10-Q/A 1 form10q043004.txt MANCHESTER TECH\APRIL 30 2004 10QA UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ COMMISSION FILE NUMBER 0-21695 Manchester Technologies, Inc. (Exact name of registrant as specified in its charter) New York 11-2312854 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 160 Oser Avenue Hauppauge, New York 11788 (Address of registrant's principal executive offices) (631) 951-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No As of June 7, 2004 there were 8,070,551 outstanding shares of the registrant's Common Stock. Explanatory Note Manchester Technologies, Inc. (the "Company") is filing this Amendment No. 1 to its Form 10-Q for the quarter ended April 30, 2004 to amend the Quarterly Report on Form 10-Q for the quarter ended April 30, 2004 previously filed by the Company (the "Original April 30, 2004 Form 10-Q"), in order to reflect the Company's decision to exclude separate disclosure of cash flows pertaining to discontinued operations in the nine months ended April 30, 2004 cash flow statement, presented in our Condensed Consolidated Statements of Cash Flows. The reclassification of the nine months ended April 30, 2004 cash flow statement will have no impact on the statements of operations or the balance sheet of the Company in any period presented. Because of the changes to our Condensed Consolidated Statements of Cash Flows, we are amending the Original April 30, 2004 Form 10-Q to: o Revise Part I Item 1, Financial Statements. The revisions appear in: - The Company's Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2004. - Note 2 to Condensed Consolidated Financial Statements in the last paragraph of "Discontinued Operations." o Revise Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. We have revised the first paragraph in "Cash Flows" under the heading "Liquidity and Capital Resources." As part of this Amendment No. 1, the Company is also filing new certifications from our Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1 and 32.2). No attempt has been made in this Form 10-Q/A to update other disclosures presented in the original Form 10-Q, except as described above. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures, except as described above. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. 2 MANCHESTER TECHNOLOGIES, INC. AND SUBSIDIARIES Table of Contents PART I. FINANCIAL INFORMATION Page ------- --------------------- ---- Item 1. Condensed Consolidated Balance Sheets as of April 30, 2004 (unaudited) and July 31, 2003 4 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended April 30, 2004 and 2003 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2004 and 2003 (unaudited) 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 21 3 PART I - FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)

See notes to unaudited condensed consolidated financial statements. 4 Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)

See notes to unaudited condensed consolidated financial statements. 5 Manchester Technologies, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

See notes to unaudited condensed consolidated financial statements. 6 Manchester Technologies, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (in thousands, except per share data) (Unaudited) 1. Organization and Basis of Presentation The condensed consolidated financial statements include the accounts of Manchester Technologies, Inc. and its wholly-owned subsidiaries (collectively, "Manchester," "we," "us," or "the Company"). As discussed further in Note 2, on May 28, 2004, the Company sold its end-user information technology fulfillment and professional services business. Prior to such sale, Manchester specialized in hardware and software procurement, display technology, custom networking, security, IP telephony, remote management, application development/e-commerce, storage, and enterprise and Internet solutions, offering its customers single-source solutions customized to their information systems needs by integrating its analysis, design and implementation services with hardware, software, networking products and peripherals from leading vendors. Subsequent to such sale, the Company will continue distributing display technology solutions and plasma display monitors and computer hardware primarily to dealers and system integrators and will no longer provide any professional services. The Company operates in a single segment. The Company has entered into agreements with certain suppliers and manufacturers that may provide the Company favorable pricing and price protection in the event the vendor reduces its prices. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the annual period ended July 31, 2003. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. The results of operations for the three and nine month periods ended April 30, 2004 are not necessarily indicative of the results to be expected for future interim periods or the entire year. 2. Discontinued Operations On May 28, 2004, the Company sold its end-user information technology fulfillment and professional services business to ePlus, inc., a leading provider of Enterprise Cost Management, in an all cash transaction. The transaction included the sale to ePlus of the customer list of the business and certain related equipment, the assumption by ePlus of certain contracts and liabilities pertaining to the business, the hiring by ePlus of approximately 135 Manchester employees involved in the business, and an option to purchase certain inventory of the business to be determined at a subsequent date. The transaction did not include, and Manchester retained, the balance of the inventory and all of the accounts receivable of the business sold. The Company will continue distributing display technology solutions and plasma display monitors and computer hardware primarily to dealers and system integrators. The purchase price for the acquisition was approximately $5,000. The Company estimates that it will record a gain of approximately $1,500 in its fourth quarter ended July 31, 2004 as a result of the transaction. Assets held for sale of the disposal group included on the accompanying condensed consolidated balance sheet as of April 30, 2004 consist of goodwill of $2,704 and property and equipment, net of $177. Liabilities of the disposal group include deferred revenue of $689, which has been included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet as of April 30, 2004. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations from the sale of the end-user information technology fulfillment and professional services business have been recorded as discontinued operations in the accompanying condensed consolidated statements 7 of operations. The revenue from discontinued operations was $34,976 and $27,411 for the three months ended April 30, 2004 and 2003, respectively. The loss from operations of the discontinued component was $(714) and $(484) for the three months ended April 30, 2004 and 2003, respectively. The revenue from discontinued operations was $98,975 and $89,135 for the nine months ended April 30, 2004 and 2003, respectively. The loss from operations of the discontinued component was $(2,314) and $(4,594) for the nine months ended April 30, 2004 and 2003, respectively. The presentation of the statement of operations for the three and nine months ended April 30, 2003 has been reclassified to reflect discontinued operations. The balance sheet as of July 31, 2003 and, as a result of the Company's decision to exclude separate disclosure of cash flows pertaining to discontinued operations in the nine months ended April 30, 2004 cash flows statement, the statement of cash flows for the nine months ended April 30, 2003 has not been reclassified to reflect discontinued operations. 3. Net Income Per Share Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the weighted average number of common shares outstanding, plus the assumed exercise of dilutive stock options, less the number of treasury shares assumed to be purchased from the proceeds of such exercises using the average market price of the Company's common stock during each respective period. Stock options representing 153,000 and 843,000 shares for the three months ended April 30, 2004 and 2003, respectively, and 429,000 and 843,000 shares for the nine months ended April 30, 2004 and 2003, respectively, have been excluded from the calculation of diluted net income per share as they are antidilutive. The following table reconciles the denominators of the basic and diluted per share computations. For each period, the numerator is the net income from continuing operations as reported and the per share amounts below represent income per share from continuing operations.

4. Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options if the current market price of the underlying stock exceeds the exercise price on the date of the grant. On August 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net income (loss) and net income (loss) per share for employee stock option grants as if such method had been used to account for stock-based compensation cost as described in SFAS 123. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations for stock options and other stock-based awards while disclosing pro forma net income (loss) and net income (loss) per share as if the fair value method had been applied in accordance with SFAS 123. 8 The Company applies the intrinsic value method as outlined in APB 25, and related interpretations in accounting for stock options granted. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant. Since the Company has issued all stock option grants at market value, no compensation cost has been recognized at the time of grant. For 50,000 options that were repriced subsequent to their date of grant, the Company is applying variable accounting to those options. The related equity-based compensation expense was $24 for the nine months ended April 30, 2004. SFAS 123 requires that the Company provide pro forma information regarding net income (loss) and net income (loss) per share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. During fiscal 2003, the Company adopted the disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" requiring quarterly SFAS 123 pro forma disclosure. The following table illustrates the effect on net income (loss) and net income (loss) per share as if the Company had measured the compensation cost for the Company's stock option programs under the fair value method in each period presented.

5. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS No. 142 as of August 1, 2001. The Company's initial impairment review indicated that there was no impairment as of the date of adoption. Fair value for goodwill was determined based on discounted cash flows. 9 Also required by SFAS No. 142, on an annual basis, the Company tests goodwill and other intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. In making these assumptions and estimates, the Company uses set criteria that are reviewed and approved by various levels of management, and the Company estimates the fair value of its reporting unit by using discounted cash flow analyses. Accumulated amortization for the Company's goodwill was approximately $647 and $1,116 at April 30, 2004 and July 31, 2003, respectively. In accordance with SFAS No. 142, no goodwill amortization expense was recorded for the three months and nine months ended April 30, 2004 and 2003. As discussed in Note 2, $2,704 of goodwill, which was net of accumulated amortization of $469, has been included in assets held for sale as of April 30, 2004. The amount of the goodwill classified as held for sale was determined based on a relative fair value approach in accordance with SFAS No. 142. As of April 30, 2004 and July 31, 2003, the Company had no intangible assets other than goodwill. 10 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report and with the Company's annual report on Form 10-K for the year ended July 31, 2003. The following discussion contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which statements are made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by the use of the words "believes," "intends," "expects," "will," "plans," "anticipates," or similar expressions. Forward looking statements are not historical facts, are based on the Company's beliefs and expectations as of the date of this report, and involve risks and uncertainties that could cause actual results to differ materially from the results anticipated in those forward-looking statements. These risks and uncertainties include, but are not limited to, those set forth below and the risk factors described in the Company's other filings from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on any forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. Overview On May 28, 2004, the Company sold its end-user information technology fulfillment and professional services business to ePlus, inc., a leading provider of Enterprise Cost Management, in an all cash transaction. The transaction included the sale to ePlus of the customer list of the business and certain related equipment, the assumption by ePlus of certain contracts and liabilities pertaining to the business, the hiring by ePlus of approximately 135 Manchester employees involved in the business, and an option to purchase certain inventory of the business to be determined at a subsequent date. The transaction did not include, and Manchester retained, the balance of the inventory and all of the accounts receivable of the business sold. The Company will continue distributing display technology solutions and plasma display monitors and computer hardware primarily to dealers and system integrators. Prior to the sale we were an integrator and reseller of computer hardware, software and networking products, primarily for commercial customers, and a distributor of display technology solutions and plasma display monitors, primarily to dealers and system integrators. We offered our customers single-source solutions, customized to their information systems needs, by integrating analysis, design and implementation services with hardware, software, networking products and peripherals from leading vendors. Through April 30, 2004, most of our revenues have been derived from product sales. We generally do not develop or sell software products. However, certain computer hardware products sold by us are loaded with prepackaged software products. While the Company was able to grow the revenues of the IT products and services business, the continued pressure on margins and increased competition with respect to the sale of IT products caused the Company to review its business operations with the goal of aligning the Company's operations with what management perceived as growth opportunities in the technology marketplace. As a result, the Company decided to exit the end-user IT products and services business as it pertains to selling to end users with the expectation that this would reduce costs and allow the Company to focus primarily on its display solutions business and explore other areas of growth. The purchase price for the acquisition was approximately $5.0 million. The Company estimates that it will record a gain of approximately $1.5 million in its fourth quarter ended July 31, 2004 as a result of the transaction. 11 Revenue from continuing operations for the quarter ended April 30, 2004 was $42.4 million as compared with $36.5 million for the comparable quarter last year. The Company reported income from continuing operations for the quarter of $432,000 or $0.05 per diluted share as compared with $316,000 or $0.04 per diluted share reported a year ago. Revenue from continuing operations for the nine months ended April 30, 2004 was $132.9 million as compared with $123.6 million for the first nine months of last year. Income from continuing operations for the nine months was $2.0 million or $0.24 per diluted share as compared with $2.8 million or $0.35 per diluted share reported a year ago. The sale to ePlus of our end-user IT product and services business will enable us to focus our resources on our display solutions business. We are a dominant player in the display technology market, and we believe that this market will continue to grow in the years to come. Revenues from sales of display solutions increased by 21% as compared to the third quarter of last year and 17% as compared to the first nine months of last year. Certain Trends and Uncertainties General. The technology industry is characterized by a number of potentially adverse business conditions, including pricing pressures, evolving distribution channels, market consolidation and a decline in the selling price of display products and peripherals and computer hardware. As a result of the intense price competition within our industry, we have experienced increasing pressure on our gross profit and operating margins with respect to