UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
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For the quarterly period ended June 27, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
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For the transition period from to |
Commission file number 0-24746
TESSCO TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in charter)
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Delaware |
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52-0729657 |
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(State or other
jurisdiction of
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(IRS Employer
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11126 McCormick Road, Hunt Valley, Maryland |
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21031 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: |
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(410) 229-1000 |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes o No ý
The number of shares of the registrant’s Common Stock, $ .01 par value per share, outstanding as of
August 6, 2004 was 4,447,791.
TESSCO TECHNOLOGIES INCORPORATED
Index to Form 10-Q
2
Part I – Financial Information
Item 1 – Financial Statements
TESSCO TECHNOLOGIES INCORPORATED
See accompanying notes.
3
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Income
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Fiscal Quarters Ended |
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June 27,
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June 29,
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(unaudited) |
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(unaudited) |
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Revenues |
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$ |
110,605,000 |
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$ |
69,991,100 |
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Cost of goods sold |
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88,215,600 |
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52,685,400 |
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Gross profit |
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22,389,400 |
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17,305,700 |
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Selling, general and administrative expenses |
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19,989,100 |
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17,797,100 |
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Income (loss) from operations |
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2,400,300 |
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(491,400 |
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Interest, net |
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34,600 |
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22,300 |
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Income (loss) before provision for (benefit from) income taxes |
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2,365,700 |
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(513,700 |
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Provision for (benefit from) income taxes |
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922,600 |
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(200,400 |
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Net income (loss) |
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$ |
1,443,100 |
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$ |
(313,300 |
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Basic earnings (loss) per share |
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$ |
0.33 |
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$ |
(0.07 |
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Diluted earnings (loss) per share |
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$ |
0.32 |
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$ |
(0.07 |
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Basic weighted average shares outstanding |
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4,435,000 |
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4,470,200 |
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Diluted weighted average shares outstanding |
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4,544,600 |
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4,470,200 |
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See accompanying notes.
4
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Cash Flows
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Fiscal Quarters Ended |
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June 27,
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June 29,
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(unaudited) |
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(unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
1,443,100 |
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$ |
(313,300 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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1,027,000 |
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931,800 |
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Other non-cash items |
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372,500 |
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66,700 |
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Decrease in trade accounts receivable |
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7,247,500 |
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4,893,300 |
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Decrease (increase) in product inventory |
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3,625,900 |
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(3,348,200 |
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Decrease in prepaid expenses and other current assets |
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39,200 |
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6,256,800 |
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(Decrease) increase in trade accounts payable |
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(12,217,700 |
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3,073,600 |
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Decrease in accrued expenses and other current liabilities |
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(1,434,500 |
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(4,957,100 |
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Net cash provided by operating activities |
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103,000 |
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6,603,600 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
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(691,000 |
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(751,200 |
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Net cash used in investing activities |
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(691,000 |
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(751,200 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net repayments on revolving line of credit |
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— |
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— |
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Payments on long-term debt |
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(69,000 |
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(68,500 |
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Proceeds from issuance of stock |
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250,500 |
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54,600 |
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Purchase of treasury stock |
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— |
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(534,400 |
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Net cash provided by (used in) financing activities |
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181,500 |
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(548,300 |
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Net (decrease) increase in cash and cash equivalents |
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(406,500 |
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5,304,100 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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6,765,600 |
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— |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
6,359,100 |
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$ |
5,304,100 |
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See accompanying notes.
5
TESSCO Technologies Incorporated
Notes to Consolidated Financial Statements
June 27, 2004
(Unaudited)
Note 1. Description of Business and Basis of Presentation
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.
In management’s opinion, the accompanying interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 28, 2004.
Note 2. Stock Options Granted to Employees
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.” SFAS No. 148 amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” This statement is effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. Prior to fiscal 2005, as permitted by SFAS No. 148 and SFAS No. 123, the Company used the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense, except as noted below had been recognized for the Company’s stock options prior to fiscal 2005 because all options were granted at an exercise price equal to the market value of the underlying stock on the grant date.
Effective, March 29, 2004, the Company elected to adopt the fair value provisions of SFAS No. 123 using the modified prospective method in accordance with SFAS No. 148. Accordingly, beginning in fiscal 2005, the Company has begun expensing stock options and other equity compensation instruments using fair value methods. Stock-based employee compensation cost recognized in fiscal 2005 is the same as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all awards granted after August 1, 1995. Results for prior periods have not been restated. During the first quarter of fiscal 2005, the Company recognized expense of $483,600 related to stock based compensation, which is included as selling, general and administrative expense in the Consolidated Statement of Income.
The Company has annually reported pro-forma net income and earnings per share information in accordance with SFAS No. 123, that is, as if it had accounted for stock options using the fair value method prescribed by SFAS No. 123. In accordance with SFAS No. 123, the fair value of the Company’s stock options is determined using the Black-Scholes option pricing model, based upon facts and assumptions existing at the date of grant. The value of each option at the date of grant is amortized as compensation expense over the option vesting period. This occurs without regard to subsequent changes in stock price, volatility or interest rates over time,
6
provided that the option remains outstanding. This model, and other option pricing models, were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The Company’s options are not traded and have certain vesting restrictions. Because the Company’s stock options have characteristics significantly different from those of traded options, and because the value is determined at the date of grant and is amortized to expense over the vesting period without regard to changes in stock price, volatility or interest rates, the fair value calculated under the option models currently available may not reflect the actual fair value of the Company’s options.
On April 28, 2003, the Company’s Board of Directors authorized the Company to proceed with a stock option repurchase program. The repurchase program was completed on June 5, 2003, at which time options for 743,545 shares were repurchased and cancelled. This program resulted in compensation expense and cash paid of approximately $510,000 ($312,000, net of tax), which is included in selling, general and administrative expenses in the Company’s Consolidated Statement of Income for the quarter ended June 29, 2003. The amount paid for these options was determined on the basis of a discounted Black-Scholes calculation, using then current input assumptions.
As required by SFAS No. 123, the estimated fair value of each option, as determined as of the date of grant, is amortized as compensation expense over the option vesting period, provided the option remains outstanding. However, when an option is repurchased, it is no longer outstanding and the then unamortized portion of its value as had been determined at the grant date, is recognized as compensation expense at the date of repurchase for SFAS No. 123 pro-forma purposes. Accordingly, although the amount actually paid by the Company for the repurchased options on the basis of a discounted current Black-Scholes calculation was $510,000 ($312,000 net of tax), the unamortized compensation expense of these same options, based on the Black-Scholes calculation fixed at the date of grant, was approximately $1.7 million. Under SFAS No. 123, the latter amount was recognized as expense for pro-forma disclosure purposes in the first quarter of fiscal 2004.
In April 2004, the Company’s Board of Directors established a Performance Stock Unit Award Program under the Company’s 1994 Stock and Incentive Plan. Under the program, Performance Stock Units (PSU) have been granted to selected individuals. Each PSU entitles the recipient to earn one share of TESSCO common stock, but only after earnings per share and, for non-director employee participants, individual performance targets are met over a defined performance cycle. Once earned, shares vest and are issued over a period of years. Earnings per share targets, which take into account the earnings impact of this program, were set in advance for the complete performance cycle by the Board of Directors at levels necessary to grow shareowner value, and represent continual increases in earnings per share. If actual performance does not reach the minimum threshold targets, no shares will be issued. At the minimum threshold performance targets, up to a total of 153,000 shares could be issued. If actual performance over the three-year period reaches the highest level of targets and each recipient continues as a TESSCO employee until May 2008, a maximum of 600,000 shares of common stock could be issued over the four-year period ending May 2008. Under SFAS No. 123, the Company records compensation expense on its PSUs over the vesting period, based on the number of shares management estimates will ultimately be issued. Accordingly, the Company determines the periodic financial statement compensation charge based upon the stock price at the PSU grant date; management’s projections of future EPS performance over the performance cycle; and the resulting amount of estimated share grants, net of actual forfeitures. Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change in future periods.
Had the Company determined compensation cost based on the fair value at the grant date for its stock options consistent with the method set forth under SFAS No. 123, the Company’s net earnings would have been reduced to the pro forma amounts indicated below for the quarter ended June 29, 2003 (in thousands):
7
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Net loss, as reported |
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$ |
(313 |
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Compensation expense included in net loss, net of tax |
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312 |
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Stock-based compensation expense, relating to the previously unrecognized compensation expense of options purchased in the option repurchase program, as if the fair value method had been applied, net of tax |
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(1,660 |
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Stock-based compensation expense, relating to continuing stock options as if the fair value method had been applied, net of tax |
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(202 |
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Pro-forma loss |
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$ |
(1,863 |
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Basic loss per share, as reported |
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$ |
(0.07 |
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Pro-forma basic loss per share |
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(0.42 |
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Diluted loss per share, as reported |
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$ |
(0.07 |
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Pro-forma diluted loss per share |
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(0.42 |
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Also during the first quarter of fiscal 2005, the Company issued 14,427 shares of Company stock related to stock option exercises and 401(k) Plan matches.
Note 3. Earnings Per Share
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:
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Fiscal Quarters Ended |
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June 27,
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June 29,
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Basic weighted average common shares outstanding |
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4,435,000 |
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4,470,200 |
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Effect of dilutive common equivalent shares |
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109,600 |
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— |
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Diluted weighted average shares outstanding |
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4,544,600 |
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4,470,200 |
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Options to purchase 54,875 shares of common stock at a weighted average exercise price of $20.68 per share were outstanding as of June 27, 2004, 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 of including such shares would be antidilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.
