive "value-added"
distribution product.
Our Products
Through our "value-added" business model and philosophy we have been able
to capitalize on the display industry growth, penetrate new markets and increase
the Company's overall market share. For over twenty years Electrograph has
provided resellers with a spectrum of "value-added" technical product support
and product customization. These include our strategically located nationwide
sales offices, a nationwide inside sales support staff, nationwide warehousing
for efficient product logistics, product customization and factory authorized
service and repair. In addition, the Company also offers marketing, technical
and installation support, custom integrated solutions, touch screen solutions,
custom cabinet painting and digital signage solutions, as well as a line up of
peripheral products.
4
We offer a wide variety of display technology solutions and peripherals,
including CRT Display Monitors, LCD Flat Panel Monitors, LCD Projectors, Plasma
Display Monitors and Supplies and Accessories. We have long-standing
relationships with many manufacturers, which we believe assist us in procuring
desired products on a timely basis and on desirable financial terms. We sell
products from most major manufacturers, including, Pioneer Corporation,
Panasonic, Sony Corporation, NEC Solutions, Inc., NEC-Mitsubishi, Inc, Hitachi
America, Ltd., Philips Electronics, N.V. and Toshiba America Information
Systems, Inc.
We also offer a wide range of product repair services for both in warranty
and out of warranty products for our customers' display technology requirements.
The Company is an authorized service and repair facility for most of the
manufacturers that we represent. We also provide extensive technical and
installation support to both resellers and end users. Additional revenue is also
being generated as a result of the fees received for the Electrograph -
Value-Added Plus(R) Extended Warranty Program, which is a product that is
provided by an insured third party warranty provider.
The Company also offers custom integrated solutions, including custom
cabinet painting and touch screen solutions. Such services are performed for the
customer prior to product shipment. Our custom integrated solutions are used in
numerous market segments including digital signage, public display point of
purchase and point of sale applications. These solutions help to improve the
Company's unique focus on the value-added niche, further differentiating the
Company from the competition and improving the Company's market penetration.
As part of our goal to make our products more accessible to our customers,
we are in the process of implementing an electronic ordering system. This
ordering system will enable participating customers to access the Company via
the Internet, review various products and systems offered by us, and place and
track their orders on-line. Customers will also be able to obtain immediate
customized information regarding products and systems 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 and proper reseller authorization.
In addition, we have continuously upgraded and expanded our electronic
communication system. Our website, located at www.electrograph.com, allows
existing customers, corporate shoppers and others to find product
specifications, compare products, check price and track orders quickly and
easily 24 hours a day, seven days a week. We have made, and expect to continue
to make, significant investments and improvements in our e-commerce
capabilities.
For the fiscal year ended July 31, 2004, sales of products manufactured by
Pioneer, NEC and Panasonic comprised approximately 24%, 16% and 14%,
respectively, of our revenue. For the fiscal year ended July 31, 2003, sales of
products manufactured by Pioneer, NEC and Panasonic comprised approximately 29%,
12% and 11%, respectively, of our revenue. For the fiscal year ended July 31,
2002, sales of products manufactured by NEC and Pioneer comprised approximately
25% and 24%, respectively, of our revenue.
Relationships with Manufacturers
We have entered into agreements with our principal suppliers and
manufacturers that include provisions providing for periodic renewals and permit
termination by the vendor without cause, generally upon 30 to 90 days written
notice, depending upon the vendor. While our principal suppliers and
manufacturers have regularly renewed their respective agreements with us, there
can be no assurance that the regular renewal of our agreements will continue.
The termination, or non-renewal, of any or all of these agreements would
materially adversely affect our business. We, however, are not aware of any
reason for the termination, or non-renewal, of any of those agreements and
believe that our relationships with our principal suppliers and manufacturers
are satisfactory.
We are dependent upon the continued supply of products from our
manufacturers, particularly Pioneer, Panasonic and NEC. Occasionally, certain
suppliers and manufacturers experience shortages of select products that render
them unavailable or necessitate product allocations. We believe that product
availability issues occur as a result of the present dynamics of the technology
industry as a whole, which include varied customer product demand, shortened
product life cycles and increased frequency of new product introductions into
the marketplace. While there can be no assurance that product unavailability or
product allocation, or both, will not increase in fiscal 2005, the impact of
such an interruption is not expected to be unduly troublesome due to the breadth
of alternative product lines available to the Company.
We seek to obtain volume discounts for large customer orders directly from
manufacturers. Many of our major product manufacturers provide stock balancing
rights and price protection for a limited time period, by way of credits or
refunds, for price reductions by the manufacturer between the time of the
initial sale to the Company and the subsequent sale by the Company to our
customers. There can be no assurance that manufacturers will not further limit
or eliminate price protection and stock balancing rights in the future.
5
Customers
We believe that we benefit from our long-standing relationships with many
of our customers, providing opportunities for continued sales. We believe that
our broad range of capabilities with respect to our products is attractive to
companies of all sizes. For the fiscal years ended July 31, 2004, 2003 and 2002,
no one customer accounted for more than 10% of our total revenue.
We grant credit to customers meeting specified criteria and maintain a
credit department that reviews credit applications. Accounts are regularly
monitored for collectibility and appropriate action is taken upon indication of
credit risk.
Our return policy generally allows customers to return products, without
restocking charges, within 30 days of the original invoice date, subject to
advance approval, our ability to return the product to our vendor and certain
other conditions. We are generally able to return defective merchandise returned
from customers to the vendor for repair or replacement.
Sales and Marketing
Sales are generated primarily by our 29 sales and marketing
representatives. Our sales representatives generally are responsible for meeting
all of our customers' product 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 which our new
and existing product offerings are discussed.
We believe that our name is widely recognized for high quality,
competitively priced products. We promote name recognition and the sale of our
products through national and regional business directories, trade magazine
advertisements, direct mailings and e-mailings to customers and participation in
trade shows and special events. We also promote interest in our products through
our website on the Internet, and have expanded website functionality to provide
an electronic catalog of our products. Several manufacturers offer cooperative
advertising and other promotional programs, on which we rely to partially fund
many of our advertising and promotional campaigns.
Management Information Systems
We currently use an IBM AS/400 and a Hewlett Packard storage area network
in our integrated management information system, which enable instantaneous
access. We maintain proprietary management systems on our computer system
pursuant to which product purchases and sales are continually tracked and
analyzed. Our computer system is also used for accounting, billing and
invoicing. We utilize experienced in-house technical personnel to upgrade and
integrate additional functions into our management information systems.
Our information system assists management in maintaining controls over our
inventory and receivables. For continuing operations, Manchester's average
inventory turnover was 10, 14, and 13 times for the fiscal years ended July 31,
2004, 2003, and 2002, respectively, and we experienced bad debt expense of less
than 0.5% of revenue in each of these years.
Competition
The technology industry is characterized by intense competition. We
directly compete with local, regional and national distributors as well as with
certain manufacturers that market through direct sales forces and/or the
Internet. The technology industry has recently experienced, and may continue to
experience, a significant amount of consolidation through mergers and
acquisitions. In the future, we may face further competition from new market
entrants and possible alliances between existing competitors. In addition,
certain suppliers and manufacturers have been, and additional suppliers and
manufacturers may choose, to market products directly through a direct sales
force and/or the Internet rather than, or in addition to, channel distribution.
Some of our competitors have, or may have, greater financial, marketing and
other resources, and may offer a broader range of products than us. As a result,
they may be able to respond more quickly to new or emerging technologies or
changes in customer requirements, benefit from greater purchasing economies,
offer more aggressive product pricing or devote greater resources to the
promotion of their products.
Our ability to compete successfully depends on a number of factors such as
breadth of product offerings, sales and marketing efforts and product pricing.
In addition, product margins may decline due to pricing to win new business and
increasing pricing pressures from competition. We believe that gross margins
will continue to be reactive to industry-wide changes. Future profitability will
depend on our ability to increase focus on providing technical product support
to customers, competition, manufacturer pricing strategies, as well as our
control of operating expenses, product availability,
6
and effective utilization of vendor programs. It will also depend on the
ability to attract and retain quality sales representatives while effectively
managing the utilization of such representatives. There can be no assurance that
we will be able to attract and retain such skilled representatives. The loss of
a significant number of our existing sales representatives or difficulty in
hiring or retaining additional sales representatives could have a material
adverse effect on our business, results of operations and financial condition.
Employees
On August 31, 2004, we had 96 full-time employees consisting of 29 sales
and marketing representatives, 23 management and supervisory personnel and 44
administrative and other personnel. We are not a party to any collective
bargaining agreements and believe our relations with our employees are good.
We offer an experienced and geographically comprehensive sales team. The
Company offers on site demonstrations by our nationwide outbound sales force. In
addition, the Company employs an extensive inside sales support department. The
combination of the nationwide outbound sales force and the inside sales support
staff enable the Company to take a proactive approach to the traditional
distribution sales business model, which ultimately provides the reseller with a
high level of sales and support.
Intellectual Property
We own, or have pending, several federally registered service marks with
respect to our name and logo. Most of our various agreements permit us to refer
to ourselves as an "authorized distributor" of the products of those
manufacturers and to use their trademarks and trade names for marketing
purposes. We consider the use of these trademarks and trade names in our
marketing to be important to our business.
Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc., a leading
provider of Enterprise Cost Management, in an all cash transaction. The
transaction included the sale to ePlus of the customer list of the business and
certain related equipment, the assumption by ePlus of certain contracts and
liabilities pertaining to the business and the hiring by ePlus of the majority
of Manchester employees involved in the business. The transaction did not
include, and Manchester retained, the inventory and accounts receivable of the
IT Business.
The proceeds from the sale of the IT Business were $3,555, net of related
expenses of $1,445. The Company recorded a gain of approximately $876 as a
result of the transaction, which represented the excess of the net proceeds over
a payable to ePlus, inc. of $469 for service contracts they assumed and the
$2,210 carrying value of the net assets sold, consisting of goodwill of $2,704,
property and equipment, net of $195 and deferred revenue of $689.
Prior to such sale, Manchester specialized in hardware and software
procurement, display technology, custom networking, security, IP telephony,
remote management, application development/e-commerce, storage, and enterprise
and Internet solutions, offering its customers single-source solutions
customized to their information systems needs by integrating its analysis,
design and implementation services with hardware, software, networking products
and peripherals from leading vendors.
Available Information
We make our annual, quarterly and current reports, and any amendments to
these reports, available free of charge through our website at
www.manchesterequipment.com/Manchester+Overview/About+Manchester/Investors/
default.aspx as soon as reasonably practicable after we file such document with
the Securities and Exchange Commission. The information contained on our website
is not incorporated by reference into this Form 10-K and should not be
considered to be part of this Form 10-K.
7
ITEM 2. Properties
Properties
We currently have sales branches nationwide, including the corporate
headquarters located in Hauppauge, New York. The following table identifies the
principal leased facilities.
Approximate
Square Footage Lease
Facility Location Office Warehouse Expiration Date
- -------- -------- ------ --------- ---------------
Corporate 160 Oser Avenue (1)
Headquarters Hauppauge, NY 30,000 - March 2018
Electrograph 50 Marcus Blvd.
Corporate HQ, Hauppauge, NY 10,000 30,000 March 2018
Warehouse and
Service Center
Electrograph 40 Marcus Blvd (2)
Hauppauge, NY 10,000 13,000 March 2018
Timonium, MD 1818 Pot Spring Rd.
Sales Office Timonium, MD 4,416 - November 2007
Seattle, WA 1800 Westlake Ave. N
Sales Office Seattle, WA 650 - May 2004
Las Vegas, NV 6255 McLeod Dr.
Sales Office Las Vegas, NV 718 - April 2006
Madeira Beach, FL 13222 Gulf Blvd.
Sales Office Madeira Beach, FL 1,000 - Month-to-Month
--------------------
1. In connection with the sale of the IT Business, on May 28, 2004,
approximately 24,000 square feet of this facility was sublet to an
unrelated third party through July 31, 2005 pursuant to which the subtenant
will be responsible for substantially all of the Company's obligations
under this lease through such period.
2. On August 20, 2004, this facility was sublet to an unrelated third party
for a term expiring February 2018 pursuant to which the subtenant will be
responsible for substantially all of the Company's obligations under this
lease.
For further information on the Company's properties and lease obligations, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 7 of the Notes to the Consolidated Financial Statements
in Item 15.
ITEM 3. Legal Proceedings
We are involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, based on advice from its legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during quarter
ended July 31, 2004.
8
PART II
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our Common Stock is traded on the NASDAQ National Market(R) under the
symbol MANC. The following table sets forth the quarterly high and low sale
prices for the Common Stock as reported by the NASDAQ National Market.
Fiscal Year 2003 High Low
----------------- ---- ---
First Quarter 2.430 1.699
Second Quarter 2.240 1.759
Third Quarter 2.090 1.610
Fourth Quarter 2.500 1.710
Fiscal Year 2004
----------------
First Quarter 3.500 2.160
Second Quarter 4.330 2.840
Third Quarter 5.750 3.450
Fourth Quarter 4.910 3.210
On October 14, 2004, the closing sale price for the Company's Common Stock
was $4.70 per share. As of October 14, 2004 there were 47 shareholders of record
of the Company's Common Stock. The Company believes that there are in excess of
500 beneficial holders of its common stock.
