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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 28, 1999
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
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(State or other jurisdiction of incorporation or organization)
52-0729657
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(IRS Employer 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock, $.01 par value, held by
non-affiliates of the registrant based on the closing sales price of the Common
Stock as quoted on the Nasdaq Stock Market as of June 18, 1999 was $74,336,315.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of June 18, 1999 was 4,436,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders to be held August 13,
1999, are incorporated by reference into Part III.
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<PAGE>
CONTENTS
<TABLE>
Part I
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<S> <C>
Item 1 Business
General
Products and Services
Customers
Method of Operation
Employees
Competition
Trademarks and Trade Names
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Item 4A Executive Officers of the Company
Part II
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Item 5 Market for Registrant's Common Equity and Related Shareholder Matters
Item 6 Selected Financial Data
Quarterly Results of Operations
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Consolidated Financial Statements and Supplementary Data
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Responsibility for Financial Statements
Report of Independent Public Accountants
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
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Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Schedule II: Valuation and Qualifying Accounts
Signatures
</TABLE>
<PAGE>
Part I
Item 1: Business
General
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TESSCO Technologies Incorporated ("TESSCO" or the "Company") is a leading
provider of products and value-added services to the wireless communications
industry. The Company currently serves more than 7,000 business customers and
12,000 consumers per month 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, self-maintained
users and consumers. Its product selection, which consists of over 18,000 items
from 275 manufacturers, is used to build, operate or maintain wireless systems.
These products are presented through the TESSCO Buyer's Guide, a one-of-a-kind
industry resource, and TESSCO.com, the internet-based product knowledge and
transaction system, and made available for express delivery throughout the
world.
TESSCO's operations are centralized in the Global Logistics Center, the
Company's ISO 9002 registered headquarters in Hunt Valley, Maryland. The
customer relations and product support center provides sales, account management
and technical support services 24 hours a day, seven days a week. The
high-capacity fulfillment center is designed to configure orders for complete,
on-time delivery. TESSCO's distribution node in Reno, Nevada facilitates the
prompt delivery of freight-intensive products to the western part of the United
States. All customer, product and fulfillment activities are directed by an
integrated enterprise technology platform providing timely knowledge and product
delivery and efficient and effective sales, service and transactions.
Products and Services
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TESSCO identifies, selects, catalogs, markets and sells products and services
required to build, operate or maintain a wireless system. The Company
principally offers competitively priced, manufacturer brand name products,
ranging from simple hardware items to sophisticated spectrum analyzers, with
prices ranging from less than $1 to over $80,000 and gross profit margins
ranging from less than 5% to over 60%. During fiscal 1999, the Company offered
over 18,000 stock keeping units (SKUs), broadly classified as base site
infrastructure, subscriber accessory, and test and maintenance, which accounted
for approximately 52%, 36% and 12% of revenues during fiscal 1999, respectively.
Base site infrastructure products are used to build, repair and upgrade wireless
communications base sites and generally complement radio frequency transmitting
and switching equipment provided directly by original equipment manufacturers
(OEMs). Products include base station antennas, cable and transmission line,
filtering systems, small towers, lightning protection devices, connectors and
miscellaneous hardware. The Company's base site infrastructure service offerings
include connector installation, custom jumper assembly, filter product tuning,
site "kitting" and "logistics integration."
Subscriber accessory products are those products used with mobile and portable
devices, such as cellular telephones, pagers and two-way radios. Products
include replacement batteries, cases, microphones, speakers, mobile amplifiers,
power supplies, headsets, mounts, car antennas and various wireless data
devices. Customized order fulfillment services and affinity marketing programs
complement the Company's primary product offering.
Test and maintenance products are used to install, tune, maintain and repair
wireless communications equipment. Products include sophisticated analysis
equipment and various frequency, voltage and power measuring devices, as well as
an assortment of tools, hardware and supplies required by service technicians.
While TESSCO principally provides manufacturer brand name products, a variety of
products, which are primarily subscriber accessory products, are developed and
offered under its private labels, mainly "Wireless Solutions."
As part of its commitment to customer service, the Company allows customers to
return a product for any reason, for credit, within 30 days after the date of
purchase. Total returns and credits have been less than 4% of revenues in each
of the past three fiscal years.
As of March 28, 1999, the Company was offering products purchased from over 275
manufacturers. Although a substantial portion of the Company's purchases are
concentrated with a small number of vendors (approximately 46% of TESSCO's
fiscal 1999 revenues were generated by the sale of products purchased from its
top ten vendors, with products purchased from its largest vendor generating
approximately 14%), the Company believes that alternative sources of supply are
available for virtually every product type it carries.
<PAGE>
Customers
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TESSCO's customer base consists of cellular, PCS and paging carriers, dealers,
self-maintained users, and consumers, which accounted for approximately 36%,
36%, 20% and 8% of fiscal 1999 revenues, respectively. All of these customers,
excluding consumers, share the characteristic that they are service
organizations that design, install, operate, repair or sell some type of
wireless communications system.
Cellular, PCS and paging carriers are responsible for building and maintaining
the infrastructure system and providing airtime service to individual
subscribers.
Dealers sell, install and service cellular telephone, paging and two-way radio
communications equipment primarily for the consumer and small business markets.
TESSCO's customers in this classification include local proprietorships and
retailers, as well as sales and installation centers operated by cellular and
paging carriers.
Self-maintained users have significant internal communications requirements and,
as a result, own and operate their own two-way radio networks and service their
own equipment. TESSCO's customers in this classification include commercial
entities such as major utilities and transportation companies, federal agencies
and state and local governments, including public safety organizations.
Consumers having cellular or PCS phones place orders for accessories via
telephone and the internet through TESSCO's affinity marketing programs. Under
these programs, the Company collaborates with its affinity marketing clients,
who include OEMs, wireless carriers and dealers, to market to their customers
under their brands. TESSCO acts as the merchant on behalf of the affinity
marketing client, interfacing with the customer, accepting the order, shipping
from TESSCO's inventory and collecting payment. TESSCO's affinity marketing
programs create a high level of customer service and supplementary income for
the client through revenue share payments.
No one customer accounted for more than 6% of TESSCO's revenues during fiscal
1999. TESSCO's ten largest customers accounted for approximately 18% of its
revenues during fiscal 1999.
Method of Operation
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TESSCO's mission is to be the industry's Vital Link delivery system for a Total
Source of product intelligence, the broadest and deepest choice of products, and
world-class service. TESSCO strives to optimize the service, logistics and
fulfillment operations, and lower the total procurement costs of its customers,
while increasing sales and lowering the product and brand development, sales and
distribution costs of its manufacturers.
TESSCO believes that it has developed a highly integrated, technologically
advanced and efficient method of operation based on these key tenets:
o understanding and anticipating customers' needs and building solutions by
cultivating lasting relationships;
o allowing customers to make the best decisions by delivering product
intelligence, not just information, through TESSCO's knowledge tools;
o responding to what TESSCO refers to as "the moments of truth" by providing
sales, service and technical support 24 hours a day, seven days a week, 365
days a year;
o providing customers what they need, when and where they need it by
delivering Total Source product and service solutions;
o helping customers enhance their operations by providing real-time status
tracking and performance measurement.
The TESSCO organization is a team of teams structured to enhance marketing
innovation, customer focus and operational excellence and consists of these
integrated units:
Market Units: To meet the needs of a dynamic marketplace, sales and marketing
activities are organized on an end-market basis. Sales teams are decentralized
into four primary units: system operators (i.e., carrier, tower and
build-to-suit contractors), self-maintained users, resellers (i.e., dealers,
value-added resellers, and retail and mass merchants), and consumer and
fulfillment services (e.g., affinity programs). This organization allows
customized product offerings and selling-value propositions to be developed for
particular markets and the building of closer, long-term customer relationships.
<PAGE>
TESSCO attempts to understand and anticipate customers' needs and build
solutions by cultivating lasting relationships. The Company's proprietary
customer data base contains detailed information on over 40,000 existing and
potential customers, including the names of key personnel, past contacts, and
inquiry, buying and credit histories. This extensive customer data base enables
the Company to identify and target potential customers and to market specific
products to these targeted customers. Potential customers are identified through
their responses to direct-marketing materials, advertisements in trade journals
and industry trade shows. Customer relationship representatives follow up on
these customer inquiries through distribution of the Company's information
materials, phone contact and field visits. The information technology system
tracks a potential customer identification from the initial marketing effort
through the establishment and development of a purchasing relationship. Once a
customer relationship is established, the Company carefully analyzes purchasing
patterns and identifies opportunities to encourage customers to make more
frequent purchases of a broader array of products. TESSCO believes that it is
able to develop efficient and effective marketing programs to expand its
customer base and increase sales to its existing customers, while at the same
time limiting increases in sales and marketing expenses. Scheduled calls are
made to each regularly purchasing customer for the purpose of information
dissemination, order generation, data base maintenance and the overall
enhancement of the business supply relationship.