8
Note 4. Business Segments
In April 2003, the Company hired a Senior Vice President to run the network infrastructure line of business and promoted an existing employee to Senior Vice President to run the mobile devices and accessories line of business. Another Senior Vice President runs the test and maintenance line of business. Due to these changes and the related staffing reorganization that occurred as a result, the Company regularly evaluates revenue, gross profit and inventory as three business segments.
Network 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). Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories such as replacement batteries, cases, microphones, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices. Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Within the mobile devices and accessories line of business, the Company sells to both commercial and consumer markets. The network infrastructure and installation, test and maintenance lines of business sell primarily to commercial markets.
The Company measures segment performance based on segment gross profit. The segment operations develop their product development, pricing and strategies, which are collaborative with one another and the centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory, for internal reporting, evaluating performance or allocating capital. Accounting policies for measuring segment gross profit and inventory are substantially consistent with those described in Note 2 to the Company’s March 28, 2004 audited financial statements. Product delivery revenue and certain minor cost of sales expenses have been allocated to each segment based on a percentage of revenues and gross profit.
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In thousands |
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Network
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Mobile Devices
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Installation, Test
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Total |
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Three months ended June 27, 2004 |
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Revenue-Commercial |
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$ |
32,853 |
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$ |
16,851 |
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$ |
15,672 |
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$ |
65,376 |
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Revenue-Affinity Consumer Direct |
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— |
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45,229 |
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— |
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45,229 |
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Revenue-Total |
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32,853 |
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62,080 |
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15,672 |
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110,605 |
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Gross Profit-Commercial |
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7,964 |
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4,391 |
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4,256 |
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16,611 |
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Gross Profit-Affinity Consumer Direct |
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— |
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5,778 |
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— |
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5,778 |
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Gross Profit-Total |
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7,964 |
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10,169 |
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4,256 |
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22,389 |
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Product Inventory |
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16,368 |
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15,672 |
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5,321 |
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37,361 |
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Three months ended June 29, 2003 |
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Revenue-Commercial |
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$ |
25,189 |
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$ |
13,194 |
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$ |
12,228 |
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$ |
50,611 |
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Revenue-Affinity Consumer Direct |
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— |
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19,380 |
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— |
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19,380 |
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Revenue-Total |
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25,189 |
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32,574 |
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12,228 |
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69,991 |
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Gross Profit-Commercial |
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6,193 |
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3,379 |
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3,394 |
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12,966 |
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Gross Profit-Affinity Consumer Direct |
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— |
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4,340 |
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— |
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4,340 |
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Gross Profit-Total |
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6,193 |
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7,719 |
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3,394 |
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17,306 |
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Product Inventory |
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15,386 |
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9,569 |
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5,033 |
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29,988 |
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9
The Company’s largest customer relationship, T-Mobile USA, accounted for 38% and 24% of total revenues in the first quarter of fiscal 2005 and 2004, respectively. This relationship is similar to most of our affinity-partner relationships, which are of limited duration and terminable by either party upon several months or otherwise relatively short notice.
Note 5. Long-Term Debt
Effective June 30, 2004, the Company refinanced its existing term loan with a bank. The new term loan is payable in monthly installments of principal and interest with the balance due at maturity, June 30, 2011. The note bears interest at a floating rate of LIBOR plus 1.75%. The note is secured by a first position deed of trust encumbering the Company-owned real property in Hunt Valley, Maryland. The loan is generally subject to the same financial covenants as the Company’s revolving credit facility, which requires the Company to meet certain financial covenants and ratios and contain other limitations including a restriction on dividend payments.
Note 6. Commitments and Contingencies
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. The Company consolidated the operations in this facility into its Global Logistics Center in the third quarter of fiscal 2004 and recorded consolidation charges of $2.1 million representing exit costs including asset write-offs and the present value of the continuing lease obligation associated with the vacated facility. Monthly rent of approximately $45,000 is due through March 2006. The Company has a $949,400 liability on its Consolidated Balance Sheet at June 27, 2004, representing the present value of continuing lease obligations related to this vacated facility.
The Company has entered into a lease for space for its sales, marketing and administrative offices nearby its Global Logistics Center, for a term beginning June 1, 2004 and expiring May 31, 2007. However, the Company can terminate the lease by giving twelve months written notice at any time after June 1, 2004. The monthly rental fee ranges from $110,300 to $117,200 throughout the lease term.
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.
Note 7. Reclassifications
Certain reclassifications have been made to the prior year Consolidated Financial Statements to conform with the current year presentation.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended March 28, 2004.
Business Overview and Environment
TESSCO Technologies Incorporated 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. Although we sell products to customers in over 100 countries, over 95% of our sales are made to customers in the United States. We have operations and office facilities in both Hunt Valley, Maryland and Reno, Nevada. Due to the diversity in our business, we are not significantly affected by seasonality.
10
We offer a wide range of products that are classified into three business segments: network infrastructure, mobile devices and accessories, and installation, test and maintenance. Network infrastructure products, which are sold to our commercial sell-to and sell-through customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products are in part dependent on capital spending in the wireless communications industry. However, we have also been growing our offering of wireless broadband and in-building products, which are not as dependent on the overall capital spending of the industry. Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories. Mobile devices and accessory products are widely sold to commercial sell-to and sell-through customers and consumers. Commercial customers include retail stores, value-added resellers and dealers. Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Installation, test and maintenance products, which are sold to our commercial sell-to and sell-through customers, are used to install, tune, maintain and repair wireless communications equipment. Almost half of all of our installation test and maintenance sales are generated from the sales of replacement parts and materials for original equipment manufacturers such as Nokia, Inc (Nokia). The other portion of this segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware and supplies required by service technicians. Both our repair and replacement parts sales and consumer sales through our affinity partnerships are reliant on relationships with a small number of vendors.
The emerging wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. In addition, the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions, including those with T-Mobile USA (T-Mobile), our largest affinity partner, and Nokia, are typically of limited duration and are terminable by either party upon several months or otherwise relatively short notice. Accordingly, our ability to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and purchasing relationships with approximately 450 manufacturers provide us with a competitive advantage over new entrants to the market.
The current status of our T-Mobile relationship is discussed in further detail in the First Quarter of Fiscal 2005 Compared to First Quarter of Fiscal 2004 section below.
First quarter results in fiscal 2005 were driven by revenue growth and gross profit growth in all three of our lines of business, as well as all three of our market categories, as compared with the first quarter of fiscal 2004. Commercial customer (sell-to and sell-through market categories) revenue growth and gross profit growth were 29% and 28%, respectively. Consumer customer revenue growth and gross profit growth were 133% and 33%, respectively. We also achieved overall revenue and gross profit growth of 3% and 6%, respectively, as compared with the fourth quarter of fiscal 2004. This growth was driven by commercial revenues and gross profits, which increased 14% and 11%, respectively. Consumer revenues and gross profits for the first quarter of fiscal 2005 declined slightly from fiscal 2004 fourth quarter, by 10% and 6%, respectively.
First Quarter of Fiscal 2005 Compared to First Quarter of Fiscal 2004
Revenues increased by $40.6 million, or 58%, to $110.6 million for the first quarter of fiscal 2005 compared to $70.0 million for the first quarter of fiscal 2004. Revenues from mobile devices and accessories increased 91%, revenues from network infrastructure products increased 30%, and revenues from installation, test and maintenance products increased 28%. Network infrastructure, mobile devices and accessories and installation, test and maintenance products accounted for approximately 30%, 56% and 14%, respectively, of revenues during the first quarter of fiscal 2005, as compared to 36%, 47% and 17%, respectively, of revenues during the first quarter of fiscal 2004. Commercial sell-through customers, commercial sell-to customers and consumers accounted for approximately 30%, 29% and 41%, respectively, of revenues during the first quarter of fiscal 2005, compared to 36%, 36% and 28%, respectively, of revenues during the first quarter of fiscal 2004.
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The increase in mobile devices and accessories revenues was primarily due to strong growth in our affinity consumer-direct sales channel, but also reflects growth in our commercial business. In the first quarter of 2005, sales of mobile devices and accessories through our affinity consumer-direct sales channel represented 41% of our total revenues, but because a significant portion of these sales relate to lower margin handset sales as described below, gross profit from this channel represented only 26% of our total gross profit. The significant increase in affinity consumer-direct revenues is attributed to increased volumes from our ongoing T-Mobile affinity relationship. 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. Revenues from this affinity relationship with T-Mobile collectively accounted for approximately 38% of total revenues in the first quarter of fiscal 2005; however, gross profit generated through the T-Mobile relationship represented an appreciably smaller percent of our total gross profit. Commercial revenues for mobile devices and accessories increased 28% over the prior year quarter, due in part to enhanced merchandising and packaging programs, new retail relationships and an increase in data messaging product sales.
We believe that pent up demand for improved mobile phone coverage and new broadband technologies led to increased capital spending compared to the prior year quarter, which resulted in the increase in sales of our network infrastructure products. We also believe that increased spending in homeland security and public safety at the federal, state and local levels have contributed to increased network infrastructure sales. Although we see signs that the market for infrastructure products is stabilizing, there can be no assurances that this trend will continue.
The increase in installation, test and maintenance revenues is primarily attributable to increased sales of high dollar test equipment and lower dollar tools and shop supplies. We believe that the increased capital spending leading to our growth in network infrastructure sales has also contributed to the increase in installation, test and maintenance sales.
