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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 September 26, 1997
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 its charter)
Delaware 52-0729657
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
34 Loveton Circle Sparks, Maryland 21152
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 472-7000
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 report(s)), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 5, 1997:
Class: Common Stock, $.01 par value Number of Shares: 4,384,431
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Part I
Item 1. Financial Statements
TESSCO Technologies Incorporated
Balance Sheets
ASSETS
September 26, March 28,
1997 1997
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(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,646,400 $ --
Trade accounts receivable, net 14,947,700 16,907,100
Product inventory 13,940,800 16,942,400
Deferred tax asset 369,700 376,100
Prepaid expenses and other current assets 1,008,000 861,500
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Total current assets 33,912,600 35,087,100
PROPERTY AND EQUIPMENT, net 12,614,300 11,363,100
DEFERRED TAX ASSET 208,800 212,400
GOODWILL 4,114,000 4,252,700
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Total assets $50,849,700 $50,915,300
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 9,508,200 $10,771,700
Accrued expenses and other current liabilities 2,247,900 2,086,700
Current portion of long-term debt 285,100 331,900
Current portion of capital lease obligation 23,600 85,000
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Total current liabilities 12,064,800 13,275,300
Borrowings under credit facility -- 630,500
Long-term debt 7,590,700 7,637,900
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Total liabilities 19,655,500 21,543,700
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 46,200 46,000
Additional paid-in capital 19,825,200 19,346,200
Treasury stock, at cost (2,831,500) (2,591,500)
Retained earnings 14,154,300 12,570,900
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Total stockholders' equity 31,194,200 29,371,600
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Total liabilities and stockholders' equity $50,849,700 $50,915,300
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2
TESSCO Technologies Incorporated
Statements of Income
(unaudited)
Fiscal Quarters Ended Six Months Ended
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September 26, September 27, September 26, September 27,
1997 1996 1997 1996
---- ---- ---- ----
Revenues $33,212,000 $38,158,000 $67,335,400 $74,825,900
Cost of goods sold 24,380,100 28,563,400 49,749,600 56,265,700
----------- ----------- ----------- -----------
Gross profit 8,831,900 9,594,600 17,585,800 18,560,200
Selling, general and administrative expenses 7,224,400 7,093,000 14,620,900 13,749,200
----------- ----------- ---------- ----------
Income from operations 1,607,500 2,501,600 2,964,900 4,811,000
Interest income (expense), net (203,000) (293,500) (404,200) (429,800)
----------- ---------- --------- ----------
Income before provision for income taxes 1,404,500 2,208,100 2,560,700 4,381,200
Provision for income taxes 533,800 852,400 977,300 1,691,400
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Net income $ 870,700 $ 1,355,700 $ 1,583,400 $ 2,689,800
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Primary earnings per share $ 0.19 $ 0.29 $ 0.34 $ 0.57
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Fully diluted earnings per share $ 0.19 $ 0.29 $ 0.34 $ 0.57
========== =========== =========== ===========
Primary weighted average shares outstanding 4,699,800 4,715,300 4,630,300 4,700,000
========== =========== =========== ===========
Fully diluted weighted average shares outstanding 4,699,800 4,753,400 4,647,400 4,730,800
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3
TESSCO Technologies Incorporated
Statements of Cash Flows
(unaudited)
Six Months Ended
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September 26, September 27,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,583,400 $ 2,689,800
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects
of business acquired in fiscal 1997
Depreciation and amortization 960,200 593,800
Provision for bad debts 83,600 249,400
Deferred income taxes 10,000 (30,400)
Decrease (increase) in trade accounts receivable 1,875,800 (3,115,900)
Decrease (increase) in product inventory 3,001,600 (6,255,500)
(Increase) in prepaid expenses and other
current assets (146,500) (679,300)
(Decrease) increase in trade accounts payable (1,263,500) 3,649,200
Increase in accrued expenses and other
current liabilities 161,200 97,100
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Net cash provided by (used in) operating activities 6,265,800 (2,801,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired business -- (6,688,600)
