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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 26, 2000
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
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TESSCO TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
52-0729657
(IRS Employer Identification No.)
11126 MCCORMICK ROAD, HUNT VALLEY, MARYLAND 21031
(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
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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. Yes / /
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 May 5, 2000 was $89,582,560.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of May 5, 2000 was 4,479,128.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the 2000 Annual Meeting of Shareholders to be held July 20,
2000, are incorporated by reference into Part III.
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CONTENTS
PART I
Item 1 Business.................................................... 3
General..................................................... 3
Products and Services....................................... 3
Customers................................................... 4
Method of Operation......................................... 5
Employees................................................... 8
Competition................................................. 8
Intellectual Property....................................... 9
Item 2 Properties.................................................. 9
Item 3 Legal Proceedings........................................... 9
Item 4 Submission of Matters to a Vote of Security Holders......... 9
Item 4A Executive Officers of the Company........................... 10
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 12
Item 6 Selected Financial Data..................................... 13
Quarterly Results of Operations............................. 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 17
Item 8 Consolidated Financial Statements and Supplementary Data.... 18
Consolidated Balance Sheets................................. 18
Consolidated Statements of Income........................... 19
Consolidated Statements of Changes in Shareholders'
Equity...................................................... 20
Consolidated Statements of Cash Flows....................... 21
Notes to Consolidated Financial Statements.................. 22
Management's Responsibility for Financial Statements........ 30
Report of Independent Public Accountants.................... 30
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 31
Item 11 Executive Compensation...................................... 31
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13 Certain Relationships and Related Transactions.............. 31
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
Schedule II: Valuation and Qualifying Accounts............................ 34
Signatures................................................................ 35
2
PART I
ITEM 1: BUSINESS
GENERAL
TESSCO Technologies Incorporated (TESSCO or the Company) is a leading
provider of the services, products and solutions required to build, operate,
maintain and use wireless voice, data, messaging, location tracking and Internet
systems. The Company provides marketing and sales services, knowledge and supply
chain management, product-solution delivery and control systems utilizing
extensive Internet and information technology.
TESSCO's guiding vision is to be The Vital Link between buyers and
manufacturers. For its customers, TESSCO provides a total source of product
knowledge and solutions. For its manufacturers, TESSCO presents, markets and
sells their products as a part of a customer solution, thus providing a
cost-effective channel to a broad and diverse customer base. The TESSCO mission
is to virtually link the knowledge to make decisions and the delivery of
configured product solutions to the point of use, while providing control of the
supply chain process.
All customer, manufacturer, product, configuration, sales and delivery
activities are directed by an integrated enterprise information technology
platform. TESSCO's Product Knowledge System (PK), an integrated database
containing specifications and configuration information for over 20,000 wireless
communications products, is presented on TESSCO.com-TM-, in the Buyer's
Guide-TM- and in The Wireless Journal-Registered Trademark-. TESSCO's PK allows
presentation and comparison of product and solution choices and alternatives.
Product presentations include all specifications, features, benefits,
photographs, and usage instructions. PK information is processed into knowledge
for decision making and can be presented in print, electronically or on the
Internet.
TESSCO.com-TM-, the Internet-based Knowledge-Configuration-Delivery-Control
(KCDC) Solution and Transaction System, gives engineers, system designers,
technicians and buyers tools to help them make better decisions; configure
complete solutions; eliminate inventory; and achieve on-time, low-cost system
operation. Buyers can quickly and easily (1) select and evaluate possible
choices; (2) configure solutions and orders with worksheets; (3) confirm pricing
and availability; (4) reserve and order products for delivery; and (5) control,
support and track purchases by accessing TESSCO.com-TM- or the sales and
technical support center 24 hours a day, 7 days a week.
TESSCO's support operations are centralized in the Global Logistics Center,
the Company's ISO 9002 registered headquarters in Hunt Valley, Maryland.
Fulfillment centers in Hunt Valley, Maryland and Reno, Nevada, configure orders
for complete, on-time delivery throughout the world. The Company currently
serves more than 8,000 business customers and 14,000 consumers per month,
including a diversified mix of cellular, PCS and paging carriers, Wireless ISP,
fixed broadband and mobile dispatch operators, infrastructure site owners,
contractors and integrators, wireless value-added resellers, retailers, plus
consumers and subscribers.
PRODUCTS AND SERVICES
TESSCO identifies, selects, catalogs, markets and sells products and
services required to build, operate, maintain and use a wireless system, as well
as accessory products for wireless system subscribers. 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 2000, the Company offered over 20,000 stock
keeping units (SKUs), broadly classified as base site infrastructure, subscriber
accessory, and test and maintenance supplies, which accounted for approximately
49%, 36% and 15% of revenues, respectively, during fiscal 2000.
3
BASE SITE INFRASTRUCTURE PRODUCTS are used to build, repair and upgrade
wireless telecommunications, computing and Internet networks, and generally
complement radio frequency transmitting and switching equipment provided
directly by original equipment manufacturers (OEMs). Products include base
station antennas, cable and transmission lines, 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, such as providing outsourced call centers and private label Internet
sites, complement the Company's primary subscriber accessory 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, replacement and component parts 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-Registered Trademark-."
As part of its commitment to customer service, the Company typically 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 26, 2000, the Company was offering products purchased from over
350 manufacturers. Although a substantial portion of the Company's purchases are
concentrated with a small number of vendors (approximately 38% of TESSCO's
fiscal 2000 revenues were generated by the sale of products purchased from its
top ten vendors, with products purchased from its largest vendor generating
approximately 8%), the Company believes that alternative sources of supply are
available for many of the product types it carries.
CUSTOMERS
TESSCO's customer base consists of systems operators, resellers, consumers,
and international users which accounted for approximately 56%, 30%, 8%, and 6%,
respectively, of fiscal 2000 revenues. All of these customers, excluding
consumers, share the characteristic that they are organizations that design,
install, operate, repair or sell some type of wireless communications system.
SYSTEMS OPERATORS are generally responsible for building and maintaining the
infrastructure system and providing airtime service to individual subscribers.
Also categorized as systems operators are self-maintained users who have
significant internal communications requirements and, as a result, own and
operate their own two-way radio networks and service their own equipment.
Self-maintained users include commercial entities such as major utilities and
transportation companies, federal agencies and state and local governments,
including public safety organizations.
RESELLERS 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 and national
proprietorships and retailers, as well as sales and installation centers
operated by cellular and paging carriers.
4
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,
including 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.
INTERNATIONAL USERS are generally systems operators that conduct business
outside of the United States. TESSCO currently services customers in over 90
countries.
No one customer accounted for more than 3% of TESSCO's revenues during
fiscal 2000. TESSCO's ten largest customers accounted for approximately 14% of
its revenues during fiscal 2000.
METHOD OF OPERATION
TESSCO believes that it has developed a highly integrated, technologically
advanced and efficient method of operation based on these key tenets:
- understanding and anticipating customers' needs and building solutions by
cultivating lasting relationships;
- allowing customers to make the best decisions by delivering product
knowledge, not just information, through TESSCO's knowledge tools,
including the Buyer's Guide-TM-, a one-of-a-kind industry resource, and
TESSCO.com-TM-, the Company's Internet-based solution and transaction
system;
- 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;
- providing customers what they need, when and where they need it, by
delivering total source product and service solutions; and
- 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:
MARKETS: To meet the needs of a dynamic marketplace, sales and marketing
activities are organized on an end-market basis. Sales teams are focused on
three primary markets: system operators (i.e., carrier, tower, build-to-suit
contractors, Internet service providers, self-maintained users and international
users); resellers (i.e., dealers, value-added resellers, and retail and mass
merchants); and consumer and fulfillment services (i.e., affinity programs).
