 |
|
Our 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 2002 and 2003 are as follows:
|
| |
|
HIGH |
|
LOW |
|
| Fiscal 2002 |
| First Quarter |
|
$14.38 |
|
$11.35 |
| Second Quarter |
|
16.00 |
|
10.64 |
| Third Quarter |
|
17.85 |
|
13.25 |
| Fourth Quarter |
|
18.85 |
|
13.11 |
|
| Fiscal 2003 |
| First Quarter |
|
$16.44 |
|
$ 8.04 |
| Second Quarter |
|
12.93 |
|
9.40 |
| Third Quarter |
|
11.24 |
|
7.77 |
| Fourth Quarter |
|
9.91 |
|
7.04 |
|
As of March 30, 2003, the number of shareholders of record of the Company was 57. We estimate that the number of beneficial owners as of that date was 2,700.
We have never declared or paid any cash dividends on our common stock and do not expect to pay any cash dividends in the foreseeable future. Our revolving line of credit agreement prohibits the payment of cash dividends without the prior written consent of the lender.
|
| FISCAL YEARS ENDED |
MARCH 30, 2003 |
MARCH 31, 2002 |
APRIL 1, 2001 |
MARCH 26, 2000 |
MARCH 28, 1999 |
|
| Statement of Income Data |
|
|
|
|
|
| Revenues |
$ 273,913,400 |
$ 248,915,100 |
$ 258,769,800 |
$ 196,830,300 |
$ 160,582,200 |
| Costs of goods sold |
202,598,700 |
180,432,600 |
188,271,200 |
142,523,000 |
118,535,300 |
|
| Gross profit |
71,314,700 |
68,482,500 |
70,498,600 |
54,307,300 |
42,046,900 |
|
| Selling, general and administrative expenses |
66,264,800 |
60,596,500 |
59,953,000 |
44,027,400 |
36,793,500 |
| Benefit from insurance proceeds |
(1,212,500) |
--- |
--- |
--- |
--- |
| Asset impairment and restructuring charge |
--- |
--- |
--- |
--- |
831,000 |
|
| Income from operations |
6,262,400 |
7,886,000 |
10,545,600 |
10,279,900 |
4,422,400 |
| Interest and other expense, net |
1,303,600 |
1,496,100 |
2,039,100 |
1,340,300 |
1,240,800 |
|
| Income before provision for income taxes |
4,958,800 |
6,389,900 |
8,506,500 |
8,939,600 |
3,181,600 |
| Provision for income taxes |
1,910,200 |
2,484,000 |
3,232,500 |
3,397,000 |
1,209,200 |
|
| Net income |
$ 3,048,600 |
$ 3,905,900 |
$ 5,274,000 |
$ 5,542,600 |
$ 1,972,400 |
|
| Diluted earnings per share |
$ 0.67 |
$ 0.85 |
$ 1.13 |
$ 1.20 |
$ 0.43 |
| Diluted weighted average shares outstanding |
4,525,600 |
4,575,900 |
4,682,600 |
4,599,500 |
4,600,100 |
|
| Percentage of Revenues |
|
|
|
|
|
| Revenues |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
| Cost of goods sold |
74.0 |
72.5 |
72.8 |
72.4 |
73.8 |
|
| Gross profit |
26.0 |
27.5 |
27.2 |
27.6 |
26.2 |
|
| Selling, general and administrative expenses |
24.2 |
24.3 |
23.2 |
22.4 |
22.9 |
| Benefit from insurance proceeds |
(0.4) |
--- |
--- |
--- |
--- |
| Asset impairment and restructuring charge |
--- |
--- |
--- |
--- |
0.5 |
|
| Income from operations |
2.3 |
3.2 |
4.1 |
5.2 |
2.8 |
| Interest and other expense, net |
0.5 |
0.6 |
0.8 |
0.7 |
0.8 |
|
| Income before provision for income taxes |
1.8 |
2.6 |
3.3 |
4.5 |
2.0 |
| Provision for income taxes |
0.7 |
1.0 |
1.2 |
1.7 |
0.8 |
|
| Net income |
1.1% |
1.6% |
2.0% |
2.8% |
1.2% |
|
| Selected Operating Data |