Brand and Product Development: TESSCO actively monitors advances in technologies
and industry trends, both through market research and continual customer
interaction, and continues to add to its product offerings as new wireless
communications products and technologies are developed.
In addition to determining the fundamental product offering, the Company's
product development teams provide the technical foundation for both customers
and TESSCO personnel. The product data base is continually updated to add
technical information in response to vendor specification changes and customer
inquiries. The data base contains detailed information on each SKU offered,
including full product descriptions, category classifications, technical
specifications, illustrations, product cost, pricing and delivery information,
alternative and associated products, and purchase and sales histories. Most of
the information is available on a real-time basis to all TESSCO personnel for
product development, procurement, technical support, cataloging and marketing.
The Company utilizes its product data base to develop both broad-based and
customized product information materials. These materials are designed to
encourage both existing and potential customers to view TESSCO as an important
source of their product requirements by providing useful and timely product and
service information. These knowledge tools include Buyer's Guides distributed
semiannually to over 50,000 current and prospective buyers in 125 different
countries, Your Total Source Bulletins, which are designed to supplement the
overall marketing impact of the Buyer's Guides, The Wireless Journal, which is
designed to introduce the reader to TESSCO's capabilities and product offerings
and contains information on significant industry trends and product reviews, and
TESSCO.com.
TESSCO.com, the Company's web site, features a dynamic internet version of the
Company's printed Buyer's Guide and a unique business-to-business transaction
system, enabling customers to conduct product searches and to place customized
orders for complete, on-time delivery. Its features include:
o an electronic version of the Company's printed Buyer's Guide;
o in-depth product knowledge, including illustrations, detailed
specifications and application information;
o real-time product availability for 18,000 SKUs from 275 manufacturers of
base site infrastructure products, wireless handset and two-way radio
accessories as well as test equipment and maintenance supplies;
o customer-specific pricing, based on TESSCO's tiered pricing structure which
is tied to a customer's purchases;
o easy ordering capabilities;
o order confirmation specifying the contents, delivery date, tracking number
and total cost of an order.
While allowing customers to make the best decisions by delivering product
intelligence, not just information, through its knowledge tools, TESSCO provides
its manufacturers the opportunity to develop their brands and to promote their
products to a broad and diverse customer base.
<PAGE>
Product and Inventory Management: TESSCO's product management and purchasing
system aims to provide customers with a Total Source of broad and deep product
availability, while maximizing TESSCO's return on its inventory investment.
The Company uses its information technology system to monitor and manage its
inventory. Historical sales results, sales projections and information regarding
vendor lead times are all used to determine appropriate inventory levels. The
information technology system also provides early warning reports regarding
inventory levels. As of March 28, 1999 and March 29, 1998, the Company had an
immaterial level of backlog orders, all of which are expected to be filled
within 90 days of fiscal year-end. For the fiscal years ended March 28, 1999 and
March 29, 1998, inventory write-offs were 0.5% and 0.3% of total purchases,
respectively. Generally, the Company has been able to return slow-moving
inventory to its vendors.
Customer Support and Order Entry: The customer support teams are responsible for
responding to what TESSCO refers to as "the moments of truth" by providing sales
and customer support services by means of an effective and efficient transaction
system. TESSCO also continually monitors its customer service levels through
report cards included with each product shipment, customer surveys and regular
interaction with customers. By combining its broad product offerings with a
commitment to superior customer service, TESSCO seeks to reduce a customer's
overall procurement costs by enabling the customer to consolidate the number of
suppliers from which it obtains products while also reducing the customer's need
to maintain higher inventory levels.
The Company's information technology system provides detailed account
information on every customer, including recent inquiries, buying and credit
histories, separate buying locations within a customer and contact diaries for
key personnel, as well as access to technical, product availability and pricing
information. The information technology system increases sales productivity by
enabling any customer support representative to provide any customer with
personalized service and also allows non-technical personnel to provide a high
level of technical product information and order assistance.
TESSCO believes that its commitment to providing prompt, friendly and efficient
customer service before, during and after the sale enables it to maximize sales,
customer satisfaction and retention. The average number of business customers
per month has increased from 7,027 in fiscal 1998 to 7,489 in fiscal 1999. Over
12,200 end consumers are being served per month in fiscal 1999 as compared to
3,700 in fiscal 1998, as the Company has continued to expand its affinity
marketing programs.
Fulfillment and Distribution: Orders are received at the Company's centralized
customer support center. While entering orders, customer representatives have
access to technical information, alternative and complementary product
selections, product availability and pricing information, as well as customer
purchasing and credit histories and recent inquiry summaries. An automated
materials handling system, which is integrated with the information technology
system, utilizes bar coded labels which are applied to every product, allowing
distribution center personnel to utilize radio-frequency scanners to locate
products, fill orders and update inventory. The centralized distribution center
also allows the Company to improve inventory control, minimize multiple product
shipments to complete an order, limit inventory duplication and reduce the
overhead associated with its distribution functions. Orders can be delivered by
a variety of freight lines and carriers as specified by the customer. Delivery
charges are calculated on the basis of the weight of the products delivered, not
distance to the customer. TESSCO believes that this approach - combined with its
Performance and Delivery Guarantee, which emphasizes not merely prompt shipment
but on-time delivery - enables customers to minimize their inventories and
reduce their overall procurement costs, thereby encouraging them to make TESSCO
their Total Source supplier.
Information Technology: Critical to the success of the Company's operations is
its information technology system. TESSCO has made substantial investments in
the development of this system, which integrates cataloging, marketing, sales,
fulfillment, inventory control and purchasing, financial control and internal
communications. The information technology system includes highly developed
customer and product data bases and is integrated with the Company's centralized
distribution center. The information contained in the system is available on a
real-time basis to all TESSCO employees and is utilized in every area of the
Company's operations.
TESSCO is migrating its system to Oracle data base information technology,
thereby augmenting its proprietary enterprise system. In so doing, TESSCO hopes
to achieve system scalability while providing its customers and manufacturers
with enhanced knowledge delivery.
The Company has developed TESSCO.com, an advanced internet-based product
knowledge and transaction system that enables customers to find and compare
products; build and view worksheets; confirm the price and availability of their
product choices; and execute orders for complete, on-time delivery. The web site
is integrated into the Company's order entry and fulfillment system.
<PAGE>
Employees
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As of March 28, 1999, the Company had 349 full-time equivalent employees. Of the
Company's full-time equivalent employees, 189 were engaged in customer and
vendor service, marketing and product management, 119 were engaged in
fulfillment and distribution operations, and 41 were engaged in administration
and technology systems services. No employees are covered by collective
bargaining agreements. The Company considers its employee relations to be
excellent.
Competition
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The emerging wireless communications distribution industry is fragmented and is
comprised of several national distributors, such as Hutton Communications,
Cellstar and Brightpoint, and numerous regional distributors. In addition, many
manufacturers sell direct. Barriers to entry for distributors are relatively
low, particularly in the subscriber accessory market, and the risk of new
competitors entering the market is high. The Company believes, however, that its
strength in service, the breadth and depth of its product offering, its
information technology system, and its large customer base and purchasing
relationships with more than 275 manufacturers provide it with a significant
competitive advantage over new entrants to the market. Certain of the Company's
current competitors, particularly certain manufacturers, have substantially
greater capital resources, sales and distribution capabilities than the Company.
In response to competitive pressures from any of its current or future
competitors, the Company may be required to lower selling prices in order to
maintain or increase market share, and such measures could adversely affect the
Company's operating results.
The Company believes that the principal competitive factors in supplying
products to the wireless communications industry are the quality and consistency
of customer service, particularly timely delivery of complete orders, breadth
and quality of products offered, and total procurement costs to the customer.
The Company believes that it competes favorably with respect to each of these
factors. In particular, the Company believes it differentiates itself from its
competitors based on the breadth of its product offerings, its ability to
quickly provide products in response to customer demand and technological
advances, the level of its customer service and the reliability of its order
fulfillment process.
