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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 October 31, 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of December 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 October 31, 2003
(unaudited) and July 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended October 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
October 31, 2003 July 31, 2003
(Unaudited) -------------
----------------
Assets
Current assets:
Cash and cash equivalents $ 10,667 $ 8,553
Accounts receivable, net 33,671 35,117
Inventory 8,916 9,605
Deferred income taxes 603 603
Prepaid income taxes 1,404 1,704
Prepaid expenses and other current assets 429 709
--------- --------
Total current assets 55,690 56,291
Property and equipment, net 13,891 13,985
Goodwill, net 6,439 6,439
Deferred income taxes 757 757
Other assets 227 278
--------- --------
Total assets $77,004 $77,750
======= ======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $23,610 $24,752
Deferred service contract revenue 802 666
Current portion of capital lease obligations 220 212
------- -------
Total current liabilities 24,632 25,630
Deferred compensation payable 263 263
Capital lease obligations, net of current portion 7,864 7,923
------ ------
Total liabilities 32,759 33,816
------- -------
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 (13) (13)
Retained earnings 25,236 24,925
------- ------
Total shareholders' equity 44,245 43,934
------- ------
Total liabilities and shareholders' equity $77,004 $77,750
======= =======
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
October 31, October 31,
2003 2002
------------ ----------------
Revenue
Products $70,452 $64,715
Services 4,248 3,570
-------- -------
74,700 68,285
------- ------
Cost of revenue
Products 62,726 56,918
Services 3,078 2,403
-------- -------
65,804 59,321
------- ------
Gross profit 8,896 8,964
Selling, general and administrative expenses 8,290 8,840
-------- -------
Income from operations 606 124
Interest and other income (expense), net (87) 140
---------- -------
Income before income taxes 519 264
Income tax provision 208 106
-------- -------
Net income $ 311 $ 158
======= ======
Net income per share
Basic $ 0.04 $ 0.02
======= ======
Diluted $ 0.04 $ 0.02
======= ======
Weighted average shares outstanding
Basic 7,990 7,990
======= =====
Diluted 8,251 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)
Three months ended
October 31, October 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 311 $ 158
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 609 564
Provision for doubtful accounts 283 125
Change in assets and liabilities:
Accounts receivable 1,163 685
Inventory 689 (1,031)
Prepaid income taxes 300 (71)
Prepaid expenses and other current assets 280 179
Other assets 51 13
Accounts payable and accrued expenses (1,142) (419)
Deferred service contract revenue 136 (333)
------- -------
Net cash provided by (used in) operating activities 2,680 (130)
------ --------
Cash flows from investing activities:
Capital expenditures (515) (188)
------- -------
Net cash used in investing activities (515) (188)
------- -------
Cash flows from financing activities:
Payments on capital lease obligations (51) -
-------- --------
Net cash used in financing activities (51) -
-------- ---------
Net increase (decrease) in cash and cash equivalents 2,114 (318)
Cash and cash equivalents at beginning of period 8,553 8,963
------ -----
Cash and cash equivalents at end of period $10,667 $ 8,645
======= =======
See notes to unaudited 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)
(Unaudited)
1. Organization and Basis of Presentation
Manchester Technologies, Inc. and its subsidiaries ("Manchester," "we,"
"us," or "the Company") is a single-source solutions provider specializing in
hardware and software procurement, display technology, custom networking,
security, IP telephony, remote management, application development/e-commerce,
storage, 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. In addition,
we offer a complete line of products and peripherals for our customers' display
technology requirements. 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 financial statements, including the notes thereto, for the annual period
ended July 31, 2003. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair statement of results for the interim periods. In the opinion of management,
the accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Rule
10-01 of Regulation S-X. The results of operations for the three month period
ended October 31, 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 542,500 and 801,000
shares for the three months ended October 31, 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
October 31, 2003 October 31, 2002
---------------- ----------------
Per share Per share
Shares amount Shares amount
------ ------ ------ ------
Basic 7,990,000 $0.04 7,990,000 $0.02
===== ====
Effect of dilutive options 261,000 1,000
---------- ---------
Diluted 8,251,000 $0.04 7,991,000 $0.02
========= ===== ========= =====
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3. Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options if the
current market price of the underlying stock exceeds the exercise price on the
date of the grant. On August 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company has elected not to implement the fair value based
accounting method for employee stock options, but has elected to disclose the
pro forma net income and net income per share for employee stock option grants
made beginning in fiscal 1996 as if such method had been used to account for
stock-based compensation cost as described in SFAS 123.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations for stock
options and other stock-based awards while disclosing pro forma net income and
net income per share as if the fair value method had been applied in accordance
with SFAS 123.
