10-Q 1 form10q013102.txt FORM 10-Q 1/31/02 17 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, 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) (Former name or former address, 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 the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. There were 7,990,215 outstanding shares of COMMON STOCK at March 14, 2002. MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION Page ------- --------------------- ---- Item 1. Condensed Consolidated Balance Sheets January 31, 2002 (unaudited) and July 31, 2001 3 Condensed Consolidated Statements of Income Three months and six months ended January 31, 2002 and 2001 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Six months ended January 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 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports 16 2 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements Manchester Technologies, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands except per share amounts)
January 31, 2002 July 31, 2001 (Unaudited) ------------- ------------ Assets: Cash and cash equivalents $ 9,559 $14,493 Accounts receivable, net 29,578 25,135 Inventory 12,752 7,546 Deferred income taxes 459 459 Prepaid income taxes 109 43 Prepaid expenses and other current assets 610 362 --- --- Total current assets 53,067 48,038 Property and equipment, net 6,390 6,300 Goodwill, net 8,296 6,148 Deferred income taxes 842 842 Other assets 490 455 --- --- $69,085 $61,783 ====== ====== Liabilities: Accounts payable and accrued expenses $22,269 $15,259 Deferred service contract revenue 552 807 --- --- Total current liabilities 22,821 16,066 Deferred compensation payable 162 162 --- --- Total liabilities 22,983 16,228 ------ ------ Shareholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000 shares authorized, 7,990 issued and outstanding 80 80 Additional paid-in capital 18,942 18,942 Deferred compensation (28) (38) Retained earnings 27,108 26,571 ------ ------ Total shareholders' equity 46,102 45,555 ------ ------ $69,085 $61,783 ====== ======
See notes to 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, 2002 2001 2002 2001 ---- ---- ---- ---- Revenue Products $65,287 $68,947 $124,159 $148,462 Services 2,812 1,941 5,506 3,568 ----- ----- ----- ----- 68,099 70,888 129,665 152,030 ------ ------ ------- ------- Cost of revenue Products 55,818 60,762 107,079 131,043 Services 2,214 1,209 4,025 2,313 ----- ----- ----- ----- 58,032 61,971 111,104 133,356 ------ ------ ------- ------- Gross profit 10,067 8,917 18,561 18,674 Selling, general and administrative expenses 9,394 8,973 17,789 17,858 ----- ----- ------ ------ Income (loss) from operations 673 (56) 772 816 Interest income 47 95 122 291 -- -- --- --- Income before income taxes 720 39 894 1,107 Provision for income taxes 287 15 357 445 --- -- --- --- Net income $433 $24 $537 $662 === == === === Net Income per share Basic $0.05 $0.00 $0.07 $0.08 ==== ==== ==== ==== Diluted $0.05 $0.00 $0.07 $0.08 ==== ==== ==== ==== Weighted average shares outstanding Basic 7,990 8,014 7,990 8,074 ===== ===== ===== ===== Diluted 7,991 8,014 7,990 8,118 ===== ===== ===== =====
See notes to condensed consolidated financial statements. 4 Manchester Technologies, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands)
For the six months ended January 31, 2002 2001 ---- ---- (Unaudited) ----------- Cash flows from operating activities: Net income $537 $ 662 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,006 1,035 Increase in allowance for doubtful accounts 178 225 Non cash compensation and commission expense 10 17 Change in assets and liabilities (net of effects of acquisitions): (Increase) decrease in accounts receivable (4,355) 4,289 Increase in inventory (5,069) (1,038) (Increase) decrease in prepaid income taxes (66) 374 Increase in prepaid expenses and other current assets (228) (30) Increase in other assets (35) (10) Increase (decrease) in accounts payable and accrued expenses 6,504 (8,010) Decrease in deferred service contract revenue (255) (225) --- ---- Net cash used in operating activities (1,773) (2,711) ----- ------- Cash flows from investing activities: Capital expenditures (990) (946) Payments for acquisitions, net of cash acquired (1,613) - ------ ----- Net cash used in investing activities (2,603) (946) ------ ----- Cash flows from financing activities: Payments on notes payable - bank (515) (18) Payments on notes payable - other (43) - Purchase and retirement of common stock - (574) Issuance of common stock upon exercise of options - 6 --- ---- Net cash used in financing activities (558) (586) ---- ---- Net decrease in cash and cash equivalents (4,934) (4,243) Cash and cash equivalents at beginning of period 14,493 16,156 ------ ------ Cash and cash equivalents at end of period $9,559 $11,913 ===== ======
See notes to 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., formerly Manchester Equipment Co., Inc. ("Manchester," "we," "us," or the "Company"), is a single-source solutions provider specializing in hardware and software procurement, custom networking, storage, enterprise and Internet solutions. Manchester engineers provide answers to companies' MIS needs by combining comprehensive analysis, design and integration services with a complete line of competitively priced products and peripherals from the industry's leading vendors. Sales of hardware, software and networking products comprise the majority of the Company's revenue. The Company has entered into agreements with certain suppliers and manufacturers that may provide the Company favorable pricing and price protection in the event a vendor reduces its prices. In the opinion of the Company, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal and recurring accruals) necessary to present fairly the financial position of the Company as of January 31, 2002 and the results of operations for the three and six months ended January 31, 2002 and 2001 and cash flows for the six months ended January 31, 2002 and 2001. Although the Company believes that the disclosures herein are adequate to make the information not misleading, these financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended July 31, 2001, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. 