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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 April 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
Manchester Technologies, Inc.
(Exact name of registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
160 Oser Avenue
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(631) 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 June 7, 2004 there were 8,070,551 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, 2004 (unaudited) and July 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended
April 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 2004 and 2003 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
..
Item 6. Exhibits and Reports on Form 8-K 20
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, 2004 July 31, 2003
(Unaudited) -------------
-----------
Assets
Current assets:
Cash and cash equivalents $13,241 $ 8,553
Accounts receivable, net 33,297 35,117
Inventory 25,805 9,605
Deferred income taxes 603 603
Prepaid taxes 42 1,704
Prepaid expenses and other current assets 703 709
Assets held for sale 2,881 -
------- ----------
Total current assets 76,572 56,291
Property and equipment, net 12,894 13,985
Goodwill, net 3,735 6,439
Deferred income taxes 757 757
Other assets 134 278
---- ---
Total assets $94,092 $77,750
====== ======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $40,992 $24,752
Deferred service contract revenue - 666
Current portion of capital lease obligations 237 212
------- -------
Total current liabilities 41,229 25,630
Deferred compensation payable 263 263
Capital lease obligations, net of current portion 7,749 7,923
----- -------
Total liabilities 49,241 33,816
------ -------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares authorized,
8,071 and 7,990 shares issued and outstanding 81 80
Additional paid-in capital 19,249 18,942
Deferred compensation (13) (13)
Retained earnings 25,534 24,925
------ ------
Total shareholders' equity 44,851 43,934
------ ------
Total liabilities and shareholders' equity $94,092 $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 April 30, Nine months ended April 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenue $42,448 $36,533 $132,943 $123,636
Cost of Revenue 38,509 33,137 119,712 110,432
------ ------ ------- -------
Gross profit 3,939 3,396 13,231 13,204
Selling, general and
administrative expenses 3,149 2,847 9,735 8,657
----- ----- ----- -----
Income from operations 790 549 3,496 4,547
Interest and other income (expense), net (70) (22) (166) 146
---- --- ---- ---
Income from continuing operations
before income taxes 720 527 3,330 4,693
Income tax provision 288 211 1,312 1,877
---- --- ----- -----
Income from continuing operations 432 316 2,018 2,816
---- --- ----- -----
Discontinued operations
Loss from operations of
discontinued component (714) (484) (2,314) (4,594)
Income tax benefit 285 194 905 1,837
----- --- --- -----
Loss from discontinued operations (429) (290) (1,409) (2,757)
----- ----- ------- -------
Net income $ 3 $ 26 $ 609 $ 59
==== ====== ======= ======
Income per share from continuing operations
Basic $0.05 $0.04 $0.25 $0.35
==== ==== ==== ====
Diluted $0.05 $0.04 $0.24 $0.35
==== ==== ==== ====
Loss per share from discontinued operations
Basic $(0.05) $(0.04) $(0.18) $(0.35)
===== ===== ===== =====
Diluted $(0.05) $(0.04) $(0.17) $(0.35)
==== ===== ===== =====
Net income per share
Basic $0.00 $0.00 $0.08 $0.01
==== ==== ==== ====
Diluted $0.00 $0.00 $0.07 $0.01
==== ==== ==== ====
Weighted average
shares outstanding
=
Basic 8,070 7,990 8,017 7,990
===== ===== ===== =====
Diluted 8,533 7,990 8,364 7,990
===== ===== ===== =====
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,
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 609 $ 59
Loss from discontinued operations 1,409 -
----- -----
Income from continuing operations 2,018 59
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 1,315 1,402
Provision for doubtful accounts 489 (94)
Equity based compensation expense 24 -
Changes in assets and liabilities:
Accounts receivable 1,331 3,341
Inventory (16,200) (3,630)
Prepaid income taxes 1,662 (294)
Prepaid expenses and other current assets 6 (325)
Other assets 144 347
Accounts payable and accrued expenses 15,551 2,078
Deferred service contract revenue (666) (263)
---- -----
Net cash provided by continuing operations 5,674 2,621
Net cash used by discontinued operations (361) -
---- ------
Net cash provided by operating activities 5,313 2,621
----- ------
Cash flows from investing activities:
Capital expenditures (760) (718)
------- ----
Net cash used in investing activities (760) (718)
-------- -----
Cash flows from financing activities:
Proceeds from exercise of stock options 284 -
Payments on capital lease obligations (149) (16)
------- --------
Net cash provided by (used in) financing activities 135 (16)
------ --------
Net increase in cash and cash equivalents 4,688 1,887
Cash and cash equivalents at beginning of period 8,553 8,963
----- --------
Cash and cash equivalents at end of period $13,241 $10,850
====== =======
Capital lease obligations incurred to acquire buildings $ - $8,200
======= ======
See notes to unaudited condensed consolidated financial statements.
