34
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - ACT OF 1934
For the fiscal year ended July 31, 2003
_ 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
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Indicate by check mark whether Registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES __X__ NO _____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the common stock held by non-affiliates of
Registrant as of October 7, 2003 was $8,373,884 (2,600,585 shares at a closing
sale price of $3.22).
As of October 7, 2003, 7,990,215 shares of Common Stock ($.01 par value) of
Registrant were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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MANCHESTER TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED JULY 31, 2003
TABLE OF CONTENTS
Part I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 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
Item 9A Controls and Procedures 23
Part III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 30
Item 14. Principal Accounting Fees and Services 30
Part IV
Item 15. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 31
Signatures
Certifications
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 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 be
successful in expanding its Internet presence, that the Company will not be
adversely affected by the continued intense competition in the technology
industry, continued decreases in average selling prices of personal computers
and display technology, a decrease in the growth of the display technology
market, 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", "Competition" and "Employees" 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, display technology, custom networking, security, IP
telephony, remote management, application development/e-commerce, 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. In addition, we offer a complete
line of products and peripherals for our customers' display technology
requirements. Over the past 30 years, we have forged long-standing relationships
with both customers and suppliers and capitalized on the rapid developments in
the technology industry.
Our marketing focus for our information technology products and services 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. In the display technology arena,
our marketing focus is on a full range of resellers, both large and small, in
both the commercial and consumer markets.
We offer our customers a variety of value-added services for our
information technology products, 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. Approximately 59%
of our total revenue is 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 two web sites each incorporating an electronic commerce system. The
sites, located at www.e-manchester.com and www.electrograph.com, allow 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 five active
wholly-owned subsidiaries: Electrograph Systems, Inc., a New York corporation,
which distributes display technology solutions throughout the United States;
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 service personnel to fill temporary and permanent
positions; Coastal Office Products, Inc., a Maryland corporation, which is an
integrator and reseller of computer products in the Baltimore, Maryland and
Washington, D.C. areas; and e.Track Solutions, Inc., a New York corporation,
which delivers business, Internet and information technology solutions to
customers nationwide.
3
Industry
Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Information 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.
With the 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 display industry as a whole has experienced tremendous growth over
the past decade. Specific products included in this market include Liquid
Crystal Display ("LCD") Projectors, LCD Flat panel displays and plasma display
panels. Specifically, the flat panel display market is currently experiencing
accelerated growth, including growth in the mass market.
The display market has recently moved from the early adopter stage of
the product cycle and is moving rapidly into the mass market. The flat panel
display market covers numerous markets including home theater, professional
audio-visual and information technology. The total worldwide plasma display
panel market is expected to continue to grow as market acceptance increases.
Industry-wide sales of flat panel display products and projectors are expected
to be in the hundreds of thousands of units over the next few years.
The Manchester Solution
Manchester offers its customers with its information technology products
and services, 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.
With our display technology solutions, we are committed to the
multi-faceted support of our reseller partners. Our mission is to deliver
value-added services that differentiate the Company from the competition, which
will allow our reseller partners to be more competitive and ultimately more
profitable. From our nationwide outbound sales force, to our factory-authorized
service, our VAP (Value-Added Plus) extended warranty program offers the
reseller channel extensive "value-added" distribution services.
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 storage, IP telephony,
remote management and application development/e-commerce.
4
Through our "value-added" business model and philosophy in the display
technology arena, we have been able to capitalize on the display industry
growth, penetrate new markets and increase the Company's overall market share.
For over twenty years, our subsidiary Electrograph Systems, Inc. has
provided resellers with a spectrum of "value-added" services. These services
include our strategically located nationwide sales offices, a nationwide inside
sales support staff, nationwide warehousing for efficient product logistics,
product customization and factory authorized service and repair. In addition,
the Company also offers financing options, marketing, technical and installation
support, custom integrated solutions, touch screen solutions, custom cabinet
painting and digital signage solutions, as well as a line up of peripheral
products.
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 require outside assistance to support their
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.
Acquisitions. The Company envisions that part of our future growth will
come from acquisitions consistent with our strategy. 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.
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 and track 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. Our system allows our sales
force immediate access to information regarding price and availability of
products. In addition, our system allows sales representatives to obtain
immediate customized information regarding products and services that meet
specific requirements of customers. We believe that this system and further
enhancements to the system will increase the productivity of our sales
representatives by enabling them to offer rapid and comprehensive solutions to
their customers' needs.
