UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2004
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)
160 Oser Avenue
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(631) 951-8100
(Registrant's telephone number, including area code)
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 December 2, 2004 there were 8,296,334 outstanding shares of the
registrant's Common Stock.
Explanatory Note
Manchester Technologies, Inc. (the "Company") is filing this Amendment No.
1 to its Form 10-Q for the quarter ended October 31, 2004 to amend the Quarterly
Report on Form 10-Q for the quarter ended October 31, 2004 previously filed by
the Company (the "Original October 31, 2004 Form 10-Q"), in order to reflect the
Company's decision to exclude separate disclosure of cash flows pertaining to
discontinued operations in the three months ended October 31, 2004 cash flow
statement, presented in our Condensed Consolidated Statements of Cash Flows. The
reclassification of the three months ended October 31, 2004 cash flow statement
will have no impact on the statements of operations or the balance sheet of the
Company in any period presented.
Because of the changes to our Condensed Consolidated Statements of Cash
Flows, we are amending the Original October 31, 2004 Form 10-Q to:
o Revise Part I Item 1, Financial Statements. The revisions appear in:
- The Company's Condensed Consolidated Statements of Cash Flows for the
three months ended October 31, 2004.
- Note 2 to Condensed Consolidated Financial Statements in the last
paragraph of "Discontinued Operations."
o Revise Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations. We have revised the first paragraph in "Cash Flows" under
the heading "Liquidity and Capital Resources."
As part of this Amendment No. 1, the Company is also filing new
certifications from our Chief Executive Officer and Chief Financial Officer
(Exhibits 31.1, 31.2, and 32.1).
No attempt has been made in this Form 10-Q/A to update other disclosures
presented in the original Form 10-Q, except as described above. This Form 10-Q/A
does not reflect events occurring after the filing of the original Form 10-Q or
modify or update those disclosures, except as described above. Accordingly, this
Form 10-Q/A should be read in conjunction with our filings made with the
Securities and Exchange Commission subsequent to the filing of the original Form
10-Q, including any amendments to those filings.
2
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MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets as of
October 31, 2004 (unaudited) and July 31, 2004 4
Condensed Consolidated Statements of Income for the
Three Months Ended October 31, 2004 and
2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 2004 and
2003 (unaudited) 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 21
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
October 31, 2004 July 31, 2004
(Unaudited) -------------
Assets -----------
Current assets:
Cash and cash equivalents $20,933 $16,881
Accounts receivable, net of allowance for doubtful accounts
of $1,772 and $2,848, respectively 22,207 15,530
Inventory 12,922 20,301
Deferred income taxes 1,212 1,212
Prepaid taxes 630 916
Prepaid expenses and other current assets 1,196 1,266
----- -----
Total current assets 59,100 56,106
Property and equipment, net 9,699 9,890
Goodwill, net 3,735 3,735
Deferred income taxes 1,728 1,728
Other assets 97 183
------- -------
Total assets $74,359 $71,642
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $21,439 $21,492
Current portion of capital lease obligations 255 246
-------- --------
Total current liabilities 21,694 21,738
Deferred compensation payable 98 98
Capital lease obligations, net of current portion 7,615 7,683
----- -----
Total liabilities 29,407 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, 8,290 and 8,163 shares issued
and outstanding 83 82
Additional paid-in capital 20,077 19,597
Retained earnings 24,792 22,444
------ ------
Total shareholders' equity 44,952 42,123
------ ------
Total liabilities and shareholders' equity $74,359 $71,642
====== ======
See notes to unaudited condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three months ended
October 31, October 31,
2004 2003
---- ----
Revenue $46,881 $45,378
Cost of revenue 40,849 40,644
------ ------
Gross profit 6,032 4,734
Selling, general and administrative expenses 3,129 3,340
----- --------
Income from operations 2,903 1,394
Interest and other income (expense), net 15 (20)
----- ----------
Income from continuing operations
before income taxes 2,918 1,374
Income tax provision 1,167 530
----- -------
Income from continuing operations 1,751 844
----- ---
Discontinued operations
Income (loss) from operations of discontinued component 995 (855)
Income tax (provision) benefit (398) 322
----- ---
Income (loss) from discontinued operations 597 (533)
--- ----
Net income $2,348 $311
===== ===
Income per share from continuing operations
Basic $0.21 $0.11
===== =====
Diluted $0.21 $0.10
===== =====
Loss per share from discontinued operations
Basic $0.07 $(0.07)
==== ======
Diluted $0.07 $(0.07)
==== ======
Net income per share
Basic $0.29 $0.04
===== =====
Diluted $0.28 $0.04
===== =====
Weighted average shares outstanding
Basic 8,226 7,990
===== =====
Diluted 8,434 8,251
===== =====
See notes to unaudited condensed consolidated financial statements.