|
|
|
|
|
| Average commercial buyers per month |
9,200 |
8,900 |
8,700 |
8,000 |
7,500 |
| Average consumer buyers per month |
22,700 |
13,600 |
15,600 |
14,100 |
12,200 |
| Total orders shipped |
1,034,000 |
772,000 |
760,000 |
645,000 |
426,500 |
| Revenues per employee |
$ 492,700 |
$ 471,400 |
$ 493,800 |
$ 507,300 |
$ 462,100 |
|
| Balance Data Sheet |
|
|
|
|
|
| Working capital |
$ 35,543,900 |
$ 31,156,600 |
$ 30,826,100 |
$ 28,232,100 |
$ 23,050,700 |
| Total assets |
100,238,000 |
100,229,300 |
87,413,500 |
84,443,100 |
63,062,400 |
| Short-term debt |
372,800 |
5,785,800 |
10,365,500 |
6,194,900 |
4,690,200 |
| Long-term debt |
5,660,800 |
6,063,400 |
6,441,200 |
6,795,800 |
7,128,700 |
| Shareholders' equity |
53,985,800 |
50,807,400 |
46,739,200 |
41,082,200 |
35,456,700 |
|
Quarterly Results of Operations
|
|
FISCAL 2003 QUARTERS ENDED |
FISCAL 2002 QUARTERS ENDED |
|
|
MAR. 30, 2003 |
DEC. 29, 2002 |
SEP. 29, 2002 |
JUN. 30, 2002 |
MAR 31, 2002 |
DEC. 30, 2001 |
SEP. 30, 2001 |
JUL. 1, 2001 |
|
| Revenues |
$ 69,392,100 |
$ 65,010,300 |
$ 70,375,900 |
$ 69,135,100 |
$ 61,955,800 |
$ 65,025,100 |
$ 62,040,000 |
$ 59,894,200 |
| Cost of goods sold |
51,778,500 |
48,639,200 |
51,611,200 |
50,569,800 |
44,381,900 |
47,056,400 |
45,282,600 |
43,711,700 |
|
| Gross profit |
17,613,600 |
16,371,100 |
18,764,700 |
18,565,300 |
17,573,900 |
17,968,700 |
16,757,400 |
16,182,500 |
|
Selling, general and
administrative
expenses |
17,794,300 |
15,545,200 |
16,518,400 |
16,406,900 |
15,088,700 |
15,344,000 |
14,895,500 |
15,268,300 |
Benefit from insurance
proceeds |
(1,212,500) |
--- |
--- |
--- |
--- |
--- |
--- |
--- |
|
| Income from operations |
1,031,800 |
825,900 |
2,246,300 |
2,158,400 |
2,485,200 |
2,624,700 |
1,861,900 |
914,200 |
Interest and other
expense, net |
322,900 |
319,600 |
345,200 |
315,900 |
336,500 |
339,900 |
362,400 |
457,300 |
|
Income before provision
for income taxes |
708,900 |
506,300 |
1,901,100 |
1,842,500 |
2,148,700 |
2,284,800 |
1,499,500 |
456,900 |
Provision for income
taxes |
274,000 |
194,900 |
731,900 |
709,400 |
796,700 |
913,900 |
599,800 |
173,600 |
|
| Net income |
$ 434,900 |
$ 311,400 |
$ 1,169,200 |
$ 1,133,100 |
$ 1,352,000 |
$ 1,370,900 |
$ 899,700 |
$ 283,300 |
|
| Diluted earnings per share |
$ 0.10 |
$ 0.07 |
$ 0.26 |
$ 0.25 |
$ 0.29 |
$ 0.30 |
$ 0.20 |
$ 0.06 |
|
| Percentage of Revenues |
|
|
|
|
|
|
|
|
| Revenues |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
| Cost of goods sold |
74.6 |
74.8 |
73.3 |
73.1 |
71.6 |
72.4 |
73.0 |
73.0 |
|
| Gross profit |
25.4 |
25.2 |
26.7 |
26.9 |
28.4 |
27.6 |
27.0 |
27.0 |
|
Selling, general and
administrative
expenses |
25.6 |
23.9 |
23.5 |
23.7 |
24.4 |
23.6 |
24.0 |
25.5 |
Benefit from insurance
proceeds |
(1.7) |
--- |
--- |
--- |
--- |
--- |
--- |
--- |
|
| Income from operations |
1.5 |
1.3 |
3.2 |
3.1 |
4.0 |
4.0 |
3.0 |
1.5 |
Interest and other
expense, net |
0.5 |
0.5 |
0.5 |
0.5 |
0.5 |
0.5 |
0.6 |
0.8 |
|
Income before provision
for income taxes |
1.0 |
0.8 |