Gross profit increased by $5.1 million, or 29%, to $22.4 million for the first quarter of fiscal 2005 compared to $17.3 million for the first quarter of fiscal 2004. The gross profit margin decreased to 20.2% for the first quarter of fiscal 2005 compared to 24.7% for the first quarter of fiscal 2004. Gross profit margin for network infrastructure, mobile devices and accessories and installation, test and maintenance products was 24.2%, 16.4% and 27.2%, respectively, for the first quarter of fiscal 2005, as compared to 24.6%, 23.7% and 27.8%, respectively, for the first quarter of fiscal 2004. The decrease in gross profit margin percent for mobile devices and accessories was attributable to the increased revenues from the T-Mobile affinity relationship, which includes high volumes of lower margin handset sales. With the exception of the mobile devices and accessories line of business, our gross margins by product within each segment have been sustained and these minor variations in gross profit margin are related to sales mix within the segment product offerings. 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.
Our on-going ability to earn revenues from customers and vendors looking to us for product and supply chain solutions 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, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our affinity relationships are based, including our arrangements with T-Mobile, are typically of limited duration, and are terminable by either party upon several months or otherwise relatively short notice. These affinity relationships could also be affected by wireless carrier consolidation.
Over the past seven years, the T-Mobile relationship has become significant to our overall business. During the first quarter of fiscal 2005, this relationship accounted for 38% of total revenues, or approximately $42 million, and 18%, or approximately $4 million, of our overall corporate gross profit. The gross profit margin on these revenues was approximately 9.5% for the first quarter of fiscal 2005, compared to gross profit margin on non T-Mobile revenues of approximately 26.7% for the same period. The 9.5% T-Mobile gross profit margin is after product-material costs only, and does not include operating expenses necessary to support this business. These expenses are a significant portion of overall selling, general and administrative expenses and include: freight out and distribution supplies; compensation and benefit costs related to fulfillment and returns processing, in-bound call center, program management, and credit and collections; credit card fees and bad debt expenses related to cash collections directly from end users; and e-commerce expenses. Indirect expenses include executive involvement, depreciation of technology and operating assets, facilities, and other overhead costs.
Our current relationship with T-Mobile is an e-commerce based, marketing, sales and supply chain “outsourced” operation for their business-to-business, consumer direct and telesales channels. We have created various web sites and web stores used to interface with these channels, and continually develop, operate and maintain these web sites deploying mutually agreed upon modifications and enhancements. We plan for required inventory, then purchase and maintain inventory levels of handsets, data devices, SIM cards, software and accessories required to support projected sales for the various channels. After orders are placed on the various TESSCO operated websites or telephone hotlines, we are responsible for credit card verification, order invoicing, fulfillment, delivery and credit card collection. Our information system is tied to T-Mobile’s to allow activation of the handsets, and provides complete control of the process and customer experience. Deliveries to consumers and other end users are packaged, and accompanied by accessories, SIM cards, manuals, maps and other market-specific collateral material. When we collect payment directly from the end user via credit card processing, all related credit card fees and any bad debts are our responsibility. We accept returns by consumers and other end users whether or not defective, or otherwise nonconforming, in accordance with returns policies and procedures agreed to by T-Mobile. All of these current services are built upon business rules and interfaces that have been jointly developed over the last seven years and are fully imbedded in our systems and operations.
T-Mobile is currently considering changing the fulfillment and delivery component of the marketing, sales and supply chain model to an inventory consignment and fee for “pick, pack and ship” approach. If this change is implemented, this fulfillment and delivery component may continue to be performed by us, or performance of this component could be sourced elsewhere by T-Mobile. Implementation of this change could also impact the other components of our existing T-Mobile relationship, or could result in termination of the relationship altogether. As noted previously, these types of relationships are typically of limited duration. Moreover, any significant change to, or termination of, the existing relationship with T-Mobile would have a material adverse effect on revenues, contribution to selling, general and administrative expenses, and on our profits. We reasonably anticipate that, should any of these events be initiated, no material impact would occur for at least six months after notice of a change or termination is given or negotiated. To date, no such notice has been received. In the meantime, revenues may increase or decrease on the basis of the various factors typically applicable to this relationship. Should this relationship either change in a material way or terminate, we would take appropriate action to reallocate dedicated resources to other opportunities and reduce dedicated expenses, recognizing that some resources and expenses may not be eliminated. We believe that we are performing at or above expected standards and providing T-Mobile an effective and productive integrated marketing, sales and supply chain system.
Total selling, general and administrative expenses increased by $2.2 million, or 12%, to $20.0 million for the first quarter of fiscal 2005 compared to $17.8 million for the first quarter of fiscal 2004. The largest factor for the
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increase in total selling, general and administrative expenses were increased fulfillment costs associated with the large growth in consumer revenue. 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 are greater, as a percentage of revenue, than larger commercial shipments. Also contributing to the increase are costs associated with our reward plans including the expensing of stock options and expenses associated with our recently issued Performance Stock Units. Beginning, in fiscal 2005, credit card and other banking and related fees were included in selling, general and administrative expenses; these fees had previously been classified as interest, fees and other expense, net on the Consolidated Income Statement. Credit card and other banking and related fees for fiscal 2004 have been reclassified to selling, general and other administrative expenses to conform to the current year presentation. These fees increased $174,300 from fiscal 2004 to fiscal 2005, primarily due to higher credit card fees associated with the increase in consumer sales. The increases in total selling, general and administrative expenses discussed above for the first quarter of fiscal 2005 were partially offset by approximately $510,000 of compensation expense in the first quarter of fiscal 2004 related to a stock option repurchase program completed on June 5, 2003. 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 $319,000 and $103,300 (not including the effects of the more favorable than anticipated resolution of a customer collection issue), for the quarters ended June 27, 2004 and June 29, 2003, respectively. Total selling, general and administrative expenses decreased as a percentage of revenues to 18.1% for the first quarter of fiscal 2005 from 25.4% for the first quarter of fiscal 2004.
As a result of the factors discussed above, we had income from operations of $2.4 million in the first quarter of fiscal 2005 compared to a loss from operations of $491,400 for the first quarter of fiscal 2004. For the first quarter, we had income before provision for income taxes of $2.4 million compared to in a loss before benefit from income taxes of $513,700 for the first quarter of fiscal 2004. The effective tax rates in the first quarter of fiscal years 2005 and 2004 were both 39.0%. Net income increased $1.8 million and earnings per share (diluted) increased $0.39 over the first quarter of fiscal 2004.
Liquidity and Capital Resources
We generated $103,000 of net cash from operating activities in the first quarter of fiscal 2005 compared to $6.6 million in the first quarter of fiscal 2004. In the first quarter of fiscal 2005, our cash flow from operations was driven largely by net income plus depreciation and amortization, decreases in trade accounts receivable and inventory, and was substantially offset by a significant decrease in trade accounts payable and accrued expenses and other current liabilities. Trade accounts receivable decreased due to increased collections from our customers, many of whom maintain accounts with open terms. The decrease in inventory is primarily related to a decease in handsets associated with a sequential decrease in consumer sales this quarter. Accounts payable decreased due to the timing of our payments to our vendors and to lower inventory purchases during the quarter. In most cases, we have negotiated open payment terms with our vendors and manufacturers. We negotiate the duration of these payment terms when establishing and/or renewing relationships with vendors and manufacturers and attempt to balance the payment terms with other factors such as pricing, availability of competitive products and anticipated demand. The timing of payments related to past purchases and the amount of future inventory purchases will create periodic increases and decreases in the accounts payable balance. Accrued expenses and other current liabilities decreased primarily due the timing and amount of certain payroll related accruals.
Capital expenditures totaled $691,000 in the first quarter of fiscal 2005, primarily related to investments in information technology. In the first quarter of fiscal 2004, capital expenditures totaled $751,200, comprised primarily of investments in information technology and improvements made to our Americas Logistics Center.
Net cash provided by financing activities was $181,500 for the first quarter of fiscal 2005 compared to net cash used of $548,300 for the first quarter of fiscal 2004. During the first quarter of fiscal 2005, we did not purchase any shares of our outstanding common stock pursuant to our stock buyback program. To date under this program, a total of 112,900 shares have been purchased for $754,400, or an average price of $6.68 per share. The
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Board of Directors has authorized the purchase of up to 450,000 shares. We expect to fund any future purchases from working capital and/or our revolving credit facility. No timetable has been set for the completion of this program.
To minimize interest expense, our policy is to use excess available cash to pay down any balance on our $30 million revolving credit facility. There was no balance on this credit facility at June 27, 2004 and we only took minimal draws on the facility during the first quarter of 2005.
Effective June 30, 2004, we refinanced our existing term loan with a bank. The new term loan is with Wachovia Bank, National Association and SunTrust Bank and is payable in monthly installments of principal and interest with the balance due at maturity, June 30, 2011. The note bears interest at a floating rate of LIBOR plus 1.75%. The note is secured by a first position deed of trust encumbering the Company-owned real property in Hunt Valley, Maryland. The loan is subject to generally the same financial covenants as 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 in our Form 10-K for the fiscal year ended March 28, 2004.
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 responsibility for 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. If applying this revenue recognition guidance resulted in recording revenue on a different basis from which we have previously concluded, or if the factors above change significantly, revenues could increase or decrease; however, our gross profit would remain constant, assuming no other significant changes in the terms of our agreements.
Impairment of Long-Lived and Indefinite-Lived Assets. Our Consolidated Balance Sheet includes goodwill of approximately $2.5 million. We perform an annual impairment test for goodwill on the first day of our fourth quarter. We also periodically evaluate our 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. 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 or intangible assets are 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.
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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.
Stock-based Compensation . Effective March 29, 2004, we adopted the fair value provisions of SFAS No. 123, “ Accounting for Stock-Based Compensation” using the modified prospective method, as prescribed by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. No compensation expense related to the grant of stock options under our stock compensation plans was reflected in net income for any periods ended on or before March 28, 2003, except as noted in Note 2 of our consolidated financial statements, because we accounted for grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and all stock options granted in those periods had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to all stock compensation for the three months ended June 27, 2004 is set forth in Note 2 to our consolidated financial statements.
