10-Q 1 form10q043005.txt FORM 10-Q 043005 Microsoft Word 10.0.2627;25 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ COMMISSION FILE NUMBER 0-21695 Manchester Technologies, Inc. (Exact name of registrant as specified in its charter) New York 11-2312854 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 50 Marcus Boulevard Hauppauge, New York 11788 (Address of registrant's principal executive offices) (631) 951-8100 (Registrant's telephone number, including area code) (Former Name, Former Address and Former Fiscal Year if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No As of June 3, 2005 there were 8,542,448 outstanding shares of the registrant's Common Stock. MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION Page ------- --------------------- ---- Item 1. Condensed Consolidated Balance Sheets as of April 30, 2005 (unaudited) and July 31, 2004 3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended April 30, 2005 and 2004 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2005 and 2004 (unaudited) 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits 21 PART I - FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)

~~January~~April 3130, 2005 July 31, 2004 (Unaudited) ------------ -~~----------~~ Assets ------ Current assets: Cash and cash equivalents $1720,~~399~~476 $16,881 Accounts receivable, net of allowance for doubtful accounts of $1,~~420~~525 and $2,848, respectively 1415,~~848~~799 15,530 Inventory 1821,~~566~~166 20,301 Deferred income taxes 1,212 1,212 Prepaid taxes 655 916 Prepaid expenses and other current assets 1,~~066~~111 1,266 ----- ----- Total current assets 5360,~~746~~419 56,106 Property and equipment, net 97,~~505~~487 9,890 Goodwill, net 3,735 3,735 Deferred income taxes 1,728 1,728 Other assets ~~105~~113 183 ------ ------- Total assets $6873,~~819~~482 $71,642 ====== ====== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $1420,~~869~~899 $21,492 Current portion of capital lease obligations ~~260~~213 246 ------- -------- Total current liabilities 1521,~~129~~112 21,738 Deferred compensation payable 98 98 Capital lease obligations, net of current portion 75,~~551~~836 7,683 ----- ----- Total liabilities 2227,~~778~~046 29,519 ------ ------ Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000 shares authorized, 8,~~428~~542 and 8,163 shares issued and outstanding 8485 82 Additional paid-in capital 2021,~~913~~293 19,597 Retained earnings 25,~~044~~058 22,444 ------ ------ Total shareholders' equity 46,~~041~~436 42,123 ------ ------ Total liabilities and shareholders' equity $6873,~~819~~482 $71,642 ====== ======

See notes to unaudited condensed consolidated financial statements. 3 Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (Unaudited)

Three months ended ~~January~~April 3130, ~~Six~~Nine months ended ~~January~~April 3130, 2005 2004 2005 2004 ---- ---- ---- ---- Revenue $3941,~~289~~902 $4542,~~117~~448 $86128,~~170~~072 $90132,~~495~~943 Cost of ~~revenue~~Revenue 3436,~~408~~649 4038,~~559~~509 75111,~~257~~906 81119,~~203~~712 ------ ------ ------- ------- Gross profit 45,~~881~~253 43,~~558~~939 1016,~~913~~166 913,~~292~~231 Selling, general and administrative expenses 4,~~580~~608 3,~~246~~149 712,~~709~~317 69,~~586~~735 Loss on buy-out of capital lease 666 - 666 - --- ----- ----- ----- Income (loss) from operations ~~301~~(21) ~~1,312~~790 3,~~204~~183 23,~~706~~496 Interest and other income (expense), net ~~118~~46 (7570) ~~133~~179 (95166) --- ---- --- ----- Income from continuing operations before income taxes ~~419~~25 ~~1,237~~720 3,~~337~~362 23,~~611~~330 Income tax provision ~~167~~11 ~~494~~288 1,~~334~~345 1,~~024~~312 --- ---- ----- ----- Income from continuing operations ~~252~~14 ~~743~~432 2,~~003~~017 12,~~587~~018 --- ---- ----- ----- Discontinued operations Income (loss) from operations of discontinued component - (~~745~~714) 995 (12,~~600~~314) Income tax (provision) benefit - ~~297~~285 (398) ~~619~~905 ---- --- ----- ------ Income (loss) from discontinued operations - (~~448~~429) 597 (~~981~~1,409) ---- ----- --- ------- Net income $~~252~~ 14 $ ~~295~~3 $2,~~600~~614 $ ~~606~~609 === ======= ===== ======= Income per share from continuing operations Basic $0.0300 $0.0905 $0.24 $0.2025 ==== ==== ==== ==== Diluted $0.0300 $0.0905 $0.24 $0.1924 ==== ==== ==== ==== Income (loss) per share from discontinued operations Basic $0.00 - $(0.0605) $0.07 $(0.1218) ==== ===== ==== ====== Diluted $0.00 - $(0.0605) $0.07 $(0.1217) ==== ===== ==== ====== Net income per share Basic $0.0300 $0.0400 $0.3132 $0.08 ==== ==== ==== ==== Diluted $0.0300 $0.0400 $0.31 $0.07 ==== ==== ==== ==== Weighted average shares outstanding Basic 8,~~364~~486 78,~~990~~070 8,~~295~~289 78,~~990~~017 ===== ===== ===== ===== Diluted 8,~~560~~772 8,~~299~~533 8,~~497~~519 8,~~265~~364 ===== ===== ===== =====

See notes to unaudited condensed consolidated financial statements. 4 Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