5
Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
1. Organization and Basis of Presentation
The condensed consolidated financial statements include the accounts of
Manchester Technologies, Inc. and its wholly-owned subsidiaries (collectively,
"Manchester," "we," "us," or "the Company"). As discussed further in Note 2, on
May 28, 2004, the Company sold its end-user information technology fulfillment
and professional services business. Prior to such sale, Manchester specialized
in hardware and software procurement, display technology, custom networking,
security, IP telephony, remote management, application development/e-commerce,
storage, and enterprise and Internet solutions, offering its customers
single-source solutions customized to their information systems needs by
integrating its analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. Subsequent
to such sale, the Company will continue distributing display technology
solutions and plasma display monitors and computer hardware primarily to dealers
and system integrators and will no longer provide any professional services. The
Company operates in a single segment.
The Company has entered into agreements with certain suppliers and
manufacturers that may provide the Company favorable pricing and price
protection in the event the vendor reduces its prices.
The accompanying financial information should be read in conjunction with
the financial statements, including the notes thereto, for the annual period
ended July 31, 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 and nine month
periods ended April 30, 2004 are not necessarily indicative of the results to be
expected for future interim periods or the entire year.
2. Discontinued Operations
On May 28, 2004, the Company sold its end-user information technology
fulfillment and professional services business to ePlus, inc., a leading
provider of Enterprise Cost Management, in an all cash transaction. The
transaction included the sale to ePlus of the customer list of the business and
certain related equipment, the assumption by ePlus of certain contracts and
liabilities pertaining to the business, the hiring by ePlus of approximately 135
Manchester employees involved in the business, and an option to purchase certain
inventory of the business to be determined at a subsequent date. The transaction
did not include, and Manchester retained, the balance of the inventory and all
of the accounts receivable of the business sold. The Company will continue
distributing display technology solutions and plasma display monitors and
computer hardware primarily to dealers and system integrators.
The purchase price for the acquisition was approximately $5,000. The
Company estimates that it will record a gain of approximately $1,500 in its
fourth quarter ended July 31, 2004 as a result of the transaction.
Assets held for sale of the disposal group included on the accompanying
condensed consolidated balance sheet as of April 30, 2004 consist of goodwill of
$2,704 and property and equipment, net of $177. Liabilities of the disposal
group include deferred revenue of $689, which has been included in accounts
payable and accrued expenses on the accompanying condensed consolidated balance
sheet as of April 30, 2004.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations from the sale of the end-user
6
information technology fulfillment and professional services business have been
recorded as discontinued operations in the accompanying condensed consolidated
statements of operations. The revenue from discontinued operations was $34,976
and $27,411 for the three months ended April 30, 2004 and 2003, respectively.
The loss from operations of the discontinued component was $(714) and $(484) for
the three months ended April 30, 2004 and 2003, respectively. The revenue from
discontinued operations was $98,975 and $89,135 for the nine months ended April
30, 2004 and 2003, respectively. The loss from operations of the discontinued
component was $(2,314) and $(4,594) for the nine months ended April 30, 2004 and
2003, respectively.
The presentation of discontinued operations on the statement of operations
for the three and nine months ended April 30, 2003 has been reclassified. The
balance sheet as of July 31, 2003 and the statement of cash flows for the nine
months ended April 30, 2003 have not been reclassified to reflect discontinued
operations.
