12
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 OCTOBER 31, 2001
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) 435-1199
(Registrant's telephone number, including area code)
Manchester Equipment Co., Inc.
(Former name or former address, 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 the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
There were 7,990,215 outstanding shares of COMMON STOCK at December 10,
2001.
MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets
October 31, 2001 (unaudited) and July 31, 2001 3
Condensed Consolidated Statements of Income
Three months ended October 31, 2001 and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 2001 and 2000 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 15
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, 2001 July 31,2001
(Unaudited) ------------
------------
Assets:
Cash and cash equivalents $ 8,434 $14,493
Accounts receivable, net 27,010 25,135
Inventory 17,748 7,546
Deferred income taxes 459 459
Prepaid income taxes 306 43
Prepaid expenses and other current assets 313 362
--- ---
Total current assets 54,270 48,038
Property and equipment, net 6,203 6,300
Goodwill, net 8,020 6,148
Deferred income taxes 842 842
Other assets 458 455
--- ---
$69,793 $61,783
====== ======
Liabilities:
Accounts payable and accrued expenses $23,385 $15,259
Deferred service contract revenue 582 807
--- ---
Total current liabilities 23,967 16,066
Deferred compensation payable 162 162
--- ---
Total liabilities 24,129 16,228
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 7,990 issued and outstanding 80 80
Additional paid-in capital 18,942 18,942
Deferred compensation (33) (38)
Retained earnings 26,675 26,571
------ ------
Total shareholders' equity 45,664 45,555
------ ------
$69,793 $61,783
====== ======
See notes to 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 October 31,
2001 2000
(Unaudited)
-----------
Revenue
Products $58,872 $79,515
Services 2,694 1,627
----- -----
61,566 81,142
------ ------
Cost of revenue
Products 51,261 70,281
Services 1,811 1,104
----- -----
53,072 71,385
------ ------
Gross profit 8,494 9,757
Selling, general and administrative expenses 8,395 8,885
----- -----
Income from operations 99 872
Interest and investment income 75 196
-- ---
Income before income taxes 174 1,068
Provision for income taxes 70 430
-- ---
Net income $104 $638
==== ====
Net income per share
Basic $0.01 $0.08
===== =====
Diluted $0.01 $0.08
===== =====
Weighted average shares outstanding
Basic 7,990 8,133
===== =====
Diluted 7,990 8,222
===== =====
See notes to condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the three months
ended October 31,
2001 2000
---- ----
(Unaudited)
-----------
Cash flows from operating activities:
Net income $104 $638
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 509 543
Allowance for doubtful accounts 290 117
Non cash compensation and commission expense - 11
Change in assets and liabilities (net of the effects
of acquisition:
(Increase) decrease in accounts receivable (1,915) 46
Increase in inventory (10,065) (2,090)
(Increase) decrease in prepaid income taxes (263) 552
Increase in prepaid expenses and
other current assets 49 125
(Increase) decrease in other assets (3) 20
Increase (decrease) in accounts payable and
accrued expenses 7,733 (5,751)
Increase (decrease) in deferred service contract revenue (225) (71)
---- ---
Net cash used in operating activities (3,786) (5,860)
------ -------
Cash flows from investing activities:
Capital expenditures (343) (207)
Payment for acquisition, net of cash acquired (1,454) -
------ -----
Net cash used by investing activities (1,797) (207)
------ ---
Cash flows from financing activities:
Payments on notes payable - bank (433) -
Payments on notes payable - other (43) (7)
Purchase and retirement of common stock - (574)
Issuance of common stock upon exercise of options - 6
---- ----
Net cash used in financing activities (476) (575)
---- ---
Net decrease in cash and cash equivalents (6,059) (6,642)
Cash and cash equivalents at beginning of period 14,493 16,156
------ ------
Cash and cash equivalents at end of period $8,434 $9,514
===== =====
See notes to condensed consolidated financial statements.
5
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands except share and per share data)
1. Organization and Basis of Presentation
Manchester Technologies, Inc., formerly Manchester Equipment Co., Inc.,
("Manchester," "we," "us," or the "Company") is a single-source solutions
provider specializing in hardware and software procurement, custom networking,
storage, enterprise and Internet solutions. Manchester engineers provide answers
to companies' MIS needs by combining comprehensive analysis, design and
integration services with a complete line of competitively priced products and
peripherals from the industry's leading vendors.