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 916,000 and 899,000 shares for the three months ended January 2002 and 2001, respectively, and 925,000 and 554,000 shares for the six months ended January 31, 2002 and 2001, respectively, are excluded from the calculation of diluted net income per share since the result would be 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.
(shares in thousands) Three months ended January 31, Six months ended January 31, 2002 2001 2002 2001 ---- ---- ---- ---- Per share Per share Per share Per share Shares amount Shares amount Shares amount Shares amount ------ ------ ------ ------ ------ ------ ------ ------ Basic 7,990 $0.05 8,014 $0.00 7,990 $0.07 8,074 $0.08 ===== ===== ===== ===== Effect of dilutive options 1 - - 44 - --- - -- Diluted 7,991 $0.05 8,014 $0.00 7,990 $0.07 8,118 $0.08 ===== ===== ===== ===== ===== ===== ===== =====
6 3. Acquisition of Donovan Consulting Group, Inc. On August 29, 2001, the Company acquired all of the outstanding stock of Donovan Consulting Group, Inc. ("Donovan"), a Delaware corporation headquartered near Atlanta, Georgia. Donovan is a technical services firm that delivers Wireless LAN solutions to customers nationwide. The acquisition, which has been accounted for as a purchase, consisted of a cash payment of $1,500 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. 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 will allow 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 statement 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 No. 142, "Goodwill and Other Intangible Assets." The presentation of supplemental pro forma financial information is deemed immaterial. Acquisition of 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 will be 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 will be 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 $276. 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 $276 will not be amortized; however, it will be subject to impairment testing in accordance with Statement No. 142, "Goodwill and Other Intangible Assets." The presentation of supplemental pro for ma financial information is deemed immaterial. 4. Statement of Cash Flow Information Supplemental disclosure of cash flow information:
Six months ended January 31, 2002 2001 ------ ---- (in thousands) Cash paid for income taxes $423 $93 ===== ===
7 5. Accounting for Business Combinations, Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. 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 in accordance with the provision of SFAS No. 142. 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. 121. The Company has adopted the provisions of SFAS Nos. 141 and 142 as of August 1, 2001. The Company has evaluated its existing goodwill that was acquired in prior purchase business combinations and has determined that an adjustment or reclassification to intangible assets at August 1, 2001 was not required in order to conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. The Company was required to test goodwill for impairment in accordance with the provisions of SFAS No. 142 by January 31, 2002. In accordance with SFAS No. 142, goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. The Company determined that its reporting unit for purposes of applying the provisions of SFAS 142 was its operating segment. During the quarter, the Company completed its initial impairment review which indicated that there was no impairment as of the date of adoption. Fair value for goodwill was determined based on discounted cash flows. Goodwill amortization for the six months ended January 31, 2001 was $195,000. The following table shows the results of operations as if SFAS No. 141 was applied to prior periods:
For the six months ended January 31, 2002 2001 ---- ---- Net income as reported $537 $662 Add back: Goodwill amortization - 195 ---- --- Adjusted net income $537 $857 === === Income per share - Basic Net income, as reported $0.07 $0.08 Goodwill amortization - 0.02 ----- ---- Adjusted net income $0.07 $0.10 ==== ==== Income per share - Diluted Net income, as reported $0.07 $0.08 Goodwill amortization - 0.02 --- ---- Adjusted net income $0.07 $0.10 ==== ====
8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 included elsewhere in this Quarterly Report on Form 10-Q and with the Company's Annual Report on Form 10-K. This discussion and analysis contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts, 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, those set forth in the Company's Annual Report on Form 10-K for the year ended July 31, 2001, 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. 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. 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. 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. To date, our revenues have been based primarily upon sales in the New York Metropolitan area. 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 9 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 subject of terrorists attacks. A significant part of our business is generated from our New York City and Baltimore/Washington, D.C. offices and revenues for the month of September were adversely impacted with declines in orders and shipments. We cannot predict the impact that these or potential future attacks may have on our business, results of operations and financial condition. 