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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 January 31, 2005
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)
50 Marcus Boulevard
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(631) 951-8100
(Registrant's telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year if
Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate 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 March 3, 2005 there were 8,440,948 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
January 31, 2005 (unaudited) and July 31, 2004 3
Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended
January 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended January 31, 2005 and 2004 (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 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits 18
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)
January 31, 2005 July 31, 2004
(Unaudited) ------------
-----------
Assets
------
Current assets:
Cash and cash equivalents $17,399 $16,881
Accounts receivable, net of allowance for doubtful accounts
of $1,420 and $2,848, respectively 14,848 15,530
Inventory 18,566 20,301
Deferred income taxes 1,212 1,212
Prepaid taxes 655 916
Prepaid expenses and other current assets 1,066 1,266
----- -----
Total current assets 53,746 56,106
Property and equipment, net 9,505 9,890
Goodwill, net 3,735 3,735
Deferred income taxes 1,728 1,728
Other assets 105 183
------ -------
Total assets $68,819 $71,642
====== ======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $14,869 $21,492
Current portion of capital lease obligations 260 246
------- --------
Total current liabilities 15,129 21,738
Deferred compensation payable 98 98
Capital lease obligations, net of current portion 7,551 7,683
----- -----
Total liabilities 22,778 29,519
------ ------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 8,428 and 8,163 shares issued
and outstanding 84 82
Additional paid-in capital 20,913 19,597
Retained earnings 25,044 22,444
------ ------
Total shareholders' equity 46,041 42,123
------ ------
Total liabilities and shareholders' equity $68,819 $71,642
====== ======
See notes to unaudited condensed consolidated financial statements.
3
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three months ended January 31, Six months ended January 31,
2005 2004 2005 2004
---- ---- ---- ----
Revenue $39,289 $45,117 $86,170 $90,495
Cost of revenue 34,408 40,559 75,257 81,203
------ ------ ------ ------
Gross profit 4,881 4,558 10,913 9,292
Selling, general and
administrative expenses 4,580 3,246 7,709 6,586
----- ----- ----- -----
Income from operations 301 1,312 3,204 2,706
Interest and other income (expense), net 118 (75) 133 (95)
--- ---- --- ---
Income from continuing operations
before income taxes 419 1,237 3,337 2,611
Income tax provision 167 494 1,334 1,024
--- --- ----- -----
Income from continuing operations 252 743 2,003 1,587
--- --- ----- -----
Discontinued operations
Income (loss) from operations
of discontinued component - (745) 995 (1,600)
Income tax (provision) benefit - 297 (398) 619
---- --- ----- ---
Income (loss) from discontinued operations - (448) 597 (981)
---- ----- --- -----
Net income $252 $ 295 $2,600 $ 606
=== === ===== =====
Income per share from continuing operations
Basic $0.03 $0.09 $0.24 $0.20
==== ==== ==== ====
Diluted $0.03 $0.09 $0.24 $0.19
==== ==== ==== ====
Income (loss) per share from discontinued operations
Basic $ - $(0.06) $0.07 $(0.12)
=== ===== ==== ======
Diluted $ - $(0.06) $0.07 $(0.12)
=== ===== ==== ======
Net income per share
Basic $0.03 $0.04 $0.31 $0.08
==== ==== ==== ====
Diluted $0.03 $0.04 $0.31 $0.07
==== ==== ==== ====
Weighted average shares outstanding
Basic 8,364 7,990 8,295 7,990
===== ===== ===== =====
Diluted 8,560 8,299 8,497 8,265
===== ===== ===== =====
See notes to unaudited condensed consolidated financial statements.