our sale of products. Our inability to compete successfully on the pricing of products sold, or a continuing decline in gross margins on products sold due to adverse industry conditions or competition, may have a material adverse effect on our business, financial condition and results of operations. Value-Added Products and Services. An integral part of our strategy is to increase our value-added products and services revenue. These products and services generally provide higher gross margins than those associated with the sale of commodity products. We cannot predict whether we will be successful in increasing our focus on providing value-added products and services, and the failure to do so may have a material adverse effect on our business, results of operations and financial condition. Management of Growth. Our strategy, encompassing the expansion of offerings, exploring other areas of growth and the establishment of new regional offices, has challenged and will continue to challenge our senior management and infrastructure. We cannot predict our ability to respond to these challenges. If we fail to effectively manage our planned growth, there may be a material adverse effect on our business, results of operations and financial condition. Competition. The technology industry is characterized by intense competition. We directly compete with local, regional and national distributors as well as with certain technology manufacturers that market through direct sales forces and/or the Internet. The technology industry has recently experienced, and may continue to experience, a significant amount of consolidation through mergers and acquisitions, and manufacturers may increase competition by offering a range of services in addition to their current product and service offerings. In the future, we may face further competition from new market entrants and possible alliances between existing competitors. In addition, certain manufacturers have been, and additional manufacturers may choose, to market products directly to end users through a direct sales force and/or the Internet rather than or in addition to distribution channels, and may also choose to market services directly to end users. Some of our competitors have or may have, greater financial, marketing and other resources, and may offer a broader range of products and services, than us. As a result, they may be able to respond more quickly to new or emerging technologies or changes in customer requirements, benefit from greater purchasing economies, offer more aggressive hardware and service pricing or devote greater resources to the promotion of their products and services. We may not be able to compete successfully in the future with these or other current or potential competitors. 12 Vendor Relationships and Product Availability. Our business is dependent upon our relationships with major manufacturers in the technology industry. Many aspects of our business are affected by our relationships with major manufacturers, including product availability, pricing and related terms. The increasing demand for display technology solutions and ancillary equipment has resulted in significant product shortages from time to time, because manufacturers have been unable to produce sufficient quantities of certain products to meet demand. In addition, many manufacturers have adopted "just in time" manufacturing principles that can reduce the immediate availability of a wide range of products at any one time. We cannot predict that manufacturers will maintain an adequate supply of these products to satisfy all the orders of our customers or that, during periods of increased demand, manufacturers will provide products to us, even if available, or at discounts previously offered to us. In addition, we cannot assure you that the pricing and related terms offered by major manufacturers will not adversely change in the future. Our failure to obtain an adequate supply of products, the loss of a major manufacturer, the deterioration of our relationship with a major manufacturer or our inability in the future to develop new relationships with other manufacturers may have a material adverse effect on our business, financial condition and results of operations. Our profitability has been affected by our ability to obtain volume discounts from certain manufacturers, which has been dependent, in part, upon our ability to sell large quantities of products to resellers. Our inability to obtain the desired volume discounts from manufacturers may have a material adverse effect on our business, financial condition and results of operations. Changing Technology; Inventory Risk. The markets for our products and services are characterized by rapidly changing technology and frequent introduction of new hardware products and services. This may render many existing products and services noncompetitive, less profitable or obsolete. Our continued success will depend on our ability to keep pace with the technological developments of new products and services and to address increasingly sophisticated customer requirements. Our success will also depend upon our abilities to address the technical requirements of our customers arising from new generations of technologies, to obtain these new products from present or future manufacturers at reasonable costs, to educate and train our employees as well as our customers with respect to these new products or services and to integrate effectively and efficiently these new products into both our internal systems and systems developed for our customers. We may not be successful in identifying, developing and marketing product and service developments or enhancements in response to these technological changes. Our failure to respond effectively to these technological changes may have a material adverse effect on our business, financial condition and results of operations. Rapid product improvement and technological change characterize the technology industry. This results in relatively short product life cycles and rapid product obsolescence, which can place inventory at considerable valuation risk. Certain of our manufacturers provide price protection to us, which is intended to reduce the risk of inventory devaluation due to price reductions on current products. Certain of our manufacturers also provide stock balancing to us pursuant to which we are able to return unsold inventory to a supplier as a partial