Manchester has never declared or paid any dividends to shareholders. At
this time we intend to continue our policy of retaining earnings for the
continued development and expansion of our business.
9
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The following selected financial data is qualified in its entirety by the
Consolidated Financial Statements of the Company (and the related Notes thereto)
contained in Item 15 and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The operating results and financial position data for each of the fiscal
years set forth below have been derived from the Company's audited Consolidated
Financial Statements.
Fiscal Year Ended July 31,
--------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Income Statement Data from Continuing Operations:
Revenue $173,040 $164,156 $133,749 $146,759 $140,353
Cost of revenue 156,354 147,672 117,656 132,343 129,273
------- ------- ------- ------- -------
Gross profit 16,686 16,484 16,093 14,416 11,080
Selling, general and
administrative expenses 12,892 12,214 11,142 10,848 8,433
------ ------ ------ ------ -----
Income from operations 3,794 4,270 4,951 3,568 2,647
Interest and other income (expense), net (20) 115 184 512 681
Income tax provision 1,490 1,775 2,054 1,667 1,331
----- ----- ----- ----- -----
Net income $2,284 $2,610 $3,081 $2,413 $1,997
====== ===== ===== ===== =====
Net income (loss) per share:
Basic $0.28 $0.33 $0.39 $0.30 $0.25
==== ==== ==== ==== ====
Diluted $0.28 $0.33 $0.39 $0.30 $0.24
===== ===== ===== ===== =====
Weighted average shares of common stock outstanding:
Basic 8,077 7,990 7,990 8,036 8,108
===== ===== ===== ===== =====
Diluted 8,210 8,007 7,991 8,058 8,228
===== ===== ===== ===== =====
July 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $34,368 $30,661 $30,098 $31,972 $30,453
Total assets 71,642 77,750 70,661 61,783 74,573
Shareholders' equity 42,123 43,934 46,512 45,555 44,263
10
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the other
sections of this Annual Report on Form 10-K, including "Item 1: Business"; "Item
6: Selected Financial Data"; and "Item 8: Financial Statements and Supplementary
Data." Our MD&A includes forward-looking statements that are subject to risks
and uncertainties. Actual results may differ substantially from the statements
we make in this section due to a number of factors that are discussed throughout
this filing and particularly in the section entitled "Risk Factors and
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995" beginning on page 16.
General
We are a distributor of display technology solutions and plasma display
monitors and computer hardware, primarily to dealers and system integrators. To
date, most of our revenues have been derived from product sales. We do not
develop or sell software products.
On May 28, 2004, we sold our end-user information technology fulfillment
and professional services business ("IT Business") to ePlus, inc. ("ePlus") in
an all cash transaction. The transaction included the sale to ePlus of the
customer list of the business and certain related equipment, the assumption by
ePlus of certain contracts and liabilities pertaining to the business and the
hiring by ePlus of the majority of Manchester employees involved in the
business. The transaction did not include, and we retained, the inventory and
accounts receivable of the business.
Prior to this sale, we specialized in hardware and software procurement,
display technology, custom networking, security, IP telephony, remote
management, application development/e-commerce, storage, and enterprise and
Internet solutions. Subsequent to the sale, we have continued distributing
display technology solutions and plasma display monitors and computer hardware,
but no longer provide professional services.
E-Commerce
We utilize a website incorporating an electronic communication system. The
site, located at www.electrograph.com allows both existing customers, corporate
shoppers and others to find product specifications, compare products, check
price and track orders quickly and easily 24 hours a day seven days a week. We
have made, and expect to continue to make, significant investments and
improvements in our e-commerce capabilities. There can be no assurance that we
will be successful in enhancing and increasing our business through our expanded
Internet presence.
Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc., a leading
provider of Enterprise Cost Management, in an all cash transaction. The proceeds
from the sale of the IT Business were $3,555, net of related expenses of $1,445.
The Company recorded a gain, included in loss from operations of discontinued
component in the accompanying fiscal 2004 statement of operations, of
approximately $876 as a result of the transaction, which represented the excess
of the net proceeds over a payable to ePlus, inc. of $469 for service contracts
they assumed and the $2,210 carrying value of the net assets sold, consisting of
goodwill of $2,704, property and equipment, net of $195 and deferred revenue of
$689. The loss from the operations of the discontinued IT Business was $8,492 in
fiscal 2004, which included the following charges in the fourth quarter of
fiscal 2004 associated with the discontinued IT Business:
Employee severance and other employee costs $1,016
Provision for doubtful accounts receivable 1,250
Fixed asset impairments 2,639
Other 50
--------
Total $4,955
======
As of July 31, 2004 approximately $491 of the employee severance and
other employee costs were included in accounts payable and accrued expenses in
the accompanying balance sheet located elsewhere in this report, which will be
paid in fiscal 2005, ending July 31, 2005.
11
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make judgments, assumptions and
estimates that affect the amounts reported in the consolidated financial
statements and accompanying notes. Note 1 to the consolidated financial
statements appearing elsewhere in this report describes the significant
accounting policies and methods used in the preparation of the consolidated
financial statements. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the consolidated financial statements.
Revenue Recognition. Revenue from product sales is recognized when title
and risk of loss are passed to the customer, which is at the time of shipment to
the customer. The Company does not develop or sell software products. However,
certain computer hardware products sold by the Company are loaded with
prepackaged software products. The net impact on the Company's financial
statements of product returns, primarily for defective products, has been
insignificant.
Revenue from services, which is included in discontinued operations, is
recognized when the related services are performed. When product sales and
services are bundled, revenue is recognized upon delivery of the product and
completion of the installation. Service contract fees are recognized as revenue
ratably over the period of the applicable contract. Deferred service contract
revenue represents the unearned portion of service contract fees.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is
based on our assessment of the collectibility of specific customer accounts and
the aging of the accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than our historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory. Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden and significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to increase
our inventory allowances and our gross margin could be adversely affected.
Goodwill. We perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. In assessing the recoverability
of the Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
12
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of related revenue or total revenue.
Percentage of Revenue for
the Year Ended July 31,
2004 2003 2002
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Cost of Revenue 90.4 90.0 88.0
---- ---- ----
Gross profit 9.6 10.0 12.0
---
Selling, general and administrative expenses 7.5 7.4 8.3
--- --- ---
Income from operations 2.2 2.6 3.7
Interest and other income (expense), net - 0.1 0.1
----- ---- ---
Income from continuing operations before income taxes 2.2 2.7 3.8
Income tax provision 0.9 1.1 1.5
--- --- ---
Income from continuing operations 1.3 1.6 2.3
--- --- ---
Discontinued operations:
Loss from operations of discontinued component (4.4) (4.9) (2.7)
Income tax benefit (1.6) (1.7) (1.1)
----- ---- ----
Loss on discontinued operations (2.8) (3.2) (1.6)
----- ----- -----
Net income (loss) (1.4)% (1.6)% 0.7%
===== ====== ====
Year Ended July 31, 2004 Compared to Year Ended July 31, 2003
Revenue. Revenue increased by $8.9 million or 5% to $173.0 million for the
year ended July 31, 2004 or fiscal 2004 from $164.2 million for the year ended
July 31, 2003 or fiscal 2003. The increase in revenue is primarily a result of
an increase in unit sales of display technology solutions, primarily sales of
large screen flat panel displays, as a result of the growth in the industry
which is anticipated to continue to grow. This increase was partially offset by
a decrease in average selling prices of large screen flat panel displays and a
decrease in sales of computer hardware to dealers and systems integrators.
Gross Profit. Cost of revenue includes the direct costs of products sold
and freight. All other operating costs are included in selling, general and
administrative expenses. Gross profit increased by $0.2 million or 1% from $16.5
million in fiscal 2003 to $16.7 million in fiscal 2004. As a percentage of
revenue, gross profit was 9.6% in fiscal 2004 as compared to 10.0% in fiscal
2003. The decrease in the gross profit percentage is directly attributable to
the more accelerated decrease in average selling prices of display technology
solutions, primarily sales of flat panel displays, than the decrease in the cost
of purchasing the products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.7 million or 6% from $12.2 million in
fiscal 2003 to $12.9 million in fiscal 2004. The increase is principally due to
an increase in salaries and other personnel costs of approximately $429,000
reflecting the increase in employee headcount and associated costs with respect
to the continuing growth of the business, increased sales commissions of
approximately $238,000 and increased tradeshow costs of approximately $111,000.
These increases were partially offset by lower rent expense of approximately
$114,000 as a result of the capital leases entered into in March 2003. As a
percentage of revenue, selling, general and administrative expenses increased
from approximately 7.4% in fiscal 2003 to 7.5% in fiscal 2004.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by $135,000 from income of approximately $115,000 in
fiscal 2003 to an expense of approximately $20,000 in fiscal 2004. The decrease
in fiscal 2004 as compared to fiscal 2003 is primarily a result of the Company's
receipt of insurance proceeds in the amount of $113,000 in fiscal 2003.
13
Income Tax Provision. Our effective tax rate was 39.5% and 40.5% for fiscal
2004 and fiscal 2003, respectively.
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations in the accompanying consolidated
statements of operations. The net loss from discontinued operations was $4.8
million and $5.2 million for fiscal 2004 and fiscal 2003 respectively. The
statement of operations for the year ended July 31, 2003 has been reclassified
to present discontinued operations.
Year Ended July 31, 2003 Compared to Year Ended July 31, 2002
Revenue. Revenue increased by $30.4 million or 23% to $164.2 million for
fiscal 2003 from $133.7 million for the year ended July 31, 2002 or fiscal 2002.
The increase in revenue is primarily a result of an increase in unit sales of
display technology solutions, primarily sales of large screen flat panel
displays, as a result of the growth in the industry.
Gross Profit. Gross profit increased by $0.4 million or 2% from $16.1
million in fiscal 2002 to $16.5 million in fiscal 2003. As a percentage of
revenue, gross profit was 10.0% in fiscal 2003 as compared to 12.0% in fiscal
2002. The decrease in the gross profit percentage is directly attributable to
the more accelerated decrease in average selling prices of display technology
solutions, primarily sales of flat panel displays, than the decrease in the cost
of purchasing the products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.1 million or 10% from $11.1 million in
fiscal 2002 to $12.2 million in fiscal 2003. The increase is principally due to
an increase in salaries and other personnel costs of approximately $412,000
reflecting the increase in employee headcount and associated costs with respect
to the continuing growth of the business, increased telephone expense of
approximately $144,000, increased bad debt expense of approximately $145,000
resulting from the increase in sales and increased depreciation costs of
approximately $104,000. As a percentage of revenue, selling, general and
administrative expenses decreased from approximately 8.3% in fiscal 2002 to 7.4%
in fiscal 2003.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by $69,000 from income of approximately $184,000 in
fiscal 2002 to income of approximately $115,000 in fiscal 2003. The decrease in
fiscal 2003 as compared to fiscal 2002 is primarily a result of the interest
expense portion of the capital leases of approximately $117,000, entered into by
the company in March 2003 offset by the receipt of insurance proceeds in the
amount of $113,000 in fiscal 2003 and decreased income earned on the Company's
investments of approximately $65,000.
Income Tax Provision. Our effective tax rate was 40.5% and 40.0% for fiscal
2003 and fiscal 2002, respectively.
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations in the accompanying consolidated
statements of operations. The net loss from discontinued operations was $5.2
million and $2.1 million for fiscal 2003 and fiscal 2002 respectively. The
statement of operations for the years ended July 31, 2003 and July 31, 2002 have
been reclassified to present discontinued operations.
Liquidity and Capital Resources
Working Capital
Our primary source of cash and cash equivalents has been internally
generated working capital from profitable operations. The Company's working
capital at July 31, 2004 and July 31, 2003 was approximately $34.4 million and
$30.7 million, respectively.
Cash Flows
Operating activities for fiscal 2004, 2003 and 2002, provided (used) cash
of approximately $5.3 million, $0.9 million and $(0.7) million, respectively.
The cash provided by operating activities in fiscal 2004 was primarily related
to the collection of accounts receivable and other changes resulting from the
sale of the IT Business, partially offset by a $10.7 million increase in
inventory that resulted from increased sales, as well as increased inventory
purchases due to special product offerings and volume discounts received from
manufacturers. Our accounts receivable and accounts payable balances, as well as
our inventory balances, can fluctuate significantly from one period to the next
due to the receipt of large customer orders or payments or variations in product
availability and vendor shipping patterns at any particular date.
Investing activities for fiscal 2004, 2003 and 2002 provided (used) cash of
approximately $2.7 million, $(1.3) million and $(4.2) million, respectively. For
fiscal 2004 this amount included approximately $3.6 million of net proceeds from
the
14
sale of the IT Business partially offset by approximately $0.9 million of
additions to property and equipment. For fiscal 2003 this amount consisted
solely of additions to property and equipment. For fiscal 2002 this amount
included approximately $2.6 million of additions to property and equipment and
approximately $1.6 million for acquisitions, net of cash acquired.
