2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
Manchester Technologies, Inc.
(Exact name of registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
160 Oser Avenue
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(631) 435-1199
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of December 4, 2002 there were 7,990,215 outstanding shares of the
registrant's Common Stock.
MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets as of
October 31, 2002 (unaudited) and July 31, 2002 3
Condensed Consolidated Statements of Income for the
Three Months Ended October 31, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 2002 and 2001 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
October 31, 2002 July 31, 2002
(Unaudited)
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 8,645 $8,963
Accounts receivable, net 31,751 32,561
Inventory 12,196 11,165
Deferred income taxes 403 403
Prepaid income taxes 497 426
Prepaid expenses and other current assets 567 526
--- ---
Total current assets 54,059 54,044
Property and equipment, net 6,636 7,012
Goodwill, net 8,311 8,311
Deferred income taxes 803 803
Other assets 258 491
--- ---
Total assets $70,067 $70,661
======= =======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $22,659 $23,078
Deferred service contract revenue 535 868
--- ---
Total current liabilities 23,194 23,946
Deferred compensation payable 203 203
--- ---
Total liabilities 23,397 24,149
------ ------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000 shares
authorized, 7,990 and 7,990 issued and outstanding 80 80
Additional paid-in capital 18,942 18,942
Deferred compensation (23) (23)
Retained earnings 27,671 27,513
------ ------
Total shareholders' equity 46,670 46,512
------ ------
Total liabilities and shareholders' equity $70,067 $70,661
======= =======
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
October 31, October 31,
2002 2001
---- ----
Revenue
Products $64,715 $58,872
Services 3,570 2,694
----- -----
68,285 61,566
------ ------
Cost of revenue
Products 56,918 51,261
Services 2,403 1,811
----- -----
59,321 53,072
------ ------
Gross profit 8,964 8,494
Selling, general and administrative expenses 8,840 8,395
----- -----
Income from operations 124 99
Interest and other income, net 140 75
--- --
Income before income taxes 264 174
Provision for income taxes 106 70
--- --
Net income $ 158 $ 104
====== ======
Net income per share
Basic $0.02 $0.01
===== =====
Diluted $0.02 $0.01
===== =====
Weighted average shares outstanding
Basic 7,990 7,990
===== =====
Diluted 7,991 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)
Three months ended
October 31, October 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $158 $104
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 564 509
Allowance for doubtful accounts 125 290
Change in assets and liabilities (net of
effects of acquisition):
Accounts receivable 685 (1,915)
Inventory (1,031) (10,065)
Prepaid income taxes (71) (263)
Prepaid expenses and other current assets 179 49
Other assets 13 (3)
Accounts payable and accrued expenses (419) 7,733
Deferred service contract revenue (333) (225)
---- ----
Net cash used in operating activities (130) (3,786)
---- ------
Cash flows from investing activities:
Capital expenditures (188) (343)
Payment for acquisition, net of cash acquired - (1,454)
---- ------
Net cash used by investing activities (188) (1,797)
---- ------
Cash flows from financing activities:
Payments on notes payable - bank - (433)
Payments on notes payable - other - (43)
-- ---
Net cash used in financing activities - (476)
-- ----
Net decrease in cash and cash equivalents (318) (6,059)
Cash and cash equivalents at beginning of period 8,963 14,493
----- ------
Cash and cash equivalents at end of period $ 8,645 $ 8,434
======= =======
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)
1. Organization and Basis of Presentation
Manchester Technologies, Inc., ("Manchester," "we," "us," or "the
Company"), is a single-source solutions provider specializing in hardware and
software procurement, custom networking, storage, display technology and
enterprise and Internet solutions. The Company offers its customers
single-source solutions customized to their information systems needs by
integrating its analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. The Company
operates in a single segment.
Sales of hardware, software and networking products comprise the majority
of the Company's revenues. The Company has entered into agreements with certain
suppliers and manufacturers that may provide the Company favorable pricing and
price protection in the event the vendor reduces its prices.
The accompanying financial information should be read in conjunction with
the financial statements, including the notes thereto, for the annual period
ended July 31, 2002. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of operations for
the three month period ended October 31, 2002 are not necessarily indicative of
the results to be expected for future interim periods or the entire year.
