UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended December 28, 2003 | ||
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OR | ||
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission file number 0-24746
TESSCO Technologies Incorporated
(Exact name of registrant as specified in charter)
Delaware |
| 52-0729657 |
(State or other jurisdiction of |
| (IRS Employer |
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11126 McCormick Road, Hunt Valley, Maryland |
| 21031 |
(Address of principal executive offices) |
| (Zip Code) |
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Registrant’s telephone number, including area code: |
| (410) 229-1000 |
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 filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes o No ý
The number of shares of the registrant’s Common Stock, $ .01 par value per share, outstanding as of February 6, 2004 was 4,428,481.
TESSCO Technologies Incorporated
Index to Form 10-Q
2
Part I – Financial Information
Item 1 – Financial Statements
TESSCO Technologies Incorporated
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| December 28, |
| March 30, |
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| (unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
| $ | 4,175,900 |
| $ | — |
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Trade accounts receivable, net |
| 43,543,900 |
| 32,216,000 |
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Insurance receivable from disaster |
| — |
| 7,248,100 |
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Product inventory |
| 37,443,800 |
| 26,639,700 |
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Deferred tax asset |
| 2,258,600 |
| 2,258,600 |
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Prepaid expenses and other current assets |
| 2,617,000 |
| 3,606,300 |
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Total current assets |
| 90,039,200 |
| 71,968,700 |
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PROPERTY AND EQUIPMENT, net |
| 26,451,200 |
| 24,876,900 |
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GOODWILL, net |
| 2,452,200 |
| 2,452,200 |
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OTHER LONG-TERM ASSETS |
| 1,185,600 |
| 940,200 |
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Total assets |
| $ | 120,128,200 |
| $ | 100,238,000 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Trade accounts payable |
| $ | 48,597,800 |
| $ | 27,474,200 |
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Accrued expenses and other current liabilities |
| 6,516,400 |
| 8,577,800 |
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Revolving credit facility |
| — |
| — |
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Current portion of long-term debt |
| 497,200 |
| 372,800 |
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Total current liabilities |
| 55,611,400 |
| 36,424,800 |
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DEFERRED TAX LIABILITY |
| 3,240,600 |
| 3,240,600 |
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LONG-TERM DEBT, net of current portion |
| 5,262,800 |
| 5,660,800 |
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OTHER LONG-TERM LIABILITIES |
| 1,198,000 |
| 926,000 |
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Total liabilities |
| 65,312,800 |
| 46,252,200 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS’ EQUITY: |
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Preferred stock |
| — |
| — |
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Common stock |
| 48,400 |
| 48,300 |
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Additional paid-in capital |
| 22,191,100 |
| 22,040,100 |
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Treasury stock, at cost |
| (4,547,000 | ) | (3,792,600 | ) | ||
Retained earnings |
| 37,122,900 |
| 35,690,000 |
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Total shareholders’ equity |
| 54,815,400 |
| 53,985,800 |
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Total liabilities and shareholders’ equity |
| $ | 120,128,200 |
| $ | 100,238,000 |
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See accompanying notes.
3
TESSCO Technologies Incorporated
Consolidated Statements of Income
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| Fiscal Quarters Ended |
| Nine Months Ended |
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|
| December 28, |
| December 29, |
| December 28, |
| December 29, |
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| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
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Revenues |
| $ | 93,131,700 |
| $ | 65,010,300 |
| $ | 245,051,300 |
| $ | 204,521,300 |
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Cost of goods sold |
| 73,185,200 |
| 48,639,200 |
| 188,535,300 |
| 150,820,100 |
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Gross profit |
| 19,946,500 |
| 16,371,100 |
| 56,516,000 |
| 53,701,200 |
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Selling, general and administrative expenses |
| 18,067,500 |
| 15,545,200 |
| 53,506,100 |
| 48,470,500 |
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Restructuring charges |
| 2,285,700 |
| — |
| 2,285,700 |
| — |
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Benefit from insurance proceeds |
| — |
| — |
| (3,054,000 | ) | — |
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| 20,353,200 |
| 15,545,200 |
| 52,737,800 |
| 48,470,500 |
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(Loss) income from operations |
| (406,700 | ) | 825,900 |
| 3,778,200 |
| 5,230,700 |
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Interest, fees and other expense, net |
| 483,100 |
| 319,600 |
| 1,429,300 |
| 980,800 |
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(Loss) income before provision for income taxes |
| (889,800 | ) | 506,300 |
| 2,348,900 |
| 4,249,900 |
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(Benefit from) provision for income taxes |
| (347,000 | ) | 194,900 |
| 916,000 |
| 1,636,200 |
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Net (loss) income |
| $ | (542,800 | ) | $ | 311,400 |
| $ | 1,432,900 |
| $ | 2,613,700 |
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Basic (loss) earnings per share |
| $ | (0.12 | ) | $ | 0.07 |
| $ | 0.32 |
| $ | 0.58 |
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Diluted (loss) earnings per share |
| $ | (0.12 | ) | $ | 0.07 |
| $ | 0.32 |
| $ | 0.58 |
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Basic weighted average shares outstanding |
| 4,420,300 |
| 4,516,700 |
| 4,435,700 |
| 4,512,700 |
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Diluted weighted average shares outstanding |
| 4,420,300 |
| 4,516,700 |
| 4,455,600 |
| 4,527,000 |
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See accompanying notes.