Financing activities for fiscal 2004, 2003 and 2002 provided (used) cash of
approximately $343,000, $(65,000) and $(558,000), respectively. For fiscal 2004,
this amount consisted of proceeds from the exercise of stock options of
approximately $549,000 partially offset by $206,000 of payments on capitalized
lease obligations. For fiscal 2003 this amount consisted solely of payments on
capitalized lease obligations. For fiscal 2002 this amount consisted solely of
net repayments of bank loans and other debt from acquisitions made during the
period.
Line of Credit
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At July 31, 2004, no amounts were outstanding
under this line which expires on January 31, 2005. The line of credit facility
requires the Company to maintain certain financial ratios and covenants. At July
31, 2004, the Company was not in compliance with all the financial ratios and
covenants that it is required to maintain in connection with its line of credit.
The Company received a waiver waiving its requirements from its bank for the
period ended July 31, 2004.
Financial Commitments
We believe that our current balances in cash and cash equivalents, expected
cash flows from operations and available borrowings under the line of credit
will be adequate to support current operating levels for the foreseeable future,
specifically through at least the end of fiscal 2005 which ends on July 31,
2005. We currently have no material commitments for capital expenditures, other
than operating and capital leases, that the Company has committed to for its
facilities and certain tangible property. Future capital requirements of the
Company include those for the growth of working capital items such as accounts
receivable and inventory, the purchase of equipment, expansion of facilities, as
well as the possible opening of new offices and potential acquisitions.
As part of the sale to ePlus, inc. of the Company's end-user information
technology fulfillment and professional services business in May 2004, ePlus,
inc. entered into sublease and lease assignment agreements with the Company for
up to a one year term with respect to certain of the Company's facilities. In
addition, in August 2004 the Company entered into a sublease agreement with an
unrelated third party for its office and warehouse space at 40 Marcus Boulevard.
The terms of the sublease extend through February 2018 and cover substantially
all of the Company's responsibility under its lease. There are no other
transactions, arrangements and other relationships with unconsolidated entities
or other persons that are reasonably likely to affect liquidity or the
availability of, or requirements for, capital resources.
The following table represents the Company's financial commitments as of
July 31, 2004 without taking into account any sublease rental income:
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
(in thousands)
Capital leases $7,929 $246 $ 972 $879 $5,832
Operating leases 1,598 306 1,292 - -
---- ----- ----- --- --------
Total $9,527 $552 $2,264 $879 $5,832
====== ==== ====== ==== ======
The Company regularly examines opportunities for strategic acquisitions of
other companies or lines of business and anticipates that it may issue debt
and/or equity securities either as direct consideration for such acquisitions or
to raise additional funds to be used (in whole or in part) in payment for
acquired securities or assets. The issuance of such securities could be expected
to have a dilutive impact on the Company's shareholders, and there can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated investment.
Impact of Recently Issued Accounting Standards
The FASB recently issued a proposed accounting standard that would require
stock-based employee compensation to be recorded as a charge to earnings
beginning in calendar 2005. The Company will continue to monitor the progress of
the issuance of this standard as well as evaluate the impact on the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("Int. No. 46") an interpretation of ARB No. 51.
Int.
15
No. 46 addresses consolidation by business enterprises of variable interest
entities. Int. No. 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. Int. No. 46, as revised, applies in the
first year or interim period beginning after December 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company adopted Int. No. 46 in fiscal
2004, which had no impact on its consolidated financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, Revenue arrangements with Multiple Deliverables. The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables is not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The Company adopted EITF 00-21 in fiscal 2004 which did not
have a significant impact on the Company's financial position or results of
operations.
Inflation
We do not believe that inflation has had a material effect on our
operations.
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning
of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, which statements are made pursuant to the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995.
Forward-looking statements are generally identifiable by the use of the words
"believes," "intends," "expects," "will," "plans," "anticipates," or similar
expressions. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and in good faith,
assumed facts or bases almost always vary from the actual results, and
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we
express an expectation or belief as to future results, that expectation or
belief is expressed in good faith and is believed to have a reasonable basis. We
cannot assure you, however, that the statement of expectation or belief will
result or be achieved or accomplished, and readers are cautioned not to place
undue reliance on any forward-looking statements, which reflect our opinions
only as of the date hereof. All of our forward-looking statements are expressly
qualified by these cautionary statements and any other cautionary statements
that may accompany such forward-looking statements. We undertake no obligation
to revise or publicly release the results of any revision to any forward-looking
statements.
Our Industry is Subject to Numerous Potentially Adverse Business Conditions
The technology industry is characterized by a number of potentially adverse
business conditions, including pricing pressures, evolving distribution channels
and market consolidation. Heightened price competition among various
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
Our Success is Dependent, in Part, on Maintaining a Highly Skilled Sales Force
Our success depends in large part upon our ability to attract and retain
highly skilled sales representatives in a very competitive labor market. The
loss of a significant number of our existing sales representatives, or
difficulty in hiring or retaining additional sales representatives, may have a
material adverse effect on our business, results of operations and financial
condition.
Our Industry is Highly Competitive, with Other Competitors Having Greater
Resources
The technology industry is characterized by intense competition. We
directly compete with local, regional and national distributors as well as with
certain technology manufacturers that market through direct sales forces and/or
the
16
Internet. The technology industry has recently experienced, and may continue to
experience, a significant amount of consolidation through mergers and
acquisitions. In the future, we may face further competition from new market
entrants and possible alliances between existing competitors. In addition,
certain suppliers and manufacturers have been, and additional suppliers and
manufacturers may choose, to market products directly to end users through a
direct sales force and/or the Internet rather than or in addition to channel
distribution. Some of our competitors have or may have, greater financial,
marketing and other resources, and may offer a broader range of products than
us. As a result, they may be able to respond more quickly to new or emerging
technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware pricing or devote greater
resources to the promotion of their products. We may not be able to compete
successfully in the future with these or other current or potential competitors.
We Rely on Maintaining Good Relationships with Our Vendors, and Certain Products
We Sell May Be in Short Supply
Our business is dependent upon our relationships with major manufacturers
and distributors in the technology industry. Many aspects of our business are
affected by our relationships with major manufacturers, including product
availability, pricing and related terms. The increasing demand for display
technology solutions and ancillary equipment has resulted in significant product
shortages from time to time, because manufacturers have been unable to produce
sufficient quantities of certain products to meet demand. In addition, many
manufacturers have adopted "just in time" manufacturing principles that can
reduce the immediate availability of a wide range of products at any one time.
We cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations.
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. We rely on these funds for many of our advertising and
promotional campaigns. If manufacturers reduce their level of support for these
programs, or discontinue them altogether, we would have to increase our
advertising and promotion spending, which may have a material adverse effect on
our business, financial condition and results of operations.
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our inability to sell products to computer
resellers and thereby obtain the desired volume discounts from manufacturers may
have a material adverse effect on our business, financial condition and results
of operations.
We Must Rapidly Respond to New Product Offerings and Manage Our Inventory
Carefully
The markets for our products are characterized by rapidly changing
technology and frequent introduction of new products. This may render many
existing products noncompetitive, less profitable or obsolete. Our continued
success will depend on our ability to keep pace with the technological
developments of new products and to address increasingly sophisticated customer
requirements. Our success will also depend upon our abilities to obtain these
new products from present or future manufacturers and vendors at reasonable
costs, to educate and train our employees as well as our customers with respect
to these new products and to integrate effectively and efficiently these new
products into both our internal systems. We may not be successful in
identifying, developing and marketing product developments or enhancements in
response to these technological changes. Our failure to respond effectively to
these technological changes may have a material adverse effect on our business,
financial condition and results of operations.
Rapid product improvement and technological change characterize the
technology industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers and manufacturers provide price protection to us,
which is intended to reduce the risk of inventory devaluation due to price
reductions on current products. Certain of our suppliers also provide stock
balancing to us pursuant to which we are able to return unsold inventory to a
supplier or manufacturer as a partial credit against payment for new products.
There are often restrictions on the dollar amount of inventory that we can
return at any one time. Price protection and stock balancing may not be
available to us in the future, and, even if available, these measures may not
provide complete protection against the risk of excess or obsolete inventories.
Certain manufacturers have reduced the period for which they provide price
protection and stock balancing rights. Although we maintain a sophisticated
proprietary inventory management system, we cannot assure you that we will
continue to successfully manage our existing and future inventory. Our failure
to successfully manage our current or future inventory may have a material
adverse effect on our business, financial condition and results of operations.
17
As a result of the rapid changes that are taking place in display
technologies, product life cycles are short. Accordingly, our product offerings
change constantly. Prices of products change frequently, with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The technology industry has experienced rapid declines
in average selling prices of display technology and computer hardware. In some
instances, we have been able to offset these price declines with increases in
units shipped. There can be no assurance that average selling prices will not
continue to decline or that we will be able to offset declines in average
selling prices with increases in units shipped.
We Are Highly Dependent on a Select Group of Senior Management
We are highly dependent upon the services of the members of our senior
management team. The loss of any member of the senior management team may have a
material adverse effect on our business.
We May, From Time to Time, Take Actions to Enhance Shareholder Value, Which
Actions May Not be Successful
The Company periodically considers methods of enhancing shareholder value,
including, without limitation, acquisitions, divestitures, business
combinations, and strategic partnering. There can be no assurance that we will
consummate any such transactions, be able to identify suitable candidates for
any such transactions or to negotiate successfully such transactions at a price
or on terms and conditions favorable to us and our shareholders. Acquisitions
may be of significant size and may include assets that are outside our
geographic territories or are ancillary to our core business strategy. In
addition, there can be no assurance that the divestiture of our IT Business or
any other action taken with the intent of enhancing shareholder value will
result in an increase in our revenues or earnings or otherwise increase
shareholder value.
Our Revenues and Operating Results Fluctuate From Quarter to Quarter
Our quarterly revenue and operating results have varied significantly in
the past and are expected to continue to do so in the future. Quarterly revenue
and operating results generally fluctuate as a result of the demand for our
products, the introduction of new hardware with improved features, changes in
the level of our operating expenses, competitive conditions and economic
conditions. As a result, we believe that period-to-period comparisons of our
operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not
necessarily indicative of results to be expected for a full fiscal year.
We Rely on the Continued Proper Functioning of our Information Technology
Systems
Our success is dependent in part on the accuracy, proper utilization and
continuing development of our information technology systems, including our
business application systems, Internet servers and telephony system. The quality
and our utilization of the information generated by our information technology
systems affects, among other things, our ability to conduct business with our
customers, manage our inventory and accounts receivable, purchase, sell, ship
and invoice our products efficiently and on a timely basis and maintain
cost-efficient operations. While we have taken steps to protect our information
technology systems from a variety of threats, including computer viruses and
malicious hackers, we cannot guarantee that such steps will be effective. If
there is a disruption to or an infiltration of our information technology
systems, it could significantly harm our business and results of operations.
This discussion of uncertainties is by no means exhaustive, but is designed
to highlight important factors that may impact the Company's outlook and
results.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not exposed to significant market risk. The Company
primarily invests its cash in mutual funds consisting of U.S. Government and
Government Agency Securities, Municipal Bonds and Corporate Fixed Income
securities. Neither a 100 basis point increase nor decrease from current
interest rates would have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 8. Financial Statements and Supplementary Data
The information required by this item is contained in a separate section of
this Report beginning on page F-1. See Index to Consolidated Financial
Statements beginning on page F-1.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
18
None.
ITEM 9A. Controls and Procedures
Within 90 days prior to the filing of this report, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures as defined in Rule 14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon the evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded the
Company's disclosure controls and procedures were effective, in all material
respects, in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) and to ensure that the
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
There have been no significant changes in the Company's internal controls
or in other factors subsequent to the date of the evaluation that could
significantly affect these controls.
ITEM 9B. Other Information
None.
19
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table sets forth information concerning each of the
directors and executive officers of the Company:
Name Age Position
- ---- --- --------
Barry R. Steinberg 62 Chairman of the Board, President, Chief
Executive Officer and Director
Seth Collins 37 Executive Vice President and Secretary
Elan Yaish 34 Vice President Finance, Chief Financial
Officer and Assistant Secretary
Joel G. Stemple, Ph.D. 62 Director
Joel Rothlein, Esq. 75 Director
Bert Rudofsky 71 Director
Michael E. Russell 57 Director
Julian Sandler 60 Director
Yacov A. Shamash, Ph.D. 54 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.
Seth Collins has served as Executive Vice president and Secretary since
August 1, 2004. Prior to that he served as Vice President of Operations since
January 2003 and Director of Operations since joining the Company in February
1999. Prior to joining Manchester in February 1999, Mr. Collins was a manager in
the financial services consulting group of Oracle. Previously, Mr. Collins
worked for FleetBoston and Andersen Consulting. Mr. Collins is the son-in-law of
Barry R. Steinberg.