Also under SFAS No. 123, we record compensation expense on our Performance Share Units (PSUs) over the vesting period, based on the number of shares management estimates will ultimately be issued. Accordingly, we determine the periodic financial statement compensation charge based upon the stock price at the PSU grant date; our projections of future EPS performance over the performance cycle; and the resulting amount of estimated share grants, net of actual forfeitures. Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change in future periods.
Additional Risks
We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. In addition to risks elsewhere discussed in this Quarterly Report on Form 10-Q and in our most recent filing on Form 10-K for the fiscal year ended March 28, 2004, included among the risks that could lead to a materially adverse impact on our business or operating results are: failure of our information technology system or distribution system; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; technology changes in the wireless communications industry, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; loss of significant customers or relationships, including affinity relationships; the strength of the customers’, vendors’ and affinity partners’ business; the termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners which are typically terminable by either party upon several months, or otherwise relatively short notice; economic conditions that may impact customers ability to fund purchase of our products and services; 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 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; inability to protect certain intellectual property, including systems and technologies on which we rely; and consolidation among large wireless service carriers and others within the wireless communications industry.
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Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
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, including those described throughout this Quarterly Report on Form 10-Q and our most recent filing on Form 10-K for the fiscal year ended March 28, 2004, and under the heading “Additional Risk Factors” above. For a variety of reasons, actual results may differ materially from those described in any such forward-looking statement. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.
Available Information
Our Internet Web site address is: www.tessco.com. We make available free of charge through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
We have not used derivative financial instruments. We believe our exposure to market risks, including exchange rate risk, interest rate risk and commodity price risk, is not material at the present time.
Item 4 – Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – Other Information
Item 1 – L egal Proceedings
Lawsuits and claims are filed against us from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on our financial condition or results of operations.
Item 2 – C hanges in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Not Applicable
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Item 3 – D efaults upon Senior Securities
None
Item 4 – S ubmission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders at the Company’s offices on July 22, 2004. At the meeting, the shareholders were asked to vote on the election of directors, the readoption of the Company’s 1994 Stock and Incentive Plan (including the extension of the date through which awards may be granted, to July 22, 2009), and the ratification of the appointment of the Company’s independent public accountants. Each of these proposals was described in the Company’s Definitive Proxy Statement filed with the Commission on June 17, 2004 (additional Proxy Statement information was filed with the Commission on July 12, 2004).
ELECTION OF DIRECTORS. At the meeting, the shareholders re-elected Jerome C. Eppler and Dennis J. Shaughnessy for a three-year term expiring at the Company’s 2007 Annual Meeting of Shareholders and until their successors are duly elected and qualify.. The term of office of each of Robert B. Barnhill, Jr., Benn R. Konsynski, John D. Beletic, Daniel Okrent and Morton Zifferer also continued after the meeting. The votes cast for Mr. Eppler and Mr. Shaughnessy were as follows:
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Jerome C. Eppler |
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4,260,233 |
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For |
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123,070 |
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Against or Withheld |
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Dennis J. Shaughnessy |
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4,273,328 |
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For |
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109,975 |
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Against or Withheld |
STOCK AND INCENTIVE PLAN. At the meeting, the shareholders approved the readoption of the Company’s 1994 Stock and Incentive Plan and the extension of the date which awards may be granted under the 1994 Stock and Incentive Plan to July 22, 2009. The number of votes “for” was 2,196,649, the number of votes “against” or “withheld” was 482,541, and the number of abstentions was 11,246.
INDEPENDENT AUDITORS. At the meeting, the shareholders ratified the appointment of Ernst & Young LLP to serve as the independent public accountants of the Company for the fiscal year ending March 27, 2005. The number of votes “for” was 4,369,476, the number of votes “against” or “withheld” was 10,184, and the number of abstentions was 3,643.
Item 5 – O ther Information
None
Item 6 – E xhibits and Reports on Form 8-K
(a) EXHIBITS:
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10.1 |
TESSCO Technologies Incorporated Performance Share Unit Agreement - Officers and Employees |
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10.2 |
TESSCO Technologies Incorporated Performance Share Unit Agreement - Non-Employee Directors |
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31.1 |
Rule 15d-14(a) Certification of Robert B. Barnhill, Jr., Chief Executive Officer. |
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31.2 |
Rule 15d-14(a) Certification of Robert C. Singer, Chief Financial Officer. |
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32.1 |
Section 1350 Certification of Robert B. Barnhill, Jr., Chief Executive Officer. |
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32.2 |
Section 1350 Certification of Robert C. Singer, Chief Financial Officer. |
(b) REPORT OF FORM 8-K
Current Report on Form 8-K filed April 23, 2004, announcing the Company’s fourth quarter fiscal 2004 financial results.
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Pursuant to the requirements 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.
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TESSCO TECHNOLOGIES INCORPORATED |
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Date: August 11, 2004 |
By: |
/s/Robert C. Singer |
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Robert C. Singer |
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Senior Vice President
and Chief Financial
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(principal financial and accounting officer) |
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Exhibit 10.1
TESSCO TECHNOLOGIES INCORPORATED
PERFORMANCE SHARE UNIT AGREEMENT – OFFICERS AND EMPLOYEES
THIS PERFORMANCE SHARE UNIT AGREEMENT between TESSCO TECHNOLOGIES INCORPORATED (the “ Company ”) and (“ you ”) is effective as of April 9, 2004.
Section 1. Grant of Performance Shares .
1.1. The Compensation Committee of the Company’s Board of Directors has awarded to you the conditional right to receive up to shares of the Company’s common stock (“ Performance Shares ”) under the TESSCO Technologies Incorporated 1994 Stock and Incentive Plan (the “ Plan ”). Your right to receive one (1) Performance Share is sometimes referred to as a “ Performance Share Unit ” or “ PSU ” and is in all respects subject to the terms and conditions contained in this Agreement.
1.2. In general, whether your PSUs ripen into the right to receive Performance Shares depends on two factors: (1) the Company’s earnings per share over the next three Fiscal Years, on a year-by-year basis or cumulatively, and (2) your individual performance rating for each of the next three Fiscal Years under the Company’s appraisal process. In addition, as described below, you must remain employed by the Company until Performance Shares are issued, which generally will occur in from two to four annual installments after the Fiscal Year for which the Performance Shares are earned.
Section 2. Defined Terms . This Agreement uses a number of terms that are defined either in the body of the Agreement or in the Glossary (section 11), which appears at the end of this Agreement. These defined terms are capitalized wherever they are used.
Section 3. Earning of Performance Shares .
3.1. In General . Performance Shares may be earned as of the end of each of the following three Fiscal Years of the Company: FY2005, FY2006, and FY2007. In particular:
(a) Performance Shares may be earned for any one of these three Fiscal Years if EPS for that particular Fiscal Year exceeds the Threshold EPS for that Fiscal Year. This is referred to as the “ Annual Test .”
(b) For the second and third Fiscal Years, i.e. , FY 2006 and FY2007, Performance Shares may also be earned if EPS (i) for that Fiscal Year and the preceding Fiscal Year (in the case of FY2006) or (ii) for that Fiscal Year and the two preceding Fiscal Years (in the case of FY2007) on a cumulative basis exceeds the Cumulative Threshold EPS for that Fiscal Year. This is referred to as the “ Cumulative Test .”
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(c) In general, the number of Performance Shares that can be earned for FY2006 and FY2007 under the Cumulative Test is significantly greater than the number that can be earned under the Annual Test. Whichever Test results in the greater number of Performance Shares earned for either of these Fiscal Years is the Test that will be applied.
3.2. Number of Performance Shares Earned . The number of Performance Shares earned for any Fiscal Year depends on the Corporate Performance Factor for the Fiscal Year (which is based on EPS as described below) and your Individual Performance Factor for the Fiscal Year. Specifically, the number of Performance Shares earned for a particular Fiscal Year is determined as follows:
Base Number of Shares x Corporate Performance Factor x Individual Performance Factor
where:
• “Base Number of Shares” is the number of shares determined from Table 1 for the particular Fiscal Year and the particular Test (Annual Test or Cumulative Test);
• “Corporate Performance Factor” is the percentage determined based on EPS as described in the next section; and
• “Individual Performance Factor” is the percentage based on your “Collaboration Rating” and your “Bottom Line Contribution to Results Rating” for the Fiscal Year as subjectively determined by the Company as part of the Company’s annual appraisal of your performance. This percentage will be % if you have not achieved your personal goals and between % and % if you meet or exceed your personal goals.
In applying this formula, two additional rules apply:
• Under the Cumulative Test, the result is reduced by the number of Performance Shares earned in the preceding Fiscal Year or Years; and
• In no case may the total number of Performance Shares earned as of the end of any Fiscal Year exceed the Cumulative Maximum Number of Performance Shares set forth in Table 1 .
3.3. Determination of “Corporate Performance Factor .” The Corporate Performance Factor for a particular Fiscal Year and for a particular Test is a percentage based on EPS (or cumulative EPS) relative to the applicable Threshold EPS and Goal EPS.
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If EPS (or cumulative EPS) is: |
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then the Corporate Performance Factor is |
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Less than Threshold EPS |
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% |
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Exactly equal to Threshold EPS |
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% |
2
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Greater than Threshold EPS but
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Determined by multiplying the “Incremental Percentage” shown in Table 1 by the number of cents by which EPS exceeds Threshold EPS and adding the result (rounded to the nearest whole percentage) to % |
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Exactly equal to or greater than Goal EPS |
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% |
Note that the maximum Corporate Performance Factor if Goal EPS is not achieved is %. If Goal EPS is achieved (or exceeded), then the Corporate Performance Factor is %.
