10-K 1 form10k73102.txt FORM10K 7/31/02 2 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- 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, 2002 _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 0-21695 MANCHESTER TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) New York 11-2312854 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) I. D. Number) 160 Oser Avenue, Hauppauge, New York, 11788 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (631) 435-1199 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ------------------ 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. [ X ] The aggregate market value of the common stock held by non-affiliates of the Registrant as of October 15, 2002 was $5,014,577 (2,639,251 shares at a closing sale price of $1.90). As of October 15, 2002, 7,990,215 shares of Common Stock ($.01 par value) of the Registrant were issued and outstanding. -------------------- DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ MANCHESTER TECHNOLOGIES, INC. FORM 10-K YEAR ENDED JULY 31, 2002 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 22 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 22 Part III Item 10. Directors and Executive Officers of the Registrant 23 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 28 Item 13. Certain Relationships and Related Transactions 29 Part IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 30 Signatures Certifications 2 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, Donovan Consulting Group, Inc. and e.Track Solutions, 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 the slowdown in technology related spending, 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. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. 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, security, IP telephony, remote management, application development/e-commerce, wireless, display technology, 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 29 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 58% 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. Manchester was incorporated in New York in 1973 and has eight 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 display technology solutions and plasma display monitors throughout the United States; Coastal Office Products, Inc., a Maryland corporation, which is an integrator and 3 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; Donovan Consulting Group, Inc., a Delaware corporation, which delivers wireless LAN solutions to customers nationwide; and e.Track Solutions, Inc., a New York corporation, which delivers business, Internet and information technology 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 Protocol), inter-networking (routers and switches security assessment, wireless analysis), database design and management. 4 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.); Long Beach, California; Timonium, Maryland; and Rochester, New York, as well as other locations throughout the United States, from which we derived approximately 42% of our revenues for the fiscal year ended July 31, 2002. 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 Hewlett Packard, 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. 5 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"(R). 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. 6 Products. We offer a wide variety of personal computer and networking products, display technology solutions, and peripherals, including: CRT Display Monitors Routers Desktop Computers Scanners Internet Access Products Servers LCD Flat Panel Monitors Software Modems Storage Systems Monitors and Displays Switches Network Equipment Supplies and Accessories Notebook Computers Teleconferencing Equipment Plasma Display Monitors Terminals Power Protection Devices Wireless Products Printers 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. Computer Associates International, Inc. Novell, Inc. Epson America, Inc. Panasonic Hewlett-Packard Company Philips Electronics N.V. Hitachi America, Ltd. Pioneer Corp. Intel Corporation Seagate Technology, Inc. Microsoft Corporation Sony Corporation NEC Technologies, Inc. 3Com Corp. NEC-Mitsubishi, Inc. Toshiba America Information Systems, Inc. For the fiscal year ended July 31, 2002, sales of products manufactured by Compaq, (now part of Hewlett Packard) Pioneer and NEC comprised approximately 19%, 11% and 11%, respectively, of our revenue. For the fiscal year ended July 31, 2001, sales of products manufactured by Compaq and Toshiba comprised approximately 20% and 11%, respectively, of our revenue. For the fiscal year ended July 31, 2000, sales of products manufactured by Compaq and Toshiba comprised approximately 13% and 19%, respectively, of our revenue. 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. While our principal suppliers have regularly renewed their respective agreements with us, 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 our principal suppliers are satisfactory. We are dependent upon the continued supply of products from our manufacturers, particularly Hewlett-Packard, Pioneer, NEC 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 varied customer product demand, shortened product life cycles and increased frequency of new product introductions into the marketplace. While there can be no assurance that product unavailability or product allocation, or both, will not increase in fiscal 2003, 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. Many of our major product manufacturers provide stock balancing rights and price protection for a limited time period, 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. 7 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, 2002, 2001 and 2000, no one customer accounted for more than 10% of our total revenue. Some of our significant commercial customers currently include Quest Diagnostics, Inc., Citrix Systems, Inc., Rochester Gas and Electric Corp., Ann Taylor, Inc. and Reuters 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 for repair or replacement. 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, computer and display technology 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 advertisements in yearbooks and/or program guides for sports teams such as the New York Mets and the New York Knicks, 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 and customer 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. In addition, we built a storage lab in our New York City office for sales force training and for customer demonstration and training. 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 and a Hewlett Packard storage area network in our integrated management information system, which enable 8 instantaneous access. We maintain proprietary management systems on our computer system pursuant to which product purchases and sales are continually tracked and analyzed. Our computer system is also used for accounting, billing and invoicing. Our information system assists management in maintaining controls over our inventory and receivables. Manchester's average inventory turnover was 24, 33, and 34 times for the fiscal years ended July 31, 2002, 2001, and 2000, 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. During the fiscal year ended July 31, 2002, we further invested in our management information systems, which included replacing all routers and switches, implementing a storage area network, installing wireless access points and putting into service an IP telephony phone system. 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 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. 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 a leading wholesale distributor of plasma display monitors in the United States. Electrograph offers a full range of display technology solutions for dealers and system integrators throughout the U.S. 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 nationwide distribution of display technology solutions, Electrograph also markets a complete line of LCD flat panel and plasma display monitors under the Electrograph brand name. Electrograph is headquartered in Hauppauge, New York, with branch offices throughout the U.S. 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 9 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. Some suppliers permit Electrograph to rotate its inventory by returning slow moving inventory for other inventory. While Electrograph distributes products of more than 30 suppliers, approximately 32%, and 31% of Electrograph's purchases in fiscal 2002 were derived from products manufactured by Pioneer and NEC, respectively. Electrograph's distribution operations are currently conducted from distribution centers in Hauppauge, New York and Long Beach, California. Electrograph also maintains sales offices throughout the U.S. Acquisitions 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 near Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless LAN solutions to customers nationwide. The acquisition, which has been 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. Donovan was acquired in order to strengthen the Company's position in the Wireless LAN arena. Donovan allows the Company to offer total Wireless LAN solutions including state of the art products as well as the services necessary to have those products operate optimally. Operating results of Donovan are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $497,000 and $869,000, respectively. The excess of the aggregate purchase price over the estimated fair value of the tangible net assets acquired was approximately $1,872,000. The factors that contributed to the determination of the purchase price and the resulting goodwill include the significant growth expected in this area due to the combination of the Company's long history of strong customer relationships, financial strength and stability coupled with Donovan's product offerings and highly skilled technical staff. The $1,872,000 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." e.Track Solutions, Inc. On November 9, 2001, the Company acquired all of the outstanding stock of e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in Pittsford, New York. e.Track is a business and software services firm that delivers business, Internet and information technology solutions to customers nationwide. The acquisition, which has been accounted for as a purchase, consisted of cash payments of $290,000 (including debt assumed and subsequently repaid). e.Track was acquired in order to allow the Company to offer our customers customized software solutions along with the products and services that we have traditionally offered. Operating results of e.Track are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $116,000 and $192,000, respectively. The excess of aggregate purchase price over the estimated fair value of the tangible net assets acquired was $291,000. The factors that contributed to the determination of the purchase price and the resulting goodwill include the expectation that the combination of e.Track's highly skilled technical staff, coupled with the Company's financial strength and customer base, will result in significant growth at e.Track going forward. The $291,000 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 On August 31, 2002, we had 330 full-time employees consisting of 50 sales and marketing representatives, 67 management and supervisory personnel, 107 technical personnel and 106 administrative and other personnel. In addition, on August 31, 2002, we had 18 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. ITEM 2. Properties Properties We currently have sales branches nationwide, including the corporate headquarters located in Hauppauge, New York. The following table identifies the principal leased facilities.
