UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 24, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-24746
TESSCO TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in charter)
Delaware 52-0729657
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11126 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (410) 229-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes /X/ No / /
The number of shares of the registrant's Common Stock, $ .01 par value per
share, outstanding as of October 25, 2000 was 4,494,400.
TESSCO TECHNOLOGIES INCORPORATED
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION
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Item 1 Financial Statements
Consolidated Balance Sheets as of September 24, 2000 and March 3
26, 2000
Consolidated Statements of Income for the periods ended 4
September 24, 2000 and September 26, 1999
Consolidated Statements of Cash Flows for the periods ended 5
September 24, 2000 and September 26, 1999
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 10
PART II OTHER INFORMATION
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Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 12
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Signature 13
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TESSCO TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
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September 24, March 26,
2000 2000
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(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and marketable securities $ -- $ 818,100
Trade accounts receivable, net 30,634,400 28,177,400
Product inventory 37,770,200 31,723,800
Deferred tax asset 1,199,700 1,199,700
Prepaid expenses and other current assets 1,474,300 1,843,100
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Total current assets 71,078,600 63,762,100
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PROPERTY AND EQUIPMENT, net 18,476,100 17,160,900
GOODWILL 3,148,900 3,291,200
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Total assets $ 92,703,600 $ 84,214,200
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 30,739,200 $ 25,353,800
Accrued expenses and other current liabilities 4,377,400 3,981,300
Revolving line of credit 5,128,000 5,862,000
Current portion of long-term debt 344,300 332,900
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Total current liabilities 40,588,900 35,530,000
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DEFERRED TAX LIABILITY 806,200 806,200
LONG-TERM DEBT, net of current portion 6,593,800 6,795,800
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Total liabilities 47,988,900 43,132,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- --
Common stock 48,300 47,700
Additional paid-in capital 21,624,300 21,283,600
Treasury stock, at cost (3,792,600) (3,710,600)
Retained earnings 26,834,700 23,461,500
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Total shareholders' equity 44,714,700 41,082,200
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Total liabilities and shareholders' equity $ 92,703,600 $ 84,214,200
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See accompanying notes.
3
TESSCO TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
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Fiscal Quarters Ended Six Months Ended
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
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(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 66,602,100 $ 44,612,900 $129,124,600 $ 88,140,700
Cost of goods sold 48,622,000 31,932,300 94,321,100 63,834,700
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Gross profit 17,980,100 12,680,600 34,803,500 24,306,000
Selling, general and administrative expenses 14,629,700 9,988,200 28,399,900 19,329,400
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Income from operations 3,350,400 2,692,400 6,403,600 4,976,600
Interest expense, net 480,900 259,600 962,900 585,400
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Income before provision for income
taxes 2,869,500 2,432,800 5,440,700 4,391,200
Provision for income taxes 1,090,400 924,400 2,067,500 1,668,600
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Net income $ 1,779,100 $ 1,508,400 $ 3,373,200 $ 2,722,600
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Basic earnings per share $ 0.40 $ 0.34 $ 0.75 $ 0.61
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Diluted earnings per share $ 0.37 $ 0.33 $ 0.71 $ 0.59
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Basic weighted average shares outstanding 4,492,600 4,460,900 4,490,600 4,455,300
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Diluted weighted average shares outstanding 4,828,400 4,576,500 4,732,800 4,597,400
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See accompanying notes.
4
TESSCO TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended
September 24, September 26,
2000 1999
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,373,200 $ 2,722,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,706,100 1,299,300
Provision for bad debts 273,200 127,200
Increase in trade accounts receivable (2,730,200) (3,183,600)
Increase in product inventory (6,046,400) (372,200)
Decrease in prepaid expenses and other current assets 368,800 265,300
Increase in trade accounts payable 5,385,400 5,119,900
Increase (decrease) in accrued expenses and other current liabilities 396,100 (74,000)
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Net cash provided by operating activities 2,726,200 5,904,500
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,879,000) (1,516,600)
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Net cash used in investing activities (2,879,000) (1,516,600)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility (734,000) (3,872,000)
Payments on long-term debt (190,600) (154,400)
Proceeds from exercise of stock options 259,300 --
Decrease in other liabilities -- (50,000)
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Net cash used in financing activities (665,300) (4,076,400)
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Net (decrease) increase in cash and marketable securities (818,100) 311,500
CASH AND MARKETABLE SECURITIES, beginning of period 818,100 97,700
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CASH AND MARKETABLE SECURITIES, end of period $ -- $ 409,200
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See accompanying notes.
