($0.09) EPS, 0.02 better than last Q, w/o Cam Designs - much better:
See earnings statement below my comments.
I guessed EPS loss of $0.08, actual is 0.09, but the Cam Designs loss of $271,000 accounts for 2.5 cents of the loss. I'm not disappointed, but some people are because they're selling. I do not plan to sell any TSQD, with DRIV at 12, TSQD at $1.5-1.8 is a good price range.
Computer sales up 60%, $500,000 from Net Direct, TSQD is headed in the right direction. NetDirect will be a longterm plus, nothing unexpected (Other than Cam Designs) happened on the negative side, so things look pretty good to me.
Decrease in distribution for Mac clones (now zero, was $500,000), but I assume that was offset by iMac sales.
The company is making more money, but costs are higher becasue of NetDirect. By the 1Q 1998, they should be back on the way to being profittable, by my estimates.
The DRIV shares will certainly help longterm, and the DTP Direct website is better than its been in the past.
Overall, my guess is TSQD will continue to trade at ~12-16% of DRIV, but eventually will approach 30% when option is exercised, and will be greater than that when TSQD becomes profitable again. What does everyone else think?
TECH SQUARED INC
Filed on Nov 16 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking statements within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934 that involve a number of risks
and uncertainties. Such forward-looking information may be indicated by words such as will,
may be, expects or anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the following: business conditions
and growth in the personal computer industry and the general economy; competitive factors
such as rival computer and peripheral product sellers and price pressures; availability of vendor
products at reasonable prices; inventory risks due to shifts in market demand; and risks
presented from time to time in reports filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on Form 10-K for the year ended
December 31, 1997.
The Company through its DTP Direct catalog sells computer and peripheral products targeted
at the graphic arts market, which currently employs primarily Apple Macintosh related
products. In May 1998, the Company launched a new catalog, Net Direct, which is directed at
developers of internal corporate intranet and external Internet sites. The Company also markets
through direct marketing channels and to value added resellers.
The following table is a summary of the operating results for Tech Squared Inc. consolidated
and Tech Squared Inc., excluding Digital River, for the three and nine month periods ended
September 30, 1998 and 1997, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER, 30 SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income/(loss) - Tech Squared
Consolidated ($982,000) ($210,000) ($2,529,000) ($711,000)
Per Share ($0.09) ($0.02) ($0.23) ($0.07)
Net income/(loss) - Tech Squared
(excluding Digital River) ($612,000) $107,000 ($700,000) $186,000
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's third quarter ended September 30, 1998 totaled $9,721,000
compared to $8,973,000 for the corresponding period of 1997, an increase of 8.3%. Sales to
DTP Direct catalog customers increased $907,000, a 15.3% increase over the same period last
year which is primarily due to an increase in computer system sales. Total computer system
sales dollars for the third quarter increased 60.0% over the same period a year ago. Sales
through the Company's distribution business decreased $669,000 during the third quarter of
1998, a decrease of 22.4% compared to the same period last year. The decrease was mainly
attributable to the elimination of Macintosh clone system sales. There were no Macintosh clone
system sales in the third quarter of 1998, compared to $570,000 for the same period of 1997.
Sales to Net Direct catalog customers, the Company's network-focused catalog which was
launched in May 1998, contributed $511,000 to the third quarter sales. Net sales for the first
nine months of 1998 totaled $27,816,000 compared to $27,421,000 for the same period of
1997.
Fluctuations in the Company's net sales from period to period can be expected due to a number
of factors, including the timing of new product introductions by the Company's major vendors
and their competitors, seasonal cycles commonly experienced in computer-related industries,
and changes in product mix, product pricing and market conditions. In addition, the potential
delay of customers' purchase decisions because of uncertainty about the year 2000 issues may
have a significant effect on sales. As a result, the operating results for any particular period are
not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit increased slightly for the quarter ended September 30, 1998. Gross profit for the
period was $1,243,000 or 12.8% of net sales compared to $1,123,000 or 12.5% of net sales for
the comparable period of 1997. Gross profit for the nine month period ended September 30,
1998 was $3,523,000 or 12.7% compared to $3,275,000 or 11.9% of net sales for the same
period in 1997. The Company expects ongoing competitive pressure on gross profit, and,
consequently, changes in pricing and product configuration will be necessary in order to remain
competitive.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $817,000 or 8.4% of sales during the quarter ended
September 30, 1998, compared to $487,000 or 5.4% of sales during the corresponding period of
1997. For the nine month period ended September 30, 1998, selling and marketing expenses
were $2,101,000 or 7.6% of sales versus $1,430,000 or 5.2% of sales for the same period in
1997. This increase was primarily due to an increase in the number of outbound sales
consultants from 3 to 12, an increase in net marketing costs related to the development,
production and distribution of DTP Direct catalogs, and the costs related to the development,
production and distribution of a new catalog, Net Direct. Although the Company believes the
potential target market for the Net Direct catalog is substantially larger than that for the DTP
Direct catalog, and that the new catalog could provide significant opportunity for revenue
growth, there are significant costs and risks associated with the launch of a new catalog
including: a completely new target audience, lack of any historical direct marketing data on
which to base mailing decisions, competitive forces and new product lines. As a result, the
Company believes the launch of the Net Direct catalog will have a negative impact on the
profitability of the Company in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended September 30, 1998 were $734,000
compared to $504,000 for the comparable period of 1997. For the nine month period ended
September 30, 1998, general and administrative expenses were $1,782,000 compared to
$1,616,000 for the related period of 1997. The increase for the quarter ended September 30,
1998 over the same period of 1997 is attributable to several factors including payroll expense,
consulting services and transaction processing fees. The increase in payroll expense is primarily
the result of reallocation of personnel within the company.
