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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2001
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21695
MANCHESTER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer I. D. Number)
incorporation or organization)
160 Oser Avenue 11788
Hauppauge, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (631) 435-1199
Manchester Equipment Co., Inc.
(Former name or former address, if changed from the last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: YES __X__ NO _____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 19, 2001 was $ 5,615,854 (2,636,557 shares at a closing
sale price of $2.13).
As of October 19, 2001, 7,990,215 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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MANCHESTER TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED JULY 31, 2001
TABLE OF CONTENTS
Part I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure 20
Part III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 46
Signatures Chief Executive Officer, Chief Financial Officer,
and Directors 49
2
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PART I
This Report contains certain forward-looking statements that are based on
current expectations. The actual results of Manchester Technologies, Inc. (the
"Company") may differ materially from the results discussed herein as a result
of a number of unknown factors. Such factors include, but are not limited to,
there being no assurance that the Company will be successful in expanding its
Internet presence, that the acquisitions of Electrograph Systems, Inc., Coastal
Office Products, Inc., Texport Technology Group, Inc., Learning Technology
Group, LLC, and Donovan Consulting Group, Inc. will add or continue to add to
the Company's profitability, that the Company will be successful in its efforts
to focus on value-added services, that the Company will be successful in
attracting and retaining highly skilled technical personnel and sales
representatives necessary to implement the Company's growth strategies, that the
Company will not be adversely affected by continued intense competition in the
computer industry, continued decreases in average selling prices of personal
computers, a lack of product availability or deterioration in relationships with
manufacturers, or a loss or decline in sales to any of its major customers. See
"Products" and "Competition" in Part I, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
this report for a discussion of important factors that could affect the validity
of any forward looking statements.
ITEM 1. Business
Our Company
Manchester Technologies, Inc. ("Manchester" "we," "us," "our," or the
"Company") is a single-source solutions provider specializing in hardware and
software procurement, custom networking, storage, enterprise and Internet
solutions. We offer our customers single-source solutions customized to their
information systems needs by integrating our analysis, design and implementation
services with hardware, software, networking products and peripherals from
leading vendors. Over the past 28 years, we have forged long-standing
relationships with both customers and suppliers and capitalized on the rapid
developments in the computer industry, including the shift toward
client/server-based platforms.
Our marketing focus is on mid- to large-sized companies, which have
become increasingly dependent upon complex information systems in an effort to
gain competitive advantages. While many of these companies have the financial
resources to make the required capital investments in information systems, often
they do not have the necessary information technology personnel to design,
install or maintain complex systems or to incorporate the continuously evolving
technologies. As a result, these companies are turning to independent third
parties to procure, design, install, maintain and upgrade their information
systems.
We offer our customers a variety of value-added services, such as
consulting, integration and support services, together with a broad range of
computer and networking products from leading vendors. Consulting services
include systems design, performance analysis, and migration planning.
Integration services include product procurement, configuration, testing and
systems installation and implementation. Support services include network
management and monitoring, "help-desk" support, and enhancement, maintenance and
repair of computer systems. Most of our revenues are derived from sales to
customers located in the New York City Metropolitan area, with approximately 65%
of our revenue generated from our Long Island and New York City offices. As a
result, our business, financial condition and results of operations are
susceptible to regional economic downturns and other regional factors. In
addition, as we expand in our existing markets, opportunities for growth within
these regions may become more limited. There can be no assurance that we will
grow enough in other markets to lessen our regional geographic concentration.
We have a corporate web site and electronic commerce system. The site,
located at www.e-manchester.com, allows existing customers, corporate shoppers
and others to find product specifications, compare products, check price and
availability and place and track orders quickly and easily, 24 hours a day, 7
days a week. In addition, on June 25, 1999, we announced the launch of a
consumer products on-line super store, Marketplace4U.com. This site was closed
in January 2001.
Manchester was incorporated in New York in 1973 and has seven active
wholly-owned subsidiaries: Manchester International, Ltd., a New York
corporation, which sells computer hardware, software and networking products to
resellers domestically and internationally; ManTech Computer Services, Inc., a
New York corporation, which identifies and provides temporary information
technology positions and solutions for commercial customers; Electrograph
Systems, Inc., a New York corporation, which distributes microcomputer
peripherals throughout the United States; Coastal Office Products, Inc., a
Maryland corporation, which is an integrator and reseller of computer products
in the Baltimore, Maryland and Washington, D.C. areas; Texport Technology Group,
Inc., a New York corporation, which is an integrator and reseller of computer
products in the Rochester, New York area; Learning Technology Group, LLC, a New
York limited liability company, which is an integrator and reseller of computer
products mainly to educational institutions within New York State and Donovan
Consulting Group, Inc., a Delaware corporation, which delivers wireless LAN
solutions to customers nationwide.
Industry
Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Computer technology and related products are continuously evolving,
making predecessor technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant challenges
to companies.
Over the last several years, the increase in performance of personal
computers, the development of a variety of effective business productivity
software programs and the ability to interconnect personal computers in high
speed networks have led to an industry shift away from mainframe computer
systems to client/server systems based on personal computer technology. In such
systems, the client computer, in addition to its stand-alone capabilities, is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers. Networked
applications such as electronic mail and work group productivity software,
coupled with widespread acceptance of Internet technologies, have led companies
to implement corporate intranets (networks that enable end-users (e.g.,
employees) to share information). The use of a corporate intranet allows a
company to warehouse valuable information, which may be "mined" or accessed by
employees or other authorized users through readily available Internet tools
such as Web browsers and other graphical user interfaces.
With these advances in information systems and networking, many
companies are reengineering their businesses using these technologies to enhance
their revenue and productivity. However, as the design of information systems
has become more complex to accommodate the proliferating network applications,
the configuration, selection and integration of the necessary hardware and
software products have become increasingly more difficult and complicated. While
many companies have the financial resources to make the required capital
investments, they often do not have the necessary information technology
personnel to design, install or maintain complex systems and may not be able to
provide appropriate or sufficient funding or internal management for the
maintenance of their information systems. As a result, such companies are
increasingly turning to independent third parties to procure, design, install,
maintain and upgrade their information systems. By utilizing the services of
such third parties, companies are able to acquire state-of-the-art equipment and
expertise on a cost-effective basis.
The Manchester Solution
Manchester offers its customers single-source solutions customized to
their information systems needs. Our solution includes a variety of value-added
services, including consulting, integration, network management, "help-desk"
support, and enhancement, maintenance and repair of computer systems, together
with a broad range of computer and networking products from leading vendors. We
believe we provide state-of-the-art, cost-effective information systems designed
to meet our customers' particular needs.
As a result of our long-standing relationships with certain suppliers
and our large volume purchases, we are often able to obtain significant purchase
discounts which can result in cost-savings for our customers. Our relationships
with our suppliers, our inventory management system and our industry knowledge
generally enable us to procure desired products on a timely basis and therefore
to offer our customers timely product delivery.
Our Strategy
The key elements of our strategy include:
Emphasizing Value-added Services. Value-added services, such as
consulting, integration and support services, generally provide higher profit
margins than computer hardware sales. We have increased our focus on providing
these services through a number of key strategies. We have recruited additional
technical personnel with broad-based knowledge in systems design and specialized
knowledge in different areas of systems integration, including VoIP (Voice over
Internet Provider), inter-networking (routers and switches security assessment,
wireless analysis), database design and management.
Increasing Marketing Focus on Companies Outside the Fortune 500. We
have increased our marketing focus on those companies outside the Fortune 500 in
order to increase our value-added services revenue. Our experience is that those
companies are increasingly looking to third parties to provide a complete
solution to their information systems needs from both a service and product
standpoint. Such companies often do not have the necessary information
technology personnel to procure, design, install or maintain complex systems or
to incorporate continuously evolving technologies. We believe that we can
provide these companies with solutions to their information systems requirements
by providing a variety of value-added services together with a broad range of
computer and networking products.
Electronic Ordering System. We have implemented an electronic ordering
system. This ordering system enables participating customers to access us via
the Internet, review various products, systems and services offered by us and
place their orders on-line. Customers are also able to obtain immediate
customized information regarding products, systems and services that meet their
specific requirements. The ordering system produces a matrix of alternative
fully compatible packages, together with their availability and related costs,
based on parameters indicated by the customer. Customers are not granted access
to this system without prior credit clearance. (See "Expanding Internet
Presence").
Increasing Sales Force Productivity. We are addressing a variety of
strategies to increase sales force productivity. We have implemented
enhancements to our system allowing our sales force immediate access to
information regarding price and availability of products. In addition, we are
developing enhancements that will allow sales representatives to obtain
immediate customized information regarding products and services that meet
specific requirements of customers. We believe that this system will increase
the productivity of our sales representatives by enabling them to offer rapid
and comprehensive solutions to their customers' needs.
We provide training of our sales representatives in matters relating to
value-added services, such as consulting and integration services. To facilitate
such training, we constructed dedicated training facilities in our New York City
office.
Expanding New York Metropolitan Area Presence. We believe that we have
a strong presence and wide name recognition in the New York Metropolitan area,
where there is a strong corporate demand for computer products and services.
Manchester is seeking to expand its presence in this area through its New York
City office and increased sales and service capabilities. We believe that these
steps will enable us to capture a greater percentage of the New York
Metropolitan area market.
Expanding into Additional Business Centers. We have regional offices in
Newton, Massachusetts; Baltimore, Maryland; Boca Raton, Florida; Lanham,
Maryland (Washington, D.C.); and Rochester, New York, from which we derived
approximately 13% of our revenues for the fiscal year ended July 31, 2001.
Expanding Internet Presence. We have continuously upgraded and expanded
our electronic communication system. Our website, located at
www.e-manchester.com, allows existing customers, corporate shoppers and others
to find product specifications, compare products, check prices and availability
and place and track orders quickly and easily 24 hours a day, seven days a week.
We have made, and expect to continue to make, significant investments and
improvements in our e-commerce capabilities.
Our Services and Products
We offer customized single-source solutions to our customers'
information systems requirements, including consulting, integration and support
services, together with a broad range of computer and networking products from a
variety of leading vendors. We provide our services through a skilled staff of
engineers who are trained and certified in leading products and technology,
including Compaq, Microsoft, Novell and Cisco Systems.
Services. Our services include consulting, integration and support
services.
Consulting. Our staff of senior systems engineers provides consulting
services consisting of systems design, performance and needs analysis, and
migration planning services.
Systems design services include network, communications, applications
and custom solutions design. Network design services involve analysis of a
customer's overall network needs, including access to the Internet;
communications design services involve analysis and creation of enterprise-wide
networks, including corporate intranets; applications design services include
creation of relational databases meeting customers' specific business
requirements; and custom solutions design services include design of storage
systems, remote access systems and document retention through scanning
technology.
Performance analysis involves analyzing a customer's information
systems to assess potential points of failure, to determine where performance
could be increased and to prepare for change and growth. This service includes
the evaluation of applications and their interaction with the network in order
to maximize existing computer resources. Through this evaluation process, which
includes a detailed report to the end-user, a plan for the optimization of the
customer's existing system is created, as well as recommendations for
enhancements and future systems.
Security analysis involves working with customers to develop security
policies covering network security, as well as risk analysis. After a policy is
developed, a security strategy is planned and deployed using a variety of tools,
including physical firewalls, packet filtering, encryption and user
authentication.
Migration planning involves the performance of a detailed assessment of
existing mission critical systems, followed by an analysis of the end-user's
future requirements. Working closely with the customer, our consultants develop
a migration strategy using a defined project plan that encompasses skills
transfer and training, checking for data integrity, project management and
consolidation and reallocation of resources. The primary objective of this
service is to rapidly move the customer from a slow or costly system to a newer,
more efficient and cost-effective solution.
Integration. Integration services include product procurement,
configuration, testing, installation and implementation.
We maintain a sophisticated systems build and test area, adjacent to
our warehousing facilities, where computer systems are configured and tested
through the use of automated systems. Manchester manages the installation and
implementation of its customers' information systems, and provides critical path
analysis, vendor management and facility management services. Critical path
analysis involves the management and coordination of the various hardware and
software networking components of a systems design project. Our engineers
prepare reports setting forth coordinated timetables with respect to installing
and integrating the customer's information systems.
Support. We offer support services for customers' existing information
systems, including network management, "help-desk" services, monitoring,
enhancements, maintenance and repair.
Network management consists of managing the compatibility of, and
communication between, the various components comprising a customer's
information system. The increased expense associated with the ownership of
information systems has encouraged customers to outsource the management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Our engineers can provide network management services on site at
customers' facilities, and remotely.
"Help-desk" services consist of providing customers with telephone
support. In addition, our service call management system, which we are in the
process of enhancing, will enable our "help-desk" technicians to access an
archive of prior service calls concerning similar problems and their solutions,
resulting in a more efficient response to customers' calls.
