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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 September 27, 1998
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
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(Exact name of registrant as specified in charter)
Delaware 52-0729657
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11126 McCormick Road, Hunt Valley, Maryland 21031
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(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,
outstanding as of November 10, 1998 was 4,417,580.
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Part I - Financial Information
Item 1 - Financial Statements
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Balance Sheets
...................................................................................................................
September 27, March 29,
1998 1998
...................................................................................................................
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and marketable securities $ - $ 4,459,200
Trade accounts receivable, net 19,942,700 15,757,100
Product inventory 20,960,300 18,872,100
Deferred tax asset 523,900 523,900
Prepaid expenses and other current assets 1,437,500 1,609,400
...................................................................................................................
Total current assets 42,864,400 41,221,700
...................................................................................................................
PROPERTY AND EQUIPMENT, net 15,558,100 14,755,200
GOODWILL 3,786,100 3,950,000
...................................................................................................................
Total assets $62,208,600 $59,926,900
...................................................................................................................
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $13,551,200 $16,394,200
Accrued expenses and other current liabilities 2,387,200 2,363,400
Current portion of long-term debt 303,200 294,000
...................................................................................................................
Total current liabilities 16,241,600 19,051,600
...................................................................................................................
DEFERRED TAX LIABILITY 42,400 42,400
REVOLVING LINE OF CREDIT 4,381,400 -
LONG-TERM DEBT, net of current portion 7,262,300 7,441,400
...................................................................................................................
Total liabilities 27,927,700 26,535,400
...................................................................................................................
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - -
Common stock 46,800 46,700
Additional paid-in capital 20,283,900 20,241,800
Treasury stock, at cost (2,843,500) (2,843,500)
Retained earnings 16,793,700 15,946,500
...................................................................................................................
Total shareholders' equity 34,280,900 33,391,500
...................................................................................................................
Total liabilities and shareholders' equity $62,208,600 $59,926,900
...................................................................................................................
See accompanying notes.
- 2 -
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Income
...................................................................................................................
Fiscal Quarters Ended Six Months Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
...................................................................................................................
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $43,317,800 $33,212,000 $79,617,600 $67,335,400
Cost of goods sold 32,767,200 24,380,100 59,811,100 49,749,600
...................................................................................................................
Gross profit 10,550,600 8,831,900 19,806,500 17,585,800
...................................................................................................................
Selling, general and
administrative expenses
9,364,000 7,224,400 17,886,700 14,620,900
...................................................................................................................
Income from operations 1,186,600 1,607,500 1,919,800 2,964,900
Interest expense, net (322,400) (203,000) (553,100) (404,200)
...................................................................................................................
Income before provision
for income taxes 864,200 1,404,500 1,366,700 2,560,700
Provision for income taxes 328,400 533,800 519,500 977,300
...................................................................................................................
Net income $ 535,800 $ 870,700 $ 847,200 $ 1,583,400
...................................................................................................................
Basic earnings per share $ 0.12 $ 0.20 $ 0.19 $ 0.36
...................................................................................................................
Diluted earnings per share $ 0.12 $ 0.19 $ 0.18 $ 0.34
...................................................................................................................
Basic weighted average shares
outstanding 4,417,600 4,370,700 4,414,500 4,360,200
...................................................................................................................
Diluted weighted average
shares outstanding 4,580,800 4,700,500 4,580,500 4,630,200
...................................................................................................................
See accompanying notes.
- 3 -
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Cash Flows
...................................................................................................................
Six Months Ended
September 28, September 28,
1998 1997
...................................................................................................................
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 847,200 $ 1,583,400
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 940,400 960,200
Provision for bad debts 210,900 83,600
Deferred income taxes - 10,000
(Increase) decrease in trade accounts receivable (4,396,500) 1,875,800
(Increase) decrease in product inventory (2,088,200) 3,001,600
Decrease (increase) in prepaid expenses and other current assets 171,900 (146,500)
Decrease in trade accounts payable (2,843,000) (1,263,500)
Increase in accrued expenses and other current liabilities 23,800 161,200
...................................................................................................................
Net cash (used in) provided by operating activities (7,133,500) 6,265,800
...................................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,579,400) (2,072,700)
...................................................................................................................
Net cash used in investing activities (1,579,400) (2,072,700)
...................................................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 4,381,400 -
Repayments of revolving line of credit - (630,500)
Payments on long-term debt (169,900) (94,000)
Proceeds from exercise of stock options 42,200 239,200
Payment of capital lease obligations - (61,400)
...................................................................................................................
Net cash provided by (used in) financing activities 4,253,700 (546,700)
...................................................................................................................
Net (decrease) increase in cash and marketable securities (4,459,200) 3,646,400
CASH AND MARKETABLE SECURITIES, beginning of period 4,459,200 -
...................................................................................................................
