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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 June 28, 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 July 30, 1998 was 4,417,214.
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<PAGE>
Part I. Financial Information
Item 1. Financial Statements
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
June 28, 1998 March 29, 1998
- - -------------------------------------------------------------------------------------------------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and marketable securities $ - $ 4,459,200
Trade accounts receivable, net 17,382,200 15,757,100
Product inventory 19,512,200 18,872,100
Deferred tax asset 523,900 523,900
Prepaid expenses and other current assets 1,586,700 1,609,400
- - -------------------------------------------------------------------------------------------------------------
Total current assets 39,005,000 41,221,700
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PROPERTY AND EQUIPMENT, net 15,166,000 14,755,200
GOODWILL 3,868,100 3,950,000
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Total assets $58,039,100 $59,926,900
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $10,356,300 $16,394,200
Accrued expenses and other current liabilities 2,368,800 2,363,400
Current portion of long-term debt 298,500 294,000
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Total current liabilities 13,023,600 19,051,600
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DEFERRED TAX LIABILITY 42,400 42,400
REVOLVING LINE OF CREDIT 3,862,900 -
LONG-TERM DEBT, net of current portion 7,365,000 7,441,400
- - -------------------------------------------------------------------------------------------------------------
Total liabilities 24,293,900 26,535,400
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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 16,258,000 15,946,500
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Total shareholders' equity 33,745,200 33,391,500
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Total liabilities and shareholders' equity $58,039,100 $59,926,900
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</TABLE>
See accompanying notes.
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<PAGE>
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Income
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Fiscal Quarters Ended
June 28, 1998 June 27, 1997
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(unaudited) (unaudited)
<S> <C> <C>
Revenues $36,299,800 $34,123,400
Cost of goods sold 27,043,900 25,369,500
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Gross profit 9,255,900 8,753,900
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Selling, general and administrative expenses 8,522,600 7,396,500
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Income from operations 733,300 1,357,400
Interest income (expense), net (230,700) (201,200)
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Income before provision for income taxes 502,600 1,156,200
Provision for income taxes 191,100 443,500
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Net income $ 311,500 $ 712,700
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Basic earnings per share $ 0.07 $ 0.16
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Diluted earnings per share $ 0.07 $ 0.16
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Basic weighted average shares outstanding 4,411,500 4,349,600
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Diluted weighted average shares outstanding 4,580,100 4,559,900
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</TABLE>
See accompanying notes.
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<PAGE>
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Fiscal Quarters Ended
June 28, 1998 June 27, 1997
- - -------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 311,500 $ 712,700
Adjustments to reconcile net income to net cash
(used in) provided by operating activities, net of
effects of business acquired in fiscal 1997:
Depreciation and amortization 545,900 476,700
Provision for bad debts 124,900 81,500
Deferred income taxes - 10,000
(Increase) decrease in trade accounts receivable (1,750,000) 54,000
(Increase) decrease in product inventory (640,100) 703,600
Decrease in prepaid expenses and other current assets 22,700 14,700
Decrease in trade accounts payable (6,037,900) (637,100)
Increase in accrued expenses and other current liabilities 5,400 567,100
- - -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (7,417,600) 1,983,200
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (874,800) (1,086,600)
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Net cash used in investing activities (874,800) (1,086,600)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 3,862,900 -
Repayments of revolving line of credit - (630,500)
Payments on long-term debt (71,900) (25,500)
Proceeds from exercise of stock options 42,200 53,500
Payment of capital lease obligations - (30,300)
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,833,200 (632,800)
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Net (decrease) increase in cash and marketable securities (4,459,200) 263,800
CASH AND MARKETABLE SECURITIES, beginning of period 4,459,200 -
- - -------------------------------------------------------------------------------------------------------------
CASH AND MARKETABLE SECURITIES, end of period $ - $ 263,800
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</TABLE>
See accompanying notes.
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<PAGE>
TESSCO TECHNOLOGIES INCORPORATED
Notes to Consolidated Financial Statements
June 28, 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 FASB issued 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.
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:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Fiscal Quarters Ended
June 28, 1998 June 27, 1997
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<S> <C> <C>
Basic weighted average common shares outstanding 4,411,500 4,349,600
Effect of dilutive common equivalent shares 168,600 210,300
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Diluted weighted average shares outstanding 4,580,100 4,559,900
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 181,500 shares of common stock at a weighted average
exercise price of $28.46 per share were outstanding as of June 28, 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.
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<PAGE>
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 which the Company may be required to repay subject to the
achievement of defined employment levels. Management of the Company believes
that it has satisfied the requirements of the agreement and that it will not be
required to repay the funds.
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<PAGE>
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.