5
TESSCO TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 24, 2000
(Unaudited)
Note 1. Description of Business and Basis of Presentation
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TESSCO Technologies Incorporated (the "Company") is a leading provider of the
services, products and solutions required to build, operate, maintain and use
wireless voice, data, messaging, tracking and Internet systems. The Company
provides marketing and sales services, knowledge and supply chain management,
product-solution delivery, and control systems utilizing extensive Internet and
information technology. Although the Company conducts business selling various
products to different customer groups, these products and customers all fall
within the telecommunications industry; therefore, the Company reports operating
results as one reportable segment.
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 26, 2000.
Note 2. Earnings Per Share
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In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board (APB) Opinion No. 15 "Earnings
per Share" by replacing the presentation of primary earnings per share (EPS)
with basic EPS and replacing fully diluted EPS with diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares and the dilutive
common equivalent shares outstanding for the period.
6
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 Six Months Ended
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
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Basic weighted average
common shares
outstanding 4,492,600 4,460,900 4,490,600 4,455,300
Effect of dilutive common
equivalent shares 335,800 115,600 242,200 142,100
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Diluted weighted average
shares outstanding 4,828,400 4,576,500 4,732,800 4,597,400
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Options to purchase 95,000 shares of common stock at a weighted average exercise
price of $33.36 per share were outstanding as of September 24, 2000, 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.
Note 3. Revolving Credit Agreement
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On September 28, 2000, the Company and its affiliates amended the terms of the
Company's bank financing agreement. Pursuant to the amended terms, the
$15,000,000 credit facility has been increased to $30,000,000, the expiration
date of the facility was extended from September 2002 until September 2003, and
the net worth covenant was adjusted in a manner generally consistent with the
increased amount of available credit. Otherwise, the terms of the bank financing
agreement remain, in all material respects, the same as those set forth in the
financing agreement as existing prior to the amendment.
7
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 26, 2000.
Second Quarter of Fiscal 2001 Compared to Second Quarter of Fiscal 2000
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Revenues increased by $22.0 million, or 49.3%, to $66.6 million for the second
quarter of fiscal 2001 compared to $44.6 million for the second quarter of
fiscal 2000. Revenues from each of the Company's product categories increased.
The largest percentage increase was experienced in the sale of test and
maintenance products. Base site infrastructure, subscriber accessory, and test
and maintenance products and services accounted for approximately 50%, 30% and
20%, respectively, of revenues during the second quarter of fiscal 2001. The
Company experienced revenue growth in its system operators, reseller and
consumer market categories, partially offset by a decrease in its international
market category. Resellers, system operators, consumer services and
international users accounted for approximately 31%, 58%, 7% and 4%,
respectively, of revenues during the first quarter of fiscal 2001.
Gross profit increased by $5.3 million, or 41.8%, to $18.0 million for the
second quarter of fiscal 2001 compared to $12.7 million for the second quarter
of fiscal 2000 due to increased revenues. The gross profit margin decreased to
27.0% for the second quarter of fiscal 2001 compared to 28.4% for the second
quarter of fiscal 2000. The decrease in gross profit margin was principally
attributable to a change in product mix.
Total selling, general and administrative expenses increased by $4.6 million, or
46.5%, to $14.6 million for the second quarter of fiscal 2001 compared to $10.0
million for the second quarter of fiscal 2000. The increase in these expenses is
primarily attributable to continued investment in personnel and marketing
expenses to support future revenue and gross profit growth as well as increased
depreciation and amortization related to information system enhancements. Total
selling, general and administrative expenses decreased as a percentage of
revenues to 22.0% for the second quarter of fiscal 2001 from 22.4% for the
second quarter of fiscal 2000.