2. Net Income Per Share
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the weighted average number of
common shares outstanding, plus the assumed exercise of dilutive stock options
and warrants, less the number of treasury shares assumed to be purchased from
the proceeds of such exercises using the average market price of the Company's
common stock during each respective period. Stock options and warrants
representing 801,000 and 934,000 shares for the three months ended October 31,
2002 and 2001, respectively, have been excluded from the calculation of diluted
net income per share as they are antidilutive. The following table reconciles
the denominators of the basic and diluted per share computations. For each
period, the numerator is the net income as reported.
Three months ended
October 31, 2002 October 31, 2001
---------------- ----------------
Per share Per share
Shares amount Shares amount
------ ------ ------ ------
Basic 7,990,000 $0.02 7,990,000 $0.01
Effect of dilutive options 1,000 -
----- -------
Diluted 7,991,000 $0.02 7,990,000 $0.01
========= ===== ========= =====
3. Acquisitions
Donovan Consulting Group, Inc.
------------------------------
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan Consulting Group, Inc. ("Donovan"), a Delaware corporation headquartered
near Atlanta, Georgia. Donovan is a technical services firm that delivers
Wireless LAN solutions to customers nationwide. The acquisition, which has been
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Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands except share and per share data)
accounted for as a purchase, consisted of a cash payment of $1,500 plus
potential future contingent payments. Contingent payments of up to $1,000 may be
payable on each of November 2, 2002 and November 2, 2003 based upon Donovan
achieving certain agreed-upon increases in revenue and pre-tax earnings. No
contingent payment was made on November 2, 2002. In connection with the
acquisition, the Company assumed approximately $435 of bank debt and $43 of
other debt, which were subsequently repaid. Donovan was acquired in order to
strengthen the Company's position in the Wireless LAN arena. Donovan allows the
Company to offer total Wireless LAN solutions including state of the art
products as well as the services necessary to have those products operate
optimally.
Operating results of Donovan are included in the condensed consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497 and $869, respectively. The
excess of the aggregate purchase price over the estimated fair value of the
tangible net assets acquired was approximately $1,872. The factors that
contributed to the determination of the purchase price and the resulting
goodwill include the significant growth expected in this area due to the
combination of the Company's long history of strong customer relationships,
financial strength and stability coupled with Donovan's product offerings and
highly skilled technical staff. The $1,872 will not be amortized; however, it
will be subject to impairment testing in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
The presentation of supplemental pro forma financial information is deemed
immaterial.
e.Track Solutions, Inc.
- -----------------------
On November 9, 2001, the Company acquired all of the outstanding stock of
e.Track Solutions, Inc. ("e.Track"), a New York corporation headquartered in
Pittsford, New York. e.Track is a business and software services firm that
delivers business, Internet and information technology solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of cash payments of $290 (including debt assumed and subsequently
repaid). e.Track was acquired in order to allow the Company to offer our
customers customized software solutions along with the products and services
that we have traditionally offered.
Operating results of e.Track are included in the condensed consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116 and $192, respectively. The
excess of aggregate purchase price over the estimated fair value of the tangible
net assets acquired was $291. The factors that contributed to the determination
of the purchase price and the resulting goodwill include the expectation that
the combination of e.Track's highly skilled technical staff, coupled with the
Company's financial strength and customer base, will result in significant
growth at e.Track going forward. The $291 will not be amortized; however, it
will be subject to impairment testing in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets."
The presentation of supplemental pro forma financial information is deemed
immaterial.
4. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes an accounting
standard requiring the recording of the fair value of liabilities associated
with the retirement of long-lived assets in the period in which they are
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Manchester Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands except share and per share data)
incurred. The Company has adopted the provisions of SFAS 143 effective August 1,
2002. The adoption of SFAS 143 did not have a significant effect on the
Company's results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining
the fundamental recognition and measurement provisions of that statement. SFAS
144 requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spin-off to be considered held
and used until it is disposed of. However, SFAS 144 requires that management
consider revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of
SFAS No. 121 and, therefore, requires that discontinued operations no longer be
measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning
after December 15, 2001. The Company has adopted the provisions of SFAS 144 as
of August 1, 2002. The adoption of SFAS 144 did not have any material impact on
the Company's condensed consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" ("SFAS
145"). SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements by rescinding Statement 4, which required all gains and losses
from extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. Additionally,
the Statement requires that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Company has adopted the provisions of
SFAS 145 as of August 1, 2002. The adoption of SFAS 145 did not have any impact
on the Company's condensed consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will spread
out the reporting of expenses related to restructurings initiated after 2002,
because commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a liability for the anticipated costs.