3. Net Income Per Share
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the weighted average number of
common shares outstanding, plus the assumed exercise of dilutive stock options,
less the number of treasury shares assumed to be purchased from the proceeds of
such exercises using the average market price of the Company's common stock
during each respective period. Stock options representing 153,000 and 843,000
shares for the three months ended April 30, 2004 and 2003, respectively, and
429,000 and 843,000 shares for the nine months ended April 30, 2004 and 2003,
respectively, have been excluded from the calculation of diluted net income per
share as they are antidilutive. The following table reconciles the denominators
of the basic and diluted per share computations. For each period, the numerator
is the net income from continuing operations as reported and the per share
amounts below represent income per share from continuing operations.
Three months ended April 30, Nine months ended April 30,
2004 2003 2004 2003
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ ------ ------
(shares in thousands)
Basic 8,070 $0.05 7,990 $0.04 8,017 $0.25 7,990 $0.35
===== ===== ==== =====
Effect of
dilutive
options 463 347
--- ---- --- -----
Diluted 8,533 $0.05 7,990 $0.04 8,364 $0.24 7,990 $0.35
===== ==== ===== ===== ==== ===== ===== =====
4. 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 (loss) and net income (loss) per share for employee stock
option grants as if such method had been used to account for stock-based
compensation cost as described in SFAS 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
(loss) and net income (loss) 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
7
intrinsic value method, no compensation expense is recognized if the exercise
price of the Company's employee stock options equals or exceeds the market price
of the underlying stock on the date of grant. Since the Company has issued all
stock option grants at market value, no compensation cost has been recognized at
the time of grant. For 50,000 options that were repriced subsequent to their
date of grant, the Company is applying variable accounting to those options. The
related equity-based compensation expense was $24 for the nine months ended
April 30, 2004. SFAS 123 requires that the Company provide pro forma information
regarding net income (loss) and net income (loss) per share as if compensation
cost for the Company's stock option programs had been determined in accordance
with the fair value method prescribed therein. 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 (loss) and
net income (loss) 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 April 30, Nine Months Ended April 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $3 $26 $609 $ 59
Add: Stock-based compensation
expense included in net income
net of related tax effects 14 - 14 -
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (119) (123) (405) (369)
----- ----- ----- -----
Net income (loss) - pro forma $(102) $(97) $218 $(310)
==== === === ====
Net income (loss) per share:
Basic - as reported $0.00 $(0.00) $0.08 $0.01
==== ===== ==== ====
Basic - pro forma $(0.01) $(0.01) $0.03 $(0.04)
===== ===== ===== =====
Diluted - as reported $0.00 $(0.00) $0.07 $0.01
==== ===== ==== ====
Diluted - pro forma $(0.01) $(0.01) $0.03 $(0.04)
===== ===== ==== =====
5. Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
This pronouncement also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
The Company adopted the provisions of SFAS No. 142 as of August 1, 2001.
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
8
estimates, the Company uses set criteria that are reviewed and approved by
various levels of management, and the Company estimates the fair value of its
reporting unit by using discounted cash flow analyses.
Accumulated amortization for the Company's goodwill was approximately
$647 and $1,116 at April 30, 2004 and July 31, 2003, respectively. In accordance
with SFAS No. 142, no goodwill amortization expense was recorded for the three
months and nine months ended April 30, 2004 and 2003.
As discussed in Note 2, $2,704 of goodwill, which was net of
accumulated amortization of $469, has been included in assets held for sale as
of April 30, 2004. The amount of the goodwill classified as held for sale was
determined based on a relative fair value approach in accordance with SFAS No.
142.
As of April 30, 2004 and July 31, 2003, the Company had no intangible
assets other than goodwill.
9
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.
