17
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2002
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)
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
As of June 12, 2002, there were 7,990,215 outstanding shares of the registrant's
Common Stock.
MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Balance Sheets
April 30, 2002 (unaudited) and July 31, 2001 3
Condensed Consolidated Statements of Income Three months and
nine months ended April 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows Nine months
ended April 30, 2002 and 2001 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except per share amounts)
April 30, 2002 July 31, 2001
(Unaudited) -------------
-----------
Assets:
Cash and cash equivalents $ 8,073 $14,493
Accounts receivable, net 32,085 25,135
Inventory 13,229 7,546
Deferred income taxes 459 459
Prepaid income taxes 401 43
Prepaid expenses and other current assets 612 362
--- ---
Total current assets 54,859 48,038
Property and equipment, net 6,671 6,300
Goodwill, net 8,311 6,148
Deferred income taxes 842 842
Other assets 618 455
--- ---
$71,301 $61,783
====== ======
Liabilities:
Accounts payable and accrued expenses $24,135 $15,259
Deferred service contract revenue 533 807
--- ---
Total current liabilities 24,668 16,066
Deferred compensation payable 162 162
--- ---
Total liabilities 24,830 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 (23) (38)
Retained earnings 27,472 26,571
------ ------
Total shareholders' equity 46,471 45,555
------ ------
$71,301 $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 April 30, Nine months ended April 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenue
Products $61,678 $66,522 $185,837 $214,984
Services 3,453 2,076 8,959 5,644
----- ----- ----- -----
65,131 68,598 194,796 220,628
------ ------ ------- -------
Cost of revenue
Products 53,391 57,151 160,470 188,194
Services 2,699 1,682 6,724 3,995
----- ----- ----- -----
56,090 58,833 167,194 192,189
------ ------ ------- -------
Gross profit 9,041 9,765 27,602 28,439
Selling, general and
administrative expenses 8,480 8,734 26,269 26,592
----- ----- ------ ------
Income from operations 561 1,031 1,333 1,847
Interest income 40 116 162 407
-- --- --- ---
Income before income taxes 601 1,147 1,495 2,254
Provision for income taxes 237 482 594 927
--- --- --- ---
Net income $364 $665 $901 $1,327
=== === === =====
Net income per share
Basic $0.05 $0.08 $0.11 $0.16
==== ==== ==== ====
Diluted $0.05 $0.08 $0.11 $0.16
==== ==== ==== ====
Weighted average
shares outstanding
Basic 7,990 8,005 7,990 8,051
===== ===== ===== =====
Diluted 7,992 8,005 7,991 8,080
===== ===== ===== =====
See notes to condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the nine months ended
April 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 901 $ 1,327
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,514 1,636
Allowance for doubtful accounts 20 405
Stock compensation expense 15 22
Tax benefit from exercise of options - 77
Change in assets and liabilities, net of the effects
of acquisitions:
(Increase) decrease in accounts receivable (6,704) 7,484
Increase in inventory (5,546) (3,443)
(Increase) decrease in prepaid income taxes (358) 441
Increase in prepaid expenses and
other current assets (230) (124)
(Increase) decrease in other assets (163) 60
Increase (decrease) in accounts payable and
accrued expenses 8,355 (6,173)
Decrease in deferred service revenue (274) (295)
---- ----
Net cash (used in) provided by
operating activities (2,470) 1,417
----- -----
Cash flows from investing activities:
Capital expenditures (1,779) (1,471)
Payments for acquisitions, net of cash acquired (1,613) -
------- -----
Net cash used in investing activities (3,392) (1,471)
------- -----
Cash flows from financing activities:
Payments on notes payable - bank (515) -
Payments on notes payable - other (43) (18)
Purchase and retirement of common stock - (621)
Issuance of common stock upon exercise of options - 6
----- ----
Net cash used in financing activities (558) (633)
----- -----
Net decrease in cash and cash equivalents (6,420) (687)
Cash and cash equivalents at beginning of period 14,493 16,156
------ ------
Cash and cash equivalents at end of period $8,073 $15,469
===== ======
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., ("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
Company's financial position, results of operations and cash flows as of
the dates and for the periods presented. The operating results of the
interim period presented are not necessarily indicative of the results to
be achieved for future interim periods or the entire year. 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 908,000 and 881,000 shares
for the three months ended April 30, 2002 and 2001, respectively, and
919,000 and 663,000 shares for the nine months ended April 30, 2002 and
2001, respectively, are excluded from the calculation of diluted net
