27
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2003
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 June 5, 2003 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 as of
April 30, 2003 (unaudited) and July 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended
April 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 2003 and 2002 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 22
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 30, 2003 July 31, 2002
(Unaudited)
----------- -----------
Assets
Current Assets:
Cash and cash equivalents $10,850 $ 8,963
Accounts receivable, net 29,314 32,561
Inventory 14,795 11,165
Deferred income taxes 403 403
Prepaid income taxes 720 426
Prepaid expenses and other current assets 851 526
------ --------
Total current assets 56,933 54,044
Property and equipment, net 14,528 7,012
Goodwill, net 8,311 8,311
Deferred income taxes 803 803
Other assets 144 491
------ -------
Total assets $80,719 $70,661
====== ======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $25,156 $23,078
Deferred service contract revenue 605 868
Current portion of capital lease obligations 204 -
------ -----
Total current liabilities 25,965 23,946
Deferred compensation payable 203 203
Capital lease obligations, net of current portion 7,980 -
-------- -----
Total liabilities 34,148 24,149
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized,
none issued - -
Common stock, $.01 par value; 25,000 shares authorized,
7,990 and 7,990 issued and outstanding 80 80
Additional paid-in capital 18,942 18,942
Deferred compensation (23) (23)
Retained earnings 27,572 27,513
------ ------
Total shareholders' equity 46,571 46,512
------ ------
Total liabilities and shareholders' equity $80,719 $70,661
====== ======
See notes to unaudited condensed consolidated financial statements.
3
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months ended April 30, Nine months ended April 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenue
Products $60,083 $61,678 $199,081 $185,837
Services 3,861 3,453 13,690 8,959
----- ----- ------ -----
63,944 65,131 212,771 194,796
------ ------ ------- -------
Cost of revenue
Products 53,703 53,391 177,600 160,470
Services 2,968 2,699 10,459 6,724
----- ----- ------ -----
56,671 56,090 188,059 167,194
------ ------ ------- -------
Gross profit 7,273 9,041 24,712 27,602
Selling, general and
administrative expenses 7,208 8,480 24,759 26,269
----- ----- ------ ------
Income (loss) from operations 65 561 (47) 1,333
Interest and other income (expense), net (22) 40 146 162
--- -- --- ---
Income before income taxes 43 601 99 1,495
Income tax provision 17 237 40 594
-- --- -- ---
Net income $26 $364 $59 $901
== === == ===
Net income per share
Basic $0.00 $0.05 $0.01 $0.11
==== ==== ==== ====
Diluted $0.00 $0.05 $0.01 $0.11
==== ==== ==== ====
Weighted average
shares outstanding
Basic 7,990 7,990 7,990 7,990
===== ===== ===== =====
Diluted 7,990 7,992 7,990 7,991
===== ===== ===== =====
See notes to unaudited condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
April 30, April 30,
2003 2002
---- ----
Cash flows from operating activities:
Net cash from operations after adjustment for non-cash items $ 1,367 $ 2,450
Changes in assets and liabilities (net of effects of acquisitions):
Accounts receivable 3,341 (6,704)
Inventory (3,630) (5,546)
Prepaid income taxes (294) (358)
Prepaid expenses and other current assets (325) (230)
Other assets 347 (163)
Accounts payable and accrued expenses 2,078 8,355
Deferred service contract revenue (263) (274)
------ --------
Net cash provided by (used in) operating activities 2,621 (2,470)
------ --------
Cash flows from investing activities:
Capital expenditures (718) (1,779)
Payment for acquisitions, net of cash acquired - (1,613)
-------- ------
Net cash used in investing activities (718) (3,392)
----- ------
Cash flows from financing activities:
Payments on notes payable - bank - (515)
Payments on notes payable - other - (43)
Payments on capital lease obligations (16) -
-------- --------
Net cash used in financing activities (16) (558)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,887 (6,420)
Cash and cash equivalents at beginning of period 8,963 14,493
-------- ------
Cash and cash equivalents at end of period $10,850 $ 8,073
======= =======
See notes to unaudited condensed consolidated financial statements.