In the display technology arena we offer an experienced and geographically
comprehensive sales team. The Company offers on site demonstrations by our
nationwide outbound sales force. In addition, the Company employs an extensive
inside sales support department. The combination of the nationwide outbound
sales force and the inside sales support staff enable the Company to take a
proactive approach to the traditional distribution sales business model, which
ultimately provides the reseller with a high level of sales and support.
Expanding Internet Presence. We have continuously upgraded and expanded our
electronic communication system. Our websites, located at www.e-manchester.com
and www.electrograph.com, allow 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.
Custom Solutions. Another value-added service the Company offers in the
display technology arena is custom integrated solutions, including custom
cabinet painting and touch screen solutions. Our custom integrated solutions are
used in numerous market segments including digital signage, public display point
of purchase and point of sale applications. These solutions help to improve the
Company's unique focus on the value-added services niche, further
differentiating the Company from the competition and improving the Company's
market penetration.
Our Services and Products
We offer customized single-source solutions for our information technology
products 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
5
our information technology 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.
In addition, we offer a wide range of product repair and services for both
in warranty and out of warranty products for our customers' display technology
requirements. The Company is an authorized service and repair facility for most
of the manufacturers that we represent. Our service department also provides
extensive technical and installation support to both resellers and end users and
provides in and out of warranty product repair. Additional revenue is also being
generated as a result of our implementation of the Electrograph - Value-Added
Plus(R) Extended Warranty Program.
Services. Our services include consulting, integration and support
services.
Consulting. Our staff of senior systems engineers provides consulting
services consisting of systems design, performance, security and needs analysis,
and migration planning services.
Systems design services include network, communications, applications and
custom solutions design. Network design services involve analysis of a
customer's overall network needs, including access to the Internet;
communications design services involve analysis and creation of enterprise-wide
networks, including corporate intranets; applications design services include
creation of relational databases meeting customers' specific business
requirements; and custom solutions design services include design of storage
systems, remote access systems and document retention through scanning
technology.
Performance analysis involves analyzing a customer's information systems to
assess potential points of failure, to determine where performance could be
increased and to prepare for change and growth. This service includes the
evaluation of applications and their interaction with the network in order to
maximize existing computer resources. Through this evaluation process, which
includes a detailed report to the end-user, a plan for the optimization of the
customer's existing system is created, as well as recommendations for
enhancements and future systems.
Security analysis involves working with customers to develop security
policies covering network security, as well as risk analysis. After a policy is
developed, a security strategy is planned and deployed using a variety of tools,
including physical firewalls, packet filtering, encryption and user
authentication.
Migration planning involves the performance of a detailed assessment of
existing mission critical systems, followed by an analysis of the end-user's
future requirements. Working closely with the customer, our consultants develop
a migration strategy using a defined project plan that encompasses skills
transfer and training, checking for data integrity, project management and
consolidation and reallocation of resources. The primary objective of this
service is to rapidly move the customer from a slow or costly system to a newer,
more efficient and cost-effective solution.
Integration. Integration services include product procurement,
configuration, testing, installation and implementation.
We maintain a sophisticated systems build and test area, adjacent to our
warehousing facilities, where computer systems are configured and tested through
the use of automated systems. Manchester manages the installation and
implementation of its customers' information systems, and provides critical path
analysis, vendor management and facility management services. Critical path
analysis involves the management and coordination of the various hardware and
software networking components of a systems design project. Our engineers
prepare reports setting forth coordinated timetables with respect to installing
and integrating the customer's information systems.
Support. We offer support services for customers' existing information
systems, including network management, "help-desk" services, monitoring,
enhancements, maintenance and repair.
Network management consists of managing the compatibility of, and
communication between, the various components comprising a customer's
information system. The increased expense associated with the ownership of
information systems has encouraged customers to outsource the management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Our engineers can provide network management services on site at
customers' facilities, and remotely.
"Help-desk" services consist of providing customers with telephone support.
In addition, our "service call management system", which we are in the process
of enhancing, will enable our "help-desk" technicians to access an archive of
prior service calls concerning similar problems and their solutions, resulting
in a more efficient response to customers' calls.
We offer our customers a comprehensive remote monitoring and management
6
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.
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
LCD Projectors Storage Systems
Modems 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. NEC-Mitsubishi, Inc.
Citrix Nortel Networks, Inc.
Computer Associates International, Inc. Novell, Inc.
Epson America, Inc. Panasonic
Fujitsu Philips Electronics N.V.
Hewlett-Packard Company Pioneer Corp.
Hitachi America, Ltd. Seagate Technology, Inc.