Sales of hardware, software and networking products comprise the majority
of the Company's revenue. The Company has entered into agreements with certain
suppliers and manufacturers that may provide the Company favorable pricing and
price protection in the event a vendor reduces its prices.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting of only
normal and recurring accruals) necessary to present fairly the financial
position of the Company as of October 31, 2001 and the results of operations for
the three months ended October 31, 2001 and 2000 and cash flows for the three
months ended October 31, 2001 and 2000. Although the Company believes that the
disclosures herein are adequate to make the information not misleading, these
financial statements should be read in conjunction with the audited financial
statements and the notes thereto for the year ended July 31, 2001, included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
2. 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
and warrants, 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 and warrants
representing 934,000 and 210,000 shares for the three months ended October 31,
2001 and 2000, 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 as reported.
(shares in thousands)
Three months ended October 31,
2001 2000
---- ----
Per share Per share
Shares amount Shares amount
------ ------ ------ ------
Basic 7,990 $0.01 8,133 $0.08
==== =====
Effect of dilutive options - 89
------ --
Diluted 7,990 $0.01 8,222 $0.08
===== ==== ===== =====
3. Acquisition of Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan Consulting Group, Inc. ("Donovan") a Delaware corporation headquartered
in Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless
6
LAN solutions to customers nationwide. The acquisition, which has been accounted
for as a purchase, consisted of a cash payment of $1,500 plus potential future
contingent payments. Contingent payments of up to $1,000 may be payable on each
of November 2, 2002 and November 2, 2003 based upon Donovan achieving certain
agreed-upon increases in revenue and pre-tax earnings. In connection with the
acquisition, the Company assumed approximately $435 of bank debt and $43 of
other debt, which were subsequently repaid. Donovan was acquired in order to
strengthen the Company's position in the wireless LAN arena. Donovan will allow
the Company to offer total solutions including state of the art products as well
as the services necessary to have those products operate optimally.
Operating results of Donovan are included in the consolidated statement of
income from the acquisition date. The estimated fair value of tangible assets
and liabilities acquired was $497 and $869, respectively. The excess of the
aggregate purchase price over the estimated fair value of the tangible net
assets acquired was approximately $1,872. The factors that contributed to the
determination of the purchase price and the resulting goodwill include the
significant growth expected in this area due to the combination of the Company's
long history of strong customer relationships, financial strength and stability
coupled with Donovan's product offerings and highly skilled technical staff. The
$1,872 will not be amortized; however, it will be subject to impairment testing
in accordance with Statement No. 142, "Goodwill and Other Intangible Assets."
The presentation of supplemental pro forma financial information is deemed
immaterial.
Acquisition of e.Track Solutions, Inc.
On November 9, 2001, the Company acquired all of the outstanding stock of
e.Track Solutions, Inc. ("e.Track"), a New York Corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to customers
nationwide. The acquisition, which will be accounted for as a purchase,
consisted of cash payments of $290,000 (including debt assumed and subsequently
repaid). e.Track was acquired in order to allow the Company to offer our
customers customized software, solutions along with the products and services
that we have traditionally offered.
Operating results of e.Track will be included in the consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116 and $192, respectively. The
excess of aggregate purchase price over the estimated fair value of the tangible
net assets acquired was $276. The factors that contributed to the determination
of the purchase price and the resulting goodwill include the expectation that
the combination of e.Track's highly skilled technical staff, coupled with the
Company's financial strength and customer base will result in significant growth
at e.Track going forward. The $276 will not be amortized; however, it will be
subject to impairment testing in accordance with Statement No. 142, "Goodwill
and Other Intangible Assets."
4. Statement of Cash Flow Information
Supplemental disclosure of cash flow information:
Three months ended October 31,
2001 2000
(in thousands)
--------------
Cash paid for income taxes $333 $62
==== ===
7
5. Accounting for Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported apart
from goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provision of SFAS No. 142.
This pronouncement also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 121.
The Company has adopted the provisions of SFAS Nos. 141 and 142 as of
August 1, 2001. The Company has evaluated its existing goodwill that was
acquired in prior purchase business combinations and has determined that an
adjustment or reclassification to intangible assets at August 1, 2001 was not
required in order to conform to the new criteria in SFAS No. 141 for recognition
apart from goodwill.
The Company will be required to test goodwill for impairment in accordance
with the provisions of SFAS No. 142 by January 31, 2002. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle as of August 1, 2001. Because of the
extensive effort needed to comply with adopting SFAS No. 142, it is not
practicable to reasonably estimate whether the Company will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle.