This organization allows customized product offerings and value propositions to
be developed for particular markets and the building of closer, long-term
customer relationships.
TESSCO attempts to understand and anticipate customers' needs and build
solutions by cultivating lasting relationships. The Company's customer database
contains detailed information on over 75,000 existing and potential customers,
including the names of key personnel, past contacts and inquiry, buying and
credit histories. This extensive customer database 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, as well as through referrals from other TESSCO customers. 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
5
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 managing sales and marketing
expenses. Scheduled calls are made to each regularly purchasing customer for the
purpose of information dissemination, order generation, database maintenance and
the overall enhancement of the business supply relationship.
MARKETING AND SOLUTION 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 product offering, the Company's product
development teams provide the technical foundation for both customers and TESSCO
personnel. The Product Knowledge System (PK) is continually updated to add
technical information in response to vendor specification changes and customer
inquiries. PK 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. This 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 Knowledge System 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-TM-distributed semi-annually to over 75,000 current and prospective
buyers in over 120 countries; The Wireless Journal-Registered Trademark-, which
is designed to introduce the reader to TESSCO's capabilities and product
offerings and contains information on significant industry trends and product
reviews; Technical Application Notes and White Papers, which provide in-depth
planning and installation instructions and diagrams; TESSCO T-Flash-TM-, which
features new products and monthly specials; Tech Tips, which offer suggestions
and ideas from other TESSCO vendor partners; and TESSCO.com-TM-.
TESSCO.com-TM-, the Company's Internet-based
Knowledge-Configuration-Delivery-Control (KCDC) Solution and Transaction System,
features an on-line version of the Company's printed Buyer's Guide-TM- 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:
- an electronic version of the Company's printed Buyer's Guide-TM-;
- in-depth product knowledge, including illustrations, detailed
specifications and application information;
- real-time product availability for over 20,000 SKUs from more than 350
manufacturers of base site infrastructure products, subscriber accessory
products, as well as test equipment and maintenance products;
- customer-specific pricing, based on TESSCO's tiered pricing structure
which is tied to a customer's purchases;
- easy ordering capabilities; and
- order confirmation, specifying the contents, delivery date, tracking
number and total cost of an order.
TESSCO not only empowers its customers to make better decisions by
delivering product knowledge, rather than just information, but through its
knowledge tools, it also provides its
6
manufacturers the opportunity to develop their brands and to promote their
products to a broad and diverse customer base.
PROCUREMENT 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 26, 2000 and March 28, 1999, 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 26, 2000 and
March 28, 1999, inventory write-offs were 0.3% and 0.5% of total purchases,
respectively. Generally, the Company has been able to return slow-moving
inventory to its vendors pursuant to stock rotation agreements.
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 information on
every customer account, including recent inquiries, buying and credit histories,
separate buying locations within a customer and contact diaries for key
personnel, as well as detailed product information, including 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 7,500 in fiscal 1999 to 8,000 in
fiscal 2000. An average of 14,000 consumer end-users were served per month in
fiscal 2000 as compared to 12,200 in fiscal 1999, 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. As orders are received, 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
7
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 databases and is integrated with the Company's centralized
distribution center. The information contained in the system is available on a
real-time basis to TESSCO employees and is utilized in every area of the
Company's operations.
During fiscal 1999, TESSCO began migrating its system to Oracle database
information technology, thereby augmenting its existing system. During fiscal
2000, TESSCO continued this migration. To date, the Company has completed
implementation of several Oracle applications and continues its strategy to
migrate completely to Oracle database technology. In so doing, TESSCO believes
it has achieved and will continue to achieve system scalability while providing
its customers and manufacturers with enhanced knowledge delivery.
The Company has developed TESSCO.com-TM-, an Internet-based
Knowledge-Configuration-Delivery-Control (KCDC) Solution 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.
In addition, TESSCO hosts several websites for certain affinity partners. By
hosting these websites, TESSCO is able to seamlessly interact with the customer
and fulfill on-line orders for these affinity partners.
EMPLOYEES
As of March 26, 2000, the Company had 388 full-time equivalent employees. Of
the Company's full-time equivalent employees, 210 were engaged in customer and
vendor service, marketing and product management, 130 were engaged in
fulfillment and distribution operations, and 48 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
The emerging wireless communications distribution industry is fragmented and
is comprised of several national distributors, such as Hutton Communications,
Cellstar, Brightpoint, Sprint North Supply and Anicom, 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 350 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.
Continuing changes in the wireless communications industry, including risks
associated with conflicting technology, changes in technology and inventory
obsolescence, could adversely affect future operating results. In addition, the
Company views the rapid expansion of Internet technology as a
8
positive business opportunity; however, this technology and evolving Internet
business models could also present additional competitive pressures and
challenges to the Company.
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.
INTELLECTUAL PROPERTY
TESSCO seeks to protect its intellectual property through a combination of
trademarks, service marks, confidentiality agreements, trade secret protection
and, if and when appropriate, patent protection. Thus far, TESSCO has generally
sought to protect its intellectual property, including its product data and
information, customer information and information technology systems, through
trademark filings and non-disclosure, confidentiality and trade secret
agreements. The Company typically requires its employees, consultants and others
having access to its technology to sign confidentiality and non-disclosure
agreements. There can be no assurance that these confidentiality and
non-disclosure agreements will be honored, or whether they can be fully
enforced, or that other entities may not independently develop systems,
technologies or information similar to that on which the Company relies.
The Company maintains a number of trade names and registered trademarks in
connection with its business activities, including
"TESSCO-Registered Trademark-," "Your Total Source-Registered Trademark-," "The
Wireless Journal-Registered Trademark-," "Wireless
Solutions-Registered Trademark-," "TESSCO Technologies-Registered Trademark-,"
"TESSCO Service Solutions-TM-," "National Airtime-Registered Trademark-," "The
Vital Link for the Wireless Communications Industry-Registered Trademark-,"
"TESSCO Magic-Registered Trademark-," "Your Procurement
Wizard-Registered Trademark-," "Wireless Rent-TM-,"
"TechNet-Registered Trademark-," "Striving to be the Best-Registered Trademark-"
and "Power Tower-Registered Trademark-." 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.
Although TESSCO currently holds no patents, TESSCO intends, if and when
appropriate, to seek patent protection for patentable technology. The ability to
obtain patent protection involves complex legal and factual questions. Others
may obtain patent protection for technologies which are important to TESSCO's
business, and as a result, the Company's business may be adversely affected. In
response to patents of others, the Company may need to license the right to use
technology patented by others, or in the event that a license cannot be
obtained, to design its systems around the patents of others.
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 5 to the Consolidated
Financial Statements. West coast sales and fulfillment is facilitated by a
15,000 square-foot distribution center in Reno, Nevada which is leased by the
Company pursuant to a non-cancellable lease expiring June 2001.