Although the “Corporate Performance Factor” will be determined as set forth in this section (which is definitive), Exhibits A through E illustrate this information in graph form.
3.4. Applicable Parameters . The Base Number of Shares, the Threshold EPS, and the Goal EPS for each Fiscal Year for the Annual Test and for the Cumulative Test, as well as the Cumulative Maximum Number of Performance Shares that may be earned as of the end of each Fiscal Year, are as follows:
Table 1
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FY2005 |
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FY2006 |
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FY2007 |
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Cumulative Test : |
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Base Number of Shares |
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N/A |
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Threshold EPS |
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N/A |
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$ |
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$ |
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Goal EPS |
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N/A |
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$ |
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$ |
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Incremental Percentage |
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N/A |
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% |
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% |
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Annual Test : |
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Threshold EPS |
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Section 4. Issuance and Distribution of Performance Shares . Performance Shares earned as described in section 3 will be issued and distributed to you in installments as follows, subject to section 5:
• Performance Shares earned for FY2005 will be issued and distributed in four (4) approximately equal installments, on May 1, 2005, 2006, 2007, and 2008.
• Performance Shares earned for FY2006 will be issued and distributed in three (3) approximately equal installments, on May 1, 2006, 2007, and 2008.
• Performance Shares earned for FY2006 will be issued and distributed in two (2) approximately equal installments, on May 1, 2007 and 2008.
Section 5. Continued Employment .
5.1. In order to earn Performance Shares for any particular Fiscal Year, you must be employed by the Company for the entire Fiscal Year. Once your employment terminates (for whatever reason), you may no longer earn any additional Performance Shares.
5.2. In order to receive Performance Shares that you have earned, you must be employed by the Company on the date that the Performance Shares are to be issued and distributed (as provided in section 4). You will forfeit your right to receive Performance Shares that have been earned but have not been issued and distributed as of the date your employment terminates. This condition will not apply, however, if:
• Your employment was terminated by the Company other than for Cause;
• You terminated your employment for Good Reason;
• You terminated your employment after reaching your “normal retirement date” as defined in the Company’s Retirement Savings Plan (or successor plan);
• Your employment was terminated either by you or by the Company on account of Disability; or
• Your employment was terminated by reason of your death.
5.3. “ Employment ” by the Company for purposes of this Agreement includes employment by any of the Company’s subsidiaries.
Section 6. Illustrations . The application of the above provisions is illustrated by the following examples:
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Example 1 . If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is %. If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is %. If EPS for FY2005 is $ or greater, then the Corporate Performance Factor for that Fiscal Year is %.
Example 2 If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is the excess of EPS ($ ) over Threshold EPS ($ ), or cents, times the Incremental Percentage ( %), which (rounded to the nearest whole percentage) is % ( x %), plus %, which is %. If your Individual Performance Factor for the Fiscal Year is 100%, you would earn Performance Shares, which is the Base Number of Shares for FY2005 ( ) times the Corporate Performance Factor ( %) times your Individual Performance Factor (100%). Assuming that you remain employed as required by section 5 (and there is no intervening Change in Control as described in section 7), these Performance Shares would be issued and distributed you as follows: shares on May 1, 2005; shares on May 1, 2006; shares on May 1, 2007;and shares on May 1, 2008.
Example 3 Assume that EPS for FY2005 is $ and that your Individual Performance Factor for the Fiscal Year is %. Then (if you are employed for the entire Fiscal Year as required by section 5.1) you will earn Performance Shares: ($ -= cents) x % = % (rounded to %) + %, or % x % x .
Example 4 Assume that EPS for FY2005 (as in Example 3 ) is $ and for FY2006 is $ . You would not be entitled to any Performance Shares under the Annual Test for FY2006 since EPS is less than the Threshold EPS for FY2006 ($ ). If your Individual Performance is %, you would, however, be entitled to Performance Shares under the Cumulative Test (assuming you were employed for the entire Fiscal Year as required by section 5.1), determined as follows:
• Corporate Performance Factor = Cumulative EPS ($ + = $ ) minus the Cumulative Test Threshold EPS for FY2006 ($ ), or cents, times the Incremental Percentage ( %), which rounded to the nearest whole percentage is % ( x % = %), plus % = %
• times Base Number of Shares ( )
5
• times your Individual Performance Factor (assumed to be % in this example)
• minus the Performance Shares earned for FY2005 (per Example 3 ).
Example 5 Assume that for FY2005 your Individual Performance Factor is 100% and that EPS equals or exceeds the Goal EPS ($ ) for that Fiscal Year. Thus, the Corporate Performance Factor will be . Although the Base Number of Shares for FY2005 ( ) times the Corporate Performance Factor () times your Individual Performance Factor () is , the number of Performance Shares you can earn for FY2005 is limited to . In the same vein, if the cumulative Goal EPS for FY2006 is met (and therefore the Corporate Performance Factor is %) and your Individual Performance Factor for that Fiscal Year is %, the maximum number of Performance Shares you can earn for FY2006 is , even though the Base Number of Shares under the Cumulative Test ( ) times % times % is .
Section 7. Change in Control . If there is a Change in Control of the Company, then:
7.1. For the Fiscal Year in which the Change in Control occurs ( provided you are employed by the Company on the date of the Change in Control), you will earn Performance Shares as though (i) EPS for that Fiscal Year equals Goal EPS for that Fiscal Year (as set forth in Table 1 for the Annual Test) and (ii) your Individual Performance Factor is %;
7.2. Provided you are employed by the Company on the date of the Change in Control, any Performance Shares that you have earned for prior Fiscal Years but that have not yet been issued and distributed to you will be issued and distributed to you effective as of the Change in Control, along with any Performance Shares earned under section 7.1; and
7.3. Except as provided in this section, this Agreement and your right to earn Performance Shares for any period beginning on or after the date of the Change in Control will terminate.
Section 8. Confidentiality .
8.1. You acknowledge that the information contained in this Agreement, particularly the Threshold EPS and Goal EPS information may be highly confidential and not available to the public and that disclosure of the information contained in this Agreement could result in harm to the Company. Therefore, in addition to any obligation you may have under the TESSCO Code of Conduct or any other policy of or agreement with the Company, you specifically agree that you will not disclose any of the provisions of or information contained in this Agreement except as expressly
6
required by a subpoena or other order of a court or administrative agency. If you believe that you are so required to disclose any of the provisions of or information contained in this Agreement, you agree to give the Company prompt written notice of this requirement so that the Company (at its expense) may seek an appropriate protective order or otherwise resist disclosure.
8.2. If you breach your obligations under this section, the Company may terminate this Agreement by giving you written notice of termination. If the Company does so, you will no longer be entitled to earn any Performance Shares under this Agreement or to receive any Performance Shares that have been earned but not yet issued and distributed, whether or not the Company also terminates your employment.
8.3. The nondisclosure obligation contained in this section will not apply to information that has been disclosed to the public by the Company or by someone other than you or a person who (directly or indirectly) obtained the information from you.
Section 9. Adjustment of Number of Performance Shares, etc .
9.1. Stock Dividends, Splits, Etc . In the event of a stock split, a stock dividend or a similar change in the shares of the Company’s common stock, the number of Performance Shares that may be earned and the number of Performance Shares that have been earned but not yet issued and distributed under this Agreement, as well as Threshold EPS, Goal EPS, Base Number of Shares, and the Maximum Number of Performance Shares, may be adjusted pursuant to the Plan or otherwise as the Compensation Committee deems reasonable so as to preserve the same relative rights and obligations as are provided for in this Agreement.
9.2. Reorganization Events . After any capital reorganization, reclassification of shares of the Company’s common stock, or consolidation of the Company with, or merger of the Company into, any other corporation or entity that does not constitute a Change in Control (each a “ Reorganization Event ”), the number of Performance Shares that may be earned and the number of Performance Shares that have been earned but not yet issued and distributed under this Agreement, as well as Threshold EPS, Goal EPS, Base Number of Shares, and the Maximum Number of Performance Shares, may be adjusted pursuant to the Plan or otherwise as the Compensation Committee deems reasonable so as to preserve the same relative rights and obligations as are provided for in this Agreement.
9.3. Reservation of Sufficient Shares . The Company will reserve and keep available out of its authorized but unissued shares of common stock a number of such shares as will be sufficient to enable the Company to issue and distribute any Performance Shares that become issuable and distributable under this Agreement.
9.4. Registration and Approval . If any shares reserved for issuance under this Agreement require registration with or approval of any governmental authority under any federal or state law before those shares may be validly issued, then
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the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval. This provision, however, will not require the Company to secure any registration or approval in order (i) to issue shares under this Agreement if those shares can lawfully be issued pursuant to one or more exemptions from registration under applicable federal and state securities laws (even though the shares may constitute “restricted securities” or the holder of such shares may be unable to transfer the shares without registration or the availability of a suitable exemption from registration under such laws) or (ii) to enable any person to sell or distribute shares received under this Agreement in a transaction involving a public offering within the meaning of the Securities Act as then in effect.
9.5. Shares Fully Paid and Nonassessable . All Shares issued under this Agreement will upon issuance be fully paid and nonassessable.
Section 10. Restrictions on Transfer; Legends .
10.1. Transfer Restrictions; Opinion of Counsel . Neither this Agreement nor all or any part of your rights under this Agreement may be transferred, i.e. , pledged, hypothecated, sold, assigned, or otherwise encumbered or disposed of, either voluntarily or by operation of law (whether by virtue of execution, attachment, or similar process), except as may expressly be provided in the Plan. No shares issued under this Agreement may be transferred, other than by will or by operation of the laws of descent and distribution, unless the transferor first delivers to the Company an opinion of counsel reasonably satisfactory to counsel for the Company to the effect that the transfer is permitted under federal and state securities laws. Any purported transfer in violation of these restrictions will be ineffective.