5
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
October 31, October 31,
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 2,348 $ 311
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 263 609
Provision for doubtful accounts 51 283
Equity based compensation expense 15 -
Tax benefits from exercise of stock options 29 -
Change in assets and liabilities:
Accounts receivable 6,728 1,163
Inventory 7,379 689
Prepaid taxes 286 300
Prepaid expenses and other current assets 70 280
Other assets 86 51
Accounts payable and accrued expenses (53) (1,142)
Deferred service contract revenue - 136
-------- -------
Net cash provided by operating activities 3,746 2,680
----- ------
Cash flows from investing activities:
Capital expenditures (72) (515)
---- -------
Net cash used in investing activities (72) (515)
---- -------
Cash flows from financing activities:
Payments on capital lease obligations (59) (51)
Proceeds from exercise of stock options 437 -
--- ------
Net cash provided by (used in) financing activities 378 (51)
--- -------
Net increase in cash and cash equivalents 4,052 2,114
Cash and cash equivalents at beginning of period 16,881 8,553
------ ------
Cash and cash equivalents at end of period $20,933 $10,667
====== =======
See notes to unaudited condensed consolidated financial statements.
6
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
(Unaudited)
1. Business and Basis of Presentation
Manchester Technologies, Inc. and its subsidiaries ("the Company") is a
distributor of display technology solutions and plasma display monitors 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 month period
ended October 31, 2004 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. Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc., 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 Manchester employees involved in the business. The transaction did not
include, and Manchester retained, the inventory and accounts receivable of the
IT Business.
In the fourth quarter of fiscal 2004, the Company accrued $1,016 of
employee severance and other employee costs associated with the discontinued IT
Business. As of October 31, 2004 approximately $150 of the employee severance
and other employee costs and $328 of amounts payable to ePlus, inc. for assumed
service contracts were included in accounts payable and accrued expenses which
will be paid in fiscal 2005, ending July 31, 2005.
7
In accordance with SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the results of operations from the end-user information
technology fulfillment and professional services business have been recorded as
discontinued operations in the accompanying consolidated statements of income.
The revenue from discontinued operations was $0 and $29,322 for the three months
ended October 31, 2004 and 2003, respectively. The pre-tax income (loss) from
operations of the discontinued component was $995 and $(855), for the three
months ended October 31, 2004 and 2003, respectively. The 2004 pre-tax income
resulted from recoveries of previously written off accounts receivable related
to the discontinued IT Business.
The presentation of the statement of operations for the three months
ended October 31, 2003 has been reclassified to reflect discontinued operations.
3. 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. Stock options representing approximately 50,000
and 542,500 shares for the three months ended October 31, 2004 and 2003,
respectively, have been excluded from the calculation of diluted net income per
share as they are antidilutive. 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 and the per share amounts below
represent income per share from continuing operations.
Three months ended
October 31, 2004 October 31, 2003
---------------- ----------------
Per share Per share
Shares amount Shares amount
Basic 8,226,000 $0.29 7,990,000 $0.11
==== ====
Effect of dilutive options 208,000 261,000
------- ----------
Diluted 8,434,000 $0.28 8,251,000 $0.10
========= ==== ========= =====
4. 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 (loss) and net income (loss) 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 (loss) and net income (loss) 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 income per share as if the Company had
8
measured the compensation cost for the Company's stock option programs under the
fair value method in each period presented.
Three Months Ended
October 31, 2004 October 31, 2003
---------------- ----------------
Net income, as reported $2,348 $ 311
Add: Stock based compensation expense
included in net income, net of related tax effects 9 -
Deduct: Total stock-based employee compensation
expense determined under fair value method for all
awards, net of related tax effects (125) (166)
----- -------
Net income - pro forma $2,232 $ 145
===== ======
Net income per share:
Basic - as reported $0.29 $ 0.04
==== =====
Basic - pro forma $0.27 $ 0.02
==== =====
Diluted - as reported $0.28 $ 0.04
==== ====
Diluted - pro forma $0.26 $ 0.02
==== ====
5. 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, on an annual basis, that the Company 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.