Trademarks and Trade Names
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The Company maintains a number of registered trademarks and trade names in
connection with its business activities, including "TESSCO(R)," "Your Total
Source(R)," "The Wireless Journal(R)," "Wireless Solutions(R)," "Cartwright
Communications," "TESSCO Service Solutions," "National Airtime," "The Vital Link
for the Wireless Communications Industry," "TESSCO Magic," "Your Procurement
Wizard," "Wireless Rent," "Tech Net," and "Power Tower." The Company's general
policy is to file for trademark and service mark protection for each of its
trademarks and trade names and to enforce its rights against any infringement.
Item 2: Properties
The Company's corporate headquarters and centralized distribution center, its
Global Logistics Center, are located in a Company owned 184,000-square-foot
facility located north of Baltimore in Hunt Valley, Maryland. Certain long-term
debt is secured by the property, as described in Note 4 to the Consolidated
Financial Statements. West coast sales and fulfillment is facilitated by its
leased distribution center in Reno, Nevada.
Item 3: Legal Proceedings
None
Item 4: Submission of Matters to a Vote of Security Holders
None
<PAGE>
Item 4A: Executive Officers of the Company
Executive officers are elected annually by the Board of Directors and serve at
the discretion of the Board of Directors. Information regarding the executive
officers of the Company is as follows:
<TABLE>
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Name Age Position
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<S> <C> <C> <C>
Robert B. Barnhill, Jr. 55 Chairman, President Robert B. Barnhill, Jr. is Chairman, President and
and Chief Executive Chief Executive Officer and founded the business in
Officer 1982.
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Gerald T. Garland 48 Treasurer, Vice Gerald T. Garland joined the Company in September 1993
President and Chief and currently serves as Treasurer, Vice President and
Financial Officer Chief Financial Officer. Previously, he was a Senior
Vice President and Division Head in the Commercial
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Richard A. Guipe 49 Vice President and Finance Division of NationsBank Richard A. Guipe joined
Unit Director the Company in June 1996 and currently serves as Vice
President and Director of the Wireless Network Provider
and Self-Maintained User Market Units. Previously, he was
Vice President and General Manager for the Heliax
Products Division of Andrew Corporation and held various
senior management positions with Belden Wire and Cable.
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Brian K. Hedlund 34 Vice President and Brian K. Hedlund joined the Company in July 1997 and
Unit Director currently serves as Vice President and Director of the
TESSCO Service Solutions Unit. Previously, he was
Director of Materials Management for APC Sprint Spectrum.
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Elias J. Kabeche 36 Vice President and Elias J. Kabeche joined the Company in June 1997 and Uni
Unit Director Director currently serves as Vice President and Director
of the International Market Unit. Previously, he was
Director of Sales and Markets at Larsen Electronics and
Director of Accessories for Andrew Wireless.
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Steven E. Lehukey 41 Vice President and Steven E. Lehukey joined the Company in March 1994 and
Unit Director currently serves as Vice President and Director of the
Sales Support Unit. Previously, he was a Vice President
in the Commercial Finance Division of Maryland National
Bank.
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Sara C. Noon 37 Vice President and Sara C. Noon joined the Company in April 1997 and
Unit Director currently serves as Vice President and Director of the
Retail and Mass Market Unit. Previously, she was in Brand
Management for Consumer Packaged Goods at Proctor and
Gamble.
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Mary Lynn Schwartz 43 Vice President and Mary Lynn Schwartz rejoined the Company in November 1997
Chief Administrative and currently serves as Vice President and Chief
Officer Administrative Officer. Between 1992 and 1997, she owned
and managed a local public accounting and management
consulting practice. She previously served as the
Company's Chief Financial Officer from 1988 to 1992.
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Jeffrey Shockey 38 Vice President and Jeffrey Shockey joined the Company in April 1998 and
Unit Director currently serves as Vice President and Director of the
Product and Inventory Management Unit. Previously, he was
Purchasing Manager for APC Sprint Spectrum and Director
of Operations for Mobile Telesystems, a subsidiary of
Comstat.
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Randolph S. Wilgis 35 Vice President and Randolph S. Wilgis joined the Company in June 1991 and
Unit Director currently serves as Vice President and Director of the
Dealer and Value-Added Reseller Market Unit. Previously,
he served as a project manager for the Whiting Turner
Company.
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</TABLE>
<PAGE>
Part II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock has been publicly traded on the Nasdaq Stock Market
since September 28, 1994 under the symbol "TESS." The quarterly range of prices
per share during fiscal years 1998 and 1999 are as follows:
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High Low
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Fiscal 1998
First Quarter 23 1/4 15
Second Quarter 32 21 1/2
Third Quarter 28 3/8 18
Fourth Quarter 19 3/4 16 15/16
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Fiscal 1999
First Quarter 21 1/4 17 3/8
Second Quarter 21 1/8 18 1/4
Third Quarter 24 3/4 20
Fourth Quarter 22 3/4 21 1/8
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As of June 18, 1999, the number of shareholders of record of the Company was 51.
The Company estimates that the number of beneficial owners as of that date was
2,600.
The Company has never declared or paid any cash dividends on its common stock
and does not expect to pay any cash dividends in the foreseeable future. The
Company's revolving line of credit agreement prohibits the payment of cash
dividends without the prior written consent of the lender.
<PAGE>
<TABLE>
<CAPTION>
Item 6: Selected Financial Data
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<S> <C> <C> <C> <C> <C>
Fiscal Years Ended March 28, 1999 March 29, 1998 March 28, 1997 March 29, 1996 March 31, 1995
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STATEMENT OF INCOME DATA
Revenues $ 160,582,200 $ 131,658,200 $ 147,086,000 $ 92,290,100 $ 74,517,600
Cost of goods sold 118,535,300 95,858,800 109,817,800 68,974,400 57,828,800
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Gross profit 42,046,900 35,799,400 37,268,200 23,315,700 16,688,800
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Selling, general and administrative expenses 36,793,500 29,662,200 29,183,200 17,126,700 12,500,200
Asset impairment and restructuring charge 831,000 - 310,200 - -
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Income from operations 4,422,400 6,137,200 7,774,800 6,189,000 4,188,600
Interest income (expense), net (1,240,800) (712,600) (982,100) 179,000 (157,100)
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Income before provision for income taxes 3,181,600 5,424,600 6,792,700 6,368,000 4,031,500
Provision for income taxes 1,209,200 2,049,000 2,614,800 2,327,000 1,558,600
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Net income $ 1,972,400 $ 3,375,600 $ 4,177,900 $ 4,041,000 $ 2,472,900
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Diluted earnings per share $ 0.43 $ 0.73 $ 0.89 $ 0.89 $ 0.64
Diluted weighted average shares outstanding 4,600,100 4,610,300 4,703,800 4,555,200 3,834,000
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PERCENTAGE OF REVENUES
Revenues 100.0 100.0 100.0 100.0 100.0
Cost of goods sold 73.8 72.8 74.7 74.7 77.6
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Gross profit 26.2 27.2 25.3 25.3 22.4
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Selling, general and administrative expenses 22.9 22.5 19.8 18.6 16.8
Asset impairment and restructuring charge 0.5 - 0.2 - -
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Income from operations 2.8 4.7 5.3 6.7 5.6
Interest income (expense), net (0.8) (0.5) (0.7) 0.2 (0.2)
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Income before provision for income taxes 2.0 4.1 4.6 6.9 5.4
Provision for income taxes 0.8 1.6 1.8 2.5 2.1
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Net income 1.2 2.5 2.8 4.4 3.3
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SELECTED OPERATING DATA
Average commercial buyers per month 7,489 7,027 6,181 4,569 3,898
Average consumer buyers per month 12,201 3,700 1,679 - -
Total orders shipped 426,494 302,028 255,392 176,412 141,950
Revenues per employee $ 462,100 $ 454,000 $ 584,000 $ 576,000 $ 583,000
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BALANCE SHEET DATA