~~Six~~Nine months ended ~~January~~April 3130, ~~January~~April 3130, 2005 2004 ---- ---- Cash flows from operating activities: Net income $2,~~600~~614 $ ~~606~~609 (Income) loss from discontinued operations (597) 1,409 ----- ----- Income from continuing operations 2,~~003~~017 2,018 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization ~~527~~777 1,~~271~~315 Provision for doubtful accounts ~~167~~305 ~~295~~489 Equity based compensation expense ~~108~~53 2324 Loss on buyout of capital lease 666 - Tax ~~benefits~~benefit from exercise of stock options ~~240~~290 - Changes in assets and liabilities, net of ~~the~~ effects of discontinued operations ~~in 2005~~: Accounts receivable (13,~~892~~389) 1,~~112~~331 Inventory ~~1,735~~(865) (816,~~747~~200) Prepaid income taxes 261 ~~(128)~~1,662 Prepaid expenses and other current assets ~~200~~155 6 Other assets 7870 ~~101~~144 Accounts payable and accrued expenses (41,~~337)~~984 115,~~772~~551 Deferred service contract revenue - (60666) -------- ---- Net cash ~~used~~provided inby continuing operations ~~(910)~~2,324 (35,~~749)~~674 Net cash provided (used) by discontinued operations ~~718~~835 -(361) --- --- ---- Net cash ~~used~~provided inby operating activities ~~(192) (~~3,~~749)~~159 5,313 ----- ------- Cash flows from investing activities: Capital expenditures (~~142~~190) (~~842~~760) ------- ------- Net cash used in investing activities (~~142~~190) (~~842~~760) ------- -------- Cash flows from financing activities: Proceeds from exercise of stock options 1,356 284 Payments onfor buyout of capital lease ~~obligations~~obligation (~~118~~550) ~~(96)~~- ~~Proceeds~~Payments ~~from~~on ~~exercise~~capital oflease ~~stock~~obligations ~~options~~(180) ~~970~~(149) - ------ ------- Net cash provided by ~~(used in)~~ financing activities ~~852~~626 ~~(96)~~135 --- --- ----- Net increase ~~(decrease)~~ in cash and cash equivalents ~~518~~3,595 (4,~~687)~~688 Cash and cash equivalents at beginning of period 16,881 8,553 ------ ----- Cash and cash equivalents at end of period $1720,~~399~~476 $313,~~866~~241 ====== ====== Income taxes paid during the period $ 3093 $ ~~208~~292 ====== ======= Reduction of property and equipment from termination of capital lease obligation $ 1,700 $ - ====== ========

See notes to unaudited condensed consolidated financial statements. 5 Manchester Technologies, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (in thousands, except per share data) (Unaudited) 1. Organization and Basis of Presentation Manchester Technologies, Inc. and its subsidiaries ("the Company") is a distributor of display technology solutions and plasma display monitors, through its subsidiary Electrograph Systems, Inc. ("Electrograph Systems"), and computer hardware primarily to dealers and system integrators. As discussed further in Note 2, on May 28, 2004, the Company sold its end-user information technology fulfillment and professional services business (the "IT Business"). Prior to such sale, Manchester specialized in hardware and software procurement, display technology, custom networking, security, IP telephony, remote management, application development/e-commerce, storage, and enterprise and Internet solutions, offering its customers single-source solutions customized to their information systems needs by integrating its analysis, design and implementation services with hardware, software, networking products and peripherals from leading vendors. Subsequent to such sale, the Company continued distributing display technology solutions and plasma display monitors and computer hardware and no longer provides any professional services. The Company operates in a single segment. The Company has entered into agreements with certain suppliers and manufacturers that may provide the Company favorable pricing and price protection in the event the vendor reduces its prices. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the annual period ended July 31, 2004. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. The results of operations for the three and nine month periods ended April 30, 2005 are not necessarily indicative of the results to be expected for future interim periods or the entire year. 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. 2. Definitive Merger Agreement On April 17, 2005, the Company entered into a definitive merger agreement under which entities associated with Caxton-Iseman Capital, Inc. ("Caxton-Iseman") will acquire all of the Company's outstanding shares in an all cash transaction valued at approximately $55 million. Under the terms of the agreement, which was unanimously approved by the Company's Board of Directors, Manchester shareholders will receive $6.40 per share in cash for each share they own at the effective time of the merger. Consummation of the merger, which is expected to occur in the third quarter of calendar year 2005, is subject to approval by the holders of two-thirds of the shares of the Company's outstanding common stock, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Act, completion of debt financing by Caxton-Iseman and customary closing conditions. Barry R. Steinberg, Chief Executive Officer of the Company, who holds approximately 55% of the Company's outstanding shares, has agreed to vote his 6 shares in favor of the transaction. In connection with the merger, various members of management will receive severance payments and other benefits. In addition, non-management directors will receive bonuses in recognition of their services in connection with the merger. If the merger agreement is terminated under certain circumstances, the Company would be obligated to pay Caxton-Iseman $2.5 million. Any stock options outstanding immediately prior to the completion of the merger will be terminated and canceled immediately prior to the completion of the merger. Each holder of a cancelled option that has an exercise price per share less than $6.40 and that is vested immediately prior to the completion of the merger, shall have the right to receive from the Company a cash payment (less applicable federal, state and local withholding taxes) in an amount equal to $6.40 minus the applicable exercise price per share of the option, multiplied by the number of shares of common stock for which such option was exercisable immediately prior to its cancellation. Each option that, immediately prior to the completion of the merger, is not vested or that is vested but has an exercise price greater than or equal to $6.40 will be automatically cancelled without compensation at the completion of the merger. 3. Discontinued Operations On May 28, 2004, the Company sold its IT Business to ePlus, inc. ("ePlus"), a leading provider of enterprise cost management, in an all cash transaction. The transaction included the sale to ePlus of the customer list of the business and certain related equipment, the assumption by ePlus of certain contracts and liabilities pertaining to the business, and the hiring by ePlus of the majority of the Company's employees involved in the business. The transaction did not include, and the Company retained, the inventory and accounts receivable of the IT Business. As of April 30, 2005, all of the accrued liabilities related to the discontinued operations were discharged by payments in amounts equal to the accruals. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations of the end-user information technology fulfillment and professional services business have been recorded as discontinued operations in the accompanying condensed consolidated statements of operations. The revenue from discontinued operations was $0 and $34,976 for the three months ended April 30, 2005 and 2004, respectively. The pretax income (loss) from operations of the discontinued component was $0 and $(714) for the three months ended April 30, 2005 and 2004, respectively. The revenue from discontinued operations was $0 and $98,975 for the nine months ended April 30, 2005 and 2004, respectively. The pretax income (loss) from operations of the discontinued component was $995 and $(2,314) for the nine months ended April 30, 2005 and 2004, respectively. The 2005 pre-tax income resulted from recoveries of previously written off accounts receivable related to the discontinued IT Business. For the nine months ended April 30 2005, net cash provided by discontinued operations of $835 was comprised of collections of accounts receivable of $2,815 plus net income from discontinued operations of $597 less payments of accounts payable and accrued expenses of $2,577, all of which were related to the sold IT Business. 4. Net Income Per Share Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the weighted average number of common shares outstanding, plus the assumed exercise of dilutive stock options, less the number of treasury shares assumed to be purchased from the proceeds of such exercises using the average market price of the Company's common stock during each respective period. As of April 30, 2005 potentially dilutive common stock equivalents consisting of 2,000 outstanding stock options were excluded from the calculation of net income per share. The following table reconciles the denominators of the basic and diluted per share computations. For each period, the numerator is the net income from continuing operations as reported and the per share amounts below represent income per share from continuing operations. 7