Elan Yaish has served as Vice President Finance since January 2003 and as
the Company's Chief Financial Officer and Assistant Secretary since August 2002.
From February 2000 until joining the Company, Mr. Yaish served as Assistant Vice
President of Finance for Comverse Technology, Inc. From June 1996 until February
2000, Mr. Yaish was employed as Vice President of Finance and Controller for
Trans-Resources, Inc. Mr. Yaish is a Certified Public Accountant, a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
Joel G. Stemple, Ph.D. has served as a Director since August 1982. He
served as Executive Vice President of the Company from September 1996 until July
31, 2004 and prior to that as Vice President 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.
Joel Rothlein, Esq. has been a director of the Company since October 1996.
Mr. Rothlein is a partner in the law firm of Kressel Rothlein Walsh & Roth, LLC,
at Massapequa, New York. Kressel Rothlein Walsh & Roth, LLC, and its predecessor
firms, have acted as outside general counsel to the Company since the inception
of the Company.
Bert Rudofsky became a director on July 15, 1998. Mr. Rudofsky is the
founder and president of Bert Rudofsky and Associates, a management consulting
firm specializing in the computer industry. Mr. Rudofsky was a founder of MTI
Systems Corp., a leading edge, technical, value-added distribution company
specializing in computer and data communications products. Mr. Rudofsky was CEO
of MTI from 1968 until MTI was sold in 1990.
Michael E. Russell became a director on July 15, 1998. Mr. Russell is
presently a Director of Investments at Wachovia Securities and has held several
distinguished positions as a member of the business community, as a member of
the New York State Metropolitan Transportation Authority (1987-1989), as
commissioner of the New York State
20
Commission on Cable Television (1989-1991) and as Special Assistant to the New
York State Senate Majority Leader (1991-1994).
Julian Sandler became a director on December 2, 1996. Mr. Sandler is Chief
Executive Officer of Rent-a-PC, Inc., a full-service provider of short-term
computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is also the
founder and was the President from 1974 to 1993 of Brookvale Associates, a
national organization specializing in the remarketing of hardware manufactured
by Digital Equipment Corporation. Mr. Sandler also co-founded and from 1970 to
1973 was Vice President of Periphonics Corporation, a developer and manufacturer
of voice response systems.
Yacov A. Shamash, Ph.D. became a Director of the Company on December 17,
2003, and has been the Dean of Engineering and Applied Sciences at the State
University of New York campus at Stony Brook since 1992. Dr. Shamash developed
and directed the NSF Industry/University Cooperative Research Center for the
Design of Analog/Digital Integrated Circuits from 1989 to 1992 and also served
as Chairman of the Electrical and Computer Engineering Department at Washington
State University from 1985 until 1992. Dr. Shamash also serves as a Director of
Key Tronic Corporation, Netsmart Technologies, and American Medical Alert Corp.
Audit Committee Composition
The Company has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Bert Rudofsky, Michael E. Russell
and Julian Sandler are the members of our audit committee.
Audit Committee Financial Experts
The audit committee plays an important role in promoting effective
corporate governance, and it is imperative that members of the audit committee
have requisite financial literacy and expertise. Our Board of Directors has
determined that in its judgment, each of Bert Rudofsky, Michael E. Russell and
Julian Sandler qualifies as an "audit committee financial expert" in accordance
with the applicable rules and regulations of the SEC. An audit committee
financial expert is a person who has (1) an understanding of generally accepted
accounting principles and financial statements; (2) the ability to assess the
general application of such principles in connection with the accounting for
estimates, accruals and reserves; (3) experience preparing, auditing, analyzing
or evaluating financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by the
registrant's financial statements, or experience actively supervising one or
more persons engaged in such activities; (4) an understanding of internal
controls and procedures for financial reporting; and (5) an understanding of
audit committee functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of the Common Stock
(collectively, "Reporting Persons") file reports of their trading in our equity
securities with the Securities and Exchange Commission. Based on a review of
Section 16 forms filed by the Reporting Persons during the fiscal year ended
July 31, 2004, we believe that the Reporting Persons timely complied with all
applicable Section 16 filing requirements, with the exception of Mr. Rudofsky,
who filed Form 4 reporting the issuance of options to him by the Company
approximately two weeks late, and Mr. Valentine, who filed Form 4 reporting the
issuance of options to him by the Company approximately five weeks late.
Code of Ethics
The Company has adopted a Code of Ethics (as defined in Item 406 of
Regulation S-K) that applies to our Chief Executive Officer, Chief Financial
Officer, and members of our Finance Department. The Company has also adopted a
Code of Business Conduct and Ethics that applied to all of our employees as well
as our Board of Directors. These Codes are posted on our website at
www.manchesterequipment.com/Manchester+Overview/About+Manchester/Investors/
default.aspx under the heading "Code of Ethics" and "Code of Business Conduct
and Ethics." We intend to satisfy the disclosure requirement regarding any
amendment to, or a waiver of, a provision of our Codes by posting such
information at the same location on our website.
ITEM 11. Executive Compensation.
The following table sets forth a summary of the compensation paid or
accrued by the Company during the fiscal years ended July 31, 2004, 2003, and
2002 to the Company's Chief Executive Officer and to its next five most highly
compensated executive officers whose compensation exceeded $100,000
(collectively, the "Named Executive Officers"):
21
Summary Compensation Table
Long Term
Compensation
------------
Annual Compensation Common Stock
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation
- ------------------ ---- ------ ----- ----------------------- ------------
Barry R. Steinberg, 2004 $650,000 $55,808 (2) - -
President and Chief 2003 $650,000 - $47,931 (2) - -
Executive Officer 2002 $650,000 - $49,429 (2) - -
Seth Collins, 2004 $225,000 $150,000 $13,500 (3) - -
Executive Vice President 2003 $171,202 - $20,700 (3) - -
and Secretary(8)
Elan Yaish, 2004 $225,000 $150,000 $21,950 (4) - -
Chief Financial Officer, Vice 2003 $200,782 $ 25,000 $12,433 (4) - -
President - Finance and
Assistant Secretary
Joel G. Stemple, 2004 $225,000 - $35,066 (5) - -
Executive Vice President 2003 $225,000 - $33,649 (5) - -
and Secretary (9) 2002 $375,000 - $33,349 (5) - -
Laura Fontana, 2004 $225,000 $150,000 $ 9,901 (6) - -
Vice President - Technical 2003 $227,630 - $30,744 (6) - -
Services (10) 2002 $196,794 $ 20,406 $35,744 (6) - -
Rob Sbarra 2004 $225,000 $ 35,000 $26,952 (7)
Vice President - Sales
and Marketing (11)
No restricted stock awards, stock appreciation rights or long-term incentive
plan awards (all as defined in the proxy regulations promulgated by the
Securities and Exchange Commission) were awarded to, earned by, or paid to the
Named Executive Officers during the fiscal year ended July 31, 2004.
- ------------------
(1) Includes in fiscal 2004 employer matching contributions to the Company's
defined contribution plan of $6,150 for each of Messrs. Steinberg, Collins,
Yaish and Stemple, $4,152 for Mr. Sbarra and $3,053 for Ms. Fontana, in
fiscal 2003 employer matching contributions to the Company's defined
contribution plan of $6,000 for each of Messrs. Steinberg, Collins, Yaish
and Stemple, and $4,500 for Ms. Fontana, and in fiscal 2002 employer
matching contributions of $6,000 for each of Messrs. Steinberg, Stemple and
Ms. Fontana.
(2) Includes $42,302 in 2004 and $34,575 in 2003 and 2002, of premiums paid by
the Company for a whole life insurance policy in the name of Mr. Steinberg
having a face value of $2,600,000 and under which his daughters, on the one
hand, and the Company, on the other hand, are beneficiaries and share
equally in the death benefits payable under the policy.
(3) Includes $5,000 in 2004 and $11,250 in 2003 representing the present value
of benefits earned under the Company's deferred compensation plan.
(4) Includes $8,000 in 2004 and $1,333 in 2003 representing the present value
of benefits earned under the Company's deferred compensation plan.
(5) Includes $10,575 in 2004 and $17,286 in 2003 and 2002 of premiums paid by
the Company for a whole life insurance policy in the name of Mr. Stemple
having a face value of $1,300,000 and under which his spouse and the
Company are beneficiaries and are entitled to $600,000 and $700,000,
respectively, of the death benefits payable under the policy.
(6) Includes $1,944 in 2003, and $1,943 in 2002 of premiums paid by the Company
for a whole life insurance policy in the name of Ms. Fontana having a face
value of $589,000 and under which her minor child and the Company are
beneficiaries and are entitled to $200,000 and $389,000, respectively, of
death benefits payable under the policy. Also includes $15,000 and $20,000
in 2003 and 2002, respectively, representing the present value of benefits
earned under the Company's deferred compensation plan.
(7) Includes $15,000 in 2004 representing the present value of benefits earned
under the Company's deferred compensation plan.
(8) Mr. Collins was promoted to Executive Vice President and Secretary August
1, 2004.
(9) Mr. Stemple served as Executive Vice President and Secretary until July 31,
2004.
(10) Ms. Fontana served as Vice President - Technical Services until June 1,
2004.
(11) Mr. Sbarra served as Vice President - Sales and Marketing until July 31,
2004.
22
Aggregated Options/SAR Exercises and Fiscal Year-end Options/SAR Value Table
The following table sets forth information with respect to the number and
value of exercisable and unexercisable options granted to the Named Executive
Officers as of July 31, 2004. The Named Executive Officers did not exercise any
options during the fiscal year ended July 31, 2004. The Company has not granted
any stock appreciation rights.
Number of Securities Value of
Shares Underlying Unsecured Unexercised In-the-Money
Acquired Options/SAR's at Options/SAR's at
on Value July 31, 2004 July 31, 2004(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
Seth Collins - - 31,000/75,000 $85,870/$207,750
Elan Yaish - - 25,000/75,000 $69,250/$207,750
- --------
(1) Based on the closing sale price of common stock as of July 31, 2004 ($4.61
per share) minus the applicable exercise price.
Compensation of Directors
Pursuant to the Company's compensation plan for its directors, all
non-employee directors receive a $20,000 annual stipend, payable in four
quarterly installments. In addition, each non-employee director is granted
annually on August 1, an option under the Company's Amended and Restated 1996
Incentive and Non Incentive Stock Option Plan to purchase 10,000 shares at an
exercise price equal to the fair market value of the common stock as of the
close of business on the last business day preceding such close. Such options
are for a term of five years and are exercisable immediately upon such grant. On
August 1, 2003, each of Joel Rothlein, Bert Rudofsky, Michael E. Russell and
Julian Sandler, who are non-employee directors, and Robert J. Valentine, who was
a non-employee director, received non-incentive options to purchase 10,000
shares at an exercise price of $2.13 per share (the fair market value of the
common stock on that date).
Employment Contracts
Mr. Steinberg. We do not have an employment agreement with Mr. Steinberg.
We continue to make available to Mr. Steinberg the auto and deferred
compensation benefits that he has historically received. Mr. Steinberg also
participates in other benefits that we make generally available to our
employees, such as medical and other insurance, and Mr. Steinberg is eligible to
participate under the Company's stock option plan. In the event Mr. Steinberg's
employment with us was terminated, he would not be precluded from competing with
us.
Dr. Stemple. We had an employment agreement with Joel G. Stemple, PhD,
which terminated on July 31, 2004. Under the employment agreement, which
commenced on August 1, 2003, Dr. Stemple received a base salary of $225,000, and
was entitled to an automobile and certain deferred compensation benefits, as
well as medical and other benefits generally offered by us to our employees. Dr.
Stemple also was able to participate in our stock option plan. The Company and
Dr. Stemple have entered into a Severance and Release Agreement, which became
effective upon the termination of Dr. Stemple's employment by the Company. See
Item 13, "Certain Relationships and Related Transactions."
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are Joel Rothlein, Esq., Julian
Sandler, and Bert Rudofsky. Mr. Rothlein is a partner of Kressel Rothlein Walsh
& Roth, LLC, which, with its predecessor firms, has acted as our outside general
counsel since our inception. We paid Kressel Rothlein Walsh & Roth, LLC
approximately $555,000, $257,000, and $208,000, for legal fees in the fiscal
years ended July 31, 2004, 2003 and 2002, respectively. In addition, during the
years ended July 31, 2004, 2003 and 2002, we recorded revenue of approximately
$303,000, $164,000, and $45,000, respectively, in connection with the sale of
equipment to a company controlled by Mr. Sandler.
Our stock option plan is administered by the Board of Directors. Barry R.
Steinberg is President and Chief Executive Officer and until July 31, 2004, Joel
G. Stemple was Executive Vice President of the Company and each of them remains
a member of the Board. As members of the Board, they could vote on executive
compensation issues before the Board pertaining to the granting of stock
options. Although the issue has not arisen to date, each of Messrs. Steinberg
and Stemple has agreed to abstain from voting on the grant of stock options to
him or to the other of them.