ITEM 3: LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
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:
NAME AGE POSITION
- ---- -------- ----------------------------
Robert B. Barnhill, Jr............ 56 Chairman, President and Robert B. Barnhill, Jr. is
Chief Executive Officer Chairman, President and Chief
Executive Officer and founded the
business in 1982.
Robert C. Singer.................. 44 Senior Vice President and Robert C. Singer joined the
Chief Financial Officer Company in October 1999 as Senior
Vice President and Chief Financial
Officer. Previously, he was Vice
President and Chief Financial
Officer of the Global Industrial
Group of McCormick & Company, Inc.
Richard A. Guipe.................. 50 Senior Vice President of Richard A. Guipe joined the
Sales and Market Development Company in June 1996 and has
served as Senior Vice President of
Sales and Market Development since
January 2000. Prior to that date,
Mr. Guipe served in several
executive positions with the
Company. Prior to joining the
Company, he served as a vice
president for the Heliax Products
Division of Andrew Corporation.
Douglas A. Rein................... 40 Senior Vice President of Douglas A. Rein joined the Company
Fulfillment and Operations in July 1999 as Senior Vice
President of Fulfillment and
Operations. Previously, he was
Director of Operations for Compaq
Computer Corporation and Vice
President, Distribution and
Logistics Operations for
Intelligent Electronics.
10
NAME AGE POSITION
- ---- -------- ----------------------------
Mary Lynn Schwartz................ 44 Senior Vice President, Chief Mary Lynn Schwartz rejoined the
Administrative Officer and Company in November 1997 and has
Corporate Secretary served as Senior Vice President,
Chief Administrative Officer and
Corporate Secretary since January
2000. Prior to that date,
Ms. Schwartz served in several
executive positions with the
Company. Between 1992 and 1997,
she owned and managed a local
public accounting and management
consulting practice. She served as
the Company's Chief Financial
Officer from 1988 to 1992.
Randolph S. Wilgis................ 36 Senior Vice President of New Randolph S. Wilgis joined the
Business Development Company in June 1991 and has
served as Senior Vice President of
New Business Development since
January 2000. Prior to that date,
Mr. Wilgis served in several
executive positions with the
Company. Prior to joining the
Company, he served as a project
manager for the Whiting Turner
Company.
11
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 1999 and 2000 are as follows:
HIGH LOW
---------- ----------
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
FISCAL 2000
First Quarter.............................................. 24 3/8 21
Second Quarter............................................. 22 15 1/2
Third Quarter.............................................. 20 1/2 14 1/4
Fourth Quarter............................................. 24 15
As of May 5, 2000, the number of shareholders of record of the Company was
61. 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.
12
ITEM 6: SELECTED FINANCIAL DATA
FISCAL YEARS ENDED MARCH 26, 2000 MARCH 28, 1999 MARCH 29, 1998 MARCH 28, 1997 MARCH 29, 1996
- ------------------ -------------- -------------- -------------- -------------- --------------
STATEMENT OF INCOME DATA
Revenues................................ $196,830,300 $160,582,200 $131,658,200 $147,086,000 $92,290,100
Cost of goods sold...................... 142,523,000 118,535,300 95,858,800 109,817,800 68,974,400
------------ ------------ ------------ ------------ -----------
Gross profit............................ 54,307,300 42,046,900 35,799,400 37,268,200 23,315,700
Selling, general and administrative
expenses.............................. 44,027,400 36,793,500 29,662,200 29,183,200 17,126,700
Asset impairment and restructuring
charge................................ -- 831,000 -- 310,200 --
------------ ------------ ------------ ------------ -----------
Income from operations.................. 10,279,900 4,422,400 6,137,200 7,774,800 6,189,000
Interest expense (income), net.......... 1,340,300 1,240,800 712,600 982,100 (179,000)
------------ ------------ ------------ ------------ -----------
Income before provision for income
taxes................................. 8,939,600 3,181,600 5,424,600 6,792,700 6,368,000
Provision for income taxes.............. 3,397,000 1,209,200 2,049,000 2,614,800 2,327,000
------------ ------------ ------------ ------------ -----------
Net income.............................. $ 5,542,600 $ 1,972,400 $ 3,375,600 $ 4,177,900 $ 4,041,000
============ ============ ============ ============ ===========
Diluted earnings per share.............. $ 1.20 $ 0.43 $ 0.73 $ 0.89 $ 0.89
Diluted weighted average shares
outstanding........................... 4,599,500 4,600,100 4,610,300 4,703,800 4,555,200
============ ============ ============ ============ ===========
PERCENTAGE OF REVENUES
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 72.4 73.8 72.8 74.7 74.7
------------ ------------ ------------ ------------ -----------
Gross profit............................ 27.6 26.2 27.2 25.3 25.3
Selling, general and administrative
expenses.............................. 22.4 22.9 22.5 19.8 18.6
Asset impairment and restructuring
charge................................ -- 0.5 -- 0.2 --
------------ ------------ ------------ ------------ -----------
Income from operations.................. 5.2 2.8 4.7 5.3 6.7
Interest expense (income), net.......... 0.7 0.8 0.5 0.7 (0.2)
------------ ------------ ------------ ------------ -----------
Income before provision for income
taxes................................. 4.5 2.0 4.1 4.6 6.9
Provision for income taxes.............. 1.7 0.8 1.6 1.8 2.5
------------ ------------ ------------ ------------ -----------
Net income.............................. 2.8% 1.2% 2.5% 2.8% 4.4%
============ ============ ============ ============ ===========
SELECTED OPERATING DATA
Average commercial buyers per month..... 8,000 7,500 7,000 6,200 4,600
Average consumer buyers per month....... 14,100 12,200 3,700 1,700 --
Total orders shipped.................... 645,000 426,500 302,000 255,400 176,400
Revenues per employee................... $ 507,300 $ 462,100 $ 454,000 $ 584,000 $ 576,000
BALANCE SHEET DATA
Working capital......................... $ 28,232,100 $ 23,050,700 $ 22,270,100 $ 21,331,300 $17,389,800
Total assets............................ 84,214,200 63,062,400 59,926,900 50,915,300 36,527,900
Short-term debt......................... 6,194,900 4,690,200 294,000 416,900 126,400
Long-term debt.......................... 6,795,800 7,128,700 7,441,400 7,637,900 85,000
Shareholders' equity.................... 41,082,200 35,456,700 33,391,500 29,371,600 24,544,100
13
QUARTERLY RESULTS OF OPERATIONS
FISCAL 2000 QUARTERS ENDED FISCAL 1999 QUARTERS ENDED
--------------------------------------------------------------- ------------------------------
MARCH 26, 2000 DEC. 26, 1999 SEPT. 26, 1999 JUNE 27, 1999 MARCH 28, 1999 DEC. 27, 1998
-------------- ------------- -------------- ------------- -------------- -------------
Revenues............... $56,253,300 $52,436,300 $44,612,900 $43,527,800 $40,303,400 $40,661,200
