 |
|
Item 8. Consolidated Financial Statements and Supplementary Data.
TESSCO Technologies Incorporated, a Delaware corporation (the Company), is a leading provider of integrated product plus supply chain solutions to the professionals that design, build, run, 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. Over 95% of the Company's sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. The Company conducts business selling various products to different customer groups, these products and customers all fall within the telecommunications industry. The Company's chief operating decision maker regularly evaluates financial information in the aggregate, and therefore, the Company reports operating results as one reportable segment.
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
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 30, 2003 and March 31, 2002 contained 52 weeks and the fiscal year ended April 1, 2001 contained 53 weeks. The effect of the extra week in fiscal 2001 does not materially affect the Consolidated Financial Statements of the Company.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with an original maturity of 90 days or less.
Allowance for Doubtful Accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable and unbilled receivables to their expected net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience and the Company's stability as it relates to its customer base. Typical payments from commercial customers are due 30 days from the date of the invoice. The Company charges-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized.
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:
Depreciation of property and equipment was $3,919,300, $4,187,400 and $3,320,400 for fiscal years 2003, 2002 and 2001, respectively (see Note 4).
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standard (FAS) No. 142, Goodwill and Other Intangible Assets (see Note 5).
Revenue Recognition
The Company records revenue when product is shipped to the customer. Other than subscriber accessory sales relating to the Company's private brand, Wireless Solutions®, TESSCO offers no product warranties in excess of original equipment manufacturers' warranties. The Company's warranty expense is estimated and accrued at the time of sale. Warranty expense was immaterial for the fiscal years 2003, 2002 and 2001. The Company estimates sales returns and accrues a sales return reserve based on this estimate.
Shipping and Handling Costs
Shipping and handling costs are included in selling, general and administrative expenses on the Consolidated Income Statement and totaled $11,782,400 for the fiscal year ended March 30, 2003.
Stock Options Granted to Team Members
The Company records compensation expense for all stock-based compensation plans using the intrinsic-value-based method and provides pro forma disclosures of net income and net earnings per common share as if the fair value method had been applied in measuring compensation expense.
Pro forma net income and earnings per share information has been determined as if the Company had accounted for its stock options using the fair value method. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The weighted average estimated fair values of stock options granted during fiscal years 2003, 2002, and 2001 were $6.40, $3.22 and $9.76, respectively.
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 2003, 2002 and 2001:
|
|
|
2003 |
|
2002 |
|
2001 |
|
| Dividend yield |
|
0.0% |
|
0.0% |
|
0.0% |
| Expected volatility |
|
50.0% |
|
15.0% |
|
32.0% |
| Risk-free interest rate |
|
2.9–4.5% |
|
3.7–4.8% |
|
4.8–6.5% |
| Expected lives |
|
6–10 years |
|
6–10 years |
|
6–10 years |
|
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information is as follows for the fiscal years ended:
|
|
|
2003 |
|
2002 |
|
2001 |
|
| Net income (in thousands), as reported |
|
$ 3,049 |
|
$ 3,906 |
|
$ 5,274 |
Stock-based compensation expense
as if the fair value method had
been applied, net of tax |
|
1,390 |
|
2,330 |
|
2,043 |
|
| Pro forma income |
|
$ 1,659 |
|
$ 1,576 |
|
$ 3,231 |
|
| Basic earnings per share, as reported |
|
$ 0.68 |
|
$ 0.87 |
|
$ 1.17 |
| Pro forma basic earnings per share |
|
0.37 |
|
0.35 |
|
0.72 |
| Diluted earnings per share, as reported |
|
$ 0.67 |
|
$ 0.85 |
|
$ 1.13 |
| Pro forma diluted earnings per share |
|
0.37 |
|
0.34 |
|
0.69 |
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Impact of Recently Issued Accounting Standards
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.
Reclassifications
Certain reclassifications have been made to the prior year Consolidated Financial Statements to conform with the current year presentation.
On October 12, 2002, the Company's primary office, distribution center and network operating center was flooded as a result of a malfunctioning public water main system. The Company has recorded a $7.2 million insurance receivable on its 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 a $1.2 million interim and partial settlement of the Company's third quarter business interruption insurance claim; less insurance advances from the Company's 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 the Company, the Company received payment of the partial business interruption claim noted above, and has settled and received payment on its building and information technology claims. The Company believes that insurance proceeds less minimal deductibles will be adequate to cover financial loss.