5
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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, display technology and enterprise and
Internet solutions. The Company offers 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. The Company operates in a single segment.
Sales of hardware, software and networking products comprise the majority
of the Company's revenues. 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 consolidated financial statements, including the notes thereto, for the
annual period ended July 31, 2002. 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. The results
of operations for the three and nine month periods ended April 30, 2003 are not
necessarily indicative of the results to be expected for future interim periods
or the entire year.
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,
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 843,000 and 908,000
shares for the three months ended April 30, 2003 and 2002, respectively, and
843,000 and 919,000 shares for the nine months ended April 30, 2003 and 2002,
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.
Three months ended April 30, Nine months ended April 30,
2003 2002 2003 2002
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ ------ ------
(shares in thousands)
Basic 7,990 $0.00 7,990 $0.05 7,990 $0.01 7,990 $0.11
==== ==== ==== ====
Effect of
dilutive
options - 2 - 1
------ ----- ------ ----
Diluted 7,990 $0.00 7,992 $0.05 7,990 $0.01 7,991 $0.11
===== ==== ===== ==== ===== ==== ===== ====
6
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
3. Related Party Transactions
The Company leases its warehouse and distribution center as well as its
corporate offices and certain sales facilities from entities owned or controlled
by shareholders, officers or directors of the Company. In March 2003, the owners
sold the properties leased by the Company to an unaffiliated company. In
connection with the sale, the Company entered into three fifteen-year leases,
each expiring on March 31, 2018, with the new owner. Lease terms include a lower
base rent in the first year, annual rent increases of two percent and four
five-year renewal options.
The Company recorded the new leases as capital leases and accordingly,
recorded an asset of approximately $8.2 million. The asset is classified in the
balance sheet as Property and equipment, net, and is amortized using the
straight-line method over the lease terms and the related obligations are
recorded as liabilities.
The following represents the Company's commitment under capital leases for
the period May 1, 2003 through July 31, 2003, each of the next five years ended
July 31, and thereafter:
(in thousands)
May 1 - July 31, 2003 $205
2004 825
2005 842
2006 859
2007 876
2008 894
2009 and thereafter 9,612
--------
Total payments 14,113
Amount representing interest (5,929)
---------
Obligations under capital leases 8,184
Obligations due within one year (204)
-------
Long-term obligations under capital leases $7,980
=======
4. Employee Stock Options
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which requires companies to measure stock
compensation plans based on the fair value method of accounting or to continue
to apply APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
to provide pro forma footnote disclosure under the fair value method. The
Company has adopted the pro forma disclosure provision of SFAS No. 123.
Accordingly, the Company does not record compensation cost in the financial
statements for its stock options that have an exercise price equal to or greater
than the fair market value of the underlying stock on the date of grant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Compensation-Transition and Disclosure-an amendment of FAS 123" ("SFAS 148").
This statement amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-
7
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
based employee compensation and amends the disclosure requirements to SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results.
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant date under SFAS 123, the Company's net
income per share for the three months and nine months ended April 30, 2003 and
2002 would approximate the pro forma amounts below:
Three Months Ended Nine Months Ended
------------------ -----------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
-------- ---------- ------- -------
(in thousands)
Net income:
As reported $ 26 $364 $ 59 $901
Compensation expense,
net of taxes (123) (155) (369) (464)
--- --- --- ---
Pro Forma $(97) $209 $(310) $437
==== ==== ===== ====
Basic net income per share:
As reported $ 0.00 $0.05 $ 0.01 $0.11
Pro Forma $(0.01) $0.03 $ (0.04) $0.05
Diluted net income per share:
As reported $ 0.00 $0.05 $ 0.01 $0.11
Pro Forma $(0.01) $0.03 $ (0.04) $0.05
5. Acquisitions
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 $1,500,000 plus
potential future contingent payments. Contingent payments of up to $1,000,000
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.