2.7 |
2.7 |
3.5 |
3.5 |
2.4 |
0.8 |
Provision for income
taxes |
0.4 |
0.3 |
1.0 |
1.0 |
1.3 |
1.4 |
1.0 |
0.3 |
|
| Net income |
0.6% |
0.5% |
1.7% |
1.6% |
2.2% |
2.1% |
1.5% |
0.5% |
|
Results of Operations: Fiscal 2003 Compared to Fiscal 2002
Revenues increased by $25.0 million, or 10%, to $273.9 million in fiscal 2003 compared to $248.9 million in fiscal 2002. Revenues from mobile devices and accessories products increased significantly, network infrastructure sales decreased, and revenues from installation, test and maintenance products remained flat. Network infrastructure, mobile devices and accessories and installation, test and maintenance products and services accounted for approximately 33%, 44% and 23%, respectively, of fiscal 2003 revenue, as compared to 43%, 32% and 25%, respectively, of fiscal 2002 revenues. Revenue increases in the consumer and dealers and resellers categories were offset by decreases in the systems operators and international categories. The largest increase was experienced in the consumer category, while the largest decrease was in the international category. Systems operators, dealers and resellers, consumers, and international users accounted for approximately 36%, 39%, 22% and 3%, respectively, of fiscal 2003 revenues, as compared to 50%, 38%, 8% and 4%, respectively, of fiscal 2002 revenues.
We believe that revenues from all categories were negatively affected by the disaster that occurred in our Global Logistics Center on October 12, 2002 (see Note 3 to the Consolidated Financial Statements). The recovery efforts delayed the launch of and affected numerous commercial proactive marketing and sales initiatives. We came to a partial and interim settlement with our insurance carrier on our third quarter business interruption claim in the amount of $1.2 million. This amount has been recorded as a Benefit from Insurance Proceeds in the Consolidated Income Statements. Because the remainder of our third quarter business interruption claim has not been settled, and since the timing and amount of proceeds from any other future claims for business interruption insurance are uncertain, we are not able to estimate or accrue additional amounts at this time. We have recorded a $7.2 million insurance receivable on our Balance Sheet associated with this disaster. The components of the receivable are: $11.0 million of disaster-related expenses; plus $5.0 million representing the book value of assets destroyed in the disaster; plus the $1.2 million interim and partial settlement discussed above; less insurance advances from our insurance carrier of $10.0 million as of March 30, 2003. Subsequent to the balance sheet date, disaster recovery expenses continue to be incurred and paid by us, we have received payment of the partial business interruption claim noted above, and have settled and received payment on our building and information technology claims. We believe that insurance proceeds less minimal deductibles will be adequate to cover financial loss.
