SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 28, 2004
EPLUS INC.
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(Exact name of registrant as specified in its charter)
Delaware 000-28926 54-1817218
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
400 Herndon Parkway, Herndon, Virginia 20170
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(Address, including zip code, of principal executive office)
(703) 834-5710
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(Registrant's telephone number, including area code)
-1-
Item 2. Acquisition or Disposition of Assets
This form 8-K/A amends the current report on Form 8-K of ePlus inc. ("ePlus")
and the registrant hereunder regarding the acquisition of certain assets of
Manchester Technologies, Inc. ("Manchester"). The sole purpose of this amendment
is to provide the audited annual historical financial statements and the
unaudited historical interim financial statements with respect to the business
acquired and the unaudited pro forma financial information required by Item 7,
which financial statements were not included in the original filing.
The financial information provided on Manchester represents the carved-out
portion of business acquired in this acquisition transaction between the
parties. ePlus acquired certain fixed assets, vehicles, customer lists, a
non-compete agreement, certain contracts and assumed certain limited liabilities
relating to the IT fulfillment and IT professional services business of
Manchester. ePlus' acquisition was made pursuant to an Asset Purchase and Sale
Agreement dated May 28, 2004 by and between ePlus Technology, Inc., a Virginia
corporation and wholly-owned subsidiary of ePlus, and Manchester Technologies,
Inc., a New York Corporation, for a consideration of $5 million in cash.
Item 7. Financial Statements, Pro Forma Information and Exhibits
Introduction to Pro Forma Financial Statements F-1
Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 2004 for
ePlus inc. and subsidiaries F-2
Notes to the Unaudited Pro Forma Combined Condensed Balance Sheet as of March
31, 2004 for ePlus inc. and subsidiaries F-3
Unaudited Pro Forma Combined Condensed Statement of Earnings for the fiscal
year ended March 31, 2004 for ePlus inc. and subsidiaries F-4
Notes to the Unaudited Pro Forma Combined Condensed Statement of Earnings for
the fiscal year ended March 31, 2004 for ePlus inc. and subsidiaries F-5
Unaudited Condensed Balance Sheet of Manchester Technologies, Inc. as of April
30, 2004 F-6
Unaudited Condensed Statements of Operations of Manchester Technologies, Inc.
for the nine months ended April 30, 2004 and 2003 F-7
Unaudited Condensed Statements of Cash Flow of Manchester Technologies, Inc. for
the nine months ended April 30, 2004 and 2003 F-8
Notes to Unaudited Financial Statements of Manchester Technologies, Inc. F-9
Report of KPMG, Independent Auditor F-12
Balance Sheets of Manchester Technologies, Inc. as of July 31, 2003, 2002, and
2001 F-13
Statements of Operations of Manchester Technologies, Inc. for the years ended
July 31, 2003, 2002, and 2001 F-14
Statements of Shareholders' Equity of Manchester Technologies, Inc. for the
years ended July 31, 2003, 2002, and 2001 F-15
Statements of Cash Flow of Manchester Technologies, Inc. for the years ended
July 31, 2003, 2002, and 2001 F-16
Notes to Financial Statements of Manchester Technologies, Inc. F-17
(c) Exhibits
2.1 Asset Purchase Agreement by and between ePlus Technology, inc. and
Manchester Technologies, Inc. dated May 28, 2004 (incorporated herein by
reference from Exhibit 2.1 of ePlus inc.'s current report on Form 8-K as
filed with the SEC on May 28, 2004)
23.1 Consent of KPMG LLP
-2-
Introduction to Pro Forma Financial Information
The unaudited pro forma combined condensed financial statements give effect to
the acquisition of Manchester Technologies, Inc. on May 28, 2004 as if it had
taken place on March 31, 2004. This transaction, while considered an acquisition
of a business, was effectively a purchase of certain assets and liabilities and
the employment of certain employees. Certain material assets and liabilities of
the entity were not acquired or transferred. The accompanying notes provide the
detail regarding the purchase price, which assets and liabilities were and were
not acquired or assumed in the transaction, and the sources and uses of funds
respective to the acquisition.
The unaudited pro forma combined condensed balance sheet includes the balance
sheet as of March 31, 2004 for ePlus inc. and the balance sheet of Manchester
Technologies, Inc. as of April 30, 2004. The unaudited pro forma combined
condensed statement of earnings includes the fiscal year ended March 31, 2004 of
ePlus inc. and the twelve-month period of May 1, 2003 to April 30, 2004 for
Manchester Technologies, Inc. The pro forma adjustments are based upon
preliminary estimates, available information and certain assumptions that
management believes to be appropriate.
The unaudited pro forma combined condensed financial data presented herein do
not purport to represent the results that the Company would have obtained had
the transactions, which are the subject of pro forma adjustments, been completed
as of the assumed dates and for the period presented, or which may be obtained
in the future. The unaudited pro forma combined condensed financial statements
should be read in conjunction with Manchester's separate historical financial
statements and notes thereto. The pro forma adjustments are described in the
accompanying notes and are based upon available information and certain
assumptions that the Company believes are reasonable. A preliminary allocation
of purchase price has been made in the accompanying balance sheet based on
available information. The actual allocation of purchase price and the resulting
effect on income from operations may differ significantly from the pro forma
amounts included herein. Consequently, the amounts reflected in the Pro Forma
Combined Condensed Financial Statements are subject to change and the final
amounts may differ substantially.