International Business Machines, Corp. Sony Corporation
Microsoft Corporation Symantec Corp.
NEC Solutions, Inc. Toshiba America Information
Systems, Inc
For the fiscal year ended July 31, 2003, sales of products manufactured by
Pioneer, HP/Compaq, Cisco and Toshiba comprised approximately 17%, 15%, 11% and
10%, respectively, of our revenue. For the fiscal year ended July 31, 2002,
sales of products manufactured by HP/Compaq, 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.
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
agreements will continue. The termination, or non-renewal, of any or all of
these agreements would materially adversely affect our business. We, however,
are not aware of any reason for the termination, or non-renewal, of any of those
agreements and believe that our relationships with our principal suppliers are
satisfactory.
We are dependent upon the continued supply of products from our
manufacturers, particularly Hewlett-Packard, Cisco, Pioneer, Panasonic and
Toshiba. Occasionally, certain suppliers experience shortages of select products
that render them unavailable or necessitate product allocations among resellers.
We believe that product availability issues occur as a result of the present
dynamics of the technology industry as a whole, which include varied customer
product demand, shortened product life cycles and increased frequency of new
product introductions into the marketplace. While there can be no assurance that
product unavailability or product allocation, or both, will not increase in
fiscal 2004, 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.
7
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.
Customers
We grant credit to customers meeting specified criteria and maintain credit
departments that review 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, 2003, 2002 and 2001, 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., Ann Taylor, Inc. and Dell Marketing, LP.
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 71 sales and marketing
representatives. 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
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 and e-mailings to customers and
participation in 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 Yankees, and often feature nationally recognized
athletes in our advertising campaigns. We also promote interest in our products
and services through our websites on the Internet, and have expanded website
functionality 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.
Management Information Systems
We currently use an IBM AS/400 and a Hewlett Packard storage area network
in our integrated management information system, which enable instantaneous
access. We maintain proprietary management systems on our computer system
pursuant to which product purchases and sales are continually tracked and
analyzed. Our computer system is also used for accounting, billing and
invoicing.
Our information system assists management in maintaining controls over our
inventory and receivables. Manchester's average inventory turnover was 24, 24,
and 33 times for the fiscal years ended July 31, 2003, 2002, and 2001,
respectively, and we experienced bad debt expense of less than 0.6% of revenue
in each of these years.
8
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 technology 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 manufacturers
that market through direct sales forces and/or the Internet. The technology
industry has recently experienced, and may continue to experience, a significant
amount of consolidation through mergers and acquisitions, 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 have
been, and additional suppliers and manufacturers may choose, to market products
directly through a direct sales force and/or the Internet rather than, or in
addition to, channel distribution, and also 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.
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.
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 line
of LCD monitors, plasma display monitors and peripheral solutions under the
Electrograph brand name. Electrograph is headquartered in Hauppauge, New York,
with branch 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. No contingent payments were made. 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 allowed the Company to offer total Wireless LAN solutions
including state of the art products as well as the services necessary to have
those products operate optimally.
9
Operating results of Donovan are included in the consolidated statements of
operations from the acquisition date. The estimated fair value of tangible
assets and liabilities acquired was $497,000 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 was not amortized and was subject
to impairment testing in accordance with Statement No. 142, "Goodwill and Other
Intangible Assets."
In July 2003, the Company closed the Donovan operations and sold certain
assets back to the former owners of Donovan. The operations were closed because
the synergies that were anticipated at the time of the purchase did not
materialize and the Company will continue to provide wireless solutions via
partner delivered relationships that are estimated to be more cost effective. As
a result, the Company recorded a charge of $2,481,000 for the impairment of
goodwill and write-off of related assets of Donovan.
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
operations 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."
Employees
On August 31, 2003, we had 278 full-time employees consisting of 57 sales
and marketing representatives, 57 management and supervisory personnel, 81
technical personnel and 83 administrative and other personnel. In addition, on
August 31, 2003, we had 14 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. The loss of any
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.
10
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
Headquarters Hauppauge, NY 30,000 - March 2018
Warehouse and 50 Marcus Blvd.
Service Center Hauppauge, NY 10,000 30,000 March 2018
New York City 469 Seventh Avenue
Sales Office New York, NY 14,600 - October 2007
Boca Raton, FL 185 N.W. Spanish River Blvd.
Sales Office Boca Raton, FL 3,214 - December 2007
Baltimore, MD 7130 Columbia Gateway Dr.