Overview
On May 28, 2004, the Company sold its end-user information technology
fulfillment and professional services business to ePlus, inc., a leading
provider of Enterprise Cost Management, in an all cash transaction. The
transaction included the sale to ePlus of the customer list of the business and
certain related equipment, the assumption by ePlus of certain contracts and
liabilities pertaining to the business, the hiring by ePlus of approximately 135
Manchester employees involved in the business, and an option to purchase certain
inventory of the business to be determined at a subsequent date. The transaction
did not include, and Manchester retained, the balance of the inventory and all
of the accounts receivable of the business sold. The Company will continue
distributing display technology solutions and plasma display monitors and
computer hardware primarily to dealers and system integrators.
Prior to the sale we were 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 offered 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. Through
April 30, 2004, 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.
While the Company was able to grow the revenues of the IT products and
services business, the continued pressure on margins and increased competition
with respect to the sale of IT products caused the Company to review its
business operations with the goal of aligning the Company's operations with what
management perceived as growth opportunities in the technology marketplace. As a
result, the Company decided to exit the end-user IT products and services
business as it pertains to selling to end users with the expectation that this
would reduce costs and allow the Company to focus primarily on its display
solutions business and explore other areas of growth.
The purchase price for the acquisition was approximately $5.0 million.
The Company estimates that it will record a gain of approximately $1.5 million
in its fourth quarter ended July 31, 2004 as a result of the transaction.
10
Revenue from continuing operations for the quarter ended April 30, 2004 was
$42.4 million as compared with $36.5 million for the comparable quarter last
year. The Company reported income from continuing operations for the quarter of
$432,000 or $0.05 per diluted share as compared with $316,000 or $0.04 per
diluted share reported a year ago.
Revenue from continuing operations for the nine months ended April 30, 2004
was $132.9 million as compared with $123.6 million for the first nine months of
last year. Income from continuing operations for the nine months was $2.0
million or $0.24 per diluted share as compared with $2.8 million or $0.35 per
diluted share reported a year ago.
The sale to ePlus of our end-user IT product and services business will
enable us to focus our resources on our display solutions business. We are a
dominant player in the display technology market, and we believe that this
market will continue to grow in the years to come. Revenues from sales of
display solutions increased by 21% as compared to the third quarter of last year
and 17% as compared to the first nine months of last year.
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 selling price
of display products and peripherals and computer hardware. 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 Products and Services. An integral part of our strategy is to
increase our value-added products and services revenue. These products and
services generally provide higher gross margins than those associated with the
sale of commodity products. We cannot predict whether we will be successful in
increasing our focus on providing value-added products and services, and the
failure to do so may have a material adverse effect on our business, results of
operations and financial condition.
Management of Growth. Our strategy, encompassing the expansion of
offerings, exploring other areas of growth 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.
Competition. The technology industry is characterized by intense
competition. We directly compete with local, regional and national distributors
as well as with certain technology manufacturers that market through direct
sales forces and/or the Internet. The technology industry has recently
experienced, and may continue to experience, a significant amount of
consolidation through mergers and acquisitions, and manufacturers 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 manufacturers have been, and additional 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 distribution channels, 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.
11
Vendor Relationships and Product Availability. Our business is dependent
upon our relationships with major manufacturers in the technology industry. Many
aspects of our business are affected by our relationships with major
manufacturers, including product availability, pricing and related terms. The
increasing demand for display technology solutions and ancillary equipment has
resulted in significant product shortages from time to time, because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. In addition, many manufacturers have adopted "just in
time" manufacturing principles that can reduce the immediate availability of a
wide range of products at any one time. We cannot predict that manufacturers
will maintain an adequate supply of these products to satisfy all the orders of
our customers or that, during periods of increased demand, manufacturers will
provide products to us, even if available, or at discounts previously offered to
us. In addition, we cannot assure you that the pricing and related terms offered
by major manufacturers will not adversely change in the future. Our failure to
obtain an adequate supply of products, the loss of a major manufacturer, the
deterioration of our relationship with a major manufacturer or our inability in
the future to develop new relationships with other manufacturers may have a
material adverse effect on our business, financial condition and results of
operations.
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 resellers. Our inability to
obtain the desired volume discounts from manufacturers 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 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 technologies, to obtain these new products from present or
future manufacturers 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 manufacturers provide price protection to us, which is
intended to reduce the risk of inventory devaluation due to price reductions on
current products. Certain of our manufacturers 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 display
technologies, product life cycles are short. Accordingly, our product offerings
change constantly. Prices of products change frequently, with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The technology industry has experienced rapid declines
in average selling prices of display technology products. In some instances, we
have been able to offset these price declines with increases in units shipped.