We offer our customers a comprehensive remote monitoring and management
service called "TelstarR"SM. TelstarR provides our customers cost effective
24/7/365 network support that is fully integrated for servers, workstations and
routers. This remote management can improve company performance and identify and
respond to current and potential systems failures and other problems.
Enhancement, maintenance and repair services range from broad on-site
coverage to less expensive, basic maintenance and repair of itemized hardware or
software, as well as enhancements such as upgrades of existing systems. Field
representatives are equipped with notebook computers to facilitate the exchange
of information with both the information systems at the Company's headquarters
and with technical databases available on the Internet. We maintain a laboratory
at our Long Island facilities where we prototype customer problems for quicker
solutions without jeopardizing customers' information systems.
Products. We offer a wide variety of personal computer and networking
products and peripherals, including:
Desktop Computers Servers
Internet Access Products Software
Modems Storage Systems
Monitors and Displays Switches
Network Equipment Supplies and Accessories
Notebook Computers Teleconferencing Equipment
Printers Terminals
Routers Wireless Products
Scanners Workstations
We have long-standing relationships with many manufacturers, which we
believe assist us in procuring desired products on a timely basis and on
desirable financial terms. We sell products from most major manufacturers,
including:
Cisco Systems, Inc Nortel Networks, Inc.
Compaq Computer Corporation Novell, Inc.
Computer Associates International, Inc Philips Electronics N.V.
Epson America, Inc. Pioneer Corp.
Hewlett-Packard Company Seagate Technology, Inc.
Intel Corporation 3Com Corp.
Microsoft Corporation Toshiba America Information
NEC-Mitsubishi, Inc. Systems, Inc.
For the fiscal years ended July 31, 2001, 2000 and 1999, sales of
products manufactured by Compaq, Hewlett-Packard and Toshiba collectively
comprised approximately 38%, 33%, and 43%, respectively, of our revenues. In
fiscal years ended July 31, 2001, 2000 and 1999, sales of products manufactured
by Toshiba accounted for approximately 11%, 19%, and 9%, respectively, of
revenue, substantially all of which were sales of notebook computers and related
accessories. Also in these fiscal years, sales of products manufactured by
Compaq accounted for 20%, 13%, and 25%, respectively, of revenue. The total
dollar volume of products purchased directly from manufacturers, as opposed to
distributors or resellers, was approximately $119 million, $122 million and $118
million, for the fiscal years ended July 31, 2001, 2000, and 1999, respectively,
and as a percentage of total cost of products sold was approximately 50%, 48%,
and 61%, respectively.
We have entered into agreements with our principal suppliers that
include provisions providing for periodic renewals and permit termination by the
vendor without cause, generally upon 30 to 90 days written notice, depending
upon the vendor. Compaq, Hewlett-Packard, and Toshiba have regularly renewed
their respective agreements with us, although there can be no assurance that the
regular renewal of our dealer agreements will continue. The termination, or
non-renewal, of any or all of these dealer agreements would materially adversely
affect our business. We, however, are not aware of any reason for the
termination, or non-renewal, of any of those dealer agreements and believe that
our relationships with Compaq, Hewlett-Packard, and Toshiba are satisfactory.
We are dependent upon the continued supply of products from our
suppliers, particularly Compaq, Hewlett-Packard and Toshiba. Historically,
certain suppliers occasionally experience shortages of select products that
render them unavailable or necessitate product allocations among resellers. Each
fiscal year, the Company has experienced product shortages, particularly related
to newer models. We believe that product availability issues occur as a result
of the present dynamics of the personal computer industry as a whole, which
include high customer product demand, shortened product life cycles and
increased frequency of new product introductions into the marketplace. While
there can be no assurance that product unavailability or product allocation, or
both, will not increase in fiscal 2002, the impact of such an interruption is
not expected to be unduly troublesome due to the breadth of alternative product
lines available to the Company.
We seek to obtain volume discounts for large customer orders directly
from manufacturers and through aggregators and distributors.
Most of our major product manufacturers provide price protection for a
limited time period as well as stock balancing rights, by way of credits or
refunds, against price reductions by the supplier between the time of the
initial sale to the Company and the subsequent sale by the Company to our
customers. There can be no assurance that manufacturers will not further limit
or eliminate price protection and stock balancing rights in the future.
Customers
We grant credit to customers meeting specified criteria and maintain a
centralized credit department that reviews credit applications. Accounts are
regularly monitored for collectibility and appropriate action is taken upon
indication of risk.
We believe that we benefit from our long-standing relationships with
many of our customers, providing opportunities for continued sales and services.
We believe that our broad range of capabilities with respect to both products
and services is attractive to companies of all sizes. Although we target
companies outside the Fortune 500 as one part of our strategy, we have sold, and
anticipate that we will continue to sell, to some of the largest companies in
the United States. For the fiscal years ended July 31, 2001, 2000 and 1999, no
one customer accounted for more than 10% of our total revenue. Some of our
significant commercial customers currently include Sterling Doubleday
Enterprises (New York Mets), Reuters America Inc., Vytra Choice Care, Inc.,
United Nations International Children's Emergency Fund (UNICEF) and United
Parcel Service of America, Inc.
Our return policy generally allows customers to return hardware and
unopened software, without restocking charges, within 30 days of the original
invoice date, subject to advance approval, our ability to return the product to
our vendor and certain other conditions. We are generally able to return
defective merchandise returned from customers to the vendor.
Sales and Marketing
Our sales are generated primarily by our 68 person sales force. Our
sales representatives generally are responsible for meeting all of our
customers' product and service needs and are supervised by sales managers with
significant industry experience. The sales managers are responsible for
overseeing sales representative training, establishing sales objectives and
monitoring account management principles and procedures. Sales representatives
attend seminars conducted by manufacturers' representatives at our facilities,
at which our new and existing product and service offerings are discussed.
Our sales representatives are assisted by technical personnel who
support and supplement the sales efforts. The responsibilities of technical
support personnel include answering preliminary inquiries from customers
regarding systems design, and on-site visits to customers' facilities. At
customers' facilities, the technical personnel gather information necessary to
assist customers in making informed decisions regarding their information
systems. Such data includes the nature of the customer's current information
systems, the existing hardware and networking environment, the customer's level
of expertise and its applications needs.
We believe that our name is widely recognized for high quality,
competitively priced products and services. Our corporate logo includes the
phrase "Manchester, the Answer" to emphasize our position as a knowledgeable
resource for networking and computer solutions for our customers. We promote
name recognition and the sale of our products and services through regional
business directories, trade magazine advertisements, television and radio
advertisements, direct mailings to customers and participation in computer trade
shows and special events. We advertise at numerous sporting events in the New
York metropolitan region, including full page four-color advertisements in
yearbooks and/or program guides for sports teams such as the New York Mets, the
New York Knicks and the New York Rangers, and often feature nationally
recognized athletes in our advertising campaigns. We also promote interest in
our products and services through our website on the Internet, and have expanded
our website information to provide an electronic catalog of our products and
services. Several manufacturers offer market development funds, cooperative
advertising and other promotional programs, on which we rely to partially fund
many of our advertising and promotional campaigns.
Sales force training is an integral part of our strategy to increase
our focus on providing value-added services. As client/server-based systems,
applications and network capabilities grow in complexity, the need for
technically knowledgeable sales personnel becomes critical to the sale of
value-added services. Accordingly, we have expanded our training capabilities at
one of our Long Island facilities to conduct seminars for sales representatives.
The seminars address such topics as general developments in the computer
industry, systems integration services and our management information systems.
We utilize our technical personnel to conduct such seminars and may hire
additional dedicated trainers as needed.
Management Information Systems
We currently use an IBM AS/400 integrated management information
system, which is an on-line system enabling instantaneous access. We maintain a
proprietary inventory management system on our computer system pursuant to which
product purchases and sales are continually tracked and analyzed. Our computer
system is also used for accounting, billing and invoicing.
Our information system assists management in maintaining controls over
our inventory and receivables. Manchester's average inventory turnover was 33,
34, and 22 times for the fiscal years ended July 31, 2001, 2000, and 1999,
respectively, and we experienced bad debt expense of less than 0.3% of revenue
in each of these years.
During the fiscal year ended July 31, 2000, we invested in our
management information systems, including upgrading and expanding the IBM AS/400
system, enhancing and modifying our client/server-based management system to
track services rendered for customers, and upgrading servers and network
infrastructures for our headquarters. We utilize experienced in-house technical
personnel, assisted by our senior engineers, to upgrade and integrate additional
functions into our management information systems.
Competition
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry continues to experience a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. In addition, certain suppliers and manufacturers market products
directly through a direct sales force and/or the Internet rather than, or in
addition to, channel distribution, and also market services, such as repair and
configuration services, directly to end users. The number of suppliers and
manufacturers employing direct marketing may increase in the future. Some of our
competitors have, or may have, greater financial, marketing and other resources,
and may offer a broader range of products and services, than us. As a result,
they may be able to respond more quickly to new or emerging technologies or
changes in customer requirements, benefit from greater purchasing economies,
offer more aggressive hardware and service pricing or devote greater resources
to the promotion of their products and services. We may not be able to compete
successfully in the future with these or other current or potential competitors.
Our ability to compete successfully depends on a number of factors such
as breadth of product and service offerings, sales and marketing efforts,
product and service pricing, and quality and reliability of services. In
addition, product margins may decline due to pricing to win new business and
increasing pricing pressures from competition. We believe that gross margins
will continue to be reactive to industry-wide changes. Future profitability will
depend on our ability to increase focus on providing technical service and
support to customers, competition, manufacturer pricing strategies, as well as
our control of operating expenses, product availability, and effective
utilization of vendor programs. It will also depend on the ability to attract
and retain quality service personnel and sales representatives while effectively
managing the utilization of such personnel and representatives. There can be no
assurance that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives or difficulty in hiring or retaining
additional technical personnel or sales representatives or reclassification of
our sales representatives as employees could have a material adverse effect on
our business, results of operations and financial condition.
Subsidiaries
Electrograph Systems, Inc.
Electrograph Systems, Inc. ("Electrograph") is a national value-added
wholesale distributor of display technology solutions, and the largest wholesale
distributor of plasma display monitors in the United States. Electrograph offers
a full range of display technology solutions for dealers and system integrators
through the U.S. and Europe. Products include LCD flat panel, CRT and plasma
display monitors, portable and fixed installation projectors, touch screen
monitors, and customer monitor integration solutions. In addition to
Electrograph's worldwide distribution of display technology solutions,
Electrograph also manufactures a complete line of LCD flat panel and plasma
display monitors. Electrograph is headquartered in Hauppauge, New York, with
branch offices throughout the U.S. and in Europe.
Products are selected by Electrograph to minimize competition among
suppliers' products while maintaining some overlap to provide protection against
product shortages and discontinuations and to provide different price points for
certain items. Management believes Electrograph's relationships with its
suppliers are enhanced by providing feedback to suppliers on products, advising
suppliers of customer preferences, working with suppliers to develop marketing
programs, and offering suppliers the opportunity to provide seminars for
Electrograph's customers.
None of Electrograph's material supplier agreements require the sale of
specified quantities of products or restrict Electrograph from selling similar
products manufactured by competitors. Electrograph, therefore, has the ability
to terminate or curtail sales of one product line in favor of another product
line as a result of technological change, pricing considerations, customer
demand or supplier distribution policy. Electrograph has never been terminated
by any of its suppliers.
Most of Electrograph's major suppliers provide price protection for a
limited time period, by way of credits, against price reductions by the supplier
between the time of the initial sale to Electrograph and the subsequent sale by
Electrograph to its customer. Additionally, most of Electrograph's suppliers
accept defective merchandise returned within 12 to 15 months after shipment to
Electrograph. Some suppliers permit Electrograph to rotate its inventory by
returning slow moving inventory for other inventory.
While Electrograph distributes products of more than 15 suppliers,
approximately 28%, 28% and 10% of Electrograph's purchases in fiscal 2001 were
derived from products manufactured by Pioneer, NEC, and Sony, respectively.
Electrograph's distribution operations are currently conducted from
distribution centers in Hauppauge, New York and Long Beach, California.
Electrograph also maintains sales offices in Timonium, Maryland, Northville, New
York and Long Beach, California.
Acquisitions
Texport Technology Group, Inc. and Learning Technology Group, LLC
On March 22, 2000, we acquired all of the outstanding ownership
interests of Texport Technology Group, Inc. ("Texport") and Learning Technology
Group, LLC ("LTG"), affiliated entities engaged in reselling and providing of
microcomputer services and peripherals to companies in the greater Rochester,
New York area. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $0.4 million plus potential future contingent
payments. A contingent payment of up to $750,000 may be payable on March 22,
2002 based upon achieving certain agreed-upon increases in revenue and pretax
earnings. The cash payment was made from our cash balances. The selling owners
received employment agreements that also provided for the issuance of 10,000
shares of common stock. The fair value of the common stock, amounting to
$61,250, was recorded as deferred compensation and is being expensed over the
three-year vesting period. In connection with the acquisition, we assumed
approximately $648,000 of bank debt, which was subsequently repaid.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
tangible assets and liabilities acquired was $1.6 million and $2.2 million,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $995,000, which is
being amortized on a straight-line basis over 20 years.
Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan Consulting Group, Inc. ("Donovan") a Delaware corporation headquartered
in Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless
LAN solutions to customers nationwide. The acquisition, which will be accounted
for as a purchase, consisted of a cash payment of $1,500,000 plus potential
future contingent payments. Contingent payments of up to $1,000,000 may be
payable on each of November 2, 2002 and November 2, 2003 based upon Donovan
achieving certain agreed-upon increases in revenue and pre-tax earnings. In
connection with the acquisition, the Company assumed approximately $435,000 of
bank debt and $43,000 of other debt, which were subsequently repaid.
Operating results of Donovan will be included in the consolidated statement
of income from the acquisition date. The estimated fair value of tangible assets
and liabilities acquired was $472,000 and $648,000, respectively. The excess of
the aggregate purchase price over the estimated fair value of the tangible net
assets acquired was approximately $1,700,000. The $1,700,000 will not be
amortized; however, it will be subject to impairment testing in accordance with
Statement No. 142, "Goodwill and Other Intangible Assets."
10
Employees
At August 31, 2001, we had 304 full-time employees consisting of 47
sales representatives, 48 management personnel, 88 technical personnel and 121
distribution and clerical personnel. In addition, at August 31, 2001, we had 21
independent sales representatives. We are not a party to any collective
bargaining agreements and believe our relations with our employees are good.
The Company is highly dependent upon the services of the members of its
senior management team, particularly Barry R. Steinberg, the Company's founder,
Chairman of the Board, President and Chief Executive Officer, and Joel G.
Stemple, Ph.D., the Company's Executive Vice President. The loss of either
member of the Company's senior management team may have a material adverse
effect on its business.
Intellectual Property
We own, or have pending, several federally registered service marks
with respect to our name and logo. Most of our various dealer agreements permit
us to refer to ourselves as an "authorized dealer" of the products of those
manufacturers and to use their trademarks and trade names for marketing
purposes. We consider the use of these trademarks and trade names in our
marketing to be important to our business.
<page>
ITEM 2. Properties
Properties
We currently have ten sales branches nationwide, including the
corporate headquarters located in Hauppauge, New York. The following table
identifies the principal leased facilities.
Approximate
Square Footage Lease
Facility Location Office Warehouse Expiration Date
Corporate 160 Oser Avenue (1)
Headquarters Hauppauge, NY 30,000 - July 2005
Warehouse and 40 and 50 Marcus Blvd. (1) October 2005 (40)
Service Center Hauppauge, NY 20,000 43,000 January 2008 (50)
New York City 469 Seventh Avenue
Sales Office New York, NY 13,000 - October 2007
Boca Raton, FL 185 N.W. Spanish River Blvd.
Sales Office Boca Raton, FL 6,000 - November 2002
Boston 25-27 Christina Street
Sales Office Newton, MA 3,000 - October 2002
Baltimore, MD 3832 Falls Rd.
Sales office Baltimore, MD 8,000 2,000 January 2002
Washington, D.C. 5001 Forbes Blvd.
Sales office Lanham, MD 3,000 - February 2003
Rochester, NY 106 Despatch Dr.
Sales office Rochester, NY 3,500 6,500 February 2004
Electrograph 175 Commerce Drive
Corporate HQ Hauppauge, NY 5,000 5,000 June 2002
Electrograph,
Timonium, MD 57 W. Timonium Rd.
Sales Office Timonium, MD 650 - Month to month
Donovan 510 Swanson Road
Corporate HQ Tyrone, GA 4,000 1,500 September 2006
(1) Leased from entities controlled by or affiliated with certain of our
executive officers, directors and principal shareholders. Effective with the
consummation of our initial public offering in November 1996, the leases with
related parties were amended to provide terms comparable to those that could be
obtained from independent third parties.
<page>
ITEM 3. Legal Proceedings
We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on advice from
its legal counsel, the ultimate disposition of these matters will not have a
material adverse effect.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended July 31, 2001.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our Common Stock commenced trading on November 26, 1996 and 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 2000 High Low
---------------- ---- ---
First Quarter 4.500 2.250
Second Quarter 8.000 3.000
Third Quarter 9.125 3.785
Fourth Quarter 6.938 3.125
Fiscal Year 2001
First Quarter 5.625 3.156
Second Quarter 4.000 2.000
Third Quarter 2.750 1.938
Fourth Quarter 2.850 2.060
On October 19, 2001, the closing sale price for the Company's Common
Stock was $2.13 per share. As of October 19, 2001 there were 45 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.
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The selected consolidated financial data presented below are derived
from our audited consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Fiscal Year Ended July 31,
--------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data:
Revenue $280,278 $300,073 $228,641 $202,530 $187,801
Cost of revenue 242,925 260,236 195,423 171,930 161,186
------- ------- ------- ------- -------
Gross profit 37,353 39,837 33,218 30,600 26,615
Selling, general and
administrative expenses 35,485 33,539 29,849 27,414 21,023
------ ------ ------ ------ ------
Income from operations 1,868 6,298 3,369 3,186 5,592
Interest and other income, net 767 602 404 546 395
Provision for income taxes 908 2,800 1,590 1,560 2,450
--- ----- ----- ----- -----
Net income $1,727 $4,100 $2,183 $2,172 $3,537
===== ===== ===== ===== =====
Net income per share:
Basic $0.21 $0.51 $0.27 $0.26 $0.45
==== ==== ==== ==== ====
Diluted $0.21 $0.50 $0.27 $0.26 $0.45
==== ==== ==== ==== ====
Weighted average shares of common stock outstanding:
Basic 8,036 8,108 8,096 8,494 7,779
===== ===== ===== ===== =====
Diluted 8,058 8,228 8,096 8,499 7,779
===== ===== ===== ===== =====
July 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $31,972 $30,453 $27,461 $26,112 $30,578
Total assets 61,783 74,573 61,778 56,894 58,208
Short-term debt, including
current maturities of
capital lease obligation - 18 85 82 1,637
Capital lease obligation, excluding
current maturities - - - - 77
Shareholders' equity 45,555 44,263 39,586 37,345 36,877
ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion and analysis of financial condition and
results of operations of Manchester should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. The following discussion contains certain forward-looking statements
within the meaning of Securities Act of 1933 as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, which are not historical facts
and involve risks and uncertainties that could cause actual results to differ
materially from the results anticipated in those forward-looking statements.
These risks and uncertainties include, but are not limited to those set forth
below and the risk factors described in the Company's other filings from time to
time with the Securities and Exchange Commission.
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions customized to their information systems needs by
integrating analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of our revenues have been derived from product sales. We generally do not
develop or sell software products. However, certain computer hardware products
sold by us are loaded with prepackaged software products.
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a decline in the rate of growth in sales of
personal computers. Heightened price competition among various hardware
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
An integral part of our strategy is to increase our value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires us, among
other things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We can't
predict whether we will be successful in increasing our focus on providing
value-added services, and the failure to do so may have a material adverse
effect on our business, results of operations and financial condition.
Our strategy also includes expanding our presence in the New York
metropolitan area by increasing our sales and service capabilities in our New
York City office and enlarging our sales, service and training capabilities at
our Long Island headquarters as well as expanding geographically into growing
business centers in the eastern half of the United States. We can't assure you
that the expansion of our New York metropolitan area operations will increase
profits generated by such operations, that the opening of new offices will prove
profitable, or that these expansion plans will not substantially increase future
capital expenditures or other expenditures. The failure of this component of our
strategy may materially adversely affect our business, results of operations and
financial condition.
To date, our success has been based primarily upon sales in the New
York Metropolitan area. Our strategy, encompassing the expansion of service
offerings, the expansion of existing offices and the establishment of new
regional offices, has challenged and will continue to challenge our senior
management and infrastructure. We cannot predict our ability to respond to these
challenges. If we fail to effectively manage our planned growth, there may be a
material adverse effect on our business, results of operations and financial
condition.
On September 11, 2001, the World Trade Center in New York City and the
Pentagon in Washington, D.C. were the subject of terrorists attacks. Although a
significant part of our business is generated from our New York City and
Baltimore/Washington, D.C. offices, we are not aware of any material impact on
our business as a result of these attacks. We cannot predict the impact that
these or potential future attacks may have on our business, results of
operations and financial condition.
In addition, the success of our strategy depends in large part upon our
ability to attract and retain highly skilled technical personnel and sales
representatives, including independent sales representatives, in a very
competitive labor market. Our ability to grow our service offerings has been
somewhat limited by a shortage of qualified personnel, and we cannot assure you
that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives, difficulty in hiring or retaining additional
technical personnel or sales representatives, or reclassification of our sales
representatives as employees may have a material adverse effect on our business,
results of operations and financial condition.
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. Moreover, additional suppliers and manufacturers may choose to
market products directly to end users through a direct sales force and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration services, directly to end
users. Some of our competitors have or may have, greater financial, marketing
and other resources, and may offer a broader range of products and services,
than us. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services. We may
not be able to compete successfully in the future with these or other current or
potential competitors.
Our business is dependent upon our relationships with major
manufacturers and distributors in the computer industry. Many aspects of our
business are affected by our relationships with major manufacturers, including
product
availability, pricing and related terms, and reseller authorizations. The
increasing demand for personal computers and ancillary equipment has resulted in
significant product shortages from time to time, because manufacturers have been
unable to produce sufficient quantities of certain products to meet demand. We
cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations. On September 4, 2001,
Hewlett-Packard Company and Compaq Computer Corporation announced their
intention to merge. Manchester sells the products of both companies and we
believe that we have strong relationships with both companies. While we do not
believe that there will be a material adverse effect on our business, financial
condition and results of operations as a result of this merger, there can be no
assurance that such a material adverse effect will not occur.
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. We rely on these funds for many of our advertising and
promotional campaigns. In recent years, manufacturers have generally reduced
their level of support with respect to these programs, which has required us to
increase spending of our own funds to obtain the same level of advertising and
promotion. If manufacturers continue to reduce their level of support for these
programs, or discontinue them altogether, we would have to further increase our
advertising and promotion spending, which may have a material adverse effect on
our business, financial condition and results of operations.
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our sales to resellers have been made at profit
margins generally less favorable than our sales directly to commercial
customers. Our inability to sell products to computer resellers and thereby
obtain the desired volume discounts from manufacturers or to expand our sales to
commercial customers sufficiently to offset our need to rely on sales to
computer resellers may have a material adverse effect on our business, financial
condition and results of operations.
The markets for our products and services are characterized by rapidly
changing technology and frequent introduction of new hardware and software
products and services. This may render many existing products and services
noncompetitive, less profitable or obsolete. Our continued success will depend
on our ability to keep pace with the technological developments of new products
and services and to address increasingly sophisticated customer requirements.
Our success will also depend upon our abilities to address the technical
requirements of our customers arising from new generations of computer
technologies, to obtain these new products from present or future suppliers and
vendors at reasonable costs, to educate and train our employees as well as our
customers with respect to these new products or services and to integrate
effectively and efficiently these new products into both our internal systems
and systems developed for our customers. We may not be successful in
identifying, developing and marketing product and service developments or
enhancements in response to these technological changes. Our failure to respond
15
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we can't
assure you that we will continue to successfully manage our existing and future
inventory. Our failure to successfully manage our current or future inventory
may have a material adverse effect on our business, financial conditions and
results of operations.
Our strategy envisions that part of our future growth will come from
acquisitions consistent with our strategy. There can be no assurance that we
will be able to identify suitable acquisition candidates and, once identified,
to negotiate successfully their acquisition at a price or on terms and
conditions favorable to us, or to integrate the operations of such acquired
businesses with our operations. Certain of these acquisitions may be of
significant size and may include assets that are outside our geographic
territories or are ancillary to our core business strategy.
Our quarterly revenue and operating results have varied significantly
in the past and are expected to continue to do so in the future. Quarterly
revenue and operating results generally fluctuate as a result of the demand for
our products and services, the introduction of new hardware and software
technologies with improved features, the introduction of new services by us and
our competitors, changes in the level of our operating expenses, competitive
conditions and economic conditions. In particular, we have increased certain of
our fixed operating expenses, including a significant increase in personnel, as
part of our strategy to increase our focus on providing systems integration and
other higher margin and value added services. As a result, we believe that
period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. In addition, the results of any
quarterly period are not necessarily indicative of results to be expected for a
full fiscal year.
As a result of the rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, our product
offerings change constantly. Prices of products change with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The computer industry has experienced rapid declines
in average selling prices of personal computers. 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 decline or that we will be
able to offset declines in average selling prices with increases in units
shipped.