23
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 14, 2004
(except as otherwise indicated) with respect to the number of shares of the
Company's common stock beneficially owned by each person who is known to the
Company to beneficially own more than 5% of the common stock, together with
their respective addresses, the number of shares of common stock beneficially
owned by each director of the Company and each Named Executive Officer of the
Company, and the number of shares of common stock beneficially owned by all
named executive officers and directors of the Company as a group. Except as
otherwise indicated, each such shareholder has sole voting and investment power
with respect to the shares beneficially owned by such shareholder.
Shares Beneficially Percent of Shares
Name and Address Owned(1) Outstanding
-----------------------------------------------------------------------------------------
Barry R. Steinberg(2) (3) 4,690,201 56.8%
Joel G. Stemple(2) 626,263 7.6
Seth Collins(2) (4) (5) 90,000 1.1
Elan Yaish(2) (5) 25,000 *
Joel Rothlein (5) 62,666 *
Bert Rudofsky (5) 55,000 *
Michael E. Russell (5) 50,000 *
Julian Sandler(5) 56,000 *
Yacov A. Shamash (5) 10,000 *
Dimensional Fund Advisors, Inc. (6) 553,200 6.7 (8)
1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401
Bjurman, Barry and Associates (7) 441,000 5.3 (8)
10100 Santa Monica Boulevard, Suite 1200,
Los Angeles, CA 90067
All executive officers and directors as a group
(9 persons) (9) 5,665,130 66.4%
* Less than 1%.
(1) For purposes of determining the aggregate amount and percentage of shares
deemed beneficially owned by directors and Named Executive Officers of the
Company individually and by all directors, nominees and Named Executive
Officers as a group, exercise of all options exercisable at or within 60
days listed in the footnotes hereto is assumed. For such purposes 8,529,584
shares of Common Stock are deemed to be outstanding.
(2) Address is 160 Oser Avenue, Hauppauge, New York 11788.
(3) Excludes 59,000 shares owned by Mrs. Collins, the daughter of Mr.
Steinberg, which shares were purchased with the proceeds of a loan from Mr.
Steinberg. As reported on Schedule 13D filed on March 24, 1997, as amended,
Mr. Steinberg and Mrs. Collins each disclaim beneficial ownership of the
common stock owned by the other.
(4) Includes 59,000 shares owned by Mrs. Collins, Mr. Collins' wife.
(5) Includes options exercisable at or within 60 days to purchase 25,000 shares
(Mr. Yaish); 31,000 shares (Mr. Collins); 50,000 shares (Mr. Sandler);
50,000 shares (Mr. Rudofsky); 50,000 shares (Mr. Rothlein); 50,000 shares
(Mr. Russell); and 10,000 shares (Mr. Shamash).
(6) Based upon a Schedule 13G filed with Securities and Exchange Commission as
of February 6, 2004.
(7) Based upon a Schedule 13G filed with Securities and Exchange Commission as
of April 7, 2004.
(8) Based on 8,263,584 shares of common stock issued and outstanding on October
14, 2004.
(9) See Notes 1 through 5 above.
24
ITEM 13. Certain Relationships and Related Transactions
Our Hauppauge, New York facilities were formerly leased from entities
affiliated with certain of our executive officers, directors or principal
shareholders. In March 2003, the owners sold these facilities to an unaffiliated
company. In connection with the sale, the Company entered into three
fifteen-year leases, each expiring on March 31, 2018, with the new owner. Lease
terms include a lower base rent in the first year, annual rent increases of two
percent and four five-year renewal options.
Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein Walsh & Roth, LLC, which, with its predecessor firms, has acted as
outside general counsel to the Company since our inception. During fiscal 2004,
2003, and 2002, $555,000, $257,000 and $208,000, respectively, was paid to such
firm for legal fees.
During the years ended July 31, 2004, 2003, and 2002, we recorded
revenue of $303,000, $164,000 and $45,000, respectively, in connection with the
sale of equipment to a company controlled by Julian Sandler, a director of the
Company.
In the ordinary course of its business with customers and vendors, the
Company utilizes a restaurant owned by Ilene Steinberg, the daughter of Barry
Steinberg for catering, dining and entertainment services. During the years
ended July 31, 2004, 2003 and 2002, the Company paid approximately $42,000,
$49,000 and $109,000, respectively, for such services.
The Company and Joel Stemple, a director of the Company, are parties to a
certain Severance and Release Agreement, pursuant to which the Company agreed to
pay to Dr. Stemple the sum of $62,000 per annum during each of fiscal years
2005, 2006 and 2007, agreed to provide certain medical insurance benefits and
agreed to release Dr. Stemple from certain claims, and pursuant to which Dr.
Stemple agreed to release the Company from certain claims, agreed not to
disclose certain information pertaining to the Company's business, and, during
the severance period, to not compete with the Company, solicit its employees or
interfere with its relationships with its customers.
ITEM 14. Principal Accounting Fees and Services
Audit Fees. The aggregate fees billed by KPMG LLP for professional services
rendered for the audit of our annual financial statements set forth in our
Annual Report on Form 10-K for the fiscal years ended July 31, 2004 and July 31,
2003 and the reviews of the interim financial statements included in our
Quarterly Reports on Form 10-Q for such fiscal years were $121,000 and $100,000,
respectively.
Audit-Related Fees. The aggregate fees billed by KPMG LLP for Audit-Related
services for the fiscal year ended July 31, 2004 were $125,000. These fees
related to professional services rendered for carve-out audits required under
SEC rules in connection with the sale of the Company's IT Business. The
aggregate fees billed by KPMG LLP for Audit-Related services for the fiscal year
ended July 31, 2003 were $3,500. These fees related to services performed by
KPMG LLP in connection with the new leases entered into by the Company following
the sale of the Company's Hauppauge, New York facilities. See "Certain
Relationships and Related Transactions" above.
Tax Fees. The Company did not pay any fees to KPMG LLP for tax compliance,
tax advice, and tax planning during the fiscal years ended July 31, 2004 and
July 31, 2003.
All Other Fees. The Company did not pay any fees to KPMG LLP for any other
professional services during the fiscal years ended July 31, 2004 and July 31,
2003.
Policy for Approval of Audit and Non-Audit Fees. During 2004, the Audit
Committee approved all the types of audit and non-audit services which KPMG LLP
was to perform during the year and the range of fees for each of these
categories, as required under applicable law. The Audit Committee's current
practice is to consider for pre-approval annually all categories of audit and
non-audit services proposed to be provided by our independent auditors for the
fiscal year. The Audit Committee will also consider for pre-approval annually
the range of fees and the manner in which the fees are determined for each type
of pre-approved audit and non-audit services proposed to be provided by our
independent auditors for the fiscal year. The Audit Committee must separately
pre-approve any service that is not included in the approved list of services or
any proposed services exceeding pre-approved cost levels. The Audit Committee
has not delegated pre-approval authority to any of its members or any other
person. In selecting KPMG LLP as our independent auditor, the Audit Committee
believes the provision of the audit and non-audit services rendered by KPMG LLP
is compatible with maintaining that firm's independence.
The Audit Committee has considered whether the provision of non-audit
services by KPMG LLP is compatible with maintaining auditor independence and has
determined that auditor independence has not been compromised.
25
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements (See Index to Consolidated Financial Statements
on page F-1 of this Report);
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits required by Securities and Exchange Commission Regulation
S-K, Item 601: "*" denotes management contract or compensatory plan or
arrangement required to be filed as an Exhibit to this Form 10-K
Exhibit No. Description of Exhibit
---------- ----------------------
2 Asset Purchase and Sale Agreement by and between ePlus Technology,
Inc. and Manchester Technologies, Inc. dated May 28, 2004
(incorporated by reference to Exhibit 2 of Registrant's Form 8-K filed
on June 10, 2004).
2.1 Services Agreement by and between ePlus Technology, Inc. and
Manchester Technologies, Inc. dated May 28, 2004 (incorporated by
reference to Exhibit 2.1 of Registrant's Form 8-K filed on June 10,
2004).
2.2 Escrow Agreement by and between ePlus Technology, Inc., Manchester
Technologies, Inc. and Joel Rothlein, as Escrow Agent, dated May 28,
2004 (incorporated by reference to Exhibit 2.2 of Registrant's Form
8-K filed on June 10, 2004).
3.1.a Restated Certificate of Incorporation filed October 1, 1996
(incorporated by reference to Exhibit 3.1.c of Registrant's
Registration Statement on Form S-1 as filed on October 3, 1996).
3.1.b Certificate of Amendment of Certificate of Incorporation filed
January 30, 2001 (incorporated by reference to Exhibit 3.1.d of
Registrant's Form 8-K filed on February 6, 2001).
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of
Registrant's Registration Statement on Form S-1 as filed on October 3,
1996).
10.1 1996 Incentive and Non-Incentive Stock Option Plan of Registrant
(incorporated by reference to Exhibit 10.1 of Registrant's
Registration Statement on Form S-1 as filed on October 3, 1996).
10.2 Agreement dated September 24, 1996 between Registrant and Michael
Bivona (incorporated by reference to Exhibit 10.2 of Registrant's
Registration Statement on Form S-1 as filed on October 3, 1996).
10.3* Modification of Employment Agreement dated January 29, 2003 between
Registrant and Joel G. Stemple (incorporated by reference to Exhibit
10.3 of the Registrant's Form 10-K for the fiscal year ended July 31,
2003 as filed on October 29, 2003).
10.3.a * Severance and Release Agreement dated January 29, 2003 between
Registrant and Joel G. Stemple (incorporated by reference to Exhibit
10.3.a of the Registrant's Form 10-K for the fiscal year ended July
31, 2003 as filed on October 29, 2003).
10.4* Agreement of Employment dated April 1, 2003 between Registrant and
Robert Sbarra (incorporated by reference to Exhibit 10.4 of the
Registrant's Form 10-K for the fiscal year ended July 31, 2003 as
filed on October 29, 2003).
10.5.a.1 Lease dated June 23, 1997 between Registrant and First Willow, LLC
(incorporated by reference to Exhibit 10.5.h of the Registrant's Form
10-K for the fiscal year ended July 31, 1997 as filed on October 28,
1997).
10.5.a.2 Sub-Lease by and between Manchester Technologies, Inc. and ePlus
Technology, Inc., dated May 28, 2004 (incorporated by reference to
Exhibit 2.4 of Registrant's Form 8-K filed on June 10, 2004).
26
10.5.b Lease dated September 9, 2002 between Electrograph Systems, Inc. and
Pot Spring Center Limited Partnership (incorporated by reference to
Exhibit 10.5.q of the Registrant's Form 10-K for the fiscal year ended
July 31, 2002 as filed on October 28, 2002).
10.5.c.1 Lease dated March 14, 2003 between Registrant and General Electric
Capital Business Asset Funding Corporation (incorporated by reference
to Exhibit 10.5.r of the Registrant's Form 10-Q for the fiscal quarter
ended April 30, 2003 as filed on June 16, 2003)
10.5.c.2 Sub-Lease by and between Manchester Technologies, Inc. and ePlus
Technology, Inc., dated May 28, 2004 (incorporated by reference to
Exhibit 2.3 of Registrant's Form 8-K filed on June 10, 2004).
10.5.d Lease dated March 14, 2003 between Registrant and General Electric
Capital Business Asset Funding Corporation (incorporated by reference
to Exhibit 10.5.s of the Registrant's Form 10-Q for the fiscal quarter
ended April 30, 2003 as filed on June 16, 2003).
10.5.e Lease dated March 14, 2003 between Electrograph Systems, Inc. and
General Electric Capital Business Asset Funding Corporation
(incorporated by reference to Exhibit 10.5.t of the Registrant's Form
10-Q for the fiscal quarter ended April 30, 2003 as filed on June 16,
2003).
10.5.f Lease dated May 1, 2003 between Registrant and FSP Gateway Crossing
Limited Partnership (incorporated by reference to Exhibit 10.5.u of
the Registrant's Form 10-Q for the fiscal quarter ended April 30, 2003
as filed on June 16, 2003).
10.6 Reseller Agreement dated May 1, 1990 between Toshiba America
Information Systems, Inc. and Registrant (incorporated by reference to
Exhibit 10.9 of Registrant's Registration Statement on Form S-1 as
filed on October 3, 1996).
10.7 Agreement for Authorized Resellers dated March 1, 1996 between
Hewlett-Packard Company and Registrant (incorporated by reference to
Exhibit 10.10 of Registrant's Amendment No. 1 to Registration
Statement on Form S-1 as filed on November 7, 1996).
10.8 Asset Purchase Agreement dated April 15, 1997 among Electrograph
Systems, Inc., Bitwise Designs, Inc., Electrograph Acquisition, Inc.
and Registrant (incorporated by reference to Exhibit 10.10 of the
Registrant's Form 10-Q for the fiscal quarter ended April 30, 1997 as
filed on June 13, 1997).
10.9.a $15,000,000 Revolving Credit Facility Agreement dated June 25, 1999
between Registrant and EAB, as Agent (incorporated by reference to
Exhibit 10.14 of the Registrant's Form 10-K for the fiscal year ended
July 31, 1999 as filed on October 29, 1999).
