MANCHESTER TECHNOLOGIES, INC.
50 Marcus Boulevard
Hauppauge, New York 11788
June 16, 2005
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0306
Re: Manchester Technologies, Inc. Form 10-K for the fiscal year ended July
31, 2004 and Forms 10-Q for the fiscal quarters ended October 31, 2004
and January 31, 2005 (File No. 000-21695)
Ladies and Gentlemen:
We have received a copy of your letter dated June 7, 2005 (the "Staff
Letter") conveying the comments of the staff of the Securities and Exchange
Commission (the "Commission") on the above-referenced periodic reports. The
following sets forth the Staff comments and the response of Manchester
Technologies, Inc. ("Manchester", the "Company" or "we") with respect to each of
the items.
Form 10-K
Report of Independent Registered Public Accounting Firm, page F-2
1. It appears your independent registered public accounting firm has not signed
the accountant's report. Tell us how you considered the requirements of Article
2.02 of Regulation S-X to include a signed report from the Company's independent
accounting firm.
The record copy of the Form 10-K for fiscal 2004 maintained in the
Company's files includes an accountant's report signed by its independent
registered public accounting firm. The conformed signature of such firm was
inadvertently omitted from the edgarized version of the Form 10-K. We will file
an amendment on Form 10-K/A to add the conformed signature of our independent
registered public accounting firm to the accountant's report.
Consolidated Statements of Cash Flows, page F-6
2. We note in your statements of cash flows you include separate line items
within operating activities for losses from discontinued operations and net cash
provided by discontinued operations for the year ended July 31, 2004. However,
we also note you have not included a similar line item for discontinued
operations for each of the years ended July 31, 2003 and 2002. Please tell us
how you considered footnote 10 of SFAS 95 in determining your presentation for
discontinued operations in your 10-K and subsequent 10-Q's. Also, if you intend
to maintain the presentation of separate cash flow information
Securities and Exchange Commission
June 16, 2005
for discontinued operations, your statements of cash flows should separately
disclose cash flows from investing and financing activities related to
discontinued operations. Additionally, your disclosure of operating cash flows
should show all components of operating cash flow related to discontinued
operations rather than the net operating cash flows. Please tell us how you
intend to comply with these reporting requirements.
The Company reviewed paragraph 43 of SFAS 144, "Accounting For the
Impairment or Disposal of Long-lived Assets", which requires a company in a
period in which a component of an entity has been disposed of or classified as
held for sale to reclassify only its income statements for prior periods to
report the results of operations of the component as discontinued operations.
The Company also noted that under paragraph 46 of SFAS 144 the reclassification
of the balance sheet is done for the current year but is not required for prior
years. In fact, prevalent practice is to not restate the balance sheet to
present assets held for sale as a separate line item in periods prior to meeting
the criteria of paragraph 30 of SFAS 144. The Company also reviewed footnote 10
of SFAS 95, "Statement of Cash Flows", which states that an enterprise that
nevertheless chooses to report separately operating cash flows of discontinued
operations shall do so consistently for all periods affected, which may include
periods long after sale or liquidation of the operation. The periods affected
commenced with the third quarter of fiscal 2004 (nine months ended April 30,
2004) through the third quarter of fiscal 2005 (nine months ended April 30,
2005). In the third quarter of fiscal 2004 the Company made a commitment to
dispose of the sold IT Business and classified the related assets and
liabilities as held for sale. The sale of that business was consummated on May
28, 2004 during the Company's fourth quarter of fiscal 2004. Based on a review
of this literature and the facts and circumstances related to the transaction,
the Company reflected in its statements of cash flows separate line items within
operating activities for the results of discontinued operations and cash
provided from discontinued operations for the nine months ended April 30, 2004,
the year ended July 31, 2004 and, in the subsequent Form 10-Q's, for the periods
ending October 31, 2004 and January 31, 2005, which were all the periods
affected by the discontinued operations.
Given that a cash flow statement using the indirect method presents changes
in balance sheet accounts, it could be viewed as being "part balance sheet" and
"part income statement" related. The Company believes that footnote 10 of SFAS
95 in conjunction with the balance sheet guidance in paragraph 46 of SFAS 144
does not require the Company to reclassify its prior period statements of cash
flows for the previously reported years ended July 31, 2003 and 2002.
We agree that separate disclosure of cash flows for investing and financing
activities related to discontinued operations should be presented for the
periods in which reclassifications have been made. However, for all the periods
for which separate cash flow information is presented for discontinued
operations, the Company had no financing activities related to discontinued
operations and the only investing activity related to discontinued operations
was the $3,555,000 net proceeds from the sale of the discontinued operations,
which was separately disclosed in the statement of cash flows on page F-6 of the
fiscal 2004 Form 10-K.