The significant increase in revenues from mobile devices and accessories is attributed to increased volumes from our ongoing T-Mobile USA affinity relationship, partially offset by the affect of the disaster on our commercial business. This relationship is an e-commerce, complete supply-chain relationship. We sell and deliver wireless telephones and accessories to consumers and other end-users. We purchase the telephones and accessories, record orders via Internet ordering tools and hotlines, and then serialize, package and kit the telephones and accessories for delivery to the end-user.
The decline in revenues of network infrastructure products can be attributed in part to the tight capital markets as well as to the disaster. Many of our customers are experiencing difficulty in obtaining consistent and continuing access to capital, thus resulting in decreased capital expenditures and delayed deployment of new technologies and, correspondingly, reduced purchases of our products.
Revenue for installation, test and maintenance products was essentially flat from fiscal 2002 to fiscal 2003. We supply repair and replacement materials to authorized service centers for Nokia Inc. (Nokia) in the United States. Sales of the Nokia repair and replacement materials accounted for approximately 12% of our total revenues in fiscal 2003. Although sales of these products in fiscal 2003 increased 7% over fiscal 2002, this increase was offset by a decrease in sales of high-value test equipment, which can also be attributed to the disaster and the difficulties described in the above paragraph.
Our on-going ability to earn revenues from customers and vendors looking to us for product and supply chain solutions, including T-Mobile USA and Nokia, is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each affinity relationship often differ. Among these factors are the strength of the customer's or vendor's business, the supply and demand for the product or service, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. We believe that in order to achieve our stated goal of increasing market share through these and our other vendor and customer relationships, we must focus on achieving a higher share of current product categories purchased by our customers, both large and small; expanding the product categories purchased by these customers; and continuing to acquire and sell more customers, on a monthly basis. In addition, the agreements or arrangements on which these affinity relationships are based are typically of limited duration, and are terminable by either party upon several months notice. We are conscious of this possibility and are dedicated to superior performance and quality and consistency of service in an effort to maintain and expand these relationships. Thus far, we believe that we have been successful in these efforts.
Gross profit increased by $2.8 million, or 4%, to $71.3 million in fiscal 2003 compared to $68.5 million in fiscal 2002. The increase in gross profit is due to the increase in revenues. The gross profit margin decreased to 26.0% in fiscal 2003 from 27.5% in fiscal 2002. Gross profit margin percent for mobile devices and accessories decreased significantly on significantly increased volume, gross profit margin percent for installation, test and maintenance products decreased slightly, while gross profit margin percent for network infrastructure products increased slightly. The decrease in mobile devices and accessories gross profit margin was attributable to growth in lower margin handset sales related to the expansion of the existing mobile devices and accessories relationship discussed above. We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.
Total selling, general and administrative expenses increased by $5.7 million, or 9%, to $66.3 million in fiscal 2003 compared to $60.6 million in fiscal 2002. Total selling, general and administrative expenses decreased as a percentage of revenues to 24.2% in fiscal 2003, from 24.3% in fiscal 2002. This increase in total selling, general and administrative expenses was incurred in an effort to drive future growth, as well as in support of the large increase in consumer sales. We continue to increase our investment in operations and technology personnel. As of March 30, 2003, we employed 556 people compared to 528 as of March 31, 2002. Because of the continued success of our affinity relationships, the number of orders we delivered in fiscal 2003 grew significantly compared to fiscal 2002. These consumer orders are typically smaller in size and weight and many items are delivered to residences, not typical places of business. The resulting freight charges we pay to third party common carriers with whom we contract for those deliveries is greater, as a percentage of revenue, than larger commercial shipments. Our information technology support costs, including depreciation, increased this fiscal year as we continue to develop, build, maintain and host private-labeled Web sites for our affinity partners, as well as continuing to develop TESSCO.com® and other internal systems. Effective April 1, 2002, in accordance with FAS 142, we no longer amortize goodwill (see Note 5). Goodwill expense of $267,500 was included in selling, general and administrative expenses in fiscal 2002. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve, based on this evaluation. We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of $616,100 and $823,300 for the years ended March 30, 2003 and March 31, 2002, respectively.