No contingent payment was made on November 2, 2002. In connection with the
acquisition, the Company assumed approximately $435,000 of bank debt and $43,000
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
statements of operations from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497,000 and $869,000,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $1,872,000. 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 $1,872,000 has not been
8
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
amortized; however, it is subject to impairment testing in accordance with No.
142, "Goodwill and Other Intangible Assets " ("SFAS 142").
The presentation of supplemental pro forma financial information is deemed
immaterial.
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 $290,000 (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 are included in the condensed consolidated
statements of operations from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116,000 and $192,000 respectively.
The excess of aggregate purchase price over the estimated fair value of the
tangible net assets acquired was $291,000. 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 $291,000 has not been
amortized; however, it is subject to impairment testing in accordance with SFAS
142.
The presentation of supplemental pro forma financial information is deemed
immaterial.
6. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting
standard requiring the recording of the fair value of liabilities associated
with the retirement of long-lived assets in the period in which they are
incurred. The Company has adopted the provisions of SFAS 143 effective August 1,
2002. The adoption of SFAS 143 did not have a significant effect on the
Company's results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 144"), 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
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 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 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 144 is effective for all fiscal quarters of fiscal years beginning
after December 15, 2001. The Company has adopted the provisions of SFAS 144 as
of August 1, 2002. The adoption of SFAS 144 did not have a material impact on
the Company's condensed consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" ("SFAS
145"). SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements by rescinding Statement 4, which required all gains and losses
9
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
from extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. Additionally,
the Statement requires that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Company has adopted the provisions of
SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did not have a material
impact on the Company's condensed consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread
out the reporting of expenses related to restructurings initiated after 2002,
because commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a liability for the anticipated costs.
Instead, companies will record exit and disposal costs when they are "incurred"
and can be measured at fair value, and they will subsequently adjust the
recorded liability for changes in estimated cash flows. The Company has adopted
the provisions of SFAS 146 as of January 1, 2003. The adoption of SFAS 146 did
not have a material impact on the Company's condensed consolidated financial
statements.
In November 2002, the FASB issued FASB interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The adoption of FIN 45 did not have
a material impact on the Company's condensed consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation".
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both the annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of SFAS 148 are
effective for all financial statements for fiscal years ending after December
15, 2002. The Company adopted the disclosure portion of this statement for the
current fiscal quarter ended April 30, 2003. The application of the disclosure
portion of this standard will have no material impact on our consolidated
financial position or results of operations. The FASB recently indicated that
they will require stock-based employee compensation to be recorded as a charge
to earnings pursuant to a standard they are currently deliberating, which they
believe will become effective on January 1, 2004. The Company will continue to
monitor their progress on the issuance of this standard as well as evaluate the
Company's position with respect to current guidance.
10
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
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 appearing elsewhere in this
report and with the Company's annual report on Form 10-K for the year ended July
31, 2002. The following discussion 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," "will," "plans,"
"anticipates," or similar expressions. Forward looking statements are not
historical facts, are based on the Company's beliefs and expectations as of the
date of this report, 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 and the risk factors described in the Company's
Annual Report on Form 10-K for the year ended July 31, 2002, and those set forth
in the Company's other filings from time to time with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to any forward-looking statements.
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers, and a distributor of
display technology solutions and plasma display monitors primarily to dealers
and system integrators. 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.
Certain Trends and Uncertainties
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, and expect to continue experiencing, 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 gross 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.
Geographic Considerations. On September 11, 2001, the World Trade Center in
New York City and the Pentagon in Washington, D.C. were the subjects of
terrorist attacks. A significant part of our business is generated from our New
York City and Baltimore/Washington, D.C. offices. We cannot predict the impact
11
that potential future attacks may have on our business, results of operations
and financial condition. In addition, given the concentration of our business in
these geographic areas, our business could be materially affected by economic
conditions and other significant events in the New York City and
Baltimore/Washington, D.C. areas.