The Company applies the intrinsic value method as outlined in APB 25, and
related interpretations in accounting for stock options granted. Under the
intrinsic value method, no compensation expense is recognized if the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant. Since the Company has issued all stock
option grants at market value, no compensation cost has been recognized. SFAS
123 requires that the Company provide pro forma information regarding net income
and net income per share as if compensation cost for the Company's stock option
programs had been determined in accordance with the fair value method prescribed
therein. During fiscal 2003, the Company adopted the disclosure portion of SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
requiring quarterly SFAS 123 pro forma disclosure. The following table
illustrates the effect on net income and net income per share as if the Company
had measured the compensation cost for the Company's stock option programs under
the fair value method in each period presented.
Three Months Ended
October 31, 2003 October 31, 2002
---------------- ----------------
Net income, as reported $ 311 $ 158
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (166) (160)
------- -------
Net income (loss) - pro forma $ 145 $ (2)
====== ========
Net income (loss) per share:
Basic - as reported $ 0.04 $ 0.02
Basic - pro forma $ 0.02 $ 0.00
Diluted - as reported $ 0.04 $ 0.02
Diluted - pro forma $ 0.02 $ 0.00
4. Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
7
longer be amortized, but instead be tested for impairment at least annually.
This pronouncement also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
The Company adopted the provisions of SFAS No. 142 as of August 1, 2001. 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 No. 142 was its operating segment. The Company's initial
impairment review indicated that there was no impairment as of the date of
adoption. Fair value for goodwill was determined based on discounted cash flows.
Also required by SFAS No. 142, on an annual basis, the Company tests
goodwill and other intangible assets for impairment. To determine the fair value
of these intangible assets, there are many assumptions and estimates used that
directly impact the results of the testing. In making these assumptions and
estimates, the Company uses set criteria that are reviewed and approved by
various levels of management, and the Company estimates the fair value of its
reporting units by using discounted cash flow analyses.
Accumulated amortization for the Company's goodwill was approximately
$1,116 at both October 31, 2003 and July 31, 2003. In accordance with SFAS No.
142, no goodwill amortization expense was recorded for the quarters ended
October 31, 2003 and 2002.
As of October 31, 2003 and July 31, 2003, there were no intangible assets,
other than goodwill, subject or not subject to amortization. There was no
amortization expense for intangible assets subject to amortization during the
quarters ended October 31, 2003 and 2002.
5. Line of Credit
The Company has available a line of credit with a financial institution in
the aggregate amount of $15.0 million. At October 31, 2003, no amounts were
outstanding under this line, which expires on January 31, 2005. The line of
credit facility requires the Company to maintain certain financial ratios and
covenants. At October 31, 2003, the Company was not in compliance with all the
financial ratios and covenants required. The Company received a waiver of its
requirements from its banks as of and for the period ended October 31, 2003.
6. Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") an interpretation of ARB No. 51. FIN 46
addresses consolidation by business enterprises of variable interest entities as
defined in the Interpretation. In October 2003, the FASB, with the issuance of
its proposed Interpretation, "Consolidation of Variable Interest Entities: A
Modification of FASB Interpretation No. 46", proposed significant changes in how
companies identify variable interest entities and determine who should
consolidate them under FIN 46. The proposed Interpretation of FIN 46 would
clarify a number of provisions and relax certain of its requirements. Other
changes being proposed would make it more likely that potential variable
interest entities are identified and consolidated, and some would add difficult
judgments. FIN 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. For variable interest entities created or
acquired prior to February 1, 2003, the provision of FIN 46, as revised, must be
applied for the first interim or annual period ending after December 15, 2003.
Accordingly, the Company will adopt the provisions of FIN 46 during the quarter
ended January 31, 2004. The Company does not believe that the adoption of FIN 46
will have a significant impact on the Company's financial condition or results
of operations.
8
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, 2003. 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 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
General. The technology 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
manufacturers, integrators or resellers of technology products 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.