Cost of goods sold..... 40,767,600 37,920,700 31,932,300 31,902,400 29,102,700 29,621,500
----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 15,485,700 14,515,600 12,680,600 11,625,400 11,200,700 11,039,700
Selling, general and
administrative
expenses............. 12,711,300 11,986,700 9,988,200 9,341,200 9,248,800 9,658,100
Asset impairment and
restructuring
charge............... -- -- -- -- 831,000 --
----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 12,711,300 11,986,700 9,988,200 9,341,200 10,079,800 9,658,100
----------- ----------- ----------- ----------- ----------- -----------
Income from
operations........... 2,774,400 2,528,900 2,692,400 2,284,200 1,120,900 1,381,600
Interest expense,
net.................. 444,800 310,100 259,600 325,800 365,600 322,100
----------- ----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes..... 2,329,600 2,218,800 2,432,800 1,958,400 755,300 1,059,500
Provision for income
taxes................ 885,200 843,200 924,400 744,200 287,100 402,600
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 1,444,400 $ 1,375,600 $ 1,508,400 $ 1,214,200 $ 468,200 $ 656,900
=========== =========== =========== =========== =========== ===========
Diluted earnings per
share................ $ 0.31 $ 0.30 $ 0.33 $ 0.26 $ 0.10 $ 0.14
=========== =========== =========== =========== =========== ===========
PERCENTAGE OF REVENUES
Revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..... 72.5 72.3 71.6 73.3 72.2 72.8
----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 27.5 27.7 28.4 26.7 27.8 27.2
Selling, general and
administrative
expenses............. 22.6 22.9 22.4 21.5 22.9 23.8
Asset impairment and
restructuring
charge............... -- -- -- -- 2.1 --
----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 22.6 22.9 22.4 21.5 25.0 23.8
----------- ----------- ----------- ----------- ----------- -----------
Income from
operations........... 4.9 4.8 6.0 5.2 2.8 3.4
Interest expense,
net.................. 0.8 0.6 0.6 0.7 0.9 0.8
----------- ----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes..... 4.1 4.2 5.5 4.5 1.9 2.6
Provision for income
taxes................ 1.5 1.6 2.1 1.7 0.7 1.0
----------- ----------- ----------- ----------- ----------- -----------
Net income............. 2.6% 2.6% 3.4% 2.8% 1.2% 1.6%
=========== =========== =========== =========== =========== ===========
FISCAL 1999 QUARTERS ENDED
------------------------------
SEPT. 27, 1998 JUNE 28, 1998
-------------- -------------
Revenues............... $43,317,800 $36,299,800
Cost of goods sold..... 32,767,200 27,043,900
----------- -----------
Gross profit........... 10,550,600 9,255,900
Selling, general and
administrative
expenses............. 9,364,000 8,522,600
Asset impairment and
restructuring
charge............... -- --
----------- -----------
Total operating
expenses............. 9,364,000 8,522,600
----------- -----------
Income from
operations........... 1,186,600 733,300
Interest expense,
net.................. 322,400 230,700
----------- -----------
Income before provision
for income taxes..... 864,200 502,600
Provision for income
taxes................ 328,400 191,100
----------- -----------
Net income............. $ 535,800 $ 311,500
=========== ===========
Diluted earnings per
share................ $ 0.12 $ 0.07
=========== ===========
PERCENTAGE OF REVENUES
Revenues............... 100.0% 100.0%
Cost of goods sold..... 75.6 74.5
----------- -----------
Gross profit........... 24.4 25.5
Selling, general and
administrative
expenses............. 21.6 23.5
Asset impairment and
restructuring
charge............... -- --
----------- -----------
Total operating
expenses............. 21.6 23.5
----------- -----------
Income from
operations........... 2.7 2.0
Interest expense,
net.................. 0.7 0.6
----------- -----------
Income before provision
for income taxes..... 2.0 1.4
Provision for income
taxes................ 0.8 0.5
----------- -----------
Net income............. 1.2% 0.9%
=========== ===========
14
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues increased by $36.2 million, or 23%, to $196.8 million in fiscal
2000 compared to $160.6 million in fiscal 1999. The overall increase was
primarily a result of increased unit volume due to strong market demand.
Revenues from all of the Company's product lines increased. The largest
percentage increase was experienced in the sale of test and maintenance
products. Base site infrastructure, subscriber accessory, and test and
maintenance products and services accounted for approximately 49%, 36% and 15%,
respectively, of fiscal 2000 revenue, as compared to 52%, 36% and 12%,
respectively, of fiscal 1999 revenues. Revenue increases in the systems
operators, resellers and consumer categories were partially offset by a decrease
in the international category. The largest increase was experienced in the
systems operator category. Systems operators, resellers, international users and
consumers accounted for approximately 56%, 30%, 6% and 8%, respectively, of
fiscal 2000 revenues, as compared to 53%, 29%, 9% and 9%, respectively, of
fiscal 1999 revenues.
Gross profit increased by $12.3 million, or 29%, to $54.3 million in fiscal
2000 compared to $42.0 million in fiscal 1999. The gross profit margin increased
to 27.6% in fiscal 2000 from 26.2% in fiscal 1999. The increase in gross profit
margin was attributable to continued margin improvement in all market categories
as well as changes in product mix.
Total operating expenses increased by $6.4 million, or 17%, to
$44.0 million in fiscal 2000 compared to $37.6 million in fiscal 1999. Fiscal
1999 operating expenses included a non-recurring 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 decreased as a percentage of revenues to
22.4% in fiscal 2000, from 23.4%, or 22.9% excluding the above-mentioned
non-recurring charge, in fiscal 1999. The increase in operating expenses is
primarily attributable to an increased investment in personnel and marketing
expenses to support revenue and gross profit growth, as well as increases in
depreciation and amortization related to information systems enhancements. The
decrease in operating expenses as a percentage of revenue is attributable to a
disproportionately greater increase in revenues.
Income from operations increased by $5.9 million, or 132%, to $10.3 million
in fiscal 2000 compared to $4.4 million in fiscal 1999. Excluding the
non-recurring charge in fiscal 1999, income from operations increased 96%. The
operating income margin increased to 5.2% in fiscal 2000 from 2.8%, or 3.3%
excluding the non-recurring charge, in fiscal 1999.
Net interest expense increased by $99,500, or 8%, to $1.3 million in fiscal
2000 compared to $1.2 million in fiscal 1999. This increase is due to increased
levels of borrowing under the Company's revolving credit facility to finance
capital expenditures, as well as higher interest rates.
Income before the provision for income taxes increased $5.8 million or 181%
to $8.9 million in fiscal 2000 compared to $3.2 million in fiscal 1999. The
effective tax rate in fiscal 2000 and 1999 was 38.0%. Net income and diluted
earnings per share for fiscal 2000 increased 181% and 179%, respectively,
compared to fiscal 1999.
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 due to strong market demand.