income per share since the result would be 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 April 30, Nine months ended April 30,
2002 2001 2002 2001
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ ------ ------
Basic 7,990 $0.05 8,005 $0.08 7,990 $0.11 8,051 $0.16
==== ===== ==== ====
Effect of
dilutive
options 2 - 1 29
----- --- ---- --
Diluted 7,992 $0.05 8,005 $0.08 7,991 $0.11 8,080 $0.16
===== ==== ===== ===== ===== ==== ====== =====
6
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 near Atlanta, Georgia. Donovan is a technical services firm
that delivers Wireless 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
allows the Company to offer total Wireless LAN 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 condensed
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 has been
accounted for as a purchase, consisted of cash payments of $290 (including
debt assumed and subsequently repaid). e.Track was acquired in order to
allow the Company to offer our customers customized software solutions
along with the products and services that we have traditionally offered.
Operating results of e.Track are included in the condensed
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 $291. 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 $291 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.
4. Statement of Cash Flow Information
Supplemental disclosure of cash flow information:
Nine months ended April 30,
2002 2001
------ ----
(in thousands)
Cash paid for income taxes $952 $93
===== ===
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 was required to test goodwill for impairment in accordance
with the provisions of SFAS No. 142 by January 31, 2002. In accordance
with SFAS No. 142, goodwill is allocated to reporting units, which are
either the operating segment or one reporting level below the operating
segment. The Company determined that its reporting unit for purposes of
applying the provisions of SFAS 142 was its operating segment. During the
quarter, the Company completed its initial impairment review, which
indicated that there was no impairment as of the date of adoption. Fair
value for goodwill was determined based on discounted cash flows.
Goodwill amortization for the nine months ended April 30, 2001
was $285,000. The following table shows the results of operations as if
SFAS No. 142 was applied to prior periods:
For the nine months
ended April 30,
2002 2001
---- ----
Net income as reported $901 $1,327
Add back: Goodwill amortization - 285
---- ---
Adjusted net income $901 $1,612
=== ======
Income per share - Basic
Net income, as reported $0.11 $0.16
Goodwill amortization - 0.04
----- -----
Adjusted net income $0.11 $0.20
==== ====
Income per share - Diluted
Net income, as reported $0.11 $0.16
Goodwill amortization - 0.04
--- -----
Adjusted net income $0.11 $0.20
==== ====
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, including
statements regarding expectations, beliefs, intentions, plans or strategies
regarding the future, which are not historical facts. The Company intends that
all forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements reflect the Company's views as of the date they are made with respect
to future events and financial performance, and involve risks and uncertainties
that could cause actual results to differ materially from the results
anticipated in the 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. The Company does not undertake any obligation to update
or revise any forward-looking statement, made by it or on its behalf, whether as
a result of new information, future events, or otherwise.
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.
9
To date, our revenues have 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.
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.
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. 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. On May 3,
2002, the Hewlett-Packard Company and Compaq Computer Corporation merged.
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.
10
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.
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.
11
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.
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.
Critical Accounting Policies
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, 2001 describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts, inventory allowances,
and goodwill impairments. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.
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 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.
We will perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. In assessing the recoverability
12
of the Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from our Condensed Consolidated Statements of Income expressed as a
percentage of related revenue or total revenue.
