UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
\X\ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 1999
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 0-24746
TESSCO TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in charter)
Delaware 52-0729657
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11126 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
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 \X\ No \ \
The number of shares of the registrant's Common Stock, $ .01 par value per
share, outstanding as of January 31, 2000 was 4,469,882.
TESSCO TECHNOLOGIES INCORPORATED
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION
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Item 1 Financial Statements
Consolidated Balance Sheets as of December 26, 1999 and March 28, 1999 3
Consolidated Statements of Income for the periods ended 4
December 26, 1999 and December 27, 1998
Consolidated Statements of Cash Flows for the periods ended 5
December 26, 1999 and December 27, 1998
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION
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Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
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Signature 13
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TESSCO TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
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December 26, March 28,
1999 1999
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(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and marketable securities $ -- $ 97,700
Trade accounts receivable, net 27,426,000 19,621,000
Product inventory 27,783,500 21,149,000
Deferred tax asset 626,600 626,600
Prepaid expenses and other current assets 1,527,100 1,968,900
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Total current assets 57,363,200 43,463,200
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PROPERTY AND EQUIPMENT, net 16,359,800 15,725,900
DEFERRED TAX ASSET 255,100 255,100
GOODWILL 3,373,400 3,618,200
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Total assets $ 77,351,500 $ 63,062,400
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 22,642,900 $ 12,938,500
Accrued expenses and other current liabilities 3,736,200 2,783,800
Revolving line of credit 4,195,000 4,403,000
Current portion of long-term debt 294,900 287,200
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Total current liabilities 30,869,000 20,412,500
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DEFERRED TAX LIABILITY 14,500 14,500
OTHER LIABILITY -- 50,000
LONG-TERM DEBT, net of current portion 6,887,600 7,128,700
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Total liabilities 37,771,100 27,605,700
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- --
Common stock 53,000 47,000
Additional paid-in capital 21,220,900 20,598,400
Treasury stock, at cost (3,710,600) (3,107,600)
Retained earnings 22,017,100 17,918,900
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Total shareholders' equity 39,580,400 35,456,700
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Total liabilities and shareholders' equity $ 77,351,500 $ 63,062,400
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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
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
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(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 52,436,300 $ 40,661,200 $ 140,577,000 $ 120,278,800
Cost of goods sold 37,920,700 29,621,500 101,755,400 89,432,600
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Gross profit 14,515,600 11,039,700 38,821,600 30,846,200
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Selling, general and
administrative
expenses 11,986,700 9,658,100 31,316,200 27,544,700
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Income from operations 2,528,900 1,381,600 7,505,400 3,301,500
Interest expense, net 310,100 322,100 895,400 875,200
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Income before
provision for
income taxes 2,218,800 1,059,500 6,610,000 2,426,300
Provision for income taxes 843,200 402,600 2,511,800 922,100
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Net income $ 1,375,600 $ 656,900 $ 4,098,200 $ 1,504,200
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Basic earnings per share $ 0.31 $ 0.15 $ 0.92 $ 0.34
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Diluted earnings per share $ 0.30 $ 0.14 $ 0.89 $ 0.33
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Basic weighted average
shares outstanding 4,488,100 4,420,100 4,466,300 4,416,400
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Diluted weighted average
shares outstanding 4,563,000 4,627,500 4,586,000 4,596,000
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See accompanying notes.
4
TESSCO TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
December 26, December 27,
1999 1998
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,098,200 $ 1,504,200
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,983,600 1,497,600
Provision for bad debts 204,900 283,100
Increase in trade accounts receivable (8,009,900) (3,593,700)
Increase in product inventory (6,634,500) (1,841,500)
Decrease (increase) in prepaid expenses and other current assets 441,800 (372,400)
Increase (decrease) in trade accounts payable 9,704,400 (1,817,300)
Increase in accrued expenses and other current liabilities 977,900 63,900
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Net cash provided by (used in)operating activities 2,766,400 (4,276,100)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,372,700) (2,211,400)
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Net cash used in investing activities (2,372,700) (2,211,400)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit -- 2,230,200
Repayments of revolving line of credit (208,000) --
Payments on long-term debt (233,400) (244,100)
Proceeds from exercise of stock options -- 42,200
Decrease in other liabilities (50,000) --
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Net cash (used in) provided by financing activities (491,400) 2,028,300
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Net decrease in cash and marketable securities (97,700) (4,459,200)
CASH AND MARKETABLE SECURITIES, beginning of period 97,700 4,459,200
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CASH AND MARKETABLE SECURITIES, end of period $ -- $ --
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See accompanying notes.