4
TESSCO Technologies Incorporated
Consolidated Statements of Cash Flows
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| Nine Months Ended |
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|
| December 28, |
| December 29, |
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| (unaudited) |
| (unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
| $ | 1,432,900 |
| $ | 2,613,700 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 2,989,400 |
| 3,089,400 |
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Provision for bad debts |
| 487,400 |
| 287,900 |
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Non-cash restructuring charges |
| 2,023,400 |
| — |
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Deferred income taxes and other |
| (18,400 | ) | 57,100 |
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Increase in trade accounts receivable |
| (11,815,300 | ) | (2,651,000 | ) | ||
(Increase) decrease in product inventory |
| (10,804,100 | ) | 7,804,900 |
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Decrease (increase) in prepaid expenses and other current assets |
| 7,306,400 |
| (2,241,400 | ) | ||
Increase in trade accounts payable |
| 21,123,600 |
| 2,243,700 |
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Decrease in accrued expenses and other current liabilities |
| (3,261,400 | ) | (1,814,300 | ) | ||
Net cash provided by operating activities |
| 9,463,900 |
| 9,390,000 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
| (4,411,100 | ) | (4,070,400 | ) | ||
Net cash used in investing activities |
| (4,411,100 | ) | (4,070,400 | ) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net payments under revolving credit facility |
| — |
| (5,408,000 | ) | ||
Payments on long-term debt |
| (273,600 | ) | (294,900 | ) | ||
Proceeds from issuance of stock |
| 151,100 |
| 103,400 |
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Purchase of treasury stock |
| (754,400 | ) | — |
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Net cash used in financing activities |
| (876,900 | ) | (5,599,500 | ) | ||
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Net increase (decrease) in cash and cash equivalents |
| 4,175,900 |
| (279,900 | ) | ||
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CASH AND CASH EQUIVALENTS, beginning of period |
| — |
| 505,100 |
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CASH AND CASH EQUIVALENTS, end of period |
| $ | 4,175,900 |
| $ | 225,200 |
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See accompanying notes.
5
TESSCO Technologies Incorporated
Notes to Consolidated Financial Statements
December 28, 2003
(Unaudited)
Note 1. Description of Business and Basis of Presentation
TESSCO Technologies Incorporated, a Delaware corporation (the Company), is a leading provider of integrated product plus supply chain solutions to the professionals that design, build, run, maintain and use wireless voice, data, messaging, location tracking and Internet systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive Internet and information technology. Over 95% of the Company’s sales are made to customers in the United States.
In management’s opinion, the accompanying interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 30, 2003.
Note 2. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first reporting period beginning after December 15, 2003. The adoption of FIN 46 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
Note 3. Stock Options Granted to Employees and Stock Option Repurchase Program
In December 2002, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” (SFAS No. 148). SFAS No. 148 amends the transition and disclosure requirements of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). This statement is effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. As permitted by SFAS No. 148, the Company has used the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, to date, no compensation expense, except as noted below as a result of the recently completed stock option repurchase program, has actually been recognized for the Company’s stock options because all options were granted at an exercise price equal to the market value of the underlying stock on the grant date.
6
The Company has annually reported pro-forma net income and earnings per share information in accordance with SFAS No. 123, that is, as if it had accounted for stock options using the fair value method prescribed by SFAS No. 123. In accordance with SFAS No. 123, the fair value of the Company’s options is determined using the Black-Scholes option pricing model, based upon facts and assumptions existing at the date of grant. The value of each option at the date of grant is amortized as compensation expense over the option vesting period. This occurs without regard to subsequent changes in stock price, volatility or interest rates over time, provided that the option remains outstanding. This model, and other option pricing models, were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The Company’s options are not traded and have certain vesting restrictions. Because the Company’s stock options have characteristics significantly different from those of traded options, and because the value is determined at the date of grant and is amortized to expense over the vesting period without regard to changes in stock price, volatility or interest rates, the fair value calculated under the option models currently available may not reflect the actual fair value of the Company’s options.
On April 28, 2003, the Company’s Board of Directors authorized the Company to proceed with a stock option repurchase program for options having an exercise price of $18 per share or higher regardless of expiration date, and for options having an exercise price per share of $11 or higher and an expiration date within four years. The program covered outstanding options to purchase up to 783,120 shares of common stock from all holders, with the exception of independent directors. The repurchase program was completed on June 5, 2003, at which time options for 743,545 shares, having a weighted average exercise price of $21.89 were repurchased and cancelled. Of the options repurchased, 701,045 were made available for future awards, if any. This program resulted in compensation expense and cash paid of approximately $510,000 ($312,000, net of tax) which was included in selling, general and administrative expenses in the Company’s Consolidated Statement of Income for the quarter ended June 29, 2003. The amount paid for these options was determined on the basis of a discounted Black-Scholes calculation, using current input assumptions.
As noted above, for purposes of the pro-forma disclosures required by SFAS No. 123, the estimated fair value of each option, as determined as of the date of grant, is amortized as compensation expense over the option vesting period, provided the option remains outstanding. However, under the provisions of SFAS No. 123 when an option is repurchased, it is no longer outstanding and the then unamortized portion of its value as had been determined at the grant date, is recognized as compensation expense at the date of repurchase for pro-forma purposes. Accordingly, although the amount actually paid by the Company for the repurchased options on the basis of a discounted current Black-Scholes calculation was $510,000 ($312,000 net of tax), the unamortized compensation expense of these same options, based on the Black-Scholes calculation fixed at grant, is approximately $1.7 million, net of tax. For pro-forma purposes under SFAS No. 123, the latter amount was recognized in the first quarter of fiscal 2004. If the Company had not repurchased these options, this same $1.7 million would have to instead be expensed for pro-forma purposes over the remaining vesting period of the options, primarily fiscal years 2004 and 2005, assuming no significant changes in the option plan or the employment of the option holders. Therefore, pro-forma expense for fiscal years 2004 and 2005 will be significantly reduced compared to the pro-forma expense had the Company not completed the option repurchase, again assuming no significant changes in the option plan or the employment of the option holders.