Instead, companies will record exit and disposal costs when they are "incurred"
and can be measured at fair value, and they will subsequently adjust the
recorded liability for changes in estimated cash flows. The Company is required
to adopt the provisions of SFAS 146 as of January 1, 2003. The Company does not
believe that the adoption of this statement will have any impact on the
Company's condensed consolidated financial statements as no planned
restructuring charges currently exist.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing elsewhere in this
report and with the Company's annual report on Form 10-K for the year ended July
31, 2002. The following discussion contains certain forward-looking statements
within the meaning of the Securities Act of 1933, as amended, and Section 21E of
the Securities and Exchange Act of 1934, as amended, which statements are made
pursuant to the safe harbor provisions of The Private Securities Litigation
Reform Act of 1995. Forward looking statements are not historical facts, are
based on the Company's beliefs and expectations as of the date of this report,
and involve risks and uncertainties that could cause actual results to differ
materially from the results anticipated in those forward-looking statements.
These risks and uncertainties include, but are not limited to those set forth
below and the risk factors described in the Company's Annual Report on Form 10-K
for the year ended July 31, 2002, and those set forth in the Company's other
filings from time to time with the Securities and Exchange Commission.
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers and a distributor of
display technology solutions and plasma display monitors primarily to dealers
and system integrators. We offer our customers single-source solutions,
customized to their information systems needs, by integrating analysis, design
and implementation services with hardware, software, networking products and
peripherals from leading vendors. To date, most of our revenues have been
derived from product sales. We generally do not develop or sell software
products. However, certain computer hardware products sold by us are loaded with
prepackaged software products.
Certain Trends and Uncertainties
The computer industry is characterized by a number of potentially adverse
business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a decline in the rate of growth in sales of
personal computers. Heightened price competition among various hardware
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
An integral part of our strategy is to increase our value-added services
revenue. These services generally provide higher operating margins than those
associated with the sale of products. This strategy requires us, among other
things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We cannot
predict whether we will be successful in increasing our focus on providing
value-added services, and the failure to do so may have a material adverse
effect on our business, results of operations and financial condition.
Geographic Issues. Our strategy also includes expanding our presence in the
New York metropolitan area by increasing our sales and service capabilities in
our New York City office and enlarging our sales, service and training
capabilities at our Long Island headquarters, as well as expanding
geographically into growing business centers in the eastern half of the United
States. We cannot assure you that the expansion of our New York metropolitan
area operations will increase profits generated by such operations, that the
opening of new offices will prove profitable, or that these expansion plans will
not substantially increase future capital expenditures or other expenditures.
The failure of this component of our strategy may materially adversely affect
our business, results of operations and financial condition.
9
Our strategy, encompassing the expansion of service offerings, the
expansion of existing offices and the establishment of new regional offices, has
challenged and will continue to challenge our senior management and
infrastructure. We cannot predict our ability to respond to these challenges. If
we fail to effectively manage our planned growth, there may be a material
adverse effect on our business, results of operations and financial condition.
On September 11, 2001, the World Trade Center in New York City and the
Pentagon in Washington, D.C. were the subjects of terrorist attacks. A
significant part of our business is generated from our New York City and
Baltimore/Washington, D.C. offices. We cannot predict the impact that potential
future attacks may have on our business, results of operations and financial
condition.
Personnel Issues. The success of our strategy depends in large part upon
our ability to attract and retain highly skilled technical personnel and sales
representatives, including independent sales representatives, in a very
competitive labor market. Our ability to grow our service offerings has been
somewhat limited by a shortage of qualified personnel, and we cannot assure you
that we will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of our existing technical
personnel or sales representatives, difficulty in hiring or retaining additional
technical personnel or sales representatives, or reclassification of our sales
representatives as employees may have a material adverse effect on our business,
results of operations and financial condition.