Three months ended ~~January~~April 3130, ~~Six~~Nine months ended ~~January~~April 3130, ~~------------------------------ ---------------------------~~ 2005 2004 2005 2004 ---- ---- ---- ---- Per share Per share Per share Per share Shares amount Shares amount Shares amount Shares amount ------ ------ ------ ------ ------ ------ ------ ------ (shares in thousands) Basic 8,~~364~~486 $~~0.03~~ 7- 8,~~990~~070 $0.0905 8,~~295~~289 $0.24 78,~~990~~017 $0.2025 ==== ===== ==== ==== Effect of dilutive options ~~196~~286 ~~309~~463 ~~202~~230 ~~275~~347 --- --- --- --- Diluted 8,~~560~~772 $~~0.03~~ - 8,~~299~~533 $0.0905 8,~~497~~519 $0.24 8,~~265~~364 $0.1924 ===== ==== ===== ==== ===== ==== ===== ====

5. Accounting for Stock-Based Compensation The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations for stock options and other stock-based awards and records compensation expense for employee stock options if the market price of the underlying common stock exceeds the exercise price on the date of the grant. On August 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net income and net income per share for employee stock option grants as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. The Company applies the intrinsic value method as outlined in APB 25 and related interpretations in accounting for stock options granted. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant. Since the Company has issued all stock option grants at market value, no compensation cost has been recognized at the time of the grant. SFAS 123 requires that the Company provide pro forma information regarding net income and net income per share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. The following table illustrates the effect on net income and net income per share if the Company had measured the compensation cost for the Company's stock option programs under the fair value method in each period presented. 8

Three Months Ended ~~January~~April 3130, ~~Six~~Nine Months Ended ~~January~~April 3130, 2005 2004 2005 2004 ---- ---- ---- ---- Net income, as reported $~~252~~14 $~~295~~3 $2,~~600~~614 $~~606~~609 Add (deduct): Stock-based compensation expense (income) included in net income net of related tax effects 56(33) 14 6532 14 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (~~104~~77) (~~120~~119) (~~229~~306) (~~286~~405) ----- ----- ----- ----- Net income (loss) - pro forma $~~204~~(96) $~~189~~(102) $2,~~436~~340 $~~334~~218 ==== ==== ===== === Net income (loss) per share: Basic - as reported $0.0300 $0.0400 $0.3132 $0.08 ==== ==== ==== ==== Basic - pro forma $(0.0201) $(0.0201) $0.2928 $0.0403 ====== ===== ==== ===== Diluted - as reported $0.0300 $0.0400 $0.31 $0.07 ==== ==== ==== ==== Diluted - pro forma $(0.0201) $(0.0201) $0.2927 $0.0403 ====== ===== ==== ====

6. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 142 requires that the Company, on an annual basis, test goodwill and other intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. In making these assumptions and estimates, the Company uses set criteria that are reviewed and approved by various levels of management, and the Company estimates the fair value of its reporting unit by using discounted cash flow analyses. As of April 30, 2005 and July 31, 2004, the Company had no intangible assets, other than goodwill. 7. Line of Credit The Company has available a line of credit with a financial institution in the aggregate amount of $15,000, which expires on January 31, 2008. At April 30, 2005, no amounts were outstanding under this line. The line of credit facility requires the Company to maintain certain financial ratios and covenants. At April 30, 2005, the Company was in compliance with all the financial ratios and covenants that it is required to maintain. 9 8. Leases and Subleases As part of the sale to ePlus of the Company's end-user information technology fulfillment and professional services business in May 2004, ePlus entered into sublease and lease assignment agreements with the Company for up to a one year term with respect to certain of the Company's facilities. The Company and ePlus agreed to extend one sublease agreement for an additional two months for one of the Company's facilities. In addition, in August 2004 the Company entered into a sublease agreement with an unrelated third party for its office and warehouse space at 40 Marcus Boulevard. The terms of the sublease extend through February 2018 and cover substantially all of the Company's required payments under its lease. On April 11, 2005, the Company terminated its lease for the fifth floor in the building located at 469 Seventh Avenue, New York, NY. Pursuant to the Surrender Agreement with 469 Owners, LLC (the "Landlord"), successors in interest to First Willow, LLC, the lease terminated effective as of March 31, 2005 as compared to the prior termination date of October 31, 2007, resulting in a reduction of approximately $1.1 million in rental obligations and other payments otherwise due under the lease. The Surrender Agreement required the Company to pay an early termination fee of $325,000 to the Landlord which is included in selling, general and administrative expenses. Effective April 19, 2005 Electrograph Systems assigned its lease for the real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord. Pursuant to the Assignment and Assumption Agreement entered into with the landlord, Electrograph Systems assigned all right, title and interest in and to the lease for the remainder of the lease term, whereupon Electrograph Systems was released from any and all obligations and liabilities under the lease by the landlord in exchange for a payment of $550,000. The lease buy-out resulted in a decrease of property, plant and equipment, net, of approximately $1,816,000 and a reduction of capital lease obligations of approximately $1,700,000. As a result of the lease buy-out the Company recorded a loss of approximately $666,000, including $116,000 for the write-down of capital improvements at this location. 9. Major Vendors The Company's top three vendors accounted for approximately 29%, 16%, and 16% of total product purchases from continuing operations for the nine months ended April 30, 2005. The Company's top three vendors accounted for approximately 33%, 16%, and 15% of total product purchases from continuing operations for the nine months ended April 30, 2004. The Company's top three vendors accounted for approximately 36%, 17% and 14% of total product purchases from continuing operations for the three months ended April 30, 2005. The Company's top three vendors accounted for approximately 37%, 17% and 16% of total product purchases from continuing operations for the three months ended April 30, 2004. 10. Incentive Compensation Plan On March 10, 2005, at the Company's annual meeting of shareholders, the Company's shareholders approved the Company's 2005 Incentive Compensation Plan (the "2005 Plan"). The 2005 Plan provides the Company with the flexibility to grant other forms of compensation to its directors, officers, employees, consultants, agents, advisors and third party service providers in addition to that which was formerly available under the Company's Amended and Restated 1996 Incentive and Non-Incentive Stock Option Plan. The 2005 Plan permits the Company to issue up to 1,000,000 shares of common stock for the grant of options, share appreciation rights, restricted shares, restricted share units, performance awards, annual incentive awards and other share based awards and cash-based awards. The 2005 Plan is intended to comply with applicable securities law requirements, permit the performance-based awards to qualify for deductibility under Section 162(m) of the Internal Revenue Code and allow for the issuance of incentive stock options. 10 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report and with the Company's Annual Report on Form 10-K for the year ended July 31, 2004. General We are a distributor of display technology solutions and plasma display monitors and computer hardware, primarily to dealers and system integrators. Most of our revenues have been derived from product sales. We do not develop or sell software products. On April 17, 2005, the Company entered into a definitive merger agreement under which entities associated with Caxton-Iseman Capital, Inc. ("Caxton-Iseman") will acquire all of the Company's outstanding shares in an all cash transaction valued at approximately $55 million. Under the terms of the agreement, which was unanimously approved by the Company's Board of Directors, Manchester shareholders will receive $6.40 per share in cash for each share they own at the effective time of the merger. Consummation of the merger, which is expected to occur in the third quarter of calendar year 2005, is subject to approval by the holders of two-thirds of the shares of the Company's outstanding common stock, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Act, completion of debt financing by Caxton-Iseman and customary closing conditions. Barry R. Steinberg, Chief Executive Officer of the Company, who holds approximately 55% of the Company's outstanding shares, has agreed to vote his shares in favor of the transaction. In connection with the merger, various members of management will receive severance payments and other benefits. In addition, non-management directors will receive bonuses in recognition of their services in connection with the merger. If the merger agreement is terminated under certain circumstances, the Company would be obligated to pay Caxton-Iseman $2.5 million. Any stock options outstanding immediately prior to the completion of the merger will be terminated and canceled immediately prior to the completion of the merger. Each holder of a cancelled option that has an exercise price per share less than $6.40 and that is vested immediately prior to the completion of the merger, shall have the right to receive from the Company a cash payment (less applicable federal, state and local withholding taxes) in an amount equal to $6.40 minus the applicable exercise price per share of the option, multiplied by the number of shares of common stock for which such option was exercisable immediately prior to its cancellation. Each option that, immediately prior to the completion of the merger, is not vested or that is vested but has an exercise price greater than or equal to $6.40 will be automatically cancelled without compensation at the completion of the merger. In connection with the merger, the Company filed a preliminary proxy statement with the Securities and Exchange Commission ("SEC") on May 24, 2005 and intends to file additional relevant material with the SEC, including a definitive proxy statement. BECAUSE THOSE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION, HOLDERS OF SHARES OF THE COMPANY'S COMMON STOCK ARE URGED TO READ THEM, IF AND WHEN THEY BECOME AVAILABLE. When filed with the SEC, they will be available for free (along with any other documents and reports filed by the Company with the SEC) at its website, www.sec.gov, and the Company's shareholders will receive information at an appropriate time on how to obtain the definitive proxy statement for free from the Company. A special meeting of the Company's shareholders will be convened as soon as practicable after the filing of definitive proxy materials with the SEC. On May 28, 2004, we sold our end-user information technology fulfillment and professional services business ("IT Business") to ePlus, inc. ("ePlus") in an all cash transaction. The transaction included the sale to ePlus of the customer list of the business and certain related equipment, the assumption by ePlus of certain contracts and liabilities pertaining to the business and the hiring by ePlus of the majority of Manchester employees involved in the 11 business. The transaction did not include, and we retained, the inventory and accounts receivable of the business. Prior to this sale, we specialized in hardware and software procurement, display technology, custom networking, security, IP telephony, remote management, application development/e-commerce, storage, and enterprise and Internet solutions. Subsequent to the sale, we have continued distributing display technology solutions and plasma display monitors and computer hardware, but no longer provide professional services. E-Commerce We utilize a website incorporating an electronic communication system. The site, located at www.electrograph.com allows existing customers, corporate shoppers and others to find product specifications, compare products, check prices and purchase products quickly and easily 24 hours a day seven days a week. We have made, and expect to continue to make, significant investments and improvements in our e-commerce capabilities. There can be no assurance that we will be successful in enhancing and increasing our business through our expanded Internet presence. Discontinued Operations On May 28, 2004, the Company sold its IT Business to ePlus, a leading provider of enterprise cost management, in an all cash transaction. The proceeds from the sale of the IT Business were $3,555,000 net of related expenses of $1,445,000. The Company recorded a gain, included in loss from operations of discontinued component in the fiscal 2004 (ended July 31, 2004) statement of operations, of approximately $876,000 as a result of the transaction. This amount represented the excess of the net proceeds over a payable to ePlus of $469,000 for service contracts they assumed and the $2,210,000 carrying value of the net assets sold, consisting of goodwill of $2,704,000, property and equipment, net of $195,000 and deferred revenue of $689,000. The loss from the operations of the discontinued IT Business was $8,492,000 in fiscal 2004, which included the following charges in the fourth quarter of fiscal 2004: Employee severance and other employee costs $1,016,000 Provision for doubtful accounts receivable 1,250,000 Fixed asset impairments 2,639,000 Other 50,000 --------- Total $4,955,000 ========== As of April 30, 2005, all of the accrued liabilities related to the discontinued operations were discharged by payments in amounts equal to the accruals. Disclosure Regarding Forward-Looking Statements This report on Form 10-Q contains statements that may constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information and represent the beliefs of our management. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including, but not limited to, our inability to attract and retain highly skilled sales representatives or technical personnel necessary to maintain our current operations and implement our growth strategies; our inability to maintain good relationships with our vendors and customers; not being successful in our efforts to focus on higher-margin products and services and not being able to rapidly respond to new product offerings; not managing our inventory successfully; being adversely affected by continued intense competition in the technology industry, including competition from competitors with greater resources; being subject to potentially adverse business conditions that our industry is subject to, including, without limitation, pricing pressures involving distribution 12 channels, market consolidation, a potential short supply of products, continued deterioration in average selling prices of personal computers and display technologies, and a decrease in the growth of the display technology market; the risk that our success is highly dependent upon a select group of senior management and that our revenues and operating results are subject to fluctuation from quarter to quarter; the failure of our information technology systems to function properly; the failure of our actions to enhance shareholder value; failure to consummate the merger; failure of the Company's shareholders to adopt the merger agreement and the merger; the occurrence or existence of any event, fact or set of circumstances that has had or would reasonably be expected to have, individually or in the aggregate, a "company material adverse effect" as such term is defined in the merger agreement; failure of the Company and the acquiror to obtain the required consents and approvals under the Hart-Scott-Rodino Act; the imposition of any government conditions to the closing of the proposed transaction; the failure by the Company or the acquiror to satisfy other conditions to the completion of the merger as set forth in the merger agreement; the failure of the acquiror to obtain debt and equity financing; the failure of the Company to collect from Caxton-Iseman the termination fee of $2.5 million following an event that gives rise to an obligation to pay such termination fee; or the Company's obligation to pay a termination fee of $2.5 million to the acquiror following an event that gives rise to an obligation to pay such termination fee. For further information on certain of these risks and others affecting us, please see our Annual Report on Form 10-K for the year ended July 31, 2004, and those set forth from time to time in our other filings with the SEC. Each of these documents is on file with the SEC and is available free of charge. Readers of this report are referred to such filings. The forward-looking statements herein speak only as of the date of this report. We do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations is based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended July 31, 2004 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. Revenue Recognition. Revenue from product sales is recognized when title and risk of loss are passed to the customer, which is at the time of shipment to the customer. The Company does not develop or sell software products. However, certain computer hardware products sold by the Company are loaded with prepackaged software products. The net impact on the Company's financial statements of product returns, primarily for defective products, has been insignificant. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of our accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. 13 Goodwill. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. In assessing the recoverability of the Company's goodwill, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations Results of Operations The following table sets forth, for the periods indicated, information derived from the Company's condensed consolidated statements of income expressed as a percentage of related revenue or total revenue.