The Company intends to file additional business interruption insurance claims to recover lost profits caused by the disaster as well as reaching a final settlement on its third quarter business interruption claim noted above. Because the timing and amount of proceeds from current and future business interruption insurance claims are uncertain, the Company is not able to estimate or accrue additional amounts at this time.
All of the Company's property and equipment is located in the United States. Property and equipment is summarized as follows:
|
|
|
2003 |
|
2002 |
|
| Land |
|
$ 4,803,200 |
|
$ 4,803,200 |
| Building and improvements |
|
12,568,000 |
|
12,589,800 |
| Information technology equipment and software |
|
13,725,400 |
|
16,700,600 |
| Equipment, furniture and tooling |
|
3,533,000 |
|
7,888,400 |
|
|
|
34,629,600 |
|
41,982,000 |
|
| Less accumulated depreciation and amortization |
|
(9,752,700) |
|
(16,138,900) |
|
| Property and equipment, net |
|
$ 24,876,900 |
|
$ 25,843,100 |
|
Prior to fiscal year 2003, goodwill was being amortized using the straight-line method over 15 years. Amortization on other intangible assets continues to be amortized using the straight-line method over 15 years. Amortization expense relating to goodwill and other intangible assets was $65,600, $332,100 and $332,400 for fiscal years 2003, 2002 and 2001, respectively. Intangible assets net of accumulated amortization, which is included in Other Long-term Assets on the Consolidated Balance Sheet, totaled $189,000 and $239,900 as of March 30, 2003 and March 31, 2002, respectively.
In June 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standard (FAS) No. 142, Goodwill and Other Intangible Assets. FAS No. 142 requires companies to cease amortizing goodwill and certain other intangible assets. FAS No. 142 also establishes a new method of testing goodwill and intangible assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of FAS No. 142 resulted in discontinuation of amortization of goodwill commencing April 1, 2002; however, the Company has tested goodwill and intangible assets for impairment under the new standard during fiscal 2003. The Company performed its transitional impairment test as of April 1, 2002. The Company performs its annual impairment test on the first day of its fourth quarter. As a result of these impairment tests, no impairment of goodwill and intangible assets was recognized in fiscal year 2003.
The following table presents the impact of FAS No. 142 on net income and earnings per share assuming adoption as of March 27, 2000:
|
| FISCAL YEAR ENDED |
|
MARCH 31, 2003 |
|
MARCH 31, 2002 |
|
APRIL 1, 2002 |
|
| Reported net income |
|
$ 3,048,600 |
|
$ 3,905,900 |
|
$ 5,274,000 |
| Add: Goodwill amortization, net of tax |
|
--- |
|
163,900 |
|
165,900 |
|
| Adjusted net income |
|
$ 3,048,600 |
|
$ 4,069,800 |
|
$ 5,439,900 |
|
Basic earnings per share
Reported net income |
|
$ 0.68 |
|
$ 0.87 |
|
$ 1.17 |
| Add: Goodwill amortization, net of tax |
|
--- |
|
0.04 |
|
0.04 |
|
| Adjusted net income |
|
$ 0.68 |
|
$ 0.91 |
|
$ 1.21 |
|
Diluted earnings per share
Reported net income |
|
$ 0.67 |
|
$ 0.85 |
|
$ 1.13 |
| Add: Goodwill amortization, net of tax |
|
--- |
|
0.04 |
|
0.03 |
|
| Adjusted net income |
|
$ 0.67 |
|
$ 0.89 |
|
$ 1.16 |
|
Accrued expenses and other current liabilities are summarized as follows:
|
|
|
2003 |
|
2002 |
|
| Payroll, benefits and taxes |
|
$ 3,718,400 |
|
$ 3,796,400 |
| Outstanding checks |
|
3,441,700 |
|
--- |
| Income and sales taxes |
|
479,300 |
|
871,700 |
| Other |
|
938,400 |
|
1,325,400 |
|
Accrued expenses and other
current liabilities |
|
$ 8,577,800 |
|
$ 5,993,500 |
|
At March 30, 2003 and March 31, 2002, the Company had a balance outstanding on a revolving credit facility to a bank of $0 and $5,408,000, respectively. The revolving credit facility expires in September 2003 and has a maximum borrowing limit of $30,000,000.