Revenues in fiscal 1999 from the Company's base site infrastructure and
subscriber accessory products and services increased as compared to fiscal 1998,
while sales of test and maintenance products and services remained relatively
flat. The largest percentage increase in fiscal 1999 as compared to fiscal 1998
was experienced in the sale of subscriber accessory products and services. Base
site infrastructure, subscriber accessory, and test and maintenance products and
services accounted for approximately 52%, 36% and 12%, respectively, of fiscal
1999 revenues, as compared to
15
54%, 32% and 14%, respectively, of fiscal 1998 revenues. In fiscal 1999,
revenues increased in each of the major customer categories, with the largest
percentage growth experienced in the consumer category. Systems operators,
resellers, international users and consumers accounted for approximately 53%,
29%, 9% and 9%, respectively, of fiscal 1999 revenues, as compared to 47%, 40%,
8% and 5%, respectively, of fiscal 1998 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 by $8.0 million, or 27%, to
$37.6 million in fiscal 1999 compared to $29.7 million in fiscal 1998. Fiscal
1999 operating expenses included the above-mentioned non-recurring charge of
$831,000. Total operating expenses increased as a percentage of revenue from
22.5% in fiscal 1998 to 23.4%, or 22.9% excluding the non-recurring change, in
fiscal 1999. The increase in these expenses was primarily attributable to an
increased 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. Excluding the non-recurring
charge in fiscal 1999, income from operations decreased 14%. The operating
income margin decreased to 2.8% in fiscal 1999 from 4.7% in fiscal 1998.
Excluding the non-recurring charge, the operating income margin was 3.3% in
fiscal 1999.
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.
Income before the provision for income taxes decreased $2.2 million, or 41%,
to $3.2 million for fiscal 1999 compared to $5.4 million for fiscal 1998. The
effective tax rate in fiscal 1999 was 38.0% compared to 37.8% in fiscal 1998.
Net income and diluted earnings per share for fiscal 1999 decreased 42% and 41%,
respectively, compared to fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 26, 2000, cash and marketable securities totaled $818,100.
Working capital increased to $28.2 million as of March 26, 2000, from
$23.1 million as of March 28, 1999. Shareholders' equity increased to
$41.1 million as of March 26, 2000, from $35.5 million as of March 28, 1999.
The Company generated $3.4 million of net cash from operating activities in
fiscal 2000 compared to net cash used in operating activities of $5.5 million in
fiscal 1999. The significant increase in operating cash flow was primarily the
result of increased income from operations and an increase in trade accounts
payable and accrued expenses, partially offset by increases in trade accounts
receivable and inventory.
Capital expenditures totaled $3.9 million in fiscal 2000, primarily related
to investments in information technology, compared to $3.0 million in fiscal
1999.
The Company generated $1.2 million of net cash from financing activities in
fiscal 2000 compared to $4.1 million in fiscal 1999. In fiscal 2000 and 1999,
the Company increased borrowings under its revolving credit facility to support
increased capital expenditures.
The Company has a revolving credit facility with a bank which provides for a
maximum borrowing capacity of $15.0 million through September 30, 2002. This
agreement contains certain conditions, covenants and representations with which
the Company was in compliance as of March 26, 2000. As of March 26, 2000, the
Company had $5.9 million in outstanding borrowings under this facility.
16
OUTLOOK
During fiscal 2000, the Company achieved record growth in revenues, gross
profits, net income and earnings per share. In fiscal 1999 and 2000, the Company
made necessary investments in information technology, staffing and marketing
initiatives focused on enhancing long-term growth. The Company expects to
continue to build a strong technical foundation in support of the Company's
planned growth initiatives. The Company continues to aggressively expand its
product and service offerings, as well as marketing, sales and operational
initiatives, in furtherance of its continued efforts to accelerate its revenue
and earnings 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.
Based on its assessment, the Company determined that it was required to
modify or replace significant portions of its software so that its computer
systems would properly utilize dates beyond December 31, 1999. The Company
utilized both internal and external resources to reprogram, or replace, and test
the software for Year 2000 modifications. The cost of new software purchased was
capitalized; all other costs were expensed as incurred. The cost of the project
did not have a material effect on the results of operations for fiscal 2000. The
Company experienced no computer failures due to the Year 2000 issue on any of
the Company's "mission critical" systems.
In addition, the Company has experienced no material adverse effects related
to the failure of third parties to remediate their own Year 2000 issues.
However, there can be no guarantee that the Company or other third parties will
not experience Year 2000 related computer system malfunctions during calendar
2000 or beyond.
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. These forward-looking statements may
generally be identified by the use of the words "may," "will," "expects,"
"anticipates," "estimates," and similar expressions. 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 service its
customers promptly and efficiently, if at all; the possibility that, for
unforeseen reasons, the Company may be delayed in entering into or performing,
or may fail to enter into or perform, anticipated contracts or may otherwise be
delayed in realizing or fail to realize 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 technologies, inventory obsolescence and evolving
Internet business models and the resulting competition. 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.
17
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
MARCH 26, 2000 MARCH 28, 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and marketable securities............................ $ 818,100 $ 97,700
Trade accounts receivable, net of allowance for doubtful
accounts of $739,300 and $551,900, respectively......... 28,177,400 19,621,000
Product inventory......................................... 31,723,800 21,149,000
Deferred tax asset........................................ 1,199,700 626,600
Prepaid expenses and other current assets................. 1,843,100 1,968,900
----------- -----------
Total current assets.................................... 63,762,100 43,463,200
----------- -----------
PROPERTY AND EQUIPMENT, NET................................. 17,160,900 15,725,900
DEFERRED TAX ASSET, net of current portion.................. -- 255,100
GOODWILL.................................................... 3,291,200 3,618,200
----------- -----------
Total assets............................................ $84,214,200 $63,062,400
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $25,353,800 $12,938,500
Accrued expenses and other current liabilities............ 3,981,300 2,783,800
Revolving credit facility................................. 5,862,000 4,403,000
Current portion of long-term debt......................... 332,900 287,200
----------- -----------
Total current liabilities............................... 35,530,000 20,412,500
----------- -----------
DEFERRED TAX LIABILITY...................................... 806,200 14,500
OTHER LIABILITY............................................. -- 50,000
LONG-TERM DEBT, net of current portion...................... 6,795,800 7,128,700
----------- -----------
Total liabilities....................................... 43,132,000 27,605,700
----------- -----------
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; 4,769,020 shares issued and 4,464,085 shares
outstanding as of March 26, 2000, and 4,714,162 shares
issued and 4,438,121 shares outstanding as of March 28,
1999.................................................... 47,700 47,000
Additional paid-in capital................................ 21,283,600 20,598,400
Treasury stock, at cost, 304,935 shares and 276,041
shares, respectively.................................... (3,710,600) (3,107,600)
Retained earnings......................................... 23,461,500 17,918,900
----------- -----------
Total shareholders' equity.............................. 41,082,200 35,456,700
----------- -----------
Total liabilities and shareholders' equity.............. $84,214,200 $63,062,400
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
18
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED
------------------------------------------------
MARCH 26, 2000 MARCH 28, 1999 MARCH 29, 1998
-------------- -------------- --------------
Revenues........................................... $196,830,300 $160,582,200 $131,658,200
Cost of goods sold................................. 142,523,000 118,535,300 95,858,800
------------ ------------ ------------
Gross profit................................... 54,307,300 42,046,900 35,799,400
------------ ------------ ------------
Selling, general and administrative expenses....... 44,027,400 36,793,500 29,662,200
Asset impairment and restructuring charge.......... -- 831,000 --