Accumulated amortization was approximately $647 at both October 31, 2004
and July 31, 2004. In accordance with SFAS No. 142, no goodwill amortization
expense was recorded for the quarters ended October 31, 2004 and 2003.
As of October 31, 2004 and July 31, 2004, there were no intangible assets,
other than goodwill.
9
6. Line of Credit
The Company has available a line of credit with a financial institution in
the aggregate amount of $15,000. At October 31, 2004, no amounts were
outstanding under this line, which expires on January 31, 2005. The line of
credit facility requires the Company to maintain certain financial ratios and
covenants. At October 31, 2004, the Company was not in compliance with all the
financial ratios and covenants that it is required to maintain. The Company
received a waiver of its requirements from its banks as of and for the period
ended October 31, 2004.
7. Subleases
As part of the sale to ePlus, inc. 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. 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.
8. Major Vendors
The Company's top three vendors accounted for approximately 16%, 15%, and
15% of total product purchases from continuing operations for the three months
ended October 31, 2004. The Company's top three vendors accounted for
approximately 25%, 14%, and 14% of total product purchases from continuing
operations for the three months ended October 31, 2003.
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. To
date, most of our revenues have been derived from product sales. We do not
develop or sell software products.
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
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 both existing customers, corporate
shoppers and others to find product specifications, compare products and check
prices 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, inc., 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, which
represented the excess of the net proceeds over a payable to ePlus, inc. 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 associated
with the discontinued IT Business:
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
==========
11
As of October 31, 2004 approximately $150,000 of the employee severance and
other employee costs and $328,000 of amounts payable to ePlus, inc. for assumed
service contracts were included in accounts payable and accrued expenses in the
accompanying balance sheet located elsewhere in this report, which will be paid
in fiscal 2005, ending July 31, 2005.
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning
of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, which statements are made pursuant to the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995.
Forward-looking statements are generally identifiable by the use of the words
"believes," "intends," "expects," "plans," "anticipates," or similar
expressions. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and in good faith,
assumed facts or bases almost always vary from the actual results, and
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we
express an expectation or belief as to future results, that expectation or
belief is expressed in good faith and is believed to have a reasonable basis. We
cannot assure you, however, that the statement of expectation or belief will
result or be achieved or accomplished, and readers are cautioned not to place
undue reliance on any forward-looking statements, which reflect our opinions
only as of the date hereof. All of our forward-looking statements are expressly
qualified by these cautionary statements and any other cautionary statements
that may accompany such forward-looking statements. We undertake no obligation
to revise or publicly release the results of any revision to any forward-looking
statements.
Our Industry is Subject to Numerous Potentially Adverse Business Conditions
The technology industry is characterized by a number of potentially adverse
business conditions, including pricing pressures, evolving distribution channels
and market consolidation. Heightened price competition among various
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
Our Success is Dependent, in Part, on Maintaining a Highly Skilled Sales Force
Our success depends in large part upon our ability to attract and retain
highly skilled sales representatives in a very competitive labor market. The
loss of a significant number of our existing sales representatives, or
difficulty in hiring or retaining additional sales representatives, may have a
material adverse effect on our business, results of operations and financial
condition.
Our Industry is Highly Competitive, with Other Competitors Having Greater
Resources
The technology industry is characterized by intense competition. We
directly compete with local, regional and national distributors as well as with
certain technology manufacturers that market through direct sales forces and/or
the Internet. The technology industry has recently experienced, and may continue
to experience, a significant amount of consolidation through mergers and
acquisitions. In the future, we may face further competition from new market
entrants and possible alliances between existing competitors. In addition,
certain suppliers and manufacturers have been, and additional suppliers and
manufacturers may choose, to market products directly to end users through a
direct sales force and/or the Internet rather than or in addition to channel
distribution. Some of our competitors have or may have, greater financial,
marketing and other resources, and
12
may offer a broader range of products than us. As a result, they may be able to
respond more quickly to new or emerging technologies or changes in customer
requirements, benefit from greater purchasing economies, offer more aggressive
hardware pricing or devote greater resources to the promotion of their products.