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 auto-borrow advances up to $7,000,000 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 3.09%, 5.36% and 8.78% for fiscal years 2003, 2002 and 2001, respectively. Interest expense on the credit facility for fiscal years 2003, 2002 and 2001 totaled $28,900, $152,200 and $600,000, respectively. Average borrowings under the credit facility totaled $935,600 $2,839,100 and $6,833,200; maximum borrowings totaled $4,362,000, $10,427,000 and $11,000,000 for fiscal years 2003, 2002 and 2001, 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 2003, 2002 and 2001.
At March 30, 2003 and March 31, 2002, the Company had a term note outstanding to a bank of $4,787,700 and $5,040,300, respectively. The term note is payable in monthly installments of principal and interest with the balance due at maturity, June 30, 2003. Effective May 1, 2003, the maturity date of the note payable was extended until June 30, 2004, with no additional substantial changes to the terms and conditions. The note bears interest at a floating rate of LIBOR plus 1.50% per annum. The weighted average interest rate in fiscal years 2003, 2002 and 2001 was 3.55%, 4.66% and 8.13%, respectively. Interest expense under this note was $174,700, $240,500 and $437,300 for fiscal years 2003, 2002 and 2001, respectively. The note is secured by a first position in the real property of the Company. The note contains certain restrictive covenants that, among other things, require the maintenance of certain financial ratios. The Company was in compliance with the provisions of the agreement during fiscal years 2003, 2002 and 2001.
At March 30, 2003 and March 31, 2002, the Company had a note payable outstanding to Baltimore County, Maryland of $128,200 and $141,500, respectively. 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 $6,500, $6,400 and $8,800 for fiscal years 2003, 2002 and 2001, respectively. The note is secured by a subordinate position on Company-owned real property located in Hunt Valley, Maryland.
At March 30, 2003 and March 31, 2002, the Company had a note payable outstanding to the Maryland Economic Development Corporation of $1,117,700 and $1,259,400, respectively. The note is payable in equal quarterly installments of principal and interest of $37,400, with the balance due at maturity, October 10, 2011. The note bears interest at 3.00% per annum. Interest expense under this note was $45,100, $40,100 and $43,300 for fiscal years 2003, 2002 and 2001, respectively. The note is secured by a subordinate position on Company-owned real property located in Hunt Valley, Maryland.
|
| FISCAL YEAR |
|
| 2004 |
|
$ 372,800 |
|
| 2005 |
|
4,647,500 |
|
| 2006 |
|
137,600 |
|
| 2007 |
|
216,300 |
|
| 2008 |
|
131,100 |
|
| Thereafter |
|
528,300 |
|
|
|
|
$ 6,033,600 |
|
|
The Company leases 15,000 square feet of distribution and office space in Reno, Nevada under a month-to-month operating lease. Effective April 1, 2001, the Company entered into a lease, which expires in March 2006, for an additional 65,000 square feet of distribution and office space in Hunt Valley, Maryland, adjacent to the Company's Global Logistics Center. This space is used as the Company's Solutions Development Center. Rent expense for fiscal years 2003, 2002 and 2001 totaled $668,200, $653,300 and $125,200, respectively.
The Company also licenses other space for customer meetings and other business generation activities through fiscal 2004 at an annual cost of approximately $225,000.
As of March 30, 2003, the Company's minimum future obligations under existing leases, other than the $9,200 per month obligation under the Reno facility lease which is cancelable on one-month notice, are as follows:
|
| FISCAL YEAR |
|
| 2004 |
|
$ 765,600 |
|
| 2005 |
|
551,400 |
|
| 2006 |
|
562,400 |
|
|
|
|
$ 1,879,400 |
|
|
The Company also entered into a sublease for approximately 84,000 square-feet of temporary office space to accommodate displaced employees as a result of the disaster (see Note 3). This sublease expires May 31, 2004. The monthly rental fee is approximately $115,000. No amounts relating to this sublease are included in the above schedule as the Company believes these payments will be reimbursed by its insurance carrier.
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. The Company does not believe that any lawsuits or claims pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on the Company's financial condition or results of operations.