credit against payment for new products. There are often restrictions on the dollar amount of inventory that we can return at any one time. Price protection and stock balancing may not be available to us in the future, and, even if available, these measures may not provide complete protection against the risk of excess or obsolete inventories. Certain manufacturers have reduced the period for which they provide price protection and stock balancing rights. Although we maintain a sophisticated proprietary inventory management system, we cannot assure you that we will continue to successfully manage our existing and future inventory. Our failure to successfully manage our current or future inventory may have a material adverse effect on our business, financial condition and results of operations. As a result of the rapid changes that are taking place in display technologies, product life cycles are short. Accordingly, our product offerings change constantly. Prices of products change frequently, with generally higher prices early in the life cycle of the product and lower prices near the end of the product's life cycle. The technology industry has experienced rapid declines in average selling prices of display technology products. In some instances, we have been able to offset these price declines with increases in units shipped. There can be no 13 assurance that average selling prices will not continue to decline or that we will be able to offset declines in average selling prices with increases in units shipped. Management. The Company is highly dependent upon the services of the members of its senior management team. The loss of any member of the Company's senior management team may have a material adverse effect on its business. Maximizing Shareholder Value. The Company periodically considers methods of enhancing shareholder value, including, without limitation, acquisitions, divestitures, business combinations, and strategic partnering. There can be no assurance that we will consummate any such transactions, be able to identify suitable candidates for any such transactions or to negotiate successfully such transactions at a price or on terms and conditions favorable to us and our shareholders. Acquisitions may be of significant size and may include assets that are outside our geographic territories or are ancillary to our core business strategy. Quarterly Variations. Our quarterly revenue and operating results have varied significantly in the past and are expected to continue to do so in the future. Quarterly revenue and operating results generally fluctuate as a result of the demand for our products and services, the introduction of new hardware and software technologies with improved features, the introduction of new services by us and our competitors, changes in the level of our operating expenses, competitive conditions and economic conditions. As a result, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not necessarily indicative of results to be expected for a full fiscal year. Information Technology Systems. Our success is dependent in part on the accuracy, proper utilization and continuing development of our information technology systems, including our business application systems, Internet servers and telephony system. The quality and our utilization of the information generated by our information technology systems affects, among other things, our ability to conduct business with our customers, manage our inventory and accounts receivable, purchase, sell, ship and invoice our products efficiently and on a timely basis and maintain cost-efficient operations. While we have taken steps to protect our information technology systems from a variety of threats, including computer viruses and malicious hackers, we cannot guarantee that such steps will be effective. If there is a disruption to or an infiltration of our information technology systems, it could significantly harm our business and results of operations. This discussion of uncertainties is by no means exhaustive, but is designed to highlight important factors that may impact the Company's outlook and results. E-Commerce We utilize a website incorporating an electronic commerce system. The site, located at www.electrograph.com allows both existing customers, corporate shoppers and others to find product specifications, compare products, check price and availability and place and track orders quickly and easily 24 hours a day seven days a week. We have made, and expect to continue to make, significant investments and improvements in our e-commerce capabilities. There can be no assurance that we will be successful in enhancing and increasing our business through our expanded Internet presence. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations is based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended July 31, 2003 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The following critical accounting policies are impacted 14 significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. Revenue Recognition. Revenue from product sales is recognized when title and risk of loss are passed to the customer, which is generally at the time of shipment to the customer. The Company generally does not develop software products. However, certain computer hardware products sold by the Company are loaded with prepackaged software products. The net impact on the Company's financial statements of product returns, primarily for defective products, has been insignificant Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Goodwill. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. In assessing the recoverability of the Company's goodwill, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. 15 Results of Operations The following table sets forth, for the periods indicated, information derived from the Company's condensed consolidated statements of operations expressed as a percentage of related revenue or total revenue.