Acquisition of property and equipment (2,072,700) (3,862,800)
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Net cash used in investing activities (2,072,700) (10,551,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under credit facility (630,500) 6,632,300
Payments on long-term debt (94,000) --
Proceeds from long-term debt -- 6,198,400
Proceeds from exercise of stock options 239,200 147,700
Payment of capital lease obligations (61,400) (64,600)
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Net cash (used in) provided by financing activities (546,700) 12,913,800
Net (decrease) increase in cash and marketable securities 3,646,400 (439,400)
CASH AND CASH EQUIVALENTS, beginning of period -- 439,400
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CASH AND CASH EQUIVALENTS, end of period $ 3,646,400 $ --
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4
TESSCO Technologies Incorporated
Notes to Unaudited Financial Statements
September 26, 1997
1. Description of Business and Basis of Presentation
TESSCO Technologies Incorporated is a leading distributor of products to the
wireless communications industry. The Company serves almost 7,000 customers per
month in the cellular telephone, personal communications services (PCS), paging
and mobile radio-dispatch markets, including a diversified mix of dealers,
cellular and paging carriers and self-maintained users. The Company offers a
wide selection of nearly 17,500 SKUs which are broadly classified as
infrastructure, mobile and portable accessory and test and maintenance.
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 at September 26, 1997 and September 27, 1996 and the results of its
operations and its cash flows for the periods then ended. 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.
Readers of these statements should refer to the Company's annual financial
statements and notes thereto as of March 28, 1997 and for the year then ended.
The results of operations presented in the accompanying interim financial
statements are not necessarily representative of operations for an entire year.
2. Earnings per Share
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS 128 simplifies the standards for computing earnings
per share previously found in APB No. 15, "Earnings per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS and requires a
reconciliation of the numerator and denominator of the basic EPS calculation to
the numerator and denominator of the diluted EPS calculation. 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 similarly to primary EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and
early adoption is not permitted. When adopted, it will require restatement of
prior years' EPS. When adopted for the year ended March 27, 1998, the Company
will report basic EPS and diluted EPS instead of primary EPS and fully diluted
EPS. Basic EPS for the quarters ended September 26, 1997 and September 27, 1996
is $0.20 and $0.32, respectively. Basic EPS for the six months ended September
26, 1997 and September 27, 1996 is $0.36 and $0.63, respectively.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Second Quarter of Fiscal 1998 Compared to Second Quarter of Fiscal 1997
Revenues decreased by $4.9 million, or 13.0%, to $33.2 million for the
second quarter of fiscal 1998 compared to $38.2 million for the second quarter
of fiscal 1997. The overall decrease in revenues was primarily due to the
renegotiation of, and accounting for, one of the Company's fulfillment services
contracts. In February 1997, the Company successfully renegotiated an existing
fulfillment services contract resulting in the elimination of any future
accounts receivable exposure. Correspondingly, with this change, the Company now
reports revenues coinciding with fees realized. Revenues increased in only one
of the Company's three major product categories -- test and maintenance
products. Revenues decreased in the mobile and portable accessory product
category primarily due to the renegotiation and accounting treatment for one of
the Company's fulfillment services contracts. Revenues also decreased in the
infrastructure product category primarily from the slower than expected
transition of cable sales and general industry softness. Infrastructure, mobile
and portable accessory and test and maintenance products accounted for
approximately 50%, 34%, and 16%, respectively, of product revenues during the
second quarter of fiscal 1998. Revenues decreased in each of the three major
customer classifications, with the largest decrease experienced in dealers.
Cellular, paging and PCS carriers, dealers and self-maintained users accounted
for approximately 43%, 38%, and 19%, respectively, of product revenues during
the second quarter of fiscal 1998.