10.2. Stock Certificate Legends . Each certificate evidencing Performance Shares issued under this Agreement and each certificate evidencing shares issued to any subsequent transferee of any Performance Shares may be imprinted with a legend in substantially the following form:
The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state. The transfer of the shares represented by this certificate is subject to compliance with the conditions specified in an Agreement dated as of April 9, 2004 under which these shares were issued, and no transfer of these shares will be valid or effective until such conditions and provisions have been fulfilled or complied with. A copy of the Agreement will be made available to any person having a valid interest therein upon request and without charge. Upon the fulfillment of such conditions and provisions, the issuer has agreed to deliver to the holder hereof a new certificate, not bearing this legend, for the number of shares represented hereby, registered in the name of the holder hereof.
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Section 11. Miscellaneous .
11.1. Entire Agreement . This Agreement constitutes the entire agreement and understanding between us, and supersedes any prior agreement or understanding, relating to the subject matter of this Agreement.
11.2. Conflicts with Plan; Amendments . This Agreement has been granted as a “Performance Award” under the Plan and will be construed consistently with the Plan. In the event of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall control. The Committee has the right, in its sole discretion, to amend this Agreement from time to time in any manner for the purpose of promoting the objectives of the Plan but only if all other Performance Share Award Agreements under the Plan that are then in effect at the time of such amendment are also similarly amended with substantially the same effect. Any such amendment of this Agreement will, upon adoption by the Committee, become and be binding and conclusive on all persons affected by it without requirement for consent or other action by any such person. The Company will give you written notice of any such amendment of this Agreement as promptly as practicable after it is adopted.
11.3. No Rights of Stockholder . You will not have the rights of a stockholder of the Company with respect to the Performance Shares that may become issuable under this Agreement until the Performance Shares have actually been issued and distributed to you. This Agreement will not affect in any way the right or power of the Board of Directors or the stockholders to make or authorize any adjustments, recapitalizations, reorganizations, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, or shares of capital stock with a preference ahead of, or convertible into, or otherwise affecting the common stock or rights of holders of common stock, or any dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company’s assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
11.4. Notices . Any notice or communication required or permitted by this Agreement will be sufficiently given if delivered in person or by commercial courier service or sent by first class mail, postage prepaid:
(i) if to the Company, addressed to it at 11126 McCormick Road, Hunt Valley, Maryland 21031, marked for the attention of the President, and
(ii) if to you, to the address set forth below your signature,
or in either case to such other address as either of us notifies the other in accordance with this section.
11.5. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
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11.6. Headings . The descriptive headings in this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement.
11.7. Limitations on Issuance . Notwithstanding any other provisions of this Agreement or of the Plan, no Performance Shares will be issuable under this Agreement at any time when such issuance is prohibited by the Company’s policies then in effect concerning transactions by officers, directors, and employees in securities of the Company.
11.8. Fractional Shares . The Company will not be required to issue fractions of Performance Shares under this Agreement. If any fractional interest in a Performance Share is otherwise deliverable, the Company will instead pay cash equal to the fair market value of the fractional interest as reasonably determined by the Company.
11.9. Withholding Taxes . The Company will be entitled to require as a condition of delivery to you of a certificate representing any Performance Shares that you remit to the Company an amount sufficient to satisfy all federal, state, and other taxes or withholding requirements that may be imposed upon the Company. Whether or not the Company requires you to remit any such amounts, the Company will at all times have the right to withhold such amounts from any compensation or other payments otherwise due to you (under this Agreement or otherwise).
11.10. Issuance Taxes . The issuance of stock certificates under this Agreement will be made without charge to you for any stamp or similar tax imposed with respect to such certificate. The Company will not, however, be required to pay any such tax that may be payable on account of the issuance and delivery of stock certificates in any name other yours, and the Company will not be required to issue or deliver any such stock certificate unless and until the person or persons requesting its issuance have paid to the Company the amount of such tax or have established to the satisfaction of the Company that such tax has been paid.
Section 12. Glossary . The following capitalized terms have the meanings set forth in this section:
12.1. “ EPS ” means the Company’s consolidated diluted earnings per share net of the costs for the Fiscal Year associated with all components of the Company’s Reward for Results Program (or successor incentive compensation arrangements), including the costs associated with the grant of Performance Shares under this and similar Agreements, all as determined in good faith by the Compensation Committee. The Compensation Committee may make such adjustments to EPS, and to Threshold EPS and Goal EPS, for any Fiscal Year as the Compensation Committee reasonably determines in its sole discretion are necessary (i) to maintain consistency with the accounting principles and practices applied by the Company on the effective date of this Agreement or (ii) as a result of transactions or events described in sections 9.1 or 9.2, or other extraordinary or nonrecurring events not contemplated in developing the Threshold EPS and Goal EPS targets, in order to preserve the Compensation Committee’s intent in issuing this and similar Agreements.
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12.2. “ Base Number of Shares ” is defined in section 3.2.
12.3. “ Cause ” means:
(i) your conviction of, or a plea of guilty or nolo contendere to, a felony or a crime involving moral turpitude;
(ii) your embezzlement or criminal diversion of funds or property of the Company or any of the Company’s subsidiaries;
(iii) your breach of your confidentiality obligations under section ; or
(iv) any other gross misconduct by you in connection with your employment with the Company or any willful failure by you to perform the substantial duties of your position.
12.4. “ Change in Control ” means the occurrence of any of the following:
(i) any “person” (as that term is used in section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) (other than Robert B. Barnhill, Jr., his affiliates, and members of his family) becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the then-outstanding securities of the Company; or
(ii) there is a change in the composition of a majority of the Board of Directors of the Company within twelve (12) months after any “person” (as defined above) (other than Robert B. Barnhill, Jr., his affiliates, and members of his family) becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the then-outstanding securities of the Company; or
(iii) there is consummated any consolidation or merger or share exchange involving the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately before the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or
(iv) there is consummated any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or a substantial portion of the assets of the Company other than to one or more of its wholly-owned subsidiaries; or
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(v) the stockholders of the Company approve a plan or proposal for the complete or partial liquidation, dissolution, or divisive reorganization of the Company.
12.5. “ Compensation Committee ” means the Compensation Committee of the Company’s Board of Directors as constituted from time to time.
12.6. “ Corporate Performance Factor ” is defined in section 3.3.
12.7. “ Disability ” means a physical or mental disease, injury, or infirmity that prevents you (despite the provision of reasonable accommodations as required by law) from performing the substantial duties of your position for a period of one hundred eighty (180) consecutive days as certified by a physician designated by or acceptable to the Company.
12.8. “ Fiscal Year ” means a fiscal year of the Company.
12.9. “ FY2005 ,” “ FY2006 ,” and “ FY2007 ” mean the Fiscal Years ending in March 2005, 2006, and 2007, respectively.
12.10. “ Good Reason ” means:
(i) any material adverse change in your title or reporting responsibilities or any material reduction in your authority, provided you specifically object in writing to the change or reduction within thirty (30) days and the Company does not rescind the change or reduction within a further period of thirty (30) days; or
(ii) any failure by the Company or its subsidiaries to make a payment due to you or to provide you with a benefit due to you, but only if the failure is not cured within fifteen (15) days after the Company receives written notice of the failure.
12.11. “ Incremental Percentage ” is defined in sections 3.3 and 3.4.
12.12. “ Individual Performance Factor ” is defined in section 3.2.
12.13. “ Performance Shares ” means shares of the Company’s common stock that may become issuable to you under this Agreement.
12.14. “ Performance Share Unit ” or “ PSU ” means your right to receive, subject to the terms and conditions contained in this Agreement, one (1) Performance Share.
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To confirm the above, the Company and you hereby sign this Agreement, which is effective as of the date set forth on the first page.
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ATTEST/WITNESS: |
TESSCO TECHNOLOGIES INCORPORATED |
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Robert B. Barnhill, Jr. |
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Chairman and Chief Executive
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(SEAL) |
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«Participant» |
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Exhibit 10.2
TESSCO TECHNOLOGIES INCORPORATED
PERFORMANCE SHARE UNIT AGREEMENT – NON EMPLOYEE DIRECTORS
THIS PERFORMANCE SHARE UNIT AGREEMENT between TESSCO TECHNOLOGIES INCORPORATED (the “ Company ”) and «Participant» (“ you ”) is effective as of April 9, 2004.
Section 1. Grant of Performance Shares .
1.1. The Company has awarded to you the conditional right to receive up to shares of the Company’s common stock (“ Performance Shares ”) under the TESSCO Technologies Incorporated 1994 Stock and Incentive Plan (the “ Plan ”). Your right to receive one (1) Performance Share is sometimes referred to as a “ Performance Share Unit ” or “ PSU ” and is in all respects subject to the terms and conditions contained in this Agreement.
1.2. In general, whether your PSUs ripen into the right to receive Performance Shares depends on the Company’s earnings per share over the next three Fiscal Years, on a year-by-year basis or cumulatively. In addition, as described below, you must remain a member of the Company’s Board of Directors until Performance Shares are issued, which generally will occur in from two to four annual installments after the Fiscal Year for which the Performance Shares are earned.
Section 2. Defined Terms . This Agreement uses a number of terms that are defined either in the body of the Agreement or in the Glossary (section 11), which appears at the end of this Agreement. These defined terms are capitalized wherever they are used.
Section 3. Earning of Performance Shares .
3.1. In General . Performance Shares may be earned as of the end of each of the following three Fiscal Years of the Company: FY2005, FY2006, and FY2007. In particular:
(a) Performance Shares may be earned for any one of these three Fiscal Years if EPS for that particular Fiscal Year exceeds the Threshold EPS for that Fiscal Year. This is referred to as the “ Annual Test .”