Percentage of Revenue ~~---------------------------------------------------~~ Three Months Ended ~~Six~~Nine Months Ended ~~January~~April 3130, ~~January~~April 3130, 2005 2004 2005 2004 ---- ----- ---- ----- Revenue 100.0% 100.0% 100.0% 100.0% Cost of ~~revenue~~Revenue 87.65 8990.97 87.34 8990.70 ---- ---- ---- ---- Gross profit 12.45 109.13 12.76 10.30 Selling, general and administrative expenses 11.70 7.24 8.9.6 7.3 Loss on buy-out of capital lease 1.6 0.0 0.5 0.0 --- --- --- --- Income (loss) from operations (0.81) 21.9 32.75 32.06 Interest and other income (expense), net 0.31 (0.2) 0.21 (0.1) --- ----- --- ----- Income from continuing operations before income taxes 10.1 21.7 32.96 2.95 Income tax provision 0.40 10.17 1.51 1.10 --- ---- --- --- Income from continuing operations 0.60 1.60 21.36 1.85 --- ---- --- --- Discontinued operations Income (loss) from operations of discontinued component -0.0 (1.7) 10.28 (1.87) Income tax (provision) benefit -0.0 0.7 (0.53) 0.7 ---- --- ----- --- Income (loss) from discontinued operations -0.0 (1.0) 0.75 (1.1) ---- ----- --- ----- Net income 0.60% 0.70% 32.0% 0.75% ==== ===== ==== ====