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. 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. 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. 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 September 4, 2001, the Hewlett-Packard Company and Compaq Computer Corporation announced their intention to merge. Manchester sells the products of both companies and we believe that we have strong relationships with both companies. 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 10 promotional campaigns. In recent years, manufacturers have generally reduced their level of support with respect to these programs, which has required us to increase spending of our own funds to obtain the same level of advertising and promotion. If manufacturers continue to reduce their level of support for these programs, or discontinue them altogether, we would have to further increase our advertising and promotion spending, which may have a material adverse effect on our business, financial condition and results of operations. Our profitability has been affected by our ability to obtain volume discounts from certain manufacturers, which has been dependent, in part, upon our ability to sell large quantities of products to computer resellers, including value added resellers. Our sales to resellers have been made at profit margins generally less favorable than our sales directly to commercial customers. Our inability to sell products to computer resellers and thereby obtain the desired volume discounts from manufacturers or to expand our sales to commercial customers sufficiently to offset our need to rely on sales to computer resellers may have a material adverse effect on our business, financial condition and results of operations. The markets for our products and services are characterized by rapidly changing technology and frequent introduction of new hardware and software products and services. This may render many existing products and services noncompetitive, less profitable or obsolete. Our continued success will depend on our ability to keep pace with the technological developments of new products and services and to address increasingly sophisticated customer requirements. Our success will also depend upon our abilities to address the technical requirements of our customers arising from new generations of computer technologies, to obtain these new products from present or future suppliers and vendors at reasonable costs, to educate and train our employees as well as our customers with respect to these new products or services and to integrate effectively and efficiently these new products into both our internal systems and systems developed for our customers. We may not be successful in identifying, developing and marketing product and service developments or enhancements in response to these technological changes. Our failure to respond effectively to these technological changes may have a material adverse effect on our business, financial condition and results of operations. Rapid product improvement and technological change characterize the computer industry. This results in relatively short product life cycles and rapid product obsolescence, which can place inventory at considerable valuation risk. Certain of our suppliers provide price protection to us, which is intended to reduce the risk of inventory devaluation due to price reductions on current products. Certain of our suppliers also provide stock balancing to us pursuant to which we are able to return unsold inventory to a supplier as a partial credit against payment for new products. There are often restrictions on the dollar amount of inventory that we can return at any one time. Price protection and stock balancing may not be available to us in the future, and, even if available, these measures may not provide complete protection against the risk of excess or obsolete inventories. Certain manufacturers have reduced the period for which they provide price protection and stock balancing rights. Although we maintain a sophisticated proprietary inventory management system, we cannot assure you that we will continue to successfully manage our existing and future inventory. Our failure to successfully manage our current or future inventory may have a material adverse effect on our business, financial conditions and results of operations. 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. 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, 11 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. As a result of the rapid changes which are taking place in computer and networking 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. 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. 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, which could delay the introduction and distribution of Microsoft products. The potential unavailability of Microsoft products could have a material adverse effect on our business, results of operations and financial condition. We lease certain warehouses and offices from entities that are owned or controlled by our majority shareholder. Each of the leases with related parties has been amended effective with the closing of our initial public offering in December 1996 to reduce the rent payable under that lease to then current market rates. Critical Accounting Policies 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, 2001 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 will 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 our Condensed Consolidated Statements of Income expressed as a percentage of related revenue or total revenue.