7
The Company’s pro-forma information is as follows for the periods ended December 28, 2003 and December 29, 2002 (in thousands):
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| Fiscal Quarters Ended |
| Nine Months Ended |
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| Dec. 28, 2003 |
| Dec. 29, 2002 |
| Dec. 28, 2003 |
| Dec. 29, 2002 |
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Net income (loss), as reported |
| $ | (543 | ) | $ | 311 |
| $ | 1,433 |
| $ | 2,614 |
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Compensation expense included in net income, net of tax |
| 18 |
| — |
| 334 |
| — |
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Stock-based compensation expense, relating to the previously unrecognized compensation expense of options purchased in the option repurchase program, as if the fair value method had been applied, net of tax |
| — |
| — |
| (1,660 | ) | — |
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Stock-based compensation expense, relating to continuing stock options as if the fair value method had been applied, net of tax |
| (43 | ) | (338 | ) | (288 | ) | (1,084 | ) | ||||
Pro-forma income (loss) |
| $ | (568 | ) | $ | (27 | ) | $ | (181 | ) | $ | 1,530 |
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Basic earnings (loss) per share, as reported |
| $ | (0.12 | ) | $ | 0.07 |
| $ | 0.32 |
| $ | 0.58 |
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Pro-forma basic earnings (loss) per share |
| (0.13 | ) | (0.01 | ) | (0.04 | ) | 0.34 |
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Diluted earnings (loss) per share, as reported |
| $ | (0.12 | ) | $ | 0.07 |
| $ | 0.32 |
| $ | 0.58 |
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Pro-forma diluted earnings (loss) per share |
| (0.13 | ) | (0.01 | ) | (0.04 | ) | 0.34 |
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Note 4. Earnings Per Share
The dilutive effect of all options outstanding has been determined by using the treasury stock method. The weighted average shares outstanding is calculated as follows:
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| Fiscal Quarters Ended |
| Nine Months Ended |
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|
| December 28, |
| December 29, |
| December 28, |
| December 29, |
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Basic weighted average common shares outstanding |
| 4,420,300 |
| 4,516,700 |
| 4,435,700 |
| 4,512,700 |
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Effect of dilutive common equivalent shares |
| — |
| — |
| 19,900 |
| 14,300 |
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Diluted weighted average shares outstanding |
| 4,420,300 |
| 4,516,700 |
| 4,455,600 |
| 4,527,000 |
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Options to purchase 507,375 shares of common stock at a weighted average exercise price of $12.81 per share were outstanding as of December 28, 2003, but the common equivalent shares were not included in the computation of diluted earnings per share as the Company incurred a net loss for the quarter ended December 28, 2003, and therefore, including such options would have been antidilutive.
Note 5. Benefit from Insurance Proceeds
On October 12, 2002, the Company’s primary office, distribution center and network operating center was flooded as a result of a malfunctioning public water main system. In August 2003, the Company reached a final settlement with its insurance carrier. This final settlement closes all claims, including extra expenses required for recovery, building, information technology equipment, business personal property rebuild and/or replacement, and business interruption.
As a result, the Company recorded a $3.1 million benefit from insurance proceeds during the second quarter of fiscal 2004. Of this amount, $1.7 million is related to business interruption insurance and the remaining $1.4 million represented the gain on assets destroyed in the disaster, net of fees and deductibles. The Company previously recognized a $1.3 million gain from business interruption insurance proceeds in the fourth quarter of fiscal 2003.
8
Also, as part of this final settlement, the Company received funds to be used for future disaster related expenses, primarily temporary office space and related expenses, as well as relocation costs. This amount, which totaled $1.1 million as of December 28, 2003, is included in accrued expenses and other current liabilities on the Company’s Consolidated Balance Sheet.
Note 6. Line of Credit Facility
Effective September 30, 2003, the Company established a $30 million revolving line of credit facility with Wachovia Bank, National Association and SunTrust Bank, replacing its previously existing $30 million revolving credit facility with another lender. This new facility has a three-year term expiring September 2006 and is unsecured. Interest is payable monthly at the LIBOR rate plus an applicable margin, which ranges from 1½% to 2%. The facility is subject to a borrowing base and certain financial covenants, conditions and representations.
Note 7. Stock Buyback Program
On April 28, 2003, the Company’s Board of Directors approved a share buyback program, authorizing the purchase of up to 450,000 shares of its outstanding common stock. Shares may be purchased from time to time in the open market, by block purchase, or through negotiated transactions, or possibly other transactions managed by broker-dealers. No time limit has been set for completion of the program. As of December 28, 2003, the Company had purchased 112,900 shares for $754,400, or an average of $6.68 per share.
Note 8. Business Segments
In April 2003, the Company hired a Senior Vice President to run the network infrastructure line of business and promoted an existing employee to Senior Vice President to run the mobile devices and accessories line of business. Another Senior Vice President ran and now continues to run the test and maintenance line of business. Due to these changes and the related staffing reorganization that occurred as a result, the Company now regularly evaluates revenue, gross profit and inventory as three business segments.
Network infrastructure products are used to build, repair and upgrade wireless telecommunications, computing and Internet networks, and generally complement radio frequency transmitting and switching equipment provided directly by original equipment manufacturers (OEMs). Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories such as replacement batteries, cases, microphones, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices. Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Within the mobile devices and accessories line of business, the Company sells to both commercial and consumer markets. The network infrastructure and installation, test and maintenance lines of business sell primarily to commercial markets.
The Company measures segment performance based on segment gross profit. The segment operations develop their product offering, pricing and strategies, which are collaborative with one another and the centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory, for internal reporting, evaluating performance or allocating capital. Accounting policies for measuring segment gross profit and inventory are substantially consistent with those described in Note 2 to the Company’s March 30, 2003 audited financial statements. Product delivery revenue and certain minor cost of sales expenses have been allocated to each segment based on a percentage of revenues and gross profit to agree to financial statement revenue and gross profit. The below segment information has been presented under the new segment organization; in addition, prior periods have been restated to conform to the new segment organization.