Competition. The computer industry is characterized by intense competition.
We directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. Moreover, additional suppliers and manufacturers may choose to
market products directly to end users through a direct sales force and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration services, directly to end
users. Some of our competitors have or may have, greater financial, marketing
and other resources, and may offer a broader range of products and services,
than us. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services. We may
not be able to compete successfully in the future with these or other current or
potential competitors.
Vendor Relationships and Product Availability. Our business is dependent
upon our relationships with major manufacturers and distributors in the computer
industry. Many aspects of our business are affected by our relationships with
major manufacturers, including product availability, pricing and related terms,
and reseller authorizations. The increasing demand for personal computers and
ancillary equipment has resulted in significant product shortages from time to
time, because manufacturers have been unable to produce sufficient quantities of
certain products to meet demand. In addition, many manufacturers have adopted
"just in time" manufacturing principles that can reduce the immediate
availability of a wide range of products at any one time. We cannot predict that
manufacturers will maintain an adequate supply of these products to satisfy all
the orders of our customers or that, during periods of increased demand,
manufacturers will provide products to us, even if available, or at discounts
previously offered to us. In addition, we cannot assure you that the pricing and
related terms offered by major manufacturers will not adversely change in the
future. Our failure to obtain an adequate supply of products, the loss of a
major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations. On May 3, 2002, the
Hewlett-Packard Company and Compaq Computer Corporation merged. Manchester sold
the products of both companies and we believe that we had strong relationships
10
with both companies and continue to have a strong relationship with the merged
company. While we do not believe that there will be a material adverse effect on
our business, financial condition and results of operations as a result of this
merger, there can be no assurance that such a material adverse effect will not
occur.
Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. We rely on these funds for many of our advertising and
promotional campaigns. In recent years, manufacturers have generally reduced
their level of support with respect to these programs, which has required us to
increase spending of our own funds to obtain the same level of advertising and
promotion. If manufacturers continue to reduce their level of support for these
programs, or discontinue them altogether, we would have to further increase our
advertising and promotion spending, which may have a material adverse effect on
our business, financial condition and results of operations.
Our profitability has been affected by our ability to obtain volume
discounts from certain manufacturers, which has been dependent, in part, upon
our ability to sell large quantities of products to computer resellers,
including value added resellers. Our sales to resellers have been made at profit
margins generally less favorable than our sales directly to commercial
customers. Our inability to sell products to computer resellers and thereby
obtain the desired volume discounts from manufacturers or to expand our sales to
commercial customers sufficiently to offset our need to rely on sales to
computer resellers may have a material adverse effect on our business, financial
condition and results of operations.
On September 29, 2002 the Pacific Maritime Association, which represents
shipping companies and terminal operators on the west coast of the United
States, locked out approximately 10,500 members of the International Longshore
and Warehouse Union. The lock out led to a 10-day shut down of the docks on the
west coast of the U.S. and disrupted the normal importation of goods and
products through the west coast, which disruption continues to be felt
throughout the U.S. As a result, we experienced, and continue to experience,
product shortages and an increase of product allocations by manufacturers. We do
not know when the effects of the lock out will subside and we can not predict at
this time the impact the lock out had or will have on our business, financial
condition and results of operations.
Changing Technology; Inventory Risk. The markets for our products and
services are characterized by rapidly changing technology and frequent
introduction of new hardware and software products and services. This may render
many existing products and services noncompetitive, less profitable or obsolete.
Our continued success will depend on our ability to keep pace with the
technological developments of new products and services and to address
increasingly sophisticated customer requirements. Our success will also depend
upon our abilities to address the technical requirements of our customers
arising from new generations of computer technologies, to obtain these new
products from present or future suppliers and vendors at reasonable costs, to
educate and train our employees as well as our customers with respect to these
new products or services and to integrate effectively and efficiently these new
products into both our internal systems and systems developed for our customers.
We may not be successful in identifying, developing and marketing product and
service developments or enhancements in response to these technological changes.