Most of the personal computers we sell utilize operating systems
developed by Microsoft Corporation. The United States Department of Justice has
brought a successful antitrust action against Microsoft, which could delay the
introduction and distribution of Microsoft products. The potential
unavailability of Microsoft products could have a material adverse effect on our
business, results of operations and financial condition.
We lease certain warehouses and offices from entities that are owned or
controlled by our majority shareholder. Each of the leases with related parties
has been amended effective with the closing of our initial public offering in
December 1996 to reduce the rent payable under that lease to then current market
rates.
E-Commerce
We utilize a website and electronic commerce system. The site, located
at www.e-manchester.com allows both existing customers, corporate shoppers and
others to find product specifications, compare products, check price and
availability and place and track orders quickly and easily 24 hours a day seven
days a week. We have made, and expect to continue to make, significant
investments and improvements in our e-commerce capabilities. There can be no
assurance that we will be successful in enhancing and increasing our business
through our expanded Internet presence.
16
Recent Acquisitions
Texport Technology Group, Inc.
On March 22, 2000, we acquired all of the outstanding ownership
interests of Texport Technology Group, Inc. ("Texport") and Learning Technology
Group, LLC ("LTG"), affiliated entities engaged in reselling and providing of
microcomputer services and peripherals to companies in the greater Rochester,
New York area. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $0.4 million plus potential future contingent
payments. A contingent payment of up to $750,000 may be payable on March 22,
2002 based upon achieving certain agreed-upon increases in revenue and pretax
earnings. The cash payment was made from our cash balances. The selling owners
received employment agreements that also provided for the issuance of 10,000
shares of common stock. The fair value of the common stock, amounting to
$61,250, was recorded as deferred compensation and is being expensed over the
three-year vesting period. In connection with the acquisition, we assumed
approximately $648,000 of bank debt, which was subsequently repaid.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
tangible assets and liabilities acquired was $1.6 million and $2.2 million,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $995,000, which is
being amortized on a straight-line basis over 20 years.
Donovan Consulting Group, Inc.
-----------------------------
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan Consulting Group, Inc. ("Donovan") a Delaware corporation headquartered
in Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless
LAN solutions to customers nationwide. The acquisition, which will be accounted
for as a purchase, consisted of a cash payment of $1,500,000 plus potential
future contingent payments. Contingent payments of up to $1,000,000 may be
payable on each of November 2, 2002 and November 2, 2003 based upon Donovan
achieving certain agreed-upon increases in revenue and pre-tax earnings. In
connection with the acquisition, the Company assumed approximately $435,000 of
bank debt and $43,000 of other debt, which were subsequently repaid.
Operating results of Donovan will be included in the consolidated statement
of income from the acquisition date. The estimated fair value of tangible assets
and liabilities acquired was $472,000 and $648,000, respectively. The excess of
the aggregate purchase price over the estimated fair value of the tangible net
assets acquired was approximately $1,700,000. The $1,700,000 will not be
amortized; however, it will be subject to impairment testing in accordance with
Statement No. 142, "Goodwill and Other Intangible Assets."
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of income expressed as a
percentage of related revenue or total revenue.
Percentage of Revenue
the Year Ended July 31,
2001 2000 1999
---- ---- ----
Revenue
Products 97.0% 97.6% 97.0%
Services 3.0 2.4 3.0
--- --- ---
100.0 100.0 100.0
----- ----- -----
Cost of revenue
Products 87.1 87.2 86.1
Services 71.8 66.0 65.3
---- ---- ----
86.7 86.7 85.5
---- ---- ----
Product gross profit 12.9 12.8 13.9
Services gross profit 28.2 34.0 34.7
---- ---- ----
Gross profit 13.3 13.3 14.5
Selling, general and administrative expenses 12.6 11.2 13.0
---- ---- ----
Income from operations 0.7 2.1 1.5
Interest and other income, net 0.2 0.2 0.2
--- --- ---
Income before income taxes 0.9 2.3 1.7
Provision for income taxes 0.3 0.9 0.7
--- --- ---
Net income 0.6% 1.4% 1.0%
=== === ===
17
Year Ended July 31, 2001 Compared to Year Ended July 31, 2000
Revenue. Our revenue decreased to $280.3 million in fiscal 2001 from $300.1
million in fiscal 2000. The decline in revenue was 16% and 27% in the third and
fourth quarters of fiscal 2001, compared to the same quarters a year ago,
respectively, reflecting the overall slowdown in economic activity in general as
well as the decline in corporate spending in the technology industry in
particular. Revenue from product sales decreased by $21.0 million, or 7.2%, as a
result of lower selling prices for personal computers partially offset by a 6%
increase in the number of personal computers sold as well as increased revenue
from the sales of large screen flat-panel displays by our Electrograph
subsidiary. Service revenue increased by $1.2 million, or 16.8%, due to our
continued focus on developing and selling value-added services to our customers
including significant growth in the sales of services to customers that are
delivered by manufacturers or vendors.
Gross Profit. Cost of revenue includes the direct costs of products
sold, freight and the personnel costs associated with providing technical
services, offset in part by certain market development funds provided by
manufacturers. All other operating costs are included in selling, general and
administrative expenses. Gross profit decreased by $2.4 million or 6.2%, from
$39.8 million in fiscal 2000 to $37.4 million in fiscal 2001. This decrease is
primarily the result of the decline in revenue discussed above. As a percentage
of revenue, gross profit from the sale of products increased slightly from 12.8%
in fiscal 2000 to 12.9% in fiscal 2001. As a percentage of revenue, gross profit
from the sale of services declined from 34.0% in fiscal 2000 to 28.2% in fiscal
2001 primarily as a result of increased sales of lower margin services that are
delivered by manufacturers or vendors as well as reduced demand for higher
margin consulting and network design services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 5.8% from $33.5 million in
fiscal 2000 to $35.5 million in fiscal 2001. The increase is principally due to
higher bad debts and depreciation and amortization costs as well as costs from
our Rochester office which was opened in connection with the acquisitions of
Texport and LTG on March 22, 2000. These increases were partially offset by
lower commission costs due to the lower revenue discussed above. In addition,
selling, general and administrative costs were lower in the third and fourth
quarters of fiscal 2001 when compared to the same quarters a year ago,
reflecting the cost cutting measures (principally personnel costs) that have
been instituted as a result of the reduction in revenue.
Other Income. Interest and investment income, net, declined by $90,000
from $602,000 in fiscal 2000 to $512,000 in fiscal 2001 principally due to lower
interest rates earned on short term investments as well as lower cash balances
available for investment. Other income, net in fiscal 2001 consists of
approximately $505,000 proceeds received by the Company in connection with a
life insurance policy that it carried on a deceased employee, partially offset
by approximately $250,000 in compensation benefits paid to the deceased
employee's beneficiary principally under the terms of a deferred compensation
agreement with the employee.
Provision for income taxes. Our effective tax rate decreased from 40.6%
of pre-tax income in fiscal 2000 to 34.5% of pre-tax income in fiscal 2001. This
decrease is primarily the result of nontaxable life insurance proceeds received
in the fourth quarter of fiscal 2001 (as discussed in Other Income above)
partially offset by higher state and local income taxes.
Year Ended July 31, 2000 Compared to Year Ended July 31, 1999
Revenue. Our revenue increased $71.4 million or 31.2% from $228.6
million in fiscal 1999 to $300.1 million for fiscal 2000. Revenue from product
sales increased by $71.3 million (32.1%) primarily due to higher revenue
generated from the Company's wholly-owned subsidiaries, Electrograph Systems,
Inc. ("Electrograph") and Texport Technology Group, Inc. (Texport), which was
acquired on March 22, 2000, as well as increases in the number of personal
computers shipped and higher average selling prices for personal computers.
Services revenue increased by $180,000, or 2.6%, reflecting our continued
emphasis on providing services.
Gross Profit. Gross profit increased by $6.6 million or 19.9% from
$33.2 million for fiscal 1999 to $39.8 million for fiscal 2000. Gross profit
from the sale of products increased by $6.6 million or 21.4% due primarily to
increases in revenue partially offset by generally lower margins on products
resulting from the highly competitive environment for computer products. Gross
profit generated through service offerings increased by $15,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.7 million or 12.4% from $29.8 million in
fiscal 1999 to $33.5 million in fiscal 2000. This increase primarily relates to
higher operating and personnel costs at Electrograph and Coastal as well as
operating costs from Texport which was acquired on March 22, 2000. In addition,
we incurred higher advertising, depreciation and commission costs in fiscal 2000
partially offset by a recovery of bad debt expenses.
18
Other Income. Interest income increased due to higher cash balances
available for investment and higher interest rates.
Provision for Income Taxes. Our effective income tax rate decreased
from 42.1% in fiscal 1999 to 40.6% in fiscal 2000 primarily due to the lower
percentage of non-taxable interest income and the non-deductible amortization of
goodwill to the current year taxable income as compared to that of the prior
year.
Liquidity and Capital Resources
Our primary sources cash and cash equivalents in fiscal 2001 have been
internally generated working capital from profitable operations and a line of
credit from financial institutions.
For the year ended July 31, 2001, cash provided by operating activities
was $942,000 consisting primarily of net income adjusted for non cash charges
(principally depreciation and amortization), and decreases in accounts
receivable partially offset by a decrease in accounts payable and accrued
expenses and an increase in inventory. Our accounts receivable and accounts
payable balances, as well as our investment in inventory, can fluctuate
significantly from one period to the next due to the receipt of large customer
orders or payments or variations in product availability and vendor shipping
patterns at any particular date. Generally, our experience is that increases in
accounts receivable, accounts payable and accrued expenses will coincide with
growth in revenue and increased operating levels. During the year ended July 31,
2001, we used approximately $2.0 million for capital expenditures and
approximately $621,000 was used to purchase and retire common stock.
We have available a line of credit with financial institutions in the
aggregate amount of $15.0 million. At July 31, 2001, no amounts were outstanding
under this line.
We believe that our current balances in cash and cash equivalents,
expected cash flows from operations and available borrowings under the lines of
credit will be adequate to support current operating levels for the foreseeable
future, specifically through at least the end of fiscal 2002. We currently have
no material commitments for capital expenditures. Future capital requirements
include those for the growth of working capital items such as accounts
receivable and inventory, the purchase of equipment, expansion of facilities,
potential contingent acquisition payments of $2,750,000, as well as the possible
opening of new offices and potential acquisitions.
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142 "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combinations must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of."
The Company is required to adopt the provisions of Statement 141
immediately and has elected to adopt Statement 142 effective August 1, 2001.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will not be amortized after August 1, 2001. 19
19
<page>
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it with the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statement of income.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $6,148, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $386 for the year ended July 31, 2001. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
Inflation
We do not believe that inflation has had a material effect on our
operations.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not exposed to significant market risk.
ITEM 8. Financial Statements and Supplementary Data
See Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
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 59 Chairman of the Board, President, Chief
Executive Officer and Director
Joel G. Stemple, Ph.D 59 Executive Vice President, Secretary and Director
Joseph Looney 44 Vice President, Finance, Chief Financial Officer
and Assistant Secretary
Laura Fontana 46 Vice President - Technical Services
Joel Rothlein, Esq. 72 Director
Bert Rudofsky 67 Director
Michael E. Russell 54 Director
Julian Sandler 57 Director
Robert J. Valentine 51 Director
Barry R. Steinberg, the founder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer and as a director since
Manchester's formation in 1973. Mr. Steinberg previously served as a systems
analyst for Sleepwater, Inc. and Henry Glass and Co.
Joel G. Stemple, Ph.D. has served as Executive Vice President since
September 1996 and as Vice President and as a director since August 1982. Dr.
Stemple previously performed consulting services for the Company and, from 1966
to 1982, served as Assistant and Associate Professor of Mathematics at Queens
College, City University of New York.
Joseph Looney has served as the Company's Vice President, Finance since
January 2000 and as the Company's Chief Financial Officer since May 1996 and as
Assistant Secretary since April 1999. From 1984 until joining the Company, Mr.
Looney served in various positions with KPMG LLP, including Senior Audit Manager
at the end of his tenure at such firm. Mr. Looney is a Certified Public
Accountant, a member of the AICPA, the New York State Society of Certified
Public Accountants and the Institute of Internal Auditors.
Laura Fontana has served as Vice President - Technical Services since
January 2000 and as Director of Technical Services since January 1999. A
twenty-year Manchester veteran, Ms. Fontana had previously managed the sales
organization and been largely responsible for the design of sales, product
information, and automated order-processing systems. She received her B.A. from
Dowling College.
Joel Rothlein, Esq. has been a director of the Company since October 1996.
Mr. Rothlein is a partner in the law firm of Kressel Rothlein Walsh & Roth, LLC,
Massapequa, New York, where he has practiced law since 1955. Kressel Rothlein
Walsh & Roth, LLC. and its predecessor firms have acted as outside general
counsel to the Company since the Company's inception.