------------ ------------ ------------
Total operating expenses....................... 44,027,400 37,624,500 29,662,200
------------ ------------ ------------
Income from operations......................... 10,279,900 4,422,400 6,137,200
Interest expense, net.............................. 1,340,300 1,240,800 712,600
------------ ------------ ------------
Income before provision for income taxes....... 8,939,600 3,181,600 5,424,600
Provision for income taxes......................... 3,397,000 1,209,200 2,049,000
------------ ------------ ------------
Net income..................................... $ 5,542,600 $ 1,972,400 $ 3,375,600
============ ============ ============
Basic earnings per share........................... $ 1.24 $ 0.45 $ 0.77
Diluted earnings per share......................... $ 1.20 $ 0.43 $ 0.73
============ ============ ============
Basic weighted average shares outstanding.......... 4,472,500 4,420,200 4,377,600
Diluted weighted average shares outstanding........ 4,599,500 4,600,100 4,610,300
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
19
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK TOTAL
-------------------- ADDITIONAL TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL STOCK EARNINGS EQUITY
--------- -------- --------------- ----------- ----------- -------------
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
Net proceeds from exercise of
options in exchange for
cash and treasury stock.... 25,964 700 677,600 (603,000) -- 75,300
Tax benefit of option
exercises.................. -- -- 7,600 -- -- 7,600
Net income................... -- -- -- -- 5,542,600 5,542,600
--------- ------- ----------- ----------- ----------- -----------
Balance at March 26, 2000.... 4,464,085 $47,700 $21,283,600 $(3,710,600) $23,461,500 $41,082,200
========= ======= =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED
------------------------------------------------
MARCH 26, 2000 MARCH 28, 1999 MARCH 29, 1998
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 5,542,600 $1,972,400 $3,375,600
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization................... 2,746,400 2,138,100 1,928,100
Loss on disposal of property and equipment...... -- 191,900 --
Provision for bad debts......................... 328,100 290,200 158,900
Deferred income taxes........................... 473,700 (385,700) 107,000
(Increase) decrease in trade accounts
receivable...................................... (8,884,500) (4,154,100) 991,100
Increase in product inventory..................... (10,574,800) (2,276,900) (1,929,700)
Decrease (increase) in prepaid expenses and other
current assets.................................. 125,800 (359,500) (747,900)
Increase (decrease) in trade accounts payable..... 12,415,300 (3,355,700) 5,672,500
Increase in accrued expenses and other current
liabilities..................................... 1,205,100 423,400 392,200
----------- ---------- ----------
Net cash provided by (used in) operating
activities.................................... 3,377,700 (5,515,900) 9,947,800
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and
equipment....................................... -- 3,100 --
Acquisition of property and equipment............. (3,854,400) (2,972,000) (5,017,500)
----------- ---------- ----------
Net cash used in investing activities........... (3,854,400) (2,968,900) (5,017,500)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility.... 1,459,000 4,403,000 (630,500)
Decrease in other liabilities..................... (50,000) (50,000) (50,000)
Payments on long-term debt........................ (287,200) (319,500) (234,400)
Proceeds from exercise of stock options........... 75,300 89,800 528,800
Payment of capital lease obligation............... -- -- (85,000)
----------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... 1,197,100 4,123,300 (471,100)
----------- ---------- ----------
Net increase (decrease) in cash and marketable
securities........................................ 720,400 (4,361,500) 4,459,200
CASH AND MARKETABLE SECURITIES, beginning of
period............................................ 97,700 4,459,200 --
----------- ---------- ----------
CASH AND MARKETABLE SECURITIES, end of period....... $ 818,100 $ 97,700 $4,459,200
=========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
TESSCO Technologies Incorporated (the Company) is a leading provider of the
services, products and solutions required to build, operate, maintain and use
wireless voice, data, messaging, tracking and Internet systems. The company
provides marketing and sales services, knowledge and supply chain management,
product-solution delivery, and control systems utilizing extensive Internet and
information technology. 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.
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
Effective for fiscal year 1998, the Company's fiscal year is 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. The fiscal years ended March 29, 1998, March 28, 1999 and
March 26, 2000 contained 52 weeks.
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
Depreciation and amortization of property and equipment was $2,419,400,
$1,806,300 and $1,600,200 for fiscal years 2000, 1999 and 1998, respectively
(see Note 3).
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is being amortized using the straight-line method over 15 years.
Amortization expense was $327,000, $331,800 and $327,900 for fiscal years 2000,
1999 and 1998, respectively. Accumulated amortization as of March 26, 2000 and
March 28, 1999 was $1,519,900 and $1,192,900, respectively.
REVENUE RECOGNITION
The Company records sales when product is shipped to the customers or when
services are provided.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during fiscal years 2000, 1999 and 1998 totaled
$604,200, $584,100 and $516,200, respectively. Cash paid for income taxes for
fiscal years 2000, 1999 and 1998 totaled $3,566,940, $1,124,600, and $1,599,600,
respectively.
The Company had noncash transactions during fiscal years 2000, 1999 and 1998
as follows:
2000 1999 1998
-------- -------- --------
Exercise of options in exchange for treasury
stock....................................... $603,000 $264,100 $252,000
Tax benefit from exercise of stock options.... 7,600 3,000 115,500
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, borrowings
under revolving credit facility and the note payable to a bank approximate their
fair value as of March 26, 2000 and March 28, 1999.
Fair value of long-term debt, excluding the note payable to a bank, as of
March 26, 2000 and March 28, 1999 is as follows:
2000 1999
---------- ----------
Note payable to Baltimore County, Maryland........... $ 148,300 $ 163,200
Note payable to the Maryland Economic Development
Corporation........................................ 1,192,200 1,284,500
---------- ----------
$1,340,500 $1,447,700
========== ==========
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 2000, 1999 and 1998 sales of products purchased from
the Company's top ten vendors accounted for 38%, 46% and 49% of total revenues,
respectively, with sales of products purchased from the Company's largest vendor
generating approximately 8%, 14% and 16% 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
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company believes that alternative sources of supply are available for many of
the product types it carries, the loss of certain principal suppliers could have
a material adverse effect on the Company.
The Company's future results could also be negatively impacted by the
potential loss of certain customers. For fiscal year 2000, 1999 and 1998, sales
of products to the Company's top ten customers accounted for 14%, 18%, and 17%
of total revenues, respectively, with sales to the Company's largest customer
generating approximately 3%, 6% and 6% of total revenues, respectively.
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 the prior year consolidated
financial statements to conform with the current year presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
MARCH 26, 2000 MARCH 28, 1999
-------------- --------------
Land............................................. $ 2,185,500 $ 2,185,500
Building and improvements........................ 9,316,400 9,218,300
Information technology equipment and software.... 7,980,500 4,955,200
Equipment, furniture and tooling................. 6,360,200 5,930,700
----------- -----------
25,842,600 22,289,700
Less--accumulated depreciation and
amortization................................... (8,681,700) (6,563,800)
----------- -----------
Property and equipment, net.................... $17,160,900 $15,725,900
=========== ===========
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. BORROWINGS UNDER CREDIT FACILITY
On September 30, 1999, the Company amended the terms of the Company's bank
financing agreement. Pursuant to the amended terms, the two facilities
previously existing under the agreement, a $5,000,000 line of credit facility
and a $10,000,000 revolving credit loan, were consolidated into one $15,000,000
revolving credit facility, and the expiration date of the consolidated facility
was extended until September 2002. The consolidated facility is unsecured and
bears interest at a variable rate of the London Interbank Offered Rate (LIBOR)
plus 1.25% per annum on the first $5,000,000 and 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 on the remaining balance of the facility.