(b) For the second and third Fiscal Years, i.e. , FY 2006 and FY2007, Performance Shares may also be earned if EPS (i) for that Fiscal Year and the preceding Fiscal Year (in the case of FY2006) or (ii) for that Fiscal Year and the two preceding Fiscal Years (in the case of FY2007) on a cumulative basis exceeds the Cumulative Threshold EPS for that Fiscal Year. This is referred to as the “ Cumulative Test .”
(c) In general, the number of Performance Shares that can be earned for FY2006 and FY2007 under the Cumulative Test is significantly greater
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than the number that can be earned under the Annual Test. Whichever Test results in the greater number of Performance Shares earned for either of these Fiscal Years is the Test that will be applied.
3.2. Number of Performance Shares Earned . The number of Performance Shares earned for any Fiscal Year depends on the Corporate Performance Factor for the Fiscal Year (which is based on EPS as described below). Specifically, the number of Performance Shares earned for a particular Fiscal Year is determined as follows:
Base Number of Shares x Corporate Performance Factor
where:
• “Base Number of Shares” is the number of shares determined from Table 1 for the particular Fiscal Year and the particular Test (Annual Test or Cumulative Test); and
• “Corporate Performance Factor” is the percentage determined based on EPS as described in the next section.
In applying this formula, two additional rules apply:
• Under the Cumulative Test, the result is reduced by the number of Performance Shares earned in the preceding Fiscal Year or Years; and
• In no case may the total number of Performance Shares earned as of the end of any Fiscal Year exceed the Cumulative Maximum Number of Performance Shares set forth in Table 1 .
3.3. Determination of “Corporate Performance Factor .” The Corporate Performance Factor for a particular Fiscal Year and for a particular Test is a percentage based on EPS (or cumulative EPS) relative to the applicable Threshold EPS and Goal EPS.
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If EPS (or cumulative EPS) is: |
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Determined by multiplying the “Incremental Percentage” shown in Table 1 by the number of cents by which EPS exceeds Threshold EPS and adding the result (rounded to the nearest whole percentage) to % |
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Note that the maximum Corporate Performance Factor if Goal EPS is not achieved is %. If Goal EPS is achieved (or exceeded), then the Corporate Performance Factor is %.
Although the “Corporate Performance Factor” will be determined as set forth in this section (which is definitive), Exhibits A through E illustrate this information in graph form.
3.4. Applicable Parameters . The Base Number of Shares, the Threshold EPS, and the Goal EPS for each Fiscal Year for the Annual Test and for the Cumulative Test, as well as the Cumulative Maximum Number of Performance Shares that may be earned as of the end of each Fiscal Year, are as follows:
Table 1
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Base Number of Shares |
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Threshold EPS |
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$ |
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$ |
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Goal EPS |
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N/A |
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$ |
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$ |
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Incremental Percentage |
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N/A |
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% |
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% |
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Annual Test : |
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Base Number of Shares |
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Threshold EPS |
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$ |
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$ |
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$ |
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Goal EPS |
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$ |
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$ |
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$ |
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Incremental Percentage |
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Section 4. Issuance and Distribution of Performance Shares . Performance Shares earned as described in section 3 will be issued and distributed to you in installments as follows, subject to section 5:
• Performance Shares earned for FY2005 will be issued and distributed in four (4) approximately equal installments, on May 1, 2005, 2006, 2007, and 2008.
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• Performance Shares earned for FY2006 will be issued and distributed in three (3) approximately equal installments, on May 1, 2006, 2007, and 2008.
• Performance Shares earned for FY2006 will be issued and distributed in two (2) approximately equal installments, on May 1, 2007 and 2008.
Section 5. Continued Employment .
5.1. In order to earn Performance Shares for any particular Fiscal Year, you must be a member of the Company’s Board of Directors (a “ Director ”) for the entire Fiscal Year. Once you are no longer a Director (for whatever reason), you may no longer earn any additional Performance Shares.
5.2. In order to receive Performance Shares that you have earned, you must be a Director of the Company on the date that the Performance Shares are to be issued and distributed (as provided in section 4). You will forfeit your right to receive Performance Shares that have been earned but have not been issued and distributed as of the date you are no longer a Director. This condition will not apply, however, if you are no longer a Director because of your Disability or death.
Section 6. Illustrations . The application of the above provisions is illustrated by the following examples:
Example 1 . If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is %. If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is %. If EPS for FY2005 is $ or greater, then the Corporate Performance Factor for that Fiscal Year is %.
Example 2 If EPS for FY2005 is $ , then the Corporate Performance Factor for that Fiscal Year is the excess of EPS ($ ) over Threshold EPS ($ ), or $ , times the Incremental Percentage ( %), which (rounded to the nearest whole percentage) is % ( x %), plus %, which is %. You would earn Performance Shares, which is the Base Number of Shares for FY2005 ( ) times the Corporate Performance Factor ( %). Assuming that you remain a Director as required by section 5 (and there is no intervening Change in Control as described in section 7), these Performance Shares would be issued and distributed you as follows: shares on May 1, 2005; shares on May 1, 2006; shares on May 1, 2007;and shares on May 1, 2008.
Example 3 Assume that EPS for FY2005 is $ . Then (if you remain a Director for the entire Fiscal Year as required by section 5.1) you will earn Performance Shares: [($ - = ) x % = % (rounded to %) + %, or %] x % x .
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Example 4 Assume that EPS for FY2005 (as in Example 3 ) is $ and for FY2006 is $ . You would not be entitled to any Performance Shares under the Annual Test for FY2006 since EPS is less than the Threshold EPS for FY2006 ($ ). You would, however, be entitled to Performance Shares under the Cumulative Test (assuming you were a Director for the entire Fiscal Year as required by section 5.1), determined as follows:
• Corporate Performance Factor = Cumulative EPS ($ + = $ ) minus the Cumulative Test Threshold EPS for FY2006 ($ ), or , times the Incremental Percentage ( %), which rounded to the nearest whole percentage is % ( x % = %), plus % = %
• times Base Number of Shares ( )
• minus the Performance Shares earned for FY2005 (per Example 3 ).
Example 5 Assume that for FY2005 EPS equals or exceeds the Goal EPS ($ ) for that Fiscal Year. Thus, the Corporate Performance Factor will be %. Although the Base Number of Shares for FY2005 ( ) times the Corporate Performance Factor ( %) is , the number of Performance Shares you can earn for FY2005 is limited to . In the same vein, if the cumulative Goal EPS for FY2006 is met (and therefore the Corporate Performance Factor is %), the maximum number of Performance Shares you can earn for FY2006 is , even though the Base Number of Shares under the Cumulative Test ( ) times % is .
Section 7. Change in Control . If there is a Change in Control of the Company, then:
7.1. For the Fiscal Year in which the Change in Control occurs ( provided you are a Director of the Company on the date of the Change in Control), you will earn Performance Shares as though EPS for that Fiscal Year equals Goal EPS for that Fiscal Year (as set forth in Table 1 for the Annual Test);
7.2. Provided you are a Director of the Company on the date of the Change in Control, any Performance Shares that you have earned for prior Fiscal Years but that have not yet been issued and distributed to you will be issued and distributed to you effective as of the Change in Control, along with any Performance Shares earned under section 7.1; and
7.3. Except as provided in this section, this Agreement and your right to earn Performance Shares for any period beginning on or after the date of the Change in Control will terminate.
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Section 8. Confidentiality .
8.1. You acknowledge that the information contained in this Agreement, particularly the Threshold EPS and Goal EPS information, may be highly confidential and not available to the public and that disclosure of the information contained in this Agreement could result in harm to the Company. Therefore, in addition to any obligation you may have under the TESSCO Code of Conduct or any other policy of or agreement with the Company, you specifically agree that you will not disclose any of the provisions of or information contained in this Agreement except as expressly required by a subpoena or other order of a court or administrative agency. If you believe that you are so required to disclose any of the provisions of or information contained in this Agreement, you agree to give the Company prompt written notice of this requirement so that the Company (at its expense) may seek an appropriate protective order or otherwise resist disclosure.
8.2. If you breach your obligations under this section, the Company may terminate this Agreement by giving you written notice of termination. If the Company does so, you will no longer be entitled to earn any Performance Shares under this Agreement or to receive any Performance Shares that have been earned but not yet issued and distributed, whether or not you thereafter remain a Director.
8.3. The nondisclosure obligation contained in this section will not apply to information that has been disclosed to the public by the Company or by someone other than you or a person who (directly or indirectly) obtained the information from you.
Section 9. Adjustment of Number of Performance Shares, etc .
9.1. Stock Dividends, Splits, Etc . In the event of a stock split, a stock dividend or a similar change in the shares of the Company’s common stock, the number of Performance Shares that may be earned and the number of Performance Shares that have been earned but not yet issued and distributed under this Agreement, as well as Threshold EPS, Goal EPS, Base Number of Shares, and the Maximum Number of Performance Shares, may be adjusted pursuant to the Plan or otherwise as the Compensation Committee deems reasonable so as to preserve the same relative rights and obligations as are provided for in this Agreement.
9.2. Reorganization Events . After any capital reorganization, reclassification of shares of the Company’s common stock, or consolidation of the Company with, or merger of the Company into, any other corporation or entity that does not constitute a Change in Control (each a “ Reorganization Event ”), the number of Performance Shares that may be earned and the number of Performance Shares that have been earned but not yet issued and distributed under this Agreement, as well as Threshold EPS, Goal EPS, Base Number of Shares, and the Maximum Number of Performance Shares, may be adjusted pursuant to the Plan or otherwise as the Compensation Committee deems reasonable so as to preserve the same relative rights and obligations as are provided for in this Agreement.