Bert Rudofsky became a director on July 15, 1998. Mr. Rudofsky is the
founder and president of Bert Rudofsky and Associates, a management consulting
firm specializing in the computer industry. Mr. Rudofsky was a founder of MTI
Systems Corp., a leading edge, technical, value-added distribution company
specializing in computer and data communications products. Mr. Rudofsky was CEO
of MTI from 1968 until MTI was sold in 1990.
Michael E. Russell became a director on July 15, 1998. Mr. Russell is
presently a senior vice president at Prudential Securities Incorporated and has
held several distinguished positions as a member of the business community, as a
member of the New York State Metropolitan Transportation Authority (1997-1989),
as commissioner of the New York State Commission on Cable Television (1989-1991)
and as Special Assistant to the New York State Senate Majority Leader
(1991-1994).
Julian Sandler became a director on December 2, 1996. Mr. Sandler is
Chief Executive Officer of Rent-a-PC, Inc., a full-service provider of
short-term computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is
also the founder and was the President from 1974 to 1993 of Brookvale
Associates, a national organization specializing in the remarketing of hardware
manufactured by Digital Equipment Corporation. Mr. Sandler also co-founded and
from 1970 to 1973 was Vice President of Periphonics Corporation, a developer and
manufacturer of voice response systems.
Robert J. Valentine became a director on April 17, 2001. Mr. Valentine is
the Manager of the New York Mets Major League Baseball team. In addition, Mr.
Valentine is the owner of a chain of restaurants, a corporate spokesman and
author.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of the Common Stock
(collectively, "Reporting Persons") file reports of their trading in our equity
securities with the Securities and Exchange Commission. Based on a review of
Section 16 forms filed by the Reporting Persons during the fiscal year ended
July 31, 2001, we believe that the Reporting Persons timely complied with all
applicable Section 16 filing requirements, with the exception of Mr. Valentine,
who filed Form 3, reporting his having become a director of the Company
approximately two weeks late and Mr. Looney, who filed Form 5, reporting the
issuance of options to him by the Company approximately three weeks late.
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, 2001, 2000, and
1999 to the Company's Chief Executive Officer and the other executive officers
whose compensation exceeded $100,000 (collectively, the "Named Executive
Officers"):
Summary Compensation Table
Long Term
Compensation
Annual Compensation Common Stock
Name and Other Annual Underlying All
Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation
Barry R. Steinberg, 2001 $650,000 - $63,954 (2) - -
President and Chief 2000 $650,000 $485,248 $58,707 (2) - -
Executive Officer 1999 $650,000 - $23,806 (2) - -
Joel G. Stemple, Executive 2001 $450,000 - $38,379 (3) - -
Vice President and 2000 $450,000 $242,624 $31,375 (3) - -
Secretary 1999 $450,000 - $13,881 (3) - -
Joseph Looney, Chief 2001 $245,000 - $26,694 (4) 10,000 -
Financial Officer, Vice 2000 $220,000 $80,875 $11,025 (4) - -
President, Finance and 1999 $200,000 $15,000 $15,061 (4)
Assistant Secretary
Laura Fontana, Vice 2001 $203,782 $13,418 $31,438 (5) - -
President - Technical Services 2000 $169,254 $38,683 $17,848 (5) - -
Mark Glerum, Vice 2001 $154,041 - $7,800 - -
President - Sales(7) 2000 $128,830 $35,866 $ 6,675 9,000(6) -
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, 2001.
------------------
(1) Includes in fiscal 2001 employer matching contributions to the Company's
defined contribution plan of $5,100, $5,100, $5,100, and $5,100, for Mr.
Steinberg, Mr. Stemple, Mr. Looney, and Ms. Fontana, respectively, fiscal
2000 employer matching contributions to the Company's defined contribution
plan of $5,100, $5,100, $5,100 and $5,048 for Messrs. Steinberg, Stemple,
Looney, and Ms. Fontana, respectively, fiscal 1999 employer matching
contributions of $4,800, $4,800 and $4,960 for Messrs. Steinberg, Stemple
and Looney, respectively.
(2) Includes $50,000 in 2001, $50,000 in 2000, and $15,399 in 1999 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 $25,000 in 2001, $25,000 in 2000, and $7,606 in 1999, of premiums
paid by the Company for a whole life insurance policy in the name of Mr.
Stemple having a face value of $1,300,000 and under which his spouse and
the Company are beneficiaries and are entitled to $600,000 and $700,000,
respectively, of the death benefits payable under the policy.
(4) Includes $5,000 in each of 2001, 2000 and 1999 of premiums paid by the
Company for a whole life insurance policy in the name of Mr. Looney having
a face value of $345,000 and under which his spouse and the Company are
beneficiaries and are entitled to $100,000 and $245,000, respectively, of
the death benefits payable under the policy. Also includes $15,569
representing the present value of benefits earned under the Company's
deferred compensation plan.
(5) Includes $5,000 in each of 2001 and 2000 of premiums paid by us 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 $13,538
representing the present value of benefits earned under the Company's
deferred compensation plan.
(6) See option grant table below.
(7) Resigned his position with the Company in June 2001.
<page>
No bonus was paid for fiscal 2001 or 1999 to Mr. Steinberg. We continue
to make available to Mr. Steinberg the auto use 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
were terminated, he would not be precluded from competing with us.
We have an employment agreement with Joel G. Stemple, Ph.D., under
which Dr. Stemple received a base salary of $450,000. No bonus was paid for
fiscal 2001 or 1999. Under the employment agreement, we provide Dr. Stemple with
an automobile and certain deferred compensation benefits and provide Dr. Stemple
with medical and other benefits generally offered by us to our employees. Dr.
Stemple also is able to participate in our stock option plan. The employment
agreement is terminable by either party on 90 days' prior notice. In the event
we so terminate Dr. Stemple's employment, or we elect not to renew his
employment agreement, he is entitled to severance equal to 12 months of his then
current base salary. This severance will be payable in accordance with our
customary payroll practices. Under the employment agreement, if Dr. Stemple
terminates his employment, or we terminate his employment for cause, Dr. Stemple
is prohibited, for a two-year period from such termination, from competing with
us in the eastern half of the United States.
Option/SAR Grants in the Last Fiscal Year
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended July 31,
2001. No stock appreciation rights have been granted by the Company.
Option Grants During the Fiscal Year Ended July 31, 2001
Number of % of Total Potential Realizable Value
Securities Options at Assumed Annual Rates
Underlying Granted to Exercise of Stock Price Appreciation
Options Employees in Price Expiration for Option Term(2)
------------------
Name Granted(1) Fiscal Year Per Share Date 5% 10%
---- ---------- ----------- --------- ---- -- ---
Joseph Looney 10,000 8% $3.75 10/25/10 $23,584 $59,765
-------------
(1) Grant consists of ten year ISOs granted under the Option Plan, exercisable
immediately.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the common stock over the term of the options. These numbers are calculated
based on rules promulgated by the Securities and Exchange Commission.
Actual gains, if any, in option exercises are dependent on the time of such
exercise and the future performance of the common stock.
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, 2001. No options were exercised by the Named
Executive Officers during the fiscal year ended July 31, 2001. No stock
appreciation rights have been granted by the Company.
Number of Securities Value of
Shares Underlying Unsecured Unexercised
In-the-Money Acquired Options/SAR's at Options/SAR's at
or Value July 31, 2001 July 31, 2001(1)
Name Exercised Realized Exercisable/Unexercisable Exercisable/Unexercisable
Joseph Looney - - 55,000/25,000 $ - /$ -
Laura Fontana - - 25,000/25,000 $ - /$ -
Mark Glerum (2) - - - /9,000 $ - /$ -
--------
(1) Based on the closing sale price of common stock as of July 31, 2001 ($2.80
per share) minus the applicable exercise price.
(2) Employment terminated in June 2001. All options expired 90 days after
termination.
Compensation of Directors
Effective July 12, 2000, the Board voted to change the directors'
compensation plan. Starting August 1, 2000, all non-employee directors will
receive a $20,000 annual stipend payable in four quarterly installments. In
addition, each non-employee director will be granted annually on August 1, an
option to purchase 10,000 shares at an exercise price equal to the fair market
value of the common stock on August 1 of each year. Such options will be for a
term of five years and will be exercisable immediately upon such grant.
On August 1, 1999, under the previous directors' compensation plan, the
Board of Directors granted to each of Joel Rothlein, Bert Rudofsky, Michael E.
Russell and Julian Sandler, who are non-employee directors, non-incentive
options under the Plan to purchase 5,000 shares at on exercise price of $2.75
per share (the fair market value of the common stock on August 2, 1999). In
addition, on August 1, 2001 and 2000 pursuant to and in accordance with the
directors compensation program described above, the Board of Directors granted
to each of Joel Rothlein, Bert Rudofsky, Michael E. Russell and Julian Sandler,
who are non-employee directors, non-incentive options under the Plan to purchase
10,000 shares at an exercise price of $2.80 per share and $4.625 per share,
respectively (the fair market value of the common stock on those dates).
On October 19, 1998, the Board of Directors appointed a Special
Committee ("Special Committee") consisting of Bert Rudofsky, Michael Russell and
Julian Sandler to explore possible strategies and methods of enhancing
shareholder value. As compensation for their work on the Special Committee
through December 31, 1999, each member of the Committee was paid $10,000 on
February 1, 1999 and $10,000 on August 1, 1999.
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 $215,000, $177,000, and $213,000, for legal fees in the fiscal
years ended July 31, 2001, 2000 and 1999, respectively. In addition, during the
years ended July 31, 2001, 2000 and 1999, we recorded revenue of approximately
$178,000, $273,000, and $597,000 respectively, in connection with the sale of
computer equipment to a company controlled by Mr. Sandler.
Our stock option plan is administered by the Board of Directors. Barry
R. Steinberg is President and Chief Executive Officer and Joel G. Stemple is
Executive Vice President of the Company and each of them is a member of the
Board. As members of the Board, they could vote on executive compensation issues
before the Board pertaining to the granting of stock options. Although the issue
has not arisen to date, each of Messrs. Steinberg and Stemple has agreed to
abstain from voting on the grant of stock options to himself or to the other of
them.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 19,
2001 (except as otherwise indicated) with respect to the number of shares of the
Company's common stock beneficially owned by each person who is known to the
Company to beneficially own more than 5% of the common stock, together with
their respective addresses, the number of shares of common stock beneficially
owned by each director of the Company and each Named Executive Officer of the
Company, and the number of shares of common stock beneficially owned by all
executive officers and directors of the Company as a group. Except as otherwise
indicated, each such shareholder has sole voting and investment power with
respect to the shares beneficially owned by such shareholder.
Shares Beneficially Percent of Shares
Name and Address Owned(1) Outstanding
-----------------------------------------------------------------------------------------
Barry R. Steinberg(2) (3) 4,690,201 57.3%
Joel G. Stemple(2) 626,263 7.7
Joseph Looney(4) 59,700 0.7
Laura Fontana 25,000 0.3
Joel Rothlein(4) (5) 63,500 0.8
Bert Rudofsky (4) 25,000 0.3
Michael E. Russell (4) 25,000 0.3
Julian Sandler(4) 33,500 0.4
Robert J. Valentine - -
Dimensional Fund Advisors, Inc. (6) 611,600
1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401
All executive officers and directors as a group
(9 persons) (7) 5,548,164 67.8%
(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 currently exercisable options listed
in the footnotes hereto is assumed. For such purposes 8,182,715 shares of
Common Stock are deemed to be outstanding.
(2) Address is 160 Oser Avenue, Hauppauge, New York 11788.
(3) Excludes 59,500 shares owned by Ilene Steinberg and 59,000 shares owned by
Sheryl Steinberg, daughters of Mr. Steinberg, which shares were purchased
with the proceeds of a loan from Mr. Steinberg. As reported on Schedule
13D filed on March 24, 1997, as amended, Mr. Steinberg, Ilene Steinberg,
and Sheryl Steinberg each disclaim beneficial ownership of the common
stock owned by the others.
(4) Includes currently exercisable options to purchase 55,000 shares (Mr.
Looney); 25,000 shares (Ms. Fontana); 32,500 shares (Mr. Sandler); 25,000
shares (Mr. Rudofsky); 30,000 shares (Mr. Rothlein); and 25,000 shares (Mr.
Russell).
(5) Includes 31,500 shares held by the Kressel Rothlein & Roth Profit Sharing
Plan. Mr. Rothlein disclaims beneficial ownership of the common stock owned
by the Kressel Rothlein & Roth Profit Sharing Plan, except to the extent of
his beneficial interest in such plan.
(6) Based upon a Schedule 13F filed with Securities and Exchange Commission as
of June 30, 2001. (7) See Notes 1 through 5 above.
ITEM 13. Certain Relationships and Related Transactions
Until August 1994, we were affiliated with Electrograph Systems, Inc.