Three Months Ended April 30, 2005 Compared with Three Months Ended April 30, 2004 Revenue. Revenue decreased by $0.5 million or 1% to $41.9 million for the three months ended April 30, 2005 from $42.4 million for the three months ended April 30, 2004. The decrease in revenue is primarily a result of decreased sales of computer hardware to dealers and systems integrators. Such sales of computer hardware decreased by approximately 38% compared to last year as a result of the Company's inability to procure products at previous levels for this line of its business. The decrease in computer hardware sales was partially offset by an increase in sales of display technology solutions of approximately 4% compared to last year resulting from the increase in unit sales of display technology 14 solutions, primarily large screen flat panel displays, partially offset by the ongoing decline in average selling prices. Gross Profit. Cost of revenue includes the direct costs of products sold and freight. All other operating costs are included in selling, general and administrative expenses. Gross profit increased by $1.3 million or 33%, from $3.9 million for the three months ended April 30, 2004 to $5.3 million for the three months ended April 30, 2005 and as a percentage of revenue, gross profit increased from 9.3% for the three months ended April 30, 2004 to 12.5% for the three months ended April 30, 2005. The increase in gross profit percentage is primarily attributable to special product offerings received from manufacturers with higher margins, volume discounts received from manufacturers and sales of higher margin products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.5 million, or 46% from $3.1 million for the three months ended April 30, 2004 to $4.6 million for the three months ended April 30, 2005. The increase is principally due to an increase in salaries, commissions and other personnel costs of approximately $328,000, reflecting the increase in employee headcount and associated costs with respect to the continuing growth of the display technology business, $325,000 of charges related to obtaining a release from the rental obligation for the Company's leased property in New York City, increased legal and professional costs of approximately $280,000 primarily as a result of the increased legal costs associated with the Company's entering into a definitive merger agreement and the adoption of the Company's 2005 Incentive Compensation Plan approved by our shareholders and an increase in bad debt expense of approximately $220,000 primarily due to a recovery in the prior year. As a percentage of revenue, selling, general and administrative expenses increased from 7.4% for the three months ended April 30, 2004 to 11.0% for the three months ended April 30, 2005. Loss on Buy-Out of Capital Lease. Effective April 19, 2005 Electrograph Systems, Inc., a subsidiary of the Company ("Electrograph Systems"), assigned its lease for the real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord. Pursuant to the Assignment and Assumption Agreement entered into with the landlord, Electrograph Systems assigned all right, title and interest in and to the lease for the remainder of the lease term, whereupon Electrograph Systems was released from any and all obligations and liabilities under the lease by the landlord in exchange for a payment of $550,000. As a result of the lease buy-out, the Company recorded a loss of approximately $666,000, including $116,000 for the write-down of capital improvements at this location. Interest and Other Income (Expense), net. Interest and other income (expense), net, increased by approximately $116,000 from an expense of approximately $70,000 for the three months ended April 30, 2004 to income of approximately $46,000 for the three months ended April 30, 2005. The amount for the three months ended April 30, 2004 included approximately $85,000 of interest expense related to the interest portion of the capital leases entered into by the Company in March 2003 offset by interest income of approximately $15,000. The amount for the three months ended April 30, 2005 included $84,000 of interest expense related to the interest portion of the capital leases and interest income of approximately $130,000 earned on the Company's cash investments which had higher average balances than during the prior year period. Income Tax Provision. Our effective tax rate was 42.4% for the three months ended April 30, 2005 and 40.0% for the three months ended April 30, 2004. Discontinued Operations. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations for the end-user information technology fulfillment and professional services business have been recorded as discontinued operations in the accompanying consolidated statements of income. The net income (loss) from discontinued operations was $0 and $(429,000) for the three months ended April 30, 2005 and 2004, respectively. 15 Nine Months Ended April 30, 2005 Compared to Nine Months Ended April 30, 2004 Revenue. Revenue decreased by $4.9 million or 4% to $128.1 million for the nine months ended April 30, 2005 from $132.9 million for the nine months ended April 30, 2004. The decrease in revenue is primarily a result of decreased sales of computer hardware to dealers and systems integrators. Such sales of computer hardware decreased by approximately 49% compared to last year as a result of the Company's inability to procure products at previous levels for this line of its business. The decrease in computer hardware sales was partially offset by an increase in sales of display technology solutions of approximately 3% compared to last year resulting from the increase in unit sales of display technology solutions, primarily large screen flat panel displays, partially offset by the ongoing decline in average selling prices. Gross Profit. Gross profit increased by $2.9 million or 22%, from $13.2 million for the nine months ended April 30, 2004 to $16.2 million for the nine months ended April 30, 2005 and as a percentage of revenue, gross profit increased from 10.0% for the nine months ended April 30, 2004 to 12.6% for the nine months ended April 30, 2005. The increase in gross profit percentage is primarily attributable to special product offerings received from manufacturers with higher margins, volume discounts received from manufacturers and sales of higher margin products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by approximately $2.6 million, or 27% from $9.7 million for the nine months ended April 30, 2004 to $12.3 million for the nine months ended April 30, 2005. The increase is principally due to an increase in salaries, commissions and other personnel costs of approximately $796,000, reflecting the increase in employee headcount and associated costs with respect to the continuing growth of the display technology business, $325,000 of charges related to obtaining a release from the rental obligation for the Company's leased property in New York City, increased legal and professional costs of approximately $736,000 primarily as a result of the Company entering into a definitive merger agreement and the increased legal costs associated with the adoption of the Company's 2005 Incentive Compensation Plan approved by our shareholders, increased sales personnel expenses of approximately $180,000 due to the increased participation in trade shows and increased rent expense of approximately $147,000. As a percentage of revenue, selling, general and administrative expenses increased from 7.3% for the nine months ended April 30, 2004 to 9.6% for the nine months ended April 30, 2005. Loss on Buy-Out of Capital Lease. Effective April 19, 2005 Electrograph Systems assigned its lease for the real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord. Pursuant to the Assignment and Assumption Agreement entered into with the landlord, Electrograph Systems