SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 3, 1996
TESSCO Technologies Incorporated
(Exact name of registrant as specified in its charter)
Delaware 0-24746 52-0729657
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
34 Loveton Circle, Sparks, Maryland 21152-5100
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 472-7000
Not applicable
(Former name or former address, if changed since last report)
Item 5. Other Events.
On June 3, 1996, the Registrant and Cartwright Communications
Company ("Cartwright") consummated the transactions
contemplated by an Asset Purchase Agreement, whereby the
Registrant acquired substantially all of Cartwright's assets
(excluding real estate) for $3.0 million in cash and an
$800,000 note, plus the net value of inventory, receivables
and payables. The purchase price was determined by negotiation
between the parties.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
Index to Financial Statements
Page
----
Report of Independent Public Accountants............................................ F-1
Balance Sheets (December 31, 1995 and 1994)......................................... F-2
Statements of Income (Years ended December 31, 1995, 1994 and
1993)............................................................................. F-3
Statements of Changes in Stockholder's Equity (Years ended December 31,
1995, 1994 and 1993).............................................................. F-4
Statements of Cash Flows (Years ended December 31, 1995, 1994 and
1993)............................................................................. F-5
Notes to Financial Statements (December 31, 1995 and 1994).......................... F-6
- 2 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Cartwright Communications Company:
We have audited the accompanying balance sheets of Cartwright Communications
Company (an Ohio S corporation) as of December 31, 1995 and 1994, and the
related statements of income, changes in stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cartwright Communications
Company as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
March 29, 1996
F-1
CARTWRIGHT COMMUNICATIONS COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 656,843 $ 239,347
Accounts receivable, net of allowance for doubtful accounts
of $27,500 and $30,000 1,388,439 1,373,172
Inventory (Notes 1 and 3) 2,180,596 2,482,280
Prepaid expenses and other 15,614 17,659
--------- ---------
Total current assets 4,241,492 4,112,458
PROPERTY AND EQUIPMENT, net (Notes 1 and 2) 243,106 281,429
--------- ---------
Total assets $4,484,598 $4,393,887
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable 682,628 889,243
Accrued expenses (Note 4) 160,922 170,300
--------- ---------
Total liabilities 843,550 1,059,543
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, no par value; $5 stated value, 500
shares authorized; 100 shares issued and outstanding 500 500
Additional paid-in capital 49,500 49,500
Retained earnings 3,591,048 3,284,344
--------- ---------
Total stockholder's equity 3,641,048 3,334,344
--------- ---------
Total liabilities and stockholder's equity $4,484,598 $4,393,887
========= =========
The accompanying notes are an integral part of these balance sheets.
F-2
CARTWRIGHT COMMUNICATIONS COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
NET SALES (Note 1) $14,625,406 $14,741,210 $13,746,150
COST OF GOODS SOLD 11,337,625 11,208,471 10,482,159
---------- ---------- ----------
Gross profit 3,287,781 3,532,739 3,263,991
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 1): 2,196,050 2,036,932 1,915,120
---------- ---------- ----------
Income from operations 1,091,731 1,495,807 1,348,871
INTEREST INCOME, net 35,824 21,779 24,035
---------- ---------- ----------
NET INCOME $ 1,127,555 $ 1,517,586 $ 1,372,906
========== ========== ==========
INCOME PER COMMON SHARE DATA:
NET INCOME PER COMMON SHARE $ 11,276 $ 15,176 $ 13,729
========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 100 100 100
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-3
CARTWRIGHT COMMUNICATIONS COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Additional Total
--------------------------------- Paid-in Retained Stockholder's
Shares Amount Capital Earnings Equity
BALANCE, December 31, 1992 100 $ 500 $ 49,500 $ 2,343,717 $ 2,393,717
Net income - - - 1,372,906 1,372,906
Distributions to stockholder - - - (1,449,865) (1,449,865)
----------- ------------- ------------- -------------- --------------
BALANCE, December 31, 1993 100 500 49,500 2,266,758 2,316,758
Net income - - - 1,517,586 1,517,586
Distributions to stockholder - - - (500,000) (500,000)
----------- ------------- ------------- -------------- --------------
BALANCE, December 31, 1994 100 500 49,500 3,284,344 3,334,344
Net income - - - 1,127,555 1,127,555
Distributions to stockholder - - - (820,851) (820,851)
----------- ------------- ------------- -------------- --------------
BALANCE, December 31, 1995 100 $ 500 $ 49,500 $ 3,591,048 $ 3,641,048
=========== ============= =========== ============== ==============
The accompanying notes are an integral part of these statements.