("Electrograph"). Barry R. Steinberg, our President and Chief Executive Officer
and majority shareholder, served as Electrograph's Chairman of the Board and
Chief Financial Officer and had beneficial ownership (directly and through
shares held by his spouse and certain trusts, of which his children are
beneficiaries) of 35.5% of the outstanding shares of common stock of
Electrograph. In August 1994, Bitwise Designs, Inc. ("Bitwise"), a
publicly-traded company engaged in the manufacture and distribution of document
imaging systems, personal and industrial computers and related peripherals,
acquired Electrograph through a stock-for-stock merger; Mr. Steinberg acquired
beneficial ownership of less than 1% of the outstanding capital stock of Bitwise
for the common stock of Electrograph in which he had a direct or indirect
beneficial interest. Mr. Steinberg served as a director of, and provided
consulting services to, Bitwise from August 1994 through September 17, 1996. On
April 25, 1997, we purchased substantially all of the assets of Electrograph.
Three of our four Hauppauge, New York facilities are leased from
entities affiliated with certain of our executive officers, directors or
principal shareholders. The property located at 40 Marcus Boulevard, Hauppauge,
New York is leased from a limited liability company owned 70% by Mr. Steinberg
and his relatives, 20% by Joel G. Stemple, Ph.D., the Company's Executive Vice
President and a principal shareholder, and 10% by Michael Bivona, a shareholder
and former officer of the Company. For the fiscal years ended July 31, 2001,
2000, and 1999, we made lease payments of $196,000, $190,000, and $186,000,
respectively, to such entity. Our offices at 160 Oser Avenue, Hauppauge, New
York are leased from a limited liability company owned 65% by Mr. Steinberg,
17.5% by Dr. Stemple and 17.5% by Mr. Bivona. For the fiscal years ended July
31, 2001, 2000, and 1999, we made lease payments of $322,000, $279,000, and
$271,000, respectively, to such entity. The property located at 50 Marcus
Boulevard, Hauppauge, New York is leased from Mr. Steinberg doing business in
the name of Marcus Realty. For the fiscal years ended July 31, 2001, 2000, and
1999, we made lease payments of $366,000, $360,000, and $344,000, respectively,
to such entity. See "Business--Properties."
Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein Walsh & Roth, LLC, which, with its predecessor firms, has acted as
outside general counsel to the Company since our inception. During fiscal 2001,
2000, and 1999, $215,000, $177,000, and $213,000, respectively, was paid to such
firm for legal fees.
During the years ended July 31, 2001, 2000, and 1999, we recorded
revenue of $178,000, $273,000, and $597,000, respectively in connection with the
sale of computer equipment to a company controlled by Julian Sandler, a director
of the Company.
27
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements included herein are filed as a part
of this Report.
Manchester Technologies, Inc.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 29
Consolidated Financial Statements:
Balance Sheets as of July 31, 2001 and 2000 30
Statements of Income for the years ended
July 31, 2001, 2000, and 1999 31
Statements of Shareholders' Equity for the years ended
July 31, 2001, 2000, and 1999 32
Statements of Cash Flows for the years ended July 31, 2001,
2000, and 1999 33
Notes to Consolidated Financial Statements 34
Schedule II - Valuation and Qualifying Accounts 49
28
Independent Auditors' Report
The Board of Directors and Shareholders
Manchester Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Manchester
Technologies, Inc. and subsidiaries as of July 31, 2001 and 2000 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended July 31, 2001. In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manchester
Technologies, Inc. and subsidiaries at July 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended July 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Melville, New York
September 21, 2001
29
Manchester Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 2001 and 2000
Assets 2001 2000
------ ---- ----
(in thousands,
except per share amounts)
Current assets:
Cash and cash equivalents $14,493 $16,156
Accounts receivable, net of allowance for doubtful accounts
of $1,100 and $899, respectively 25,135 36,024
Inventory 7,546 6,797
Deferred income taxes 459 579
Prepaid income taxes 43 635
Prepaid expenses and other current assets 362 538
--- ---
Total current assets 48,038 60,729
Property and equipment, net 6,300 6,329
Goodwill, net 6,148 6,534
Deferred income taxes 842 673
Other assets 455 308
--- ---
$61,783 $74,573
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $15,259 $29,312
Notes payable - 18
Deferred service contract revenue 807 946
--- ---
Total current liabilities 16,066 30,276
Deferred compensation payable 162 34
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 7,990 and 8,159 shares issued
and outstanding 80 82
Additional paid-in capital 18,942 19,402
Deferred compensation (38) (65)
Retained earnings 26,571 24,844
------ ------
Total shareholders' equity 45,555 44,263
------ ------
$61,783 $74,573
====== ======
See accompanying notes to consolidated financial statements.
30
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Revenue
Products $271,982 $292,971 $221,719
Services 8,296 7,102 6,922
----- ----- -----
280,278 300,073 228,641
------- ------- -------
Cost of revenue
Products 236,970 255,549 190,901
Services 5,955 4,687 4,522
----- ----- -----
242,925 260,236 195,423
------- ------- -------
Gross profit 37,353 39,837 33,218
Selling, general and administrative expenses 35,485 33,539 29,849
------ ------ ------
Income from operations 1,868 6,298 3,369
Other income (expense):
Other income, net 255 - -
Interest and investment income, net 512 602 404
--- --- ---
Income before provision for income taxes 2,635 6,900 3,773
Provision for income taxes 908 2,800 1,590
--- ----- -----
Net income $1,727 $4,100 $2,183
===== ===== =====
Net income per share
Basic $0.21 $0.51 $0.27
==== ==== ====
Diluted $0.21 $0.50 $0.27
===== ===== =====
Weighted average shares of common
stock and equivalents outstanding
Basic 8,036 8,108 8,096
===== ===== =====
Diluted 8,058 8,228 8,096
===== ===== =====
See accompanying notes to consolidated financial statements.
31
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended July 31, 2001, 2000 and 1999
Additional
Common Par Paid-in Deferred Retained
Shares Value Capital Compensation Earnings Total
------ ----- ------- ------------ -------- -----
(in thousands)
Balance July 31, 1998 8,097 81 18,767 (64) 18,561 37,345
Purchase and retirement of stock (12) - (33) - - (33)
Stock option commission expense - - 65 - - 65
Stock award compensation expense - - - 26 - 26
Net income - - - - 2,183 2,183
---- ---- -------- --- ----- -----
Balance July 31, 1999 8,085 81 18,799 (38) 20,744 39,586
Purchase and retirement of stock (151) (1) (670) - - (671)
Stock award compensation expense - - - 34 - 34
Deferred compensation 10 - 61 (61) - -
Stock issued in connection with
exercise of stock options 109 1 413 - - 414
Stock issued in connection with
purchase acquisition 106 1 799 - - 800
Net income - - - - 4,100 4,100
---- -- ------ --- ----- -----
Balance July 31, 2000 8,159 82 19,402 (65) 24,844 44,263
Purchase and retirement of stock (171) (2) (619) - - (621)
Stock option commission expense - - 10 - - 10
Stock award compensation expense - - - 27 - 27
Stock issued in connection with
exercise of stock options 2 - 6 - - 6
Tax benefit of stock option plan - - 143 - - 143
Net income - - - - 1,727 1,727
----- ----- ----- ---- ----- -----
Balance July 31, 2001 7,990 $80 $18,942 $(38) $26,571 $45,555
====== == ====== ==== ====== ======
See accompanying notes to consolidated financial statements.
32
Manchester Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $1,727 $4,100 $2,183
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 2,387 2,081 1,835
Provision for (recovery of) doubtful accounts 832 (366) 154
Non-cash compensation and commission expense 37 34 91
Deferred income taxes (49) (154) (141)
Tax benefit from exercise of options 143 - -
Change in assets and liabilities, net of the effects of
acquisitions:
Decrease (increase) in accounts receivable 10,057 (264) (8,605)
(Increase) decrease in inventory (749) 1,951 922
Decrease (increase) in prepaid income taxes 592 (620) -
Decrease (increase) in prepaid expenses and
other current assets 176 (177) (50)
(Increase) decrease in other assets (147) (27) 287
(Decrease) increase in accounts payable and
accrued expenses (14,053) 6,991 2,325
(Decrease) increase in deferred service contract revenue (139) 365 (194)
Increase (decrease) in income taxes payable - (668) 443
Increase (decrease) in deferred compensation payable 128 - (75)
Sale of investments - - 1,501
---- ------ -----
Net cash provided by operating activities 942 13,246 676
--- ------ ---
Cash flows from investing activities:
Capital expenditures (1,972) (1,661) (1,735)
Payment for acquisitions, net of cash acquired - (179) (871)
----- ---- ----
Net cash used in investing activities (1,972) (1,840) (2,606)
------- ----- -------
Cash flows from financing activities:
Net repayments of borrowings from bank - (648) -
Payments on capitalized lease obligations - (85) (104)
Payments on notes payable - other (18) (9) -
Issuance of common stock upon exercise of options 6 414 -
Purchase and retirement of common stock (621) (671) (33)
----- ----- ----
Net cash used in financing activities (633) (999) (137)
--- ---- -----
Net increase (decrease) in cash and cash equivalents (1,663) 10,407 (2,067)
Cash and cash equivalents at beginning of year 16,156 5,749 7,816
------ ----- -----
Cash and cash equivalents at end of year $14,493 $16,156 $5,749
====== ====== =====
Cash paid during the year for:
Interest $ - $4 $5
====== == ==
Income taxes $ 365 $4,205 $992
===== ====== ===
Other noncash transactions:
Capitalized lease obligation $ - $ - $107
====== ====== ====
Common stock issued in connection with acquisitions $ - $861 $ -
====== ==== ======
See accompanying notes to consolidated financial statements.
33
<page>
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
(1) Operations and Summary of Significant Accounting Policies
---------------------------------------------------------
(a) The Company
-----------
Manchester Technologies, Inc. ("the Company") is a single-source
solutions provider specializing in hardware and software procurement,
custom networking, storage, enterprise and Internet solutions. The Company
offers its customers single-source solutions customized to their
information systems needs by integrating its analysis, design and
implementation services with hardware, software, networking products and
peripherals from leading vendors. The Company operates in a single
segment.
Sales of hardware, software and networking products comprise the
majority of the Company's revenues. The Company has entered into
agreements with certain suppliers and manufacturers which 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 $11,638, and $12,178 at July 31, 2001 and
2000, respectively, consisted of money market mutual funds.
(d) Revenue Recognition
-------------------
Revenue from product sales is recognized at the time of shipment to the
customer. Revenue from services is recognized when the related services
are performed. When product sales and services are bundled, revenue is
recognized upon delivery of the product and completion of the
installation. Service contract fees are recognized as revenue ratably over
the period of the applicable contract. Deferred service contract revenue
represents the unearned portion of service contract fees. The Company
generally does not develop or sell software products. However, certain
computer hardware products sold by the Company are loaded with prepackaged
software products. The net impact on the Company's financial statements of
product returns, primarily for defective products, has been insignificant.
(e) Market Development Funds and Advertising Costs
----------------------------------------------
The Company receives various market development funds including
cooperative advertising funds from certain vendors, principally based on
volume purchases of products. The Company records such amounts related to
volume purchases as purchase discounts which reduce cost of revenue, and
other incentives that require specific incremental action on the part of
the Company, such as training, advertising or other pre-approved market
development activities, as an offset to the related costs included in
selling, general and administrative expenses. Total market development
funds amounted to $229, $414, and $380, for the years ended July 31, 2001,
2000, and 1999, respectively.
The Company expenses all advertising costs as incurred.
(f) Inventory
---------
Inventory, consisting of computer hardware, software and related
supplies, is valued at the lower of cost (first-in first-out) or market
value.
34
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
(g) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided
using the straight-line and accelerated methods over the economic lives of
the assets, generally from five to seven years. Leasehold improvements are
amortized over the shorter of the underlying lease term or asset life.
(h) Goodwill
--------
Goodwill related to acquisitions represents the excess of cost over
the fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over twenty years. The Company reviews the significant
assumptions that underlie the twenty-year amortization period on a
quarterly basis and will shorten the amortization period if considered
necessary. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted future cash
flows. Accumulated amortization was approximately $1,166, and $780 at July
31, 2001 and 2000, respectively. Amortization expense of $386, $331, and
$266, for the years ended July 31, 2001, 2000, and 1999 is included in
selling, general and administrative expenses in the consolidated statements
of income.
The Company evaluates its long-lived assets, and goodwill related to
those assets to be held and used, and long-lived assets and certain
identifiable intangibles to be disposed of and recognizes an impairment if
it is probable that the recorded amounts are in excess of anticipated
undiscounted future cash flows. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
assets, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds the fair value.