Approximate Square Footage Lease Facility Location Office Warehouse Expiration Date -------- -------- ------ --------- --------------- Corporate 160 Oser Avenue (1) Headquarters Hauppauge, NY 30,000 - October 2005 Warehouse and 50 Marcus Blvd. (1) Service Center Hauppauge, NY 10,000 30,000 January 2008 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 3,214 - December 2007 Baltimore, MD 3832 Falls Rd. Sales Office Baltimore, MD 10,000 2,000 December 2002 Washington, D.C. 5001 Forbes Blvd. Sales Office Lanham, MD 3,000 - February 2003 Rochester, NY 106 Despatch Dr. Sales Office Rochester, NY 6,500 3,500 February 2004 Electrograph 40 Marcus Blvd. (1) Corporate HQ Hauppauge, NY 10,000 13,000 May 2007 Electrograph, Timonium, MD 1818 Pot Spring Rd. Sales Office Timonium, MD 3,280 - November 2007 Donovan 510 Swanson Road Corporate HQ Tyrone, GA 4,000 1,500 September 2006 e.Track 1169 Pittsford-Victor Rd Corporate HQ Pittsford, NY 3,662 - October 2005
(1) Leased from entities controlled by or affiliated with certain of our executive officers, directors and principal shareholders. The leases with related parties provide terms comparable to those that could be obtained from independent third parties. 11 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 fiscal 2002. PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters Our Common Stock is traded on the NASDAQ National Market(R) under the symbol MANC. The following table sets forth the quarterly high and low sale prices for the Common Stock as reported by the NASDAQ National Market.
Fiscal Year 2001 High Low ---------------- ---- --- First Quarter 5.625 3.156 Second Quarter 4.000 2.000 Third Quarter 2.750 1.938 Fourth Quarter 2.850 2.060 Fiscal Year 2002 ---------------- First Quarter 2.800 2.120 Second Quarter 2.790 2.150 Third Quarter 2.890 2.070 Fourth Quarter 2.740 2.050
On October 15, 2002, the closing sale price for the Company's Common Stock was $1.90 per share. As of October 15, 2002 there were 46 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. 12 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, -------------------------- 2002 2001 2000 1999 1998 ----- ---- ---- ---- ---- Income Statement Data: Revenue $262,010 $280,278 $300,073 $228,641 $202,530 Cost of revenue 225,602 242,925 260,236 195,423 171,930 ------- ------- ------- ------- ------- Gross profit 36,408 37,353 39,837 33,218 30,600 Selling, general and administrative expenses 35,050 35,485 33,539 29,849 27,414 ------ ------ ------ ------ ------ Income from operations 1,358 1,868 6,298 3,369 3,186 Interest and other income, net 184 767 602 404 546 Provision for income taxes 600 908 2,800 1,590 1,560 --- --- ----- ----- ----- Net income $942 $1,727 $4,100 $2,183 $2,172 === ===== ===== ===== ===== Net income per share: Basic $0.12 $0.21 $0.51 $0.27 $0.26 ==== ==== ==== ==== ==== Diluted $0.12 $0.21 $0.50 $0.27 $0.26 ==== ==== ==== ==== ==== Weighted average shares of common stock outstanding: Basic 7,990 8,036 8,108 8,096 8,494 ===== ===== ===== ===== ===== Diluted 7,991 8,058 8,228 8,096 8,499 ===== ===== ===== ===== ===== July 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $30,098 $31,972 $30,453 $27,461 $26,112 Total assets 70,661 61,783 74,573 61,778 56,894 Short-term debt - - 18 85 82 Shareholders' equity 46,512 45,555 44,263 39,586 37,345
13 ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with 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 statements are made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. Forward looking statements are not historical facts, are based on the Company's beliefs and expectations as of the date of this report, 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 and a distributor of display technology solutions and plasma display monitors primarily to dealers and system integrators. 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. Certain Trends and Uncertainties 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 cannot 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. Geographic Issues. 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 cannot 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 revenues have 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 terrorist attacks. A significant part of our business is generated from our New York City and Baltimore/Washington, D.C. offices and revenues for the month of September were adversely impacted with declines in orders and shipments. We cannot predict the impact that these or potential future attacks may have on our business, results of operations and financial condition. 14 Personnel Issues. 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. 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 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. Vendor Relationships and Product Availability. 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. In addition, many manufacturers have adopted "just in time" manufacturing principles that can reduce the immediate availability of a wide range of products at any one time. We cannot predict that manufacturers will maintain an adequate supply of these products to satisfy all the orders of our customers or that, during periods of increased demand, manufacturers will provide products to us, even if available, or at discounts previously offered to us. In addition, we cannot assure you that the pricing and related terms offered by major manufacturers will not adversely change in the future. Our failure to obtain an adequate supply of products, the loss of a major manufacturer, the deterioration of our relationship with a major manufacturer or our inability in the future to develop new relationships with other manufacturers may have a material adverse effect on our business, financial condition and results of operations. On May 3, 2002, the Hewlett-Packard Company and Compaq Computer Corporation merged. Manchester sold the products of both companies and we believe that we had strong relationships with both companies and continue to have a strong relationship with the merged company. 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. Changing Technology; Inventory Risk. 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 15 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 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 cannot assure you that we will continue to successfully manage our existing and future inventory. Our failure to successfully manage our current or future inventory may have a material adverse effect on our business, financial conditions and results of operations. 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 and peripherals. In some instances, we have been able to offset these price declines with increases in units shipped. There can be no assurance that average selling prices will not continue to decline or that we will be able to offset declines in average selling prices with increases in units shipped. Acquisitions. 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. Quarterly Variations. 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, over the last several years, 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. Microsoft Litigation. 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. Information Technology Systems. Our success is dependent in part on the accuracy, proper utilization and continuing development of our information technology systems, including our business application systems, Internet servers and telephony system. The quality and our utilization of the information generated by our information technology systems affects, among other things, our ability to conduct business with our customers, manage our inventory and accounts receivable, purchase, sell, ship and invoice our products efficiently and on a timely basis and maintain cost-efficient operations. While we have taken steps to protect our information technology systems from a variety of threats, including computer viruses and malicious hackers, we cannot guarantee that such steps will be effective. If there is a disruption to or an infiltration of our information technology systems, it could significantly harm our business and results of operations. 16 Stock Repurchase Program. The Company's Board of Directors has authorized the Company to repurchase up to $1 million of its common stock, which authorization is effective until the first Board of Directors meeting following the close of our 2003 fiscal year, unless earlier terminated by the Board. The extent to which the Company repurchases its stock and the timing of such purchases will depend upon market conditions and other corporate considerations to be evaluated by the Executive Committee of the Board. The repurchase program does not obligate the Company to repurchase any specific number of shares, and repurchases pursuant to the program may be suspended or resumed at any time or from time to time without further notice or announcement. There can be no assurance as to the effect, if any, that the adoption of the repurchase program or the making of repurchases thereunder will have on the market price of our common stock. 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. Recent Acquisitions Donovan Consulting Group, Inc. On August 29, 2001, the Company acquired all of the outstanding stock of Donovan, a Delaware corporation headquartered near Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless LAN solutions to customers nationwide. The acquisition, which has been 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. Donovan was acquired in order to strengthen the Company's position in the Wireless LAN arena. Donovan allows the Company to offer total Wireless LAN solutions including state of the art products as well as the services necessary to have those products operate optimally. Operating results of Donovan are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $497,000 and $869,000, respectively. The excess of the aggregate purchase price over the estimated fair value of the tangible net assets acquired was approximately $1,872,000. The factors that contributed to the determination of the purchase price and the resulting goodwill include the significant growth expected in this area due to the combination of the Company's long history of strong customer relationships, financial strength and stability coupled with Donovan's product offerings and highly skilled technical staff. The $1,872,000 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." e.Track Solutions, Inc. ----------------------- On November 9, 2001, the Company acquired all of the outstanding stock of e.Track, a New York corporation headquartered in Pittsford, New York. e.Track is a business and software services firm that delivers business, Internet and information technology solutions to customers nationwide. The acquisition, which has been accounted for as a purchase, consisted of cash payments of $290,000 (including debt assumed and subsequently repaid). e.Track was acquired in order to allow the Company to offer our customers customized software solutions along with the products and services that we have traditionally offered. Operating results of e.Track are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $116,000 and $192,000, respectively. The excess of aggregate purchase price over the estimated fair value of the tangible net assets acquired was $291,000. The factors that contributed to the determination of the purchase price and the resulting goodwill include the expectation that the combination of e.Track's highly skilled technical staff, coupled with the Company's financial strength and customer base, will result in significant growth at e.Track going forward. The $291,000 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." 17 Critical Accounting Policies Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, encourages all registrants, including the Company, to include a discussion of "critical" accounting policies or methods used in the preparation of financial statements. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, and goodwill impairments. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden or significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. In assessing the recoverability of the Company's goodwill, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. Results of Operations The following table sets forth, for the periods indicated, information derived from the Company's consolidated statements of income expressed as a percentage of related revenue or total revenue.