F-1
Unaudited Pro Forma Combined Condensed Balance Sheet
(in thousands)
Manchester
ePlus inc. Technologies,inc. Pro Forma Pro Forma
As of March 31, 2004 As of April 30, 2004 Adjustments Combined
-----------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 25,155 $ 12,046 $ (5,000)(A) $ 20,155
(12,046)(B)
Accounts receivable 51,189 20,929 (20,929)(B) 51,987
798 (F)
Notes receivable 52 52
Inventories 900 2,049 (2,049)(B) 900
Investment in DFL, net 166,790 166,790
Investment in OLE, net 19,877 19,877
Property and equipment, net 5,230 10,639 (10,548)(D) 5,321
Other assets 4,766 41 (H) 4,807
Goodwill and other intangibles 20,243 5,945 (C) 26,188
-----------------------------------------------------------------------------------
TOTAL ASSETS $ 294,202 $ 45,663 $(43,788) $ 296,077
===================================================================================
Liabilities and Stockholders' Equity
Liabilities
Accounts payable - trade $ 32,141 $ 13,199 $(13,199)(B) $ 32,141
Accounts payable - equipment 9,993 9,993
Salaries and commissions payable 584 1,744 (1,744)(B) 584
Accrued expenses and other liabilities 11,984 2,081 (2,081)(B) 13,859
779 (E)
602 (G)
494 (G)
Recourse notes payable 6 6
Non-recourse notes payable 117,857 117,857
Deferred taxes 10,053 10,053
Capital Lease obligations 6,234 (6,234)(D) -
-----------------------------------------------------------------------------------
Total Liabilities 182,618 23,258 (21,383) 184,493
Stockholders' Equity
Common stock 107 81 (81)(I) 107
Treasury Stock (17,193) (17,193)
Additional paid in capital 64,340 19,249 (19,249)(I) 64,340
Retained earnings 64,211 3,075 (3,075)(I) 64,211
Exchange rate adjustment 119 119
-----------------------------------------------------------------------------------
Total Stockholders' Equity 111,584 22,405 (22,405) 111,584
-----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,202 $ 45,663 $(43,788) $ 296,077
===================================================================================
See notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
F-2
Notes to the Unaudited Pro Forma Combined Condensed Balance Sheet
(dollars in thousands)
1. Basis of Presentation
The accompanying combined condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and certain disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. Management believes that the disclosures are adequate to
make the information presented not misleading.
The accompanying unaudited pro forma combined condensed balance sheet includes
the balance sheet for ePlus inc. as of March 31, 2004 and the balance sheet of
Manchester Technologies, Inc. as of April 30, 2004. The pro forma adjustments
are based upon preliminary estimates, available information and certain
assumptions that management believes appropriate.
2. Acquisition
(A) The cash purchase price of $5,000 as a result of the purchase acquisition.
(B) The acquisition is being accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"), whereby the total cost of the
acquisition has been allocated to tangible and intangible assets acquired and
liabilities assumed based upon their fair values at the effective date of the
acquisition. The allocation of the purchase price is subject to refinement. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
Contractual accounts receivable $ 798
Other current assets 29
Property and equipment 91
Other assets 12
Goodwill and other intangible assets 5,945
Current liabilities (1,096)
Deferred revenue (779)
--------
Cash paid $ 5,000
========
The acquisition, on May 28, 2004, did not transfer to ePlus any cash, accounts
receivable or inventory. ePlus did not assume any of the facility capital leases
or associated obligations, trade accounts payable, trade-related items, prior
commissions or deferred compensation.
(C) Estimated goodwill and other intangibles of $5,945 resulted from the
acquisition, net of other assets and liabilities, as of date of purchase.
(D) ePlus did not acquire, except for equipment with a fair market value of $91,
any of Manchester Technologies, Inc.'s capitalized lease office space or most of
its personal property. ePlus did agree to rent certain locations, but no lease
required capital lease treatment. The capital lease obligation of $6,234 was not
assumed by ePlus.
(E) ePlus did assume certain deferred revenues, totalling $779, reflective of
certain customer contracts.
(F) ePlus did assume certain contractual receivables, net of a $141 allowance,
of $798.
(G) This represents the assumption by ePlus of payroll-related liabilities of
$494 and other contractual liabilities of $602.
(H) Other miscellaneous assets in acquisition.
(I) Elimination of Manchester Technologies, Inc. stockholder equity accounts.
F-3
Unaudited Pro Forma Combined Condensed Statement of Earnings
(in thousands, except for per-share data)
ePlus inc.
for the year Manchester Technologies, Inc.
ended for the twelve months ended Pro Forma Pro Forma
March 31, 2004 April 30, 2004 Adjustments Combined
-----------------------------------------------------------------------------------
Sales of product $ 267,899 $ 133,132 $(36,000)(a) $ 365,031
Lease revenues 51,254 51,254
Fee and other income 11,405 21,776 33,181
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Total other revenue 62,659 21,776 - 84,435
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-
-----------------------------------------------------------------------------------
TOTAL REVENUES 330,558 154,908 (36,000) 449,466
-----------------------------------------------------------------------------------
Cost of product 236,283 133,454 (33,120)(a) 336,617
Direct lease costs 10,561 - 10,561
Salaries, general and administrative 59,657 25,169 (9,840)(b) 74,986
Interest and financing costs 6,847 - 6,847
-----------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 313,348 158,623 (42,960) 429,011
-----------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 17,210 (3,715) 6,960 20,455
-----------------------------------------------------------------------------------
Provision for income taxes 7,056 - 1,330 (c) 8,386
-----------------------------------------------------------------------------------
NET EARNINGS $ 10,154 $ (3,715) $ 5,630 $ 12,069
===================================================================================
NET EARNINGS PER SHARE - BASIC $ 1.09 $ 1.29
======== ========
NET EARNINGS PER SHARE - DILUTED $ 1.02 $ 1.21
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING- BASIC 9,332,324 9,332,324
WEIGHTED AVERAGE SHARES OUTSTANDING- DILUTED 9,976,458 9,976,458
See notes to Unaudited Pro Forma Combined Condensed Statement of Earnings.
F-4
Notes to the Unaudited Pro Forma Combined Condensed Statement of Earnings
(dollars in thousands)
The unaudited pro forma combined condensed statement of earnings includes the
fiscal year ended March 31, 2004 of ePlus inc. and the twelve-month period of
May 1, 2003 to April 30, 2004 for Manchester Technologies, Inc. The pro forma
adjustments are based upon preliminary estimates, available information and
certain assumptions that management believes appropriate.
(a) Represents certain lines of business that ePlus will not continue subsequent
to acquisition relative to liquidation sales and small customer transactions
estimated at a total of $36,000 and the respective estimated cost of product of
$33,120.
(b) Cost reductions estimated to occur due to the immediate absorption of most
overhead functions of the acquired entity into ePlus' overhead infrastructure
and the related reduction in overhead and sales costs associated with the lines
of business that are being immediately discontinued.