(i) Income Taxes
------------
Deferred taxes are recognized for the future tax consequences
attributable to temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and income tax
purposes using enacted rates expected to be in effect when such amounts
are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(j) Net Income Per Share
--------------------
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net
income per share has been computed by dividing net income by the weighted
average number of common shares outstanding, plus the assumed exercise of
dilutive stock options and warrants, less the number of treasury shares
assumed to be purchased from the proceeds of such exercises using the
average market price of the Company's common stock during each respective
period. Options and warrants representing 899,000, 153,000, and 1,065,000
shares for the years ended July 31, 2001, 2000, and 1999, respectively,
were not included in the computation of diluted EPS because to do so would
have been antidilutive. The following table reconciles the denominators of
the basic and diluted per share computations. For each year, the numerator
is the net income as reported.
2001 2000 1999
---- ---- ----
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<s>
Basic EPS 8,036,000 $0.21 8,108,000 $0.51 8,096,000 $0.27
==== ==== =====
Effect of dilutive
options 22,000 120,000 -
------ ------- ---------
Diluted EPS 8,058,000 $0.21 8,228,000 $0.50 8,096,000 $0.27
========= ==== ========= ==== ========= ====
35
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
(k) Accounting for Stock-Based Compensation
---------------------------------------
The Company records compensation expense for employee stock options if
the current market price of the underlying stock exceeds the exercise
price on the date of the grant. On August 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has
elected not to implement the fair value based accounting method for
employee stock options, but has elected to disclose the pro forma net
income and net income per share for employee stock option grants made
beginning in fiscal 1996 as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
(l) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(m) Fair Value of Financial Instruments
-----------------------------------
The fair values of accounts receivable, prepaid expenses, notes
payable, accounts payable and accrued expenses are estimated to
approximate the carrying values at July 31, 2001 due to the short
maturities of such instruments.
(2) Property and Equipment
----------------------
Property and equipment at July 31, consist of the following:
2001 2000
---- ----
Furniture and fixtures $3,089 $2,619
Machinery and equipment 8,162 6,971
Transportation equipment 588 483
Leasehold improvements 2,934 2,834
----- -----
14,772 12,907
Less accumulated depreciation and amortization 8,472 6,578
----- -----
$6,300 $6,329
===== =====
Depreciation and amortization expense amounted to $2,001, $1,750, and
$1,569, for the years ended July 31, 2001, 2000 and 1999, respectively.
(3) Acquisitions
------------
Coastal Office Products, Inc.
-----------------------------
On January 2, 1998, the Company acquired all of the outstanding shares
of Coastal Office Products, Inc. ("Coastal"), a value added reseller and
provider of microcomputer services and peripherals to companies in the greater
Baltimore, Maryland area. The acquisition, which has been accounted for as a
purchase, consisted of cash payments of approximately $3,971 (including a
contingent payment of $871 made on March 15, 1999). An additional contingent
payment of $800 was made on March 15, 2000 through the issuance of 105,786
shares of the Company's common stock. The cash payments were made from the
Company's cash balances. The selling shareholders received employment agreements
that also provided for the issuance of 20,000 shares of common stock. The fair
value of the common stock, amounting to $80, was recorded as deferred
compensation and is being expensed over the three-year vesting period.
36
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
Operating results of Coastal are included in the consolidated
statements of income from the date of acquisition. The acquisition resulted in
goodwill of $4,776, which is being amortized on the straight-line basis over 20
years.
Texport Technology Group, Inc. and Learning Technology Group, LLC
-----------------------------------------------------------------
On March 22, 2000, the Company acquired all of the outstanding
ownership interests of Texport Technology Group, Inc. ("Texport") and Learning
Technology Group, LLC ("LTG"), affiliated entities engaged in reselling and
providing of microcomputer services and peripherals to companies in the greater
Rochester, New York area. The acquisition, which has been accounted for as a
purchase, consisted of a cash payment of $400 plus potential future contingent
payments. A contingent payment of up to $750 may be payable on March 22, 2002
based upon achieving certain agreed-upon increases in revenue and pretax
earnings. The cash payment was made from the Company's cash balances. The
selling owners received employment agreements that also provided for the
issuance of 10,000 shares of common stock. The fair value of the common stock,
amounting to $61, was recorded as deferred compensation and is being expensed
over the three-year vesting period. In connection with the acquisition, the
Company assumed approximately $648 of bank debt, and $27 of notes payable to the
former shareholders, which were subsequently repaid.
Operating results of Texport and LTG are included in the consolidated
statement of income from the date of acquisition. The estimated fair value of
tangible assets and liabilities acquired was $1,600 and $2,200, respectively.
The excess of the aggregate purchase price over the estimated fair value of the
tangible net assets acquired was approximately $995, which is being amortized on
a straight-line basis over 20 years.
The following unaudited pro forma consolidated results of operations
for the years ended July 31, 2000 and 1999 assume that the acquisitions occurred
on August 1, 1998 and reflect the historical operations of the purchased
businesses adjusted for lower interest on invested funds, contractually revised
officer compensation and increased amortization, net of applicable income taxes,
resulting from the acquisition:
Year ended July 31,
2000 1999
---- ----
Revenue $306,056 $242,166
Net income $3,773 $2,094
Diluted net income per share $0.46 $0.26
The pro forma results of operations are not necessarily indicative of the actual
results that would have occurred had the acquisitions been made at the beginning
of the period, or of results which may occur in the future.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 31,
2001 2000
---- ----
Accounts payable, trade $11,759 $25,005
Accrued salaries and wages 1,974 2,535
Customer deposits 711 628
Other accrued expenses 815 1,144
--- -----
$15,259 $29,312
====== ======
37
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
The Company has entered into financing agreements for the purchase of
inventory. These agreements are secured by the related inventory and/or
accounts receivables. In each of the years in the three-year period ended
July 31, 2001, the Company has repaid all balances outstanding under these
agreements within the non-interest-bearing payment period. Accordingly,
amounts outstanding under such agreements of $1,719, $2,645, and $2,944 and
at July 31, 2001, 2000 and 1999, respectively, are included in accounts
payable and accrued expenses. In August 1997, the Company entered into a
new financing agreement for the purchase of inventory. The agreement
provides a maximum of $10,000 in credit for purchases of inventory from
certain specified manufacturers. The agreement is unsecured, generally
allows for a 30-day non-interest-bearing payment period and requires the
Company to maintain, among other things, a certain minimum tangible net
worth. As of July 31, 2001, retained earnings available for dividends
amounted to approximately $16,500.
(5) Employee Benefit Plans
----------------------
The Company maintains a qualified defined contribution plan with a
salary deferral provision, commonly referred to as a 401(k) plan. The
Company matches 50% of employee contributions up to three percent of
employees' compensation. The Company's contribution amounted to $317, $250,
and $273 for the years ended July 31, 2001, 2000 and 1999, respectively.
The Company also has two deferred compensation plans which are
available to certain eligible key employees. The first plan consists of
life insurance policies purchased by the Company for the participants. Upon
vesting, which occurs at various times from three to ten years, a
participant becomes entitled to have ownership of the policy transferred to
him or her at termination of employment with the Company. The second plan
consists of a commitment by the Company to pay a monthly benefit to an
employee for a period of ten years commencing either ten or fifteen years
from such employee's entrance into the plan. The Company has chosen to
purchase life insurance policies to provide funding for these benefits. As
of July 31, 2001 and 2000, the Company has recorded an asset (included with
other assets) of $129 and $34, respectively, representing the cash
surrender value of policies owned by the Company and a liability of $162
and $34, respectively, relating to the unvested portion of benefits due
under these plans. For the years ended July 31, 2001, 2000 and 1999, the
Company recorded an expense of $246, $92, and $51 in connection with these
plans. During fiscal 2001, the Company received $505 in connection with a
life insurance policy that it carried on an employee who died, which was
partially offset by $250 in compensation benefits paid to the deceased
employee.
(6) Commitments and Contingencies
-----------------------------
Leases
------
The Company leases most of its executive offices and warehouse
facilities from landlords consisting primarily of related parties (note 9).
In addition, the Company is obligated under lease agreements for sales
offices and additional warehouse space. Aggregate rent expense under all
these leases amounted to $1,756, $1,594, and $1,539, for the years ended
July 31, 2001, 2000 and 1999.
The following represents the Company's commitment under operating
leases for each of the next five years ended July 31 and thereafter:
2002 $1,843
2003 1,559
2004 1,412
2005 1,366
2006 744
Thereafter 1,206
-----
$8,130
======
38
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
Litigation
----------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, based on
advice from its legal counsel, the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial position
or results of operations.
(7) Line of Credit
--------------
In July 1998, the Company entered into a revolving credit facility with
its banks which was revised in June, 1999 to change participating banks.
Under the terms of the facility, the Company may borrow up to a maximum of
$15,000. Borrowings under the facility bear interest at variable interest
rates based upon several options available to the Company. The facility
requires the Company to maintain certain financial ratios and covenants. As
of July 31, 2001, there was no balance outstanding under this agreement,
which expires on April 2, 2002.
39
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000, and 1999
(in thousands, except share and per share data)
(8) Income Taxes
------------
The provision for income taxes for the years ended July 31, 2001, 2000 and
1999 consists of the following:
2001 2000 1999
---- ---- ----
Federal $728 $2,242 $1,351
State 229 712 380
--- --- ---
957 2,954 1,731
--- ----- -----
Federal (38) (115) (106)
State (11) (39) (35)
--- --- ---
(49) (154) (141)
---- ----- -----
$908 $2,800 $1,590
=== ===== =====
The difference between the Company's effective income tax rate and the
statutory rate is as follows, for the years ended July 31, 2001, 2000 and
1999 :
2001 2000 1999
---- ---- ----
Income taxes at statutory rate $896 $2,346 $1,283
State taxes, net of federal benefit 144 444 228
Non deductible goodwill amortization 85 85 64
Nontaxable life insurance proceeds (172) - -
Other (45) (75) 15
--- --- --
$908 $2,800 $1,590
=== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at July 31, 2001 and 2000 were as
follows:
2001 2000
---- ----
Deferred tax assets (liabilities):
Allowance for doubtful accounts $439 $359
Deferred compensation 473 375
Depreciation 409 328
Other (20) 190
--- ---
Net deferred tax asset $1,301 $1,252
===== =====
A valuation allowance has not been provided in connection with the
deferred tax assets since the Company believes, based upon its long
history of profitable operations, that it is more likely than not that
such deferred tax assets will be realized.
40
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
(9) Related Party Transactions
--------------------------
The Company leases its warehouse and distribution center as well as its
corporate offices and certain sales facilities from entities owned or
controlled by shareholders, officers, or directors of the Company. The
leases generally cover a period of ten years and expire at various times
from 2005 through 2008. Lease terms generally include annual increases of
five percent. Rent expense for these facilities aggregated $884, $828, and
$801, for the years ended July 31, 2001, 2000, and 1999, respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to $215, $177, and $213,
including disbursements, in the fiscal years ended July 31, 2001, 2000,
and 1999 respectively.
During fiscal years ended July 31, 2001, 2000, and 1999 the Company
received approximately $178, $273, and $597, respectively, in revenue from
a company controlled by a director of the Company.
(10) Shareholders' Equity
--------------------
Warrants
--------
In connection with its Initial Public Offering (IPO) in December 1996,
the Company issued to the underwriter warrants to purchase an aggregate of
250,000 shares of common stock. The warrants are exercisable at a price of
$12 per share and expire in December, 2001.
Stock Option Plan
Under the Company's Amended and Restated 1996 Incentive and
Non-Incentive Stock Option Plan as amended, (the "Plan"), which was
approved by the Company's shareholders in October 1996, an aggregate of
2,600,000 shares of common stock are reserved for issuance upon exercise
of options thereunder. Under the Plan, incentive stock options, as defined
in section 422 of the Internal Revenue Code of 1986, as amended, may be
granted to employees and non-incentive stock options may be granted to
employees, directors and such other persons as the Board of Directors may
determine, at exercise prices equal to at least 100% (with respect to
incentive stock options) and at least 85% (with respect to non-incentive
stock options) of the fair market value of the common stock on the date of
grant. In addition to selecting the optionees, the Board of Directors will
determine the number of shares of common stock subject to each option, the
term of each stock option up to a maximum of ten years (five years for
certain employees for incentive stock options), the time or times when the
stock option becomes exercisable, and otherwise administer the Plan.