Goodwill amortization for the three months ended October 31, 2000 was
$102,000. The following table shows the results of operations as if SFAS No. 141
was applied to prior periods:
For the three months
ended October 31,
2001 2000
---- ----
Net income as reported $104 $638
Add back: Goodwill amortization - 102
---- ---
Adjusted net income $104 $740
=== ===
Income per share - Basic
Net income, as reported $0.01 $0.08
Goodwill amortization - 0.01
----- ----
Adjusted net income $0.01 $0.09
==== ====
Income per share - Diluted
Net income, as reported $0.01 $0.08
Goodwill amortization - 0.01
--- ----
Adjusted net income $0.01 $0.09
==== ====
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations of the Company should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q and with the Company's Annual Report on Form 10-K.
This discussion and analysis contains certain forward-looking statements within
the meaning of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from the results anticipated in those forward-looking statements.
These risks and uncertainties include, but are not limited to, those set forth
below, those set forth in the Company's Annual Report on Form 10-K for the year
ended July 31, 2001, and those set forth in the Company's other filings from
time to time with the Securities and Exchange Commission.
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions, customized to their information systems needs, by
integrating analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of our revenues have been derived from product sales. We generally do not
develop or sell software products. However, certain computer hardware products
sold by us are loaded with prepackaged software products.
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a decline in the rate of growth in sales of
personal computers. Heightened price competition among various hardware
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.
An integral part of our strategy is to increase our value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires us, among
other things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We cannot
predict whether we will be successful in increasing our focus on providing
value-added services, and the failure to do so may have a material adverse
effect on our business, results of operations and financial condition.
Our strategy also includes expanding our presence in the New York
metropolitan area by increasing our sales and service capabilities in our New
York City office and enlarging our sales, service and training capabilities at
our Long Island headquarters, as well as expanding geographically into growing
business centers in the eastern half of the United States. We cannot assure you
that the expansion of our New York metropolitan area operations will increase
profits generated by such operations, that the opening of new offices will prove
profitable, or that these expansion plans will not substantially increase future
capital expenditures or other expenditures. The failure of this component of our
strategy may materially adversely affect our business, results of operations and
financial condition.
To date, our success has been based primarily upon sales in the New
York Metropolitan area. Our strategy, encompassing the expansion of service
offerings, the expansion of existing offices and the establishment of new
regional offices, has challenged and will continue to challenge our senior
management and infrastructure. We cannot predict our ability to respond to these
challenges. If we fail to effectively manage our planned growth, there may be a
material adverse effect on our business, results of operations and financial
condition.
9
On September 11, 2001, the World Trade Center in New York City and the
Pentagon in Washington, D.C. were the subject of terrorists attacks. A
significant part of our business is generated from our New York City and
Baltimore/Washington, D.C. offices and revenues for the month of September were
adversely impacted with declines in orders and shipments. We cannot predict the
impact that these or potential future attacks may have on our business, results
of operations and financial condition.
In addition, the success of our strategy depends in large part upon our
ability to attract and retain highly skilled technical personnel and sales
representatives, including independent sales representatives, in a very
competitive labor market. Our ability to grow our service offerings has been
somewhat limited by a shortage of qualified personnel, and we cannot assure you
that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives, difficulty in hiring or retaining additional
technical personnel or sales representatives, or reclassification of our sales
representatives as employees may have a material adverse effect on our business,
results of operations and financial condition.
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. Moreover, additional suppliers and manufacturers may choose to
market products directly to end users through a direct sales force and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration services, directly to end
users. Some of our competitors have or may have, greater financial, marketing
and other resources, and may offer a broader range of products and services,
than us. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services. We may
not be able to compete successfully in the future with these or other current or
potential competitors.
Our business is dependent upon our relationships with major manufacturers
and distributors in the computer industry. Many aspects of our business are
affected by our relationships with major manufacturers, including product
availability, pricing and related terms, and reseller authorizations. The
increasing demand for personal computers 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. We
cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations. On September 4, 2001, the
Hewlett-Packard Company and Compaq Computer Corporation announced their
intention to merge. Manchester sells the products of both companies and we
believe that we have strong relationships with both companies. While we do not
believe that there will be a material adverse effect on our business, financial
condition and results of operations as a result of this merger, there can be no
assurance that such a material adverse effect will not occur.
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. We rely on these funds for many of our advertising and
promotional campaigns. In recent years, manufacturers have generally reduced
their level of support with respect to these programs, which has required us to
increase spending of our own funds to obtain the same level of advertising and
promotion. If manufacturers continue to reduce their level of support for these
programs, or discontinue them altogether, we would have to further increase our
advertising and promotion spending, which may have a material adverse effect on
our business, financial condition and results of operations.
10
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our sales to resellers have been made at profit
margins generally less favorable than our sales directly to commercial
customers. Our inability to sell products to computer resellers and thereby
obtain the desired volume discounts from manufacturers or to expand our sales to
commercial customers sufficiently to offset our need to rely on sales to
computer resellers may have a material adverse effect on our business, financial
condition and results of operations.