Income from operations increased by $658,000, or 24.4%, to $3.4 million for the
second quarter of fiscal 2001 compared to $2.7 million for the second quarter of
fiscal 2000. The operating income margin decreased to 5.0% for the second
quarter of fiscal 2001 compared to 6.0% for the second quarter of fiscal 2000.
Net interest expense increased by $221,300, or 85.2%, to $480,900 for the second
quarter of fiscal 2001 compared to $259,600 for the second quarter of fiscal
2000. This increase is due to increased levels of borrowing under the Company's
revolving credit facility as well as higher interest rates.
Income before provision for income taxes increased $436,700 or 18.0%, to $2.9
million for the second quarter of fiscal 2001 compared to $2.4 million for the
second quarter of fiscal 2000. The effective tax rate for both quarters was 38%.
Net income and earnings per share (diluted) for the second quarter of fiscal
2001 increased 17.9% and 12.1%, respectively, compared to the second quarter of
fiscal 2000.
First Six Months of Fiscal 2001 Compared to First Six Months of Fiscal 2000
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Revenues increased by $41.0 million, or 46.5%, to $129.1 million for the first
six months of fiscal 2001 compared to $88.1 million for the first six months of
fiscal 2000. Revenues increased in each of the Company's major product
categories, with the largest percentage increase experienced in the sale of test
and maintenance products. Base site infrastructure, subscriber accessory, and
test and maintenance products and services accounted for approximately 52%, 30%
and 18%, respectively, of revenues during the first six
8
months of fiscal 2001. The Company experienced revenue growth from its reseller,
system operator and consumer services categories, partially offset by a decrease
in its international category. Resellers, system operators, consumer services
and international users accounted for approximately 30%, 60%, 6% and 4%,
respectively, of revenues during the first six months of fiscal 2001.
Gross profit increased by $10.5 million, or 43.2%, to $34.8 million for the
first six months of fiscal 2001 compared to $24.3 million for the first six
months of fiscal 2000. The gross profit margin decreased to 27.0% for the first
six months of fiscal 2001 compared to 27.6% for the first six months of fiscal
2000. The decrease in gross profit margin was principally attributable to a
change in product mix.
Total operating expenses increased by $9.1 million, or 46.9%, to $28.4 million
for the first six months of fiscal 2001 compared to $19.3 million for the first
six months of fiscal 2000. The increase in these expenses is primarily
attributable to continued investment in personnel and marketing expenses to
support future revenue and gross profit growth as well as increased depreciation
and amortization related to information system enhancements. Total operating
expenses increased as a percentage of revenues to 22.0% for the first six months
of fiscal 2001 from 21.9% for the first six months of fiscal 2000.
Income from operations increased by $1.4 million, or 28.7%, to $6.4 million for
the first six months of fiscal 2001 compared to $5.0 million for the first six
months of fiscal 2000. The operating income margin decreased to 5.0% for the
first six months of fiscal 2001 compared to 5.7% for the first six months of
fiscal 2000.
Net interest expense increased by $377,500, or 64.5%, to $962,900 for the first
six months of fiscal 2001 compared to $585,400 for the first six months of
fiscal 2000. This increase is due to increased levels of borrowing under the
Company's revolving credit facility and higher interest rates.
Income before provision for income taxes increased $1.0 million or 23.9% to $5.4
million for the first six months of fiscal 2001 compared to $4.4 for the first
six months of fiscal 2000. The effective tax rate for both periods was 38%. Net
income and earnings per share (diluted) for the first six months of fiscal 2001
increased 23.9% and 20.3%, respectively, compared to the first six months of
fiscal 2000.