Sales Office Baltimore, MD 10,579 - December 2008
Electrograph 40 Marcus Blvd
Corporate HQ Hauppauge, NY 10,000 13,000 March 2018
Timonium, MD 1818 Pot Spring Rd.
Sales Office Timonium, MD 4,416 - November 2007
e.Track 1169 Pittsford-Victor Rd
Corporate HQ Pittsford, NY 3,662 - October 2005
Seattle, WA 1800 Westlake Ave. N
Sales Office Seattle, WA 650 - May 2004
Las Vegas, NV 6255 McLeod Dr.
Sales Office Las Vegas, NV 718 - April 2006
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 2003.
11
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 2002 High Low
----------------- ---- ---
First Quarter 2.800 2.120
Second Quarter 2.790 2.150
Third Quarter 2.890 2.070
Fourth Quarter 2.740 2.050
Fiscal Year 2003
First Quarter 2.430 1.699
Second Quarter 2.240 1.759
Third Quarter 2.090 1.610
Fourth Quarter 2.500 1.710
On October 7, 2003, the closing sale price for the Company's Common Stock
was $3.22 per share. As of October 7, 2003 there were 54 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,
--------------------------
2003 2002 2001 2000 1999
---- ----- ---- ---- ----
Income Statement Data:
Revenue $286,444 $262,010 $280,278 $300,073 $228,641
Cost of revenue 253,049 225,602 242,925 260,236 195,423
------- ------- ------- ------- -------
Gross profit 33,395 36,408 37,353 39,837 33,218
Selling, general and
administrative expenses 34,559 35,050 35,485 33,539 29,849
Impairment of goodwill and
write-off of related assets 2,481 - - - -
----- -------- ------- ------- -------
Income (loss) from operations (3,645) 1,358 1,868 6,298 3,369
Interest and other income, net 25 184 767 602 404
Income tax provision (benefit) (1,032) 600 908 2,800 1,590
----- --- --- ----- -----
Net income (loss) $(2,588) $942 $1,727 $4,100 $2,183
======= === ===== ===== =====
Net income (loss) per share:
Basic $(0.32) $0.12 $0.21 $0.51 $0.27
======= ==== ==== ==== ====
Diluted $(0.32) $0.12 $0.21 $0.50 $0.27
====== ==== ==== ==== ====
Weighted average shares of common stock outstanding:
Basic 7,990 7,990 8,036 8,108 8,096
===== ===== ===== ===== =====
Diluted 7,990 7,991 8,058 8,228 8,096
===== ===== ===== ===== =====
July 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $30,661 $30,098 $31,972 $30,453 $27,461
Total assets 77,750 70,661 61,783 74,573 61,778
Short-term debt - - - 18 85
Shareholders' equity 43,934 46,512 45,555 44,263 39,586
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 the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, which statements are made
pursuant to the safe harbor provisions of The Private Securities Litigation
Reform Act of 1995. Forward-looking statements are generally identifiable by the
use of the words "believes," "intends," "expects," "will," "plans,"
"anticipates," or similar expressions. 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. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to any forward-looking statements.
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
General. The technology 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
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.
Value-Added Services. An integral part of our strategy is to increase our
value-added services revenue. These services generally provide higher gross
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 Considerations. On September 11, 2001, the World Trade Center in
New York City and the Pentagon in Washington, D.C. were the subjects of
terrorist attacks. A significant part of our business is generated from our New
York City and Baltimore/Washington, D.C. offices. We cannot predict the impact
that potential future attacks may have on our business, results of operations
and financial condition. In addition, given the concentration of our business in
these geographic areas, our business could be materially affected by economic
conditions and other significant events in the New York City and
Baltimore/Washington, D.C. areas.
Management of Growth. 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.
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. 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.
14
Competition. The technology 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
technology manufacturers that market through direct sales forces and/or the
Internet. The technology industry has recently experienced, and may continue to
experience, a significant amount of consolidation through mergers and
acquisitions, 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 have been, and additional suppliers and
manufacturers may choose, to market products directly to end users through a
direct sales force and/or the Internet rather than or in addition to channel
distribution, and may also choose to market 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
technology 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
display technology solutions and ancillary equipment has resulted in significant
product shortages from time to time, because manufacturers have been unable to
produce sufficient quantities of certain products to meet demand. In addition,
many manufacturers have adopted "just in time" manufacturing principles that can
reduce the immediate availability of a wide range of products at any one time.
We cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations. 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
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.
15
Rapid product improvement and technological change characterize the
technology industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers 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 condition and
results of operations.