Percentage of Revenue for the Year Ended July 31, 2002 2001 2000 ---- ---- ---- Revenue Products 95.3% 97.0% 97.6% Services 4.7 3.0 2.4 --- --- --- 100.0 100.0 100.0 ----- ----- ----- Cost of revenue Products 86.7 87.1 87.2 Services 74.6 71.8 66.0 ---- ---- ---- - 86.1 86.7 86.7 ---- ---- ---- Product gross profit 13.3 12.9 12.8 Services gross profit 25.4 28.2 34.0 ---- ---- ---- Gross profit 13.9 13.3 13.3 Selling, general and administrative expenses 13.4 12.6 11.2 ---- ---- ---- Income from operations 0.5 0.7 2.1 Interest and other income, net 0.1 0.2 0.2 --- --- --- Income before income taxes 0.6 0.9 2.3 Provision for income taxes 0.2 0.3 0.9 --- --- --- Net income 0.4% 0.6% 1.4% === === ===
18 Year Ended July 31, 2002 Compared to Year Ended July 31, 2001 Revenue. Revenue decreased by $18.3 million or 7% to $262.0 million for the year ended July 31, 2002 or fiscal 2002 from $280.3 million for the year ended July 31, 2001 or fiscal 2001. Revenue from the sale of products decreased by $22.2 million or 8% while revenue from service offerings increased by $3.9 million or 48%. The decrease in product revenue is primarily a result of lower sales of personal computers and peripherals as a result of the overall slowdown in economic activity in general as well as the decline in corporate spending in the technology industry in particular in fiscal 2002. This was partially offset by increased sales of display monitors, primarily large screen flat panel displays by our Electrograph subsidiary. The increase in service revenue is primarily attributable to the Company's acquisitions of Donovan and e.Track in fiscal 2002 as well as the 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 $0.9 million or 3%, from $37.4 million in fiscal 2001 to $36.4 million in fiscal 2002. Gross profit from product sales decreased by $1.7 million or 5% while gross profit from service offerings increased by $0.8 million or 33%. As a percentage of revenue, gross profit from the sale of products increased from 12.9% in fiscal 2001 to 13.3% in fiscal 2002 primarily as a result of increased sales of higher margin products, increased volume rebates received from manufacturers and certain large volume product purchases for which the Company received discounts. As a percentage of revenue, gross profit from the sale of services declined from 28.2% in fiscal 2001 to 25.4% in fiscal 2002 due primarily to lower utilization of technical personnel as well as increased sales of lower margin services that are delivered by manufacturers or vendors. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $400,000, or 1% from $35.5 million in fiscal 2001 to $35.1 million in fiscal 2002. The decrease is principally due to lower salaries and personnel costs of approximately $400,000 reflecting the cost reduction measures that have been instituted as a result of the of the overall slowdown in economic activity and the reduction in revenue, decreased bad debt expense of approximately $220,000, lower advertising costs of approximately $240,000 and lower depreciation and amortization costs of $130,000. These decreases were partially offset by higher telephone expenses of approximately $250,000 and increased rent expenses of approximately $220,000 as a result of the Company's acquisitions in fiscal 2002. As a percentage of revenue, selling, general and administrative expenses increased from approximately 12.6% in fiscal 2001 to 13.4% in fiscal 2002. Interest and Other Income. Interest and other income, net, declined by $583,000 from $767,000 in fiscal 2001 to $184,000 in fiscal 2002. The decrease in fiscal 2002 is a result of lower cash balances available for investment, lower interest rates available in the marketplace and the Company's receipt of insurance proceeds in fiscal 2001 not received in fiscal 2002. In fiscal 2001 the Company received approximately $505,000 of proceeds 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 increased from 34.5% of pre-tax income in fiscal 2001 to 38.9% of pre-tax income in fiscal 2002. This increase in fiscal 2002 is primarily the result of the Company not having the benefit of the nontaxable life insurance proceeds received in fiscal 2001 (as discussed in Interest and Other Income above). 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 for the year ended July 31, 2000 or 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 19 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. Interest and Other Income. Interest and other 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 Interest and Other Income above) partially offset by higher state and local income taxes. Liquidity and Capital Resources Our primary sources of cash and cash equivalents in fiscal 2002 have been internally generated working capital from profitable operations. The Company's working capital at July 31, 2002 and 2001 was approximately $30.1 million and $32.0 million, respectively. Operations for fiscal 2002, fiscal 2001 and fiscal 2000, after adding back non-cash items, provided cash of approximately $3.7 million, $5.1 million and $5.7 million, respectively. During such years, other changes in working capital provided (used) cash of approximately ($4.4) million, ($4.1) million and $7.6 million, respectively, resulting in cash being provided by (used in) operating activities of approximately ($0.7) million, $0.9 million and $13.2 million, respectively. 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. Investment activities for fiscal 2002, fiscal 2001 and fiscal 2000 used cash of approximately $4.2 million, $2.0 million and $1.8 million, respectively. These amounts include additions to property and equipment in fiscal 2002, fiscal 2001 and fiscal 2000 of approximately $2.6 million, $2.0 million and $1.7 million, respectively, and the payment for acquisitions, net of cash acquired of approximately $1.6 million and $0.2 million in fiscal 2002 and 2000, respectively. Financing activities for fiscal 2002, fiscal 2001 and fiscal 2000 used cash of approximately $0.6 million, $0.6 million and $1.0 million, respectively. These amounts include (i) proceeds from the issuance of common stock in connection with the exercise of stock options of approximately $6,000 and $0.4 million, in fiscal 2001 and 2000, respectively; (ii) net repayments of bank loans, capitalized lease obligations and other debt of approximately $0.6 million, $18,000 and $0.7 million in fiscal 2002, 2001 and 2000, respectively; and (iii) the purchase and retirement of the Company's common stock of approximately $0.6 million and $0.7 million in fiscal 2001 and fiscal 2000, respectively. We have available a line of credit with a financial institution in the aggregate amount of $15.0 million. At July 31, 2002, 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 line of credit will be adequate to support current operating levels for the foreseeable future, specifically through at least the end of fiscal 2003. We currently have no material commitments for capital expenditures, other than operating leases 20 that the Company has committed to for its facilities and certain tangible property. Future capital requirements of the Company include those for the growth of working capital items such as accounts receivable and inventory, the purchase of equipment, expansion of facilities, as well as the possible opening of new offices, potential acquisitions and expansion of the Company's service and e-commerce capabilities. In addition, there are no transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to affect liquidity or the availability of, or requirements for, capital resources. The following represents the Company's commitment under operating leases for each of the next five years ended July 31 and thereafter: 2003 $1,729 2004 1,663 2005 1,710 2006 1,292 2007 1,175 Thereafter 607 --- $8,176 ======