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Securities and Exchange Commission
June 16, 2005
Based on the Company's understanding of footnote 10 of SFAS 95, the
requirement is to report separately operating cash flows from discontinued
operations. There does not appear to be a financial statement requirement to
separately disclose each of the components of operating cash flows related to
discontinued operations. However, the Company has disclosed the primary
components of the cash flows from discontinued operations for each period in the
"Liquidity and Capital Resources" section of Management's Discussion and
Analysis. On page 13 of the Form 10-K for fiscal 2004 it states that
"Discontinued operations provided cash of approximately $8.9 million in fiscal
2004 primarily resulting from the collection of receivables and sale of retained
inventory subsequent to the sale of the IT Business. Similarly, on page 16 and
15 of the Form 10-Q for the three and six months ended October 31, 2004 and
January 31, 2005, respectively, it states that "Discontinued operations provided
cash of approximately $737,000 and $718,000 in the three and six months ended
October 31, 2004 and January 31, 2005, respectively, primarily resulting from
the collection of retained receivables net of payments of accounts payable of
the IT Business". As an example, the underlying amounts for the six months ended
January 31, 2005 were cash inflows from the collection of receivables of the
sold IT Business of $3,004,000 less the cash outflows for the payment of IT
Business payables of $2,286,000, which resulted in the $718,000 net cash flows
from discontinued operations. Therefore, the Company believes that its
disclosures are appropriate and no changes are required.
Note 1. Operations and Summary of Significant Accounting Policies
(d) Revenue Recognition, page F-7
3. We note on page 4 that you earn revenue as a result of fees received for an
extended warranty program in which the warranty is provided by a third party
warranty provider. Please tell us whether you record revenue earned from these
sales on a gross or net basis and provide the reasons for your conclusions.
Refer to EITF 99-19.
The Company's primary business is the distribution of display technology
solutions, plasma display monitors and computer hardware, which comprise
substantially all of the Company's revenues. As a minor component of the
Company's business, it also offers its customers related extended warranties.
The Company commenced distributing the extended warranties described on page 4
of the Form 10-K in fiscal 2002. The revenue earned from warranty sales for each
year presented was insignificant and amounted to approximately $13,000, $663,000
and $553,000 for fiscal 2002, 2003 and 2004, respectively, which represented
less than 0.1%, 0.4% and 0.3% of total revenues for each year, respectively. The
related gross profit was approximately $4,000, $115,000 and $141,000 for fiscal
2002, 2003 and 2004, respectively, which represents less than 1% of gross profit
for each of the years presented.
All plasma and display products distributed by the Company include at least
a one year warranty provided by the equipment manufacturer. The Company will
distribute an extended warranty product, provided by a third party warranty
provider, ranging from an additional one to four years thereafter. The Company
pays the warranty vendor for the cost of the extended warranty based on normal
payable terms (i.e., net 30 days). When the
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Securities and Exchange Commission
June 16, 2005
Company sells an extended warranty, it provides warranty registration services
for the customer and thereafter any obligations are those of the warranty
provider. The Company registers the warranty at the time it delivers the
warranty and related product to the customer. Therefore, the Company earns and
recognizes the revenue for the warranty sale after it has performed the
registration services (which occurs at the time the equipment is shipped) and
has no further performance obligations.
The Company records the revenue generated from distributing extended
warranties on a gross basis. This conclusion was based on a review of EITF 99-19
and the following facts and circumstances:
-- The Company has latitude in establishing prices for the extended
warranties it offers. Within economic constraints, the Company establishes the
selling price of the extended warranty. The Company does not earn a fixed dollar
amount per transaction nor does it earn a stated percentage of the amount billed
the customer. The Company does not earn a commission or fee. The selling price
established solely by the Company determines the Company's gross profit on each
sale of an extended warranty.
--The Company provides a fulfillment service to the customer by completing
the required registration process for the warranty for the customer.
--The Company has discretion in supplier selection and can and does
purchase the extended warranty from alternative warranty vendors unrelated to
the equipment manufacturers.
--The Company assumes the credit risk for the amount billed the customer.
The Company has full responsibility of collecting the selling price from the
customer and the Company must pay the warranty vendor for the extended warranty
purchased regardless of whether the customer pays the Company.
--The Company considered that the warranty vendor performs the warranty
services over the life of the service contract. However, the arrangement
resulting in revenue for the Company is the distribution of the extended
warranty to the customer and, as part of the arrangement, the Company performs
the fulfillment service of registering the warranty for the customer.
Based on evaluating the above indicators, in the aggregate, the Company
believes that gross reporting of the revenue from extended warranty sales is
appropriate.
4. Additionally, please clarify the nature and terms of the service you provide
in these arrangements and when you earn and recognize the related revenues.
Furthermore, tell us the amount of revenue earned from these warranty sales for
each year presented.
We refer you to our response to question number 3 above.
We also acknowledge that:
(i) the Company is responsible for the adequacy of the disclosure in this
filing;
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Securities and Exchange Commission
June 16, 2005
(ii) staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect
to this filing; and
(iii) the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions regarding our responses, please contact the
undersigned.
Very truly yours,
/s/ Seth Collins
Seth Collins
President, Manchester Technologies, Inc.
cc: Craig Wilson
Patrick Gilmore
Kathleen Collins
Securities and Exchange Commission
Alan Pearce, Esq.
Bryan Cave LLP
Barry R. Steinberg
Manchester Technologies, Inc.
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