CASH AND MARKETABLE SECURITIES, end of period $ - $ 3,646,400
...................................................................................................................
See accompanying notes.
- 4 -
TESSCO TECHNOLOGIES INCORPORATED
Notes to Consolidated Financial Statements
September 27, 1998
(Unaudited)
Note 1. Description of Business and Basis of Presentation
................................................................................
TESSCO Technologies Incorporated (the Company) is a leading provider of products
and value-added services in 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 and self-maintained users. 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.
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 29, 1998.
Note 2. Earnings Per Share
................................................................................
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.
- 5 -
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:
...................................................................................................................
Fiscal Quarters Ended Six Months Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
...................................................................................................................
Basic weighted average common
shares outstanding 4,417,600 4,370,700 4,414,500 4,360,200
Effect of dilutive common
equivalent shares 163,200 329,800 166,000 270,000
...................................................................................................................
Diluted weighted average
shares outstanding 4,580,800 4,700,500 4,580,500 4,630,200
...................................................................................................................
Options to purchase 224,300 shares of common stock at a weighted average
exercise price of $26.73 per share were outstanding as of September 27, 1998,
but were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
Note 3. Contingency
................................................................................
In connection with the relocation of its corporate headquarters, the Company
received a $1,000,000 grant from the Maryland Department of Business and
Economic Development. At the time this grant was made, it was subject to
repayment if the Company failed to achieve defined employment levels. The
Company has since been notified that the required employment levels have been
achieved and that the grant is no longer subject to any contingent repayment
obligation.
Note 4. New Accounting Pronouncements
................................................................................
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 and will be adopted as a cumulative catch-up. The Company has not
used derivative financial instruments, and management does not expect the
adoption of this statement to have a material impact on the Company's financial
position or results of operations.
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. Management does not believe that the adoption of SOP 98-1
will have a material effect on the Company's financial condition or results of
operations.
- 6 -
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 29, 1998.
Second Quarter of Fiscal 1999 Compared to Second Quarter of Fiscal 1998
................................................................................
Revenues increased by $10.1 million, or 30.4%, to $43.3 million for the second
quarter of fiscal 1999 compared to $33.2 million for the second quarter of
fiscal 1998. The overall increase was primarily a result of increased unit
volume. Revenues from the Company's base site infrastructure and subscriber
accessory products and services increased, while sales of test and maintenance
products remained relatively flat. The largest percentage increase was
experienced in the sale of subscriber accessory products and services, primarily
attributable to growth in affinity marketing programs. Base site infrastructure,
subscriber accessory and test and maintenance products and services accounted
for approximately 54%, 35% and 11%, respectively, of revenues during the second
quarter of fiscal 1999. Revenues also increased in each of the major customer
classifications, with the largest growth experienced in cellular, PCS and paging
carriers. Dealers, cellular, PCS and paging carriers and self-maintained users
accounted for approximately 39%, 41% and 20%, respectively, of revenues during
the second quarter of fiscal 1999.
Gross profit increased by $1.7 million, or 19.5%, to $10.6 million for the
second quarter of fiscal 1999 compared to $8.8 million for the second quarter of
fiscal 1998 due to the increase in revenues between quarters. The gross profit
margin declined to 24.4% for the second quarter of fiscal 1999 compared to 26.6%
for the second quarter of fiscal 1998. The reduction in gross profit margin was
principally attributable to the effect of product mix changes, more competitive
pricing on base site infrastructure and subscriber accessory products as well as
a reduction in the volume associated with our fulfillment services contracts.
Total operating expenses increased by $2.1 million, or 29.6%, to $9.4 million
for the second quarter of fiscal 1999 compared to $7.2 million for the second
quarter of fiscal 1998. Total operating expenses decreased slightly as a
percentage of revenues to 21.6% for the second quarter of fiscal 1999 from 21.8%
for the second quarter of fiscal 1998.
Income from operations decreased by $420,900, or 26.2%, to $1.2 million for the
second quarter of fiscal 1999 compared to $1.6 million for the second quarter of
fiscal 1998. The operating income margin decreased to 2.7% for the second
quarter of fiscal 1999 compared to 4.8% for the second quarter of fiscal 1998.
Net interest expense increased by $119,400, or 58.8%, to $322,400 for the second
quarter of fiscal 1999 compared to $203,000 for the second quarter of fiscal
1998. This increase is due to increased levels of borrowing under the Company's
revolving line of credit to finance working capital requirements.
- 7 -
First Six Months of Fiscal 1999 Compared to First Six Months of Fiscal 1998
................................................................................