10.9.b Third Amendment to $15,000,000 Revolving Credit Facility Agreement
dated October 10, 2001 between Registrant and Citibank, as Agent
(incorporated by reference to Exhibit 10.18 of the Registrant's Form
10-K for the fiscal year ended July 31, 2002 as filed on October 28,
2002).
10.9.c Fourth Amendment to $15,000,000 Revolving Credit Facility Agreement
dated July 30, 2002 between Registrant and Citibank, as Agent
(incorporated by reference to Exhibit 10.19 of the Registrant's Form
10-Q for the fiscal quarter ended October 31, 2002 as filed on
December 12, 2002).
10.9.d Fifth Amendment to $15,000,000 Revolving Credit Facility Agreement
dated January 30, 2004 between Registrant and Citibank, as Agent
(incorporated by reference to Exhibit 10.21 of the Registrant's Form
10-Q for the fiscal quarter ended January 31, 2004 as filed on March
12, 2004).
10.10 Indemnification Agreement dated September 18, 2003 between Registrant
and Elan Yaish (incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-K for the fiscal year ended July 31, 2003 as
filed on October 29, 2003).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 of the Registrant's Form 10-K for the fiscal year ended July 31,
2004 as filed on October 29, 2004).
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of
the Exchange Act
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer Pursuant to Rule 13a-14(a) of the Exchange Act
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer and Principal Accounting Officer Pursuant to Rule 13a-14(b) of
the Exchange Act and 18 U.S.C. Section 1350, as
27
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K filed May 28, 2004, disclosing press release dated May 28, 2004,
announcing the sale of the Company's IT fulfillment, professional services,
and enterprise software development and operations consulting business.
Form 8-K filed June 10, 2004, with regard to certain agreements entered
into by the Company with respect to the sale of its IT fulfillment,
professional services, and enterprise software development and operations
consulting business.
Form 8-K filed June 17, 2004, disclosing press release date June 17, 2004,
reporting earnings for the third quarter ended April 30, 2004.
Form 8-K filed July 19, 2004, disclosing press release dated July 19, 2004,
announcing further financial details with respect to the Company's sale of
its IT fulfillment, professional services, and enterprise software
development and operations consulting business.
28
Items 8 and 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 2004 and 2003 F-3
Statements of Operations for the years ended
July 31, 2004, 2003, and 2002 F-4
Statements of Shareholders' Equity for the years ended
July 31, 2004, 2003, and 2002 F-5
Statements of Cash Flows for the years ended July 31,
2004, 2003, and 2002 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-20
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Manchester Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Manchester
Technologies, Inc. and subsidiaries as of July 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended July 31, 2004. In
connection with our audits of the consolidated financial statements, we also
audited the consolidated financial statement schedule as listed in the
accompanying index. These consolidated financial statements and the consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the consolidated financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manchester
Technologies, Inc. and subsidiaries as of July 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated
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.
Melville, New York /s/ KPMG LLP
October 13, 2004 ------------
F-2
Manchester Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31, 2004 and 2003
Assets 2004 2003
------ ---- ----
(in thousands, except per share amounts)
Current assets:
Cash and cash equivalents $16,881 $ 8,553
Accounts receivable, net of allowance for doubtful accounts
of $2,848 and $1,426, respectively 15,530 35,117
Inventory 20,301 9,605
Deferred income taxes 1,212 603
Prepaid taxes 916 1,704
Prepaid expenses and other current assets 1,266 709
----- ------
Total current assets 56,106 56,291
Property and equipment, net 9,890 13,985
Goodwill, net 3,735 6,439
Deferred income taxes 1,728 757
Other assets 183 278
------- -------
Total assets $71,642 $77,750
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $21,492 $24,752
Deferred service contract revenue - 666
Current portion of capital lease obligations 246 212
-------- --------
Total current liabilities 21,738 25,630
Deferred compensation payable 98 263
Capital lease obligations, net of current portion 7,683 7,923
----- -----
Total liabilities 29,519 33,816
------ ------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 8,163 and 7,990 shares issued
and outstanding 82 80
Additional paid-in capital 19,597 18,942
Deferred compensation - (13)
Retained earnings 22,444 24,925
------ ------
Total shareholders' equity 42,123 43,934
------ ------
Total liabilities and shareholders' equity $71,642 $77,750
====== ======
See accompanying notes to consolidated financial statements.
F-3
Manchester Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ---- -
(in thousands, except per share amounts)
Revenue $173,040 $164,156 $133,749
Cost of Revenue 156,354 147,672 117,656
-------- ------- -------
Gross profit 16,686 16,484 16,093
Selling, general and
administrative expenses 12,892 12,214 11,142
------ ------ ------
Income from operations 3,794 4,270 4,951
Interest and other income (expense), net (20) 115 184
---- --- ---
Income from continuing operations
before income taxes 3,774 4,385 5,135
Income tax provision 1,490 1,775 2,054
----- ----- -----
Income from continuing operations 2,284 2,610 3,081
----- ----- -----
Discontinued operations:
Loss from operations of
discontinued component (7,616) (8,005) (3,593)
Income tax benefit (2,851) (2,807) (1,454)
------- ------ ------
Loss from discontinued operations (4,765) (5,198) (2,139)
------ ----- ------
Net income (loss) $ (2,481) $(2,588) $ 942
======== ======= ======
Income per share from continuing operations
Basic $0.28 $0.33 $0.39
==== ==== =====
Diluted $0.28 $0.33 $0.39
==== ==== ====
Loss per share from discontinued operations
Basic $(0.59) $(0.65) $(0.27)
====== ===== =====
Diluted $(0.59) $(0.65) $(0.27)
====== ===== =====
Net income (loss) per share
Basic $(0.31) $(0.32) $0.12
===== ====== =====
Diluted $(0.31) $(0.32) $0.12
===== ====== =====
Weighted average shares outstanding
Basic 8,077 7,990 7,990
===== ===== =====
Diluted 8,210 8,007 7,991
===== ===== =====
See accompanying notes to consolidated financial statements.
F-4
Manchester Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended July 31, 2004, 2003 and 2002
Additional
Common Par Paid-in Deferred Retained
Shares Value Capital Compensation Earnings Total
------ ----- ------- ------------ -------- -----
(in thousands)
Balance July 31, 2001 7,990 $ 80 $ 18,942 $ (38) $ 26,571 $ 45,555
Stock award compensation expense - - - 15 - 15
Net income - - - - 942 942
-------- ---- ---------- ----- -------- --------
Balance July 31, 2002 7,990 80 18,942 (23) 27,513 46,512
Stock award compensation expense - - - 10 - 10
Net loss - - - - (2,588) (2,588)
-------- ---- ---------- ----- ------- -------
Balance July 31, 2003 7,990 80 18,942 (13) 24,925 43,934
Stock award compensation expense - - - 13 - 13
Equity based compensation expense - - 43 - - 43
Stock issued in connection with
exercise of stock options 173 2 547 - - 549
Tax benefit from exercise
of stock options - - 65 - - 65
Net loss - - - - (2,481) (2,481)
------ ----- ----- ----- ----- ------
Balance July 31, 2004 8,163 $82 $19,597 $ - $22,444 $42,123
===== == ====== ==== ====== ======
See accompanying notes to consolidated financial statements.
F-5
Manchester Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 2004, 2003, and 2002
2004 2003 2002
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income (loss) $(2,481) $(2,588) $ 942
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 2,132 2,265 2,012
Provision for doubtful accounts 1,933 1,545 613
Gain on sale of IT Business (876) - -
Fixed asset impairment charge 2,639 - -
Impairment of goodwill and write-off of related assets - 2,481 -
Non-cash compensation and commission expense 13 10 15
Deferred income taxes (1,580) (154) 95
Equity based compensation expense 43 - -
Tax benefit from exercise of stock options 65 - -
Change in assets and liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable 17,654 (4,266) (7,773)
Inventory (10,696) 1,402 (3,482)
Prepaid taxes 788 (1,278) (383)
Prepaid expenses and other current assets (557) (201) (92)
Other assets 95 213 (88)
Accounts payable and accrued expenses (3,729) 1,649 7,298
Deferred service contract revenue 23 (202) 61
Deferred compensation payable (165) 61 41
----- -- --
Net cash provided by (used in) operating activities 5,301 937 (741)
----- --- -----
Cash flows from investing activities:
Capital expenditures (871) (1,282) (2,618)
Payment for acquisitions, net of cash acquired - - (1,613)
Net proceeds from the sale of IT Business 3,555 - -
----- -------- --------
Net cash provided by (used in) investing activities 2,684 (1,282) (4,231)
----- ------- -----
Cash flows from financing activities:
Net repayments of borrowings from bank - - (515)
Payments on capitalized lease obligations (206) (65) -
Payments on notes payable - other - - (43)
Proceeds from exercise of stock options 549 - -
--- ----- -----
Net cash provided by (used in) financing activities 343 (65) (558)
--- ---- -----
Net increase (decrease) in cash and cash equivalents 8,328 (410) (5,530)
Cash and cash equivalents at beginning of year 8,553 8,963 14,493
----- ----- ------
Cash and cash equivalents at end of year $16,881 $8,553 $8,963
====== ===== =====
Cash paid during the year for:
Interest $614 $208 $ -
=== === ======
Income taxes $422 $320 $723
=== === ===
Capital lease obligations incurred to acquire buildings $ - $8,200 $ -
====== ===== =====
See accompanying notes to consolidated financial statements.
F-6
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(1) Operations and Summary of Significant Accounting Policies
(a) The Company
Manchester Technologies, Inc. and its subsidiaries ("the Company") is
a distributor of display technology solutions and plasma display monitors
and computer hardware primarily to dealers and system integrators. As
discussed further in Note 2, on May 28, 2004, the Company sold its end-user
information technology fulfillment and professional services business (the
"IT Business"). Prior to such sale, Manchester specialized in hardware and
software procurement, display technology, custom networking, security, IP
telephony, remote management, application development/e-commerce, storage,
and enterprise and Internet solutions, offering its customers single-source
solutions customized to their information systems needs by integrating its
analysis, design and implementation services with hardware, software,
networking products and peripherals from leading vendors. Subsequent to
such sale, the Company continued distributing display technology solutions
and plasma display monitors and computer hardware and no longer provides
any professional services. The Company operates in a single segment.
The Company has entered into agreements with certain suppliers and
manufacturers that may provide the Company favorable pricing and price
protection in the event the vendor reduces its prices.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances are eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
equivalents. Cash equivalents of $14,632 and $6,120 at July 31, 2004 and
2003, respectively, consisted of money market mutual funds.
(d) Revenue Recognition
Revenue from product sales is recognized when title and risk of loss
are passed to the customer, which is at the time of shipment to the
customer. The Company does not develop or sell software products. However,
certain computer hardware products sold by the Company are loaded with
prepackaged software products. The net impact on the Company's financial
statements of product returns, primarily for defective products, has been
insignificant.
Revenue from services, which is included in discontinued operations,
is recognized when the related services are performed. When product sales
and services are bundled, revenue is recognized upon delivery of the
product and completion of the installation. Service contract fees are
recognized as revenue ratably over the period of the applicable contract.
Deferred service contract revenue represents the unearned portion of
service contract fees.
(e) Market Development Funds and Advertising Costs
Related to the discontinued IT Business, the Company received various
market development funds including cooperative advertising funds from
certain vendors, principally based on volume purchases of products. The
Company records such amounts related to volume purchases as purchase
discounts which reduce cost of revenue, and other incentives that require
specific incremental action on the part of the Company, such as training,
advertising or other pre-approved market development activities, as an
offset to the related costs included in selling, general and administrative
expenses. Total market development funds amounted to $598, $1,189, and
$1,118, for the years ended July 31, 2004, 2003 and 2002, respectively,
which is included in discontinued operations in the statement of
operations.
The Company expenses all advertising costs as incurred.
F-7
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(f) Inventory
Inventory, consisting of hardware, software and related supplies, is valued
at the lower of cost (first-in, first-out) or market value.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the economic lives of the assets,
generally from five to seven years. Leasehold improvements are amortized over
the shorter of the underlying lease term or asset life.
(h) Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. This pronouncement also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets."
The Company adopted the provisions of SFAS No. 142 as of August 1, 2001.
The Company's initial impairment review indicated that there was no impairment
as of the date of adoption. Fair value of goodwill was based on discounted cash
flows.
Also required by SFAS No. 142, on an annual basis, the Company tests
goodwill and other intangible assets for impairment. To determine the fair value
of these intangible assets, there are many assumptions and estimates used that
directly impact the results of the testing. In making these assumptions and
estimates, the Company uses set criteria that are reviewed and approved by
various levels of management, and the Company estimates the fair value of its
reporting units by using discounted cash flow analyses.
Accumulated amortization was approximately $647 and $1,116 at July 31,
2004 and 2003, respectively. In accordance with SFAS No. 142, no goodwill
amortization expense was recorded for the three years ended July 31, 2004.
As discussed in Note 2, $2,704 of goodwill, which was net of accumulated
amortization of $469, was associated with the sale of the Company's discontinued
IT Business. The amount of the goodwill allocated to the discontinued IT
Business was based on a relative fair value approach in accordance with SFAS No.