4
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
January 31, January 31,
2005 2004
---- ----
Cash flows from operating activities:
Net income $2,600 $ 606
Income from discontinued operations 597
---
Income from continuing operations 2,003
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 527 1,271
Provision for doubtful accounts 167 295
Equity based compensation expense 108 23
Tax benefits from exercise of stock options 240 -
Changes in assets and liabilities, net of the
effects of discontinued operations in 2005:
Accounts receivable (1,892) 1,112
Inventory 1,735 (8,747)
Prepaid taxes 261 (128)
Prepaid expenses and other current assets 200 6
Other assets 78 101
Accounts payable and accrued expenses (4,337) 1,772
Deferred service contract revenue - (60)
------- ----
Net cash used in continuing operations (910) (3,749)
Net cash provided by discontinued operations 718 -
--- ------
Net cash used in operating activities (192) (3,749)
----- -------
Cash flows from investing activities:
Capital expenditures (142) (842)
--- ----
Net cash used in investing activities (142) (842)
----- -------
Cash flows from financing activities:
Payments on capital lease obligations (118) (96)
Proceeds from exercise of stock options 970 -
--- ----
Net cash provided by (used in) financing activities 852 (96)
--- -------
Net increase (decrease) in cash and cash equivalents 518 (4,687)
Cash and cash equivalents at beginning of period 16,881 8,553
------ -----
Cash and cash equivalents at end of period $17,399 $3,866
====== =====
Income taxes paid during the period $ 30 $ 208
==== ====
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 ("the Company") is a
distributor of display technology solutions and plasma display monitors, through
its subsidiary Electrograph Systems, Inc., and computer hardware primarily to
dealers and system integrators. As discussed further in Note 2, on May 28, 2004,
the Company sold its end-user information technology fulfillment and
professional services business (the "IT 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 continued distributing display technology
solutions and plasma display monitors and computer hardware and no longer
provides 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, 2004. 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 six month
periods ended January 31, 2005 are not necessarily indicative of the results to
be expected for future interim periods or the entire year.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.
2. Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, inc. ("ePlus"),
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, and the hiring by ePlus of the majority
of the Company's employees involved in the business. The transaction did not
include, and the Company retained, the inventory and accounts receivable of the
IT Business.
In the fourth quarter of fiscal 2004, the Company accrued $1,016 of
employee severance and other employee costs associated with the discontinued IT
Business. As of January 31, 2005 approximately $150 of the employee severance
and other employee costs and $141 of amounts payable to ePlus, inc. for assumed
service contracts were included in accounts payable and accrued expenses which
will be paid in fiscal 2005, which ends July 31, 2005.
6
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations from the end-user information
technology fulfillment and professional services business have been recorded as
discontinued operations in the accompanying consolidated statements of income.
The revenue from discontinued operations was $0 and $34,677 for the three months
ended January 31, 2005 and 2004, respectively, and $0 and $63,999 for the six
months ended January 31, 2005 and 2004, respectively. The pre-tax income (loss)
from operations of the discontinued component was $0 and $(745), for the three
months ended January 31, 2005 and 2004, respectively, and $995 and $(1,600) for
the six months ended January 31, 2005 and 2004, respectively. The 2005 pre-tax
income resulted from recoveries of previously written off accounts receivable
related to the discontinued IT Business.
The presentation of the statement of operations for the three months and
six months ended January 31, 2004 has been reclassified to reflect discontinued
operations. The statement of cash flows for the six months ended January 31,
2004 has 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. As of January 31, 2005 potentially dilutive
common stock equivalents consisting of 2,000 outstanding stock options were
excluded from the calculation of net income per share. 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 and the
per share amounts below represent income per share from continuing operations.