12
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. The loss of any member of the Company's
senior management team may have a material adverse effect on its business.
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.
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 a website incorporating an electronic commerce system. The site,
located at www.electrograph.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.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make judgments, assumptions and
estimates that affect the amounts reported in the consolidated financial
statements and accompanying notes. Note 1 to the consolidated financial
statements in the Annual Report on Form 10-K for the fiscal year ended July 31,
2003 describes the significant accounting policies and methods used in the
preparation of the consolidated financial statements. The following critical
13
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the consolidated financial statements.
Revenue Recognition. Revenue from product sales is recognized when title
and risk of loss are passed to the customer, which is generally at the time of
shipment to the customer. The Company generally does not develop software
products. However, certain computer hardware products sold by the Company are
loaded with prepackaged software products. The net impact on the Company's
financial statements of product returns, primarily for defective products, has
been insignificant
Allowance for Doubtful Accounts. The allowance for doubtful accounts is
based on our assessment of the collectibility of specific customer accounts and
the aging of the accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than our historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory. Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden and significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to increase
our inventory allowances and our gross margin could be adversely affected.
Goodwill. We perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. In assessing the recoverability
of the Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
14
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,
2004 2003 2004 2003
---- ----- ---- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 90.7 90.7 90.0 89.3
---- ---- ---- ----
Gross profit 9.3 9.3 10.0 10.7
Selling, general and
administrative expenses 7.4 7.8 7.3 7.0
--- --- --- ---
Income from operations 1.9 1.5 2.6 3.7
Interest and other income (expense), net (0.2) (0.1) (0.1) 0.1
---- ---- ---- ---
Income from continuing operations
before income taxes 1.7 1.4 2.5 3.8
Income tax provision 0.7 0.6 1.0 1.5
---- --- --- ---
Income from continuing operations 1.0 0.9 1.5 2.3
---- --- --- ---
Discontinued operations
Loss from operations of
discontinued component (1.7) (1.3) (1.7) (3.7)
Income tax benefit 0.7 0.5 0.7 1.5
------- --- --- ---
Loss on discontinued operations (1.0) (0.8) (1.1) (2.2)
----- ----- ----- -----
Net income 0.0% 0.1% 0.5% 0.0%
===== ===== ==== =====
Three Months Ended April 30, 2004 Compared with Three Months Ended April
30, 2003
Revenue. Revenue increased by $5.9 million or 16% to $42.4 million for the
three months ended April 30, 2004 from $36.5 million for the three months ended
April 30, 2003. The increase in revenue is primarily a result of increased sales
of display technology solutions, primarily large screen flat panel displays, as
a result of the growth in the industry which is anticipated to continue to grow.
This increase was partially offset by a decrease in sales of computer hardware
to dealers and system integrators.
Gross Profit. Cost of revenue includes the direct costs of products sold
and freight. All other operating costs are included in selling, general and
administrative expenses. Gross profit increased by $0.5 million or 16%, from
15
$3.4 million for the three months ended April 30, 2003 to $3.9 million for the
three months ended April 30, 2004 and as a percentage of revenue, gross profit
was 9.3% for the three months ended April 30, 2003 and April 30, 2004.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $302,000, or 11% from $2.8 million for the
three months ended April 30, 2003 to $3.1 million for the three months ended
April 30, 2004. The increase is principally due to an increase in salaries and
other personnel costs of approximately $78,000 reflecting the increase in
employee headcount and associated costs with respect to the continuing growth of
the business, increased sales commissions of approximately $70,000, increased
tradeshow costs of approximately $163,000 and an aggregate increase of $186,000
of various other selling and general and administrative expenses. This was
partially offset by a recovery of bad debt expense of $287,000 reduced by an
increase in bad debt expense of approximately $92,000 in the period. As a
percentage of revenue, selling, general and administrative expenses decreased
from 7.8% for the three months ended April 30, 2003 to 7.4% for the three months
ended April 30, 2004.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by $48,000 from an expense of $22,000 for the three
months ended April 30, 2003 to an expense of $70,000 for the three months ended
April 30, 2004. 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 $85,000 offset partially by interest income of
approximately $37,000 earned on the Company's cash investments.