Working capital 23,050,700 22,270,100 21,331,300 17,389,800 18,055,400
Total assets 63,062,400 59,926,900 50,915,300 36,527,900 28,176,000
Short-term debt 4,690,200 294,000 416,900 126,400 120,600
Long-term debt 7,128,700 7,441,400 7,637,900 85,000 199,300
Shareholders' equity 35,456,700 33,391,500 29,371,600 24,544,100 20,168,400
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
Fiscal 1999 Quarters Ended Fiscal 1998 Quarters Ended
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March 28, Dec. 27, Sept. 27, June 28, March 29, Dec. 28, Sept. 28, June 29,
1999 1998 1998 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 40,303,400 $ 40,661,200 $ 43,317,800 $ 36,299,800 $ 31,838,600 $ 32,484,300 $ 33,212,000 $ 34,123,400
Cost of goods sold 29,102,700 29,621,500 32,767,200 27,043,900 22,565,200 23,544,000 24,380,100 25,369,500
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 11,200,700 11,039,700 10,550,600 9,255,900 9,273,400 8,940,300 8,831,900 8,753,900
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general
and administrative
expenses 9,248,800 9,658,100 9,364,000 8,522,600 7,727,300 7,314,100 7,224,400 7,396,500
Asset impairment
and restructuring
charge 831,000 - - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 10,079,800 9,658,100 9,364,000 8,522,600 7,727,300 7,314,100 7,224,400 7,396,500
- ----------------------------------------------------------------------------------------------------------------------------------
Income from
operations 1,120,900 1,381,600 1,186,600 733,300 1,546,100 1,626,200 1,607,500 1,357,400
Interest expense,
net (365,600) (322,100) (322,400) (230,700) (143,900) (164,900) (202,700) (201,200)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before
provision for
income taxes 755,300 1,059,500 864,200 502,600 1,402,200 1,461,300 1,404,800 1,156,200
Provision for
income taxes 287,100 402,600 328,400 191,100 516,300 555,300 533,800 443,500
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 468,200 $ 656,900 $ 535,800 $ 311,500 $ 885,900 $ 906,000 $ 871,000 $ 712,700
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings
per share $ 0.10 $ 0.14 $ 0.12 $ 0.07 $ 0.20 $ 0.20 $ 0.19 $ 0.16
- ----------------------------------------------------------------------------------------------------------------------------------
Percentage of Revenues
Revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold 72.2 72.8 75.6 74.5 70.9 72.5 73.4 74.3
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 27.8 27.2 24.4 25.5 29.1 27.5 26.6 25.7
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general
and administrative
expenses 22.9 23.8 21.6 23.5 24.3 22.5 21.8 21.7
Asset impairment
and restructuring
charge 2.1 - - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 25.0 23.8 21.6 23.5 24.3 22.5 21.8 21.7
- ----------------------------------------------------------------------------------------------------------------------------------
Income from
operations 2.8 3.4 2.7 2.0 4.9 5.0 4.8 4.0
Interest expense,
net (0.9) (0.8) (0.7) (0.6) (0.5) (0.5) (0.6) (0.6)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before
provision for
income taxes 1.9 2.6 2.0 1.4 4.4 4.5 4.2 3.4
Provision for
income taxes 0.7 1.0 0.8 0.5 1.6 1.7 1.6 1.3
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1.2 1.6 1.2 0.9 2.8 2.8 2.6 2.1
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal 1999 Compared to Fiscal 1998
- -------------------------------------------------------------------------------
Revenues increased by $28.9 million, or 22%, to $160.6 million in fiscal 1999
compared to $131.7 million in 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 and services 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 52%, 36% and 12%,
respectively, of fiscal 1999 revenues. Revenues increased in each of the major
customer classifications, with the largest percentage growth experienced in
consumers. Cellular, PCS and paging carriers, dealers, self-maintained users,
and consumers accounted for approximately 36%, 36%, 20% and 8%, respectively, of
fiscal 1999 revenues.
Gross profit increased by $6.2 million, or 18%, to $42.0 million in fiscal 1999
compared to $35.8 million in fiscal 1998. The gross profit margin declined to
26.2% in fiscal 1999 from 27.2% in fiscal 1998. The reduction in gross profit
margin was principally attributable to the effect of more competitive pricing on
base site infrastructure and subscriber accessory products and product mix
changes.
Total operating expenses increased to $37.6 million for fiscal 1999, compared to
$29.7 million in fiscal 1998. Fiscal 1999 operating expenses include a
nonrecurring asset impairment and restructuring charge of $831,000 taken as a
result of the Company's decision to reorganize its sales and marketing
activities including the closure of two sales offices. Total operating expenses
excluding the effects of the nonrecurring asset impairment and restructuring
charge increased as a percentage of revenues to 22.9% from 22.5% in 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 $1.7 million, or 28%, to $4.4 million in
fiscal 1999 compared to $6.1 million in fiscal 1998, and as a percentage of
revenues decreased to 2.8% in fiscal 1999 from 4.7% in fiscal 1998.
Net interest expense increased by $528,200, or 74%, to $1.2 million in fiscal
1999 compared to $712,600 in fiscal 1998. This increase is due to increased
levels of borrowing under the Company's revolving credit facility to finance
working capital requirements.
The provision for income taxes decreased by $839,800, or 41%, to $1.2 million in
fiscal 1999 compared to $2.0 million in fiscal 1998. The effective tax rate in
fiscal 1999 was 38.0% compared to 37.8% in fiscal 1998.
Diluted earnings per share was $0.43 for fiscal 1999, compared to $0.73 for
fiscal 1998. Excluding the effects of the non-recurring asset impairment and
restructuring charge, diluted earnings per share was $0.54 for fiscal 1999.
Fiscal 1998 Compared to Fiscal 1997
- -------------------------------------------------------------------------------
Revenues decreased by $15.4 million, or 11%, to $131.7 million in fiscal 1998
compared to $147.1 million in fiscal 1997. Most of the overall decrease was a
result of restructuring a fulfillment contract in February 1997 and the need to
transition approximately 28% of business associated with a major cable vendor.
Revenues from the Company's base site infrastructure and subscriber accessory
products and services decreased, while sales of test and maintenance products
and services remained flat. The largest percentage decrease was experienced in
the sale of subscriber accessory products and services due to a contractual
restructuring associated with one of the Company's phone fulfillment programs.
Base site infrastructure, subscriber accessory, and test and maintenance
products and services accounted for approximately 53%, 33% and 14%,
respectively, of fiscal 1998 revenues. Revenues decreased from both cellular,
PCS and paging carriers and dealers. Self-maintained users maintained fiscal
1997 levels. Cellular, PCS and paging carriers, dealers, self-maintained users,
and consumers accounted for approximately 32%, 43%, 20% and 5%, respectively, of
fiscal 1998 revenues.
Gross profit decreased by $1.5 million, or 4%, to $35.8 million in fiscal 1998
compared to $37.3 million in fiscal 1997 due to a reduction in revenues between
years. The gross profit margin improved to 27.2% in fiscal 1998 from 25.3% in
fiscal 1997, primarily due to positive product mix changes principally in the
base site infrastructure and subscriber accessory areas of the business.
<PAGE>
Total operating expenses remained relatively flat for fiscal 1998 at $29.7
million, compared to $29.5 million in fiscal 1997. An increase in expenses
attributable to the continued investment in compensation and marketing expenses
and to increased facilities costs related to the new Global Logistics Center was
offset to some extent by the restructuring charge taken in fiscal 1997. Total
operating expenses increased as a percentage of revenues to 22.5% in fiscal 1998
from 20.1% in fiscal 1997, primarily as a result of the reduced revenue base.
Income from operations decreased by $1.6 million, or 21%, to $6.1 million in
fiscal 1998 compared to $7.8 million in fiscal 1997, and as a percentage of
revenues decreased to 4.7% in fiscal 1998 from 5.3% in fiscal 1997.
Net interest expense decreased by $269,500, or 27%, to $712,600 in fiscal 1998
compared to $982,100 in fiscal 1997. This decrease was due to reduced debt
levels from positive cash flow and lower interest rates during fiscal 1998.
The provision for income taxes decreased by $565,800, or 22%, to $2.0 million in
fiscal 1998 compared to $2.6 million in fiscal 1997. The effective tax rate in
fiscal 1998 was 37.8% compared to 38.5% in fiscal 1997.
Liquidity and Capital Resources
- -------------------------------------------------------------------------------
As of March 28, 1999, cash and marketable securities totaled $97,700. Working
capital increased to $23.1 million as of March 28, 1999, from $22.3 million as
of March 29, 1998. Shareholders' equity increased to $35.5 million as of March
28, 1999, from $33.4 million as of March 29, 1998.