The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may issue debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. Impact of Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company has adopted the provisions of SFAS 143 effective August 1, 2002. The adoption of SFAS 143 did not have a significant effect on the Company's results of operations or its financial position. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining the fundamental recognition and measurement provisions of that statement. SFAS 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset or distributed to owners in a spin-off to be considered held and used until it is disposed of. However, SFAS 144 requires that management consider revising the depreciable life of such long-lived asset. With respect to long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of SFAS No. 121 and, therefore, requires that discontinued operations no longer be measured on a net realizable value basis and that future operating losses associated with such discontinued operations no longer be recognized before they occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning after December 15, 2001. The Company has adopted the provisions of SFAS 144 as of August 1, 2002. The adoption of SFAS 144 did not have any material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements by rescinding Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Additionally, the Statement requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company has adopted the provisions of SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did not have any impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread out the reporting of expenses related to restructurings initiated after 2002, because commitment to a plan to exit an activity or dispose of long-lived assets will no longer be enough to record a liability for the anticipated costs. Instead, companies will record exit and disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. The Company is required 21 to adopt the provisions of SFAS 146 as of January 1, 2003. The Company does not believe that the adoption of this statement will have any impact on the Company's consolidated financial statements as no planned restructuring charges currently exist. 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. The Company primarily invests its cash in mutual funds consisting of U.S. Government and Government Agency Securities, Municipal Bonds and Corporate Fixed Income securities. Neither a 100 basis point increase nor decrease from current interest rates would have a material effect on the Company's financial position, results of operations or cash flows. ITEM 8. Financial Statements and Supplementary Data The information required by this item is contained in a separate section of this Report beginning on page F-1. See Index to Consolidated Financial Statements beginning on page F-1. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 22 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 60 Chairman of the Board, President, Chief Executive Officer and Director Joel G. Stemple, Ph.D 60 Executive Vice President, Secretary and Director Elan Yaish 32 Chief Financial Officer and Assistant Secretary Laura Fontana 47 Vice President - Technical Services Joel Rothlein, Esq. 73 Director Bert Rudofsky 69 Director Michael E. Russell 55 Director Julian Sandler 58 Director Robert J. Valentine 52 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. Elan Yaish has served as the Company's Chief Financial Officer and Assistant Secretary since August 2002. From February 2000 until joining the Company, Mr. Yaish served as Assistant Vice President of Finance for Comverse Technology, Inc. From June 1996 until February 2000, Mr. Yaish was employed as Vice President of Finance and Controller for Trans-Resources, Inc. Mr. Yaish is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. 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 (1987-1989), 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). 23 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 was the Manager of the New York Mets Major League Baseball team from August 1996 to September 2002. 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, 2002, we believe that the Reporting Persons timely complied with all applicable Section 16 filing requirements. 24 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, 2002, 2001, and 2000 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, 2002 $650,000 - $ 49,429 (2) - - President and Chief 2001 $650,000 - $63,954 (2) - - Executive Officer 2000 $650,000 $485,248 $58,707 (2) - - Joel G. Stemple, Executive 2002 $375,000 - $33,349 (3) - - Vice President and 2001 $450,000 - $38,379 (3) - - Secretary 2000 $450,000 $242,624 $31,375 (3) - - Joseph Looney, Chief 2002 $245,000 - $24,340 (4) 10,000 - Financial Officer, Vice 2001 $245,000 - $26,694 (4) 10,000 - President, Finance and 2000 $220,000 $80,875 $11,025 (4) - - Assistant Secretary(6) Laura Fontana, Vice 2002 $196,794 $20,406 $35,744 (5) - - President - Technical Services 2001 $203,782 $13,418 $31,438 (5) - - 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 -
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, 2002. ------------------ (1) Includes in fiscal 2002 employer matching contributions to the Company's defined contribution plan of $6,000, $6,000, $5,153, and $6,000, for Messrs. Steinberg, Stemple, and Looney and Ms. Fontana, respectively, in fiscal 2001 employer matching contributions to the Company's defined contribution plan of $5,100, $5,100, $5,100 and $5,100 for Messrs. Steinberg, Stemple and Looney, and Ms. Fontana, respectively, and in fiscal 2000 employer matching contributions of $5,100, $5,100, $5,100 and $5,048 for Messrs. Steinberg, Stemple and Looney and Ms. Fontana, respectively. (2) Includes $34,575 in 2002, $50,000 in 2001, and $50,000 in 2000 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 $17,286 in 2002, $25,000 in 2001, and $25,000 in 2000, 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 and 2000 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 $18,333 and $15,569 in 2002 and 2001, respectively, representing the present value of benefits earned under the Company's deferred compensation plan. (5) Includes $1,943 in 2002 and $5,000 in each of 2001 and 2000 of premiums paid by the Company for a whole life insurance policy in the name of Ms. Fontana having a face value of $589,000 and under which her minor child and the Company are beneficiaries and are entitled to $200,000 and $389,000, respectively, of death benefits payable under the policy. Also includes $20,000 and $13,538 in 2002 and 2001, respectively, representing the present value of benefits earned under the Company's deferred compensation plan. (6) Resigned his position with the Company in July 2002. (7) Resigned his position with the Company in June 2001. 25 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, 2002. The Company has not granted any stock appreciation rights.
Option Grants During the Fiscal Year Ended July 31, 2002 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 12.2% $2.30 1/15/12(3) $14,465 $36,656
------------- (1) Grant consists of ten year incentive stock options (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. (3) Employment terminated in July 2002. All options expire 90 days after termination. 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, 2002. The Named Executive Officers did not exercise any options during the fiscal year ended July 31, 2002. The Company has not granted any stock appreciation rights.