Income Tax Provision. Our effective tax rate was 40.0% for the three months
ended April 30, 2004 and April 30, 2003.
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations on the accompanying condensed
consolidated statements of operations. The net loss from discontinued operations
was $429,000 and $290,000 for the three months ended April 30, 2004 and 2003,
respectively. The presentation of discontinued operations in the statement of
operations for the three months ended April 30, 2003 has been reclassified.
Nine Months Ended April 30, 2004 Compared to Nine Months Ended April 30,
2003
Revenue. Revenue increased by $9.3 million or 8% to $132.9 million for the
nine months ended April 30, 2004 from $123.6 million for the nine months ended
April 30, 2003. The increase in revenue is primarily a result of increased sales
of display technology solutions, primarily large screen flat panel displays, as
a result of the growth in the industry which is anticipated to continue to grow.
This increase was partially offset by a decrease in sales of computer hardware
to dealers and system integrators.
Gross Profit. Gross profit remained relatively the same increasing by
$27,000 or 0.0%, during the nine months ended April 30, 2004 as compared to the
nine months ended April 30, 2003 and as a percentage of revenue, gross profit
decreased from 10.7% for the nine months ended April 30, 2003 to 10.0% for the
nine months ended April 30, 2004. Our gross margins have been impacted by
increased competition and pricing pressure resulting in lower gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.1 million, or 12% from
$8.7 million for the nine months ended April 30, 2003 to $9.7 million for the
nine months ended April 30, 2004. The increase is principally due to an increase
in salaries and other personnel costs in the amount of approximately $135,000
reflecting the increase in employee headcount and associated costs with respect
to the continuing growth of the business, increased sales commissions of
approximately $158,000, increased insurance costs of approximately $196,000 due
to an increase in rates, increased tradeshow costs of approximately $90,000,
increased bad debt expense of approximately $184,000 resulting from the increase
in sales and increased depreciation costs of approximately $134,000 as a result
16
of the increase in capital expenditures in the period. As a percentage of
revenue, selling, general and administrative expenses increased from 7.0% for
the nine months ended April 30, 2003 to 7.3% for the nine months ended April 30,
2004.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, decreased by approximately $312,000 from income of $146,000 for
the nine months ended April 30, 2003 to an expense of approximately $166,000 for
the nine months ended April 30, 2004. The amounts for the nine months ended
April 30, 2004 included approximately $258,000 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 $92,000 earned on the Company's
cash investments. The amount for the nine months ended April 30, 2003 included
the receipt of insurance proceeds in the amount of $113,000 and interest income
of approximately $33,000 earned on the Company's cash investments.
Income Tax Provision (Benefit). Our effective tax rate was 39.4% and 40.0%
for the nine months ended April 30, 2004 and April 30, 2003, respectively.
Discontinued Operations. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the results of operations for the
end-user information technology fulfillment and professional services business
have been recorded as discontinued operations on the accompanying condensed
consolidated statements of operations. The net loss from discontinued operations
was $1.4 million and $2.8 million for the nine months ended April 30, 2004 and
2003, respectively. The presentation of discontinued operations in the statement
of operations for the nine months ended April 30, 2003 has been reclassified.
Liquidity and Capital Resources
Working Capital
---------------
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, 2004 and July 31, 2003 was approximately $35.3 million and
$30.7 million, respectively.