Our failure to respond effectively to these technological changes may have a
material adverse effect on our business, financial condition and results of
operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we cannot
assure you that we will continue to successfully manage our existing and future
11
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 which are taking place in computer,
networking and display technologies, product life cycles are short. Accordingly,
our product offerings change constantly. Prices of products change, with
generally higher prices early in the life cycle of the product and lower prices
near the end of the product's life cycle. The computer industry has experienced
rapid declines in average selling prices of personal computers and peripherals.
In some instances, we have been able to offset these price declines with
increases in units shipped. There can be no assurance that average selling
prices will not continue to decline or that we will be able to offset declines
in average selling prices with increases in units shipped.
Acquisitions. Our strategy envisions that part of our future growth will
come from acquisitions consistent with our strategy. There can be no assurance
that we will be able to identify suitable acquisition candidates and, once
identified, to negotiate successfully their acquisition at a price or on terms
and conditions favorable to us, or to integrate the operations of such acquired
businesses with our operations. Certain of these acquisitions may be of
significant size and may include assets that are outside our geographic
territories or are ancillary to our core business strategy.
Quarterly Variations. Our quarterly revenue and operating results have
varied significantly in the past and are expected to continue to do so in the
future. Quarterly revenue and operating results generally fluctuate as a result
of the demand for our products and services, the introduction of new hardware
and software technologies with improved features, the introduction of new
services by us and our competitors, changes in the level of our operating
expenses, competitive conditions and economic conditions. In particular, over
the last several years, we have increased certain of our fixed operating
expenses, including a significant increase in personnel, as part of our strategy
to increase our focus on providing systems integration and other higher margin
and value added services. As a result, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indication
of future performance. In addition, the results of any quarterly period are not
necessarily indicative of results to be expected for a full fiscal year.
Microsoft Litigation. Most of the personal computers we sell utilize
operating systems developed by Microsoft Corporation. The United States
Department of Justice has brought a successful antitrust action against
Microsoft. On November 12, 2002, the United States District Court for the
District of Columbia issued an order entering a final judgment in the action. We
believe that the final judgment, if implemented, will not have a material
adverse effect on our business, results of operations and financial condition.
However, the final judgment has been appealed, and we cannot predict the outcome
of the appeal or the effect that any modifications to the final judgment would
have on our business, results of operations or financial condition.
Information Technology Systems. Our success is dependent in part on the
accuracy, proper utilization and continuing development of our information
technology systems, including our business application systems, Internet servers
and telephony system. The quality and our utilization of the information
generated by our information technology systems affects, among other things, our
ability to conduct business with our customers, manage our inventory and
accounts receivable, purchase, sell, ship and invoice our products efficiently
and on a timely basis and maintain cost-efficient operations. While we have
taken steps to protect our information technology systems from a variety of
threats, including computer viruses and malicious hackers, we cannot guarantee
that such steps will be effective. If there is a disruption to or an
infiltration of our information technology systems, it could significantly harm
our business and results of operations.
Stock Repurchase Program. The Company's Board of Directors has authorized
the Company to repurchase up to $1 million of its common stock, which
authorization is effective until the first Board of Directors meeting following
the close of our 2003 fiscal year, unless earlier terminated by the Board. The
extent to which the Company repurchases its stock and the timing of such
purchases will depend upon market conditions and other corporate considerations
to be evaluated by the Executive Committee of the Board. The repurchase program
12
does not obligate the Company to repurchase any specific number of shares, and
repurchases pursuant to the program may be suspended or resumed at any time or
from time to time without further notice or announcement. There can be no
assurance as to the effect, if any, that the adoption of the repurchase program
or the making of repurchases thereunder will have on the market price of our
common stock.
E-Commerce
We utilize a website and electronic commerce system. The site, located at
www.e-manchester.com allows both existing customers, corporate shoppers and
others to find product specifications, compare products, check price and
availability and place and track orders quickly and easily 24 hours a day seven
days a week. We have made, and expect to continue to make, significant
investments and improvements in our e-commerce capabilities. There can be no
assurance that we will be successful in enhancing and increasing our business
through our expanded Internet presence.
Acquisitions
Donovan Consulting Group, Inc.