REDUCTIONS
----------
Estimated reduction of personnel and associated fringe benefits ($8,200)
Reduction of promotional expenses (460)
General office-expense savings (550)
Depreciation and amortization reduction due to not acquiring Manchester
Technologies, Inc.'s property and equipment or associated capital-lease
obligations (1,000)
Reduction of interest expense on capital leases not assumed (160)
Reduction of commission and selling expenses on discontinued sales (550)
ADDITIONS
---------
Estimated depreciation on replacement assets for office furniture and
computer equipment $ 360
Estimated addition to ePlus headquarters' personnel costs in the consolidation 720
--------
Net decrease in salaries, general, and administrative expenses $9,840
========
(c) This adjustment represents the effective tax rate for combined federal and
state income taxes for the Manchester Technologies, Inc. and pro forma
adjustments at an effective tax rate of 41%.
F-5
Manchester Technologies, Inc.
Condensed Balance Sheet
(Unaudited)
(in thousands)
As of April 30, 2004
---------------------------------
Assets
Cash and cash equivalents $ 12,046
Accounts receivable 20,929
Inventories 2,049
Property and equipment, net 10,639
---------------------------------
TOTAL ASSETS $ 45,663
=================================
Liabilities and Shareholders' Equity
Accounts payable - trade $ 13,199
Salaries and commissions payable 1,744
Accrued expenses and other liabilities 2,081
Capital lease obligations 6,234
---------------------------------
Total Liabilities 23,258
---------------------------------
Shareholders' Equity
Common stock 81
Additional paid in capital 19,249
Retained earnings 3,075
---------------------------------
Total Shareholders' Equity 22,405
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,663
=================================
See notes to Unaudited Condensed Financial Statements
F-6
Manchester Technologies, Inc.
Condensed Statements of Operations
(Unaudited)
(In thousands)
For the nine months ended
April 30,
---------------------------
2003 2004
---------------------------
Total product and service revenues $ 112,314 $ 115,236
Total product and service cost of sales 99,748 99,573
Total gross margin 12,566 15,663
SG&A 16,778 18,139
Operating loss (4,212) (2,476)
Interest and other income (expense) 145 (196)
---------------------------
Net loss $ (4,067) $ (2,672)
===========================
See notes to Unaudited Condensed Financial Statements
F-7
Manchester Technologies, Inc.
Condensed Statements of Cash Flow
(Unaudited)
(In thousands)
Nine Months Ended
April 30,
------------------------
2003 2004
------------------------
Cash flows from operating activities:
Net loss $ (4,067) $ (2,672)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 1,270 1,423
Provision for doubtful accounts 120 208
Noncash compensation and commission expense - 24
Change in assets and liabilities, net of the effects of acquisitions:
Accounts receivable 5,913 686
Inventory (1,358) 95
Prepaid income taxes (293) 1,303
Prepaid expenses and other current assets (166) 120
Other assets 158 144
Accounts payable and accrued expenses (4,559) 931
Deferred service contract revenue (263) 23
------------------------
Net cash used in operating activities (3,245) 2,285
------------------------
Cash flows from investing activities:
Capital expenditures (406) (687)
Net cash used in investing activities (406) (687)
------------------------
Cash flows from financing activities:
Advances from affiliates 5,119 2,560
Payments on capitalized lease obligations (13) (115)
Proceeds from exercise of stock options 284
------------------------
Net cash provided by financing activities 5,106 2,729
------------------------
Net increase in cash and cash equivalents 1,455 4,327
------------------------
Cash and cash equivalents at beginning of year 8,238 7,719
------------------------
Cash and cash equivalents at end of year $ 9,693 $ 12,046
========================
Supplemental Disclosures of Cash-Flow Information:
Cash paid for interest $ 41 $ 360
========================
Cash paid for taxes $ 25 $ 3
========================
See notes to Unaudited Condensed Financial Statements.
F-8
Manchester Technologies, Inc.
Notes to Unaudited Condensed Financial Statements
(In thousands)
1. Operations and Summary of Significant Accounting Policies
(a) The Company
Manchester Technologies, Inc. ("the Company") is a single-source solutions
provider specializing in hardware and software procurement, custom networking,
security, IP telephony, remote management, application development/e-commerce,
storage, and enterprise and Internet solutions. The Company offers its customers
single-source solutions customized to their information systems needs by
integrating its analysis, design, and implementation services with hardware,
software, networking products, and peripherals from leading vendors. The company
operates in a single segment.
(b) Basis of Presentation
The Company was a component of a consolidated group of entities that included
the Company and its wholly-owned subsidiaries. The accompanying financial
statements are presented on a carve-out basis and include the historical results
of operations and assets and liabilities directly related to Manchester
Technologies, Inc. and have been prepared from Manchester Technologies, Inc.'s
historical accounting records. Certain costs incurred by the Company have been
allocated to other entities in the consolidated group based upon specific
identification, and to the extent that such identification was not practicable,
the costs were allocated based upon percentage of sales of the consolidated
entity. The allocated costs included a portion of officers and office salaries,
legal and other professional fees, and insurance costs. The allocation of these
costs has been reflected as a reduction to selling, general and administrative
expenses in the respective statements of operations. The allocated costs, while
reasonable, many not necessarily be indicative of the costs that would have been
incurred by the other entities in the consolidated group if they had performed
these functions or received services as a stand-alone entity.
(c) Cash Equivalents
The Company considers all highly liquid investments with original maturities at
the date of purchase of three months or less to be cash equivalents. Money
market mutual funds are considered cash equivalents.
(d) Revenue Recognition
Revenue from product sales is recognized when title and risk of loss are passed
to the customer, which is at the time of shipment to the customer. Revenue from
services is recognized when the related services are performed. When product
sales and services are bundled, revenue is generally recognized separately upon
delivery of the product and completion of the installation. Service contract
fees are deferred and 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
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 Company receives various market
development funds, including cooperative advertising funds from certain vendors,
principally based on volume purchases of products. The Company records such
amounts related to volume purchases as purchase discounts which reduce cost of
revenue, and other incentives that require specific incremental action on the
part of the Company, such as training, advertising, or other pre-approved
market-development activities, as an offset to the related costs including in
selling, general and administrative expenses. The Company expenses all
advertising costs as incurred.