F-4
CARTWRIGHT COMMUNICATIONS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,127,555 $ 1,517,586 $ 1,372,906
Adjustments to reconcile net income to cash
flows provided by operating activities-
Depreciation and amortization 81,237 72,241 60,903
Loss on disposal of property and equipment - 258 29
(Increase) decrease in accounts receivable, net (15,267) 111,070 (404,562)
Decrease (increase) in inventory 301,684 (564,965) (285,488)
Decrease (increase) in prepaid expenses and
other 2,045 (6,492) (5,192)
(Decrease) increase in accounts payable (206,615) (564,955) 416,902
(Decrease) increase in accrued expenses (9,378) 29,097 19,231
-------------- -------------- --------------
Net cash flows provided by operating activities 1,281,261 593,840 1,174,729
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (42,914) (76,046) (90,366)
-------------- -------------- --------------
Net cash flows used in investing activities (42,914) (76,046) (90,366)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholder (820,851) (500,000) (1,449,865)
-------------- -------------- --------------
Net cash flows used in financing activities (820,851) (500,000) (1,449,865)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 417,496 17,794 (365,502)
CASH AND CASH EQUIVALENTS, beginning of period 239,347 221,553 587,055
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 656,843 $ 239,347 $ 221,553
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-5
CARTWRIGHT COMMUNICATIONS COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company
Cartwright Communications Company (the Company) distributes two-way radio
communications accessory equipment nationwide to two-way radio dealers and
self-servicing end users such as utilities, telephone companies,
cellular/SMR/paging operators and governmental agencies.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from those estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying financial statements.
Revenue Recognition
The Company records sales when products are delivered to the customers.
Discounts provided, which are principally volume related, are accrued at the
time of the sale.
Advertising Costs
Advertising costs related to publishing the catalog and price book are expensed
as incurred and are included in selling, general and administrative expenses in
the accompanying statements of income.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments in high credit quality financial institutions.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
last-in, first-out (LIFO) method.
F-6
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided for primarily using the straight-line method over the estimated useful
lives of the related assets as follows:
Life
Computer systems 3 - 5 years
Warehouse and office equipment 5 - 10 years
Vehicles 3 - 5 years
Leasehold improvements 10 - 40 years
Income Taxes
The Company and its stockholder have elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code. As such, the Company's taxable
income or loss for the periods was included in the individual income tax returns
of its stockholder for federal and state income tax purposes. As a result, no
provision for income taxes has been included in the accompanying statements of
income.
2. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1995 and 1994, are as follows:
1995 1994
--------- ---------
Computer systems $ 232,342 $ 214,614
Warehouse and office equipment 326,247 301,060
Vehicles 100,822 100,822
Leasehold improvements 41,184 41,185
-------- --------
700,595 657,681
Less: Accumulated depreciation and amortization (457,489) (376,252)
-------- --------
Property and equipment, net $ 243,106 $ 281,429
======== ========
Depreciation and amortization expense for fiscal years 1995, 1994 and 1993 was
$81,237, $72,241 and $60,903, respectively.
F-7
3. INVENTORY:
Had inventories been valued at first-in, first-out (FIFO) cost, they would have
been $527,867 and $495,872 higher than reported for 1995 and 1994, respectively.
Use of the FIFO method would have resulted in the following amounts:
1995 1994 1993
---------- ---------- ----------
Gross profit $3,319,776 $3,554,560 $3,301,222
Income from operations 1,123,726 1,517,628 1,386,102
Net income 1,159,550 1,539,407 1,410,137
4. ACCRUED EXPENSES:
Accrued expenses as of December 31, 1995 and 1994, consist of the following:
1995 1994
-------- --------
Accrued compensation $ 91,063 $ 92,533
Accrued personal property tax 49,186 47,000
Other accrued expenses 20,673 30,767
------- -------
$160,922 $170,300
======= =======
5. "S" CORPORATION STOCKHOLDER DISTRIBUTIONS:
The Company made distributions to its stockholder during 1993, 1994 and 1995 to
enable him to pay estimated taxes on the Company's taxable income.
6. RELATED PARTY TRANSACTIONS:
The Company conducts its operations from office and warehouse facilities that
are leased from its stockholder and related family members on a month-to-month
basis. The Company is responsible for maintenance of the facilities, insurance
coverage, taxes and utilities. The lease payments are adjusted for price-level
changes. Rent expense was $123,815 for fiscal years 1995 and 1994, and $119,053
for fiscal year 1993.
7. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) plan for the benefit of all eligible employees.
At its discretion, the Company may make qualified non-elective contributions to
the plan equal to 1/2% of the compensation of all eligible participants. In
addition, the Company may also contribute discretionary profit sharing and
matching contributions. Participants may make voluntary contributions to the
plan up to 15% of their compensation (as defined). The Company's contributions
charged to operations amounted to $22,506, $16,959 and $11,338 for fiscal years
1995, 1994 and 1993, respectively.
F-8
8. SUBSEQUENT EVENT:
Subsequent to December 31, 1995, the Company began preliminary negotiations
whereby certain operating assets of the Company would be sold to and trade
payables would be assumed by an unrelated party.
F-9
(b) Pro Forma Financial Information.
The following unaudited pro forma combined balance sheet and
statement of income has been derived from the Company's
balance sheet as of March 29, 1996 and the statement of income
for the year ended March 29, 1996. Adjustments have been made
to such information to give effect to the June 3, 1996
acquisition of substantially all of the assets of Cartwright.
The pro forma combined balance sheet as of March 29, 1996
assumes that the purchase of Cartwright was consummated on the
balance sheet date. The pro forma combined statement of income
assumes the purchase of Cartwright was consummated at the
beginning of the period presented. Cartwright's historical
year end is December 31, and the information for Cartwright is
for the twelve months ended December 31, 1995.
The following unaudited pro forma statement of income is not
necessarily indicative of future results of operations of the
Company or the results which would have occurred had the
operations and management of the Company and Cartwright been
combined during the period presented. In addition, the pro
forma results are not intended to be a projection of future
results. The unaudited pro forma statement of income should be
read in conjunction with the financial statements of
Cartwright included in the response to Item 7(a) above and the
consolidated financial statements of the Company contained in
the Company's Annual Report on Form 10-K for the fiscal year
ended March 29, 1996.
3
TESSCO Technologies Incorporated
Pro Forma Combined Balance Sheet
As of March 29, 1996
(Unaudited)
Assets
TESSCO Cartwright
Technologies Communications Pro Forma Pro Forma
Incorporated Company Adjustments Combined
CURRENT ASSETS:
Cash and marketable securities $ 439,400 $ -- $ -- $ 439,400
Trade accounts receivable, net 14,312,500 1,578,300 -- 15,890,800
Product inventory 13,689,400 1,917,100 -- 15,606,500
Deferred tax asset 280,600 -- -- 280,600
Prepaid expenses and other current assets 566,700 -- -- 566,700
---------- --------- --------- ----------
Total current assets 29,288,600 3,495,400 -- 32,784,000
PROPERTY AND EQUIPMENT, net 6,602,700 198,800 -- 6,801,500
DEFERRED TAX ASSET 87,900 -- -- 87,900
OTHER ASSETS 548,700 -- 3,800,800(A) 4,349,500
---------- --------- --------- ----------
Total assets $36,527,900 $3,694,200 $3,800,800 $44,022,900
========== ========= --------- ==========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES:
Borrowings under credit facility $ -- $ -- $5,940,000(C) $ 5,940,000
Short-term note payable -- -- 800,000(C) 800,000
Current portion of capital lease
obligations 126,400 -- -- 126,400
Trade accounts payable 9,642,700 755,000 -- 10,397,700
Accrued expenses and other current
liabilities 2,129,700 -- -- 2,129,700
---------- --------- --------- ----------
Total current liabilities 11,898,800 755,000 6,740,000 19,393,800
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT
PORTION 85,000 -- -- 85,000
OTHER LONG-TERM LIABILITIES -- -- -- --
---------- --------- --------- ----------
Total liabilities 11,983,800 -- 6,740,000 19,478,800
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- -- -- --
Common stock 44,600 -- -- 44,600
Additional paid-in capital 18,232,900 -- -- 18,232,900
Treasury stock, at cost (2,126,400) -- -- (2,126,400)
Retained earnings 8,393,000 -- -- 8,393,000
---------- --------- --------- ----------
Total shareholders' equity 24,544,100 -- -- 24,544,100
---------- --------- --------- ----------
Total liabilities and
shareholders' equity $36,527,900 $ 755,000 $6,740,000 $44,022,900
========== ========= ========= ==========
See Notes to Pro Forma Combined Financial Statements
4
TESSCO Technologies Incorporated
Pro Forma Combined Statement of Income
Fiscal Year Ended March 29, 1996
TESSCO Cartwright