------------------------------
On August 29, 2001, the Company acquired all of the outstanding stock of
Donovan, a Delaware corporation headquartered near Atlanta, Georgia. Donovan is
a technical services firm that delivers Wireless LAN solutions to customers
nationwide. The acquisition, which has been accounted for as a purchase,
consisted of a cash payment of $1,500,000 plus potential future contingent
payments. Contingent payments of up to $1,000,000 may be payable on each of
November 2, 2002 and November 2, 2003 based upon Donovan achieving certain
agreed-upon increases in revenue and pre-tax earnings. No contingent payment was
made on November 2, 2002. In connection with the acquisition, the Company
assumed approximately $435,000 of bank debt and $43,000 of other debt, which
were subsequently repaid. Donovan was acquired in order to strengthen the
Company's position in the Wireless LAN arena. Donovan allows the Company to
offer total Wireless LAN solutions including state of the art products as well
as the services necessary to have those products operate optimally.
Operating results of Donovan are included in the condensed consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $497,000 and $869,000,
respectively. The excess of the aggregate purchase price over the estimated fair
value of the tangible net assets acquired was approximately $1,872,000. The
factors that contributed to the determination of the purchase price and the
resulting goodwill include the significant growth expected in this area due to
the combination of the Company's long history of strong customer relationships,
financial strength and stability coupled with Donovan's product offerings and
highly skilled technical staff. The $1,872,000 will not be amortized; however,
it will be subject to impairment testing in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets."
e.Track Solutions, Inc.
-----------------------
On November 9, 2001, the Company acquired all of the outstanding stock of
e.Track, a New York corporation headquartered in Pittsford, New York. e.Track is
a business and software services firm that delivers business, Internet and
information technology solutions to customers nationwide. The acquisition, which
has been accounted for as a purchase, consisted of cash payments of $290,000
(including debt assumed and subsequently repaid). e.Track was acquired in order
to allow the Company to offer our customers customized software solutions along
with the products and services that we have traditionally offered.
Operating results of e.Track are included in the condensed consolidated
statements of income from the acquisition date. The estimated fair value of
tangible assets and liabilities acquired was $116,000 and $192,000,
respectively. The excess of aggregate purchase price over the estimated fair
value of the tangible net assets acquired was $291,000. The factors that
contributed to the determination of the purchase price and the resulting
goodwill include the expectation that the combination of e.Track's highly
13
skilled technical staff, coupled with the Company's financial strength and
customer base, will result in significant growth at e.Track going forward. The
$291,000 will not be amortized; however, it will be subject to impairment
testing in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, encourages all registrants, including the Company, to
include a discussion of "critical" accounting policies or methods used in the
preparation of financial statements. The preparation of financial statements and
related disclosures in conformity with accounting principles generally accepted
in the United States of America requires management to make judgments,
assumptions and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. Note 1 to the consolidated
financial statements in the Annual Report on Form 10-K for the fiscal year ended
July 31, 2002 describes the significant accounting policies and methods used in
the preparation of the consolidated financial statements. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventory allowances, and goodwill impairments. Actual results could differ from
these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the consolidated financial statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there is a sudden and significant decrease in demand for our products or
there is a higher risk of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.
We perform goodwill impairment tests on an annual basis and between annual
tests in certain circumstances. In assessing the recoverability of the Company's
goodwill, the Company must make various assumptions regarding estimated future
cash flows and other factors in determining the fair values of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets in
future periods. Any such resulting impairment charges could be material to the
Company's results of operations.
14
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's condensed consolidated statements of income expressed
as a percentage of related revenue or total revenue.