F-9
(e) Inventory
All inventory is finished goods, consisting of hardware, software, and related
supplies, and is valued at the lower of cost (first-in, first-out) or market
value.
2. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
straight-line and accelerated methods over the economic lives of the assets,
generally from five to seven years. Leasehold improvements are amortized over
the shorter of the underlying lease term or asset life.
Property and equipment consist of the following at April 30, 2004:
Furniture and fixtures $ 1,815
Machinery and equipment 12,530
Transportation equipment 527
Leasehold improvements 2,804
Buildings under capital lease 6,400
--------------
24,706
Less accumulated depreciation and amortization (13,437)
--------------
$ 10,639
==============
3. Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options if the
current market price of the underlying stock exceeds the exercise price on the
date of the grant. On August 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. The Company has elected not to
implement the fair value based accounting method for employee stock options, but
has elected to disclose the pro forma net income (loss) for employee stock
option grants made beginning in fiscal 1996 as if such method had been used to
account for stock-based compensation cost as described in SFAS No. 123.
The Company applies Accounting Principles Board Opinion, Accounting for Stock
Issued to Employees (APB 25), and related interpretations for stock options and
other stock-based awards while disclosing pro form net loss as if the fair value
method had been applied in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
The Company applies the intrinsic value method as outlined in APB 25, and
related interpretations in accounting for stock options and share units granted
under these programs. Under the intrinsic value method, no compensation expense
is recognized if the exercise price of the Company's employee stock options
equals the market price of the underlying stock grants on the date of grant.
Since the Company has issued all stock option grants at market value, no
compensation cost has been recognized. SFAS 123 requires that the Company
provide pro forma information regarding net income (loss) as if compensation
cost for the Company's stock option programs had been determined in accordance
with the fair value method prescribed therein. During fiscal 2003, the Company
adopted the disclosure portion of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure requiring quarterly SFAS 123 pro form
disclosure. The following table illustrates the effect on net loss as if the
Company had measured compensation cost for the Company's stock option programs
under the fair value method:
F-10
For the nine months ended April 30,
2003 2004
----------- -----------
Net loss - as reported $ (4,067) $ (2,672)
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (369) (405)
----------- -----------
Net loss - pro-forma $ (4,436) $ (3,077)
=========== ===========
4. Accounts Payable and Accrued Expenses
The Company has entered into financing agreements for the purchase of inventory.
These agreements are unsecured and generally allow for a 30-day
non-interest-bearing payment period. As of April 30, 2004, the Company has
amounts outstanding under such agreements of $2,324.
5. Reserve for Credit Losses
As of April 30, 2004, the Company's reserves for credit losses were $1,044.
F-11
KPMG LLP
Suite 200
1305 Walt Whitman Road
Melville, NY 11747-4302
Independent Auditors' Report
The Shareholders
Manchester Technologies, Inc.
We have audited the accompanying balance sheets of Manchester Technologies, Inc.
("the Company") as of July 31, 2003, 2002 and 2001, and the related statements
of operations, shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Manchester Technologies, Inc.
as of July 31, 2003, 2002, and 2001, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the Unites States of America.
/s/ KPMG LLP
May 21, 2004
F-12
MANCHESTER TECHNOLOGIES, INC.
Balance Sheets
July 31, 2003, 2002, and 2001
(In thousands, except per-share amounts)
Assets 2003 2002 2001
-------- -------- --------
Current assets:
Cash and cash equivalents $ 7,719 8,238 13,413
Accounts receivable, net of allowance for
doubtful accounts of $1,044, $550, and
$700, respectively 21,820 22,411 17,162
Inventory 2,144 3,416 2,189
Prepaid income taxes 1,524 426 43
Prepaid expenses and other current assets 609 585 478
--------- -------- --------
Total current assets 33,816 35,076 33,285
Property and equipment, net 11,375 6,288 6,067
Goodwill, net - - 2,554
Investment in and advances to affiliates 878 4,915 5,671
Other assets 278 302 289
--------- -------- --------
Total assets $ 46,347 46,581 47,866
========= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,313 15,368 10,716
Deferred service contract revenue 666 868 807
Current portion of capital lease obligations 165 - -
--------- -------- --------
Total current liabilities 15,144 16,236 11,523
Deferred compensation payable 263 203 162
Capital lease obligations, net of current portion 6,184 - -
--------- -------- --------
Total liabilities 21,591 16,439 11,685
--------- -------- --------
Commitments and contingencies
Shareholder's equity:
Preferred stock, $0.01 par value. Authorized 5,000 shares; issued none. - - -
Common stock, $0.01 par value. Authorized 25,000 shares;
7,990 issued and outstanding 80 80 80
Additional paid-in capital 18,942 18,942 18,942
Deferred compensation (13) (23) (38)
Retained earnings 5,747 11,143 17,197
--------- -------- --------
Total shareholders' equity 24,756 30,142 36,181
--------- -------- --------
Total liabilities and shareholder's equity $ 46,347 46,581 47,866
========= ======== ========
See accompanying notes to financial statements.
F-13
MANCHESTER TECHNOLOGIES, INC.
Statements of Operations
Years ended July 31, 2003, 2002, and 2001
(In thousands)
2003 2002 2001
----------- ----------- -----------
Revenue:
Products $ 132,433 138,431 169,350
Services 19,553 12,242 8,296
----------- ----------- -----------
151,986 150,673 177,646
----------- ----------- -----------
Cost of Revenue:
Products 118,705 120,605 146,124
Services 14,924 9,131 5,955
----------- ----------- -----------
133,629 129,736 152,079
----------- ----------- -----------
Gross Profit 18,357 20,937 25,567
Selling, general and administrative expenses 23,808 24,626 26,699
----------- ----------- -----------
Loss from operations (5,451) (3,689) (1,132)
Interest and other income, net 55 189 496
----------- ----------- -----------
Loss before cumulative effect of accounting change (5,396) (3,500) (636)
Cumulative effect of accounting change - (2,554) -
----------- ----------- -----------
Net loss $ (5,396) (6,054) (636)
=========== =========== ===========
See accompanying notes to financial statements.