Management of Growth. 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.
Personnel Issues. 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. 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.
Competition. 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, 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, and may also choose to market 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.
Vendor Relationships and Product Availability. 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 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. On May 3, 2002, the
Hewlett-Packard Company and Compaq Computer Corporation merged. Manchester sold
the products of both companies and we believe that we had strong relationships
with both companies and continue to have a strong relationship with the merged
company. 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.
12
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.
Changing Technology; Inventory Risk. 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 condition and
results of operations.
As a result of the rapid changes that are taking place in computer,
networking and display 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 and peripherals.
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.
13
Acquisitions. 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.
Quarterly Variations. 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. 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.
Microsoft Litigation. 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. On November 12, 2002, the United States District Court for the
District of Columbia issued an order entering a final judgment in the action. We
believe that the final judgment, if implemented, will not have a material
adverse effect on our business, results of operations and financial condition.
However, the final judgment has been appealed, and we cannot predict the outcome
of the appeal or the effect that any modifications to the final judgment would
have on our business, results of operations or financial condition.
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.
Stock Repurchase Program. The Company's Board of Directors has authorized
the Company to repurchase up to $1 million of its common stock, which
authorization is effective until the first Board of Directors meeting following
the close of our 2003 fiscal year, unless earlier terminated by the Board. The
extent to which the Company repurchases its stock and the timing of such
purchases will depend upon market conditions and other corporate considerations
to be evaluated by the Executive Committee of the Board. The repurchase program
does not obligate the Company to repurchase any specific number of shares, and
repurchases pursuant to the program may be suspended or resumed at any time or
from time to time without further notice or announcement. There can be no
assurance as to the effect, if any, that the adoption of the repurchase program
or the making of repurchases thereunder will have on the market price of our
common stock.
E-Commerce
We utilize a website and electronic commerce system. The site, located at
www.e-manchester.com allows both existing customers, corporate shoppers and
others to find product specifications, compare products, check price and
availability and place and track orders 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.
14
Acquisitions
Donovan Consulting Group, Inc.
On August 29, 2001, the Company acquired all of the outstanding stock of
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 $1,500,000 plus potential future contingent
payments. Contingent payments of up to $1,000,000 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. No contingent payment was
made on November 2, 2002. In connection with the acquisition, the Company
assumed approximately $435,000 of bank debt and $43,000 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
statements of operations from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497,000 and $869,000,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $1,872,000. 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 $1,872,000 has not been amortized; however,
it is subject to impairment testing in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets."
e.Track Solutions, Inc.
On November 9, 2001, the Company acquired all of the outstanding stock of
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 $290,000
(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 are included in the condensed consolidated
statements of operations from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116,000 and $192,000,
respectively. The excess of aggregate purchase price over the estimated fair
value of the tangible net assets acquired was $291,000. 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
$291,000 has not been amortized; however, it is subject to impairment testing in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, encourages all registrants, including the Company, to
include a discussion of "critical" accounting policies or methods used in the
preparation of financial statements. 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
15
July 31, 2002 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 condensed 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 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.
16
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's condensed consolidated statements of operations
expressed as a percentage of related revenue or total revenue.