The weighted average interest rate on borrowings under the credit facility
was 6.94%, 6.53% and 8.22%, for fiscal years 2000, 1999 and 1998, respectively.
Interest expense on the credit facility for fiscal years 2000, 1999 and 1998,
totaled $156,400, $128,300 and $400, respectively. Average borrowings under the
credit facility totaled $2,228,600, $2,254,500 and $4,700, maximum borrowings
totaled $5,862,000, $5,000,000 and $323,200 for fiscal years 2000, 1999 and
1998, respectively. The outstanding balance under the agreement as of March 26,
2000 and March 28, 1999 was $5,862,000 and $4,403,000, respectively.
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 2000, 1999 and 1998.
NOTE 5. 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 2000, 1999 and 1998 was 7.21%, 6.35% and 7.27%,
respectively. Interest expense under this note was $402,800, $404,000 and
$439,700 for fiscal years 2000, 1999 and 1998, respectively. As of March 26,
2000 and March 28, 1999, principal outstanding under this note was $5,489,000
and $5,687,900, 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 $8,100, $8,600 and $9,000 for fiscal years 2000,
1999 and 1998, respectively. As of March 26, 2000 and March 28, 1999, principal
outstanding under this note was $164,300 and $174,900, 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
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
note was $45,400, $48,500 and $51,500 for fiscal years 2000 and 1999, and 1998,
respectively. As of March 26, 2000 and March 28, 1999, principal outstanding
under this note was $1,475,400 and $1,553,100, respectively. The note is secured
by the real property of the Company.
As of March 26, 2000, scheduled annual maturities of long-term debt are as
follows:
FISCAL YEAR:
- ------------
2001........................................................ $ 332,900
2002........................................................ 354,600
2003........................................................ 377,800
2004........................................................ 4,916,800
2005........................................................ 133,300
Thereafter.................................................. 1,013,300
----------
$7,128,700
==========
NOTE 6. LEASES
The Company leases distribution and office facilities under operating leases
expiring in various years through fiscal 2002. Rent expense for fiscal years
2000, 1999 and 1998 totaled $113,100, $230,700 and $305,000, respectively.
During fiscal 1999, the Company recorded a restructuring charge relating to
the closure of its Miami and Cincinnati sales offices. Included in the
restructuring charge were certain lease termination costs (see Note 11).
As of March 26, 2000, future minimum lease payments are as follows:
FISCAL YEAR:
- ------------
2001........................................................ $ 94,000
2002........................................................ 23,500
--------
$117,500
========
NOTE 7. 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:
2000 1999 1998
-------- -------- --------
Statutory federal rate...................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit......................... 3.0 2.6 2.6
Non-deductible expenses..................................... 2.0 3.7 1.0
Other....................................................... (1.0) (2.3) 0.2
---- ---- ----
Effective rate............................................ 38.0% 38.0% 37.8%
==== ==== ====
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The provision for income taxes was comprised of the following:
2000 1999 1998
---------- ---------- ----------
Federal: Current........................................ $2,576,700 $1,427,000 $1,730,000
Deferred........................................ 421,100 (345,100) 95,300
State: Current........................................ 346,600 167,900 212,000
Deferred........................................ 52,600 (40,600) 11,700
---------- ---------- ----------
Provision for income taxes............................... $3,397,000 $1,209,200 $2,049,000
========== ========== ==========
Total deferred tax assets and deferred tax liabilities as of March 26, 2000
and March 28, 1999, 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:
2000 1999
---------- --------
Deferred tax assets:
Property and equipment.................................... $ -- $198,500
Accrued expenses and reserves............................. 1,199,700 683,200
---------- --------
$1,199,700 $881,700
========== ========
Deferred tax liabilities:
Property and equipment.................................... $ 714,500 $ --
Other assets.............................................. 91,700 14,500
---------- --------
$ 806,200 $ 14,500
========== ========
NOTE 8. PROFIT-SHARING PLAN
The Company has 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. 401(k) profit-sharing plan expense was $76,800, $53,200 and
$96,900 during fiscal years 2000, 1999 and 1998, respectively. As of March 26,
2000, plan assets included 19,773 shares of Common Stock of the Company.
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.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EARNINGS PER SHARE (CONTINUED)
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:
2000 1999 1998
--------- --------- ---------
Basic weighted average shares outstanding................... 4,472,500 4,420,200 4,377,600
Effect of dilutive common equivalent shares............... 127,000 179,900 232,700
--------- --------- ---------
Diluted weighted average shares outstanding................. 4,599,500 4,600,100 4,610,300
========= ========= =========
Options to purchase 418,600 shares of common stock at a weighted average
exercise price of $24.12 per share were outstanding as of March 26, 2000, but
were not included in the computation of diluted earnings per share because the
options' exercise prices were 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 incentive plans--the 1984 Employee Incentive Stock
Option Plan (the 1984 Plan) and the 1994 Stock and Incentive Plan (the 1994
Plan). The 1984 Plan and the 1994 Plan allow for the grant of awards in respect
of an aggregate of 401,250 and 872,500 shares of the Company's Common Stock,
respectively. As of March 26, 2000, no shares were available for issue in
respect of additional awards under the 1984 Plan and 29,700 shares were
available for issue in respect of additional awards under the 1994 Plan. The
1994 Plan, which has a term of 10 years and expires in 2004, allows for the
grant of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock and restricted stock units, and other
performance awards. To date, only options have been granted as awards under the
1994 Plan.
In addition to options outstanding under the 1984 Plan and the 1994 Plan,
non-plan options to purchase an aggregate of 281,888 shares of the Company's
common stock have been granted at the discretion of the Board of Directors or
the Compensation Committee of the Board of Directors. Transactions involving
options are summarized as follows:
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year........ 702,200 $ 18.23 694,600 $ 17.20 686,000 $15.91
Granted............................... 396,300 20.14 116,100 19.89 185,800 20.77
Exercised............................. (50,900) 12.83 (55,900) 7.10 (72,800) 10.73
Cancelled............................. (56,900) 22.19 (52,600) 20.09 (104,400) 19.83
------- ------- ------- ------- -------- ------
Outstanding, end of year.............. 990,700 $ 19.04 702,200 $ 18.23 694,600 $17.20
Exercisable at end of year............ 272,400 323,300 383,000
Weighted average fair value of options
granted during the year............. $ 7.14 $ 7.13 $ 12.57
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK-BASED COMPENSATION (CONTINUED)
Information about fixed stock options outstanding and exercisable as of
March 26, 2000 is as follows:
OUTSTANDING EXERCISABLE
---------------------------------------------- ---------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------- -------- ---------------- ---------------- -------- ----------------
$ 0.00-15.00...................... 260,800 4.5 $12.00 260,800 $12.00
15.00-25.00...................... 633,900 7.0 19.74 11,600 19.13
25.00-36.50...................... 96,000 6.3 32.55 -- --
------- ----- ------ -------- ------
0.00-36.50...................... 990,700 6.3 19.04 272,400 12.30
======= ===== ====== ======== ======
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 2000, 1999 and 1998 would have been
reduced to the pro forma amounts indicated as follows:
2000 1999 1998
-------- -------- --------
Net earnings (in thousands) As reported...................... $5,543 $1,972 $3,376
Pro forma........................ 4,047 830 2,538
Diluted earnings per share As reported...................... $ 1.20 $ 0.43 $ 0.73
Pro forma........................ 0.88 0.18 0.55
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 2000, 1999 and 1998:
2000 1999 1998
---------- ---------- ----------
Dividend yield....................................... 0.0% 0.0% 0.0%
Expected volatility.................................. 24.0% 21.0% 55.0%
Risk-free interest rate.............................. 5.2-6.7% 4.4-5.7% 5.5-6.9%
Expected lives....................................... 6 years 6-10 years 8 years
During fiscal 2000, the Company adopted the Team Member Stock Purchase Plan.