assigned all right, title and interest in and to the lease for the remainder of the lease term, whereupon Electrograph Systems was released from any and all obligations and liabilities under the lease by the landlord in exchange for a payment of $550,000. As a result of the lease buy-out, the Company recorded a loss of approximately $666,000, including $116,000 for the write-down of capital improvements at this location. Interest and Other Income (Expense), net. Interest and other income (expense), net, increased by approximately $345,000 from an expense of approximately $166,000 for the nine months ended April 30, 2004 to income of approximately $179,000 for the nine months ended April 30, 2005. The amount for the nine months ended April 30, 2004 included approximately $258,000 of interest expense related to the interest portion of the capital leases entered into by the Company in March 2003 offset by interest income of approximately $92,000. The amount for the nine months ended April 30, 2005 included $252,000 of interest expense related to the interest portion of the capital leases and interest income of approximately $431,000 earned on the Company's cash investments which had higher average balances than during the prior year period. Income Tax Provision (Benefit). Our effective tax rate was 40.0% and 39.4% for the nine months ended April 30, 2005 and April 30, 2004, respectively. 16 Discontinued Operations. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations for the end-user information technology fulfillment and professional services business have been recorded as discontinued operations in the accompanying consolidated statements of income. The net income (loss) from discontinued operations was $597,000 and $(1.4) million for the nine months ended April 30, 2005 and 2004, respectively. The income in the 2005 period resulted from a recovery of accounts receivable related to the IT Business. Liquidity and Capital Resources Working Capital Our primary source of cash and cash equivalents have been internally generated working capital from profitable operations. The Company's working capital at April 30, 2005 and July 31, 2004 was approximately $39.3 million and $34.4 million, respectively. Cash Flows Operating activities for the nine months ended April 30, 2005 and 2004, resulted in an increase in cash and cash equivalents of approximately $3.2 million and $5.3 million, respectively. Continuing operations provided approximately $2.3 million of cash in the nine months ended April 30, 2005 primarily resulting from operating cash flows of $6.6 million principally derived from net income and the increase in accounts payable and accrued expenses exceeding an increase in accounts receivable and inventory of approximately $4.3 million. Discontinued operations provided cash of approximately $835,000 in the nine months ended April 30, 2005 primarily resulting from the collection of retained receivables net of payments of accounts payable of the IT Business. Our accounts receivable and accounts payable balances, as well as our inventory balances, can fluctuate significantly from one period to the next due to the receipt of large customer orders or payments or variations in product availability and vendor shipping patterns at any particular date. Investing activities for the nine months ended April 30, 2005 and 2004 used cash of approximately $190,000 and $760,000, respectively. These amounts consisted solely of additions to property and equipment. Financing activities for the nine months ended April 30, 2005 and 2004 provided cash of approximately $626,000 and $135,000, respectively. For the nine months ended April 30, 2005, this amount consisted of proceeds from the exercise of stock options of approximately $1.4 million partially offset by $180,000 of payments on capitalized lease obligations and a $550,000 payment to obtain a release from one of our capital lease obligations. For the nine months ended April 30, 2004 this amount consisted of proceeds from the exercise of stock options of approximately $284,000 partially offset by $149,000 of payments on capitalized lease obligations. Line of Credit We have available a line of credit with a financial institution in the aggregate amount of $15.0 million, which expires on January 31, 2008. At April 30, 2005, no amounts were outstanding under this line. The line of credit facility requires the Company to maintain certain financial ratios and covenants. At April 30, 2005, the Company was in compliance with all the financial ratios and covenants that it is required to maintain. Financial Commitments We believe that our current balances in cash and cash equivalents, expected cash flows from operations and available borrowings under the line of credit will be adequate to support current operating levels for the foreseeable future, specifically for at least the next twelve months. The only material commitments for capital expenditures are operating and capital leases for the Company's facilities and certain tangible property. Future capital requirements of the Company include those for the growth of working capital items such as accounts 17 receivable and inventory, the purchase of equipment, expansion of facilities, as well as the possible opening of new offices and potential acquisitions. As part of the sale to ePlus of the Company's end-user information technology fulfillment and professional services business in May 2004, ePlus, inc. entered into sublease and lease assignment agreements with the Company for up to a one year term with respect to certain of the Company's facilities. The Company and ePlus agreed to extend one sublease agreement for an additional two months for one of the Company's facilities. In addition, in August 2004 the Company entered into a sublease agreement with an unrelated third party for its office and warehouse space at 40 Marcus Boulevard, Hauppauge, N.Y. The terms of the sublease extend through February 2018 and cover substantially all of the Company's required payments under its lease, amounting to approximately $2.8 million. On April 11, 2005, the Company terminated its lease for the fifth floor in the building located at 469 Seventh Avenue, New York, NY. Pursuant to the Surrender Agreement with 469 Owners, LLC (the "Landlord"), successors in interest to First Willow, LLC, the lease terminated effective as of March 31, 2005 as compared to the prior termination date of October 31, 2007, resulting in a reduction of approximately $1.1 million in rental obligations and other payments otherwise due under the lease. The Surrender Agreement required the Company to pay an early termination fee of $325,000 to the Landlord which is included in selling, general and administrative expenses. Effective April 19, 2005 Electrograph Systems assigned its lease for the real property known as 40 Marcus Boulevard, Hauppauge, N.Y. to the landlord. Pursuant to the Assignment and Assumption Agreement entered into with the landlord, Electrograph Systems assigned all right, title and interest in and to the lease for the remainder of the lease term, whereupon Electrograph Systems was released from any and all obligations and liabilities under the lease by the landlord in exchange for a payment of $550,000. The lease buy-out resulted in a decrease of property, plant and equipment, net, of approximately $1,816,000 and a reduction of capital lease obligations of approximately $1,700,000. As a result of the lease buy-out the Company recorded a loss of approximately $666,000, including $116,000 for the write-down of capital improvements at this location. There are no other transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to affect liquidity or the availability of, or requirements for, capital resources. The following table represents the Company's financial commitments as of April 30, 2005 without taking into account any sublease rental income:

Less than 1 - 3 4 - 5 After Total 1 Year Years Years 5 Years ------------------------------------------------------------------------- (in thousands) Capital leases $76,~~811~~049 $~~260~~213 $~~1,036~~ 834 $~~932~~ 748 $54,~~583~~254 Operating leases 1,~~552~~869 ~~467~~404 1,~~085~~148 -317 - ----- ----- -------- ---- -------- Total $97,~~363~~918 $~~727~~617 $21,~~121~~982 $~~932~~1,065 $54,~~583~~254 ===== === ===== ===== =====

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. 18 Impact of Recently Issued Accounting Standards In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment" ("SFAS No. 123 (R)"). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the grant-date fair value of stock options or other equity instruments. SFAS 123 (R) will be effective for annual periods beginning after June 15, 2005. While the Company currently provides the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," on a quarterly basis (see "Note 5 - Accounting for Stock-Based Compensation"), it is currently evaluating the impact this statement will have on its consolidated financial statements. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company believes that this statement will have no effect on its consolidated financial statements. Inflation We do not believe that inflation has had a material effect on our operations. ITEM 3. 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 primarily of short-term 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 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company's management conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports. (b) Changes in Internal Controls There was no change in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19 PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders At our Annual Meeting of Shareholders held on March 10, 2005, the following proposals were adopted by the margins indicated: (1) Elect seven Directors to serve until the 2006 Annual Meeting of Shareholders;

(2) Vote on the approval of the Company's 2005 Incentive Compensation Plan.

(3) Vote on the ratification of the reappointment of KPMG LLP as independent auditors of the Company for the year ending July 31, 2005.

No other items were voted on at the Annual Meeting of Shareholders or during the quarter ended April 30, 2005. ITEM 5. OTHER INFORMATION. As of March 15, 2005, Electrograph Systems entered into a Lease Agreement with Harsch Investment Properties - Nevada, LLC for office and warehouse space at a building located at 470 Mirror Court, Suite 102-103 (the "Lease"). The Lease commenced on April 1, 2005 and terminates on July 31, 2010. The Company is a guarantor of Electrograph Systems' obligations under the Lease. As of May 11, 2005, Electrograph Systems and Harsch Investment Properties - Nevada, LLC entered into a first amendment to the Lease (the "First Amendment"). The First Amendment, among other things, increased the amount of space leased by Electrograph Systems from approximately 26,431 square feet to approximately 37,072 square feet, and also increased the amount of monthly base rent to be paid by Electrograph Systems by $5,465 per month for the period of June 2005 through April 2006, with additional increases thereafter. Both the Lease and the First Amendment are attached hereto as Exhibits 10.1 and 10.2 respectively. 20 ITEM 6. EXHIBITS Exhibits 10.1 - Lease Agreement, dated as of March 15, 2005, between Electrograph Systems, Inc. and Harsch Investment Properties - Nevada, LLC. 10.2 - First Amendment to Lease, dated as of May 11, 2005, between Electrograph Systems, Inc. and Harsch Investment Properties - Nevada, LLC. 31.1 - Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21 MANCHESTER TECHNOLOGIES, INC. Signatures 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, thereunto duly authorized. MANCHESTER TECHNOLOGIES, INC. (Registrant) DATE: June 10, 2005 /S/ Barry R. Steinberg ------------------------------- Barry R. Steinberg Chief Executive Officer DATE: June 10, 2005 /S/ Elan Yaish -------------------------------------------- Elan Yaish Vice President Finance, Chief Financial Officer and Assistant Secretary 22

Filing Compare · MANCHESTER TECHNOLOGIES INC