9
Segment activity for the periods ended December 28, 2003 and December 29, 2002 is as follows:
In thousands |
| Network |
| Mobile Devices |
| Installation, Test |
| Total |
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Three months ended December 28, 2003 |
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Revenue-Commercial |
| $ | 30,310 |
| $ | 15,074 |
| $ | 14,208 |
| $ | 59,592 |
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Revenue-Affinity Consumer Direct |
| — |
| 33,540 |
| — |
| 33,540 |
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Revenue-Total |
| 30,310 |
| 48,614 |
| 14,208 |
| 93,132 |
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Gross Profit-Commercial |
| 7,962 |
| 3,758 |
| 3,656 |
| 15,376 |
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Gross Profit-Affinity Consumer Direct |
| — |
| 4,571 |
| — |
| 4,571 |
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Gross Profit-Total |
| 7,962 |
| 8,329 |
| 3,656 |
| 19,947 |
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Product Inventory |
| 15,474 |
| 16,923 |
| 5,047 |
| 37,444 |
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Three months ended December 29, 2002 |
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Revenue-Commercial |
| $ | 22,937 |
| $ | 12,669 |
| $ | 13,976 |
| $ | 49,582 |
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Revenue-Affinity Consumer Direct |
| — |
| 15,428 |
| — |
| 15,428 |
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Revenue-Total |
| 22,937 |
| 28,097 |
| 13,976 |
| 65,010 |
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Gross Profit-Commercial |
| 5,851 |
| 3,255 |
| 3,659 |
| 12,765 |
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Gross Profit-Affinity Consumer Direct |
| — |
| 3,606 |
| — |
| 3,606 |
| ||||
Gross Profit-Total |
| 5,851 |
| 6,861 |
| 3,659 |
| 16,371 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 13,636 |
| 11,370 |
| 5,670 |
| 30,676 |
| ||||
In thousands |
| Network |
| Mobile Devices |
| Installation, Test |
| Total |
| ||||
Nine months ended December 28, 2003 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 86,252 |
| $ | 43,486 |
| $ | 38,469 |
| $ | 168,207 |
|
Revenue-Affinity Consumer Direct |
| — |
| 76,844 |
| — |
| 76,844 |
| ||||
Revenue-Total |
| 86,252 |
| 120,330 |
| 38,469 |
| 245,051 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 21,564 |
| 10,988 |
| 10,206 |
| 42,758 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 13,758 |
| — |
| 13,758 |
| ||||
Gross Profit-Total |
| 21,564 |
| 24,746 |
| 10,206 |
| 56,516 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 15,474 |
| 16,923 |
| 5,047 |
| 37,444 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Nine months ended December 29, 2002 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 75,811 |
| $ | 40,310 |
| $ | 47,539 |
| $ | 163,660 |
|
Revenue-Affinity Consumer Direct |
| — |
| 40,861 |
| — |
| 40,861 |
| ||||
Revenue-Total |
| 75,811 |
| 81,171 |
| 47,539 |
| 204,521 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 19,548 |
| 10,037 |
| 12,916 |
| 42,501 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 11,200 |
| — |
| 11,200 |
| ||||
Gross Profit-Total |
| 19,548 |
| 21,237 |
| 12,916 |
| 53,701 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 13,636 |
| 11,370 |
| 5,670 |
| 30,676 |
| ||||
10
Note 9. Restructuring Charges
On October 21, 2003, the Company announced a major program designed to improve profitability at current revenue levels and to strengthen the foundation for future profitable growth. The cost of this program, which primarily consisted of termination charges, was $164,000 and was expensed in the third quarter. There were 21 employees terminated as a result of this program. Also during the quarter, the Company consolidated its distribution operations from three facilities to two. Consolidation charges of $2.1 million, which are based on current assumptions, represent exit costs, including asset write-offs and the present value of the continuing lease obligation associated with the vacated facility. Due to current real estate market conditions and the short remaining lease term, the Company does not expect to be able to sub-lease this facility. These profitability program costs and facility consolidation charges, which total $2.3 million in the aggregate, are included as restructuring charges on the Company’s Consolidated Income Statement for the periods ended December 29, 2003. The Company has recorded a $1.2 million liability on its Consolidated Balance Sheet, representing the current present value of continuing lease obligations related to this vacated facility.
Note 10. Commitment
Following the October 12, 2002 disaster, the Company relocated its sales, marketing and administrative offices to a subleased location nearby its Global Logistics Center. The sublease for this space expires May 31, 2004; and the Company has entered into a direct lease for this space for a term beginning June 1, 2004 and expiring May 31, 2007. However, the lease can be terminated by the Company by giving twelve months written notice at any time after June 1, 2004. The monthly rental fee will range from $112,000 to $117,000 throughout the lease term.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended March 30, 2003.
Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003
Revenues increased by $28.1 million, or 43%, to $93.1 million for the third quarter of fiscal 2004 compared to $65.0 million for the third quarter of fiscal 2003. Revenues from mobile devices and accessories increased 73%, revenues from network infrastructure products increased 32%, and test and maintenance products increased 2%. Network infrastructure, mobile devices and accessories, and test and maintenance products accounted for approximately 33%, 52% and 15%, respectively, of revenues during the third quarter of fiscal 2004, as compared to 35%, 43% and 22%, respectively, of revenues during the third quarter of fiscal 2003. We experienced revenue growth in our systems operators, dealers and resellers, and consumer market categories, partially offset by a decrease in revenue from our international category. Systems operators, dealers and resellers, consumers, and international users accounted for approximately 31%, 31%, 36% and 2%, respectively, of revenues during the third quarter of fiscal 2004, compared to 35%, 38%, 24% and 3%, respectively, of revenues during the third quarter of fiscal 2003.