142.
In July 2003, the Company closed the operations of its subsidiary, Donovan
Consulting Group, Inc. ("Donovan") and recorded a charge of $1,872 for the
impairment of goodwill associated with the acquisition of Donovan (see Note 3).
There was no accumulated amortization associated with this goodwill.
As of July 31, 2004 and 2003, there were no intangible assets, other than
goodwill.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
Effective August 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which establishes accounting
and reporting standards for the impairment or disposal of long-lived assets.
SFAS No. 144 removes goodwill from its scope and retains the requirements of
SFAS No. 121 regarding the recognition of impairment losses on long-lived assets
held for use.
F-8
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. Recoverability of assets held for
sale is measured by comparing the carrying amount of the assets to their
estimated fair market value. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
As a result of closing the operations of Donovan (see Note 4) in fiscal
2003, the Company recorded a write-off of certain assets in the amount of $609.
(j) Income Taxes
Deferred taxes are recognized for the future tax consequences attributable
to temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and income tax purposes using enacted rates
expected to be in effect when such amounts are realized or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
(k) Net Income Per Share
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the weighted average number of
common shares outstanding, plus the assumed exercise of dilutive stock options,
less the number of treasury shares assumed to be purchased from the proceeds of
such exercises using the average market price of the Company's common stock
during each respective period. Stock options representing approximately 355,000,
1,302,000, and 887,000 shares for the years ended July 31, 2004, 2003 and 2002,
respectively, were not included in the computation of diluted net income per
share because to do so would have been antidilutive. The following table
reconciles the denominators of the basic and diluted per share computations. For
each year, the numerator is the net income from continuing operations and the
per share amounts below represent income per share from continuing operations.
2004 2003 2002
---- ---- ----
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS 8,077,000 $0.28 7,990,000 $0.33 7,990,000 $0.39
==== ===== ====
Effect of dilutive
options 133,000 17,000 1,000
------- ------ -----
Diluted EPS 8,210,000 $0.28 8,007,000 $0.33 7,991,000 $0.39
========= ==== ========= ==== ========= ====
(l) Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations for stock options and other stock-based awards and records
compensation expense for employee stock options if the market price of the
underlying common stock exceeds the exercise price on the date of the grant. On
August 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has elected not to implement the fair
value based accounting method for employee stock options, but has elected to
disclose the pro forma net income (loss) and net income (loss) per share for
employee stock option grants as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
F-9
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
The Company applies the intrinsic value method as outlined in APB 25, and
related interpretations in accounting for stock options granted. Under the
intrinsic value method, no compensation expense is recognized if the exercise
price of the Company's employee stock options equals or exceeds the market price
of the underlying stock on the date of grant. Since the Company has issued all
stock option grants at market value, no compensation cost has been recognized at
the time of the grant. SFAS 123 requires that the Company provide pro forma
information regarding net income (loss) and net income (loss) per share as if
compensation cost for the Company's stock option programs had been determined in
accordance with the fair value method prescribed therein. During fiscal 2003,
the Company adopted the disclosure portion of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" requiring quarterly SFAS
123 pro forma disclosure. The following table illustrates the effect on net
income (loss) and income (loss) per share as if the Company had measured the
compensation cost for the Company's stock option programs under the fair value
method in each period presented.
2004 2003 2002
---- ---- ----
Net income (loss), as reported $(2,481) $(2,588) $ 942
Add: Stock based compensation expense
included in net income, net of related
tax effects 34 - -
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (318) (361) (365)
----- ------ -----
Net income (loss) - pro forma $(2,765) $(2,949) $ 577
======= ======= ===
Net income (loss) per common share:
Basic - as reported $(0.31) $ (0.32) $ 0.12
Basic - pro forma $(0.34) $ (0.37) $ 0.07
Diluted - as reported $(0.31) $ (0.32) $ 0.12
Diluted - pro forma $(0.34) $ (0.37) $ 0.07
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
2004 2003 2002
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock volatility 57% 54% 59%
Risk free interest rate 3% 3% 3%
Expected option term until exercise (years) 5.00 5.00 5.00
The per share weighted average fair value of stock options granted during
fiscal 2004, 2003 and 2002 was $1.44, $1.27, and $1.79, respectively.
(m) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.
F-10
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(n) Fair Value of Financial Instruments
The fair values of accounts receivable, prepaid expenses and accounts
payable and accrued expenses are estimated to approximate the carrying values at
July 31, 2004 due to the short maturities of such instruments.
(o) Reclassifications
Certain prior year amounts have been reclassified to conform to the
manner of presentation in the current year.
In the Form 10-K as originally filed by the Company, cash flows from
discontinued operations were separately reflected in the fiscal 2004 statement
of cash flows. The fiscal 2004 statement of cash flows reflects the Company's
decision to exclude separate disclosure of cash flows pertaining to discontinued
operations. As a result, of the net cash provided by discontinued operations as
originally reported in the amount of $8,882, $9,653 of cash flows was
reclassified to other balances included in cash flows from operating activities
and $771 of capital expenditures for discontinued operations were reclassified
to investing activities. Thus, cash flows from operating activities increased
and cash flows from investing activities decreased by $771.
(2) Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc., a leading
provider of Enterprise Cost Management, in an all cash transaction. The
transaction included the sale to ePlus of the customer list of the business and
certain related equipment, the assumption by ePlus of certain contracts and
liabilities pertaining to the business, and the hiring by ePlus of the majority
of Manchester employees involved in the business. The transaction did not
include, and Manchester retained, the inventory and accounts receivable of the
IT Business.
The proceeds from the sale of the IT Business were $3,555, net of related
expenses of $1,445. The Company recorded a gain, included in loss from
operations of discontinued component in the accompanying fiscal 2004 statement
of operations, of approximately $876 as a result of the transaction, which
represented the excess of the net proceeds over a payable to ePlus, inc. of $469
for service contracts they assumed and the $2,210 carrying value of the net
assets sold, consisting of goodwill of $2,704, property and equipment, net of
$195 and deferred revenue of $689. The loss from the operations of the
discontinued IT Business was $8,492 in fiscal 2004, which included the following
charges in the fourth quarter of fiscal 2004 associated with the discontinued IT
Business:
Employee severance and other employee costs $1,016
Provision for doubtful accounts receivable 1,250
Fixed asset impairments 2,639
Other 50
--------
Total $4,955
======
As of July 31, 2004 approximately $491 of the employee severance and other
employee costs and $422 of amounts payable to ePlus, inc. for assumed service
contracts were included in accounts payable and accrued expenses which will be
paid in fiscal 2005, ending July 31, 2005.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations from the end-user information
technology fulfillment and professional services business have been recorded as
discontinued operations in the accompanying consolidated statements of
operations. The revenue from discontinued operations was $112,534, $122,288 and
$128,261 for the years ended July 31, 2004, 2003 and 2002, respectively. The
loss from operations of the discontinued component was $(7,616), $(8,005) and
$(3,593) for the years ended July 31, 2004, 2003 and 2002, respectively.
The presentation of the statement of operations for the years ended July
31, 2003 and 2002 have been reclassified to reflect discontinued operations. The
balance sheet as of July 31, 2003 and, as a result of the Company's decision to
exclude separate disclosure of cash flows pertaining to discontinued operations
in the fiscal 2004 cash flow statement, the statements of cash flows for the
years ended July 31, 2003 and 2002 have not been reclassified to reflect
discontinued operations.
F-11
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(3) Property and Equipment
Property and equipment at July 31, consist of the following:
2004 2003
---- ----
Furniture and fixtures $2,037 $2,242
Machinery and equipment 1,804 12,131
Transportation equipment 263 567
Leasehold improvements 3,149 3,226
Capital leases 8,200 8,200
----- -----
15,453 26,366
Less accumulated depreciation and amortization (5,563) (12,381)
------- -------
$9,890 $13,985
====== =======
Depreciation and amortization expense from continuing operations amounted
to $928, $838, and $734, for the years ended July 31, 2004, 2003 and 2002,
respectively.
(4) Acquisitions
Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan, a Delaware corporation headquartered near Atlanta, Georgia. Donovan is
a technical services firm that delivers Wireless LAN solutions to customers
nationwide. The acquisition, which was accounted for as a purchase, consisted of
a cash payment of $1,500. In connection with the acquisition, the Company
assumed approximately $435 of bank debt and $43 of other debt, which were
subsequently repaid. Donovan was acquired in order to strengthen the Company's
position in the Wireless LAN arena. Donovan allowed the Company to offer total
Wireless LAN solutions including state of the art products as well as the
services necessary to have those products operate optimally.
Operating results of Donovan are included in the consolidated statements of
operations from the acquisition date. The estimated fair value of tangible
assets and liabilities acquired was $497 and $869, respectively. The excess of
the aggregate purchase price over the estimated fair value of the tangible net
assets acquired was approximately $1,872. The factors that contributed to the
determination of the purchase price and the resulting goodwill include the
significant growth expected in this area due to the combination of the Company's
long history of strong customer relationships, financial strength and stability
coupled with Donovan's product offerings and highly skilled technical staff. The
$1,872 was not amortized and was subject to impairment testing in accordance
with No. 142, "Goodwill and Other Intangible Assets " ("SFAS 142").
In July 2003, the Company closed the operations of Donovan and sold certain
assets back to the former owners of Donovan. The operations were closed because
the synergies that were anticipated at the time of the purchase did not
materialize. As a result, the Company recorded a charge of $2,481 for the
impairment of goodwill and write-off of related assets of Donovan, which is
included in the loss from operations of discontinued component in the
accompanying fiscal 2003 statement of operations.
e.Track Solutions, Inc.
On November 9, 2001, the Company acquired all of the outstanding stock of
e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of cash payments of $290 (including debt assumed and subsequently
repaid). e.Track was acquired in order to allow the Company to offer customers
customized software solutions along with the products and services traditionally
offered.
F-12
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
Operating results of e.Track are included in the consolidated statements of
operations from the acquisition date. The estimated fair value of tangible
assets and liabilities acquired was $116 and $192, respectively. The excess of
aggregate purchase price over the estimated fair value of the tangible net
assets acquired was $291. The factors that contributed to the determination of
the purchase price and the resulting goodwill include the expectation that the
combination of e.Track's highly skilled technical staff, coupled with the
Company's financial strength and customer base, will result in significant
growth at e.Track. The $291 will not be amortized; however, it will be subject
to impairment testing in accordance with SFAS No. 142. e.Track was included in
the IT Business sold in fiscal 2004.
The presentation of supplemental pro forma financial information was
omitted as the impact of the acquisitions was deemed immaterial.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 31,
2004 2003
---- ----
Accounts payable, trade $19,070 $21,314
Accrued salaries and wages 1,187 1,932
Customer deposits 218 778
Other accrued expenses 1,017 728
----- ---
$21,492 $24,752
======= =======
The Company has entered into financing agreements for the purchase of
inventory. These agreements are unsecured, generally allow for a 30-day
non-interest-bearing payment period and require the Company to maintain, among
other things, a certain minimum tangible net worth. In each of the years in the
three-year period ended July 31, 2004, the Company has repaid all balances
outstanding under these agreements within the non-interest- bearing payment
period. Accordingly, amounts outstanding under such agreements of $0 and $2,757
at July 31, 2004 and 2003, respectively, are included in accounts payable and
accrued expenses. As of July 31, 2004, under the terms of the agreement,
retained earnings available for dividends amounted to approximately $14,300.
(6) Employee Benefit Plans
The Company maintains a qualified defined contribution plan with a
salary deferral provision, commonly referred to as a 401(k) plan. The Company
matches 50% of employee contributions up to three percent of employees'
compensation. The Company's contribution related to continuing operations
amounted to $115, $120, and $112, for the years ended July 31, 2004, 2003, and
2002, respectively.
The Company also has a deferred compensation plan that is available to
certain eligible key employees. The plan consists of a commitment by the Company
to pay a monthly benefit to an employee for a period of ten years commencing no
earlier than ten years from such employee's entrance into the plan. The Company
has chosen to purchase life insurance policies to provide funding for the
majority of these benefits. As of July 31, 2004 and 2003, the Company has
recorded an asset (included in other assets) of $183 and $278, respectively,
representing the prepaid premiums and cash surrender value of policies owned by
the Company and a liability of $98 and $263, respectively, relating to the
unvested portion of benefits due under the plan. For the years ended July 31,
2004, 2003 and 2002, the Company recorded income (expense) of $116, $(144), and
$(212), respectively, in connection with this plan, a portion of which relates
to terminated employees in the IT Business and is included in discontinued
operations.
F-13
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(7) Commitments and Contingencies
Leases
Through March 2003, the Company leased its warehouse and distribution
center as well as its corporate offices and certain sales facilities from
entities owned or controlled by shareholders, officers or directors of the
Company. In March 2003, the owners sold the properties leased by the Company to
an unaffiliated company. In connection with the sale, the Company entered into
three fifteen-year leases, each expiring on March 31, 2018, with the new owner.