A reconciliation of the difference between the provision for income taxes computed at statutory rates and the provision for income taxes provided on the Consolidated Statements of Income is as follows:
|
|
|
2003 |
|
2002 |
|
2001 |
|
| Statutory federal rate |
|
34.0% |
|
34.0% |
|
34.0% |
| State taxes, net of federal benefit |
|
2.5 |
|
2.8 |
|
2.7 |
| Non-deductible expenses |
|
3.2 |
|
2.1 |
|
1.2 |
| Other |
|
(1.2) |
|
--- |
|
0.1 |
|
| Effective rate |
|
38.5% |
|
38.9% |
|
38.0% |
|
The provision for income taxes was comprised of the following:
|
|
|
2003 |
|
2002 |
|
2002 |
|
| Federal: Current |
|
$ 1,281,100 |
|
$ 2,498,600 |
|
$ 1,864,100 |
| Deferred |
|
471,400 |
|
(263,800) |
|
1,017,400 |
| State: Current |
|
95,600 |
|
280,200 |
|
231,600 |
| Deferred |
|
62,100 |
|
(31,000) |
|
119,400 |
|
| Provision for income taxes |
|
$ 1,910,200 |
|
$ 2,484,000 |
|
$ 3,232,500 |
|
Total deferred tax assets and deferred tax liabilities as of March 30, 2003 and March 31, 2002, and the sources of the differences between financial accounting and tax bases of the Company's assets and liabilities which give rise to the deferred tax assets and liabilities are as follows:
|
|
|
2003 |
|
2002 |
|
Deferred tax assets:
Accrued expenses and reserves |
|
$ 2,219,500 |
|
$ 2,231,000 |
| Other assets |
|
39,100 |
|
--- |
|
|
|
$ 2,258,600 |
|
$ 2,231,000 |
|
Deferred tax liabilities:
Depreciation |
|
$ 2,552,200 |
|
$ 2,611,400 |
| Other assets |
|
688,400 |
|
68,100 |
|
|
|
$ 3,240,600 |
|
$ 2,679,500 |
|
The Company has a 401(k) profit-sharing plan that covers all eligible employees. Contributions to the plan can be made by employees, as well as by the Company at the discretion of the Company. Profit-sharing plan expense was $155,000, $120,200 and $75,300 during fiscal years 2003, 2002 and 2001, respectively. As of March 30, 2003, plan assets included 33,976 shares of Common Stock of the Company.
The Company maintains a nonqualified deferred compensation plan that covers directors and certain management personnel as determined by the Board of Directors. Contributions to the plan can be made by these individuals, as well as by the Company at the discretion of the Company's Board of Directors; however, the Company has made no contributions to the plan as of March 30, 2003. All plan assets are held in an irrevocable Rabbi trust. These assets and the related liabilities are included in other long-term assets and other long-term liabilities on the Company's Consolidated Balance Sheets.
The Company maintains a Supplemental Executive Retirement Plan for Robert B. Barnhill, Jr., chairman, president and CEO of the Company. This plan is funded through a life insurance policy for which the Company is the sole beneficiary. The cash surrender value of the life insurance policy and the net present value of the benefit obligation are included in other long-term assets and other long-term liabilities on the Company's Consolidated Balance Sheets.
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:
|
|
|
2003 |
|
2002 |
|
2001 |
|
| Basic weighted average shares outstanding |
|
4,514,500 |
|
4,500,800 |
|
4,494,800 |
| Effect of dilutive common equivalent shares |
|
11,100 |
|
75,100 |
|
187,800 |
|
| Diluted weighted average shares outstanding |
|
4,525,600 |
|
4,575,900 |
|
4,682,600 |
|
Options to purchase 1,245,545 shares of common stock at a weighted average exercise price of $18.72 per share were outstanding as of March 30, 2003, but the common equivalent shares 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.