Generally, incentive stock options expire three months from the date of
the holder's termination of employment with the Company other than by
reason of death or disability. Options may be exercised with cash or
common stock previously owned for in excess of six months. The following
table summarizes stock option activity:
41
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
Weighted
Average
Exercise Exercise
Balance Price
Balance July 31, 1998 849,600 $3.92
Granted 19,000 $3.52
Cancelled (53,500) $3.8125
-------
Balance July 31, 1999 815,100 $3.93
Granted 253,250 $4.37
Exercised (109,416) $3.8125
Cancelled (132,250) $4.50
--------
Balance July 31, 2000 826,684 $4.00
Granted 123,000 $3.74
Exercised (1,500) $3.8125
Cancelled (49,100) $4.19
--------
Balance July 31, 2001 899,084 $3.95
=======
At July 31, 2001, options with the following ranges of exercise prices
were outstanding:
Options Outstanding Options Currently Exercisable
------------------- -----------------------------
Range of
Exercise Weighted Average Weighted Average
Prices Number Exercise Price Remaining life Number Exercise Price
------ ------ -------------- -------------- ------ --------------
$2.50 - $3.75 141,000 $3.25 8 Yrs. 68,334 $3.31
$3.8125 - $4.875 753,084 $4.07 6 Yrs. 453,632 $3.91
$5.69 5,000 $5.69 9 Yrs - -
----- -------
$2.50 - $5.69 899,084 $3.95 6 Yrs. 521,966 $3.83
======= =======
All options granted expire ten years from the date of grant except for
options granted to directors which expire five years from the date of
grant.
The Company has adopted the pro forma disclosure provision of SFAS No.
123, "Accounting for Stock Based Compensation". Accordingly, the Company
does not record compensation cost in the financial statements for its stock
options which have an exercise price equal to or greater than the fair
market value of the underlying stock on the date of grant. The Company has
recognized a total of $152 in deferred commission expense representing the
value of stock options granted to non-employee sales representatives. Such
cost is expensed over the vesting period, amounting to $10 and $65 in
fiscal 2001 and 1999, respectively. No expense was recognized in fiscal
2000. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant date under SFAS No. 123,
the Company's net income and net income per share for the years ended July
31, 2001, 2000 and 1999 would approximate the pro forma amounts below:
42
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
2001 2000 1999
---- ---- ----
Net income:
As reported $1,727 $4,100 $2,183
Pro forma $1,335 $3,813 $1,940
Basic net income per share:
As reported $0.21 $0.51 $0.27
Pro forma $0.17 $0.47 $0.24
Diluted net income per share:
As reported $0.21 $0.50 $0.27
Pro forma $0.17 $0.46 $0.24
The pro forma effects on net income and diluted net income per share for 2001,
2000 and 1999 may not be representative of the pro forma effects in future
years.
The fair value of options granted was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock volatility 55% 49% 43%
Risk free interest rate 5% 5% 5%
Expected option term until exercise (years) 5.00 5.00 5.00
The per share weighted average fair value of stock options granted during
fiscal 2001, 2000 and 1999 was $2.03, $2.15, and $1.40, respectively.
Repurchase of Common Stock
--------------------------
During the years ended July 31, 2001, 2000 and 1999, the Company
repurchased 171,000, 150,600, and 11,800 shares of its common stock at an
aggregate purchase price of $621, $671, and $33, respectively. Such shares were
subsequently retired.
(11) Major Customer and Vendors and Concentration of Credit Risk
-----------------------------------------------------------
The Company sells and provides services to customers who are located
primarily in the eastern United States.
The Company's top four vendors accounted for approximately 19%, 14%, 10%, and
10%, respectively of total product purchases for the year ended July 31, 2001.
The Company's top three vendors accounted for approximately 16%, 14%, and 10%,
respectively, of total product purchases for the year ended July 31, 2000. The
Company's top two vendors accounted for approximately, 21%, and 10%,
respectively of total product purchases for the year ended July 31, 1999.
No customer accounted for more than 5% of the Company's accounts receivable
at July 31, 2001 and 2000. For the fiscal years ended July 31, 2001, 2000 and
1999, no one customer accounted for more than 10% of total revenue.
43
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
(12) Impact of Recently Issued Accounting Standards
----------------------------------------------
In July 2001, the FASB issued Statement No. 141, "Business Combinations," and
Statement No. 142 "Goodwill and Other Intangible Assets." Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combinations
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of."
The Company is required to adopt the provisions of Statement 141
immediately and has elected to adopt Statement 142 effective August 1, 2001.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will not be amortized after August 1, 2001.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it with the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statement of income.
44
Manchester Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2001, 2000 and 1999
(in thousands, except share and per share data)
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $6,148 which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $386 for the year ended July 31, 2001. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
(13) Subsequent Event
----------------
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan Consulting Group, Inc. ("Donovan") a Delaware corporation headquartered
in Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless
LAN solutions to customers nationwide. The acquisition, which will be accounted
for as a purchase, consisted of a cash payment of $1,500 plus potential future
contingent payments. Contingent payments of up to $1,000 may be payable on each
of November 2, 2002 and November 2, 2003 based upon Donovan achieving certain
agreed-upon increases in revenue and pre-tax earnings. In connection with the
acquisition, the Company assumed approximately $435 of bank debt and $43 of
other debt, which were subsequently repaid.
Operating results of Donovan will be included in the consolidated statement
of income from the acquisition date. The estimated fair value of tangible assets
and liabilities acquired was $472 and $648, respectively. The excess of the
aggregate purchase price over the estimated fair value of the tangible net
assets acquired was approximately $1,700. The $1,700 will not be amortized;
however, it will be subject to impairment testing in accordance with Statement
Statement No. 142, "Goodwill and Other Intangible Assets."
(14) Quarterly Results (unaudited)
----------------------------
Oct. 31 Jan 31 Apr. 30 July 31 Year
------- ------ ------- ------- ----
2001
Revenue $81,142 $70,888 $68,598 $59,650 $280,278
Gross profit 9,757 8,917 9,765 8,914 37,353
Net income 638 24 665 400 1,727
Basic earnings per share 0.08 0.00 0.08 0.05 0.21
Diluted earnings per share 0.08 0.00 0.08 0.05 0.21
2000
Revenue 65,360 70,847 81,867 81,999 300,073
Gross profit 9,743 8,970 11,251 9,973 39,837
Net income 1,086 825 1,495 694 4,100
Basic earnings per share 0.13 0.10 0.18 0.09 0.51
Diluted earnings per share 0.13 0.10 0.18 0.08 0.50
Basic and diluted earnings per share for each of the quarters are based on
the weighted average number of shares outstanding in each period. Therefore, the
sum of the quarters in a year may not necessarily equal the year's earnings per
share.
45
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(Continued)
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits:
3.1.a(1) Certificate of Incorporation of Registrant filed August 21, 1973.
3.1.b(1) Certificate of Amendment of Certificate of Incorporation filed January
29, 1985.
3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996.
3.2(1) Bylaws of Registrant.
4.2(1) Form of Representative's Warrants.
10.1(1) 1996 Incentive and Non-Incentive Stock Option Plan of Registrant.
10.2(1) Agreement dated September 24, 1996 between Registrant and Michael
Bivona.
10.3(1) * Compensation Agreement dated November 6, 1996 between Registrant and
Joel G. Stemple.
10.4.a(1)* Amendment dated November 6, 1996 to Agreement of Employment dated
September 30, 1996 between Registrant and Joel G. Stemple.
10.5.a(1) Lease dated October 1995 between Registrant and 40 Marcus Realty, LLC
- f/k/a 40 Marcus Realty Associates, as amended.
10.5.b(1) Lease dated January 1988 between Registrant and Marcus Realty, as
amended.
10.5.c(1) Lease dated June 1995 between Registrant and Facilities Management.
10.5.d(1) Lease dated July 31, 1995 between Registrant and Boatman's Equities,
LLC - f/k/a 160 Oser Avenue Associates, as amended.
10.5.e(1) Lease dated January 15, 1992 between Registrant and 352 Seventh Avenue
Associates.
10.5.f(1) Lease dated April 16, 1990 between Registrant and Regent Holding
Corporation, as successor to Crow-Childress-Donner, Limited, as amended.
10.5.g(1) Business Lease dated December 4, 1992 between Registrant and TRA
Limited, as amended.
10.5.h5 Lease dated June 23, 1997 between Registrant and First Willow, LLC.
10.5.i(5) Lease dated June 30, 1997 between Registrant and Angela C. Maffeo,
Trustee Under the Will of John Capobianco.
10.5.j(6) Lease dated October 1, 1997 between Registrant and Spanish River
Executive Plaza, Ltd. A/k/a Century Financial Plaza.
10.5.k(4) Lease dated January 2, 1998 between Coastal Office Products, Inc. and
BC & HC Properties, LLC
10.5.l(10)Lease dated March 1, 2000 between ASP Washington LLC and Coastal
Office Products.
10.5.m(11)Lease dated April 5, 2001 between Emmatt Enterprises Inc., and
Donovan Consulting Group, Inc.,
10.5.n(11) Lease dated July 31, 1995 between Registrant and Boatman's Equities,
LLC - f/k/a 160 Oser Avenue Associates, as amended.
10.6(2) Promissory Note dated October 15, 1996 between Registrant and The Bank
of New York
10.7.a(1) Letter Agreement Regarding Inventory Financing dated December 7, 1993
between ITT Commercial Finance Corp. and Registrant.
10.7.b(1) Agreement for Wholesale Financing dated November 11, 1993 between ITT
Commercial Finance Corp. and Registrant.
10.7.c(1) Intercreditor Agreement dated May 18, 1994 between ITT Commercial
Finance Corp. and The Bank of New York.
10.8.a(1) Letter Agreement Regarding Inventory Financing dated April 22, 1996
between AT&T Capital Corporation and Registrant.
10.8.b(1) Intercreditor Agreement dated May 18, 1994 between AT&T Commercial
Finance Corporation and The Bank of New York.
10.9(1) Reseller Agreement dated May 1, 1990 between Toshiba America Information
Systems, Inc. and Registrant.
10.10(1) Agreement for Authorized Resellers dated March 1, 1996 between
Hewlett-Packard Company and Registrant.
10.11(3) Asset Purchase Agreement dated April 15, 1997 among Electrograph
Systems, Inc., Bitwise Designs, Inc., Electrograph Acquisition, Inc.
and Registrant.
10.12(4) Definitive Purchase Agreement and Indemnity Agreement dated January 2,
1998 between Registrant and Coastal Office Products, Inc.
10.13(7) $15,000,000 Revolving Credit Facility Agreement dated July 21, 1998
between Registrant and Bank of New York, as Agent.
10.14(8) $15,000,000 Revolving Credit Facility Agreement dated June 25, 1999
between Registrant and EAB, as Agent.
10.15(9) Definitive Purchase Agreement dated March 22, 2000 between Registrant
and Texport Technology Group, Inc. and Learning Technology Group, LLC.
10.16(11) Definitive Purchase Agreement dated August 29, 2001 between Registrant
and Donovan Consulting Group
23.1 Independent auditors' consent.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none were required.
-----------------------
* Denotes management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
1. Filed as the same numbered Exhibit to the Company's Registration Statement
on Form S-1 (File No. 333-13345) and incorporated herein by reference
thereto.
2. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1996 (Commission File No.
0-21695) and incorporated herein by reference thereto.
3. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1997 (Commission File No.
0-21695) and incorporated herein by reference thereto.
4. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998 (Commission File No.
0-21695) and incorporated herein by reference thereto.
5. Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
6. Filed as the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997 (Commission File No.
0-21695) and incorporated herein by reference thereto.
7. Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1998 (Commission File No. 0-21695) and
incorporated herein by reference thereto.
8. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1999 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
9. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2000 (Commission File No.
0-21695) and incorporated herein by reference thereto.
10. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 2000 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
11. Filed as the same numbered Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 2001 (Commission File No. 0-21695)
and incorporated herein by reference thereto.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunder duly authorized.
Manchester Technologies, Inc.
Date: October 29, 2001 By: ss/ Barry R. Steinberg_
--------------------
Barry R. Steinberg
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of this Registrant and
in the capacities and on the dates indicated.
ss/ Barry R. Steinberg Date: October 29, 2001
----------------------
Barry R. Steinberg
President, Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)
ss/ Joel G. Stemple Date: October 29, 2001
----------------
Joel G. Stemple
Executive Vice President and Director
ss/ Joseph Looney Date: October 29, 2001
--------------
Joseph Looney
Vice President - Finance,
Chief Financial Officer (Principal Accounting Officer)
ss/ Joel Rothlein Date: October 29, 2001
--------------
Joel Rothlein
Director
ss/ Michael Russell Date: October 29, 2001
---------------
Michael Russell
Director
ss/ Bert Rudofsky Date: October 29, 2001
-------------
Michael Russell
Director
48
Manchester Technologies, Inc.
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
(dollars in thousands)
Column C-Additions
------------------
Column B- (1)- (2)-
Balance at Charged to Charged to Column D- Column E-
Column A - beginning of costs and other Deductions- Balance at
Description period expenses accounts (b) (a) end of period
----------- ------ -------- ------------ --- -------------
Allowance for doubtful
accounts
Year ended:
<c>
July 31, 1999 $1,150 $154 - $100 $1,204
July 31, 2000 $1,204 ($366) $61 - $899
July 31, 2001 $899 $832 - $631 $1,100
(a) Write-off amounts against allowance provided.
(b) Recorded in connection with the acquisitions.
49