Gross profit decreased by $763,000, or 7.9%, to $8.8 million for the
second quarter of fiscal 1998 compared to $9.6 million for the second quarter of
fiscal 1997, while the gross profit margin increased to 26.6% from 25.1%. The
gross profit decrease resulted primarily from reduced gross profit dollars from
the company's infrastructure products. The increase in gross profit margin
primarily resulted from product and service mix changes, as well as the effect
of the renegotiation of one of the company's fulfillment services contracts and
the accounting treatment of that contract.
Selling, general and administrative expenses increased by $131,000, or
1.9%, to $7.2 million during the second quarter of fiscal 1998 compared to $7.1
million for the second quarter of fiscal 1997. The increase in these expenses
was primarily attributable to the continued investment in personnel to build and
support future revenue and gross profit growth and increased marketing costs
associated with the transition of customers to competitive infrastructure
products. As a percentage of revenues, selling, general and administrative
expenses increased to 21.8% for the second quarter of fiscal 1998 compared to
18.6% for the second quarter of fiscal 1997.
Income from operations decreased by $894,000, or 35.7%, to $1.6
million for the second quarter of fiscal 1998 compared to $2.5 million for the
second quarter of fiscal 1997. The operating income margin was 4.8% compared to
the corresponding prior year's 6.6% as a result of increased operating expenses,
but is primarily due to a lower revenue base.
Net interest expense for the second quarter of fiscal 1998 was
$203,000 compared to $294,000 for the second quarter of fiscal 1997. This change
is a direct result of positive cash flow during the second quarter of fiscal
1998 when compared to the interest incurred on the borrowings in connection with
the Company's acquisition of Cartwright Communications Company, the funding of
the Company's global logistics center, and increased working capital
requirements during the second quarter of fiscal 1997.
6
First Six Months of Fiscal 1998 Compared to First Six Months of Fiscal 1997
Revenues decreased by $7.5 million, or 10.0%, to $67.3 million for the
first six months of fiscal 1998 compared to $74.8 million for the first six
months of fiscal 1997. Although there was an increase in unit volume, an
expanded product offering, and the inclusion of Cartwright Communications
Company's revenues for the entire six month period of fiscal 1998 compared to
four months in the first six months of fiscal 1997, there was an overall
decrease in revenues primarily due to the renegotiation of, and accounting for,
one of the Company's fulfillment services contracts. In February 1997, the
Company successfully renegotiated an existing fulfillment services contract
resulting in the elimination of any future accounts receivable exposure.
Correspondingly, with this change, the Company now reports revenues coinciding
with fees realized. Revenues increased in only one of the Company's three major
product categories -- test and maintenance products. Revenues decreased in the
mobile and portable accessory product category primarily due to the
renegotiation and accounting treatment for one of the Company's fulfillment
services contracts. Revenues also decreased in the infrastructure product
category primarily from the slower than expected transition of cable sales and
general industry softness. Infrastructure, mobile and portable accessory and
test and maintenance products accounted for approximately 52%, 33%, and 15%,
respectively, of product revenues during the first six months of fiscal 1998.
Revenues decreased in each of the three major customer classifications, with the
largest decrease experienced in paging and PCS carriers. Cellular, paging and
PCS carriers, dealers and self-maintained users accounted for approximately 43%,
39%, and 18%, respectively, of product revenues during the first six months of
fiscal 1998.
Gross profit decreased by $974,000, or 5.2%, to $17.6 million for the
first six months of fiscal 1998 compared to $18.6 million for the first six
months of fiscal 1997, while the gross profit margin increased to 26.1% from
24.8%. The gross profit decrease resulted primarily from reduced fees associated
with fulfillment services contracts and from reduced gross profit dollars from
the company's cable conversion process and general industry softness. The
increase in gross profit margin primarily resulted from product and service mix
changes, as well as the effect of the renegotiation of one of the company's
fulfillment services contracts and the accounting treatment of that contract.