Percentage of Revenue Three Months Ended Six Months Ended January 31, January 31, 2002 2001 2002 2001 ---- ----- ---- ---- Product sales 95.9% 97.3% 95.8% 97.7% Services 4.1 2.7 4.2 2.3 --- --- --- ---- Total revenue 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost of product sales 85.5 88.1 86.2 88.3 Cost of services 78.7 62.3 73.1 64.8 ---- ---- ---- ---- Cost of revenue 85.2 87.4 85.7 87.7 ---- ---- ---- ---- Product gross profit 14.5 11.9 13.8 11.7 Services gross profit 21.3 37.7 26.9 35.2 ---- ---- ---- ---- Gross profit 14.8 12.6 14.3 12.3 Selling, general and administrative expenses 13.8 12.7 13.7 11.8 ---- ---- ---- ---- Income (loss) from operations 1.0 (0.1) 0.6 0.5 Interest and other income, net 0.0 0.1 0.1 0.2 --- --- --- --- Income before income taxes 1.0 0.0 0.7 0.7 --- Provision for income taxes 0.4 0.0 0.3 0.3 --- --- --- --- Net income 0.6% 0.0% 0.4% 0.4% === === === ===
Three Months Ended January 31, 2002 Compared with Three Months Ended January 31, 2001 Revenue. The Company's revenue decreased $2.8 million or 3.9% from $70.9 million for the three months ended January 31, 2001 to $68.1 million for the three months ended January 31, 2002. Product revenue decreased by $3.7 million due primarily to lower shipments of computers as well as lower per unit prices for computers. This was somewhat offset by increases in shipments of displays. Service revenue increased $871,000 to $2.8 million from $1.9 million in the same quarter last year. Revenue from services increased primarily due to revenue generated by our two new acquisitions, Donovan and e.Track, as well as revenue from sales to customers that is delivered by manufacturers or vendors. 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 provided by manufacturers. All other operating costs are included in selling, general and administrative expenses. Gross profit increased $1.2 million or 12.9% from $8.9 million for the second quarter of fiscal 2001 to $10.1 million for the most recent fiscal quarter. Gross profit from the sale of products increased by $1.3 million or 15.7%, while gross profit from the sale of services decreased by $134,000 or 18.3%. The changes in gross profit primarily resulted from the changes in revenue discussed above. In addition, the Company was able to take advantage of certain product opportunities from manufacturers and vendors resulting in higher margins than experienced in recent quarters. Margins on service offerings were negatively impacted by lower utilization of our technical staff, primarily the staff connected with Donovan and e.Track. As a percentage of revenue, gross profit increased to 14.8% in the second quarter of fiscal 2002 as compared to 12.6% in fiscal 2001. 13 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $421,000 or 4.7% from $9.0 million in the second quarter of fiscal 2001 to $9.4 million in the second quarter of fiscal 2002. This increase is principally a result of higher bad debts expenses, as well as higher salaries and personnel costs incurred in connection with the acquisition of Donovan and e.Track, and additions to the sales and service staff to better position the Company to take advantage of any improvement in market conditions in coming quarters. The increase in personnel costs was partially offset by the reduction in amortization costs (due primarily to the August 1, 2001 adoption of SFAS Statement No. 142 "Goodwill and Other Intangible Assets" which requires that goodwill no longer be amortized). Interest and Investment Income. Interest and investment income decreased by $48,000 due to lower cash balances available for investments as well as lower interest rates. Provision for Income Taxes. The effective income tax rate increased slightly to 39.8% of pretax income in the current period compared to 38.5% of pretax income in the prior year's period. Six Months Ended January 31, 2002 Compared to Six Months Ended January 31, 2001 Revenue. The Company's revenue decreased by $22.4 million or 14.7% from $152.0 million for the six months ended January 31, 2001 to $129.7 million for the six months ended January 31, 2002. Revenue from the sale of products decreased by $24.3 million or 16.4% while revenue from service offerings increased by $1.9 million or 54.3%. The decrease in product revenue is due primarily to the shipment of fewer personal computers as well as lower average selling prices for personal computers. This was partially offset by increases in shipments of displays, primarily large screen flat panel displays shipped from our Electrograph subsidiary. The growth in services revenues is due to the acquisition of Donovan and e.Track, as well as growth in the sale of services to customers that are delivered by manufacturers or vendors. Gross Profit.Gross profit decreased by $113,000 or 0.6% to $18.6 million for the first six months of fiscal 2002 from $18.7 million in the comparable period a year ago. Gross profit from product sales decreased by $339,000 or 1.9% from $17.4 million in the first six months of fiscal 2001 to $17.1 million in the most recent six month period. Service offerings generated $1.3 million of gross profit in the first six months of fiscal 2001 and $1.5 million of gross profit for the first six months of fiscal 2002. Gross margin percentages on product sales improved in the first six months of fiscal 2002 due to increased sales of higher margin products, increased volume rebates by manufacturers and certain large volume product purchases that the Company was able to take advantage of. Service margins declined during the period due primarily to lower utilization of technical personnel as well as increases in lower margin sales of services that are delivered by other than Company personnel. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $69,000 or 0.4% from $17.9 million for the first six months of fiscal 2001 to $17.8 million for the first six months of fiscal 2002. The decrease is principally due to lower salaries and personnel costs, partially offset by higher bad debt expenses. Interest Income. Interest income decreased due to lower cash balances available for investment as well as lower interest rates available in the marketplace. Provision for Income Taxes. The effective income tax rate decreased slightly to 39.9% for the first six months of fiscal 2002 from 40.2% for the first six months of fiscal 2001. 14 Liquidity and Capital Resources The Company's primary sources of financing have been internally generated working capital from operations and a line of credit from financial institutions. For the six months ended January 31, 2002, cash used by operating activities was $1.8 million consisting primarily of increases in accounts receivable and inventory partially offset by an increase in accounts payable and accrued expenses. During the first quarter of the year the Company made an investment in inventory by purchasing a significant number of large screen flat panel displays. The investment made in this inventory resulted in benefits to the Company through the volume incentives and discounts obtained on these products. We expect that most of the remaining products from this purchase will be sold by the next fiscal quarter. We also expended $2.2 million (including $558,000 in repayment of debts assumed) for the purchase of Donovan Consulting Group, Inc. and e.Track Solutions, Inc. and $1.0 million for capital expenditures during the six months ended January 31, 2002. The Company's accounts receivable and accounts payable and accrued expenses balances as well as its 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. Generally, the Company's experience is that increases in accounts receivable, inventory and accounts payable and accrued expenses will coincide with growth in revenue and increased operating levels. The Company has available a line of credit with a financial institution in the aggregate amount of $15.0 million. This line was recently renewed and extended through January 31, 2005. No amounts were outstanding under this line as of January 31, 2002. The Company believes that its 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. The Company currently has no material commitments for capital or other expenditures, except operating leases which the Company is committed under for 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 and the purchase of equipment and expansion of facilities, 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. Impact of Recently Issued Accounting Standards In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," 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 No. 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 No. 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 No. 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 No. 144 is effective for all fiscal quarters of fiscal years beginning after December 15, 2001, and will thus be adopted by the Company on August 1, 2002. The Company has not determined the effect, if any, that the adoption of SFAS No. 144 will have on the Company's consolidated financial statements. 15 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At our Annual Meeting of Shareholders held on January 16, 2002, the following proposals were adopted by the margins indicated: (1) Elect seven Directors to serve until the 2003 Annual Meeting of Shareholders;
Broker Nominee For Withheld Abstain Non-votes ------- --- -------- ------- --------- Barry R. Steinberg 7,795,442 106,399 0 0 Joel G. Stemple 7,795,442 106,399 0 0 Joel Rothlein 7,811,442 90,399 0 0 Bert Rudofsky 7,811,442 90,799 0 0 Michael E. Russell 7,811,442 90,799 0 0 Julian Sandler 7,804,742 97,099 0 0 Robert Valentine 7,804,742 97,099 0 0
(2) Vote on the ratification of the reappointment of KPMG LLP as independent auditors of the Company for the year ending July 31, 2002.
Broker For Against Abstain Non-votes --- ------- ------- --------- 7,841,891 59,700 250 0
No other items were voted on at the Annual Meeting of Shareholders or during the quarter ended January 31, 2002. Item 6. Exhibits and Reports Exhibits 99.1 Press Release dated December 6, 2001 filed on Form 8-K December 6, 2001. (b) Reports on Form 8-K Form 8-K filed December 6, 2001 disclosing Exhibit 99.1 Press release dated December 6, 2001 reporting earnings for first quarter ended October 31, 2001. 16 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 18, 2002 s/ Barry Steinberg --------------------------- Barry Steinberg President and Chief Executive Officer DATE: March 18, 2002 s/ Barry Steinberg -------------------------------- Joseph Looney Vice President of Finance and Chief Financial Officer 17