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 1,172,500 shares of the Company's Common Stock, respectively. As of March 30, 2003, no shares were available for issue in respect of additional awards under the 1984 Plan and 35,675 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, nonqualified 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, nonplan options to purchase an aggregate of 293,888 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:
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
Shares |
|
Weighted
Average
Exercise
Price |
|
Shares |
|
Weighted
Average
Exercise
Price |
|
Shares |
|
Weighted
Average
Exercise
Price |
|
| Outstanding, beginning of year |
|
1,266,300 |
|
$ 18.92 |
|
1,177,000 |
|
$ 20.19 |
|
990,700 |
|
$ 19.04 |
| Granted |
|
70,000 |
|
11.08 |
|
193,000 |
|
12.47 |
|
276,800 |
|
23.50 |
| Exercised |
|
--- |
|
--- |
|
--- |
|
--- |
|
(23,200) |
|
13.27 |
| Cancelled |
|
(63,300) |
|
21.11 |
|
(103,700) |
|
21.39 |
|
(67,300) |
|
18.64 |
|
| Outstanding, end of year |
|
1,273,000 |
|
$ 18.38 |
|
1,266,300 |
|
$ 18.92 |
|
1,177,000 |
|
$ 20.19 |
| Exercisable at end of year |
|
770,700 |
|
|
|
605,200 |
|
|
|
459,300 |
|
|
|
Information about stock options outstanding and exercisable as of March 30, 2003 is as follows:
|
Range of
Exercise
Price |
|
Outstanding
Shares |
|
Outstanding
Weighted
Average
Remaining
Contractual
Life |
|
Weighted
Average
Exercise
Price |
|
Exercisable
Shares |
|
Exercisable
Weighted
Average
Exercise
Price |
|
| $ 0.00–15.00 |
|
494,800 |
|
3.5 |
|
$ 12.02 |
|
252,800 |
|
$ 12.11 |
| 15.01–25.00 |
|
676,700 |
|
3.4 |
|
20.98 |
|
423,400 |
|
20.51 |
| 25.01–36.50 |
|
101,500 |
|
3.7 |
|
32.04 |
|
94,500 |
|
32.49 |
|
| $ 0.00–36.50 |
|
1,273,000 |
|
3.5 |
|
$ 18.38 |
|
770,700 |
|
$ 19.22 |
|
During fiscal 2000, the Company adopted the Team Member Stock Purchase Plan. This plan permits eligible employees to purchase up to an aggregate of 200,000 shares of the Company's common stock at 85% of the lower of the market price on the first day of a six-month period and the market price on the last day of that same six-month period. The Company's only expense relating to this plan is for its administration. During fiscal 2003 and 2002, 3,096 and 8,185 shares, respectively, were sold to employees under this plan. The weighted average market value of the shares sold in fiscal 2003 and 2002 was $10.12 and $10.48, respectively.
The carrying amounts of cash and cash equivalents, trade accounts receivable, insurance receivable from disaster, product inventory, trade accounts payable and accrued expenses and borrowings under the revolving credit facility and the note payable to a bank, which bear interest at variable rates, approximate their fair value as of March 30, 2003 and March 31, 2002.
Fair value of long-term debt, calculated using current interest rates and future principal payments, excluding the note payable to a bank, as of March 30, 2003 and March 31, 2002 is as follows:
|
|
|
2003 |
|
2002 |
|
| Note payable to Baltimore County, Maryland |
|
$ 137,000 |
|
$ 149,200 |
Note payable to the Maryland
Economic Development Corporation |
|
1,173,200 |
|
1,257,700 |
|
|
|
$ 1,310,200 |
|
$ 1,406,900 |
|
Cash paid for interest during fiscal years 2003, 2002 and 2001 totaled $440,200, $553,200 and $1,035,200, respectively. Cash paid for income taxes, net of refunds, for fiscal years 2003, 2002 and 2001 totaled $2,984,700, $1,360,700 and $3,450,700, respectively.
The Company had noncash transactions during fiscal years 2003, 2002 and 2001 as follows:
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 2002, 2001 and 2000:
|
|
|
2003 |
|
2002 |
|
2001 |
|
| Exercise of options in exchange for stock |
|
$ --— |
|
$ --— |
|
$ 82,000 |
| Tax benefit from exercise of stock options |
|
$ --— |
|
$ --— |
|
$ 50,700 |
|
The Company is dependent on third-party equipment manufacturers, distributors and dealers for all of its supply of wireless communications equipment. For fiscal years 2003, 2002 and 2001 sales of products purchased from the Company's top ten vendors accounted for 42%, 42% and 31% of total revenues, respectively, with sales of products purchased from the Company's largest vendor generating approximately 12%, 13% and 6% of total revenues, respectively. The Company is dependent on the ability of its vendors to provide products on a timely basis and on favorable pricing terms. Although the Company believes that alternative sources of supply are available for many of the product types it carries, the loss of certain principal suppliers or the loss of one or more of certain ongoing affinity relationships could have a material adverse effect on the Company.