F-14
MANCHESTER TECHNOLOGIES, INC.
Statements of Shareholders' Equity
Years ended July 31, 2003, 2002, and 2001
(In thousands)
Additional
Common Par paid-in Deferred Retained
stock Value capital compensation earnings Total
---------- ---------- ------------ --------------- ---------- --------
Balance July 31, 2000 8,159 $ 82 19,402 (65) 17,833 37,252
Purchase and retirement of stock (171) (2) (619) - - (621)
Stock option commission expense - - 10 - - 10
Stock award compensation expense - - - 27 - 27
Stock issued in connection with exercise
of stock options 2 - 6 - - 6
Tax benefit from stock option exercises - - 143 - - 143
Net loss - - - - (636) (636)
---------- ---------- ------------ --------------- ---------- ---------
Balance July 31, 2001 7,990 80 18,942 (38) 17,197 36,181
Stock award compensation expense - - - 15 - 15
Net loss - - - - (6,054) (6,054)
---------- ---------- ------------ --------------- ---------- ---------
Balance July 31, 2002 7,990 80 18,942 (23) 11,143 30,142
Stock award compensation expense - - - 10 - 10
Net loss - - - - (5,396) (5,396)
---------- ---------- ------------ --------------- ---------- ---------
Balance July 31, 2003 7,990 $ 80 18,942 (13) 5,747 24,756
========== ========== ============ =============== ========== =========
See accompanying notes to financial statements.
F-15
MANCHESTER TECHNOLOGIES, INC.
Statements of Cash Flow
Years ended July 31, 2003, 2002, and 2001
(In thousands)
2003 2002 2001
--------- ---------- ---------
Cash flows from operating activities:
Net loss $ (5,396) (6,054) (636)
Adjustments to reconcile net loss to net cash from operating activities:
Cumulative effect of accounting change - 2,554
Depreciation and amortization 2,087 2,001 2,158
Provision for doubtful accounts 783 103 364
Write-off of long-lived assets 254 291 -
Noncash compensation and commission expense 10 15 37
Tax benefit from exercise of stock options - - 143
Change in assets and liabilities, net of the effects of acquisitions:
Accounts receivable (192) (5,352) 10,228
Inventory 1,272 (1,227) 573
Prepaid income taxes (1,098) (383) 592
Prepaid expenses and other current assets (59) (107) 180
Other assets 24 (13) (89)
Accounts payable and accrued expenses (1,085) 4,652 (10,197)
Deferred service contract revenue (202) 61 (139)
Deferred compensation payable 61 41 128
---------- ---------- ---------
Net cash provided by (used in) operating activities (3,541) (3,418) 3,342
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (964) (2,214) (1,807)
Payment for acquisitions, net of cash acquired - 259 -
---------- ---------- ---------
Net cash used in investing activities (964) (1,955) (1,807)
---------- ---------- ---------
Cash flows from financing activities:
Advances from (to) affiliates 4,037 756 (2,617)
Net repayments of borrowings from bank - (515) -
Payments on capitalized lease obligations (51) - -
Payments on notes payable - other - (43) (18)
Proceeds from exercise of stock options - - 6
Purchase and retirement of common stock - - (621)
---------- ---------- ---------
Net cash used in financing activities 3,986 198 (3,250)
---------- ---------- ---------
Net decrease in cash and cash equivalents (519) (5,175) (1,715)
Cash and cash equivalents at beginning of year 8,238 13,413 15,128
---------- ---------- ---------
Cash and cash equivalents at end of year $ 7,719 8,238 13,413
========== ========== =========
Capital lease obligations incurred to lease buildings $ 6,400 - -
Cash paid during the year for interest 162 - -
Cash paid during the year for income taxes 320 723 365
See accompanying notes to financial statements.
F-16
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(1) Operations and Summary of Significant Accounting Policies
(a) The Company
Manchester Technologies, Inc. (the Company) is a single-source
solutions provider specializing in hardware and software procurement,
custom networking, security, IP telephony, remote management,
application development/e-commerce, storage, and enterprise and
Internet solutions. The Company offers its customers single-source
solutions customized to their information systems needs by integrating
its analysis, design, and implementation services with hardware,
software, networking products, and peripherals from leading vendors.
The Company operates in a single segment.
(b) Basis of Presentation
For the three years ended July 31, 2003, the Company was a component
of a consolidated group of entities that included the Company and its
wholly-owned subsidiaries. The accompanying financial statements are
presented on a carve-out basis and include the historical results of
operations and assets and liabilities directly related to Manchester
Technologies, Inc. and have been prepared from Manchester
Technologies, Inc.'s historical accounting records. Amounts due to or
from any other entities in the consolidated group are included in
investment in and advances to affiliates on the accompanying balance
sheets. Certain costs incurred by the Company have been allocated to
other entities in the consolidated group based upon specific
identification, and to the extent that such identification was not
practicable, the costs were allocated based upon percentage of sales
of the consolidated entity. The allocated costs included a portion of
officers and office salaries, legal and other professional fees, and
insurance costs. The allocation of these costs has been reflected as a
reduction to selling, general and administrative expenses in the
respective statements of operations. Management believes that such
allocation methodology is reasonable. However, the allocated costs,
while reasonable, many not necessarily be indicative of the costs that
would have been incurred by the other entities in the consolidated
group if they had performed these functions or received services as a
stand-alone entity.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
equivalents. Cash equivalents of $6,120, $7,194, and $11, 638 at July
31, 2003, 2002, and 2001, respectively, consisted of money market
mutual funds.
(d) Revenue Recognition
Revenue from product sales is recognized when title and risk of loss
are passed to the customer, which is at the time of shipment to the
customer. Revenue from services is recognized when the related
services are performed. When product sales and services are bundled,
revenue is generally recognized separately upon delivery of the
product and completion of the installation. Service contract fees are
deferred and recognized as revenue ratably over the period of the
applicable contract. Deferred service contract revenue represents the
unearned portion of service contract fees.
F-17 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
The Company generally does not develop 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.
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 by the Company
commencing August 1, 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.