As a result of the rapid changes that are taking place in computer,
networking and display technologies, product life cycles are short. Accordingly,
our product offerings change constantly. Prices of products change frequently,
with generally higher prices early in the life cycle of the product and lower
prices near the end of the product's life cycle. The technology industry has
experienced rapid declines in average selling prices of personal computers,
peripherals and display technology. 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.
Management. 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.
The loss of any member of the Company's senior management team may have a
material adverse effect on its business.
Acquisitions. The Company 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. 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. On November 12, 2002, the United States District Court for the
District of Columbia issued an order entering a final judgment in the action. We
believe that the final judgment, if implemented, will not have a material
adverse effect on our business, results of operations and financial condition.
However, the final judgment has been appealed, and we cannot predict the outcome
of the appeal or the effect that any modifications to the final judgment would
have on our business, results of operations or 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.
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 (expected to be at the end of October 2003),
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
16
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.
This discussion of uncertainties is by no means exhaustive, but is designed
to highlight important factors that may impact the Company's outlook and
results.
E-Commerce
We utilize two websites each incorporating an electronic commerce system.
The sites, located at www.e-manchester.com and www.electrograph.com allow 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.
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. No contingent payments were made. 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 allowed the Company to offer total Wireless LAN solutions
including state of the art products as well as the services necessary to have
those products operate optimally.
Operating results of Donovan are included in the consolidated statements of
operations from the acquisition date. The estimated fair value of tangible
assets and liabilities acquired was $497,000 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 was not amortized and was subject
to impairment testing in accordance with Statement No. 142, "Goodwill and Other
Intangible Assets."
In July 2003, the Company closed the Donovan operations and sold certain
assets back to the former owners of Donovan. The operations were closed because
the synergies that were anticipated at the time of the purchase did not
materialize and the Company will continue to provide wireless solutions via
partner delivered relationships that are estimated to be more cost effective. As
a result, the Company recorded a charge of $2,481,000 for the impairment of
goodwill and write-off of related assets of Donovan.
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 condensed consolidated
statements of operations 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 has not been amortized; however, it is subject to impairment testing in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
17
Critical Accounting Policies
Financial Reporting Release No. 60, which was 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. The following critical accounting policies
are impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.
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 generally
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.
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 and significant decrease in demand for our products or
there is a higher risk of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.
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 operations expressed as a
percentage of related revenue or total revenue.
Percentage of Revenue for
the Year Ended July 31,
2003 2002 2001
---- ---- ----
Revenue
Products 93.2% 95.3% 97.0%
Services 6.8 4.7 3.0
--- --- ---
100.0 100.0 100.0
----- ----- -----
Cost of revenue
Products 89.2 86.7 87.1
Services 76.3 74.6 71.8
---- ---- ----
88.3 86.1 86.7
---- ---- ----
Product gross profit 10.8 13.3 12.9
Services gross profit 23.7 25.4 28.2
---- ---- ----
Gross profit 11.7 13.9 13.3
Selling, general and administrative expenses 12.1 13.4 12.6
Impairment of goodwill and write-off of related assets 0.9 - -
--- ----- ---
Income (loss) from operations (1.3) 0.5 0.7
Interest and other income, net - 0.1 0.2
----- --- ---
Income (loss) before income taxes (1.3) 0.6 0.9
Income tax provision (benefit) (0.4) 0.2 0.3
--- --- ---
Net income (loss) (0.9)% 0.4% 0.6%
===== === ===
18
Year Ended July 31, 2003 Compared to Year Ended July 31, 2002
Revenue. Revenue increased by $24.4 million or 9% to $286.4 million for the
year ended July 31, 2003 or fiscal 2003 from $262.0 million for the year ended
July 31, 2002 or fiscal 2002. Revenue from the sale of products increased by
$17.1 million or 7% while revenue from service offerings increased by $7.3
million or 60%. The increase in product revenue is primarily a result of
increased sales of display technology solutions, primarily sales of large screen
flat panel displays, by our Electrograph subsidiary. The increase in service
revenue is primarily attributable to the Company's continued focus on growing
its sales of services and solutions to its existing customer base and to new
customers, as well as the growth in the sales of services 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 related to volume purchases
provided by manufacturers. All other operating costs are included in selling,
general and administrative expenses, offset in part by certain market
development funds provided by manufacturers. Gross profit decreased by $3.0
million or 8% from $36.4 million in fiscal 2002 to $33.4 million in fiscal 2003.