As a result of the factors described above, and partially offset by the receipt of a $1.2 million benefit from insurance proceeds, income from operations decreased by $1.6 million, or 21%, to $6.3 million in fiscal 2003 compared to $7.9 million in fiscal 2002. The operating income margin decreased to 2.3% in fiscal 2003 from 3.2% in fiscal 2002.
Net interest and other expense decreased by $192,500, or 13%, to $1.3 million in fiscal 2003 compared to $1.5 million in fiscal 2002. This decrease is due to decreased levels of borrowing under our revolving credit facility and lower interest rates.
Income before the provision for income taxes decreased $1.4 million or 22%, to $5.0 million in fiscal 2003 compared to $6.4 million in fiscal 2002 as a result of the factors described above. The effective tax rates in fiscal 2003 and 2002 were 38.5% and 38.9%, respectively. Net income and diluted earnings per share for fiscal 2003 decreased 22% and 21%, respectively, compared to fiscal 2002.
Results of Operations: Fiscal 2002 Compared to Fiscal 2001
Revenues decreased by $9.9 million, or 4%, to $248.9 million in fiscal 2002 compared to $258.8 million in fiscal 2001. The overall decrease was primarily due to a decrease in network infrastructure sales as a result of the difficulty experienced by wireless carriers and supporting companies in financing their infrastructure needs and growth plans. Revenues from network infrastructure and mobile devices and accessories decreased, while revenues from installation, test and maintenance products increased. Network infrastructure, mobile devices and accessories and installation, test and maintenance products and services accounted for approximately 43%, 32% and 25%, respectively, of fiscal 2002 revenue, as compared to 49%, 32% and 19%, respectively, of fiscal 2001 revenues. Revenue increases in the dealers and resellers and international user categories were offset by decreases in systems operators and consumer categories. The largest increase was experienced in the dealers and resellers category, while the largest decrease was in the systems operator category. Systems operators, dealers and resellers, consumers and international users accounted for approximately 50%, 38%, 8% and 4%, respectively, of fiscal 2002 revenues, as compared to 57%, 31%, 8% and 4%, respectively, of fiscal 2001 revenues.
Gross profit decreased by $2.0 million, or 3%, to $68.5 million in fiscal 2002 compared to $70.5 million in fiscal 2001. The decrease in gross profit is due to the decrease in revenues. The gross profit margin increased to 27.5% in fiscal 2002 from 27.2% in fiscal 2001. The increase in gross profit margin was primarily attributable to a significant increase in sales for installation, test and maintenance products combined with a decrease in sales of network infrastructure products. We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.
Total selling, general and administrative expenses increased by $643,500, or 1%, to $60.6 million in fiscal 2002 compared to $60.0 million in fiscal 2001. Total selling, general and administrative expenses increased as a percentage of revenues to 24.3% in fiscal 2002, from 23.2% in fiscal 2001. This relatively nominal overall increase occurred notwithstanding substantial increases in some specific items or categories of selling, general and administrative expenses associated with and incurred in an effort to drive future growth. These include investments in sales and marketing personnel, facility improvements and expansion and depreciation and amortization charges relative to information system enhancements. The increases in these items or categories of expenses were, however, largely offset by significant decreases in fulfillment costs and corporate support categories, including shipping charges, off-site storage facility costs, bad debt expenses and recruiting and professional services expenses. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve, based on this evaluation. We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of $823,300 and $972,200 for the years ended March 31, 2002 and April 1, 2001, respectively.
As a result of the factors described above, income from operations decreased by $2.7 million, or 25%, to $7.9 million in fiscal 2002 compared to $10.5 million in fiscal 2001. The operating income margin decreased to 3.2% in fiscal 2002 from 4.1% in fiscal 2001.
Net interest and other expense decreased by $543,000, or 27%, to $1.5 million in fiscal 2002 compared to $2.0 million in fiscal 2001. This decrease is due to decreased levels of borrowing under our revolving credit facility and lower interest rates.