First Quarter of Fiscal 1999 Compared to First Quarter of Fiscal 1998
- - --------------------------------------------------------------------------------
Revenues increased by $2.2 million, or 6.4%, to $36.3 million for the first
quarter of fiscal 1999 compared to $34.1 million for the first quarter of fiscal
1998. The overall increase was primarily a result of increased unit volume.
Revenues from the Company's subscriber accessory and test and maintenance
products and services increased, while sales of base site infrastructure
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%, 33% and 13%, respectively, of product revenues during the
first quarter of fiscal 1999. Revenues from both dealers and self-maintained
users increased, while revenues from cellular, PCS and paging carriers
decreased, from first quarter of fiscal 1998 levels. Dealers, cellular, PCS and
paging carriers and self-maintained users accounted for approximately 40%, 38%
and 22%, respectively, of revenues during the first quarter of fiscal 1999.
Gross profit increased by $502,000, or 5.7%, to $9.3 million for the first
quarter of fiscal 1999 compared to $8.8 million for the first quarter of fiscal
1998 due to the increase in revenues between quarters. The gross profit margin
decreased slightly to 25.5% for the first quarter of fiscal 1999 compared to
25.7% for the first quarter of fiscal 1998. Increased margins generated from
positive product mix were offset by the effect of competitive pricing in the
subscriber accessory products.
Total operating expenses increased by $1.1 million, or 15.2%, to $8.5 million
for the first quarter of fiscal 1999 compared to $7.4 million for the first
quarter of fiscal 1998. Total operating expenses increased as a percentage of
revenues to 23.5% for the first quarter of fiscal 1999 from 21.7% for the first
quarter of fiscal 1998. The increase in these expenses is primarily attributable
to increased freight charges incurred to fulfill sales commitments as well as a
continued investment in personnel and marketing expenses needed to support
future revenue and gross profit growth.
Income from operations decreased by $624,100, or 46.0%, to $733,300 for the
first quarter of fiscal 1999 compared to $1.4 million for the first quarter of
fiscal 1998. The operating income margin decreased to 2.0% for the first quarter
of fiscal 1999 compared to 4.0% for the first quarter of fiscal 1998.
Net interest expense increased by $29,500, or 14.7%, to $230,700 for the first
quarter of fiscal 1999 compared to $201,200 for the first 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.
Liquidity and Capital Resources
- - --------------------------------------------------------------------------------
Net cash used in operating activities was $7.4 million for the first quarter of
fiscal 1999, compared to net cash provided by operating activities of $2.0
million for the first quarter of fiscal 1998. This change was primarily a result
of significant changes to accounts payable and accounts receivable. Net cash
used in investing activities decreased to $874,800 for the first quarter of
fiscal 1999 compared to $1.1 million for the first quarter of fiscal 1998,
primarily due to decreasing capital expenditures related to the newly opened
Global Logistics Center. Net cash provided by financing activities was $3.8
million for the first quarter of fiscal 1999 compared to net cash used in
financing activities of $632,800 for the first quarter of fiscal 1998, primarily
a result of the Company's borrowings under its revolving credit facility.
- 7 -
<PAGE>
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.
- 8 -
<PAGE>
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.
- 9 -
<PAGE>
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: August 5, 1998 By: /s/ Gerald T. Garland
--------------------------------------------
Gerald T. Garland
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
- 10 -
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith:
11. Statement re: Computation of Per Share Earnings
27. Financial Data Schedule
Exhibit 11
TESSCO TECHNOLOGIES INCORPORATED
Statement re: Computation of Per Share Earnings
(Unaudited)
The information required by this Exhibit is set forth in Note 2 to the
Consolidated Financial Statements of the Company contained in Part I of this
Report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
unaudited quarterly financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000927355
<NAME> TESSCO Technologies Incorporated
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-START> MAR-30-1998
<PERIOD-END> JUN-28-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,923,300
<ALLOWANCES> 541,100
<INVENTORY> 19,512,200
<CURRENT-ASSETS> 39,005,000
<PP&E> 20,504,700
<DEPRECIATION> 5,338,700
<TOTAL-ASSETS> 58,039,100
<CURRENT-LIABILITIES> 13,023,600
<BONDS> 11,526,400
0
0
<COMMON> 46,800
<OTHER-SE> 33,698,400
<TOTAL-LIABILITY-AND-EQUITY> 58,039,100
<SALES> 36,299,800
<TOTAL-REVENUES> 36,299,800
<CGS> 27,043,900
<TOTAL-COSTS> 27,043,900
<OTHER-EXPENSES> 8,522,600
<LOSS-PROVISION> 124,900
<INTEREST-EXPENSE> 230,700
<INCOME-PRETAX> 502,600
<INCOME-TAX> 191,100
<INCOME-CONTINUING> 311,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,500
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