Percentage of Revenue
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ----- ---- -----
Revenue
Product sales 94.0% 94.7% 93.6% 95.4%
Services 6.0 5.3 6.4 4.6
------ ----- ------ -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue
Products 89.4 86.6 89.2 86.3
Services 76.9 78.2 76.4 75.1
---- ---- ---- ----
Total cost of revenue 88.6 86.1 88.4 85.8
---- ---- ---- ----
Gross profit
Products 10.6 13.4 10.8 13.7
Services 23.1 21.8 23.6 24.9
---- ---- ---- ----
Total gross profit 11.4 13.9 11.6 14.2
Selling, general and
administrative expenses 11.3 13.0 11.6 13.5
---- ---- ---- ----
Income (loss) from operations 0.1 0.9 0.0 0.7
Interest and other income (expense), net 0.0 0.1 0.1 0.1
--- ---- --- ----
Income before income taxes 0.1 1.0 0.0 0.8
Income tax provision 0.0 0.4 0.0 0.3
--- ---- ---- ----
Net income 0.0% 0.6% 0.0% 0.5%
=== === === ===
Three Months Ended April 30, 2003 Compared with Three Months Ended April 30,
2002
Revenue. Revenue decreased by $1.2 million or 2% to $63.9 million for the
three months ended April 30, 2003 from $65.1 million for the three months ended
April 30, 2002. Revenue from the sale of products decreased by $1.6 million or
3% while revenue from service offerings increased by $400,000 or 12%. The
decrease in product revenue is primarily a result of decreased sales of computer
and networking products and peripherals as a result of the current economic and
market forces affecting the computer industry. This decrease was partially
offset by increased sales of display monitors, primarily large screen flat panel
displays, by our Electrograph subsidiary. The increase in service revenue is
primarily attributable to the Company's continued focus on growing its sales of
services and solutions to its existing customer base and to new customers.
17
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 related to volume purchases
provided by manufacturers. All other operating costs are included in selling,
general and administrative expenses, offset in part by certain market
development funds provided by manufacturers. Gross profit decreased by $1.8
million or 20%, from $9.0 million for the three months ended April 30, 2002 to
$7.3 million for the three months ended April 30, 2003 and as a percentage of
revenue, gross profit decreased from 13.9% for the three months ended April 30,
2002 to 11.4% for the three months ended April 30, 2003. Gross profit from
product sales decreased by $1.9 million or 23% while gross profit from service
offerings increased by $139,000 or 18%. As a percentage of revenue, gross profit
from the sale of products decreased from 13.4% for the three months ended April
30, 2002 to 10.6% for the three months ended April 30, 2003 primarily due to
increased competition, pricing pressure as well as a decline in demand due to
the current economic and market forces affecting our industry. As a percentage
of revenue, gross profit from the sale of services increased from 21.8% for the
three months ended April 30, 2002 to 23.1% for the three months ended April 30,
2003 as a result of increased sales of higher margin services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $1.3 million, or 15% from $8.5 million for
the three months ended April 30, 2002 to $7.2 million for the three months ended
April 30, 2003. The decrease is principally due to a decrease in salaries and
personnel costs in the amount of approximately $430,000 reflecting the cost
reduction measures instituted by the Company, decreased sales commissions of
approximately $360,000 due to the lower gross margins earned on revenues and
lower depreciation and amortization expenses of approximately $120,000. As a
percentage of revenue, selling, general and administrative expenses decreased
from 13.0% for the three months ended April 30, 2002 to 11.3% for the three
months ended April 30, 2003.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by $62,000 from interest income of $40,000 for the
three months ended April 30, 2002 to interest expense of $22,000 for the three
months ended April 30, 2003. This is primarily a result of the interest expense
related to the interest portion of the capital leases entered into by the
Company in March 2003 of approximately $52,000 offset partially by interest
income of approximately $30,000.
Income Tax Provision. Our effective tax rate was 39.5% and 39.4% for the
three months ended April 30, 2003 and April 30, 2002, respectively.
Nine Months Ended April 30, 2003 Compared to Nine Months Ended April 30, 2002
Revenue. Revenue increased by $18.0 million or 9% to $212.8 million for the
nine months ended April 30, 2003 from $194.8 million for the nine months ended
April 30, 2002. Revenue from the sale of products increased by $13.2 million or
7% while revenue from service offerings increased by $4.7 million or 53%. The
increase in product revenue is primarily a result of increased sales of display
monitors, primarily large screen flat panel displays, by our Electrograph
subsidiary as well as increased shipments of computers and peripherals offset by
lower per unit prices. The increase in service revenue is primarily attributable
to the Company's continued focus on growing its sales of services and solutions
to its existing customer base and to new customers.