Three months ended January 31, Six months ended January 31,
------------------------------ ---------------------------
2005 2004 2005 2004
---- ---- ---- ----
Per share Per share Per share Per share
Shares amount Shares amount Shares amount Shares amount
------ ------ ------ ------ ------ ------ ------ ------
(shares in thousands)
Basic 8,364 $0.03 7,990 $0.09 8,295 $0.24 7,990 $0.20
==== ==== ==== ====
Effect of
dilutive
options 196 309 202 275
--- --- --- ---
Diluted 8,560 $0.03 8,299 $0.09 8,497 $0.24 8,265 $0.19
===== ==== ===== ==== ===== ==== ===== ====
7
4. Accounting for Stock-Based Compensation
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 and records compensation expense for
employee stock options if the market price of the underlying common stock
exceeds the exercise price on the date of the grant. On August 1, 1996, the
Company adopted 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 as if such
method had been used to account for stock-based compensation cost as described
in SFAS No. 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 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 the grant. 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. The following table illustrates
the effect on net income and net income per share 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 January 31, Six Months Ended January 31,
2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $252 $295 $2,600 $606
Add: Stock-based compensation
expense included in net income
net of related tax effects 56 14 65 14
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (104) (120) (229) (286)
----- --- ----- -----
Net income - pro forma $204 $189 $2,436 $334
=== === ===== ===
Net income per share:
Basic - as reported $0.03 $0.04 $0.31 $0.08
==== ==== ==== ====
Basic - pro forma $0.02 $0.02 $0.29 $0.04
==== ==== ==== ====
Diluted - as reported $0.03 $0.04 $0.31 $0.07
==== ==== ==== ====
Diluted - pro forma $0.02 $0.02 $0.29 $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 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."
8
SFAS No. 142 requires that the Company, on an annual basis, test 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 unit by
using discounted cash flow analyses.
As of January 31, 2005 and July 31, 2004, the Company had no intangible
assets, other than goodwill.
6. Line of Credit
The Company has available a line of credit with a financial institution
in the aggregate amount of $15,000, which expires on March 18, 2005. At January
31, 2005, no amounts were outstanding under this line. The line of credit
facility requires the Company to maintain certain financial ratios and
covenants. At January 31, 2005, the Company was not in compliance with all the
financial ratios and covenants that it is required to maintain.
7. Subleases
As part of the sale to ePlus of the Company's end-user information
technology fulfillment and professional services business in May 2004, ePlus
entered into sublease and lease assignment agreements with the Company for up to
a one year term with respect to certain of the Company's facilities. In
addition, in August 2004 the Company entered into a sublease agreement with an
unrelated third party for its office and warehouse space at 40 Marcus Boulevard.
The terms of the sublease extend through February 2018 and cover substantially
all of the Company's required payments under its lease.
8. Major Vendors
The Company's top three vendors accounted for approximately 23%, 16%, and
14% of total product purchases from continuing operations for the six months
ended January 31, 2005. The Company's top three vendors accounted for
approximately 33%, 16%, and 16% of total product purchases from continuing
operations for the six months ended January 31, 2004. The Company's top three
vendors accounted for approximately 35%, 20% and 16% of total product purchases
from continuing operations for the three months ended January 31, 2005. The
Company's top three vendors accounted for approximately 36%, 16% and 15% of
total product purchases from continuing operations for the three months ended
January 31, 2004.
9. Subsequent Event
On March 10, 2005, at the Company's annual meeting of shareholders, the
Company's shareholders approved the Company's 2005 Incentive Compensation Plan
(the "2005 Plan"). The 2005 Plan provides the Company with the flexibility to
grant other forms of compensation to its directors, officers, employees,
consultants, agents, advisors and third party service providers in addition to
that which was formerly available under the Company's Amended and Restated 1996
Incentive and Non-Incentive Stock Option Plan. The 2005 Plan permits the Company
to issue up to 1,000,000 shares of common stock for the grant of options, share
appreciation rights, restricted shares, restricted share units, performance
awards, annual incentive awards and other share based awards and cash-based
awards. The 2005 Plan is intended to comply with applicable securities law
requirements, permit the performance-based awards to qualify for deductibility
under Section 162(m) of the Internal Revenue Code and allow for the issuance of
incentive stock options.
9
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") 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, 2004.
General
We are a distributor of display technology solutions and plasma display
monitors and computer hardware, primarily to dealers and system integrators.