Income before the provision for income taxes decreased $2.1 million, or 25%, to $6.4 million in fiscal 2002 compared to $8.5 million in fiscal 2001 as a result of the factors described above. The effective tax rates in fiscal 2002 and 2001 were 38.9% and 38.0%, respectively. Net income and diluted earnings per share for fiscal 2002 decreased 26% and 25%, respectively, compared to fiscal 2001.
Our fiscal 2001 financial performance, as measured by revenue and earnings per share growth, was strong for the first nine months, but weakened during the fourth quarter of fiscal 2001. This trend continued during the first quarter of fiscal 2002, when revenues declined 4% compared to the prior year's first quarter and earnings per share was $0.06. During the second and third quarters of fiscal 2002, we experienced sequential growth in revenues and earnings per share. Earnings for the fourth quarter of fiscal 2002 were essentially flat compared to the third quarter. This occurred even though revenue declined 5% sequentially, because our gross margin percentage increased and operating expenses decreased in the fourth quarter as compared to the third quarter of fiscal 2002.
Capital markets continued to be tight in fiscal 2002, and therefore, a number of our customers, particularly those involved in building out new or expanding or improving existing cellular or broadband systems, were then experiencing difficulty in obtaining consistent and continuing access to capital to finance their growth, and correspondingly, to finance the purchase of our products. This difficulty affected primarily our infrastructure product category. Notwithstanding this difficulty, we experienced only a modest decline in revenues for the 2002 fiscal year. This occurred in part because of strong demand for mobile devices and accessories and replacement parts and because of strong sales of installation, test and maintenance products, as wireless infrastructures continue to age. Our modest revenue decline in this difficult environment demonstrated, we believe, several important items: the strength of our business model; the advantage of our diverse product and solutions offering; that we have made progress toward our ongoing goal of increasing market share; and that we are well positioned in a difficult market.
Liquidity and Capital Resources
Working capital increased to $35.5 million as of March 30, 2003, from $31.2 million as of March 31, 2002. Shareholders' equity increased to $54.0 million as of March 30, 2003, from $50.8 million as of March 31, 2002.
We generated $13.2 million of net cash from operating activities in fiscal 2003 compared to $13.7 million in fiscal 2002. In fiscal 2003, our cash flow from operations was driven largely by net income plus depreciation and amortization, and a significant decrease in product inventory, partially offset by smaller increases in trade accounts receivable and prepaid expenses and other current assets. The significant decrease in product inventory was due to an improvement in inventory turnover, driven mostly by a change in sales mix. Typically, sales of mobile devices and accessory inventory occur on a higher number of smaller dollar-valued orders as compared to the other, more expensive products we sell. The nature and frequency of the mobile devices and accessory orders is therefore generally more predictable than those of other higher priced products and thus requires less inventory investment to support the expected sales volumes. Also, during the fourth quarter of fiscal 2002, we made a large strategic purchase of network infrastructure inventory. During fiscal 2003, we sold through much of this inventory. In fiscal 2002, our cash flow from operations was driven mostly by net income plus depreciation and amortization, and by a large increase in trade accounts payable, partially offset by smaller increases in trade accounts receivable and product inventory.
Capital expenditures totaled $8.0 million in fiscal 2003, primarily related to improvements made to the ALC and investments in information technology. In fiscal 2002, capital expenditures totaled $8.4 million, comprised primarily of investments in information technology and the purchase of the ALC.
We used $5.7 million of net cash from financing activities in fiscal 2003 compared to a net usage of $4.8 million in fiscal 2002. In fiscal 2003, our revolving line of credit balance decreased from $5.4 million at March 31, 2002, to $0 at March 30, 2003. We took no draws on this line of credit in the third or fourth quarter.
Our revolving credit facility with a bank provides for a maximum borrowing capacity of $30.0 million and has a term expiring in September 2003. This agreement contains certain conditions, covenants and representations, all of which were complied with as of March 30, 2003. We are currently negotiating for a revolving credit facility for a term beyond September 2003, and expect that we will be able to establish that facility in a timely manner and on reasonable terms.