Technologies Communications Pro Forma Pro Forma
Incorporated Company Adjustments Combined
----------- ----------- ----------- -------------
Revenues.................................... $92,290,100 $14,625,400 $ - $106,915,500
Cost of goods sold.......................... 68,974,400 11,337,600 - 80,312,000
----------- ----------- --------- ------------
Gross profit................................ 23,315,700 3,287,800 - 26,603,500
-
Selling, general and administrative expenses 17,126,700 2,196,100 3,400(B) 19,326,200
Income from operations...................... 6,189,000 1,091,700 (3,400) 7,277,300
Interest, net............................... 179,000 35,800 (544,400)(C) (329,600)
----------- ----------- --------- -----------
Income before provision for income taxes.... 6,368,000 1,127,500 (547,800) 6,947,700
Provision for income taxes.................. 2,327,000 - 231,800(D) 2,558,800
----------- ----------- --------- -----------
Net income.................................. $ 4,041,000 $ 1,127,500 $(779,600) $ 4,388,900
=========== ============ ========= ===========
Primary earnings per share.................. $0.89 $0.96
=========== ===========
Fully diluted earnings per share............ $0.88 $0.96
=========== ============
Primary weighted average shares outstanding. 4,555,200 4,555,200
=========== ============
Fully diluted weighted average shares outstanding 4,591,300 4,591,300
=========== ============
5
TESSCO Technologies Incorporated
Notes to Unaudited Pro Forma Combined Financial Statements
Note. 1 Acquisition of Cartwright Communications Company
On June 3, 1996, the Company acquired Cartwright through the acquisition of
substantially all of Cartwright's assets (excluding real estate) for $3.0
million in cash and a $800,000 note, plus the net value of inventory,
receivables and payables.
Note. 2 Pro Forma Adjustments
(A) The Cartwright Communications Company column reflects the assets and
liabilities acquired in connection with the purchase agreement. Goodwill is
calculated as follows:
Purchase Price $6,740,000
Add: Liabilities assumed-
Accounts payable 755,000
Less: Assets acquired-
Accounts receivable (1,578,300)
Product inventory (1,917,100)
Property and equipment (198,800)
----------
Goodwill $3,800,800
6
(B) Amortization of Goodwill/Reduction of Operating Expenses
The pro forma statement of income assumes the purchase agreement was consummated
at the beginning of the fiscal year ended March 29, 1996. Goodwill is to be
amortized over 15 years which results in amortization of approximately $253,400
for the year ended March 29, 1996. In addition, the pro forma statement of
income assumes certain operating expense reductions, primarily the elimination
of the former stockholder's annual salary.
(C) Interest Income and Interest Expense
The pro forma statement of income assumes the elimination of $35,800 of interest
income of the acquired company as the purchase agreement did not include the
acquisition of Cartwright's cash. In addition, the pro forma statement of income
assumes the use of approximately $6.7 million under the Company's revolving
line of credit to fund the acquisition. The Company's line of credit bears
interest at a rate of LIBOR plus 1.75%. This results in interest expense of
approximately $508,600 for the year ended March 29, 1996.
(D) Income Taxes
The provision for income taxes adjusts for the tax impact of the change of
Cartwright from a Subchapter S Corporation to a C Corporation for tax purposes.
This adjustment utilizes a 37.5% effective rate, resulting in pro forma income
taxes of approximately $422,800. In addition, the pro forma statement of income
includes the tax effect of the pro forma adjustments, resulting in a pro forma
tax benefit of approximately $191,000.
7
Exhibit Index
Exhibit No.
2 Asset Purchase Agreement dated May 7, 1996, by and between TESSCO
Technologies Incorporated and Cartwright Communications Company
(incorporated by reference to the Current Report on Form 8-K, dated
June 3, 1996 filed by the Company on June 13, 1996).
23.1 Consent of Arthur Andersen LLP
(c) Exhibits
Exhibit No.
2 Asset Purchase Agreement dated May 7, 1996, by and between
TESSCO Technologies Incorporated and Cartwright Communications
Company (incorporated by reference to the Current Report on
Form 8-K, dated June 3, 1996 filed by the Company on June 13,
1996).
23.1 Consent of Arthur Andersen LLP
6
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 hereunto duly authorized.
TESSCO Technologies Incorporated
Date: August 8, 1996 By: /s/ Gerald T. Garland
----------------------------------
Gerald T. Garland
Chief Financial Officer and Treasurer