Number of Securities Value of Shares Underlying Unsecured Unexercised In-the-Money Acquired Options/SAR's at Options/SAR's at on Value July 31, 2002 July 31, 2001(1) Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable Joseph Looney (2) - - 80,000/10,000 $ - /$ - Laura Fontana - - 40,000/10,000 $ - /$ -
-------- (1) Based on the closing sale price of common stock as of July 31, 2002 ($2.16 per share) minus the applicable exercise price. (2) Employment terminated in July 2002. All options expire 90 days after termination. 26 Compensation of Directors Pursuant to the Company's compensation plan for its directors, all non-employee directors receive a $20,000 annual stipend, payable in four quarterly installments. In addition, each non-employee director is granted annually on August 1, an option under the Company's Amended and Restated 1996 Incentive and Non Incentive Stock Option Plan to purchase 10,000 shares at an exercise price equal to the fair market value of the common stock as of the close of business on the last business day preceding such close. Such options are for a term of five years and are exercisable immediately upon such grant. On August 1, 2001, each of Joel Rothlein, Bert Rudofsky, Michael E. Russell and Julian Sandler, who are non-employee directors, received non-incentive options to purchase 10,000 shares at an exercise price of $2.80 per share (the fair market value of the common stock on that date). Employment Contracts Mr. Steinberg. We do not have an employment agreement with Mr. Steinberg. We continue to make available to Mr. Steinberg the auto and deferred compensation benefits that he has historically received. Mr. Steinberg also participates in other benefits that we make generally available to our employees, such as medical and other insurance, and Mr. Steinberg is eligible to participate under the Company's stock option plan. In the event Mr. Steinberg's employment with us was terminated, he would not be precluded from competing with us. Dr. Stemple. We have an employment agreement with Joel G. Stemple, PhD, which extends through fiscal 2004. Under the employment agreement, commencing with fiscal 2003, Dr. Stemple receives a base salary of $225,000, and is entitled to an automobile and certain deferred compensation benefits, as well as medical and other benefits generally offered by us to our employees. Dr. Stemple also 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, he is entitled to severance equal to 12 months of his then current base salary and $62,000 per year for the next three years plus medical benefits based upon his severance agreement with the Company. 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. 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 $208,000, $215,000, and $177,000, for legal fees in the fiscal years ended July 31, 2002, 2001 and 2000, respectively. In addition, during the years ended July 31, 2002, 2001 and 2000, we recorded revenue of approximately $45,000, $178,000, and $273,000, 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 him or to the other of them. 27 ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of October 15, 2002 (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 58.7% Joel G. Stemple(2) 626,263 7.8 Elan Yaish - * Laura Fontana(4) 40,000 * Joel Rothlein(4) (5) 73,500 * Bert Rudofsky (4) 35,000 * Michael E. Russell (4) 35,000 * Julian Sandler(4) 41,000 * Robert J. Valentine(4) 10,000 * Dimensional Fund Advisors, Inc. (6) 611,600 7.7 (7) 1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401 All executive officers and directors as a group (9 persons) (8) 5,550,964 67.8%
* Less than 1%. (1) For purposes of determining the aggregate amount and percentage of shares deemed beneficially owned by directors and Named Executive Officers of the Company individually and by all directors, nominees and Named Executive Officers as a group, exercise of all options exercisable at or within 60 days listed in the footnotes hereto is assumed. For such purposes 8,190,215 shares of Common Stock are deemed to be outstanding. (2) Address is 160 Oser Avenue, Hauppauge, New York 11788. (3) Excludes 59,000 shares owned by Sheryl Steinberg, a daughter of Mr. Steinberg, which shares were purchased with the proceeds of a loan from Mr. Steinberg. As reported on Schedule 13D filed on March 24, 1997, as amended, Mr. Steinberg and Sheryl Steinberg each disclaim beneficial ownership of the common stock owned by the other. (4) Includes options exercisable at or within 60 days to purchase 40,000 shares (Ms. Fontana); 40,000 shares (Mr. Sandler); 35,000 shares (Mr. Rudofsky); 40,000 shares (Mr. Rothlein); 35,000 shares (Mr. Russell); and 10,000 shares (Mr. Valentine). (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 13G filed with Securities and Exchange Commission as of February 12, 2002. (7) Based on 7,990,215 shares of common stock issued and outstanding on October 15, 2002. (8) See Notes 1 through 5 above. 28 ITEM 13. Certain Relationships and Related Transactions Our Hauppauge, New York facilities are leased from entities affiliated with certain of our executive officers, directors or principal shareholders. Each of the leases with related parties was amended effective with the closing of our initial public offering in December 1996 to reduce the rent payable under the lease to then current market rates. 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 former officer of the Company. For the fiscal years ended July 31, 2002, 2001, and 2000, we made lease payments of $202,000, $196,000, and $190,000, 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, 2002, 2001, and, 2000, we made lease payments of $349,000, $322,000, and $279,000, 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, 2002, 2001, and 2000, we made lease payments of $381,000, $366,000, and $360,000, 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 2002, 2001, and 2000, $208,000, $215,000, and $177,000, respectively, was paid to such firm for legal fees. During the years ended July 31, 2002, 2001, and 2000, we recorded revenue of $45,000, $178,000, and $273,000, respectively, in connection with the sale of computer equipment to a company controlled by Julian Sandler, a director of the Company. On May 20, 2002, the Company loaned Barry Steinberg $965,000 bearing an interest rate of 2.00%. Mr. Steinberg repaid approximately $585,000 of the loan on May 30, 2002. The remainder of the loan was repaid on July 18, 2002 plus accrued interest. The Company employs the services of Seth Collins as Director of Operations. Mr. Collins is the son-in-law of Barry Steinberg. Mr. Collins receives a salary of approximately $150,000 and is entitled to receive various other benefits, such as the use of an automobile owned or leased by the Company as well as other benefits generally offered by the Company to its employees. The Company employs the services of Ilene Steinberg as Design Manager. Ms. Steinberg is the daughter of Barry Steinberg. Ms. Steinberg receives a salary of approximately $81,000 and is entitled to receive various other benefits such as the use of an automobile owned or leased by the Company as well as other benefits generally offered by the Company to its employees. In the ordinary course of its business dealings with customers and vendors, the Company utilizes a restaurant owned by Ilene Steinberg and Barry Steinberg for such catering, dining and entertainment services. During the years ended July 31, 2002, 2001 and 2000, the Company paid approximately $109,000, $64,000 and $62,000, respectively, for such services. 29 PART IV ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this Report: (1) Financial Statements (See Index to Consolidated Financial Statements on page F-1 of this Report); (2) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits required by Securities and Exchange Commission Regulation S-K, Item 601: Exhibit No. Description of Exhibit ----------- ---------------------- 3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996. 3.1.d(11) Certificate of Amendment of Certificate of Incorporation filed January 30, 2001. 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.h(5) 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(12) Lease dated April 5, 2001 between Emmatt Enterprises Inc., and Donovan Consulting Group, Inc. 10.5.n(12) Lease dated July 31, 1995 between Registrant and Boatman's Equities, LLC - f/k/a 160 Oser Avenue Associates, as amended. 30 10.5.o(13) Lease dated November 30, 2001 between Registrant and Kin Properties, Inc. as agent. 10.5.p(14) Lease dated June 1, 2002 between Electrograph Systems, Inc. and 40 Marcus Realty Associates. 10.5.q(15) Lease dated September 9, 2002 between Electrograph Systems, Inc. and Pot Spring Center Limited Partnership. 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(12) Definitive Purchase Agreement dated August 29, 2001 between Registrant and Donovan Consulting Group. 10.17(13) Definitive Purchase Agreement dated November 1, 2001 between Registrant and e.Track Solutions, Inc. 10.18 Third Amendment to $15,000,000 Revolving Credit Facility Agreement dated October 10, 2001 between Registrant and Citibank, as Agent. 21 Subsidiaries of the Registrant 23 Independent auditors' consent. (b) Reports on Form 8-K Form 8-K filed June 6, 2002 disclosing Press Release dated June 5, 2002 reporting earnings for the third quarter ended April 30, 2002. Form 8-K filed June 28, 2002 disclosing Press Release dated June 27, 2002 announcing the resignation of the registrant's Chief Financial Officer. ----------------------- * Denotes management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K. 31 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 Company's Current Report on Form 8-K dated January 30, 2001 (Commission File No. 0-21695) and incorporated herein by reference thereto. 