Gross profit from product sales decreased by $4.5 million or 14% while gross
profit from service offerings increased by $1.5 million or 49%. As a percentage
of revenue, gross profit from the sale of products decreased from 13.3% in
fiscal 2002 to 10.8% in fiscal 2003 primarily as a result of increased
competition and pricing pressure. As a percentage of revenue, gross profit from
the sale of services declined from 25.4% in fiscal 2002 to 23.7% in fiscal 2003
due primarily to 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 $491,000 or 1% from $35.1 million in fiscal
2002 to $34.6 million in fiscal 2003. The decrease is principally due to lower
salaries and personnel costs of approximately $900,000 reflecting the cost
reduction measures that have been instituted by the Company, decreased rent
expense of approximately $280,000 as a result of the capital leases entered into
by the Company in March 2003 and decreased sales commissions of approximately
$630,000 due to the lower gross margins earned on revenues. These decreases were
partially offset by higher telephone expenses of approximately $390,000 and
increased bad debt expense of approximately $930,000, primarily due to the
bankruptcy of one customer. As a percentage of revenue, selling, general and
administrative expenses decreased from approximately 13.4% in fiscal 2002 to
12.1% in fiscal 2003.
Impairment of goodwill and write-off of related assets. In July 2003, the
Company closed the operations of its Donovan subsidiary, and sold certain assets
back to the former owners of Donovan. The operations were closed because the
synergies that were anticipated at the time of the purchase did not materialize
and the Company will continue to provide wireless solutions via partner
delivered relationships that are estimated to be more cost effective. As a
result, the Company recorded a charge of approximately $2.5 million for the
impairment of goodwill and write-off of related assets of Donovan.
Interest and Other Income, net. Interest and other income, net, declined by
$159,000 from $184,000 in fiscal 2002 to $25,000 in fiscal 2003. The decrease in
fiscal 2003 is primarily a result of the Company's receipt of insurance proceeds
in the amount of $113,000 and interest income of $120,000 earned on the
Company's cash investments offset by interest expense of approximately $210,000
related to the interest portion of the capital leases entered into by the
Company in March 2003 as compared with interest income of $184,000 earned in
fiscal 2002 on the Company's cash investments.
Income tax provision (benefit). Our effective tax expense rate was 38.9% in
fiscal 2002 and our effective tax benefit rate was 28.5% in fiscal 2003. The
change in the rates is primarily due to the effect permanent differences have on
the income or loss in the periods.
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
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, offset in part by certain market development funds provided by
manufacturers. 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
19
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 $435,000 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).
Liquidity and Capital Resources
Our primary sources of cash and cash equivalents in fiscal 2003 have been
internally generated working capital from profitable operations. The Company's
working capital at July 31, 2003 and 2002 was approximately $30.7 million and
$30.1 million, respectively.
Operations for fiscal 2003, fiscal 2002 and fiscal 2001, after adding back
non-cash items, provided cash of approximately $3.6 million, $3.7 million and
$5.1 million, respectively. During such years, other changes in working capital
provided (used) cash of approximately ($2.6) million, ($4.4) million and ($4.1)
million, respectively, resulting in cash being provided by (used in) operating
activities of approximately $0.9 million, ($0.7) million and $0.9 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 2003, fiscal 2002 and fiscal 2001 used
cash of approximately $1.3 million, $4.2 million and $2.0 million, respectively.
These amounts include additions to property and equipment in fiscal 2003, fiscal
2002 and fiscal 2001 of approximately $1.3 million, $2.6 million and $2.0
million, respectively, and the payment for acquisitions, net of cash acquired,
of approximately $1.6 million in fiscal 2002.
Financing activities for fiscal 2003, fiscal 2002 and fiscal 2001 used cash
of approximately $65,000, $0.6 million and $0.6 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, in fiscal 2001, (ii)
net repayments of bank loans, capitalized lease obligations and other debt of
approximately $65,000, $0.6 million and $18,000 in fiscal 2003, 2002 and 2001,
respectively; and (iii) the purchase and retirement of the Company's common
stock of approximately $0.6 million in fiscal 2001.
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At July 31, 2003, no amounts were outstanding
under this line. At July 31, 2003, the Company was not in compliance with all
the financial ratios and covenants that it is required to maintain in connection
with its line of credit. The Company received a waiver waiving its requirements
from its banks for the period ended July 31, 2003.