The markets for our products and services are characterized by rapidly
changing technology and frequent introduction of new hardware and software
products and services. This may render many existing products and services
noncompetitive, less profitable or obsolete. Our continued success will depend
on our ability to keep pace with the technological developments of new products
and services and to address increasingly sophisticated customer requirements.
Our success will also depend upon our abilities to address the technical
requirements of our customers arising from new generations of computer
technologies, to obtain these new products from present or future suppliers and
vendors at reasonable costs, to educate and train our employees as well as our
customers with respect to these new products or services and to integrate
effectively and efficiently these new products into both our internal systems
and systems developed for our customers. We may not be successful in
identifying, developing and marketing product and service developments or
enhancements in response to these technological changes. Our failure to respond
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we cannot
assure you that we will continue to successfully manage our existing and future
inventory. Our failure to successfully manage our current or future inventory
may have a material adverse effect on our business, financial conditions and
results of operations.
Our strategy envisions that part of our future growth will come from
acquisitions consistent with our strategy. There can be no assurance that we
will be able to identify suitable acquisition candidates and, once identified,
to negotiate successfully their acquisition at a price or on terms and
conditions favorable to us, or to integrate the operations of such acquired
businesses with our operations. Certain of these acquisitions may be of
significant size and may include assets that are outside our geographic
territories or are ancillary to our core business strategy.
Our quarterly revenue and operating results have varied significantly
in the past and are expected to continue to do so in the future. Quarterly
revenue and operating results generally fluctuate as a result of the demand for
our products and services, the introduction of new hardware and software
technologies with improved features, the introduction of new services by us and
our competitors, changes in the level of our operating expenses, competitive
conditions and economic conditions. In particular, over the last several years,
we have increased certain of our fixed operating expenses, including a
significant increase in personnel, as part of our strategy to increase our focus
on providing systems integration and other higher margin and value added
services. 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.
11
As a result of the rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, our product
offerings change constantly. Prices of products change, 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 computer industry has experienced rapid declines
in average selling prices of personal computers. 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.
Most of the personal computers we sell utilize operating systems
developed by Microsoft Corporation. The United States Department of Justice has
brought a successful antitrust action against Microsoft, which could delay the
introduction and distribution of Microsoft products. The potential
unavailability of Microsoft products could have a material adverse effect on our
business, results of operations and financial condition.
We lease certain warehouses and offices from entities that are owned or
controlled by our majority shareholder. Each of the leases with related parties
has been amended effective with the closing of our initial public offering in
December 1996 to reduce the rent payable under that lease to then current market
rates.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from our Condensed Consolidated Statements of Income expressed as a
percentage of related revenue or total revenue.
Percentage of Revenues
Three Months Ended
October 31,
-----------------------
2001 2000
---- ----
Product Sales 95.6% 98.0%
Services 4.4 2.0
--- ---
Total revenue 100.0 100.0
----- -----
Cost of Product Sales 87.1 88.4
Cost of Services 67.2 67.9
---- ----
Cost of revenue 86.2 88.0
---- ----
Product Gross Profit 12.9 11.6
Services Gross Profits 32.8 32.1
---- ----
Gross Profit 13.8 12.0
---- ----
Selling, general and
administrative expenses 13.6 10.9
---- ----
Income from operations 0.2 1.1
Interest and other income, net 0.1 0.2
--- ---
Income before income taxes 0.3 1.3
Provision for income taxes 0.1 0.5
--- ---
Net income 0.2% 0.8%
=== ===
12
Three Months Ended October 31, 2001 Compared with Three Months Ended October 31,
2000
Revenue. Our revenue decreased $19.6 million or 24.1% from $81.1 million
for the three months ended October 31, 2000 to $61.6 million for the three
months ended October 31, 2001. Product revenue decreased by $20.6 million or
26.0%, due primarily to decreases in revenue from sales of monitors and displays
as well as decreases in shipments of computers partially offset by increases in
units sold. The events of September 11, 2001 adversely impacted revenue for the
month of September with declines in orders and shipments. We did experience
improvements in revenue in October and do not expect significant long term
impact on our operations as a result of these events. Service revenue increased
$1.1 million or 65.6% due primarily to our continued focus on developing and
selling value-added services to our customers including revenues generated by
Donovan Consulting Group, Inc. which was acquired on August 29, 2001 and
significant growth in the sales of services to customers that are delivered by
manufacturers or vendors.
Gross Profit. Cost of revenue includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by certain market development funds provided by manufacturers.