Most of our revenues have been derived from product sales. We do not develop or
sell software products.
On May 28, 2004, we sold our end-user information technology fulfillment
and professional services business ("IT Business") to ePlus, inc. ("ePlus") 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 and the
hiring by ePlus of the majority of Manchester employees involved in the
business. The transaction did not include, and we retained, the inventory and
accounts receivable of the business.
Prior to this sale, we 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. Subsequent to the sale, we have continued distributing
display technology solutions and plasma display monitors and computer hardware,
but no longer provide professional services.
E-Commerce
We utilize a website incorporating an electronic communication system. The
site, located at www.electrograph.com allows existing customers, corporate
shoppers and others to find product specifications, compare products, check
prices and purchase products 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.
Discontinued Operations
On May 28, 2004, the Company sold its IT Business to ePlus, a leading
provider of enterprise cost management, in an all cash transaction. The proceeds
from the sale of the IT Business were $3,555,000 net of related expenses of
$1,445,000. The Company recorded a gain, included in loss from operations of
discontinued component in the fiscal 2004 (ended July 31, 2004) statement of
operations, of approximately $876,000 as a result of the transaction. This
amount represented the excess of the net proceeds over a payable to ePlus of
$469,000 for service contracts they assumed and $2,210,000 carrying value of the
net assets sold, consisting of goodwill of $2,704,000, property and equipment,
net of $195,000 and deferred revenue of $689,000. The loss from the operations
of the discontinued IT Business was $8,492,000 in fiscal 2004, which included
the following charges in the fourth quarter of fiscal 2004:
Employee severance and other employee costs $1,016,000
Provision for doubtful accounts receivable 1,250,000
Fixed asset impairments 2,639,000
Other 50,000
------------
Total $4,955,000
==========
10
As of January 31, 2005 approximately $150,000 of the employee severance and
other employee costs and $141,000 of amounts payable to ePlus, inc. for assumed
service contracts were included in accounts payable and accrued expenses in the
accompanying balance sheet located elsewhere in this report, which will be paid
in fiscal 2005, which ends July 31, 2005.
Disclosure Regarding Forward-Looking Statements
This report on Form 10-Q contains statements that may constitute
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on currently available information and represent the beliefs of our
management. These statements are subject to risks and uncertainties that could
cause actual results to differ materially, including, but not limited to, our
inability to attract and retain highly skilled sales representatives or
technical personnel necessary to maintain our current operations and implement
our growth strategies; our inability to maintain good relationships with our
vendors and customers; not being successful in our efforts to focus on
higher-margin products and services and not being able to rapidly respond to new
product offerings; not managing our inventory successfully; being adversely
affected by continued intense competition in the technology industry, including
competition from competitors with greater resources; being subject to
potentially adverse business conditions that our industry is subject to,
including, without limitation, pricing pressures involving distribution
channels, market consolidation, a potential short supply of products, continued
deterioration in average selling prices of personal computers and display
technologies, and a decrease in the growth of the display technology market; not
being able to identify suitable acquisition candidates and integrate the
acquired companies; the risk that our success is highly dependent upon a select
group of senior management and that our revenues and operating results are
subject to fluctuation from quarter to quarter; the failure of our information
technology systems to function properly; and the failure of our actions to
enhance shareholder value. For further information on these risks and others
affecting us, please see our Annual Report on Form 10-K for the year ended July
31, 2004, and those set forth from time to time in our other filings with the
Securities and Exchange Commission (the "SEC"). Each of these documents is on
file with the SEC and is available free of charge. Readers of this report are
referred to such filings. The forward-looking statements herein speak only as of
the date of this report. We do not undertake to update any forward-looking
statement that may be made from time to time by us or on our behalf.
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,
2004 describes the significant accounting policies and methods used in 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 Recognition. Revenue from product sales is recognized when title
and risk of loss are passed to the customer, which is at the time of shipment to
the customer. The Company 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.