Value-Added Services. 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
9
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
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 technology 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
technology manufacturers that market through direct sales forces and/or the
Internet. The technology industry has recently experienced, and may continue to
experience, a significant amount of consolidation through mergers and
acquisitions, 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. In addition,
certain suppliers and manufacturers have been, and additional suppliers and
manufacturers may choose, to market products directly to end users through a
direct sales force and/or the Internet rather than or in addition to channel
distribution, 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
technology 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.
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
10
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
technology industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers 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 frequently,
with generally higher prices early in the life cycle of the product and lower
prices near the end of the product's life cycle. The technology industry has
experienced rapid declines in average selling prices of personal computers,
peripherals and display technology. 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.
Management. The Company is highly dependent upon the services of the
members of its senior management team, particularly Barry R. Steinberg, the
Company's founder, Chairman of the Board, President and Chief Executive Officer.
The loss of any member of the Company's senior management team may have a
material adverse effect on its business.
11
Maximizing Shareholder Value. The Company periodically considers methods of
enhancing shareholder value, including, without limitation, acquisitions,
divestitures, business combinations, and strategic partnering. There can be no
assurance that we will consummate any such transactions, be able to identify
suitable candidates for any such transactions or to negotiate successfully such
transactions at a price or on terms and conditions favorable to us and our
shareholders. Acquisitions may be of significant size and may include assets
that are outside our geographic territories or are ancillary to our core
business strategy.
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.
This discussion of uncertainties is by no means exhaustive, but is designed
to highlight important factors that may impact the Company's outlook and
results.
E-Commerce
We utilize two websites each incorporating an electronic commerce system.
The sites, located at www.e-manchester.com and www.electrograph.com allow 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.
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
July 31, 2003 describes the significant accounting policies and methods used in
12
the preparation of the consolidated financial statements. The following critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the consolidated financial statements.
Revenue from product sales is recognized when title and risk of loss are
passed to the customer, which is generally at the time of shipment to the
customer. Revenue from services is recognized when the related services are
performed. When product sales and services are bundled, revenue is generally
recognized separately upon delivery of the product and completion of the
installation. Service contract fees are deferred and recognized as revenue
ratably over the period of the applicable contract. Deferred service contract
revenue represents the unearned portion of service contract fees. The Company
generally does not develop or sell software products. However, certain computer
hardware products sold by the Company are loaded with prepackaged software
products. The net impact on the Company's financial statements of product
returns, primarily for defective products, has been insignificant.
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.
13
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's condensed consolidated statements of income expressed
as a percentage of related revenue or total revenue.
Percentage of Revenue for the
Three Months Ended
October 31,
2003 2002
---- ----
Revenue
Products 94.3% 94.8%
Services 5.7 5.2
------ ------
Total revenue 100.0 100.0
----- -----
Cost of revenue
Products 89.0 88.0
Services 72.5 67.3
----- -----
Total cost of revenue 88.1 86.9
----- -----
Gross profit
Products 11.0 12.0
Services 27.5 32.7
----- -----
Total Gross Profit 11.9 13.1
Selling, general and
administrative expenses 11.1 12.9
----- -----
Income from operations 0.8 0.2
Interest and other income (expense), net (0.1) 0.2
------ -----
Income before income taxes 0.7 0.4
Income tax provision 0.3 0.2
----- -----
Net income 0.4% 0.2%
===== =====
Three Months Ended October 31, 2003 Compared with Three Months Ended October 31,
2002
Revenue. Revenue increased by $6.4 million or 9% to $74.7 million for the
three months ended October 31, 2003 from $68.3 million for the three months
ended October 31, 2002. Revenue from the sale of products increased by $5.7
million or 9% while revenue from service offerings increased by $0.7 million or
19%. 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. 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, as well as the
growth of sales of services that are delivered by manufacturers or vendors.