All other operating costs are included in selling, general and administrative
expenses. Gross profit decreased $1.3 million or 12.9% from $9.8 million for the
first quarter of fiscal 2001 to $8.5 million for the most recent fiscal quarter.
Gross profit from the sale of products decreased by $1.6 million or 17.6%, while
gross profit from the sale of services increased by $360,000 or 68.8%. The
changes in gross profit primarily resulted from the changes in revenue discussed
above. As a percentage of revenue, gross profit increased to 13.8% in the first
quarter of fiscal 2002 as compared to 12.0% in fiscal 2001. The increase in
margins is attributable to increased sales of higher margin products as well as
increased volume incentive rebates by vendors and manufacturers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $490,000 or 5.5% from $8.9 million in the
first quarter of fiscal 2001 to $8.4 million in the first quarter of fiscal
2002. This decrease is principally a result of lower salaries, personnel, and
depreciation and amortization costs (due primarily to the August 1, 2001
adoption of SFAS Statement No. 142 "Goodwill and Other Intangible Assets" which
requires that goodwill no longer be amortized) partially offset by higher bad
debts and insurance costs.
Interest and Investment Income. Interest and investment income decreased by
$121,000 due to lower cash balances available for investments as well as lower
interest rates.
Provision for Income Taxes. The effective income tax rate decreased
slightly to 40.2% of pretax income in the current period compared to 40.3% of
pretax income in the prior year's period.
Liquidity and Capital Resources
The Company's primary sources of financing have been internally generated
working capital from operations and a line of credit from financial
institutions.
For the three months ended October 31, 2001, cash used by operating
activities was $3.8 million consisting primarily of increases in accounts
receivable and inventory partially offset by an increase in accounts payable and
accrued expenses. During the quarter the Company made an investment in inventory
by purchasing a significant number of large screen flat panel displays. We
believe that the investment made in this inventory will result in benefits to
the Company through the volume incentives and discounts obtained on these
products. We expect that these products will be sold over the next two fiscal
quarters. We also used $1.9 million (including $500,000 in repayment of debts
assumed) for the purchase of
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Donovan Consulting Group and $343,000 for capital expenditures during this
fiscal quarter. The Company's accounts receivable and accounts payable and
accrued expenses balances as well as its investment in inventory can fluctuate
significantly from one period to the next due to the receipt of large customer
orders or payments or variations in product availability and vendor shipping
patterns at any particular date. Generally, the Company's experience is that
increases in accounts receivable, inventory and accounts payable and accrued
expenses will coincide with growth in revenue and increased operating levels.
The Company has available a line of credit with financial institutions in
the aggregate amount of $15.0 million. No amounts were outstanding under this
line as of October 31, 2001.
The Company believes that its 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 2002. The
Company currently has no material commitments for capital expenditures. In
November 2001 the Company completed the acquisition of e.Track Solutions, Inc.
Total cash paid at closing was approximately $300,000 (including debts assumed
and subsequently repaid). Future capital requirements of the Company include
those for the growth of working capital items such as accounts receivable and
inventory and the purchase of equipment and expansion of facilities, the
possible opening of new offices, potential acquisitions, and expansion of the
Company's service and e-commerce capabilities.
Impact of Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," while retaining the fundamental
recognition and measurement provisions of that statement. SFAS No. 144 requires
that a long-lived asset to be abandoned, exchanged for a similar productive
asset or distributed to owners in a spin-off to be considered held and used
until it is disposed of. However, SFAS No. 144 requires that management consider
revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS No. 144 retains the provisions
of SFAS No. 121 and, therefore, requires that discontinued operations no longer
be measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS No. 144 is effective for all fiscal quarters of fiscal years
beginning after December 15, 2001, and will thus be adopted by the Company on
August 1, 2002. The Company has not determined the effect, if any, that the
adoption of SFAS No. 144 will have on the Company's consolidated financial
statements.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
Exhibits
10.5.o Extension and Amendment Agreement dated November 30, 2001 between
Registrant and Kin Properties, Inc. as agent.
10.17 Definitive Purchase Agreement dated November 1, 2001 between Registrant
and e.Track Solutions, Inc.
(b) Reports on Form 8-K
Form 8-K filed August 29, 2001 disclosing the acquisition of Donovan
Consulting Group, Inc.
Form 8-K filed November 26, 2001 disclosing the acquisition of e.Track
Solutions, Inc.
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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: December 13, 2001 s/Barry Steinberg
------------------------------------
Barry Steinberg
President and Chief Executive Officer
DATE: December 13, 2001 s/Joseph Looney
-------------------------------
Joseph Looney
Vice President of Finance and
Chief Financial Officer
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