The Company's future results could also be negatively impacted by the loss of certain customers, or the loss of one or more of certain ongoing affinity relationships. For fiscal years 2003, 2002 and 2001, sales of products to the Company's top ten customer relationships accounted for 31%, 22% and 25% of total revenues, respectively, with sales to the Company's largest customer relationship generating approximately 20%, 4% and 6% of total revenues, respectively.
On April 28, 2003, the Company announced that its Board of Directors unanimously approved a share buyback program, authorizing the purchase of up to 450,000 shares, approximately 10% of its outstanding common stock. Shares may be purchased from time to time in the open market, by block purchase, or through negotiated transactions, or possibly other transactions managed by broker-dealers. No time limit has been set for completion of the program. Purchases under the share buyback program will be funded from working capital and/or the Company's credit facility.
On April 28, 2003, the Company's Board of Directors also authorized the Company to proceed with a stock option repurchase program for options having an exercise price of $18 or higher regardless of expiration date, and for options having an exercise price per share of $11 or higher and an expiration date within four years. The program covers outstanding options to purchase up to 783,120 shares of common stock from all holders, with the exception of independent directors. Depending upon participation, this program may result in variable accounting treatment going forward for a limited number of outstanding options. Assuming full participation in the program, the Company will recognize a pre-tax compensation expense of approximately $550,000. Purchases under the option repurchase program will be funded from working capital and/or the Company's credit facility.
The consolidated statements of TESSCO Technologies Incorporated have been prepared by the Company in accordance with accounting principles generally accepted in the United States. 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 as of and for the year ended March 30, 2003 have been audited by Ernst & Young LLP, independent public accountants. The financial statements as of and for the years ended March 31, 2002 and April 1, 2001 have been audited by Arthur Andersen, LLP, independent public accountants.
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 accounting principles generally accepted in the United States. 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.
Robert B. Barnhill, Jr.
Chairman, President and Chief Executive Officer
Robert C. Singer
Senior Vice President and Chief Financial Officer
To the Board of Directors and Stockholders
of TESSCO Technologies Incorporated:
We have audited the accompanying consolidated balance sheet of TESSCO Technologies Incorporated and subsidiaries as of March 30, 2003, and the related statements of income, changes in shareholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index as Schedule II. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The financial statements and schedule of TESSCO Technologies Incorporated and subsidiaries as of March 31, 2002 and for each of the years in the two year period then ended, were audited by other auditors who have ceased operations and whose report dated April 24, 2002, expressed an unqualified opinion on those statements and schedule, prior to the disclosures related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, discussed in Note 5.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TESSCO Technologies Incorporated and subsidiaries at March 30, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 5 to the financial statements, effective April 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets.
As discussed above, the financial statements of TESSCO Technologies Incorporated as of March 31, 2002, and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. As described in Note 5, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of April 1, 2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2002 and 2001 included (a) agreeing the previously reported net income to the previously issued financial statements (b) agreeing the amortization expense recognized in those periods related to goodwill and other intangible assets that are no longer being amortized as a result of applying Statement No. 142 to the previously issued financial statements, (c) recalculating the Company's effective tax rate for 2002 and 2001 based on the Company's previously issued financial statements and (d) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2002 and 2001 in Note 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2002 and 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2002 and 2001 financial statements taken as a whole.
ERNST & YOUNG LLP
Baltimore, Maryland
April 28, 2003
The following report is a copy of a report previously issued by Arthur Andersen LLP ("Andersen"), which report has not been reissued by Andersen. Certain financial information as of March 31, 2002 and April 1, 2001 and for the years then ended was not reviewed by Andersen and includes: (i) reclassifications to conform to our fiscal 2002 financial statement presentation and (ii) additional disclosures to conform with new accounting pronouncements and SEC rules and regulations issued during such fiscal year.
To the Board of Directors and Stockholders
of TESSCO Technologies Incorporated:
We have audited the accompanying consolidated balance sheets of TESSCO Technologies Incorporated (a Delaware Corporation) as of March 31, 2002 and April 1, 2001, 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 31, 2002. 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 31, 2002 and April 1, 2001 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, 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 consolidated 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, is fairly stated in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
April 28, 2003
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