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 related to volume purchases
provided by manufacturers. All other operating costs are included in selling,
general and administrative expenses, offset in part by certain market
development funds provided by manufacturers. Gross profit decreased by $2.9
million or 10%, from $27.6 million for the nine months ended April 30, 2002 to
$24.7 million for the nine months ended April 30, 2003 and as a percentage of
revenue, gross profit decreased from 14.2% for the nine months ended April 30,
2002 to 11.6% for the nine months ended April 30, 2003. Gross profit from
product sales decreased by $3.9 million or 15% while gross profit from service
offerings increased by $1.0 million or 45%. As a percentage of revenue, gross
18
profit from the sale of products decreased from 13.7% for the nine months ended
April 30, 2002 to 10.8% for the nine months ended April 30, 2003 primarily due
to increased competition, pricing pressure as well as a decline in demand due to
the current economic and market forces affecting our industry. As a percentage
of revenue, gross profit from the sale of services declined from 24.9% for the
nine months ended April 30, 2002 to 23.6% for the nine months ended April 30,
2003 as a result of increased sales of lower margin services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $1.5 million, or 6% from $26.3 million for
the nine months ended April 30, 2002 to $24.8 million for the nine months ended
April 30, 2003. The decrease is principally due to a decrease in salaries and
personnel costs in the amount of approximately $840,000 reflecting the cost
reduction measures instituted by the Company, decreased sales commissions of
approximately $710,000 due to the lower gross margins earned on revenues, and
lower promotional expenses and contracted work costs of approximately $230,000.
These decreases were partially offset by increased telephone expenses of
approximately $180,000 and increased advertising costs of approximately $120,000
primarily as a result of decreased market development funds received from
manufacturers for activities, such as training, advertising and other
pre-approved market development programs. As a percentage of revenue, selling,
general and administrative expenses decreased from 13.5% for the nine months
ended April 30, 2002 to 11.6% for the nine months ended April 30, 2003.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by $16,000 from $162,000 for the nine months ended
April 30, 2002 to $146,000 for the nine months ended April 30, 2003. The
decrease is primarily as a result of the Company's receipt of insurance proceeds
in the amount of $113,000 in the nine months ended April 30, 2003 partially
offset by lower interest rates available in the marketplace and increased
interest expense of approximately $52,000 related to the interest portion of the
capital leases entered into by the Company in March 2003.
Income Tax Provision. Our effective tax rate was 40.4% and 39.7% for the
nine months ended April 30, 2003 and April 30, 2002, respectively.
Liquidity and Capital Resources
Our primary sources of cash and cash equivalents have been internally
generated working capital from profitable operations. The Company's working
capital at April 30, 2003 and July 31, 2002 was approximately $31.0 million and
$30.1 million, respectively.
Operations for the nine months ended April 30, 2003 and 2002, after adding
back non-cash items, provided cash of approximately $1.4 million and $2.5
million, respectively. During such periods, other changes in working capital
provided (used) cash of approximately $1.3 million and $(4.9) million,
respectively, resulting in cash being provided by (used in) operating activities
of approximately $2.6 million and $(2.5) million, respectively. Our accounts
receivable and accounts payable balances, as well as our 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.
Investing activities for the nine months ended April 30, 2003 and 2002 used
cash of approximately $718,000 and $3.4 million, respectively. For the nine
months ended April 30, 2003 this amount consisted solely of additions to
property and equipment. For the nine months ended April 30, 2002 these amounts
included additions to property and equipment of approximately $1.8 million and
the payment for acquisitions, net of cash acquired, of approximately $1.6
million.