5
TESSCO TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1999
(Unaudited)
Note 1. Description of Business and Basis of Presentation
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TESSCO Technologies Incorporated (the "Company") is a leading provider of
products and value-added services to the wireless communications industry. The
Company serves customers in the cellular telephone, Personal Communications
Services (PCS), paging and mobile radio-dispatch markets, including a
diversified mix of cellular, PCS and paging carriers, dealers, self-maintained
users and consumers. The Company offers a wide selection of over 18,000 stock
keeping units, which are broadly classified as base site infrastructure,
subscriber accessory, and test and maintenance products. Although the Company
conducts business selling various products to different customer groups, these
products and customers all fall within the wireless telecommunications industry;
therefore, the Company reports operating results as one reportable segment.
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 28, 1999.
Note 2. Earnings Per Share
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In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board (APB) Opinion No. 15 "Earnings
per Share" by replacing the presentation of primary earnings per share (EPS)
with basic EPS and replacing fully diluted EPS with diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares and the dilutive
common equivalent shares outstanding for the period.
6
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
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
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Basic weighted average
common shares
outstanding 4,488,100 4,420,100 4,466,300 4,416,400
Effect of dilutive common
equivalent shares 74,900 207,400 119,700 179,600
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Diluted weighted average
shares outstanding 4,563,000 4,627,500 4,586,000 4,596,000
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Options to purchase 647,400 shares of common stock at a weighted average
exercise price of $22.01 per share were outstanding as of December 26, 1999,
but the common equivalent shares were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect of including
such shares would be antidilutive.
Note 3. New Accounting Pronouncements
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During March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
that computer software costs that are incurred in the preliminary project stage
should be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and who
devoted time to the internal-use computer software project (to the extent of the
time spent directly on the project); and the interest costs incurred when
developing computer software for internal use should be capitalized.
Under SOP 98-1, training costs, data conversion costs and internal costs
incurred for upgrades, enhancements and maintenance should be expensed as
incurred. Impairment of capitalized software should be recognized in accordance
with the provision of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The SOP is
effective for fiscal years beginning after December 15, 1998 and is to be
adopted prospectively. The adoption of SOP 98-1 has not had a material effect on
the Company's financial condition or results of operations.
Note 4. New Revolving Credit Agreement
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On September 30, 1999, the Company and its affiliates amended the terms of the
Company's bank financing agreement. Pursuant to the amended terms, the two
facilities previously existing under the agreement - a $5,000,000 line of credit
facility and a $10,000,000 revolving credit loan - were consolidated into one
$15,000,000 revolving credit facility, and the expiration date of the
consolidated facility was extended until September 2002. In addition, the bank
agreed to reduce the percentage amount which determines the monthly maintenance
fee required to be paid by the Company on the undisbursed balance of the
revolving credit facility. Otherwise, the terms of the bank financing agreement
remain substantially identical to those set forth in the financing agreement as
existing prior to the amendment.
7
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 28, 1999.
Third Quarter of Fiscal 2000 Compared to Third Quarter of Fiscal 1999
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Revenues increased by $11.8 million, or 29.0%, to $52.4 million for the third
quarter of fiscal 2000 compared to $40.6 million for the third quarter of fiscal
1999. Revenues from each of the Company's product categories increased. The
largest percentage increase was experienced in the sale of test and maintenance
products. Base site infrastructure, subscriber accessory and test and
maintenance products and services accounted for approximately 47%, 38% and 15%,
respectively, of revenues during the third quarter of fiscal 2000. The Company
experienced revenue growth from its market categories as well. Resellers, system
operators, consumer services and international users accounted for approximately
30%, 55%, 8% and 7%, respectively, of revenues during the third quarter of
fiscal 2000.