12. 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. 13. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2001 (Commission File No. 0-21695) and incorporated herein by reference thereto. 14. Filed as the same numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 2002, (Commission File No. 0-21695) and incorporated herein by reference thereto. 15. Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended July 31, 2002. (Commission File No. 0-21695) and incorporated herein by reference thereto. 32 Items 8 and 14(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors Report F-2 Consolidated Financial Statements: Balance Sheets as of July 31, 2002 and 2001 F-3 Statements of Income for the years ended July 31, 2002, 2001, and 2000 F-4 Statements of Shareholders' Equity for the years ended July 31, 2002, 2001, and 2000 F-5 Statements of Cash Flows for the years ended July 31, 2002, 2001, and 2000 F-6 Notes to Consolidated Financial Statements F-7 Schedule II - Valuation and Qualifying Accounts F-19 F-1 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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2002, 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" as of August 1, 2001. KPMG LLP Melville, New York September 25, 2002 F-2 Manchester Technologies, Inc. and Subsidiaries Consolidated Balance Sheets July 31, 2002 and 2001
Assets 2002 2001 ------ ---- ---- - (in thousands, e per share amounts) Current assets: Cash and cash equivalents $ 8,963 $14,493 Accounts receivable, net of allowance for doubtful accounts of $956 and $1,100, respectively 32,561 25,135 Inventory 11,165 7,546 Deferred income taxes 403 459 Prepaid income taxes 426 43 Prepaid expenses and other current assets 526 362 --- --- Total current assets 54,044 48,038 Property and equipment, net 7,012 6,300 Goodwill, net 8,311 6,148 Deferred income taxes 803 842 Other assets 491 455 --- --- Total assets $70,661 $61,783 ====== ====== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $23,078 $15,259 Deferred service contract revenue 868 807 --- --- Total current liabilities 23,946 16,066 ------ ------ Deferred compensation payable 203 162 --- --- 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 7,990 shares issued and outstanding 80 80 Additional paid-in capital 18,942 18,942 Deferred compensation (23) (38) Retained earnings 27,513 26,571 ------ ------ Total shareholders' equity 46,512 45,555 ------ ------ Total liabilities and shareholders' equity $70,661 $61,783 ====== ======
See accompanying notes to consolidated financial statements. F-3 Manchester Technologies, Inc. and Subsidiaries Consolidated Statements of Income Years ended July 31, 2002, 2001 and 2000
2002 2001 2000 ---- ---- ---- (in thousands, except per share amounts) Revenue Products $249,768 $271,982 $292,971 Services 12,242 8,296 7,102 ------ ----- ----- 262,010 280,278 300,073 ------- ------- ------- Cost of revenue Products 216,471 236,970 255,549 Services 9,131 5,955 4,687 ----- ----- ----- 225,602 242,925 260,236 ------- ------- ------- Gross profit 36,408 37,353 39,837 Selling, general and administrative expenses 35,050 35,485 33,539 ------ ------ ------ Income from operations 1,358 1,868 6,298 Interest and other income, net 184 767 602 --- --- --- Income before provision for income taxes 1,542 2,635 6,900 Provision for income taxes 600 908 2,800 --- --- ----- Net income $942 $1,727 $4,100 === ===== ===== Net income per share Basic $0.12 $0.21 $0.51 ==== ==== ==== Diluted $0.12 $0.21 $0.50 ===== ===== ===== Weighted average shares of common stock and equivalents outstanding Basic 7,990 8,036 8,108 ===== ===== ===== Diluted 7,991 8,058 8,228 ===== ===== =====
See accompanying notes to consolidated financial statements. F-4 Manchester Technologies, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended July 31, 2002, 2001 and 2000
Additional Common Par Paid-in Deferred Retained Shares Value Capital Compensation Earnings Total ------ ----- ------- ------------ -------- ----- (in thousands) 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 Stock award compensation expense - - - 15 - 15 Net income - - - - 942 942 --- ---- ---- --- --- --- Balance July 31, 2002 7,990 $80 $18,942 $(23) $27,513 $46,512 ===== == ====== ==== ====== ======
See accompanying notes to consolidated financial statements. F-5 Manchester Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended July 31, 2002, 2001, and 2000
2002 2001 2000 ---- ---- ---- (in thousands) Cash flows from operating activities: Net income $ 942 $1,727 $4,100 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 2,012 2,387 2,081 Provision for (recovery of) doubtful accounts 613 832 (366) Non-cash compensation and commission expense 15 37 34 Deferred income taxes 95 (49) (154) Tax benefit from exercise of options - 143 - Change in assets and liabilities, net of the effects of acquisitions: Accounts receivable (7,773) 10,057 (264) Inventory (3,482) (749) 1,951 Prepaid income taxes (383) 592 (620) Prepaid expenses and other current assets (92) 176 (177) Other assets (88) (147) (27) Accounts payable and accrued expenses 7,298 (14,053) 6,991 Deferred service contract revenue 61 (139) 365 Income taxes payable - - (668) Deferred compensation payable 41 128 - -- --- ----- Net cash (used in) provided by operating activities (741) 942 13,246 ----- --- ------ Cash flows from investing activities: Capital expenditures (2,618) (1,972) (1,661) Payment for acquisitions, net of cash acquired (1,613) - (179) ----- ------ ----- Net cash used in investing activities (4,231) (1,972) (1,840) ----- ------- ----- Cash flows from financing activities: Net repayments of borrowings from bank (515) - (648) Payments on capitalized lease obligations - - (85) Payments on notes payable - other (43) (18) (9) Issuance of common stock upon exercise of options - 6 414 Purchase and retirement of common stock - (621) (671) ---- ----- ----- Net cash used in financing activities (558) (633) (999) ----- --- ---- Net increase (decrease) in cash and cash equivalents (5,530) (1,663) 10,407 Cash and cash equivalents at beginning of year 14,493 16,156 5,749 ------ ------ ----- Cash and cash equivalents at end of year $8,963 $14,493 $16,156 ===== ====== ====== Cash paid during the year for: Interest $ - $ - $ 4 ==== ===== == Income taxes $723 $ 365 $4,205 === ===== ====== Other noncash transactions: Common stock issued in connection with acquisitions $ - $ - $861 ===== ===== ====
See accompanying notes to consolidated financial statements. F-6 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (1) Operations and Summary of Significant Accounting Policies (a) The Company Manchester Technologies, Inc. and its subsidiaries ("the Company") is a 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 that may provide the Company favorable pricing and price protection in the event the vendor reduces its prices. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances are eliminated in consolidation. (c) Cash Equivalents The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents of $7,194 and $11,638 at July 31, 2002 and 2001, 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 $1,118, $229, and $414, for the years ended July 31, 2002, 2001 and 2000, 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. F-7 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (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 In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provision of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121. The Company has adopted the provisions of SFAS Nos. 141 and 142 as of August 1, 2001. The Company has evaluated its existing goodwill that was acquired in prior purchase business combinations and has determined that an adjustment or reclassification to intangible assets at August 1, 2001 was not required in order to conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. The Company was required to test goodwill for impairment in accordance with the provisions of SFAS No. 142 by January 31, 2002. In accordance with SFAS No. 142, goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. The Company determined that its reporting unit for purposes of applying the provisions of SFAS 142 was its operating segment. The Company's initial impairment review indicated that there was no impairment as of the date of adoption. Fair value for goodwill was determined based on discounted cash flows. Accumulated amortization was approximately $1,116 at both July 31, 2002 and 2001. Goodwill amortization for the years ended July 31, 2002, 2001 and 2000 was approximately $0, $386 and $331, respectively. The following table shows the results of operations as if SFAS No. 142 was applied to prior periods:
For the years ended July 31, 2002 2001 2000 ---- ---- ---- Net income as reported $942 $1,727 $4,100 Add back: Goodwill amortization - 386 331 ---- --- --- Adjusted net income $942 $2,113 $4,431 === ===== ===== Income per share - Basic Net income, as reported $0.12 $0.21 $0.51 Goodwill amortization - 0.05 0.04 ------- ------ ---- Adjusted net income $0.12 $0.26 $0.55 ===== ==== ==== Income per share - Diluted Net income, as reported $0.12 $0.21 $0.50 Goodwill amortization - 0.05 0.04 ------ ---- ---- Adjusted net income $0.12 $0.26 $0.54 ==== ==== ====
F-8 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (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 approximately 887,000, 899,000, and 153,000, shares for the years ended July 31, 2002, 2001 and 2000, 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.