11
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 our 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.
12
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 revenue.
Percentage of Revenue
---------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31,
2005 2004 2005 2004
---- ----- ---- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 87.6 89.9 87.3 89.7
---- ---- ---- ----
Gross profit 12.4 10.1 12.7 10.3
Selling, general and
administrative expenses 11.7 7.2 8.9 7.3
---- --- --- ---
Income from operations 0.8 2.9 3.7 3.0
Interest and other income (expense), net 0.3 (0.2) 0.2 (0.1)
--- ----- --- -----
Income from continuing operations
before income taxes 1.1 2.7 3.9 2.9
Income tax provision 0.4 1.1 1.5 1.1
--- --- --- ---
Income from continuing operations 0.6 1.6 2.3 1.8
--- --- --- ---
Discontinued operations
Income (loss) from operations of
discontinued component - (1.7) 1.2 (1.8)
Income tax (provision) benefit - 0.7 (0.5) 0.7
---- --- ----- ---
Income (loss) from discontinued operations - (1.0) 0.7 (1.1)
---- ----- --- -----
Net income 0.6% 0.7% 3.0% 0.7%
==== === ==== ===
Three Months Ended January 31, 2005 Compared with Three Months Ended January 31,
2004
Revenue. Revenue decreased by $5.8 million or 13% to $39.3 million for the
three months ended January 31, 2005 from $45.1 million for the three months
ended January 31, 2004. The decrease in revenue is primarily a result of
decreased sales of computer hardware to dealers and systems integrators. Such
sales decreased by approximately 63% compared to last year as a result of the
Company's inability to procure products at previous levels for this line of its
business. The Company is currently reviewing its strategy related to this
business line. In addition, while unit sales of display technology solutions,
primarily large screen flat panel displays, continue to increase, the ongoing
decline in average selling prices resulted in a 5% decrease in revenue from the
sale of display technology solutions as compared to last year.
Gross Profit. Cost of revenue includes the direct costs of products sold
and freight. All other operating costs are included in selling, general and
13
administrative expenses. Gross profit increased by $300,000 or 7%, from $4.6
million for the three months ended January 31, 2004 to $4.9 million for the
three months ended January 31, 2005 and as a percentage of revenue, gross profit
increased from 10.1% for the three months ended January 31, 2004 to 12.4% for
the three months ended January 31, 2005. The increase in gross profit percentage
is primarily attributable to special product offerings received from
manufacturers with higher margins, volume discounts from manufacturers and sales
of higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.3 million, or 41% from $3.2 million for
the three months ended January 31, 2004 to $4.6 million for the three months
ended January 31, 2005. The increase is principally due to an increase in
salaries, commissions and other personnel costs of approximately $514,000,
reflecting the increase in employee headcount and associated costs with respect
to the continuing growth of the display technology business and the increase in
gross profit and increased legal and professional costs of approximately
$456,000. As a percentage of revenue, selling, general and administrative
expenses increased from 7.2% for the three months ended January 31, 2004 to
11.7% for the three months ended January 31, 2005.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by approximately $194,000 from an expense of
approximately $76,000 for the three months ended January 31, 2004 to income of
approximately $118,000 for the three months ended January 31, 2005. The amount
for the three months ended January 31, 2004 included approximately $85,000 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
$9,000. The amount for the three months ended January 31, 2005 included $83,000
of interest expense related to the interest portion of the capital leases and
interest income of approximately $201,000 earned on the Company's cash
investments which had higher average balances than during the prior year period.
Income Tax Provision (Benefit). Our effective tax rate was approximately
40% for the three months ended January 31, 2005 and January 31, 2004.
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 in the accompanying consolidated
statements of income. The net income (loss) from discontinued operations was $0
and $(448,000) for the three months ended January 31, 2005 and 2004,
respectively. The statement of operations for the period ended January 31, 2004
has been reclassified to present discontinued operations.