The Company used approximately $5.5 million of net cash for operating activities
in fiscal 1999, and generated $9.9 million in fiscal 1998 and $3.0 million in
fiscal 1997. The significant decrease in operating cash flow was primarily a
result of an increase in trade accounts receivable and product inventory to
support increased sales activity, as well as a considerable decrease in trade
accounts payable.
Capital expenditures totaled $3.0 million in fiscal 1999, primarily related to
investments in information technology, compared to $5.0 million in fiscal 1998
and $5.7 million in fiscal 1997, as the Company completed construction on the
Global Logistics Center. In fiscal 1997, the Company used $6.7 million to
acquire the Cartwright Communications Company.
The Company generated $4.1 million of net cash from financing activities in
fiscal 1999, used $471,100 in fiscal 1998 and generated $9.0 million in fiscal
1997. In fiscal 1999, the Company increased borrowings under its revolving
credit facility to support increased inventory levels. In fiscal 1997, the
Company took on additional borrowings to fund the acquisition of Cartwright
Communications Company and the Global Logistics Center.
The Company has a revolving credit facility with a bank which provides for a
maximum borrowing capacity of $15.0 million through September 30, 1999. This
agreement contains certain conditions, covenants and representations with which
the Company was in compliance as of March 28, 1999. As of March 28, 1999, the
Company had $4.4 million in outstanding borrowings under this facility.
Outlook
- -------------------------------------------------------------------------------
During fiscal 1999, the Company made necessary investments in information
technology, staffing and marketing initiatives focused on enhancing long-term
growth. The Company expects these investments to continue to build a strong
foundation to support the Company's planned growth initiatives. The Company
expects the fiscal 1999 reorganization of its sales and marketing activities
will result in enhanced operating leverage while continuing to support future
revenue growth. The Company continues to aggressively expand its product and
service offerings, as well as marketing and sales initiatives, in an attempt to
accelerate its revenue growth.
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.
<PAGE>
Based on its assessment, the Company is in the process of modifying or replacing
significant portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company currently believes that with
these modifications to existing software and conversions to new software, the
effects of the Year 2000 issue will be mitigated. The Company is utilizing both
internal and external resources to reprogram, or replace, and test the software
for Year 2000 modifications. The cost of new software and hardware 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;
the possibility of unforeseen delays in entering into or performing under
anticipated contracts or in otherwise realizing anticipated revenues or
anticipated savings; 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 7A: Quantitative and Qualitative Disclosures about Market Risk
The Company does not use 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.
<PAGE>
Item 8: Consolidated Financial Statements and Supplementary Data
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
March 28, 1999 March 29, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and marketable securities $ 97,700 $ 4,459,200
Trade accounts receivable, net of allowance for doubtful accounts
and sales returns of $551,900 and $438,100, respectively 19,621,000 15,757,100
Product inventory 21,149,000 18,872,100
Deferred tax asset 626,600 523,900
Prepaid expenses and other current assets 1,968,900 1,609,400
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 43,463,200 41,221,700
- ----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 2,185,500 2,185,500
Building and improvements 9,114,200 8,577,200
Leasehold improvements 104,100 -
Information technology equipment and software 4,955,200 3,714,400
Equipment and furniture 5,567,000 4,821,100
Tooling 363,700 340,100
- ----------------------------------------------------------------------------------------------------------------------------------
22,289,700 19,638,300
Less - accumulated depreciation and amortization 6,563,800 4,883,100
- ----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 15,725,900 14,755,200
- ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET, net of current portion 255,100 -
GOODWILL 3,618,200 3,950,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 63,062,400 $ 59,926,900
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 12,938,500 $ 16,294,200
Accrued expenses and other current liabilities 2,783,800 2,363,400
Revolving credit facility 4,403,000 -
Current portion of long-term debt 287,200 294,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,412,500 18,951,600
DEFERRED TAX LIABILITY 14,500 42,400
OTHER LIABILITY 50,000 100,000
LONG-TERM DEBT, net of current portion 7,128,700 7,441,400
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 27,605,700 26,535,400
- ----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000 shares authorized
and no shares issued and outstanding - -
Common stock, $0.01 par value, 15,000,000 shares authorized; 4,714,162 shares issued
and 4,438,121 shares outstanding as of March 28, 1999, and 4,669,920 shares
issued and 4,408,348 shares outstanding as of March 29, 1998 47,000 46,700
Additional paid-in capital 20,598,400 20,241,800
Treasury stock, at cost, 276,041 shares and 261,572 shares, respectively (3,107,600) (2,843,500)
Retained earnings 17,918,900 15,946,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 35,456,700 33,391,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 63,062,400 $ 59,926,900
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended March 28, 1999 March 29, 1998 March 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 160,582,200 $ 131,658,200 $ 147,086,000
Cost of goods sold 118,535,300 95,858,800 109,817,800
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 42,046,900 35,799,400 37,268,200
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 36,793,500 29,662,200 29,183,200
Asset impairment and restructuring charge 831,000 - 310,200
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 37,624,500 29,662,200 29,493,400
- ----------------------------------------------------------------------------------------------------------------------------------
Income from operations 4,422,400 6,137,200 7,774,800
Interest expense, net (1,240,800) (712,600) (982,100)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 3,181,600 5,424,600 6,792,700
Provision for income taxes 1,209,200 2,049,000 2,614,800
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,972,400 $ 3,375,600 $ 4,177,900
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.45 $ 0.77 $ 0.97
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.43 $ 0.73 $ 0.89
- ----------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 4,420,200 4,377,600 4,287,000
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,600,100 4,610,300 4,703,800
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Treasury Retained Shareholders'
Shares Amount Paid-In Capital Stock Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 29, 1996 4,218,814 $ 44,600 $ 18,232,900 $ (2,126,400) $ 8,393,000 $ 24,544,100
Net proceeds from exercise of
options in exchange for
cash and treasury stock 124,794 1,400 822,600 (465,100) - 358,900
Tax benefit of option exercises - - 290,700 - - 290,700
Net income - - - - 4,177,900 4,177,900
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 28, 1997 4,343,608 46,000 19,346,200 (2,591,500) 12,570,900 29,371,600
Net proceeds from exercise of
options in exchange for
cash and treasury stock 64,740 700 780,100 (252,000) - 528,800
Tax benefit of option exercises - - 115,500 - - 115,500
Net income - - - - 3,375,600 3,375,600
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 29, 1998 4,408,348 46,700 20,241,800 (2,843,500) 15,946,500 33,391,500
Net proceeds from exercise of
options in exchange for
cash and treasury stock 29,773 300 353,600 (264,100) - 89,800
Tax benefit of option exercises - - 3,000 - - 3,000
Net income - - - - 1,972,400 1,972,400
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 28, 1999 4,438,121 $ 47,000 $ 20,598,400 $ (3,107,600) $ 17,918,900 $ 35,456,700
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended March 28, 1999 March 29, 1998 March 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,972,400 $ 3,375,600 $ 4,177,900
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 2,138,100 1,928,100 1,433,200
Loss on disposal of property and equipment 191,900 - -
Provision for bad debts 290,200 158,900 335,400
Deferred income taxes (385,700) 107,000 (220,000)
(Increase) decrease in trade accounts receivable (4,154,100) 991,100 (1,351,700)
Increase in product inventory (2,276,900) (1,929,700) (1,335,900)
Increase in prepaid expenses and other current assets (359,500) (747,900) (74(294,800)
(Decrease) increase in trade accounts payable (3,355,700) 5,672,500 24,000
Increase in accrued expenses and other current liabilities 423,400 392,200 392247,700
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (5,515,900) 9,947,800 3,13,015,800
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired business - - (6,726,800)
Proceeds from disposal of property and equipment 3,100 - -
Acquisition of property and equipment (2,972,000) (5,017,500) (5,711,200)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,968,900) (5,017,500) (12,438,000)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 4,403,000 (630,500) 630,500
(Decrease) increase in other liabilities (50,000) (50,000) 150,000
Payments on long-term debt (319,500) (234,400) -
Proceeds from long-term debt - - 7,969,800
Proceeds from exercise of stock options 89,800 528,800 358,900
Payment of capital lease obligation - (85,000) (126,400)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,123,300 (471,100) 8,982,800
- ----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and marketable securities (4,361,500) 4,459,200 (439,400)
CASH AND MARKETABLE SECURITIES, beginning of period 4,459,200 - 439,400
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND MARKETABLE SECURITIES, end of period $ 97,700 $ 4,459,200 $ -
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Organization
- -------------------------------------------------------------------------------
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, self-maintained
users, and consumers. 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 products. Although the Company
conducts business selling various products to different customer groups, these
products and customers all fall within the telecommunications industry,
therefore, the Company reports operating results as one reportable segment.