Percentage of Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
---- ---- ---- ----
Product sales 94.7% 97.0% 95.4% 97.4%
Services 5.3 3.0 4.6 2.6
--- --- --- ---
Total revenue 100.0 100.0 100.0 100.0
----- ----- -----
Cost of product sales 86.6 85.9 86.3 87.5
Cost of services 78.2 81.0 75.1 70.8
---- ---- ---- ----
Cost of revenue 86.1 85.8 85.8 87.1
---- ---- ---- ----
Product gross profit 13.4 14.1 13.7 12.5
Services gross profit 21.8 19.0 24.9 29.2
---- ---- ---- ----
Gross profit 13.9 14.2 14.2 12.9
Selling, general and
administrative expenses 13.0 12.7 13.5 12.1
---- ---- ---- ----
Income from operations 0.9 1.5 0.7 0.8
Interest and other income, net 0.1 0.2 0.1 0.2
--- --- --- ---
Income before income taxes 1.0 1.7 0.8 1.0
Provision for income taxes 0.4 0.7 0.3 0.4
--- --- --- ---
Net income 0.6% 1.0% 0.5% 0.6%
=== === === ===
Three Months Ended April 30, 2002 Compared with Three Months Ended April
30, 2001
Revenue. The Company's revenue decreased $3.5 million or 5.1% from
$68.6 million for the three months ended April 30, 2001 to $65.1 million
for the three months ended April 30, 2002. Product revenue decreased by
$4.8 million due primarily to lower shipments of computers and
peripherals. This was somewhat offset by increases in shipments of
displays. Product revenues were adversely impacted by the current soft
economic conditions. The Company's primary customers are commercial end
users and the continued slowdown in technology investments by such
entities has resulted in declining product revenues. Service revenue
increased $1.4 million or 66.3% to $3.5 million from $2.1 million in the
same quarter last year. Revenue from services increased primarily due to
revenue generated by our two recently completed acquisitions, Donovan and
e.Track, as well as revenue from sales to customers that is delivered by
manufacturers or vendors.
13
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 $724,000 or 7.4% from
$9.8 million for the third quarter of fiscal 2001 to $9.0 million for the
most recent fiscal quarter. Gross profit from the sale of products
decreased by $1.1 million or 11.6%, while gross profit from the sale of
services increased by $360,000 or 91.4%. The changes in gross profit
primarily resulted from the changes in revenue discussed above. Margins on
service offerings improved somewhat when compared to the same quarter a
year ago, but were negatively impacted by lower utilization of our
technical staff, primarily the staff connected with recently completed
acquisitions. As a percentage of revenue, gross profit decreased to 13.9%
in the third quarter of fiscal 2002 as compared to 14.2% in fiscal 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $254,000 or 2.9% from $8.7 million in
the third quarter of fiscal 2001 to $8.5 million in the third quarter of
fiscal 2002. This decrease is principally a result of lower advertising,
bad debts and depreciation and amortization costs partially offset by
higher telephone costs. The reduction in amortization costs was 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.
Interest and Investment Income. Interest and investment income
decreased by $76,000 due to lower cash balances available for investments
as well as lower interest rates.
Provision for Income Taxes. The effective income tax rate
decreased to 39.4% of pretax income in the current period compared to
42.0% of pretax income in the prior year's period due primarily to
non-deductible goodwill amortization in the prior year that was not
charged in the current year due to the adoption of SFAS Statement No. 142.
Nine Months Ended April 30, 2002 Compared to Nine Months Ended April 30,
2001
Revenue. The Company's revenue decreased by $25.8 million or 11.7
% from $220.6 million for the nine months ended April 30, 2001 to $194.8
million for the nine months ended April 30, 2002. Revenue from the sale of
products decreased by $29.1 million or 13.6% while revenue from service
offerings increased by $3.3 million or 58.7%. The decrease in product
revenue is due primarily to the shipment of fewer personal computers and
peripherals, as well as the generally soft economic conditions experienced
this fiscal year. This was partially offset by increases in shipments of
displays, primarily large screen flat panel displays shipped from our
Electrograph subsidiary. The growth in services revenues is due to the
acquisitions of Donovan and e.Track, as well as growth in the sale of
services to customers that are delivered by manufacturers or vendors.