Six Months Ended January 31, 2005 Compared to Six Months Ended January 31,
2004
Revenue. Revenue decreased by $4.3 million or 5% to $86.2 million for the
six months ended January 31, 2005 from $90.5 million for the six months ended
January 31, 2004. The decrease in revenue is primarily a result of decreased
sales of computer hardware to dealers and systems integrators. Such sales
decreased by approximately 54% compared to last year as a result of the
Company's inability to procure products at previous levels for this line of its
business. The Company is currently reviewing its strategy related to this
business line. This decrease was partially offset by increased sales of display
technology solutions, primarily large screen flat panel displays, of
approximately 3% as compared to last year, due to an increase in unit sales
offset somewhat by the ongoing decline in average selling prices.
Gross Profit. Gross profit increased by $1.6 million or 17%, from $9.3
million for the six months ended January 31, 2004 to $10.9 million for the six
months ended January 31, 2005. As a percentage of revenue, gross profit
increased from 10.3% for the six months ended January 31, 2004 to 12.7% for the
six months ended January 31, 2005. The increase in gross profit percentage is
primarily attributable to special product offerings received from manufacturers
with higher margins, volume discounts from manufacturers and sales of higher
margin products.
14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.1 million, or 17% from
$6.6 million for the six months ended January 31, 2004 to $7.7 million for the
six months ended January 31, 2005. The increase is principally due to an
increase in salaries, commissions and other personnel costs of approximately
$467,000, reflecting the increase in employee headcount and associated costs
with respect to the continuing growth of the display technology business,
increased legal and professional costs of approximately $456,000, and increased
trade show costs of $257,000. These costs were partially offset by a decrease in
bad debt expense of approximately $474,000 as compared to the six months ended
January 31, 2004, which period included an expense of $370,000 due to one
customer. As a percentage of revenue, selling, general and administrative
expenses increased from 7.3% for the six months ended January 31, 2004 to 8.9%
for the six months ended January 31, 2005.
Interest and Other Income (Expense), net. Interest and other income
(expense), net, increased by approximately $228,000 from an expense of
approximately $95,000 for the six months ended January 31, 2004 to income of
approximately $133,000 for the six months ended January 31, 2005. The amount for
the six months ended January 31, 2004 included approximately $173,000 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
$78,000 earned on the Company's cash investments. The amount for the six months
ended January 31, 2005 included $168,000 of interest expense related to the
interest portion of the capital leases and interest income of approximately
$301,000 earned on the Company's cash investments which had higher average
balances than during the prior year period.
Income Tax Provision (Benefit). Our effective tax rate was 40.0% and 39.2%
for the six months ended January 31, 2005 and January 31, 2004, 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 in the accompanying consolidated
statements of income. The net income (loss) from discontinued operations was
$597,000 and $(981,000) for the six months ended January 31, 2005 and 2004,
respectively. The income in the 2005 period resulted from a recovery of accounts
receivable related to the IT Business. The statement of operations for the
period ended January 31, 2004 has been reclassified to present discontinued
operations.
Liquidity and Capital Resources
Working Capital
- ---------------
Our primary source of cash and cash equivalents has been internally
generated working capital from profitable operations. The Company's working
capital at January 31, 2005 and July 31, 2004 was approximately $38.6 million
and $34.4 million, respectively.
Cash Flows
- ----------
Operating activities for the six months ended January 31, 2005 and 2004,
resulted in a decrease in cash of approximately $192,000 and $3.7 million,
respectively. Continuing operations used approximately $910,000 of cash in the
six months ended January 31, 2005 primarily resulting from payments to reduce
accounts payable and accrued expenses of $4.3 million exceeding operating cash
flows of $3.4 million principally derived from net income. Discontinued
operations provided cash of approximately $718,000 in the six months ended
January 31, 2005 primarily resulting from the collection of retained receivables
net of payments of accounts payable of the IT Business. 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.