The increase in mobile devices and accessories revenues was primarily due to strong growth in our affinity consumer-direct sales channel, as well as growth in our commercial business. The significant increase in affinity consumer-direct revenues is attributed to increased volumes from our ongoing T-Mobile USA affinity
11
relationship. This relationship is an e-commerce, complete supply-chain relationship. We sell and deliver wireless telephones and accessories to consumers and other end-users. We purchase the telephones and accessories, record orders via Internet ordering tools and hotlines, and then serialize, package and kit the telephones and accessories for delivery to the end-user. Revenues from this affinity relationship with T-Mobile USA accounted for approximately 33% of total revenues in the third quarter. Commercial revenues for mobile devices and accessories increased 19% over the third quarter of fiscal 2003, due in part to enhanced merchandising and packaging programs and an increase in data product sales.
We believe that pent up demand for improved mobile phone coverage and new broadband technologies led to increased capital spending compared to the third quarter of the prior year, which resulted in the increase in sales of our network infrastructure products. We also believe that increased spending in homeland security and public safety at the federal, state and local levels have contributed to increased network infrastructure sales. Although we see signs that the market for infrastructure products is stabilizing, there can be no assurances that this trend will continue.
The small increase in installation, test and maintenance revenues is primarily attributable to increased sales of test equipment and tools and shop supplies, partially offset by decreases in our selling prices of repair and replacement parts pursuant to our relationship with Nokia, Inc., in which we supply these materials to Nokia Inc.’s authorized service centers in the United States.
Our on-going ability to earn revenues from customers and vendors looking to us for product and supply chain solutions, including T-Mobile USA and Nokia Inc., is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each affinity relationship often differ. Among these factors are the strength of the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. We believe that in order to achieve our stated goal of increasing market share through these and our other vendor and customer relationships, we must focus on achieving a higher share of current product categories purchased by our customers, both large and small; on expanding the product categories purchased by these customers; and on continuing to acquire and sell more customers, on a monthly basis. In addition, the agreements or arrangements on which these affinity relationships are based are typically of limited duration, and are terminable by either party upon several months notice. These affinity relationships could also be affected by wireless carrier consolidation. We are conscious of these possibilities and are dedicated to superior performance and quality and consistency of service in an effort to maintain and expand these relationships. Thus far, we believe that we have been successful in these efforts, but there can be no assurance that we will continue to be successful in this regard in the future.
Gross profit increased by $3.6 million, or 22%, to $19.9 million for the third quarter of fiscal 2004 compared to $16.4 million for the third quarter of fiscal 2003. Gross profit margin percent decreased to 21.4% for the third quarter of fiscal 2004 compared to 25.2% for the third quarter of fiscal 2003. Gross profit margin percentage decreased for all product segments. The largest decrease in gross profit margin occurred in mobile devices and accessories and was primarily attributable to the expansion of the T-Mobile USA relationship discussed above, which operates at lower than historical gross profit margin percents. The decreases in gross profit margin for our network infrastructure and installation, test and maintenance products were primarily due to product mix. We account for inventory at the lower of cost or market and as a result, write-offs/write downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.
Total selling, general and administrative expenses increased by $2.5 million, or 16%, to $18.1 million for the third quarter of fiscal 2004 compared to $15.5 million for the third quarter of fiscal 2003. The increase in these expenses is attributable to higher fulfillment costs driven by increased shipment volumes, primarily due to the increase in our consumer business; to increased marketing expenses designed to drive current and future commercial revenues; to increased facility costs related to the opening of our Reno, Nevada Americas Logistics Center in June 2003; and was partially offset by the results of our productivity and profitability program which was initiated at the beginning of the third quarter. This program was designed to improve profitability at
12
current revenue levels and to strengthen the foundation for future profitable growth and included a restructuring of our organization, policies and processes, and a consolidation of facilities. Selling, general and administrative expense savings and minor pricing adjustments related to this program totaled approximately $600,000 in the third quarter, and were primarily a result of a people count reduction, due to the termination of 21 employees, and other productivity improvements. We expect most of these cost savings to continue in future periods; however, a portion of these savings will be offset by expenditures for future growth initiatives.
We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, included in selling, general and administrative expenses is a provision for bad debts of $362,500 for the quarter ended December 28, 2003, compared to $104,500 for the quarter ended December 29, 2002.
Total selling, general and administrative expenses decreased as a percentage of revenues to 19.4% for the third quarter of fiscal 2004 from 23.9% for the third quarter of fiscal 2003.
Also related to the productivity program, we recorded $2.3 million in restructuring charges during the third quarter. This charge consists of $164,000 in severance pay and other minor costs to implement the productivity and profitability program discussed above and a $2.1 million charge relating to the consolidation of our distribution facilities from three to two. The facility consolidation portion of the charge is based on current assumptions, and represents exit costs, including asset write-offs, as well as the present value of a continuing facility lease obligation. Due to current real estate market conditions, and the short remaining lease term, we currently do not expect to be able to sub-lease the vacated facility. Beginning in the fourth quarter, we expect to realize selling, general and administrative expenses savings of approximately $250,000 per quarter relating to the facility consolidation, which will be offset by additional rent expense discussed in the following paragraph. Restructuring charges related to the present value of the continuing facility lease obligation will be paid monthly through March 2006, and will be funded from cash flow from operations, if available, or from our revolving credit facility. We currently have a $1.2 million liability for the present value of continuing lease obligations related to this vacated facility on our Consolidated Balance Sheet.
As a result of the October 12, 2002 disaster, we relocated our sales, marketing and administrative offices to a subleased location nearby our Global Logistics Center. Beginning in June of fiscal 2005, we will be incurring approximately $500,000 per quarter in rent and related expenses associated with this leased facility. The rent for this facility has been and will continue to be funded by insurance proceeds through May 2004, and therefore is not included in selling, general and administrative expenses (see Note 5 to the Financial Statements and Summary Disclosures about Contractual Obligations and Commercial Commitments).