Percentage of Revenue for the
Three Months Ended
October 31,
2002 2001
---- ----
Revenue
Products 94.8% 95.6%
Services 5.2 4.4
--- ---
Total revenue 100.0 100.0
----- -----
Cost of revenue
Products 88.0 87.1
Services 67.3 67.2
---- ----
Total cost of revenue 86.9 86.2
---- ----
Gross profit
Products 12.0 12.9
Services 32.7 32.8
---- ----
Total Gross Profit 13.1 13.8
Selling, general and
administrative expenses 12.9 13.6
---- ----
Income from operations 0.2 0.2
Interest and other income, net 0.2 0.1
--- ---
Income before income taxes 0.4 0.3
Provision for income taxes 0.2 0.1
--- ---
Net income 0.2% 0.2%
=== ===
Three Months Ended October 31, 2002 Compared with Three Months Ended October 31,
2001
Revenue. Revenue increased by $6.7 million or 11% to $68.3 million for the
three months ended October 31, 2002 from $61.6 million for the three months
ended October 31, 2001. Revenue from the sale of products increased by $5.8
million or 10% while revenue from service offerings increased by $0.9 million or
33%. The increase in product revenue is primarily a result of increased sales of
display monitors, primarily large screen flat panel displays, by our
Electrograph subsidiary. The increase in service revenue is primarily
attributable to the Company's acquisition of e.Track in November 2001 as well as
the Company's continued focus on growing its sales of services and solutions to
its customers.
15
Gross Profit. Cost of revenue includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by certain market development funds related to volume purchases
provided by manufacturers. All other operating costs are included in selling,
general and administrative expenses, offset in part by certain market
development funds provided by manufacturers. Gross profit increased by $470,000
or 6%, from $8.5 million for the three months ended October 31, 2001 to $9.0
million for the three months ended October 31, 2002 while as a percentage of
revenue, gross profit decreased from 13.8% for the three months ended October
31, 2001 to 13.1% for the three months ended October 31, 2002. Gross profit from
product sales increased by $186,000 or 2% while gross profit from service
offerings increased by $284,000 or 32%. As a percentage of revenue, gross profit
from the sale of products decreased from 12.9% for the three months ended
October 31, 2001 to 12.0% for the three months ended October 31, 2002 primarily
as a result of increased sales of lower margin products as well as decreased
volume rebates received from manufacturers. As a percentage of revenue, gross
profit from the sale of services declined from 32.8% for the three months ended
October 31, 2001 to 32.7% for the three months ended October 31, 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $445,000, or 5% from $8.4 million for the
three months ended October 31, 2001 to $8.8 million for the three months ended
October 31, 2002. The increase is principally due to increased telephone
expenses of approximately $100,000 and increased advertising costs of
approximately $320,000, primarily as a result of decreased market development
activities, such as training, advertising and other pre-approved market
development activities, received from manufacturers for the three months ended
October 31, 2002 as compared to October 31, 2001. As a percentage of revenue,
selling, general and administrative expenses decreased from 13.6% for the three
months ended October 31, 2001 to 12.9% million for the three months ended
October 31, 2002.
Interest and Other Income, net. Interest and other income, net, increased
by $65,000 from $75,000 for the three months ended October 31, 2001 to $140,000
for the three months ended October 31, 2002 primarily as a result of the
Company's receipt of insurance proceeds in the amount of $113,000 in the three
months ended October 31, 2002 partially offset by lower cash balances available
for investment and lower interest rates available in the marketplace.
Provision for income taxes. Our effective tax rate was 40.2% for the three
months ended October 31, 2002 and October 31, 2001.
Liquidity and Capital Resources
Our primary sources of cash and cash equivalents have been internally
generated working capital from profitable operations. The Company's working
capital at October 31, 2002 and July 31, 2002 was approximately $30.9 million
and $30.1 million, respectively.
Operations for the three months ended October 31, 2002 and 2001, after
adding back non-cash items, provided cash of approximately $847,000 and
$903,000, respectively. During such periods, other changes in working capital
used cash of approximately $977,000 and $4.7 million, respectively, resulting in
cash being used in operating activities of approximately $130,000 and $3.8
million, respectively. Our accounts receivable and accounts payable balances, as
well as our investment in inventory, can fluctuate significantly from one period
to the next due to the receipt of large customer orders or payments or
variations in product availability and vendor shipping patterns at any
particular date.
Investment activities for the three months ended October 31, 2002 and 2001
used cash of approximately $188,000 and $1.8 million, respectively. For the
three months ended October 31, 2002 this amount consisted solely of additions to
property and equipment. For the three months ended October 31, 2001 these
amounts included additions to property and equipment of approximately $343,000
and the payment for an acquisition, net of cash acquired, of approximately $1.5
million.