To minimize interest expense, our policy generally is to use excess available cash to pay down the balance, if any, on our revolving credit facility.
Effective April 28, 2003, our Board of Directors approved a share buyback program, authorizing the purchase of up to 450,000 shares of our outstanding common stock as well as a stock option repurchase program (see Note 17). We expect to fund these undertakings from working capital and/or our revolving credit facility.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements.
Revenue Recognition. We record revenue when product is shipped to the customer. Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of these companies have turned to us to implement supply-chain solutions, including purchasing inventory, assisting in demand forecasting, configuring, packaging, kitting and delivering products and managing customer relations, from order taking through cash collections. In performing these solutions, we assume varying levels of involvement in the transactions and varying levels of credit and inventory risk. As our solutions offerings continually evolve to meet the needs of our customers, we constantly evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States. When applying this guidance, we look at the following indicators: whether we are the primary obligor in the transaction; whether we have general inventory risk; whether we have latitude in establishing price; the extent to which we change the product or perform part of the service; whether we have supplier selection; whether we are involved in the determination of product and service specifications; whether we have physical inventory risk; whether we have credit risk; and whether the amount we earn is fixed. Each of our customer relationships is independently evaluated based on the above guidance and revenue is recorded on the appropriate basis.
Valuation of Goodwill. Our Consolidated Balance Sheet includes goodwill of approximately $2.5 million. We periodically evaluate our goodwill, long-lived assets and intangible assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance and legal factors. Based on our valuations of goodwill completed during the fiscal year, we determined that goodwill was not impaired. Future events, such as significant changes in cash flow assumptions, could cause us to conclude that impairment indicators exist and that the net book value of goodwill, long-lived assets and intangible assets is impaired. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount up to $2.5 million, resulting in a charge to operations.
Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability. This review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Based on this review, we have not established a valuation allowance. If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets, resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Summary Disclosures about Contractual Obligations and Commercial Commitments
The following tables reflect a summary of our contractual cash obligations and other commercial commitments as of March 30, 2003:
|
| PAYMENT DUE BY FISCAL YEAR ENDING |
|
|
|
TOTAL |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 AND
THEREAFTER |
|
| Long-term debt |
|
$ 6,033,600 |
|
$ 372,800 |
|
$ 4,647,500 |
|
$ 137,600 |
|
$ 216,300 |
|
$ 659,400 |
| Revolving credit facility |
|
--- |
|
--- |
|
--- |
|
--- |
|
--- |
|
--- |
| Operating leases |
|
1,654,300 |
|
540,500 |
|
551,400 |
|
562,400 |
|
--- |
|
--- |
| Other commitments |
|
225,100 |
|
225,100 |
|
--- |
|
--- |
|
--- |
|
--- |
|
Total contractual
cash obligations |
|
$ 7,913,000 |
|
$ 1,138,400 |
|
$ 5,198,900 |
|
$ 700,000 |
|
$ 216,300 |
|
$ 659,400 |
|
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses the financial accounting and reporting for certain costs associated with exit or disposal activities. Statement No. 146 requires that these costs be recorded at their fair value when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of Statement No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this standard had no impact on the Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in Interpretation No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this standard had no impact on the Consolidated Financial Statements.
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," "believes," "should," "expects," "anticipates," "estimates," and similar expressions. Our 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: our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; the effect that the loss of certain customers or vendors could have on our net profits; economic conditions that may impact customers' ability to fund purchases of our products and services; the possibility that unforeseen events could impair our ability to service customers promptly and efficiently, if at all; the possibility that, for unforeseen reasons, we 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.
We do not use derivative financial instruments. Management believes that exposure to market risks, including foreign currency exchange rate risk, interest rate risk and commodity price risk, is not material at the present time.
Not applicable
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