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 2004. We currently have no
material commitments for capital expenditures, other than operating and capital
leases that the Company has committed to for its facilities and certain tangible
20
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 Company leased its warehouse and distribution center as well as its
corporate offices and certain sales facilities from entities owned or controlled
by shareholders, officers or directors of the Company. In March 2003, the owners
sold the properties leased by the Company to an unaffiliated company. In
connection with the sale, the Company entered into three fifteen-year leases,
each expiring on March 31, 2018, with the new owner. Lease terms include a lower
base rent in the first year, annual rent increases of two percent and four
five-year renewal options.
The Company recorded the new leases as capital leases and accordingly
recorded an asset of approximately $8.2 million. The asset is classified in the
balance sheet as Property and equipment, net, and is amortized using the
straight-line method over the lease terms and the related obligations are
recorded as liabilities.
The following represents the Company's commitment under capital leases for
each of the next five years ended July 31 and thereafter:
(in thousands)
-------------
2004 $ 825
2005 842
2006 859
2007 876
2008 894
2009 and thereafter 9,612
--------
Total payments 13,908
Amount representing interest (5,773)
---------
Obligations under capital leases 8,135
Obligations due within one year (212)
----------
Long-term obligations under capital leases $7,923
=======
The following represents the Company's commitment under operating leases
for each of the next five years ended July 31 and thereafter:
(in thousands)
------------
2004 $603
2005 631
2006 595
2007 553
2008 210
Thereafter -
-------
$2,592
======
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 December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation as originally
defined by SFAS No. 123, "Accounting for Stock-Based Compensation."
Additionally, SFAS 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both the annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The transitional requirements of SFAS 148
are effective for all financial statements for fiscal years ending after
December 15, 2002. The Company adopted the disclosure portion of this statement
21
during the fiscal year ended July 31, 2003. The application of the disclosure
portion of this standard had no impact on the Company's consolidated financial
position or results of operations. The FASB recently indicated that it will
require stock-based employee compensation to be recorded as a charge to earnings
pursuant to a standard on which it is currently deliberating. The FASB
anticipates issuing an Exposure Draft in the fourth quarter of 2003 and a final
statement in the second quarter of 2004. The Company will continue to monitor
the FASB's progress on the issuance of this standard as well as evaluate the
Company's position with respect to current guidance.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company does
not believe that the adoption of SFAS No. 149 will have a material impact on its
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial instruments with Characteristics of both Liability and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity in its
statement of financial position. SFAS No. 150 is effective for new or modified
financial instruments beginning July 1, 2003 and for existing instruments
beginning August 1, 2003. The Company does not believe that the adoption of SFAS
No. 150 will have a material impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("Int. No. 46") an interpretation of ARB No. 51.
Int. No. 46 addresses consolidation by business enterprises of variable interest
entities. Int. No. 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. Int. No. 46, as revised, applies in the
first year or interim period beginning after December 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is in the process of determining
the impact, if any, of implementing Int. No. 46 on its consolidated financial
statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, Revenue arrangements with Multiple Deliverables. The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables is not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The Company does not believe that the adoption of EITF 00-21
will have a significant impact on the Company's financial position or results of
operations.
Inflation
We do not believe that inflation has had a material effect on our
operations.
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
ITEM 9A. Controls and Procedures
Our management has evaluated, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(b) under the Securities Exchange Act of 1934 [the "Exchange Act"]) as of
July 31, 2003 (the end of the period covered by this Annual Report on Form
10-K). Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of such date, the Company's disclosure controls
and procedures were effective in ensuring that all material information required
to be disclosed in the reports that the Company files or submits under the
Exchange Act have been made known to them in a timely fashion.
During our fiscal quarter ended July 31, 2003, no significant change
occurred in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
23
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 61 Chairman of the Board, President, Chief
Executive Officer and Director
Joel G. Stemple, Ph.D 61 Executive Vice President, Secretary and Director
Elan Yaish 33 Vice President Finance, Chief Financial Officer and
Assistant Secretary
Laura Fontana 48 Vice President - Technical Services
Seth Collins 36 Vice President of Operations
Robert Sbarra 43 Vice President of Sales and Marketing
Joel Rothlein, Esq. 74 Director
Bert Rudofsky 70 Director
Michael E. Russell 56 Director
Julian Sandler 59 Director
Robert J. Valentine 53 Director
Barry R. Steinberg, the founder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer and as a director since
Manchester's formation in 1973. Mr. Steinberg previously served as a systems
analyst for Sleepwater, Inc. and Henry Glass and Co.
Joel G. Stemple, Ph.D. has served as Executive Vice President since
September 1996 and as Vice President and as a director since August 1982. Dr.
Stemple previously performed consulting services for the Company and, from 1966
to 1982, served as Assistant and Associate Professor of Mathematics at Queens
College, City University of New York.