Revenues increased by $12.3 million, or 18.2%, to $79.6 million for the first
six months of fiscal 1999 compared to $67.3 million for the first six months of
fiscal 1998. The overall increase was primarily a result of increased unit
volume. Revenues increased in each of the Company's major categories, with the
largest percentage increase experienced in the sale of subscriber accessory
products and services, primarily attributable to growth in affinity marketing
programs. Base site infrastructure, subscriber accessory and test and
maintenance products and services accounted for approximately 54%, 34% and 12%,
respectively, of revenues during the first six months of fiscal 1999. Revenues
also increased in each of the major customer classifications, with the largest
growth experienced in self-maintained users. Dealers, cellular, PCS and paging
carriers and self-maintained users accounted for approximately 39%, 40% and 21%,
respectively, of revenues during the first six months of fiscal 1999.
Gross profit increased by $2.2 million, or 12.6%, to $19.8 million for the first
six months of fiscal 1999 compared to $17.6 million for the first six of fiscal
1998 due to the increase in revenues. The gross profit margin declined to 24.9%
for the first six months of fiscal 1999 compared to 26.1% for the first six
months of fiscal 1998. The reduction in gross profit margin was principally
attributable to the effect of product mix changes, more competitive pricing on
our base site infrastructure and subscriber accessory products, as well as a
reduction in the volume associated with our fulfillment services contracts.
Total operating expenses increased by $3.3 million, or 22.3%, to $17.9 million
for the first six months of fiscal 1999 compared to $14.6 million for the first
six months of fiscal 1998. Total operating expenses increased as a percentage of
revenues to 22.5% for the first six months of fiscal 1999 from 21.7% for the
first six months of fiscal 1998. The increase in these expenses is primarily
attributable to a continued investment in personnel and marketing expenses
to support future revenue and gross profit growth.
Income from operations decreased by $1.1 million, or 35.2%, to $1.9 million for
the first six months of fiscal 1999 compared to $3.0 million for the first six
months of fiscal 1998. The operating income margin decreased to 2.4% for the
first six months of fiscal 1999 compared to 4.4% for the first six months of
fiscal 1998.
Net interest expense increased by $148,900, or 36.8%, to $553,100 for the first
six months of fiscal 1999 compared to $404,200 for the first six months of
fiscal 1998. This increase is due to increased levels of borrowing under the
Company's revolving line of credit to finance working capital requirements.
Liquidity and Capital Resources
................................................................................
Net cash used in operating activities was $7.1 million for the first six months
of fiscal 1999, compared to net cash provided by operating activities of $6.3
million for the first six months of fiscal 1998. This change was primarily the
result of significant increases in trade accounts receivable and product
inventory, as well as a significant decrease in trade accounts payable. Net cash
used in investing activities decreased to $1.6 million for the first six months
of fiscal 1999 compared to $2.1 million for the first six months of fiscal 1998,
primarily due to decreasing capital expenditures related to the newly opened
Global Logistics Center. Net cash provided by financing activities was $4.3
million for the first six months of fiscal 1999 compared to net cash used in
financing activities of $546,700 for the first six months of fiscal 1998,
primarily a result of the Company's borrowings under its revolving credit
facility.
- 8 -
Year 2000 Issue
................................................................................
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 a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
currently believes that with modifications to existing software and conversions
to new software the effects of the Year 2000 issue can be mitigated. The Company
will utilize both internal and external resources to reprogram, or replace, and
test the software for Year 2000 modifications. The cost of new software
purchased will be capitalized; all other costs will be expensed as incurred. The
cost of the project is not expected to have a material effect on the results of
operations.
In addition, the Company is assessing the readiness of its significant suppliers
and large customers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues. The
Company's total Year 2000 costs include the estimated costs associated with the
impact on the Company of the Year 2000 issue and on the Company's suppliers and
customers and are based on currently available information. However, there can
be no guarantee that the systems of other companies will be timely converted or
that a failure to convert by another company would not have a material adverse
effect on the Company. The Company has determined that it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
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. 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;
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.
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.
- 9 -
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 August 14, 1998. 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
Jerome C. Eppler and Dennis J. Shaughnessy, for three year terms expiring at the
Company's 2001 Annual Meeting of Shareholders. The votes cast for Mr. Eppler and
Mr. Shaughnessy were as follows:
Jerome C. Eppler 3,502,144 For
13,145 Against or Withheld
0 Abstentions
901,925 Broker Non-Votes
Dennis J. Shaughnessy 3,477,365 For
37,924 Against or Withheld
0 Abstentions
901,925 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 28, 1999. The number
of votes for was 3,513,784, the number of votes against or withheld was 705, the
number of abstentions was 800, and the number of broker non-votes was 901,925.
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.
- 10 -
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: November 10, 1998 By: /s/Gerald T. Garland
--------------------------------------------
Gerald T. Garland
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
- 11 -
Exhibit Index
The following exhibits are filed herewith:
11. Statement re: Computation of Per Shares Earnings
27. Financial Data Schedule