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9.3. Reservation of Sufficient Shares . The Company will reserve and keep available out of its authorized but unissued shares of common stock a number of such shares as will be sufficient to enable the Company to issue and distribute any Performance Shares that become issuable and distributable under this Agreement.
9.4. Registration and Approval . If any shares reserved for issuance under this Agreement require registration with or approval of any governmental authority under any federal or state law before those shares may be validly issued, then the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval. This provision, however, will not require the Company to secure any registration or approval in order (i) to issue shares under this Agreement if those shares can lawfully be issued pursuant to one or more exemptions from registration under applicable federal and state securities laws (even though the shares may constitute “restricted securities” or the holder of such shares may be unable to transfer the shares without registration or the availability of a suitable exemption from registration under such laws) or (ii) to enable any person to sell or distribute shares received under this Agreement in a transaction involving a public offering within the meaning of the Securities Act as then in effect.
9.5. Shares Fully Paid and Nonassessable . All Shares issued under this Agreement will upon issuance be fully paid and nonassessable.
Section 10. Restrictions on Transfer; Legends .
10.1. Transfer Restrictions; Opinion of Counsel . Neither this Agreement nor all or any part of your rights under this Agreement may be transferred, i.e. , pledged, hypothecated, sold, assigned, or otherwise encumbered or disposed of, either voluntarily or by operation of law (whether by virtue of execution, attachment, or similar process), except as may expressly be provided in the Plan. No shares issued under this Agreement may be transferred, other than by will or by operation of the laws of descent and distribution, unless the transferor first delivers to the Company an opinion of counsel reasonably satisfactory to counsel for the Company to the effect that the transfer is permitted under federal and state securities laws. Any purported transfer in violation of these restrictions will be ineffective.
10.2. Stock Certificate Legends . Each certificate evidencing Performance Shares issued under this Agreement and each certificate evidencing shares issued to any subsequent transferee of any Performance Shares may be imprinted with a legend in substantially the following form:
The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state. The transfer of the shares represented by this certificate is subject to compliance with the conditions specified in an Agreement dated as of April 9, 2004 under which these shares were issued, and no transfer of these shares will be valid or effective until such conditions and provisions have been fulfilled or complied with. A copy of the Agreement will be
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made available to any person having a valid interest therein upon request and without charge. Upon the fulfillment of such conditions and provisions, the issuer has agreed to deliver to the holder hereof a new certificate, not bearing this legend, for the number of shares represented hereby, registered in the name of the holder hereof.
Section 11. Miscellaneous .
11.1. Entire Agreement . This Agreement constitutes the entire agreement and understanding between us, and supersedes any prior agreement or understanding, relating to the subject matter of this Agreement.
11.2. Conflicts with Plan; Amendments . This Agreement has been granted as a “Performance Award” under the Plan and will be construed consistently with the Plan. In the event of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall control. The Committee has the right, in its sole discretion, to amend this Agreement from time to time in any manner for the purpose of promoting the objectives of the Plan but only if all other Performance Share Award Agreements under the Plan that are then in effect at the time of such amendment are also similarly amended with substantially the same effect. Any such amendment of this Agreement will, upon adoption by the Committee, become and be binding and conclusive on all persons affected by it without requirement for consent or other action by any such person. The Company will give you written notice of any such amendment of this Agreement as promptly as practicable after it is adopted.
11.3. No Rights of Stockholder . You will not have the rights of a stockholder of the Company with respect to the Performance Shares that may become issuable under this Agreement until the Performance Shares have actually been issued and distributed to you. This Agreement will not affect in any way the right or power of the Board of Directors or the stockholders to make or authorize any adjustments, recapitalizations, reorganizations, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, or shares of capital stock with a preference ahead of, or convertible into, or otherwise affecting the common stock or rights of holders of common stock, or any dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company’s assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
11.4. Notices . Any notice or communication required or permitted by this Agreement will be sufficiently given if delivered in person or by commercial courier service or sent by first class mail, postage prepaid:
(i) if to the Company, addressed to it at 11126 McCormick Road, Hunt Valley, Maryland 21031, marked for the attention of the President, and
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(ii) if to you, to the address set forth below your signature,
or in either case to such other address as either of us notifies the other in accordance with this section.
11.5. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
11.6. Headings . The descriptive headings in this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement.
11.7. Limitations on Issuance . Notwithstanding any other provisions of this Agreement or of the Plan, no Performance Shares will be issuable under this Agreement at any time when such issuance is prohibited by the Company’s policies then in effect concerning transactions by officers, directors, and employees in securities of the Company.
11.8. Fractional Shares . The Company will not be required to issue fractions of Performance Shares under this Agreement. If any fractional interest in a Performance Share is otherwise deliverable, the Company will instead pay cash equal to the fair market value of the fractional interest as reasonably determined by the Company.
11.9. Withholding Taxes . The Company will be entitled to require as a condition of delivery to you of a certificate representing any Performance Shares that you remit to the Company an amount sufficient to satisfy all federal, state, and other taxes or withholding requirements that may be imposed upon the Company. Whether or not the Company requires you to remit any such amounts, the Company will at all times have the right to withhold such amounts from any compensation or other payments otherwise due to you (under this Agreement or otherwise).
11.10. Issuance Taxes . The issuance of stock certificates under this Agreement will be made without charge to you for any stamp or similar tax imposed with respect to such certificate. The Company will not, however, be required to pay any such tax that may be payable on account of the issuance and delivery of stock certificates in any name other yours, and the Company will not be required to issue or deliver any such stock certificate unless and until the person or persons requesting its issuance have paid to the Company the amount of such tax or have established to the satisfaction of the Company that such tax has been paid.
Section 12. Glossary . The following capitalized terms have the meanings set forth in this section:
12.1. “ EPS ” means the Company’s consolidated diluted earnings per share net of the costs for the Fiscal Year associated with all components of the Company’s Reward for Results Program (or successor incentive compensation arrangements), including the costs associated with the grant of Performance Shares under this and similar Agreements, all as determined in good faith by the Compensation
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Committee. The Compensation Committee may make such adjustments to EPS, and to Threshold EPS and Goal EPS, for any Fiscal Year as the Compensation Committee reasonably determines in its sole discretion are necessary (i) to maintain consistency with the accounting principles and practices applied by the Company on the effective date of this Agreement or (ii) as a result of transactions or events described in sections 9.1 or 9.2, or other extraordinary or nonrecurring events not contemplated in developing the Threshold EPS and Goal EPS targets, in order to preserve the Compensation Committee’s intent in issuing this and similar Agreements.
12.2. “ Base Number of Shares ” is defined in section 3.2.
12.3. “ Change in Control ” means the occurrence of any of the following:
(i) any “person” (as that term is used in section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) (other than Robert B. Barnhill, Jr., his affiliates, and members of his family) becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the then-outstanding securities of the Company; or
(ii) there is a change in the composition of a majority of the Board of Directors of the Company within twelve (12) months after any “person” (as defined above) (other than Robert B. Barnhill, Jr., his affiliates, and members of his family) becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the then-outstanding securities of the Company; or
(iii) there is consummated any consolidation or merger or share exchange involving the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately before the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or
(iv) there is consummated any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or a substantial portion of the assets of the Company other than to one or more of its wholly-owned subsidiaries; or
(v) the stockholders of the Company approve a plan or proposal for the complete or partial liquidation, dissolution, or divisive reorganization of the Company.
12.4. “ Compensation Committee ” means the Compensation Committee of the Company’s Board of Directors as constituted from time to time.
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12.5. “ Corporate Performance Factor ” is defined in section 3.3.
12.6. “ Disability ” means a physical or mental disease, injury, or infirmity that prevents you (despite the provision of reasonable accommodations as required by law) from performing the substantial duties of your position as a Director for a period of one hundred eighty (180) consecutive days as certified by a physician designated by or acceptable to the Company.
12.7. “ Fiscal Year ” means a fiscal year of the Company.
12.8. “ FY2005 ,” “ FY2006 ,” and “ FY2007 ” mean the Fiscal Years ending in March 2005, 2006, and 2007, respectively.
12.9. “ Incremental Percentage ” is defined in sections 3.3 and 3.4.
12.10. “ Performance Shares ” means shares of the Company’s common stock that may become issuable to you under this Agreement.
12.11. “ Performance Share Unit ” or “ PSU ” means your right to receive, subject to the terms and conditions contained in this Agreement, one (1) Performance Share.
To confirm the above, the Company and you hereby sign this Agreement, which is effective as of the date set forth on the first page.
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Exhibit 31.1
CERTIFICATION
I, Robert B. Barnhill, Jr., Chairman, President and Chief Executive Officer of TESSCO Technologies Incorporated, certify that:
Date: August 11, 2004 |
By: |
/s/ Robert B. Barnhill, Jr. |
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Robert B. Barnhill, Jr. |
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Chairman,
President and Chief Executive
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Exhibit 31.2
CERTIFICATION
I, Robert C. Singer, Chief Financial Officer of TESSCO Technologies Incorporated, certify that:
Date: August 11, 2004 |
By: |
/s/Robert C. Singer |
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Robert C. Singer |
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Chief Financial Officer |
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert B. Barnhill, Jr., Chief Executive Officer of TESSCO Technologies Incorporated, (the “Company”), certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Robert B. Barnhill, Jr. |
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Robert B. Barnhill, Jr. |
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The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert C. Singer, Chief Financial Officer of TESSCO Technologies Incorporated, (the “Company”), certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Robert C. Singer |
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Robert C. Singer |
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The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.