(e) Market Development Funds and Advertising Costs
The Company receives various market development funds including
cooperative advertising funds from certain vendors, principally based
on volume purchases of products. The Company records such amounts
related to volume purchases as purchase discounts which reduce cost of
revenue, and other incentives that require specific incremental action
on the part of the Company, such as training, advertising, or other
pre-approved market development activities, as an offset to the
related costs including in selling, general and administrative
expenses. Total market development funds amounted to $1,189, $1,118,
and $229, for the years ended July 31, 2003, 2002, and 2001,
respectively.
The Company expenses all advertising costs as incurred.
(f) Inventory
All inventory is finished goods, consisting of hardware, software, and
related supplies, and is valued at the lower of cost (first-in,
first-out) or market value.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using straight-line and accelerated methods over the economic lives of
the assets, generally from five to seven years. Leasehold improvements
are amortized over the shorter of the underlying lease term or asset
life.
F-18 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(h) Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart
from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with
the provision of SFAS No. 142. This pronouncement also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets. The Company has adopted the provisions
of SFAS Nos. 141 and 142 as of August 1, 2001.
As required by SFAS 142, the Company completed its transitional
impairment testing of intangible assets. To determine the fair value
of these intangible assets, there are many assumptions and estimates
used that directly impact the results of the testing. In making these
assumptions and estimates, the Company uses set criteria that are
reviewed and approved by various levels of management. In preparing
the accompanying financial statements, the Company estimated the fair
value of its reporting unit by using discounted cash flow analyses.
Due to incurred and projected operating losses and cash outflows at
the time of the transitional impairment test, the Company determined
that its goodwill was not recoverable and recorded a goodwill
impairment charge of $2,554 which has been included as a cumulative
effect of an accounting change in the accompanying statement of
operations for the year ended July 31, 2002.
Goodwill amortization expense for the years ended July 31, 2003, 2002,
and 2001 was approximately $0, $0, and $309, respectively. The
following table shows the results of operations as if SFAS No. 142 was
applied to prior periods:
Years Ended July 31
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Loss before cumulative effect of accounting change, as
reported $ (5,396) (3,500) (636)
Add back goodwill amortization - - 309
------------ ------------ ------------
Adjusted loss before cumulative effect of accounting
change $ (5,396) (3,500) (327)
============ ============ ============
As of July 31, 2003, 2002, and 2001, there were no other intangible
assets.
F-19 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
Effective August 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which establishes
accounting and reporting standards for the impairment of disposal of
long-lived assets. SFAS No. 144 removes goodwill from its scope and
retains the requirements of SFAS No. 121 regarding the recognition of
impairment losses on long-lived assets held for use.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset.
Recoverability of assets held for sale is measured by comparing the
carrying amount of the assets to their estimated fair market value. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
As a result of the Company closing certain of its operations in 2003,
the Company recorded a write-off of certain assets in the amount of
$254.
(j) Income Taxes
Deferred taxes are recognized for the future tax consequences
attributable to temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and income tax
purposes using enacted rates expected to be in effect when such
amounts are realized or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(k) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options if
the current market price of the underlying stock exceeds the exercise
price on the date of the grant. On August 1, 1996, the Company adopted
SFAS No. 123, Accounting for Stock-Based Compensation. The Company has
elected not to implement the fair value based accounting method for
employee stock options, but has elected to disclose the pro forma net
income (loss) for employee stock option grants made beginning in
fiscal 1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.
The Company applies Accounting Principles Board Opinion, Accounting
for Stock Issued to Employees (APB 25), and related interpretations
for stock options and other stock-based awards while disclosing pro
forma net income (loss) as if the fair value method had been applied
in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123).
The Company applies the intrinsic value method as outlined in APB 25,
and related interpretations in accounting for stock options and share
units granted under these programs. Under the intrinsic value method,
no compensation expense is recognized if the exercise price of the
Company's employee stock options equals the market price of the
underlying stock grants on the date of grant. Since the
F-20 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
Company has issued all stock option grants at market value, no
compensation cost has been recognized. SFAS 123 requires that the
Company provide pro forma information regarding net income (loss) as
if compensation cost for the Company's stock option programs had been
determined in accordance with the fair value method prescribed
therein. During fiscal 2003, the Company adopted the disclosure
portion of SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure requiring quarterly SFAS 123 pro form
disclosure. The following table illustrates the effect on net loss as
if the Company had measured compensation cost for the Company's stock
option programs under the fair value method:
2003 2002 2001
------------ ------------ ------------
Net loss - as reported $ (5,396) (6,054) (636)
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (361) (365) (392)
------------ ------------ ------------
Net loss - pro-forma $ (5,757) (6,419) (1,028)
============ ============ ============
The fair value of options granted was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions:
2003 2002 2001
------------ ------------ ------------
Expected dividend yield 0% 0% 0%
Expected stock volatility 54% 59% 55%
Risk free interest rate 3% 3% 5%
Expected option term until exercise (years) 5.00 5.00 5.00
The per share weighted average fair value of stock options granted
during fiscal 2003, 2002, and 2001 was $1.27, $1.79, and $2.03,
respectively.
(l) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with accounting principles generally accepted in the United
States of America. Actual results could differ from those estimates.
(m) Fair Value of Financial Instruments
The fair values of accounts receivable, prepaid expenses, and accounts
payable and accrued expenses are estimated to approximate the carrying
values at July 31, 2003, 2002 and 2001 due to the short maturities of
such instruments.
F-21 (Continued)
MANCHESTER TECHNOLGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(2) Property and Equipment
Property and equipment consist of the following at July 31:
2003 2002 2001
------------ ------------ ------------
Furniture and fixtures $ 1,815 1,885 1,858
Machinery and equipment 11,803 11,207 9,087
Transportation equipment 567 671 588
Leasehold improvements 2,804 2,820 2,828
Buildings under capital lease 6,400 - -
------------ ------------ ------------
23,389 16,583 14,361
Less accumulated depreciation and amortization (12,014) (10,295) (8,294)
------------ ------------ ------------
$ 11,375 6,288 6,067
============ ============ ============
Depreciation and amortization expense amounted to $2,087, $2,001, and
$1,849, for the years ended July 31, 2003, 2002, and 2001, respectively.