Three Months Ended April 30, 2004 Compared with Three Months Ended April 30, 2003 Revenue. Revenue increased by $5.9 million or 16% to $42.4 million for the three months ended April 30, 2004 from $36.5 million for the three months ended April 30, 2003. The increase in revenue is primarily a result of increased sales of display technology solutions, primarily large screen flat panel displays, as a result of the growth in the industry which is anticipated to continue to grow. This increase was partially offset by a decrease in sales of computer hardware to dealers and system integrators. Gross Profit. Cost of revenue includes the direct costs of products sold and freight. All other operating costs are included in selling, general and administrative expenses. Gross profit increased by $0.5 million or 16%, from $3.4 million for the three months ended April 30, 16 2003 to $3.9 million for the three months ended April 30, 2004 and as a percentage of revenue, gross profit was 9.3% for the three months ended April 30, 2003 and April 30, 2004. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $302,000, or 11% from $2.8 million for the three months ended April 30, 2003 to $3.1 million for the three months ended April 30, 2004. The increase is principally due to an increase in salaries and other personnel costs of approximately $78,000 reflecting the increase in employee headcount and associated costs with respect to the continuing growth of the business, increased sales commissions of approximately $70,000, increased tradeshow costs of approximately $163,000 and an aggregate increase of $186,000 of various other selling and general and administrative expenses. This was partially offset by a recovery of bad debt expense of $287,000 reduced by an increase in bad debt expense of approximately $92,000 in the period. As a percentage of revenue, selling, general and administrative expenses decreased from 7.8% for the three months ended April 30, 2003 to 7.4% for the three months ended April 30, 2004. Interest and Other Income (Expense), net. Interest and other income (expense), net, increased by $48,000 from an expense of $22,000 for the three months ended April 30, 2003 to an expense of $70,000 for the three months ended April 30, 2004. This is primarily a result of the interest expense related to the interest portion of the capital leases entered into by the Company in March 2003 of approximately $85,000 offset partially by interest income of approximately $37,000 earned on the Company's cash investments. Income Tax Provision. Our effective tax rate was 40.0% for the three months ended April 30, 2004 and April 30, 2003. Discontinued Operations. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations for the end-user information technology fulfillment and professional services business have been recorded as discontinued operations on the accompanying condensed consolidated statements of operations. The net loss from discontinued operations was $429,000 and $290,000 for the three months ended April 30, 2004 and 2003, respectively. The presentation of discontinued operations in the statement of operations for the three months ended April 30, 2003 has been reclassified. Nine Months Ended April 30, 2004 Compared to Nine Months Ended April 30, 2003 Revenue. Revenue increased by $9.3 million or 8% to $132.9 million for the nine months ended April 30, 2004 from $123.6 million for the nine months ended April 30, 2003. The increase in revenue is primarily a result of increased sales of display technology solutions, primarily large screen flat panel displays, as a result of the growth in the industry which is anticipated to continue to grow. This increase was partially offset by a decrease in sales of computer hardware to dealers and system integrators. Gross Profit. Gross profit remained relatively the same increasing by $27,000 or 0.0%, during the nine months ended April 30, 2004 as compared to the nine months ended April 30, 2003 and as a percentage of revenue, gross profit decreased from 10.7% for the nine months ended April 30, 2003 to 10.0% for the nine months ended April 30, 2004. Our gross margins have been impacted by increased competition and pricing pressure resulting in lower gross margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by approximately $1.1 million, or 12% from $8.7 million for the nine months ended April 30, 2003 to $9.7 million for the nine months ended April 30, 2004. The increase is principally due to an increase in salaries and other personnel costs in the amount of approximately $135,000 reflecting the increase in employee headcount and associated costs with respect to the continuing growth of the business, increased sales commissions of approximately $158,000, increased insurance costs of approximately $196,000 due to an increase in rates, increased tradeshow costs of approximately $90,000, increased bad debt expense of approximately $184,000 resulting from the increase in sales and increased depreciation costs of approximately $134,000 as a result of the increase in capital expenditures in the period. As a percentage of revenue, selling, general and administrative 17 expenses increased from 7.0% for the nine months ended April 30, 2003 to 7.3% for the nine months ended April 30, 2004. Interest and Other Income (Expense), net. Interest and other income (expense), net, decreased by approximately $312,000 from income of $146,000 for the nine months ended April 30, 2003 to an expense of approximately $166,000 for the nine months ended April 30, 2004. The amounts for the nine months ended April 30, 2004 included approximately $258,000 of interest expense related to the interest portion of the capital leases entered into by the Company in March 2003 offset by interest income of approximately $92,000 earned on the Company's cash investments. The amount for the nine months ended April 30, 2003 included the receipt of insurance proceeds in the amount of $113,000 and interest income of approximately $33,000 earned on the Company's cash investments. Income Tax Provision (Benefit). Our effective tax rate was 39.4% and 40.0% for the nine months ended April 30, 2004 and April 30, 2003, respectively. Discontinued Operations. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations for the end-user information technology fulfillment and professional services business have been recorded as discontinued operations on the accompanying condensed consolidated statements of operations. The net loss from discontinued operations was $1.4 million and $2.8 million for the nine months ended April 30, 2004 and 2003, respectively. The presentation of discontinued operations in the statement of operations for the nine months ended April 30, 2003 has been reclassified. Liquidity and Capital Resources Working Capital --------------- Our primary sources of cash and cash equivalents have been internally generated working capital from profitable operations. The Company's working capital at April 30, 2004 and July 31, 2003 was approximately $35.3 million and $30.7 million, respectively. Cash Flows ---------- Operations for the nine months ended April 30, 2004 and 2003, after adding back non-cash items, provided cash of approximately $2.8 million and $1.4 million, respectively. During such periods, other changes in working capital provided cash of approximately $2.5 million and $1.3 million, respectively, resulting in cash being provided by operating activities of approximately $5.3 million and $2.6 million, respectively. Our accounts receivable and accounts payable balances, as well as our inventory balances, can fluctuate significantly from one period to the next due to the receipt of large customer orders or payments or variations in product availability and vendor shipping patterns at any particular date. The increase in inventory and accounts payable during the nine months ended April 30, 2004 of approximately $16.2 million and $15.6 million, respectively, is a result of the increase in sales in the period, as well as increased inventory purchases due to special product offerings and volume discounts received from manufacturers. Investing activities for the nine months ended April 30, 2004 and 2003 used cash of approximately $760,000 and $718,000, respectively. For the nine months ended April 30, 2004 and 2003 these amounts consisted solely of additions to property and equipment. For the nine months ended April 30, 2004 and 2003 financing activities provided (used) cash of approximately $135,000 and $(16,000), respectively. For the nine months ended April, 2004 this amount consisted of proceeds from the exercise of stock options of approximately $284,000 offset by $149,000 of payments on capitalized lease obligations. For the nine months ended April 30, 2003, this amount consisted solely of payments on capitalized lease obligations. 18 Line of Credit -------------- We have available a line of credit with a financial institution in the aggregate amount of $15.0 million. At April 30, 2004, no amounts were outstanding under this line which expires on January 31, 2005. The line of credit facility requires the Company to maintain certain financial ratios and covenants. At April 30, 2004, the Company was in compliance with all the specified financial ratios and covenants. Financial Commitments --------------------- We believe that our current balances in cash and cash equivalents, expected cash flows from operations and available borrowings under the line of credit will be adequate to support current operating levels for the foreseeable future, specifically through at least the end of fiscal 2004 which ends on July 31, 2004. We currently have no material commitments for capital expenditures, other than operating and capital leases that the Company has committed to for its facilities and certain tangible property. Future capital requirements of the Company include those for the growth of working capital items such as accounts receivable and inventory, the purchase of equipment, expansion of facilities, as well as the possible opening of new offices and potential acquisitions. As part of the sale to ePlus, inc. of the Company's end-user information technology fulfillment and professional services business, ePlus, inc. entered into certain sublease and assignment agreements with the Company with respect to certain of the Company's facilities. The Company is awaiting landlord consent for these agreements to take effect. There are no other transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to affect liquidity or the availability of, or requirements for, capital resources. The following table represents the Company's financial commitments as of April 30, 2004:

The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may issue debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not exposed to significant market risks. The Company primarily invests its cash in mutual funds consisting of U.S. Government and Government Agency Securities, Municipal Bonds and Corporate Fixed Income securities. Neither a 100 basis point increase nor decrease from current interest rates would have a material effect on the Company's financial position, results of operations or cash flows. 19 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. 20 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 2 - Asset Purchase and Sale Agreement by and between ePlus Technology, Inc. and Manchester Technologies, Inc. dated May 28, 2004 (x) 2.1 - Services Agreement by and between ePlus Technology, Inc. and Manchester Technologies, Inc. dated May 28, 2004 (x) 2.2 - Escrow Agreement by and between ePlus Technology, Inc., Manchester Technologies, Inc. and Joel Rothlein, as Escrow Agent, dated May 28, 2004 (x) 2.3 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus Technology, Inc., dated May 28, 2004 (x) 2.4 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus Technology, Inc., dated May 28, 2004 (x) 2.5 - Sub-Lease by and between Manchester Technologies, Inc. and ePlus Technology, Inc., dated May 28, 2004 (x) 2.6 - Assignment of Lease by and between Manchester Technologies, Inc. and ePlus Technology, Inc., dated May 28, 2004 (x) 2.7 - Assignment of Lease by and between Manchester Technologies, Inc. and ePlus Technology, Inc., dated May 28, 2004 (x) 31.1 - Certification by Barry R. Steinberg, Chief Executive Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification by Elan Yaish, Chief Financial Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification by Barry R. Steinberg, Chief Executive Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 - Certification by Elan Yaish, Chief Financial Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (x) Previously filed as an exhibit to the Company's Current Report on Form 8-K (File No.: 000-21695) dated June 10, 2004 and incorporated herein by reference. (b) Reports on Form 8-K 1. Form 8-K filed March 9, 2004 disclosing Press Release dated March 9, 2004 reporting earnings for the second quarter ended January 31, 2004. 21 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: July 5, 2004 /S/ Barry R. Steinberg ------------------------------ Barry R. Steinberg Chief Executive Officer DATE: July 5, 2004 /S/ Elan Yaish ---------------------------------- Elan Yaish Vice President Finance, Chief Financial Officer and Assistant Secretary 22

MANCHESTER TECHNOLOGIES INC 10-Q/A