Lease terms include a lower base rent in the first year, annual rent increases
of two percent and four five-year renewal options.
The Company recorded the new leases as capital leases and accordingly,
recorded an asset of approximately $8.2 million. The asset is classified in the
balance sheet as Property and equipment, net, (see Note 3) and is amortized
using the straight-line method over the lease terms and the related obligations
are recorded as liabilities.
The following represents the Company's commitment under capital leases
for each of the next five years ended July 31 and thereafter:
2005 $842
2006 859
2007 876
2008 894
2009 911
2010 and thereafter 8,706
-----
Total payments 13,088
Amount representing interest at 7% (5,159)
---------
Obligations under capital leases 7,929
Obligations due within one year (246)
----------
Long-term obligations under capital leases $7,683
=======
On August 20, 2004, one of the buildings under capital lease was sublet to
an unrelated third party for a term expiring February 2018 pursuant to which the
subtenant will pay the Company $2,667 of the above total payments under capital
leases. In addition, another building was sublet whereby the subtenant will pay
$370 of the above lease payments due in fiscal 2005.
In addition, the Company is obligated under operating lease agreements for
sales offices and additional warehouse space. Aggregate rent expense under all
these leases from continuing operations amounted to $104, $218 and $277 for the
years ended July 31, 2004, 2003, and 2002, respectively.
The following represents the Company's commitment under operating leases
for each of the next five years ended July 31 and thereafter:
2005 $306
2006 525
2007 521
2008 246
2009 -
Thereafter -
-----
$1,598
======
Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on advice from
its legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
F-14
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(8) Line of Credit
In July 1998, the Company entered into a revolving credit facility with its
banks, which was revised in June, 1999 to change participating banks. Under the
terms of the facility, the Company may borrow up to a maximum of $15,000.
Borrowings under the facility bear interest at variable interest rates based
upon several options available to the Company. The facility requires the Company
to maintain certain financial ratios and covenants. At July 31, 2004, the
Company was not in compliance with all the financial ratios and covenants that
it is required to maintain. The Company received a waiver waiving its
requirements from its banks for the period ended July 31, 2004. As of July 31,
2004, there was no balance outstanding under this agreement, which expires on
January 31, 2005.
(9) Income Taxes
The provision (benefit) for income taxes for the years ended July 31,
2004, 2003 and 2002 consists of the following:
2004 2003 2002
---- ---- ----
Current
Federal $ - $(1,195) $325
State 166 317 180
--- --- ---
166 (878) 505
--- ---- ---
Deferred
Federal (1,322) (102) 70
State (205) (52) 25
---- --- --
(1,527) (154) 95
------ ---- --
$(1,361) $(1,032) $600
======= ======= ===
The difference between the Company's effective income tax rate and the
statutory rate is as follows, for the years ended July 31,:
2004 2003 2002
---- ---- ---- -
Income taxes (benefit) at statutory rate $(1,306) $(1,231) $524
State taxes, net of federal benefit ( 96) 209 114
Other 41 (10) (38)
-- --- ---
$(1,361) $(1,032) $600
======= ======= ====
The income tax provision (benefit) is presented in the statements
of operations as follows:
2004 2003 2002
---- ---- ----
Income tax provision for
continuing operations $1,490 $1,775 $2,054
Income tax benefit from
discontinued operations (2,851) (2,807) (1,454)
------- ------- -------
$(1,361) $(1,032) $600
====== ======= ===
F-15
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at July 31, 2004 and 2003 were as
follows:
2004 2003
---- ----
Deferred tax assets (liabilities):
Allowance for doubtful accounts $1,139 $583
Deferred compensation 555 605
Net operating loss carryforwards 1,020 223
Depreciation 441 162
Other (148) (132)
---- ----
3,007 1,441
Less: Valuation Allowance (67) (81)
--- ---
Net deferred tax asset $2,940 $1,360
===== =====
As of July 31, 2004, the Company has a Federal net operating loss
carryforward of approximately $2,430 which expires in 2020 to 2024.
Excluding a valuation allowance of $67 and $81 as of July 31, 2004 and
2003, respectively, related to net operating loss carryforwards subject to
Section 382 limitations, a valuation allowance has not been provided in
connection with all other deferred tax assets since the Company believes, based
upon its long history of profitable continuing operations, that it is more
likely than not that such deferred tax assets will be realized.
(10) Related Party Transactions
Through March 2003, the Company leased its warehouse and distribution
center as well as its corporate offices and certain sales facilities from
entities owned or controlled by shareholders, officers or directors of the
Company. In March 2003, the owners sold the properties leased by the Company to
an unaffiliated company. In connection with the sale, the Company entered into
three fifteen-year leases, each expiring on March 31, 2018, with the new owner.
Lease terms include a lower base rent in the first year, annual rent increases
of two percent and four five-year renewal options. Rent expense paid to the
former owners for these facilities aggregated $0, $610, and $932, for the years
ended July 31, 2004, 2003 and 2002, respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to approximately $555, $257, and $208,
including disbursements, in the fiscal years ended July 31, 2004, 2003 and 2002,
respectively.
During the fiscal years ended July 31, 2004, 2003 and 2002 the Company
received approximately $303, $164, and $45, respectively, in revenue from a
company controlled by a director of the Company.
On May 20, 2002 the Company loaned its chief executive officer
approximately $965 bearing an interest rate of 2.00%. On May 30, 2002, the
Company's chief executive officer repaid $585 of the loan and the remainder of
the loan was repaid on July 18, 2002 plus accrued interest.
In the ordinary course of its business with customers and vendors, the
Company utilizes a restaurant owned by a member of the chief executive officer's
family for catering, dining and entertainment services. During the years ended
July 31, 2004, 2003 and 2002 the Company paid approximately $42, $49, and $109,
respectively, for such services.
F-16
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(11) Shareholders' Equity
Stock Option Plan
Under the Company's Amended and Restated 1996 Incentive and Non-Incentive
Stock Option Plan as amended, (the "Plan"), which was approved by the Company's
shareholders in October 1996, an aggregate of 2,600,000 shares of common stock
are reserved for issuance upon exercise of options thereunder. Under the Plan,
incentive stock options, as defined in section 422 of the Internal Revenue Code
of 1986, as amended, may be granted to employees and non-incentive stock options
may be granted to employees, directors and such other persons as the Board of
Directors may determine, at exercise prices equal to at least 100% (with respect
to incentive stock options) and at least 85% (with respect to non-incentive
stock options) of the market value of the common stock on the date of grant. In
addition to selecting the optionees, the Board of Directors will determine the
number of shares of common stock subject to each option, the term of each stock
option up to a maximum of ten years (five years for certain employees for
incentive stock options), the time or times when the stock option becomes
exercisable, and otherwise administer the Plan. Generally, incentive stock
options expire three months from the date of the holder's termination of
employment with the Company other than by reason of death or disability. Options
may be exercised with cash or common stock previously owned for in excess of six
months. The following table summarizes stock option activity:
Weighted
Average
Options Exercise
Outstanding Price
Balance July 31, 2001 899,084 $3.95
Granted 81,800 $2.55
Exercised - -
Cancelled (55,800) $4.07
-------
Balance July 31, 2002 925,084 $3.81
Granted 665,250 $1.92
Exercised - -
Cancelled (288,584) $3.51
---------
Balance July 31, 2003 1,301,750 $2.91
Granted 68,000 $2.46
Exercised (173,286) $3.23
Cancelled (77,650) $3.25
--------
Balance July 31, 2004 1,118,814 $2.81
=========
At July 31, 2004, options with the following ranges of exercise prices were
outstanding:
Options Outstanding Options Currently Exercisable
Range of ------------------- -----------------------------
Exercise Weighted Average Weighted Average
Prices Number Exercise Price Remaining life Number Exercise Price
------ ------ --------------- -------------- ------ --------------
$1.84 - $2.29 570,250 $1.89 8 Yrs. 183,333 $1.98
$2.30 - $3.75 193,367 $2.87 6 Yrs. 106,566 $3.06
$3.76 - $4.00 202,847 $3.86 3 Yrs 202,847 $3.86
$4.01 - $5.69 152,350 $4.77 5 Yrs. 152,350 $4.77
------- -------
$1.84 - $5.69 1,118,814 $2.81 6 Yrs. 645,096 $3.41
========= =======
F-17
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
All options granted expire ten years from the date of grant except for
options granted to directors, which expire five years from the date of grant.
There are 50,000 options that were repriced subsequent to their date of
grant for which the Company is applying variable accounting. The related equity
based compensation expense was $43 in fiscal 2004.
(12) Major Customer and Vendors and Concentration of Credit Risk
The Company sells products and provides services to customers in the United
States.
The Company's top three vendors accounted for approximately 31%, 15%, and
14%, respectively, of total product purchases from continuing operations for the
year ended July 31, 2004. The Company's top three vendors accounted for
approximately 25%, 12%, and 11%, respectively, of total product purchases from
continuing operations for the year ended July 31, 2003. The Company's top two
vendors accounted for approximately 25% and 25%, respectively, of total product
purchases from continuing operations for the year ended July 31, 2002.
At July 31, 2004, one customer accounted for 5% of the Company's accounts
receivable. At July 31, 2003, two customers accounted for 12% and 5%, of the
Company's accounts receivable. For the fiscal years ended July 31, 2004, 2003
and 2002, no one customer accounted for more than 10% of total revenue.
(13) Impact of Recently Issued Accounting Standards
The FASB recently issued an exposure draft of a standard requiring
stock-based employee compensation to be recorded as a charge to earnings, which
would be effective for the Company commencing August 1, 2005. The Company will
continue to monitor the FASB's progress on the issuance of this standard as well
as evaluate the Company's position with respect to current guidance.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("Int. No. 46") an interpretation of ARB No. 51.
Int. No. 46 addresses consolidation by business enterprises of variable interest
entities. Int. No. 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. Int. No. 46, as revised, applies in the
first year or interim period beginning after December 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company adopted Int. No. 46 in fiscal
2004, which had no impact on its consolidated financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, Revenue arrangements with Multiple Deliverables. The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables is not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The Company adopted EITF 00-21 in fiscal 2004 which did not
have a significant impact on the Company's financial position or results of
operations.
F-18
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
(14) Quarterly Results - Continuing Operations (unaudited)
Oct. 31 Jan 31 Apr. 30 July 31 Year
------- ------ ------- ------- ----
2004
Revenue $45,378 $45,117 $42,448 $40,097 $173,040
Gross profit 4,734 4,558 3,939 3,455 16,686
Net income 844 743 432 265 2,284
Basic income per share 0.11 0.09 0.05 0.03 0.28
Diluted income per share 0.10 0.09 0.05 0.03 0.28
2003
Revenue $39,899 $47,204 $36,533 $40,520 $164,156
Gross profit 4,553 5,255 3,396 3,280 16,484
Net income (loss) 1,034 1,466 316 (206) 2,610
Basic income (loss) per share 0.13 0.18 0.04 (0.03) 0.33
Diluted income (loss) per share 0.13 0.18 0.04 (0.03) 0.33
Basic and diluted income (loss) per share for each of the quarters are
based on the weighted-average number of shares outstanding in each period.
Therefore, the sum of the quarters in a year may not necessarily equal the
year's income (loss) per share.
F-19
Manchester Technologies, Inc.
Schedule II - Valuation and Qualifying Accounts
(dollars in thousands)
Column C-Additions
Column B- (1)- (2)-
Column A - Balance at Charged to Charged to Column D- Column E-
Description beginning of costs and other Deductions- Balance at
period expenses accounts (a) end of period
------ -------- -------- --- -------------
Allowance for doubtful
accounts
Year ended:
July 31, 2002 $1,100 $613 - $757 $956
July 31, 2003 $956 $1,545 - $1,075 $1,426
July 31, 2004 $1,426 $1,933 - $511 $2,848
(a) Write-off amounts against allowance provided.
F-20
<page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunder duly authorized.
Manchester Technologies, Inc.
Date: July 5, 2005 By: /S/ Barry R. Steinberg
-------------------------------
Barry R. Steinberg
Chief Executive Officer,
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of this Registrant and
in the capacities and on the dates indicated.
/S/ Barry R. Steinberg Date: July 5, 2005
-------------------
Barry R. Steinberg
Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)
/S/ Seth Collins Date: July 5, 2005
-------------------
Seth Collins
President, Secretary and Director
/S/ Elan Yaish Date: July 5, 2005
- --------------
Elan Yaish,
Chief Financial Officer, Vice President Finance
and Assistant Secretary
(Principal Accounting Officer and Principal Financial
Officer)
/S/ Joel G. Stemple Date: July 5, 2005
- -------------------
Joel G. Stemple
Director
/S/ Joel Rothlein Date: July 5, 2005
- -----------------
Joel Rothlein
Director
/S/ Michael Russell Date: July 5, 2005
- -------------------
Michael Russell
Director
/S/ Jeffrey Melnick Date: July 5, 2005
- ------------------
Jeffrey Melnick
Director
/S/ Yacov A. Shamash Date: July 5, 2005
- --------------------
Yacov A. Shamash
Director
28