Amortization of assets under capital lease included in depreciation and
amortization expense amounted to $142, $0 and $0 for the years ended July
31, 2003, 2002, and 2001, respectively.
(3) Acquisition
On November 9, 2001, the Company acquired all of the outstanding stock of
e.Track Solutions, Inc. (e.Track), a New York corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to
customers nationwide. The acquisition, which has been accounted for as a
purchase, consisted of cash payments of $290 (including debt assumed and
subsequently repaid). e.Track was acquired in order to allow the Company to
offer customers customized software solutions along with the products and
services traditionally offered. Operating results of e.Track are included
in the consolidated statements of operations from the acquisition date. The
estimated fair value of tangible assets and liabilities acquired was $116
and $192, respectively. The excess of the aggregate purchase price over the
estimated fair value of the tangible assets acquired was $291. As a result
of incurred and projected operating losses and cash outflows, the Company
recorded a write-off of the goodwill during the year ended July 31, 2002.
The presentation of supplemental pro forma financial information is deemed
immaterial.
F-22 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 31
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Accounts payable, trade $ 11,373 12,555 7,601
Accrued salaries and wages 1,750 1,717 1,850
Customer deposits and other accrued expenses 1,190 1,096 1,265
------------ ------------ ------------
$ 14,313 15,368 10,716
============ ============ ============
The Company has entered into financing agreements for the purchase of
inventory. These agreements are unsecured, generally allow for a 30-day
non-interest-bearing payment period. In each of the years in the three-year
period ended July 31, 2003, the Company has repaid all balances outstanding
under these agreements within the non-interest bearing period. Accordingly,
amounts outstanding under such agreements of $2,757, $2,884, and $1,719, at
July 31, 2003, 2002, and 2001, respectively, are included in accounts
payable and accrued expenses.
(5) Employee Benefit Plans
The Company maintains a qualified defined contribution plan with a salary
deferral provision, commonly referred to as a 401(k) plan. The Company
matches 50% of employee contributions up to 3% of employees' compensation.
The Company's contribution amounted to $305, $292, and $262, for the years
ended July 31, 2003, 2002, and 2001, respectively.
The Company also has two deferred compensation plans that are available to
certain eligible key employees. The first plan consists of life insurance
policies purchased by the Company for the participants. Upon vesting, which
occurs at various times from three to ten years, a participant becomes
entitled to have ownership of the policy transferred to him or her at
termination of employment with the Company. The second plan consists of a
commitment by the Company to pay a monthly benefit to an employee for a
period of ten years commencing either ten or fifteen years from such
employee's entrance into the Plan. The Company has chosen to purchase life
insurance policies to provide funding for these benefits. As of July 31,
2003, 2002, and 2001, the Company has recorded an asset (included in other
assets) of $278, $256, and $129, respectively, representing the cash
surrender value of policies owned by the Company and a liability of $263,
$203, and $162, respectively, relating to the unvested portion of benefits
due under these plans. For the years ended July 31, 2003, 2002, and 2001,
the Company recorded an expense of $144, $212, and $246, in connection with
these plans. During fiscal 2001, the Company received $505 in connection
with a life insurance policy that it carried on an employee who died, which
was partially offset by $250 in compensation benefits paid to the deceased
employee.
F-23 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(6) Commitments and Contingencies
(a) Leases
The Company leased its warehouse and distribution center as well as
its corporate offices from entities owned or controlled by
shareholders, officers or directors of the Company. In March 2003, the
related party owners sold the properties leased by the Company to an
unaffiliated company. In connection with the sale, the Company entered
into two fifteen-year leases for two buildings, 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 2% and four five-year renewal
options.
The Company recorded the new leases as capital leases and accordingly,
recorded assets of approximately $6,400. The assets are classified in
the balance sheet as property and equipment, net, (see note 2) and are
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:
2004 $ 644
2005 657
2006 670
2007 684
2008 697
2009 and thereafter 7,502
----------------
Total payments 10,854
----------------
Amount representing interest (4,505)
----------------
Obligations under capital leases 6,349
Obligations due within one year (165)
----------------
Long-term obligations under capital leases $ 6,184
================
In addition, the Company is obligated under operating lease agreements
for sales offices and additional warehouse space. Aggregate rent
expense under all these leases amounted to $1,394, $1,650, and $1,546
for the years ended July 31, 2003, 2002, and 2001, respectively.
F-24 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
The following represents the Company's commitment under operating
leases for each of the next five years ended July 31 and thereafter:
2004 $ 513
2005 552
2006 523
2007 491
2008 179
Thereafter -
----------------
$ 2,258
================
(b) Litigation
The Company is involved in various claims and legal actions arising in
the ordinary course of business. The Company believes that the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position or results of operations.
(7) Line of Credit
In July 1998, the Company entered into a revolving credit facility with its
banks, which was revised in June 1999 to change participating banks. Under
the terms of the facility, the Company may borrow up to a maximum of
$15,000. Borrowings under the facility bear interest at variable interest
rates based upon several options available to the Company. The facility
requires the Company to maintain certain financial ratios and covenants. At
July 31, 2003, the Company was not in compliance with all of the financial
ratios and covenants that it is required to maintain. The Company received
a waiver from its bank waiving its requirements for the year ended July 31,
2003. As of July 31, 2003, there was no balance outstanding under this
agreement, which expires on January 31, 2005.
(8) Income Taxes
For income tax purposes, the Company is included in the consolidated tax
returns of Manchester Technologies, Inc. and subsidiaries. In
consolidation, the Company's taxable losses for each of the three years
ended July 31, 2003 were utilized to offset taxable income generated from
other entities in the consolidated group. Accordingly, the accompanying
statements of operations do not reflect a tax benefit and the Company has
no net operating loss carryforwards. The prepaid income taxes as of July
31, 2003 represent amounts due from tax jurisdictions.