2002 2001 2000 ---- ---- ---- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount Basic EPS 7,990,000 $0.12 8,036,000 $0.21 8,108,000 $0.51 ==== ==== ==== Effect of dilutive options 1,000 22,000 120,000 ----- ------ ------- Diluted EPS 7,991,000 $0.12 8,058,000 $0.21 8,228,000 $0.50 ========= ==== ========= ==== ========= ====
(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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (m) Fair Value of Financial Instruments The fair values of accounts receivable, prepaid expenses, notes payable, and accounts payable and accrued expenses are estimated to approximate the carrying values at July 31, 2002 due to the short maturities of such instruments. F-9 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (n) Reclassifications Certain prior year amounts have been reclassified to conform to the manner of presentation in the current year. (2) Property and Equipment ---------------------- Property and equipment at July 31, consist of the following:
2002 2001 ---- ---- Furniture and fixtures $2,194 $3,088 Machinery and equipment 11,427 8,162 Transportation equipment 671 588 Leasehold improvements 3,204 2,934 ----- ----- 17,496 14,772 Less accumulated depreciation and amortization 10,484 8,472 ------ ----- $7,012 $6,300 ===== =====
Depreciation and amortization expense amounted to $2,012, $2,001, and $1,750 for the years ended July 31, 2002, 2001 and 2000, respectively. (3) Acquisitions ------------ 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 near Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless LAN solutions to customers nationwide. The acquisition, which has been 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. Donovan was acquired in order to strengthen the Company's position in the Wireless LAN arena. Donovan allows the Company to offer total Wireless LAN solutions including state of the art products as well as the services necessary to have those products operate optimally. Operating results of Donovan are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $497 and $869, respectively. The excess of the aggregate purchase price over the estimated fair value of the tangible net assets acquired was approximately $1,872. The factors that contributed to the determination of the purchase price and the resulting goodwill include the significant growth expected in this area due to the combination of the Company's long history of strong customer relationships, financial strength and stability coupled with Donovan's product offerings and highly skilled technical staff. The $1,872 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." The presentation of supplemental pro forma financial information is deemed immaterial. F-10 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) e.Track Solutions, Inc. ----------------------- On November 9, 2001, the Company acquired all of the outstanding stock of e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in Pittsford, New York. e.Track is a business and software services firm that delivers business, Internet and information technology solutions to customers nationwide. The acquisition, which has been accounted for as a purchase, consisted of cash payments of $290 (including debt assumed and subsequently repaid). e.Track was acquired in order to allow the Company to offer our customers customized software solutions along with the products and services that we have traditionally offered. Operating results of e.Track are included in the consolidated statements of income from the acquisition date. The estimated fair value of tangible assets and liabilities acquired was $116 and $192, respectively. The excess of aggregate purchase price over the estimated fair value of the tangible net assets acquired was $291. The factors that contributed to the determination of the purchase price and the resulting goodwill include the expectation that the combination of e.Track's highly skilled technical staff, coupled with the Company's financial strength and customer base, will result in significant growth at e.Track going forward. The $291 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." The presentation of supplemental pro forma financial information is deemed immaterial. (4) Accounts Payable and Accrued Expenses ------------------------------------- Accounts payable and accrued expenses consist of the following:
July 31, 2002 2001 ---- ---- Accounts payable, trade $19,785 $11,759 Accrued salaries and wages 1,894 1,974 Customer deposits 554 711 Other accrued expenses 845 815 --- --- $23,078 $15,259 ====== ======
The Company has entered into financing agreements for the purchase of inventory. These agreements are unsecured, generally allow for a 30-day non-interest-bearing payment period and require the Company to maintain, among other things, a certain minimum tangible net worth. In each of the years in the three-year period ended July 31, 2002, the Company has repaid all balances outstanding under these agreements within the non-interest- bearing payment period. Accordingly, amounts outstanding under such agreements of $2,884, $1,719, and $2,645, at July 31, 2002, 2001 and 2000, respectively, are included in accounts payable and accrued expenses. As of July 31, 2002, retained earnings available for dividends amounted to approximately $15,500. (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 $346, $317, and $250, for the years ended July 31, 2002, 2001, and 2000, respectively. F-11 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) The Company also has two deferred compensation plans that 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, 2002 and 2001, the Company has recorded an asset (included in other assets) of $256 and $129, respectively, representing the cash surrender value of policies owned by the Company and a liability of $203 and $162, respectively, relating to the unvested portion of benefits due under these plans. For the years ended July 31, 2002, 2001 and 2000, the Company recorded an expense of $212, $246, and $92, 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 $1,973, $1,756, and $1,594, for the years ended July 31, 2002, 2001 and 2000, respectively. The following represents the Company's commitment under operating leases for each of the next five years ended July 31 and thereafter: 2003 $1,729 2004 1,663 2005 1,710 2006 1,292 2007 1,175 Thereafter 607 --- $8,176 ======
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, 2002, there was no balance outstanding under this agreement, which expires on January 31, 2005. F-12 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (8) Income Taxes ------------ The provision for income taxes for the years ended July 31, 2002, 2001 and 2000 consists of the following:
2002 2001 2000 ---- ---- ---- - Current Federal $325 $728 $2,242 State 180 229 712 --- --- --- 505 957 2,954 --- --- ----- Deferred Federal 70 (38) (115) State 25 (11) (39) -- --- --- 95 (49) (154) -- --- ---- $600 $908 $2,800 === === =====
The difference between the Company's effective income tax rate and the statutory rate is as follows, for the years ended July 31,:
2002 2001 2000 ---- ---- ---- - Income taxes at statutory rate $524 $896 $2,346 State taxes, net of federal benefit 114 144 444 Non deductible goodwill amortization - 85 85 Nontaxable life insurance proceeds - (172) - Other (38) (45) (75) --- --- --- $600 $908 $2,800 === === =====
The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset at July 31, 2002 and 2001 were as follows:
2002 2001 ---- ---- Deferred tax assets (liabilities): Allowance for doubtful accounts $383 $439 Deferred compensation 554 473 Depreciation 249 409 Other 20 (20) -- --- Net deferred tax asset $1,206 $1,301 ===== =====