16
Financing activities did not provide or use any cash for the three months
ended October 31, 2002. For the three months ended October 31, 2001 financing
activities used cash of approximately $476,000. This amount consisted solely of
net repayments of bank loans and other debt.
We have available a line of credit with a financial institution in the
aggregate amount of $15.0 million. At October 31, 2002, no amounts were
outstanding under this line.
We believe that our current balances in cash and cash equivalents, expected
cash flows from operations and available borrowings under the line of credit
will be adequate to support current operating levels for the foreseeable future,
specifically through at least the end of fiscal 2003 which ends on July 31,
2003. We currently have no material commitments for capital expenditures, other
than operating leases that the Company has committed to for its facilities and
certain tangible property. Future capital requirements of the Company include
those for the growth of working capital items such as accounts receivable and
inventory, the purchase of equipment, expansion of facilities, as well as the
possible opening of new offices, potential acquisitions and expansion of the
Company's service and e-commerce capabilities. In addition, there are no
transactions, arrangements and other relationships with unconsolidated entities
or other persons that are reasonably likely to affect liquidity or the
availability of, or requirements for, capital resources.
The Company regularly examines opportunities for strategic acquisitions of
other companies or lines of business and anticipates that it may issue debt
and/or equity securities either as direct consideration for such acquisitions or
to raise additional funds to be used (in whole or in part) in payment for
acquired securities or assets. The issuance of such securities could be expected
to have a dilutive impact on the Company's shareholders, and there can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated investment.
Market Risk Disclosure
The Company is not exposed to significant market risk. The Company
primarily invests its cash in mutual funds consisting of U.S. Government and
Government Agency Securities, Municipal Bonds and Corporate Fixed Income
securities. Neither a 100 basis point increase nor decrease from current
interest rates would have a material effect on the Company's financial position,
results of operations or cash flows.
17
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.
18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
--------
10.19 - Fourth Amendment to $15,000,000 Revolving Credit Facility
Agreement dated July 30, 2002 between Registrant and Citibank,
as Agent.
99.1 - Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
1. Form 8-K filed August 7, 2002 disclosing Press Release dated August 7, 2002
announcing the appointment of the registrant's new Chief Financial Officer.
2. Form 8-K filed August 8, 2002 disclosing Press Release dated August 8, 2002
correcting a misstatement in the Press Release dated August 7, 2002 as to
the effectiveness date of the registrant's new Chief Financial Officer.
3. Form 8-K filed September 9, 2002 disclosing Press Release dated September
5, 2002 announcing that the registrant's Board of Directors authorized the
registrant to buy back up to $1 million of its common stock.
4. Form 8-K filed October 1, 2002 disclosing Press Release dated September 27,
2002 reporting earnings for the fourth quarter and fiscal year ended July
31, 2002.
5. Form 8-K filed October 28, 2002 reporting events under Item 9 - Regulation
FD Disclosure disclosing the certification of the registrant's Chief
Executive Officer and Chief Financial Officer of the registrant's Annual
Report on Form 10-K for the year ended July 31, 2002 filed with the
Securities and Exchange Commission on October 28, 2002.
19
MANCHESTER TECHNOLOGIES, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MANCHESTER TECHNOLOGIES, INC.
(Registrant)
DATE: December 12, 2002 /S/ Barry R. Steinberg
----------------------
Barry R. Steinberg
President and Chief Executive Officer
DATE: December 12, 2002 /S/ Elan Yaish
--------------
Elan Yaish
Chief Financial Officer and
Assistant Secretary
20
CERTIFICATION
I, Barry R. Steinberg, President and Chief Executive Officer of Manchester
Technologies, Inc, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Manchester
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 12, 2002
/S/ Barry R. Steinberg
- ----------------------
Barry Steinberg
Chief Executive Officer
21
CERTIFICATION
I, Elan Yaish, Chief Financial Officer of Manchester Technologies, Inc,
certify that:
1. I have reviewed the quarterly report on Form 10-Q of Manchester
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 12, 2002
/S/ Elan Yaish
- -------------------
Elan Yaish
Chief Financial Officer
22