We may not be able to compete successfully in the future with these or other
current or potential competitors.
We Rely on Maintaining Good Relationships with Our Vendors, and Certain Products
We Sell May Be in Short Supply
Our business is dependent upon our relationships with major manufacturers
and distributors in the technology industry. Many aspects of our business are
affected by our relationships with major manufacturers, including product
availability, pricing and related terms. The increasing demand for display
technology solutions and ancillary equipment has resulted in significant product
shortages from time to time, because manufacturers have been unable to produce
sufficient quantities of certain products to meet demand. In addition, many
manufacturers have adopted "just in time" manufacturing principles that can
reduce the immediate availability of a wide range of products at any one time.
We cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations.
Certain manufacturers offer cooperative advertising and other promotional
programs to systems integrators, distributors and computer resellers. We rely on
these funds for many of our advertising and promotional campaigns. If
manufacturers reduce their level of support for these programs, or discontinue
them altogether, we would have to increase our advertising and promotion
spending, which may have a material adverse effect on our business, financial
condition and results of operations.
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our inability to sell products to computer
resellers and thereby obtain the desired volume discounts from manufacturers may
have a material adverse effect on our business, financial condition and results
of operations.
We Must Rapidly Respond to New Product Offerings and Manage Our Inventory
Carefully
The markets for our products are characterized by rapidly changing
technology and frequent introduction of new products. This may render many
existing products noncompetitive, less profitable or obsolete. Our continued
success will depend on our ability to keep pace with the technological
developments of new products and to address increasingly sophisticated customer
requirements. Our success will also depend upon our abilities to obtain these
new products from present or future manufacturers and vendors at reasonable
costs, to educate and train our employees as well as our customers with respect
to these new products and to integrate effectively and efficiently these new
products into our internal systems. We may not be successful in identifying,
developing and marketing product developments or enhancements in response to
these technological changes. Our failure to respond effectively to these
technological changes may have a material adverse effect on our business,
financial condition and results of operations.
Rapid product improvement and technological change characterize the
technology industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers and manufacturers provide price protection to us,
which is intended to reduce the risk of inventory devaluation due to price
reductions on current products. Certain of our suppliers also provide stock
balancing to us pursuant to which we are able to return unsold inventory to a
supplier or
13
manufacturer as a partial credit against payment for new products. There are
often restrictions on the dollar amount of inventory that we can return at any
one time. Price protection and stock balancing may not be available to us in the
future, and, even if available, these measures may not provide complete
protection against the risk of excess or obsolete inventories. Certain
manufacturers have reduced the period for which they provide price protection
and stock balancing rights. Although we maintain a sophisticated proprietary
inventory management system, we cannot assure you that we will continue to
successfully manage our existing and future inventory. Our failure to
successfully manage our current or future inventory may have a material adverse
effect on our business, financial condition and results of operations.
As a result of the rapid changes that are taking place in display
technologies, product life cycles are short. Accordingly, our product offerings
change constantly. Prices of products change frequently, with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The technology industry has experienced rapid declines
in average selling prices of display technology and computer hardware. In some
instances, we have been able to offset these price declines with increases in
units shipped. There can be no assurance that average selling prices will not
continue to decline or that we will be able to offset declines in average
selling prices with increases in units shipped.
We Are Highly Dependent on a Select Group of Senior Management
We are highly dependent upon the services of the members of our senior
management team. The loss of any member of the senior management team may have a
material adverse effect on our business.
We May, From Time to Time, Take Actions to Enhance Shareholder Value, Which
Actions May Not be Successful
The Company periodically considers methods of enhancing shareholder value,
including, without limitation, acquisitions, divestitures, business
combinations, and strategic partnering. There can be no assurance that we will
consummate any such transactions, be able to identify suitable candidates for
any such transactions or to negotiate successfully such transactions at a price
or on terms and conditions favorable to us and our shareholders. Acquisitions
may be of significant size and may include assets that are outside our
geographic territories or are ancillary to our core business strategy. In
addition, there can be no assurance that the divestiture of our IT Business or
any other action taken with the intent of enhancing shareholder value will
result in an increase in our revenues or earnings or otherwise increase
shareholder value.