Gross profit increased by $3.5 million, or 31.5%, to $14.5 million for the third
quarter of fiscal 2000 compared to $11.0 million for the third quarter of fiscal
1999 due to increased revenues and improved gross profit margins. The gross
profit margin increased to 27.7% for the third quarter of fiscal 2000 compared
to 27.2% for the third quarter of fiscal 1999. The increase in gross profit
margin was principally attributable to the effect of product mix changes, more
competitive pricing on base site infrastructure inventory purchases and a move
to more value-added, solution-based pricing strategies.
Total operating expenses increased by $2.3 million, or 24.1%, to $12.0 million
for the third quarter of fiscal 2000 compared to $9.7 million for the third
quarter of fiscal 1999. Total operating expenses decreased as a percentage of
revenues to 22.9% for the third quarter of fiscal 2000 from 23.8% for the third
quarter of fiscal 1999. The increase in these expenses is primarily attributable
to a continued investment in personnel and marketing expenses to support revenue
and gross profit growth as well as increased depreciation and amortization
related to information system enhancements, while the decrease as a percentage
of revenue is attributable to a disproportionately greater increase in revenues.
Income from operations increased by $1.1 million, or 83%, to $2.5 million for
the third quarter of fiscal 2000 compared to $1.4 million for the third quarter
of fiscal 1999. The operating income margin increased to 4.8% for the third
quarter of fiscal 2000 compared to 3.4% for the third quarter of fiscal 1999.
Net interest expense decreased by $12,000, or 3.7%, to $310,100 for the third
quarter of fiscal 2000 compared to $322,100 for the third quarter of fiscal
1999. This decrease is due to decreased levels of borrowing under the Company's
revolving line of credit, partially offset by higher interest rates.
Income before provision for income taxes increased $1.2 million or 109% to $2.2
million for the third quarter of fiscal 2000 compared to $1.1 million for the
third quarter of fiscal 1999. The effective tax rate for both quarters was 38%.
Net income and earnings per share (diluted) for the second quarter of fiscal
2000 increased 109% and 114%, respectively, compared to the third quarter of
fiscal 1999.
8
First Nine Months of Fiscal 2000 Compared to First Nine Months of Fiscal 1999
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Revenues increased by $20.3 million, or 16.9%, to $140.6 million for the first
nine months of fiscal 2000 compared to $120.3 million for the first nine months
of fiscal 1999. Revenues increased in each of the Company's major product
categories, with the largest percentage increase experienced in the sale of test
and maintenance products, followed closely by subscriber accessory products and
services. Base site infrastructure, subscriber accessory and test and
maintenance products and services accounted for approximately 49%, 38% and 13%,
respectively, of revenues during the first nine months of fiscal 2000. The
Company experienced revenue growth from its reseller, system operator and
consumer services categories, partially offset by a decrease in its
international category. Resellers, system operators, consumer services and
international users accounted for approximately 30%, 55%, 8% and 7%,
respectively, of revenues during the first nine months of fiscal 2000.
Gross profit increased by $8.0 million, or 25.9%, to $38.8 million for the first
nine months of fiscal 2000 compared to $30.8 million for the first nine months
of fiscal 1999. The gross profit margin increased to 27.6% for the first nine
months of fiscal 2000 compared to 25.6% for the first nine months of fiscal
1999. The increase in gross profit margin was principally attributable to the
effect of product mix changes, more competitive pricing on base site
infrastructure inventory purchases and a move to more value-added,
solution-based pricing strategies.
Total operating expenses increased by $3.8 million, or 13.7%, to $31.3 million
for the first nine months of fiscal 2000 compared to $27.5 million for the first
nine months of fiscal 1999. Total operating expenses decreased as a percentage
of revenues to 22.3% for the first nine months of fiscal 2000 from 22.9% for the
first nine months of fiscal 1999. The increase in these expenses is primarily
attributable to continued investment in personnel and marketing expenses to
support future revenue and gross profit growth as well as increased depreciation
and amortization related to information system enhancements. The decrease as a
percentage of revenue is attributable to a disproportionately greater increase
in revenue.