Elan Yaish has served as Vice President Finance since January 2003 and as
the Company's Chief Financial Officer and Assistant Secretary since August 2002.
From February 2000 until joining the Company, Mr. Yaish served as Assistant Vice
President of Finance for Comverse Technology, Inc. From June 1996 until February
2000, Mr. Yaish was employed as Vice President of Finance and Controller for
Trans-Resources, Inc. Mr. Yaish is a Certified Public Accountant, a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
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.
Seth Collins has served as Vice President of Operations since January 2003
and Director of Operations since joining the Company in February 1999. Prior to
joining Manchester in February 1999, Mr. Collins was a manager in the financial
services consulting group of Oracle. Previously, Mr. Collins worked for
FleetBoston and Andersen Consulting. Mr. Collins is a graduate of Rennselaer
Polytechnic Institute. Mr. Collins is the son-in-law of Barry R. Steinberg.
Robert Sbarra has served as Vice President of Sales and Marketing since
joining the Company in April 2003. Prior to joining Manchester, Mr. Sbarra
served in various management positions at Hewlett Packard from June 1982 to
February 2003, most recently as Sales Director for National Accounts in the
Commercial Channels Group. Mr. Sbarra is a graduate of Columbia University where
he received a B.A. in Economics.
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,
24
at Massapequa, New York. Kressel Rothlein Walsh & Roth, LLC, and its predecessor
firms, have acted as outside general counsel to the Company since the inception
of the Company.
Bert Rudofsky became a director on July 15, 1998. Mr. Rudofsky is the
founder and president of Bert Rudofsky and Associates, a management consulting
firm specializing in the computer industry. Mr. Rudofsky was a founder of MTI
Systems Corp., a leading edge, technical, value-added distribution company
specializing in computer and data communications products. Mr. Rudofsky was CEO
of MTI from 1968 until MTI was sold in 1990.
Michael E. Russell became a director on July 15, 1998. Mr. Russell is
presently a Director of Investments at Wachovia Securities and has held several
distinguished positions as a member of the business community, as a member of
the New York State Metropolitan Transportation Authority (1987-1989), as
commissioner of the New York State Commission on Cable Television (1989-1991)
and as Special Assistant to the New York State Senate Majority Leader
(1991-1994).
Julian Sandler became a director on December 2, 1996. Mr. Sandler is Chief
Executive Officer of Rent-a-PC, Inc., a full-service provider of short-term
computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is also the
founder and was the President from 1974 to 1993 of Brookvale Associates, a
national organization specializing in the remarketing of hardware manufactured
by Digital Equipment Corporation. Mr. Sandler also co-founded and from 1970 to
1973 was Vice President of Periphonics Corporation, a developer and manufacturer
of voice response systems.
Robert J. Valentine became a director on April 17, 2001. Mr. Valentine is
an analyst for ESPN and 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.
Audit Committee Composition
The Company has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Bert Rudofsky, Michael E. Russell
and Julian Sandler are the members of our audit committee.
Audit Committee Financial Experts
Our Board of Directors has determined that in its judgment, each of Bert
Rudofsky, Michael E. Russell and Julian Sandler qualifies as an "audit committee
financial expert" in accordance with the applicable rules and regulations of the
SEC. An audit committee financial expert is a person who has (1) an
understanding of generally accepted accounting principles and financial
statements; (2) the ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and reserves; (3)
experience preparing, auditing, analyzing or evaluating financial statements
that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the registrant's financial statements, or experience
actively supervising one or more persons engaged in such activities; (4) an
understanding of internal controls and procedures for financial reporting; and
(5) an understanding of audit committee functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of the Common Stock
(collectively, "Reporting Persons") file reports of their trading in our equity
securities with the Securities and Exchange Commission. Based on a review of
Section 16 forms filed by the Reporting Persons during the fiscal year ended
July 31, 2003, we believe that the Reporting Persons timely complied with all
applicable Section 16 filing requirements.
Code of Ethics
The Company has adopted a Code of Ethics (as defined in Item 406 of
Regulation S-K) that applies to our Chief Executive Officer, Chief Financial
Officer, and members of our Finance Department. The Code of Ethics is posted on
our website, http://www.e-manchester.com/company/investor.asp under the heading
"Code of Ethics." We intend to satisfy the disclosure requirement regarding any
amendment to, or a waiver of, a provision of the Code of Ethics by posting such
information at the same location on our website.
25
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, 2003, 2002, and
2001 to the Comp