Income (loss) from operations, which includes the $2.3 million of restructuring charges mentioned above, decreased by $1.2 million or 149%, to ($406,700) for the third quarter of fiscal 2004 compared to $825,900 for the third quarter of fiscal 2003. The operating income margin decreased to (0.4%) for the third quarter of fiscal 2004 compared to 1.3% for the third quarter of fiscal 2003.
Net interest, fees and other expense increased by $163,500 or 51%, to $483,100 for the third quarter of fiscal 2004 compared to $319,600 for the third quarter of fiscal 2003. This increase is due to an increase in credit card fees driven by increased consumer sales and increased credit card use by commercial customers.
Income (loss) before provision for income taxes decreased by $1.4 million or 276%, to ($889,800) for the third quarter of fiscal 2004 compared to $506,300 for the third quarter of fiscal 2003. The effective tax rates in the third quarter for fiscal years 2004 and 2003 were 39.0% and 38.5%, respectively. The effective tax rate for the quarter increased due to minor changes in the relationship between non-deductible expenses and taxable income. Net income and earnings per share (diluted) for the third quarter of fiscal 2004 decreased 274% and 271%, respectively, compared to the third quarter of fiscal 2003.
13
First Nine Months of Fiscal 2004 Compared to First Nine Months of Fiscal 2003
Revenues increased by $40.5 million, or 20%, to $245.1 million for the first nine months of fiscal 2004 compared to $204.5 million for the first nine months of fiscal 2003. Revenues from mobile devices and accessories increased 48% and revenues from network infrastructure products increased 14%. These increases were partially offset by a 19% decrease in revenues from test and maintenance products. Network infrastructure, mobile devices and accessories, and test and maintenance products accounted for approximately 35%, 49% and 16%, respectively, of revenues during the first nine months of fiscal 2004 as compared to 37%, 40% and 23%, respectively, during the first nine months of fiscal 2003. We experienced revenue growth in our systems operators, dealers and resellers, and consumer market categories, partially offset by a decrease in revenue in our international category. System operators, resellers, consumer, and international users accounted for approximately 33%, 33%, 32% and 2%, respectively, of revenues during the first nine months of fiscal 2004 as compared to 38%, 40%, 20% and 2%, respectively, of revenues during the first nine months of fiscal 2003.
The increase in mobile devices and accessories revenues was primarily due to strong growth in our affinity consumer-direct sales channel, as well a smaller growth in our commercial business. The significant increase in affinity consumer-direct revenues is attributed to increased volumes from our ongoing T-Mobile USA affinity relationship. This relationship is an e-commerce, complete supply-chain relationship. We sell and deliver wireless telephones and accessories to consumers and other end-users. We purchase the telephones and accessories, record orders via Internet ordering tools and hotlines, and then serialize, package and kit the telephones and accessories for delivery to the end-user. Revenues from this affinity relationship with T-Mobile USA accounted for approximately 28% of total revenues in the first nine months. Commercial revenues for mobile devices and accessories increased 8% over the nine-month period of fiscal 2003, due in part to enhanced merchandising and packaging programs and an increase in data product sales.
We believe that pent up demand for improved mobile phone coverage and new broadband technologies led to increased capital spending, which resulted in the increase in sales of our network infrastructure products. We also believe that increased spending in homeland security and public safety at the federal, state and local levels have contributed to increased network infrastructure sales. Although we see signs that the market for infrastructure products is stabilizing, there can be no assurances that this trend will continue.
The decline in installation, test and maintenance revenues is primarily attributable to a significant decrease in our selling prices of repair and replacement parts pursuant to our relationship with Nokia, Inc., in which we supply these materials to Nokia Inc.’s authorized service centers in the United States.
Gross profit increased by $2.8 million or 5%, to $56.5 million for the first nine months of fiscal 2004 compared to $53.7 million for the first nine months of fiscal 2003. The gross profit margin percent decreased to 23.1% for the first nine months of fiscal 2004 compared to 26.3% for the first nine months of fiscal 2003. The largest decrease in gross profit margin occurred in mobile devices and accessories and was primarily attributable to the expansion of the T-Mobile USA relationship discussed above, which operates at lower than historical gross profit margin percents. We account for inventory at the lower of cost or market and as a result, write-offs/write downs occur due to damage, deterioration, obsolescence, changes in prices and other causes. Also, during the first nine months of fiscal 2003, inventory valuation adjustments increased over the prior year period by approximately $1.1 million, which negatively affected gross profit and accordingly gross profit margin percent.
Total selling, general and administrative expenses increased by $5.0 million, or 10%, to $53.5 million for the first nine months of fiscal 2004 compared to $48.5 million for the first nine months of fiscal 2003. The increase in these expenses is attributable to higher fulfillment costs driven by increased shipment volumes, primarily due to the increase in our consumer business; to increased people and marketing expenses designed to drive current and
14
future commercial revenues; to increased facility costs related to the opening of our Reno, Nevada Americas Logistics Center in June 2003; to increased investment in information technology; and was partially offset by the results of our productivity and profitability program which was initiated at the beginning of the third quarter. This program was designed to improve profitability at current revenue levels and to strengthen the foundation for future profitable growth and included a restructuring of our organization, policies and processes, and a consolidation of facilities. Selling, general and administrative expense savings and minor pricing adjustments related to this program totaled approximately $600,000 in the third quarter, and were primarily a result of a people count reduction, due to the termination of 21 employees, and other productivity improvements. We expect most of these cost savings to continue in future periods; however, a portion of these savings will be offset by expenditures for future growth initiatives.
We continually evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, included in selling, general and administrative expenses is a provision for bad debts of $637,400 for the first nine months ended December 28, 2003 (not including the effect of a more favorable than anticipated resolution of a customer collection issue during the first quarter) compared to $287,900 for the first nine months ended December 29, 2002.
Total selling, general and administrative expenses decreased as a percentage of revenues to 21.8% for the first nine months of fiscal 2004 from 23.7% for the first nine months of fiscal 2003.