Our Revenues and Operating Results Fluctuate From Quarter to Quarter
Our quarterly revenue and operating results have varied significantly in
the past and are expected to continue to do so in the future. Quarterly revenue
and operating results generally fluctuate as a result of the demand for our
products, the introduction of new hardware with improved features, changes in
the level of our operating expenses, competitive conditions and economic
conditions. As a result, we believe that period-to-period comparisons of our
operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not
necessarily indicative of results to be expected for a full fiscal year.
We Rely on the Continued Proper Functioning of our Information Technology
Systems
Our success is dependent in part on the accuracy, proper utilization and
continuing development of our information technology systems, including our
business application systems, Internet servers and telephony system. The quality
and our utilization of the information generated by our information technology
systems affects, among other things, our ability to conduct business with our
customers, manage our inventory and accounts receivable, purchase, sell, ship
and invoice our products efficiently and on a timely basis and maintain
cost-efficient operations. While we have taken steps to protect our information
technology systems from a variety of threats, including computer viruses and
malicious hackers, we cannot guarantee that such steps will be effective. If
there is a disruption to or an infiltration of our information technology
systems, it could significantly harm our business and results of operations.
14
This discussion of uncertainties is by no means exhaustive, but is designed
to highlight important factors that may impact the Company's outlook and
results.
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 the accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than our historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory. 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.
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.
15
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 revenue.
Percentage of Revenue for the
Three Months Ended
October 31,
2004 2003
---- ----
Revenue 100.0% 100.0%
Cost of revenue 87.1 89.6
---- ----
Gross profit 12.9 10.4
Selling, general and administrative expenses 6.7 7.4
--- ---
Income from operations 6.2 3.1
Interest and other income (expense), net 0.0 0.0
--- ---
Income from continuing operations
before income taxes 6.2 3.0
Income tax provision 2.5 1.2
--- ---
Income from continuing operations 3.7 1.9
--- ---
Discontinued operations
Income (loss) from operations of discontinued
component 2.1 (1.9)
Income tax (provision) benefit (0.8) 0.7
------ ---
Income (loss) on discontinued operations 1.3 (1.2)
--- -----
Net income 5.0% 0.7%
==== ====
Three Months Ended October 31, 2004 Compared with Three Months Ended October 31,
2003
Revenue. Revenue increased by $1.5 million or 3% to $46.9 million for the
three months ended October 31, 2004 from $45.4 million for the three months
ended October 31, 2003. The increase in revenue is primarily a result of
increased sales of display technology solutions of approximately 12% as a result
of an increase in unit sales partially offset by a decrease in average selling
prices of large screen flat panel displays. In addition, sales of computer
hardware to dealers and systems integrators decreased by approximately 41%
compared to last year as a result of the Company's inability to procure products
for this line of its business.
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 27%, from
$4.7 million for the three months ended October 31, 2003 to $6.0 million for the
three months ended October 31, 2004 and as a percentage of revenue, gross profit
increased from 10.4% for the three months ended October
16
31, 2003 to 12.9% for the three months ended October 31, 2004. The increase in
gross profit percentage is primarily attributable to special product offerings
received from manufacturers with higher margins due to volume discounts and
other favorable pricing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $211,000, or 6% from $3.3 million for the
three months ended October 31, 2003 to $3.1 million for the three months ended
October 31, 2004. The decrease is principally due to decreased bad debt expense
of approximately $400,000 as compared to the three months ended October 31, 2003
which period included an expense of $370,000 due to one customer, partially
offset by an increase in salaries and other personnel costs of approximately
$196,000, reflecting the increase in employee headcount and associated costs
with respect to the continuing growth of the display technology business. As a
percentage of revenue, selling, general and administrative expenses decreased
from 7.4% for the three months ended October 31, 2003 to 6.7% for the three
months ended October 31, 2004.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by approximately $35,000 from an expense of
approximately $20,000 for the three months ended October 31, 2003 to income of
approximately $15,000 for the three months ended October 31, 2004. The amount
for the three months ended October 31, 2003 included approximately $88,000 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
$68,000 earned on the Company's cash investments. The amount for the three
months ended October 31, 2004 included $151,000 of interest expense related to
the interest portion of the capital leases and interest income of approximately
$166,000 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 40.0% for the three months
ended October 31, 2004 and 38.6% for the three months ended October 31, 2003.