14
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 rebates provided by manufacturers related to volume
incentives and/or targets achieved by the Company and/or specific sales. All
other operating costs are included in selling, general and administrative
expenses, which are offset in part by certain market development funds provided
by manufacturers. Gross profit decreased by $68,000 or 1%, from $9.0 million for
the three months ended October 31, 2002 to $8.9 million for the three months
ended October 31, 2003 while as a percentage of revenue, gross profit decreased
from 13.1% for the three months ended October 31, 2002 to 11.9% for the three
months ended October 31, 2003. Gross profit from product sales decreased by
$71,000 or 1% while gross profit from service offerings was the same as the
previous period. As a percentage of revenue, gross profit from the sale of
products decreased from 12.0% for the three months ended October 31, 2002 to
11.0% for the three months ended October 31, 2003 primarily as a result of
increased sales of lower margin products due to increased competition and
pricing pressure. As a percentage of revenue, gross profit from the sale of
services declined from 32.7% for the three months ended October 31, 2002 to
27.5% for the three months ended October 31, 2003 due to increased sales of
lower margin services that are delivered by manufacturers or vendors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $550,000, or 6% from $8.8 million for the
three months ended October 31, 2002 to $8.3 million for the three months ended
October 31, 2003. The decrease is principally due to decreased rent expense of
approximately $300,000 as a result of the capital leases entered into by the
Company in March 2003, decreased telephone expenses of approximately $160,000
and decreased advertising costs of approximately $490,000, primarily as a result
of market development funds received from manufacturers for pre-approved market
development activities. These decreases were partially offset by increased bad
debt expense of approximately $370,000 primarily due to one customer. As a
percentage of revenue, selling, general and administrative expenses decreased
from 12.9% for the three months ended October 31, 2002 to 11.1% for the three
months ended October 31, 2003.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by approximately $230,000 from income of approximately
$140,000 for the three months ended October 31, 2002 to an expense of
approximately $87,000 for the three months ended October 31, 2003. The amount
for the three months ended October 31, 2003 included approximately $155,000 of
interest expense related to the interest portion of the capital leases entered
into by the Company in March 2003 offset by interest income of approximately
$68,000 earned on the Company's cash investments. The amount for the three
months ended October 31, 2002 included income of approximately $113,000 from
insurance proceeds received by the Company and interest income of approximately
$26,000 earned on the Company's cash investments.
Income Tax Provision. Our effective tax rate was 40.1% the three months
ended October 31, 2003 and 40.2% for the three months ended October 31, 2002.
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 October 31, 2003 and July 31, 2003 was approximately $31.1 million
and $30.7 million, respectively.
Operations for the three months ended October 31, 2003 and 2002, after
adding back non-cash items, provided cash of approximately $1.2 million and $0.8
million, respectively. During such periods, other changes in working capital
provided (used) cash of approximately $1.5 million and ($1.0) million,
respectively, resulting in cash being provided by (used in) operating activities
of approximately $2.7 million and ($130,000), respectively. Our accounts
receivable and accounts payable balances, as well as our inventory balances, can
fluctuate significantly from one period to the next due to the receipt of large
customer orders or payments or variations in product availability and vendor
shipping patterns at any particular date.
15
Investment activities for the three months ended October 31, 2003 and 2002
used cash of approximately $515,000 and $188,000, respectively. For the three
months ended October 31, 2003 and October 31, 2002 these amounts consisted
solely of additions to property and equipment.
For the three months ended October 31, 2003 financing activities used cash
of approximately $51,000. This amount consisted solely of payments on
capitalized lease obligations. Financing activities did not provide or use any
cash for the three months ended October 31, 2002.
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At October 31, 2003, no amounts were
outstanding under this line, which expires on January 31, 2005. The line of
credit facility requires the Company to maintain certain financial ratios and
covenants. At October 31, 2003, the Company was not in compliance with all the
financial ratios and covenants required. The Company received a waiver of its
requirements from its banks as of and for the period ended October 31, 2003.
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 2004 which ends on July 31,
2004. 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
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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to significant market risks. 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 have been 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.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
31.1 - Certification by Barry R. Steinberg, Chief Executive Officer,
Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by Elan Yaish, Chief Financial Officer, Pursuant
to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 - Certification by Barry R. Steinberg, Chief Executive Officer,
Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification by Elan Yaish, Chief Financial Officer, Pursuant
to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K filed September 5, 2003 disclosing Press Release dated September
5, 2003 regarding a write-down of between $2.3 million and $2.5 million,
pre-tax, relating to the closing of the operations of its Donovan
Consulting Group subsidiary.
2. Form 8-K filed October 28, 2003 disclosing Press Release dated October 27,
2003 reporting earnings for the fourth quarter and fiscal year ended July
31, 2003.
18
MANCHESTER TECHNOLOGIES, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANCHESTER TECHNOLOGIES., INC.
(Registrant)
DATE: December 11, 2003 /S/ Barry R. Steinberg
----------------------------------------
Barry R. Steinberg
President and Chief Executive Officer
DATE: December 11, 2003 /S/ Elan Yaish
-----------------------------------------
Elan Yaish
Vice President Finance
and Chief Financial Officer