Also related to the productivity program, we recorded $2.3 million in restructuring charges during the third quarter. This charge consists of $164,000 in severance pay and other minor costs to implement the productivity and profitability program discussed above and a $2.1 million charge relating to the consolidation of our distribution facilities from three to two. The facility consolidation portion of the charge is based on current assumptions, and represents exit costs, including asset write-offs, as well as the present value of a continuing facility lease obligation. Due to current real estate market conditions, and the short remaining lease term, we currently do not expect to be able to sub-lease the vacated facility. Beginning in the fourth quarter, we expect to realize selling, general and administrative expenses savings of approximately $250,000 per quarter relating to the facility consolidation, which will be offset by additional rent expense discussed in the following paragraph. Restructuring charges related to the present value of the continuing facility lease obligation will be paid monthly through March 2006, and will be funded from cash flow from operations, if available, or from our revolving credit facility. We currently have a $1.2 million liability for the present value of continuing lease obligations related to this vacated facility on our Consolidated Balance Sheet.
Certain selling, general and administrative expenses have also been affected as a result of the October 12, 2002 disaster. Depreciation expense has decreased as assets destroyed in the disaster are no longer being depreciated. Most of the assets destroyed in the disaster have been replaced and were primarily placed in service near the end of the third quarter as our Global Logistics Center rebuild was completed. The depreciation decrease from the disaster was also partially offset by the opening of our Reno, Nevada facility in June 2003. Also as a result of the disaster, we relocated our sales, marketing and administrative offices to a subleased location nearby our Global Logistics Center. Beginning in June of fiscal 2005, we will be incurring approximately $500,000 per quarter in rent and related expenses associated with this leased facility. The rent for this facility has been and will continue to be funded by insurance proceeds through May 2004, and therefore is not included in selling, general and administrative expenses (see Note 5 to the Financial Statements and Summary Disclosures about Contractual Obligations and Commercial Commitments).
We recorded a benefit from insurance proceeds during the first nine months of the fiscal year of $3.1 million, representing the final settlement of insurance claims from the October 12, 2002 disaster.
Income from operations decreased by $1.5 million, or 28%, to $3.8 million for the first nine months of fiscal 2004, including the $3.1 million benefit from insurance proceeds and the $2.3 million in restructuring charges, compared to $5.2 million for the first nine months of fiscal 2003. The operating income margin decreased to 1.5% for the first nine months of fiscal 2004 compared to 2.6% for the first nine months of fiscal 2003.
15
Net interest, fees and other expense increased by $448,500 or 46%, to $1.4 million for the first nine months of fiscal 2004 compared to $980,800 for the first nine months of fiscal 2003. This increase is due to increased credit card fees due to increased sales to consumers and increased use of credit cards by commercial customers, partially offset by lower interest rates and a reduction in borrowings on our revolving credit facility.
Income before provision for income taxes decreased $1.9 million or 45% to $2.3 million for the first nine months of fiscal 2004 compared to $4.2 million for the first nine months of fiscal 2003. The effective tax rate for fiscal 2004 and 2003 was 39.0% and 38.5%, respectively. The effective tax rate for the nine-month period increased due to minor changes in the relationship between non-deductible expenses and taxable income. Net income and earnings per share (diluted) for the first nine months of fiscal 2004 both decreased 45% compared to the first nine months of fiscal 2003.
Liquidity and Capital Resources
We generated $9.5 million of net cash from operating activities in the first nine months of fiscal 2004 compared to $9.4 million in the first nine months of fiscal 2003. In the first nine months of fiscal 2004, our cash flow from operations was driven largely by a decrease in prepaid expenses and other current assets and a large increase in trade accounts payable, partially offset by a significant increase in product inventory, and a significant increase in trade accounts receivable. The decrease in prepaid expenses and other current assets is primarily a result of $7.3 million in cash proceeds received from our insurance carrier related to the disaster. The large increase in accounts payable is largely a result of increased inventory purchases in the third quarter. These inventory purchases were necessary to support increased sales volumes and are related to all lines of business, but primarily to the Consumer Mobile Devices and Accessories business. In most cases, we have negotiated open payment terms with our vendors and manufacturers. We negotiate the duration of these payment terms when establishing and/or renewing relationships with vendors and manufacturers and attempt to balance the payment terms with other factors such as pricing, availability of competitive products and anticipated demand. The timing of payments related to past purchases and the amount of future inventory purchases will create periodic increases and decreases in the accounts payable balance. Trade accounts receivable grew significantly due to increased sales to our customers, many of whom maintain accounts with open terms.
Net cash used in investing activities was $4.4 million for the first nine months of fiscal 2004 compared to $4.1 million for the first nine months of fiscal 2003, both representing the acquisition of property and equipment. Net cash used by financing activities was $876,900 for the first nine months of fiscal 2004 compared to $5.6 million for the first nine months of fiscal 2003. During the first nine months of fiscal 2004, pursuant to our stock buyback program, 112,900 shares of our outstanding common stock was purchased for $754,400 or an average price of $6.68 per share. The Board of Directors has authorized the purchase of up to 450,000 shares. Also, on June 5, 2003, we completed a stock option repurchase program at which time options for 743,545 shares were repurchased and cancelled, resulting in a cash payment of $512,000 (see Note 3 to the Financial Statements).
Effective September 30, 2003, we established a $30 million revolving line of credit facility with Wachovia Bank, National Association and SunTrust Bank, replacing our previously existing $30 million revolving credit facility with another lender. This new facility has a three-year term expiring September 2006, is unsecured and interest is payable monthly at the LIBOR rate plus an applicable margin, which ranges from 1½% to 2%. The facility is subject to a borrowing base and certain financial covenants, conditions and representations. Management believes that all covenants were complied with at December 28, 2003. There were no outstanding borrowings on this credit facility at December 28, 2003.
16
To minimize interest expense, our policy is to use excess available cash to pay down any balance on our revolving credit facility.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended March 30, 2003.