Selling, general and administrative expenses increased by $872,000, or
6.3%, to $14.6 million during the first six months of fiscal 1998 compared to
$13.7 million for the first six months of fiscal 1997. The increase in these
expenses was primarily attributable to the continued investment in personnel to
build and support future revenue and gross profit growth, increased marketing
costs associated with the transition of customers to competitive infrastructure
products, and Cartwright Communications Company's expenses being included for
the entire six months of fiscal 1998 compared to four months in fiscal 1997. As
a percentage of revenues, selling, general and administrative expenses increased
to 21.7% for the first six months of fiscal 1998 compared to 18.4% for the first
six months of fiscal 1997.
Income from operations decreased by $1.8 million, or 38.4%, to $3.0
million for the first six months of fiscal 1998 compared to $4.8 million for the
first six months of fiscal 1997. The operating income margin was 4.4% compared
to the corresponding prior year's 6.4% as a result of increased operating
expenses, but is primarily due to a lower revenue base.
Net interest expense for the first six months of fiscal 1998 was
$404,000 compared to $430,000 for the first six months of fiscal 1997. This
change is a direct result of positive cash flow during the first six months of
fiscal 1998 when compared to the interest incurred on the borrowings in
connection with the Company's acquisition of Cartwright Communications Company,
the funding of the Company's global logistics center, and increased working
capital requirements during the first six months of fiscal 1997.
7
Liquidity and Capital Resources
Net cash provided by operating activities was $6.3 million for the
first six months of fiscal 1998, compared to net cash used in operating
activities of $2.8 million for the first six months of fiscal 1997. This change
was primarily the result of a decrease in net income offset by changes in
operating assets and liabilities, particularly large changes in accounts
receivable and inventory offset partially by changes in accounts payable. Net
cash used in investing activities decreased to $2.1 million for the first six
months of fiscal 1998 compared to $10.6 million for the first six months of
fiscal 1997. This decrease was primarily due to the Company's acquisition of
Cartwright Communications Company during the first six months of fiscal 1997 and
decreasing expenditures related to the company's global logistics center in
fiscal 1998 when compared to fiscal 1997. Net cash used in financing activities
was $547,000 in the first six months of fiscal 1998 compared to net cash
provided by financing activities of $12.9 million for the first six months of
fiscal 1997. This change is primarily a result of the Company's borrowing under
its credit facilities and proceeds from long-term debt to finance the Cartwright
acquisition and the global logistics center in the first six months of fiscal
1997.
8
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
The Company held its Annual Meeting of Shareholders at the Company's
corporate headquarters on July 15, 1997. At the meeting, the shareholders were
asked to vote on the election of directors and the ratification of the
appointment of the Company's independent public accountants.
Election of Directors. At the meeting, the shareholders reelected
Martin L. Grass and Morton F. Zifferer, Jr. for three year terms expiring at the
Company's 2000 Annual Meeting of Shareholders. The votes cast for Mr. Grass and
Mr. Zifferer were as follows:
Martin L. Grass 3,696,291 For
2,390 Against or Withheld
0 Abstentions
653,561 Broker Non-Votes
Morton F. Zifferer, Jr. 3,696,456 For
2,225 Against or Withheld
0 Abstentions
653,561 Broker Non-Votes
Independent Auditors. At the meeting, the shareholders ratified the
appointment of Arthur Andersen LLP to serve as the independent public
accountants of the Company for the fiscal year ending March 27, 1998. The number
of votes for was 3,696,901, the number of votes against or withheld was 500, the
number of abstentions was 1,280, and the number of broker non-votes was 653,561.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibit 11 - Earnings per share computation
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter covered
by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESSCO Technologies Incorporated
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(Registrant)
Date: November 5, 1997
By: Gerald T. Garland
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Gerald T. Garland
Treasurer and Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
The following Exhibits are filed herewith:
11. Earnings per share computation
27. Financial Data Schedule