During fiscal year 1997, the Company increased its number of authorized shares
of common stock to 15,000,000.
Note 2. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal year
For fiscal year 1997 the Company maintained its accounts on a 52/53-week fiscal
year ending on the Friday falling on or between March 26 and April 1. The fiscal
year ending March 28, 1997 contained 52 weeks. During fiscal year 1998, the
Company changed its fiscal year to the 52 or 53 weeks ending on the Sunday
falling on or between March 26 and April 1 to allow the financial year to better
reflect the Company's natural weekly accounting and business cycle. Accordingly,
fiscal year 1998 includes the 52-week period beginning March 31, 1997 and ending
March 29, 1998. The fiscal year ending March 28, 1999 contained 52 weeks. The
results of operations and cash flows for the two-day period ended March 30, 1997
(the transition period) are immaterial for reporting purposes.
Cash and Marketable Securities
Cash and marketable securities include cash and highly liquid investments with
an original maturity of 90 days or less.
Product Inventory
Product inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method and includes certain charges
directly and indirectly incurred in bringing product inventories to the point of
sale.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows:
- -------------------------------------------------------------------------------
Useful lives
- -------------------------------------------------------------------------------
Information technology equipment and software 3-5 years
Furniture, equipment and tooling 5-10 years
Building and improvements 10-30 years
- -------------------------------------------------------------------------------
Amortization is provided on leasehold improvements using the straight-line
method over the terms of the leases ranging from three to ten years.
Depreciation and amortization of property and equipment was $1,806,300,
$1,600,200 and $1,149,600 for fiscal years 1999, 1998 and 1997, respectively.
Goodwill
Goodwill is being amortized using the straight-line method over 15 years.
Amortization expense was $331,800, $327,900 and $283,600 for fiscal years 1999,
1998 and 1997, respectively. Accumulated amortization as of March 28, 1999 and
March 29, 1998 was approximately $1,192,900 and $861,100, respectively.
Revenue Recognition
The Company records sales when product is shipped to the customers or when
services are provided.
<PAGE>
Advertising Costs
The Company capitalizes certain costs related to the printing and production of
its product catalogs. These costs are amortized over the useful life commencing
with the distribution of the catalogs.
Supplemental Cash Flow Information
Cash paid for interest during fiscal years 1999, 1998, and 1997 totaled
$584,100, $516,200 and $661,400, respectively. Cash paid for income taxes for
fiscal years 1999, 1998 and 1997 totaled $1,124,600, $1,599,600 and $3,530,100,
respectively.
The Company had noncash transactions during fiscal years 1999, 1998 and 1997 as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exercise of options in exchange for treasury stock $264,100 $252,000 $465,100
Tax benefit from exercise of stock options 3,000 115,500 290,700
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of cash and marketable securities, trade accounts
receivable, product inventory, prepaid expenses and other current assets, trade
accounts payable and accrued expenses and other current liabilities and
borrowings under revolving credit facility approximate their fair value as of
March 28, 1999 and March 29, 1998.
Fair value of long-term debt as of March 28, 1999 and March 29, 1998 is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to a bank $5,687,900 $5,871,500
Note payable to Baltimore County, Maryland 163,200 165,100
Note payable to the Maryland Economic Development Corporation 1,284,500 1,329,800
- ---------------------------------------------------------------------------------------------------------------
$7,135,600 $7,366,400
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Concentration of risk
The Company is dependent on third-party equipment manufacturers, distributors
and dealers for all of its supply of wireless communications equipment. For
fiscal years 1999, 1998 and 1997 sales of products purchased from the Company's
top ten vendors accounted for 46%, 49% and 57% of total revenues, respectively,
with sales of products purchased from the Company's largest vendor generating
approximately 14%, 16% and 14% of total revenues, respectively. The Company is
dependent on the ability of its vendors to provide products on a timely basis
and on favorable pricing terms. Although the Company believes that alternative
sources of supply are available for virtually every product type it carries, the
loss of certain principal suppliers could have a material adverse effect on the
Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could significantly differ from those estimates.
New Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes the 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, 2000 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.
Reclassifications
Certain reclassifications have been made to prior year consolidated financial
statements to conform with the current year presentation.
<PAGE>
Note 3. Borrowings Under Credit Facility
- -------------------------------------------------------------------------------
Effective June 13, 1997, the Company amended its Financing Agreement (the
Agreement) with a bank for a $15,000,000 revolving credit facility available
through September 30, 1999. The amended Agreement provides for two revolving
notes, a line of credit in the amount of $5,000,000 and a revolving credit loan
in the amount of $10,000,000. The line of credit is unsecured and bears interest
at a variable rate of the London Interbank Offered Rate (LIBOR) plus 1.25% per
annum. The revolving credit loan is unsecured and bears interest at a variable
rate of either the prime rate plus an applicable margin of up to 0.25% per
annum, or LIBOR plus an applicable margin of 1.25% to 1.75% per annum, based
upon maintenance of certain financial ratios.
The weighted average interest rate on borrowings under the credit facility was
6.53%, 8.22%, and 7.30%, for fiscal years 1999, 1998 and 1997, respectively.
Interest expense on the credit facility for fiscal years 1999, 1998 and 1997,
totaled $128,300, $400, and $210,200, respectively. Average borrowings under the
credit facility totaled $2,254,500, $4,700, and $2,503,900, and maximum
borrowings totaled $5,000,000, $323,200, and $6,609,000 for fiscal years 1999,
1998 and 1997, respectively. The outstanding balance under the Agreement as of
March 28, 1999 was $4,403,000. There was no balance outstanding under the
Agreement as of March 29, 1998 and March 28, 1997.
The provisions of the Agreement require the Company to meet certain financial
covenants and ratios and contain other limitations including a restriction on
dividend payments. The Company was in compliance with the provisions of the
Agreement during fiscal years 1999 and 1998.
Note 4. Long-Term Debt
- -------------------------------------------------------------------------------
Effective July 16, 1996, the Company issued a revolving note payable to a bank
in the face amount of $6,000,000. Interest on the outstanding principal balance
was payable monthly, with the balance of unpaid principal and interest due at
maturity, April 30, 1997. Effective April 30, 1997, the Company converted the
revolving note payable to a term note payable. The converted term note is
payable in monthly installments of principal and interest beginning on July 1,
1997, with the balance due at maturity, June 30, 2003. The note bears interest
at a floating rate of LIBOR plus 1.50% per annum. The weighted average interest
rate in fiscal years 1999, 1998 and 1997 was 6.35%, 7.27% and 7.07%,
respectively. Interest expense under this note was $404,000, $439,700 and
$304,000 for fiscal years 1999, 1998 and 1997, respectively. As of March 28,
1999 and March 29, 1998, principal outstanding under this note was $5,687,900
and $5,871,500, respectively. The note is secured by the real property of the
Company. The note contains certain restrictive covenants which, among other
things, require the maintenance of certain financial ratios.
Effective July 16, 1996, the Company issued a note payable to Baltimore County,
Maryland, in the face amount of $200,000. The note is payable in equal monthly
installments of principal and interest of $1,600, with the balance due at
maturity, June 16, 2006. The note bears interest at 4.75% per annum. Interest
expense under this note was $8,600, $9,000, and $5,500 for fiscal years 1999,
1998 and 1997, respectively. As of March 28, 1999 and March 29, 1998, principal
outstanding under this note was $174,900 and $185,000, respectively. The note is
secured by the real property of the Company.
Effective October 10, 1996, the Company issued a note payable to the Maryland
Economic Development Corporation in the face amount of $1,800,000. The note is
payable in equal quarterly installments of principal and interest of $37,400
beginning on January 10, 1997, with the balance due at maturity, October 10,
2011. The note bears interest at 3.00% per annum. Interest expense under this
note was $48,500, $51,500 and $26,800 for fiscal years 1999, 1998 and 1997,
respectively. As of March 28, 1999 and March 29, 1998, principal outstanding
under this note was $1,553,100 and $1,678,900, respectively. The note is secured
by the real property of the Company.