Investing activities for the six months ended January 31, 2005 and 2004
used cash of approximately $142,000 and $842,000, respectively. These amounts
consisted solely of additions to property and equipment.
15
Financing activities for the six months ended January 31, 2005 and 2004
provided (used) cash of approximately $852,000 and $(96,000), respectively. For
the three months ended January 31, 2005, this amount consisted of proceeds from
the exercise of stock options of approximately $970,000 partially offset by
$118,000 of payments on capitalized lease obligations. For the six months ended
January 31, 2004 this amount consisted solely of payments on capitalized lease
obligations.
Line of Credit
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million, which expires on March 18, 2005. At January
31, 2005, no amounts were outstanding under this line. The line of credit
facility requires the Company to maintain certain financial ratios and
covenants. At January 31, 2005, the Company was not in compliance with all the
financial ratios and covenants that it is required to maintain. We are currently
in the process of negotiating with this financial institution a new line of
credit agreement.
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 2005 which ends on July 31,
2005. The only material commitments for capital expenditures are operating and
capital leases for the Company's 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 of the Company's end-user information
technology fulfillment and professional services business in May 2004, ePlus,
inc. entered into sublease and lease assignment agreements with the Company for
up to a one year term with respect to certain of the Company's facilities. In
addition, in August 2004 the Company entered into a sublease agreement with an
unrelated third party for its office and warehouse space at 40 Marcus Boulevard.
The terms of the sublease extend through February 2018 and cover substantially
all of the Company's required payments under its lease, amounting to
approximately $2.8 million. 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
January 31, 2005 without taking into account any sublease rental income:
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
(in thousands)
Capital leases $7,811 $260 $1,036 $932 $5,583
Operating leases 1,552 467 1,085 - -
----- ----- ----- --- --------
Total $9,363 $727 $2,121 $932 $5,583
===== === ===== === =====
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
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment"
("SFAS No. 123 (R)"). This statement replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB No. 25, "Accounting for Stock
Issued to Employees." SFAS 123 (R) requires all stock-based compensation to be
recognized as an expense in the financial statements and that such cost be
measured according to the grant-date fair value of stock options or other equity
instruments. SFAS 123 (R) will be effective for quarterly periods beginning
after June 15, 2005. While the Company currently provides the pro forma
disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," on a quarterly basis (see "Note 4 - Accounting for
Stock-Based Compensation"), it is currently evaluating the impact this statement
will have on its consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all
companies to recognize a current-period charge for abnormal amounts of idle
facility expense, freight, handling costs and wasted materials. This statement
also requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for fiscal years beginning after June 15, 2005. The
Company believes that this statement will have no effect on its consolidated
financial statements.
Inflation
We do not believe that inflation has had a material effect on our
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to significant market risk. The Company
primarily invests its cash in mutual funds consisting primarily of short-term
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
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's
management conducted an evaluation, under the supervision and with the
participation of the principal executive officer and principal financial
officer, of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation,
the principal executive officer and principal financial officer concluded that,
as of the end of the period covered by this report, the Company's disclosure
controls and procedures are effective. Notwithstanding the foregoing, a control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in
the Company's periodic reports.
(b) Changes in Internal Controls
There was no change in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 6. Exhibits
Exhibits
31.1 - Certification of Chief Executive Officer, pursuant to
Rule 13a-14(a) under the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer, pursuant to
Rule 13a-14(a) under the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 - Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) under the Securities and Exchange Act of
1934 and 18 U.S. C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) under the Securities and Exchange Act of
1934 and 18 U.S. C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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: March 14, 2005
/s/ Barry R. Steinberg
----------------------
Barry R. Steinberg
Chief Executive Officer
DATE: March 14, 2005
/S/ Elan Yaish
--------------
Elan Yaish
Vice President Finance, Chief Financial
Officer and Assistant Secretary
19
Form 10q 013105