Gross Profit.Gross profit decreased by $837,000 or 2.9% to $27.6
million for the first nine months of fiscal 2002 from $28.4 million in the
comparable period a year ago. Gross profit from product sales decreased by
$1.4 million or 5.3% from $26.8 million in the first nine months of fiscal
2001 to $25.4 million in the most recent nine month period. Service
offerings generated $1.6 million of gross profit in the first nine months
of fiscal 2001 and $2.2 million of gross profit for the first nine months
of fiscal 2002. Gross margin percentages on product sales improved in the
first nine months of fiscal 2002 due to increased sales of higher margin
products, increased volume rebates by manufacturers and certain large
volume product purchases that the Company was able to take advantage of.
Service margins declined during the period due primarily to lower
utilization of technical personnel as well as increases in lower margin
sales of services that are delivered by other than Company personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $323,000 or 1.2% from $26.6 million
for the first nine months of fiscal 2001 to $26.3 million for the first
nine months of fiscal 2002. The decrease is principally due to lower
salaries and personnel costs as well as lower advertising and depreciation
and amortization costs. These decreases were partially offset by higher
telephone expenses and costs associated with our recent acquisitions.
14
Interest Income. Interest income decreased by $245,000 from
$407,000 for the first nine months of fiscal 2001 to $162,000 for the
first nine months of this fiscal year, due to lower cash balances
available for investment as well as lower interest rates available in the
marketplace.
Provision for Income Taxes. The effective income tax rate
decreased slightly to 39.7% for the first nine months of fiscal 2002 from
41.1% for the first nine months of fiscal 2001.
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 nine months ended April 30, 2002, cash used by operating
activities was $2.5 million consisting primarily of increases in accounts
receivable and inventory partially offset by an increase in accounts
payable and accrued expenses. During the first quarter of the year the
Company made an investment in inventory by purchasing a significant number
of large screen flat panel displays. The investment made in this inventory
resulted in benefits to the Company through the volume incentives and
discounts obtained on these products. We also expended $2.2 million
(including $558,000 in repayment of debts assumed) for the purchase of
Donovan Consulting Group, Inc. and e.Track Solutions, Inc. and $1.8
million for capital expenditures during the nine months ended April 30,
2002. 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 a financial
institution in the aggregate amount of $15.0 million. This line was
recently renewed and extended through January 31, 2005. No amounts were
outstanding under this line as of April 30, 2002.
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 2003. The Company currently has no material commitments for
capital or other expenditures, except operating leases which the Company
is committed under for 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 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. In addition, there are no
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.
Impact of Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The Company will adopt SFAS No. 143 in fiscal year
2003. The Company does not expect the provisions of SFAS No. 143 to have
any significant impact on its financial condition or results of operations.
15
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.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Generally, SFAS 145 is effective for transactions
occurring after May 15, 2002. The Company does not expect the provisions of
SFAS No. 145 to have any significant impact on its financial condition or
results of operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
Exhibits
10.5.p - Lease dated June 1, 2002 between Electrograph Systems, Inc. and 40
Marcus Realty Associates .
<
(b) Reports on Form 8-K
1. On March 8, 2002, the Company filed a report on Form 8-K relating
to its financial information for the quarter ended January 31,
2002 as presented in a press release of March 7, 2002.
16
MANCHESTER TECHNOLOGIES, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANCHESTER TECHNOLOGIES., INC.
------------------------------
(Registrant)
DATE: June 12, 2002 ss: Barry Steinberg
-------------------
Barry Steinberg
President and Chief Executive Officer
DATE: June 12, 2002 ss: Joseph Looney
-----------------------------------------
Joseph Looney
Vice President of Finance and
Chief Financial Officer
17