As of March 28, 1999, scheduled annual maturities of long-term debt are as
follows:
- -------------------------------------------------------------------------------
Fiscal year:
- -------------------------------------------------------------------------------
2000 $ 287,200
2001 332,900
2002 354,600
2003 377,800
2004 4,916,800
Thereafter 1,146,600
- -------------------------------------------------------------------------------
$7,415,900
- -------------------------------------------------------------------------------
<PAGE>
Note 5. Leases
- -------------------------------------------------------------------------------
The Company leases office facilities under operating leases expiring in various
years through fiscal 2003. Rent expense for fiscal years 1999, 1998 and 1997
totaled $230,700, $305,000 and $469,000, respectively.
As of March 28, 1999, future minimum lease payments, net of sublease revenues,
are as follows (Note 11):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Lease Net
Fiscal year: obligation Sublease obligation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $404,000 $215,100 $188,900
2001 338,700 167,100 171,600
2002 34,600 - 34,600
- ------------------------------------------------------------------------------------------------------------
$777,300 $382,200 $395,100
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6. Income Taxes
- -------------------------------------------------------------------------------
A reconciliation of the difference between the provision for income taxes
computed at statutory rates and the provision for income taxes provided on the
income is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 2.6% 2.6% 2.3%
Non-deductible expenses 3.7% 1.0% 1.8%
Other (2.3%) 0.2% 0.4%
- ------------------------------------------------------------------------------------------------------------
Effective rate 38.0% 37.8% 38.5%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal: Current $1,427,000 $1,730,000 $2,517,200
Deferred (345,100) 95,300 (191,900)
State: Current 167,900 212,000 317,700
Deferred (40,600) 11,700 (28,200)
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes $1,209,200 $2,049,000 $2,614,800
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Total deferred tax assets and deferred tax liabilities as of March 28, 1999 and
March 29, 1998, and the sources of the differences between financial accounting
and tax basis of the Company's assets and liabilities which give rise to the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property and equipment $198,500 $191,400
Accrued expenses and reserves 683,200 523,900
- ------------------------------------------------------------------------------------------------------------
$881,700 $715,300
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred revenue $ - $219,800
Other assets 14,500 14,000
- ------------------------------------------------------------------------------------------------------------
$ 14,500 $233,800
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note 7. Profit-Sharing Plan
- -------------------------------------------------------------------------------
The Company has implemented a 401(k) profit-sharing plan that covers all
eligible employees. Contributions to the plan are made at the discretion of the
Company's Board of Directors. The Company's contribution to the plan during
fiscal years 1999, 1998 and 1997 totaled $44,900, $66,700 and $87,000,
respectively. As of March 28, 1999, plan assets include 36,000 shares of common
stock of the Company.
<PAGE>
Note 8. Asset Purchase
- -------------------------------------------------------------------------------
During fiscal year 1997, the Company acquired certain assets and assumed certain
liabilities of Cincinnati, Ohio-based Cartwright Communications. The transaction
was valued at $3,988,000 plus the net value of inventory, receivables and
payables. The purchase was for cash and the assumption of certain liabilities.
The acquisition has been accounted for as a purchase, and the goodwill
associated with this transaction is being amortized over 15 years.
Note 9. 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>
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic weighted average shares outstanding 4,420,200 4,377,600 4,287,000
Effect of dilutive common equivalent shares 179,900 232,700 416,800
- -------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,600,100 4,610,300 4,703,800
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 136,800 shares of common stock at a weighted average
exercise price of $30.71 per share were outstanding as of March 28, 1999, 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 10. Stock-Based Compensation
- -------------------------------------------------------------------------------
The Company has two stock option plans - the 1984 Employee Incentive Stock
Option Plan (the 1984 Plan) and the 1994 Stock and Incentive Plan (the 1994
Plan). Under the 1984 Plan and the 1994 Plan, options for a maximum of 401,250
and 572,500 shares, respectively, may be granted at prices not less than 100% of
the fair market value at the date of option grant and for a term of not greater
than ten years. The 1994 Plan also allows for the granting of non-qualified
options, stock appreciation rights, restricted stock and restricted stock units,
and other performance awards, none of which have been granted as of March 28,
1999. All of the options granted to executive and other key contributors during
fiscal 1999 contain performance-based provisions including vesting based on the
achievement of certain predetermined cumulative increases in the market value of
the common stock.
<PAGE>
In addition, non-plan options have been granted at the discretion of the Board
of Directors. Transactions involving options are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 694,600 $17.20 686,000 $15.91 714,000 $11.17
Granted 116,100 19.89 185,800 20.77 126,500 33.69
Exercised (55,900) 7.10 (72,800) 10.73 (134,500) 6.13
Cancelled (52,600) 20.09 (104,400) 19.83 (20,000) 34.00
- ------------------------------------------------------------------------------------------------------------
Outstanding,
end of year 702,200 $18.23 694,600 $17.20 686,000 $15.91
Exercisable at
end of year 323,300 383,000 438,900
Weighted average fair
value of options
granted during the
year $7.13 $12.57 $22.40
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Information about fixed stock options outstanding and exercisable as of March
28, 1999 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
- ------------------------------------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Price Shares Life Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - 15.00 310,200 5.0 $12.12 310,200 $12.12
15.00 - 25.00 278,000 6.9 19.35 13,100 18.77
25.00 - 36.50 114,000 7.0 32.14 - -
- ------------------------------------------------------------------------------------------------------------
$0.00 - 36.50 702,200 6.1 $18.23 323,300 $12.39
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25 and the related interpretations in
accounting for the plans. Accordingly, no compensation cost has been recognized
for the Company's stock option plans. Had compensation cost for the Company's
stock option plans been determined based on fair value at the grant dates for
grants under the plans consistent with the methodology of SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net earnings and
diluted earnings per share for fiscal years 1999, 1998 and 1997 would have been
reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (in thousands) As reported $ 1,972 $ 3,376 $ 4,178
Pro forma 830 2,538 3,786
Diluted earnings per share As reported $ 0.43 $ 0.73 $ 0.89
Pro forma 0.18 0.55 0.80
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 21.0% 55.0% 53.6%
Risk-free interest rate 4.4-5.7% 5.5-6.9% 6.5%
Expected lives 6-10 years 8 years 8 years
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted in fiscal years 1999, 1998
and 1997. Therefore, the full impact of calculating compensation cost for
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to March
31, 1995 is not considered.
<PAGE>
Note 11. Asset Impairment and Restructuring Charge
- -------------------------------------------------------------------------------
During the fourth quarter of fiscal year 1997, the Company determined that it
would consolidate its Maryland facilities. The Company has a lease for its
former corporate headquarters that expires on December 31, 2000. Based on the
current monthly payments and the sublease rate the Company negotiated after
vacating its former corporate headquarters, the Company recorded a $310,200
restructuring charge in its fiscal year 1997 Consolidated Statement of Income.
As of March 28, 1999 and March 29, 1998, the liability recorded in connection
with this restructuring was $168,700 and $271,000, respectively.
During the fourth quarter of fiscal year 1999, the Company reorganized its sales
and marketing activities, resulting in the closure of its Miami and Cincinnati
sales offices and the termination of 22 employees involved in such operations.
In connection with this restructuring, the Company recorded a $831,000 asset
impairment and restructuring charge in its fiscal year 1999 Consolidated
Statement of Income, consisting of $295,700 in asset impairment charges,
$230,600 in employee termination benefits, $211,100 in lease termination costs,
and $93,600 in other related costs. As of March 28, 1999, the liability recorded
in connection with this restructuring was $237,900.
<PAGE>
Management's Responsibility for Financial Statements
The consolidated statements of TESSCO Technologies Incorporated have been
prepared by the Company in accordance with generally accepted accounting
principles. The financial information presented is the responsibility of
management and accordingly includes amounts upon which judgment has been
applied, or estimates made, based on the best information available.
The financial statements have been audited by Arthur Andersen LLP, independent
public accountants, for the fiscal years ended March 28, 1999, March 29, 1998
and March 28, 1997.
The consolidated financial statements, in the opinion of management, present
fairly the financial position, results of operations and cash flows of the
Company as of the stated dates and periods in conformity with generally accepted
accounting principles. The Company believes that its accounting systems and
related internal controls used to record and report financial information
provide reasonable assurance that financial records are reliable and that
transactions are recorded in accordance with established policies and
procedures.