Financing activities for the nine months ended April 30, 2003 and 2002 used
cash of approximately $16,000 and $558,000, respectively. For the nine months
ended April 30, 2003 this amount consisted of payments on capital lease
obligations related to the capital leases entered into by the Company in March
19
2003. For the nine months ended April 30, 2002 this amount consisted solely of
net repayments of bank loans and other debt in connection with the acquisitions
in fiscal 2002.
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At April 30, 2003, no amounts were
outstanding under this line.
The Company leases its warehouse and distribution center as well as its
corporate offices and certain sales facilities from entities owned or controlled
by shareholders, officers or directors of the Company. In March 2003, the owners
sold the properties leased by the Company to an unaffiliated company. In
connection with the sale, the Company entered into three fifteen-year leases,
each expiring on March 31, 2018, with the new owner. Lease terms include a lower
base rent in the first year, annual rent increases of two percent and four
five-year renewal options.
The Company recorded the new leases as capital leases and accordingly
recorded an asset of approximately $8.2 million. The asset is classified in the
balance sheet as Property and equipment, net, and is amortized using the
straight-line method over the lease terms and the related obligations are
recorded as liabilities.
The following represents the Company's commitment under capital leases for
the period May 1, 2003 through July 31, 2003, each of the next five years ended
July 31, and thereafter:
(in thousands)
May 1 - July 31, 2003 $205
2004 825
2005 842
2006 859
2007 876
2008 894
2009 and thereafter 9,612
--------
Total payments 14,113
Amount representing interest (5,929)
---------
Obligations under capital leases 8,184
Obligations due within one year (204)
----
Long-term obligations under capital leases $7,980
======
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 2003 which ends on July 31,
2003. 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, 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.
The Company regularly examines opportunities for strategic acquisitions of
other companies or lines of business and anticipates that it may issue debt
20
and/or equity securities either as direct consideration for such acquisitions or
to raise additional funds to be used (in whole or in part) in payment for
acquired securities or assets. The issuance of such securities could be expected
to have a dilutive impact on the Company's shareholders, and there can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated investment.
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
Within 90 days prior to the filing of this report, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures as defined in Rule 14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon the evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded the
Company's disclosure controls and procedures were effective, in all material
respects, in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) and to ensure that the
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
There were no significant changes in the Company's internal controls or in
other factors subsequent to the date of the evaluation that could significantly
affect these controls.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
10.5.r - Lease dated March 14, 2003 between Registrant and General
Electric Capital Business Asset Funding Corporation.
10.5.s - Lease dated March 14, 2003 between Registrant and General
Electric Capital Business Asset Funding Corporation.
10.5.t - Lease dated March 14, 2003 between Electrograph Systems, Inc.
and General Electric Capital Business Asset Funding Corporation.
10.5.u - Lease dated May 1, 2003 between Registrant and FSP Gateway
Crossing Limited Partnership.
99.1 - Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification of Principal 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 filed March 7, 2003 disclosing Press Release dated March 7, 2003
reporting earnings for the second quarter ended January 31, 2003.
2. Form 8-K filed April 9, 2003 disclosing Press Release dated April 9, 2003
announcing the appointment of Robert Sbarra to the position of Vice
President of Sales and Marketing.
22
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 16, 2003 /S/ Barry R. Steinberg
----------------------------------------
Barry R. Steinberg
President and Chief Executive Officer
DATE: June 16, 2003 /S/ Elan Yaish
-----------------------------------------
Elan Yaish
Vice President Finance, Chief Financial
Officer and Assistant Secretary
23
CERTIFICATION
I, Barry R. Steinberg, President and Chief Executive Officer of Manchester
Technologies, Inc, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Manchester
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 16, 2003
/S/ Barry R. Steinberg
Barry Steinberg
Chief Executive Officer
24
CERTIFICATION
I, Elan Yaish, Chief Financial Officer of Manchester Technologies, Inc,
certify that:
1. I have reviewed the quarterly report on Form 10-Q of Manchester
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and 6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: June 16, 2003
/S/ Elan Yaish
Elan Yaish
Chief Financial Officer
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