Cash Flows
----------
Continuing operations for the nine months ended April 30, 2004 and 2003,
after adding back non-cash items, provided cash of approximately $3.8 million
and $1.4 million, respectively. During such periods, other changes in working
capital provided cash of approximately $1.8 million and $1.3 million,
respectively, resulting in cash being provided by continuing operating
activities of approximately $5.7 million and $2.6 million, respectively. Our
accounts receivable and accounts payable balances, as well as our inventory
balances, can fluctuate significantly from one period to the next due to the
receipt of large customer orders or payments or variations in product
availability and vendor shipping patterns at any particular date. The increase
in inventory and accounts payable during the nine months ended April 30, 2004 of
approximately $16.2 million and $15.6 million, respectively, is a result of the
increase in sales in the period, as well as increased inventory purchases due to
special product offerings and volume discounts received from manufacturers.
Continuing investing activities for the nine months ended April 30, 2004
and 2003 used cash of approximately $760,000 and $718,000, respectively. For the
nine months ended April 30, 2004 and 2003 these amounts consisted solely of
additions to property and equipment.
For the nine months ended April 30, 2004 and 2003 continuing financing
activities provided (used) cash of approximately $135,000 and $(16,000),
respectively. For the nine months ended April, 2004 this amount consisted of
proceeds from the exercise of stock options of approximately $284,000 offset by
$149,000 of payments on capitalized lease obligations. For the nine months ended
April 30, 2003, this amount consisted solely of payments on capitalized lease
obligations.
17
Line of Credit
--------------
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At April 30, 2004, no amounts were
outstanding under this line which expires on January 31, 2005. The line of
credit facility requires the Company to maintain certain financial ratios and
covenants. At April 30, 2004, the Company was in compliance with all the
specified financial ratios and covenants.
Financial Commitments
---------------------
We believe that our current balances in cash and cash equivalents, expected
cash flows from operations and available borrowings under the line of credit
will be adequate to support current operating levels for the foreseeable future,
specifically through at least the end of fiscal 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 and potential acquisitions.
As part of the sale to ePlus, inc. of the Company's end-user information
technology fulfillment and professional services business, ePlus, inc. entered
into certain sublease and assignment agreements with the Company with respect to
certain of the Company's facilities. The Company is awaiting landlord consent
for these agreements to take effect. There are no other transactions,
arrangements and other relationships with unconsolidated entities or other
persons that are reasonably likely to affect liquidity or the availability of,
or requirements for, capital resources.
The following table represents the Company's financial commitments as
of April 30, 2004:
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
(in thousands)
Capital leases $7,986 $237 $ 940 $854 $5,955
Operating leases 2,331 629 1,494 75 133
----- ----- ----- -- ---
Total $10,317 $866 $2,434 $929 $6,088
====== === ===== === =====
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.
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.
18
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.
19
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 - Asset Purchase and Sale Agreement by and between ePlus Technology,
Inc. and Manchester Technologies, Inc. dated May 28, 2004 (x)
2.1 - Services Agreement by and between ePlus Technology, Inc. and
Manchester Technologies, Inc. dated May 28, 2004 (x)
2.2 - Escrow Agreement by and between ePlus Technology, Inc., Manchester
Technologies, Inc. and Joel Rothlein, as Escrow Agent, dated May 28,
2004 (x)
2.3 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus
Technology, Inc., dated May 28, 2004 (x)
2.4 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus
Technology, Inc., dated May 28, 2004 (x)
2.5 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus
Technology, Inc., dated May 28, 2004 (x)
2.6 - Assignment of Lease by and between Manchester Technologies, Inc. and
ePlus Technology, Inc., dated May 28, 2004 (x)
2.7 - Assignment of Lease by and between Manchester Technologies, Inc. and
ePlus Technology, Inc., dated May 28, 2004 (x)
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.
(x) Previously filed as an exhibit to the Company's Current Report on Form
8-K (File No.: 000-21695) dated June 10, 2004 and incorporated herein
by reference.
(b) Reports on Form 8-K
1. Form 8-K filed March 9, 2004 disclosing Press Release dated March 9, 2004
reporting earnings for the second quarter ended January 31, 2004.
20
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 18, 2004 /S/ Barry R. Steinberg
------------------------------
Barry R. Steinberg
President and Chief Executive Officer
DATE: June 18, 2004 /S/ Elan Yaish
----------------------------------
Elan Yaish
Vice President Finance, Chief Financial
Officer and Assistant Secretary