This plan permits eligible employees to purchase up to 200,000 shares of the
Company's Common Stock at 85% of market price. The Company's only expense
relating to this plan is for its administration. During fiscal 2000, 1,695
shares were sold to employees under this plan. The weighted average fair value
of the shares sold in fiscal 2000 was $14.77.
NOTE 11. ASSET IMPAIRMENT AND RESTRUCTURING CHARGE
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 an
$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.
29
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 26, 2000,
March 28, 1999 and March 29, 1998.
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.
/s/ ROBERT B. BARNHILL, JR. /s/ ROBERT C. SINGER
- -------------------------------------- --------------------------------------
Robert B. Barnhill, Jr. Robert C. Singer
Chairman, President and Chief Executive Senior Vice President and Chief Financial
Officer Officer
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 26, 2000 and March 28, 1999, 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 26, 2000. 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 auditing standards generally
accepted in the United States. 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 26, 2000 and March 28, 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
March 26, 2000, in conformity with accounting principles generally accepted in
the United States.
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 consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
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.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
April 21, 2000
30
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
The information regarding the Company's directors is incorporated by
reference to the information set forth under the caption "Election of Directors"
in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders
(the "Proxy Statement"), which is to be filed with the Commission pursuant to
Regulation 14A no later than one hundred twenty (120) days following the end of
the fiscal year reported upon. Information regarding executive officers of the
Company is included in Part I hereof under a separate caption, "Item 4A:
Executive Officers of the Company." Information regarding compliance with
Section 16(a) of the Exchange Act is set forth herein below:
SECTION 16(A). BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Exchange Act requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Commission and to
provide the Company with copies of such reports. The Company has reviewed such
reports received by it and written representations from directors and executive
officers. Based solely on that review, the Company believes that during fiscal
year 2000, all filing requirements were complied with, except that Messrs. Rein
and McArthur each inadvertently failed to timely file a Form 3 upon joining the
Company, and that Mr. Wilgis inadvertently failed to timely file a Form 4 during
fiscal 1999. These filing requirements have since been satisfied.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item, is incorporated by reference to the
information set forth under the caption "Executive Compensation and Other
Information" in the Company's Proxy Statement which is to be filed pursuant to
Regulation 14A no later than one hundred twenty (120) days following the end of
the fiscal year reported upon.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item, is incorporated by reference to the
information set forth under the caption "Security Ownership of Management and
Principal Shareholders" in the Company's Proxy Statement which is to be filed
pursuant to Regulation 14A no later than one hundred twenty (120) days following
the end of the fiscal year reported upon.
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 26, 2000 and March 28, 1999
Consolidated Statements of Income for the fiscal years ended March 26,
2000, March 28, 1999 and March 29, 1998
Consolidated Statements of Changes in Shareholders' Equity for the fiscal
years ended
31
March 26, 1999, March 28, 1999 and March 29, 1998
Consolidated Statements of Cash Flows for the fiscal years ended
March 26, 2000, March 28, 1999 and March 29, 1998
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.
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)).
10.2.1 Employment Letter Agreement between TESSCO Technologies
Incorporated and Robert C. Singer (incorporated by reference
to Exhibit 10.8 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 26, 1999).
10.2.2 Termination of Employment Agreement between TESSCO
Technologies Incorporated and Robert C. Singer (incorporated
by reference to Exhibit 10.9 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September
26, 1999).
10.3.1 Employment Letter Agreement between TESSCO Technologies
Incorporated and Douglas A. Rein (incorporated by reference
to Exhibit 10.10 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 26, 1999).
10.3.2 Termination of Employment Agreement between TESSCO
Technologies Incorporated and Douglas A. Rein (incorporated
by reference to Exhibit 10.10 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September
26, 1999).
32
10.4 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)).
10.5 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)).
10.6.1 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)).
10.6.2 Amendment No. 1 to 1994 Stock and Incentive Plan
(incorporated by reference to Appendix No. 1 to the
Company's Definitive Proxy Statement filed with the
Commission on July 15, 1999).
10.6.3 Amendment No. 2 to 1994 Stock and Incentive Plan
(incorporated by reference to Appendix No. 1 to the
Company's Definitive Proxy Statement filed with the
Commission on July 15, 1999).
10.6.4 Amendment No. 3 to 1994 Stock and Incentive Plan
(incorporated by reference to Proposal No. 3 as included in
the Company's Definitive Proxy Statement filed with the
Commission on July 15, 1999).
10.7 Team Member Stock Purchase Plan (incorporated by reference
to Appendix No. 2 to the Company's Definitive Proxy
Statement filed with the Commission on July 15, 1999).
10.8.1 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).
10.8.2 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).
10.8.3 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).
10.8.4 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).
10.8.5 Fourth Amendment to Financing Agreement dated September 30,
1999 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 26, 1999).
10.9 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 Independent Public Accountants (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 26, 2000.
33
SCHEDULE II: FOR THE FISCAL YEARS ENDED MARCH 26, 2000, MARCH 28, 1999 AND
MARCH 29, 1998
VALUATION AND QUALIFYING ACCOUNTS
2000 1999 1998
-------- -------- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of year.................................. $551,900 $438,100 $525,300
Provisions.................................................. 328,100 290,200 158,900
Writeoffs................................................... (140,700) (176,400) (246,100)
-------- -------- --------
Balance, end of year........................................ $739,300 $551,900 $438,100
-------- -------- --------
34
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.
TESSCO TECHNOLOGIES INCORPORATED
By: /s/ ROBERT B. BARNHILL, JR.
-----------------------------------------
Robert B. Barnhill, Jr., President
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.
/s/ ROBERT B. BARNHILL, JR. Chairman of the Board, President and
------------------------------- Chief Executive Officer (principal June 1, 2000
Robert B. Barnhill, Jr. executive officer)
Senior Vice President and Chief
/s/ ROBERT C. SINGER Financial Officer
------------------------------- (principal financial and accounting June 1, 2000
Robert C. Singer officer)
/s/ JOHN D. BELETIC
------------------------------- Director June 1, 2000
John D. Beletic
/s/ JEROME C. EPPLER
------------------------------- Director June 1, 2000
Jerome C. Eppler
/s/ BENN R. KONSYNSKI
------------------------------- Director June 1, 2000
Benn R. Konsynski
/s/ DENNIS J. SHAUGHNESSY
------------------------------- Director June 1, 2000
Dennis J. Shaughnessy
/s/ MORTON F. ZIFFERER, JR.
------------------------------- Director June 1, 2000
Morton F. Zifferer, Jr.
35