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 $(533,000) for the three months ended October 31, 2004 and 2003,
respectively. The income in the 2004 period resulted from a recovery of accounts
receivable related to the IT Business. The statement of operations for the
period ended October 31, 2003 has been reclassified to present discontinued
operations.
Liquidity and Capital Resources
Working Capital
Our primary source of cash and cash equivalents has been internally
generated working capital from profitable operations. The Company's working
capital at October 31, 2004 and July 31, 2004 was approximately $37.4 million
and $34.4 million, respectively.
Cash Flows
Operating activities for the three months ended October 31, 2004 and 2003,
provided cash of approximately $3.7 million and $2.7 million, respectively. 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. The increase
in accounts receivable during the 2004 period of approximately $6.7 million and
the decrease in inventory of approximately $7.4 million in the period, is a
result of the increase in sales in the period, as well as no additional
inventory purchases related to special product offerings received from
manufacturers during the period which had occurred and increased inventory
balances during fiscal 2004. During the three months ended October 31, 2004, the
Company collected $1.6 million of receivables related to the Sold IT Business.
17
Investing activities for the three months ended October 31, 2004 and 2003
used cash of approximately $72,000 and $515,000, respectively. These amounts
consisted solely of additions to property and equipment.
Financing activities for the three months ended October 31, 2004 and 2003
provided (used) cash of approximately $378,000 and $(51,000), respectively. For
the three months ended October 31, 2004, this amount consisted of proceeds from
the exercise of stock options of approximately $437,000 partially offset by
$59,000 of payments on capitalized lease obligations. For the three months ended
October 31, 2003 this amount consisted solely 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. At October 31, 2004, no amounts were
outstanding under this line which expires on January 31, 2005. The line of
credit facility requires the Company to maintain certain financial ratios and
covenants. At October 31, 2004, the Company was not in compliance with all the
financial ratios and covenants that it is required to maintain in connection
with its line of credit. The Company received a waiver waiving its requirements
from its bank for the period ended October 31, 2004.
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 through at least the end of fiscal 2005 which ends on July 31,
2005. We currently have no material commitments for capital expenditures, other
than operating and capital leases, that the Company has committed to for its
facilities and certain tangible property. Future capital requirements of the
Company include those for the growth of working capital items such as accounts
receivable and inventory, the purchase of equipment, expansion of facilities, as
well as the possible opening of new offices and potential acquisitions.
As part of the sale to ePlus, inc. 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. 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. 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
October 31, 2004 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 $7,870 $255 $1,003 $905 $5,707
Operating leases 1,644 417 1,227 - -
----- ----- ----- --- --------
Total $9,514 $672 $2,230 $905 $5,707
===== === ===== === =====
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
18
shareholders, and there can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated investment.
Impact of Recently Issued Accounting Standards
The FASB recently issued a proposed accounting standard that would require
stock-based employee compensation to be recorded as a charge to earnings
effective with the first annual or interim period beginning after June 15, 2004.
The Company will continue to monitor the progress of the issuance of this
standard as well as evaluate the impact on the Company.
Inflation
We do not believe that inflation has had a material effect on our
operations.
19
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 of U.S. Government and
Government Agency Securities, Municipal Bonds and Corporate Fixed Income
securities. Neither a 100 basis point increase nor decrease from current
interest rates would have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 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.
20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
31.1 - Certification by Barry R. Steinberg, Chief Executive Officer,
Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by Elan Yaish, Chief Financial Officer, Pursuant to 18
U.S. C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 - Certification by Barry R. Steinberg, Chief Executive Officer and
Elan Yaish, Chief Financial Officer, Pursuant to 18 U.S. C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
1. Form 8-K/A filed August 11, 2004 disclosing pro forma financial
information omitted from the Current Report on Form 8-K filed on June
10, 2004 regarding the sale of the Company's IT Business to ePlus,
inc.
2. Form 8-K filed October 29, 2004 disclosing Press Release dated October
28, 2004 reporting earnings for the fourth quarter and fiscal year
ended July 31, 2004.
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: July 5, 2005 /S/ Barry R. Steinberg
----------------------------------------
Barry R. Steinberg
Chief Executive Officer
DATE: July 5, 2004 /S/ Elan Yaish
----------------------------------------
Elan Yaish
Vice President Finance
and Chief Financial Officer
22