Income from operations increased by $4.2 million, or 127%, to $7.5 million for
the first nine months of fiscal 2000 compared to $3.3 million for the first nine
months of fiscal 1999. The operating income margin increased to 5.3% for the
first nine months of fiscal 2000 compared to 2.7% for the first nine months of
fiscal 1999.
Net interest expense increased by $20,200, or 2.3%, to $895,400 for the first
nine months of fiscal 2000 compared to $875,200 for the first nine months of
fiscal 1999. This increase is due to higher interest rates partially offset by
decreased levels of borrowing under the Company's revolving credit facility.
Income before provision for income taxes increased $4.2 million or 172% to $6.6
million for the first nine months of fiscal 2000 compared to $2.4 for the first
nine months of fiscal 1999. The effective tax rate for both periods was 38%. Net
income and earnings per share (diluted) for the first nine months of fiscal 2000
increased 172% and 170%, respectively, compared to the first nine months of
fiscal 1999.
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9
Liquidity and Capital Resources
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Net cash provided by operating activities was $2.8 million for the first nine
months of fiscal 2000, compared to net cash used by operating activities of $4.3
million for the first nine months of fiscal 1999. This increase was primarily
the result of significant increases in net income and trade accounts payable,
partially offset by increases in accounts receivable and product inventory. Net
cash used in investing activities increased to $2.4 million for the first nine
months of fiscal 2000 compared to $2.2 million for the first nine months of
fiscal 1999. Net cash used by financing activities was $491,400 for the first
nine months of fiscal 2000 compared to net cash provided by financing activities
of $2.0 million for the first nine months of fiscal 1999. This change is
primarily the result of net repayments of the Company's revolving line of credit
during the first nine months of fiscal 2000 compared to net borrowings during
the first nine months of fiscal 1999.
Year 2000 Issue
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The Year 2000 issue is the result of computer programs using only two digits to
identify a year within date fields. Date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on its assessment, the Company determined that it would be required to
modify or replace significant portions of its software so that its computer
systems would properly utilize dates beyond December 31, 1999. The Company has
utilized both internal and external resources to reprogram, or replace, and test
the software for Year 2000 modifications. The cost of new software purchased was
capitalized; all other costs were expensed as incurred. The cost of the project
did not have a material effect on the results of operations. The Company
experienced no computer failures due to the Year 2000 issue on any of the
Company's "mission critical" systems to date.
In addition, the Company has experienced no material adverse effects related to
the failure of third parties to remediate their own Year 2000 issues. However,
there can be no guarantee that the Company or other third parties will not
experience Year 2000 related computer system malfunctions during calendar 2000
or beyond.
Forward-Looking Statements
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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. The Company's 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: the Company's dependence
on a relatively small number of suppliers and vendors, which could hamper the
Company's ability to maintain appropriate inventory levels and meet customer
demand; the effect that the loss of certain customers or vendors could have on
the Company's net profits; the possibility that unforeseen events could impair
the Company's ability to provide prompt and efficient service to its customers;
the possibility of unforeseen delays in entering into or performing under
anticipated contracts or in otherwise realizing 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 technology and inventory obsolescence.
Consequently, the reader is cautioned to consider all forward-looking statements
in light of the risks to which they are subject.
10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not used derivative financial instruments. Management of the
Company believes its exposure to market risks, including exchange rate risk,
interest rate risk and commodity price risk, is not material at the present
time.
11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
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
11. Statement re: computation of per share earnings
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
12
SIGNATURE
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.
TESSCO TECHNOLOGIES INCORPORATED
Date: February __, 2000 By: /S/ROBERT C. SINGER
-------------------------------
Robert C. Singer
Senior Vice President and Chief Financial
Officer
(principal financial and accounting officer)
13