Revenue Recognition. We record revenue when product is shipped to the customer. Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of these companies have turned to us to implement supply-chain solutions, including purchasing inventory, assisting in demand forecasting, configuring, packaging, kitting and delivering products and managing customer relations, from order taking through cash collections. In performing these solutions, we assume varying levels of involvement in the transactions and varying levels of credit and inventory risk. As our solutions offerings continually evolve to meet the needs of our customers, we constantly evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States. When applying this guidance, we look at the following indicators: whether we are the primary obligor in the transaction; whether we have general inventory risk; whether we have latitude in establishing price; the extent to which we change the product or perform part of the service; whether we have supplier selection; whether we are involved in the determination of product and service specifications; whether we have physical inventory risk; whether we have credit risk; and whether the amount we earn is fixed. Each of our customer relationships is independently evaluated based on the above guidance and revenue is recorded on the appropriate basis.
Valuation of Goodwill. Our Consolidated Balance Sheet includes goodwill of approximately $2.5 million. We periodically evaluate our goodwill, long-lived assets and intangible assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance and legal factors. Based on our valuations of goodwill completed during the quarter, we determined that goodwill was not impaired. Future events, such as significant changes in cash flow assumptions, could cause us to conclude that impairment indicators exist and that the net book value of goodwill, long-lived assets and intangible assets is impaired. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount up to $2.5 million, resulting in a charge to operations.
Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability. This review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Based on this review, we have not established a valuation allowance. If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets, resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Inventories. Inventories are stated at the lower of cost or market. Write-offs/write downs occur due to damage, deterioration, obsolescence, changes in prices and other causes. Inventory obsolescence reserves are maintained
17
based on our estimates, historical experience and forecasted demand for our products. A material change in these estimates could adversely impact our results from operations.
Allowance for Doubtful Accounts. We use estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable and unbilled receivables to their expected net realizable value. We estimate the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience and the Company’s stability as it relates to its customer base. Typical payments from commercial customers are due 30 days from the date of the invoice. We charge-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized. Although we believe that the current allowance is sufficient to cover existing exposures, there can be no assurance against the deterioration of a major customer’s creditworthiness, or against defaults that are higher than what has been experienced historically. If our estimate of this allowance is understated, it could have an adverse impact on our results of operations.
Summary Disclosures about Contractual Obligations and Commercial Commitments
The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 28, 2003:
|
|
|
| Payment Due by Fiscal Year Ending |
| ||||||||||||||
|
| Total |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 2008 and |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, including current portion |
| $ | 5,760,000 |
| $ | 99,200 |
| $ | 4,647,500 |
| $ | 137,600 |
| $ | 216,300 |
| $ | 659,400 |
|
Revolving credit facility |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Operating leases (see Note 9) |
| 1,249,000 |
| 135,200 |
| 551,400 |
| 562,400 |
| — |
| — |
| ||||||
Operating lease-office (see Note 10) |
| 1,955,000 |
| 345,000 |
| 1,380,000 |
| 230,000 |
| — |
| — |
| ||||||
Other commitment |
| 225,100 |
| 225,100 |
| — |
| — |
| — |
| — |
| ||||||
Total contractual cash obligations |
| $ | 9,189,100 |
| $ | 804,500 |
| $ | 6,578,900 |
| $ | 930,000 |
| $ | 216,300 |
| $ | 659,400 |
|
Forward-Looking Statements
This Report contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, all of which are based on current expectations. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “believes,” “should,” “expects,” “anticipates,” “estimates,” and similar expressions. Our future results of operations and other forward-looking statements contained in this report involve a number of risks and uncertainties. For a variety of reasons, actual results may differ materially from those described in any such forward-looking statement. Such factors include, but are not limited to, the following: our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; the effect that the loss of certain customers or vendors could have on our net profits; economic conditions that may impact customers’ ability to fund purchases of our products and services; the possibility that unforeseen events could impair our ability to service customers promptly and efficiently, if at all; the possibility that, for unforeseen reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings; existing competition from national and regional distributors and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; and continuing changes in the wireless communications industry, including risks associated with conflicting technologies, changes in technologies, inventory obsolescence, consolidation among wireless carriers and other, and evolving Internet business models
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and the resulting competition. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
We have not used derivative financial instruments. We believe our exposure to market risks, including exchange rate risk, interest rate risk and commodity price risk, is not material at the present time.
Item 4 – Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information
Item 1 – Legal Proceedings
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on our financial condition or results of operations.
Item 2 – Changes in Securities
None
Item 3 – Defaults upon Senior Securities
None
Item 4 – Submission of Matters to a Vote of Security Holders
None
Item 5 – Other Information
None
Item 6 – Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 |
| Credit Agreement effective as of September 30, 2003, by and among (a) TESSCO Technologies Incorporated, Cartwright Communications Company, TESSCO Service Solutions, Inc., TESSCO Incorporated, Wireless Solutions Incorporated and TESSCO Business Services LLC and (b) Wachovia Bank, National Association and SunTrust Bank (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 3, 2003). |
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10.1 |
| Agreement of Lease By and Between Atrium Building, LLC and TESSCO Technologies Incorporated (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2003.) |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (The certifications in this exhibit are being furnished solely to accompany this report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.) |
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32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (The certifications in this exhibit are being furnished solely to accompany this report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.) |
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| (b): REPORTS ON Form 8-K |
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| Current Report on Form 8-K filed October 22, 2003, announcing the Company’s second quarter fiscal 2004 financial results. |
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| Current Report on Form 8-K filed October 3, 2003, announcing a new a $30 million revolving line of credit facility. |
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.
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| TESSCO Technologies Incorporated | ||
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Date: | February 11, 2004 | By: | /s/Robert C. Singer |
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| Robert C. Singer | ||
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| Senior Vice President and Chief Financial | ||
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