INVESTMENT INCOME/(LOSS)
The Company recorded investment income/(loss) of ($271,000) for the third quarter of 1998
compared to $1,000 for the corresponding period in 1997. The loss relates to the write off of
available-for-sale securities of Cam Designs Inc. On October 21, 1998, Cam Designs Inc.
announced that it agreed to have its U.K. companies, which constitute almost all of its
operations, placed in receivership because of its inability to secure adequate banking facilities
and reduce outstanding debt. Investment income/(loss) for the nine month period ended
September 30, 1998 was ($267,000) compared to $36,000 for the comparable period in 1997.
NET INTEREST EXPENSE
Net interest expense for the quarter ended September 30, 1998 was $33,000 compared to
$26,000 for the same period in 1997. Interest expense for the nine-month period ended
September 30, 1998 was $74,000 compared to $79,000 for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at September 30, 1998, consisted of liquid funds,
a revolving line of credit agreement with US Bancorp National Association ("US Bank"), and
vendor trade credit lines.
The Company has a Revolving Line of Credit Agreement with US Bank through June 1999.
Borrowings under the $2,500,000 agreement are payable on demand, limited by eligible
percentages of accounts receivable and inventory and bear interest at the prime rate plus
1.75%. Borrowings under the agreement are secured by substantially all the Company's assets,
and are personally guaranteed up to $500,000 by the Company's Chairman. As of September
30, 1998, the Company had unused availability under the line of credit of approximately
$679,000 and outstanding borrowings of $781,000.
The Company has a flooring program with a financing company covering up to $625,000 in
inventory purchases. The flooring program is secured by a standby letter of credit in the amount
of $550,000 issued pursuant to the Company's line of credit with US Bank. The Company uses
the flooring program to take advantage of certain programs with its major distributors.
As of September 30, 1998, the Company had a working capital deficit of ($113,000). The
working capital has been reduced by approximately $200,000, which represents the current
portion of the remaining balance of a dividend declared in April 1995, but not yet paid. The
dividend payable is subordinated to the Revolving Line of Credit and the aggregate payout of
the dividend cannot exceed $200,000 in any calendar year. In April 1998, the Company paid
$200,000 related to the dividend payable to an officer/shareholder.
In anticipation of increasing sales, inventories increased to $2,343,000 as of September
30,1998, from $1,949,000 as of June 30, 1998, and $1,890,000, as of December 31, 1997.
Although inventory levels increased in the third quarter of 1998, inventory turns were 12.3 in
the third quarter of 1998, down from 13.8 turns in the second quarter of 1998, but up from
11.9 turns in the fourth quarter of 1997. Capital expenditures totaled $216,000 in the third
quarter of 1998 compared to $116,000 in the third quarter of 1997. The increase in capital
expenditures in the third quarter of 1998 is primarily due to office renovation and computer
system upgrades and enhancements.
The Company believes that funds generated from management of receivable and inventory
levels, advances under its line of credit, further expansion of lines with trade creditors, and the
cash on hand, will be sufficient to fund its operations through the end of 1998. However,
maintaining an adequate level of working capital through the end of 1998 and thereafter
depends in part on the success of the Company's sales and marketing efforts and the Company's
ability to control operating expenses. In addition, the potential delay of customers' purchase
decisions because of uncertainty about the year 2000 issues may have a significant effect on
sales. Furthermore, funding of the Company's operations in future periods may require
additional investments in the Company in the form of equity or debt. There can be no
assurance that the Company will achieve desired levels of sales or profitability or that future
capital infusions will be available.
YEAR 2000 COMPLIANCE
The Company's computer systems and those of third parties with whom it does business will be
affected by issues and problems related to changes required as a result of the year 2000 problem
("Y2K"). The Company's two key systems and assets that may be directly impacted by the Y2k
issue are its financial and data system and its telephone system. The financial and data system
requirements have been assessed and are currently being upgraded and modified to be Y2K
compliant. Anticipated rollout and testing of the Y2K compliant system is expected by March
31, 1999. The telephone system is believed to be Y2K compliant, and testing is scheduled for
the fourth quarter of 1998. The Company does not anticipate at this time that the cost to
modify its systems or the upgrading of its current system to be Y2K compliant will be material
to its financial condition or results of operations. Maintenance and modification costs incurred
by the Company specifically related to being Y2K will be expensed as incurred and costs of
new software (whether purchased or internally developed) will be capitalized and amortized
over the useful life of the applicable software.
While the Company has exercised its best efforts to identify and remedy any potential Y2K
exposures within its control, certain risks exist with vendors and suppliers which, to a
significant extent, are beyond the immediate control of the Company. To date, the Company
has not identified any vendors or suppliers who will not be Y2K compliant; however, this
analysis is still in process. The Company plans to develop appropriate contingency plans if
non-compliant vendors are identified. Failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the Company has
relationships (e.g., vendors, clients, credit card processors) to be Y2K compliant could have a
material affect on the financial condition and operations of the Company. The Company,
however, is unable to assess disruption that may occur as a result of supplier's and customer's
non-compliance. Because the Company markets products manufactured by multiple sources
and typically sells the products as 'packages', Y2K problems affecting the Company's vendors
may have a significant affect on the Company. In addition, customers may delay purchase
decisions because of the uncertainty about Y2K issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
None
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