<TABLE>
<CAPTION>
<S> <C>
/s/Robert B. Barnhill, Jr. /s/Gerald T. Garland
- ---------------------------------------------- -----------------------------------
Robert B. Barnhill, Jr. Gerald T. Garland
Chairman, President and Chief Executive Officer Treasurer and Chief Financial Officer
</TABLE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of TESSCO Technologies Incorporated:
We have audited the accompanying consolidated balance sheets of TESSCO
Technologies Incorporated as of March 28, 1999 and March 29, 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended March 28, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 TESSCO Technologies
Incorporated as of March 28, 1999 and March 29, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
March 28, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
April 21, 1999
<PAGE>
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Part III
Item 10: Directors and Executive Officers of the Registrant
For information with respect to executive officers of the Company who are not
directors, see "Item 4A: Executive Officers of the Company." Information with
respect to directors, contained under the caption "Proposal 1 Election of
Directors" in the Company's Proxy Statement prepared in connection with the
Company's 1999 Annual Meeting of Shareholders, is incorporated by reference
herein.
Item 11: Executive Compensation
Information with respect to this item, contained under the caption "Executive
Compensation and Other Information" in the Company's Proxy Statement prepared in
connection with the Company's 1999 Annual Meeting of Shareholders, is
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item, contained under the caption "Security
Ownership of Management and Principal Shareholders" in the Company's Proxy
Statement prepared in connection with the Company's 1999 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
None
Part IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are included in Item 8
of this report:
Consolidated Balance Sheets as of March 28, 1999 and March 29, 1998
Consolidated Statements of Income for the fiscal years ended March 28,
1999, March 29, 1998 and March 28, 1997
Consolidated Statements of Changes in Shareholders' Equity for the
fiscal years ended March 28, 1999, March 29, 1998 and March 28, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
March 28, 1999, March 29, 1998 and March 28, 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. The following financial statement schedules are included herewith:
..................... ..............................................
Schedule Description
..................... ..............................................
Schedule II Valuation and Qualifying Accounts
..................... ..............................................
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
<PAGE>
3. Exhibits
2.1.1 Cartwright Communications Acquisition Agreement (incorporated
by reference to Exhibit 2 to Current Report on Form 8-K dated
June 3, 1996)
3.1.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1.1. to the
Company's Registration Statement on Form S-1 (No. 33-81834)).
3.1.2 Certificate of Retirement of the Registrant (incorporated by
reference to Exhibit 3.1.2 to the Company's Registration
Statement on Form S-1 (No. 33-81834)).
3.1.3 First Certificate of Amendment to Certificate of Incorporation
of the Registrant (incorporated by reference to Exhibit 3.1.3.
to the Company's Registration Statement on Form S-1 (No.
33-81834)).
3.1.4 Certificate of Amendment to Certificate of Incorporation of
the Registrant filed September 6, 1996 (incorporated by
reference to Exhibit 3.1.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 28, 1997).
3.2.1 Amended and Restated By-laws of the Registrant (incorporated
by reference to Exhibit 3.2.1. to the Company's Registration
Statement on Form S-1 (No. 33-81834)).
3.2.2 First Amendment to Amended and Restated By-laws of the
Registrant (incorporated by reference to Exhibit 3.2.2. to the
Company's Registration Statement on Form S-1 (No. 33-81834)).
10.1 Employment Agreement dated March 31, 1994 with Robert B.
Barnhill, Jr. (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (No.
33-81834)).
10.2 Stock Option by and between the Registrant and Robert B.
Barnhill, Jr. dated September 28, 1994 (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (No. 33-81834)).
10.3 Employee Incentive Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (No. 33-81834)).
10.4 1994 Stock and Incentive Plan, as amended (incorporated by
reference to Exhibit 10.22 to the Company's Registration
Statement on Form S-1 (No. 33-81834)).
10.5.1 Financing Agreement dated March 31, 1995 by and between the
Company and NationsBank, N.A. (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995).
10.5.2 First Amendment to Financing Agreement dated September 26,
1996 (incorporated by reference to Exhibit 10.7.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 28, 1997).
<PAGE>
10.5.3 Second Amendment to Financing Agreement dated February 28,
1997 (incorporated by reference to Exhibit 10.7.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 28, 1997).
10.5.4 Third Amendment to Financing Agreement dated June 1, 1997
(incorporated by reference to Exhibit 10.7.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 27, 1997).
10.6 Stock Compensation Plan for Chief Executive Officer dated
January 15, 1996 (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 29, 1996).
11.1 Statement re: Computation of Per Share Earnings (filed
herewith).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) The registrant did not file any reports on Form 8-K during the quarter ended
March 28, 1999.
Schedule II: For the Fiscal Years Ended March 28, 1999, March 29, 1998, and
March 28, 1997
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
................................................................................ ................ .................
1999 1998 1997
................................................................................ ................ .................
<S> <C> <C> <C>
Allowance for doubtful accounts and sales returns:
Balance, beginning of year $438,100 $525,300 $431,700
Provisions 290,200 158,900 335,400
Writeoffs (176,400) (246,100) (241,800)
............................................................................... ................ .................
Balance, end of year $551,900 $438,100 $525,300
............................................................................... ................ .................
Asset impairment and restructuring reserve:
Balance, beginning of year $271,000 $310,200 $ -
New restructuring charge 831,000 - 310,200
Amounts charged against accrual (695,400) (39,200) -
............................................................... ................. ................ ...............
Balance, end of year $406,600 $271,000 $310,200
............................................................... ................. ................ ...............
</TABLE>
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
TESSCO TECHNOLOGIES INCORPORATED
By: /s/Robert B. Barnhill, Jr.
----------------------------------
Robert B. Barnhill, Jr., President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<S> <C> <C> <C>
By: /s/Robert B. Barnhill, Jr. June 24, 1999 By: /s/Gerald T. Garland June 24, 1999
--------------------------- --------------------------
Robert B. Barnhill, Jr. Gerald T. Garland
Chairman of the Board, President and Treasurer and
Chief Executive Officer Chief Financial Officer
(principal executive officer) (principal financial and accounting officer)
By: /s/Jerome C. Eppler June 24, 1999 By: /s/Dennis J. Shaughnessy June 24, 1999
--------------------------- --------------------------
Jerome C. Eppler Dennis J. Shaughnessy
Director Director
By: /s/Benn R. Konsynski June 24, 1999 By: /s/Morton F. Zifferer, Jr. June 24, 1999
--------------------------- --------------------------
Benn R. Konsynski Morton F. Zifferer, Jr.
Director Director
</TABLE>
<PAGE>
Exhibit 11.1
Statement re: Computation of Per Share Earnings
The information required by this Exhibit is set forth in Note 9 to the Financial
Statements of the Company contained in Item 8 of this Report.
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
....................................................... .......................
Subsidiary State of Incorporation
....................................................... .......................
TESSCO Incorporated Delaware
Cartwright Communications Company Delaware
National Airtime Corporation Delaware
Wireless Solutions Incorporated Maryland
TESSCO Service Solutions, Inc. Delaware
TESSCO de Mexico S.A. de C.V. Mexico
-32-
<PAGE>
Exhibit 23.1
Consent of Arthur Andersen LLP
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K into TESSCO Technologies
Incorporated's previously filed Registration Statement on Form S-8 No.
33-87178.
/s/Arthur Andersen LLP
Baltimore, Maryland
June 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
consolidated financial statements for the year ended March 28, 1999 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> 12-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> MAR-28-1999
<EXCHANGE-RATE> 1
<CASH> 97,700
<SECURITIES> 0
<RECEIVABLES> 20,172,900
<ALLOWANCES> (551,900)
<INVENTORY> 21,149,000
<CURRENT-ASSETS> 43,463,200
<PP&E> 22,289,700
<DEPRECIATION> (6,563,800)
<TOTAL-ASSETS> 63,062,400
<CURRENT-LIABILITIES> 20,412,500
<BONDS> 7,128,700
0
0
<COMMON> 47,000
<OTHER-SE> 35,409,700
<TOTAL-LIABILITY-AND-EQUITY> 63,062,400
<SALES> 160,582,200
<TOTAL-REVENUES> 160,582,200
<CGS> 118,535,300
<TOTAL-COSTS> 118,535,300
<OTHER-EXPENSES> 37,624,500
<LOSS-PROVISION> 290,200
<INTEREST-EXPENSE> 1,240,800
<INCOME-PRETAX> 3,181,600
<INCOME-TAX> 1,209,200
<INCOME-CONTINUING> 1,972,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,972,400
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.43
</TABLE>