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. F-13 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (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 approximately $932, $884, and $828, for the years ended July 31, 2002, 2001 and 2000, respectively. The Company paid legal fees to a law firm in which a director of the Company is a partner. Such fees amounted to approximately $208, $215, and $177, including disbursements, in the fiscal years ended July 31, 2002, 2001 and 2000, respectively. During fiscal years ended July 31, 2002, 2001 and 2000 the Company received approximately $45, $178, and $273, respectively, in revenue from a company controlled by a director of the Company. On May 20, 2002 the Company loaned its chief executive officer approximately $965 bearing an interest rate of 2.00%. On May 30, 2002, the Company's chief executive officer repaid $585 of the loan and the remainder of the loan was repaid on July 18, 2002 plus accrued interest. In the ordinary course of its business dealings with customers and vendors, the Company utilizes a restaurant owned by the chief executive officer and a member of his family for such catering, dining and entertainment services. During the years ended July 31, 2002, 2001 and 2000 the Company paid approximately $109, $64, and $62, respectively, for such services. (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 were exercisable at a price of $12 per share and expired 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: F-14 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data)
Weighted Average Exercise Exercise Balance Price ------- ----- 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 Granted 81,800 $2.55 Exercised - - Cancelled (55,800) $4.07 ------- ----- Balance July 31, 2002 925,084 $3.81 ======= =====
At July 31, 2002, 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 ------ ------ -------------- -------------- ------ -------------- $2.30 - $3.75 214,800 $2.94 7 Yrs. 135,500 $3.07 $3.76 - $4.00 528,334 $3.83 5 Yrs. 461,666 $3.83 $4.01 - $5.69 181,950 $4.78 7 Yrs 109,808 $4.76 ------- ------- $2.30 - $5.69 925,084 $3.81 6 Yrs. 706,974 $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 that have an exercise price equal to or greater than the fair market value of the underlying stock on the date of grant. 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, 2002, 2001 and 2000 would approximate the pro forma amounts below: F-15 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data)
2002 2001 2000 ---- ---- ---- Net income: As reported $942 $1,727 $4,100 Pro forma $577 $1,335 $3,813 Basic net income per share: As reported $0.12 $0.21 $0.51 Pro forma $0.07 $0.17 $0.47 Diluted net income per share: As reported $0.12 $0.21 $0.50 Pro forma $0.07 $0.17 $0.46
The pro forma effects on net income and diluted net income per share for 2002, 2001 and 2000 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:
2002 2001 2000 ---- ---- ---- Expected dividend yield 0% 0% 0% Expected stock volatility 59% 55% 49% Risk free interest rate 3% 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 2002, 2001 and 2000 was $1.79, $2.03, and $2.15, respectively. Repurchase of Common Stock -------------------------- During the years ended July 31, 2001 and 2000, the Company repurchased 171,000, and 150,600 shares of its common stock at an aggregate purchase price of $621, and $671, respectively. Such shares were subsequently retired. No shares were repurchased in fiscal 2002. (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 five vendors accounted for approximately 15%, 14%, 14%, 14%, and 13%, respectively of total product purchases for the year ended July 31, 2002. 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. At July 31, 2002 two customers accounted for 9% and 5%, respectively, of the Company's accounts receivable. 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, 2002, 2001 and 2000, no one customer accounted for more than 10% of total revenue. F-16 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (12) Impact of Recently Issued Accounting Standards ---------------------------------------------- In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company has adopted the provisions of SFAS 143 effective August 1, 2002. The adoption of SFAS 143 did not have a significant effect on the Company's results of operations or its financial position. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining the fundamental recognition and measurement provisions of that statement. SFAS 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset or distributed to owners in a spin-off to be considered held and used until it is disposed of. However, SFAS 144 requires that management consider revising the depreciable life of such long-lived asset. With respect to long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of SFAS No. 121 and, therefore, requires that discontinued operations no longer be measured on a net realizable value basis and that future operating losses associated with such discontinued operations no longer be recognized before they occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning after December 15, 2001. The Company has adopted the provisions of SFAS 144 as of August 1, 2002. The adoption of SFAS 144 did not have any material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements by rescinding Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Additionally, the Statement requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company has adopted the provisions of SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did not have any impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread out the reporting of expenses related to restructurings initiated after 2002, because commitment to a plan to exit an activity or dispose of long-lived assets will no longer be enough to record a liability for the anticipated costs. Instead, companies will record exit and disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. The Company is required to adopt the provisions of SFAS 146 as of January 1, 2003. The Company does not believe that the adoption of this statement will have any impact on the Company's consolidated financial statements as no planned restructuring charges currently exist. F-17 Manchester Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 2002, 2001 and 2000 (in thousands, except share and per share data) (13) Quarterly Results (unaudited) -----------------------------
Oct. 31 Jan 31 Apr. 30 July 31 Year ------- ------ ------- ------- ---- 2002 ---- Revenue $61,566 $68,099 $65,131 $67,214 $262,010 Gross profit 8,494 10,067 9,041 8,806 36,408 Net income 104 433 364 41 942 Basic earnings per share 0.01 0.05 0.05 0.01 0.12 Diluted earnings per share 0.01 0.05 0.05 0.01 0.12 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
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. F-18 Manchester Technologies, Inc. Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- (dollars in thousands)
Column C-Additions ------------------ Column B- (1)- (2)- Column D- Column E- Column A - Balance at Charged to Charged to Deductions- Balance at Description beginning of costs and other (a) end of period period expenses accounts (b) ------ -------- ------------ --------- ------------- Allowance for doubtful accounts Year ended: July 31, 2000 $1,204 ($366) $61 - $899 July 31, 2001 $899 $832 - $631 $1,100 July 31, 2002 $1,100 $613 - $757 $956
(a) Write-off amounts against allowance provided. (b) Recorded in connection with the acquisitions. F-19 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 22 , 2002 By: /S/ Barry R. Steinberg -------------------- Barry R. Steinberg President, Chief Executive Officer Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of this Registrant and in the capacities and on the dates indicated. /S/ Barry R. Steinberg Date: October 22 , 2002 ---------------------- Barry R. Steinberg President, Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) /S/ Joel G. Stemple Date: October 22 , 2002 ---------------- Joel G. Stemple Executive Vice President, Secretary and Director /S/ Elan Yaish Date: October 22, 2002 ----------- Elan Yaish, Chief Financial Officer and Assistant Secretary (Principal Accounting Officer) /S/ Joel Rothlein Date: October 22 , 2002 -------------- Joel Rothlein Director /S/ Michael E. Russell Date: October 22, 2002 ------------------ Michael Russell Director /S/ Bert Rudofsky Date: October 22, 2002 ------------- Bert Rudofsky Director /S/ Julian Sandler Date: October 22, 2002 -------------- Julian Sandler Director /S/ Robert J. Valentine Date: October 22 , 2002 ------------------- Robert J. Valentine Director CERTIFICATIONS I, Barry R. Steinberg, certify that: 1. I have reviewed this annual report on Form 10-K of Manchester Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 28, 2002 /S/ BARRY R. STEINBERG -------------------------- Barry R. Steinberg Chief Executive Officer I, Elan Yaish, certify that: 1. I have reviewed this annual report on Form 10-K of Manchester Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 28, 2002 /S/ ELAN YAISH ----------------- Elan Yaish Chief Financial Officer