F-25 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
Tax effects of temporary differences that give rise to significant portions
of the net deferred tax asset at July 31, 2003, 2002 and 2001 were as
follows:
2003 2002 2001
------------ ------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 418 220 280
Deferred compensation 605 554 473
Depreciation 162 249 409
Other 162 20 20
------------ ------------ ------------
1,347 1,043 1,182
Less: Valuation allowance (1,347) (1,043) (1,182)
------------ ------------ ------------
Net deferred tax asset $ - - -
============ ============ ============
A valuation allowance has been provided in connection with the deferred tax
assets since the Company believes, based upon its history of pre-tax
losses, that it is more likely than not that such deferred tax assets will
not be realized.
(9) Related Party Transactions
The Company leased its warehouse and distribution center as well as its
corporate offices from entities owned or controlled by shareholders,
officers, or directors of the Company. In March 2003, the related party
owners sold the properties leased by the Company to an unaffiliated
company. In connection with the sale, the Company entered into two
fifteen-year leases for two buildings, 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 2% and four five-year renewal options. Rent
expense paid to the former owners for these facilities aggregated
approximately $472, $729, and $688, for the years ended July 31, 2003,
2002, and 2001, respectively.
The Company paid legal fees to a law firm in which a director of the
Company is a partner. Such fees amounted to approximately $232, $213, and
$191, including disbursements, in the fiscal years ended July 31, 2003,
2002, and 2001, respectively.
During the fiscal years ended July 31, 2003, 2002, and 2001, the Company
recorded approximately $157, $6, and $13, respectively, in revenue from a
company controlled by a director of the Company.
On May 20, 2002, the Company loaned its chief executive officer
approximately $965 bearing interest at a rate of 2.00%. On May 30, 2002,
the Company's chief executive officer repaid $585 of the loan and the
remainder of the loan was repaid on July 18, 2002 plus accrued interest.
In the ordinary course of its business dealings with customers and vendors,
the Company utilizes a restaurant owned by the chief executive officer and
a member of his family for such catering, dining and entertainment
services. During the years ended July 31, 2003, 2002, and 2001 the Company
paid approximately $49, $109, and $64, respectively, for such services.
F-26 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
(10) Shareholders' Equity
(a) Stock Option Plan
The Company has a stock option plan under which it granted options to
the Company's employees and employees of the Company's subsidiaries
that are not included in these financial statements. The following
stock option data includes all Company outstanding options. Under the
Company's Amended and Restated 1996 Incentive and Non-Incentive Stock
Option Plan as amended, (the Plan), which was approved by the
Company's shareholders in October 1996, an aggregate of 2,600,000
shares of common stock are reserved for issuance upon exercise of
options thereunder. Under the Plan, incentive stock options, as
defined in Section 422 of the Internal Revenue Code of 1986, as
amended, may be granted to employees and nonincentive stock options
may be granted to employees, directors, and such other persons as the
board of directors may determine, at exercise prices equal to at least
100% (with respect to incentive stock options) and at least 85% (with
respect to nonincentive stock options) of the fair market value of the
common stock on the date of grant. In addition to selecting the
optionees, the board of directors will determine the number of shares
of common stock subject to each option, the term of each stock option
up to a maximum of ten years (five years for certain employees for
incentive stock options), the time or times when the stock option
becomes exercisable, and otherwise administer the Plan. Generally,
incentive stock options expire three months from the date of the
holder's termination of employment with the Company other than by
reason of death or disability. Options may be exercised with cash or
common stock previously owned for in excess of six months. The
following table summarizes stock option activity:
Weighted
Outstanding average exercise
Options price
--------------- ------------------
Balance July 31, 2000 826,684 $ 4.00
--------------- ------------------
Granted 123,000 3.74
Exercised (1,500) 3.81
Canceled (49,100) 4.19
---------------
Balance July 31, 2001 899,084 3.95
Granted 81,800 2.55
Exercised - -
Canceled (55,800) 4.07
---------------
Balance July 31, 2002 925,084 3.81
Granted 665,250 1.92
Exercised - -
Canceled (288,584) 3.51
---------------
Balance July 31, 2003 1,301,750 2.91
===============
F-27 (Continued)
MANCHESTER TECHNOLOGIES, INC.
Notes to Financial Statements
July 31, 2003, 2002, and 2001
(In thousands, except share and per share amounts)
At July 31, 2003, options with the following ranges of exercise
prices were outstanding:
Options outstanding Options exercisable
------------------------------------------------ -------------------------------
Weighted Weighted
average average
Range of exercise exercise Remaining exercise
prices Number price life Number price
-------------------- ---------------- --------------- ------------- --------- ---------------
$1.84 - $2.29 565,250 $ 1.87 10 years 50,000 $ 2.16
$2.30 - $3.75 241,300 2.81 7 years 134,334 3.10
$3.76 - $4.00 336,250 3.84 4 years 336,250 3.84
$4.01 - $5.69 158,950 4.77 6 years 148,948 4.78
---------------- ---------
$1.84 - $5.69 1,301,750 2.91 7 years 669,532 3.78
================ =========
All options granted expire ten years from the date of grant
except for options granted to directors, which expire five years
from the date of grant.
(b) Repurchase of Common Stock
During the year ended July 31, 2001, the Company repurchased
171,000 shares of its common stock at an aggregate purchase price
of $621. Such shares were subsequently retired. No shares were
repurchased in fiscal 2003 and 2002.
(11) Major Customer and Vendors and Concentration of Credit Risk
The Company sells and provides services to customers in the United States.
The Company's top three vendors accounted for approximately 31%, 21%, and
20%, respectively, of total product purchases for the year ended July 31,
2003. The Company's top three vendors accounted for approximately 27%, 26%,
and 23%, respectively, of total product purchases for the year ended July
31, 2002. The Company's top two vendors accounted for approximately 31% and
23%, respectively, of total product purchases for the year ended July 31,
2001.
At July 31, 2003, one customer accounted for 19% of the Company's accounts
receivable. At July 31, 2002, two customers accounted for 14% and 8%,
respectively, of the Company's accounts receivable. No customer accounted
for more than 5% of the Company's accounts receivable at July 31, 2001. For
the fiscal years ended July 31, 2003, 2002, and 2001, no one customer
accounted for more than 10% of total revenue.
F-28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ePlus inc.
By: /s/ Steven J. Mencarini
------------------------------
Steven J. Mencarini
Date: August 11, 2004 Chief Financial Officer