Liquidity and Capital Resources
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Net cash provided by operating activities was $2.7 million for the first six
months of fiscal 2001, compared to $5.9 million for the first six months of
fiscal 2000. This decrease was primarily the result of an increase in product
inventory in the first six months of fiscal 2001 as compared to the first six
months of fiscal 2000 partially offset by an increase in net income and
depreciation and amortization. Net cash used in investing activities increased
to $2.9 million for the first six months of fiscal 2001 compared to $1.5 million
for the first six months of fiscal 2000. Net cash used by financing activities
was $665,300 for the first six months of fiscal 2001 compared to $4.1 million
for the first six months of fiscal 2000. This decrease is primarily the result
of decreased repayments of the Company's revolving line of credit during the
first six months of fiscal 2001 compared to the first six months of fiscal 2000.
On September 28, 2000, the Company and its affiliates amended the terms of the
Company's bank financing agreement. Pursuant to the amended terms, the
$15,000,000 credit facility has been increased to $30,000,000, the expiration
date of the facility was extended from September 2002 until September 2003, and
the net worth covenant was adjusted in a manner generally consistent with the
increased amount of available credit (see Note 3 of the Notes to the
Consolidated Financial Statements).
9
Forward-Looking Statements
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This report contains a number of forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, all of which are based
on current expectations. These forward-looking statements may generally be
identified by the use of the words "may," "will," "expects," "anticipates,"
"estimates," and similar expressions. The Company's future results of operations
and other forward-looking statements contained in this report involve a number
of risks and uncertainties. For a variety of reasons, actual results may differ
materially from those described in any such forward-looking statement. Such
factors include but are no limited to, the following: the Company's dependence
on a relatively small number of suppliers and vendors, which could hamper the
Company's ability to maintain appropriate inventory levels and meet customer
demand; the effect that the loss of certain customers or vendors could have on
the Company's net profits; the possibility that unforeseen events could impair
the Company's ability to service its customers promptly and efficiently, if at
all; the possibility that, for unforeseen reasons, the Company may be delayed in
entering into or performing, or may fail to enter into or perform, anticipated
contracts or may otherwise be delayed in realizing or fail to realize
anticipated revenues or anticipated savings; existing competition from national
and regional distributors and the absence of significant barriers to entry which
could result in pricing and other pressures on profitability and market share;
and continuing changes in the wireless communications industry, including risks
associated with conflicting technologies, changes in technologies, inventory
obsolescence and evolving Internet business models and the resulting
competition. Consequently, the reader is cautioned to consider all
forward-looking statements in light of the risk to which they are subject.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not used derivative financial instruments. Management of the
Company believes its exposure to market risks, including exchange rate risk,
interest rate risk and commodity price risk, is not material at the present
time.
10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No material legal proceedings.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders at the Company's corporate
headquarters on July 20, 2000. At the meeting, the shareholders were asked to
vote on the election of directors, the approval of an amendment to the 1994
Stock and Incentive Plan increasing the number of shares available for issuance
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 15, 2000.
ELECTION OF DIRECTORS. At the meeting, the shareholders reelected John D.
Beletic and Morton F. Zifferer, Jr., for three year terms expiring at the
Company's 2003 Annual Meeting of Shareholders. The votes cast for Mr. Beletic
and Mr. Zifferer were as follows:
John D. Beletic 3,884,911 For
5,130 Against or Withheld
Morton F. Zifferer, Jr. 3,885,311 For
4,730 Against or Withheld
1994 STOCK AND INCENTIVE PLAN. At the meeting, the shareholders approved as
proposed Amendment No. 4 to the 1994 Stock and Incentive Plan increasing the
number of shares available for issuance under the plan by 300,000. The number of
votes for was 2,417,729, the number of votes against was 173,786, the number of
abstentions was 9,216 and the number of broker non-votes was 1,289,310.
INDEPENDENT AUDITORS. At the meeting, the shareholders ratified the appointment
of Arthur Andersen LLP to serve as the independent public accountants of the
Company for the fiscal year ending April 1, 2001. The number of votes for was
3,885,960, the number of votes against or withheld was 1,580, and the number of
abstentions was 2,501.
ITEM 5 - OTHER INFORMATION
None
11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Fifth Amendment to Financing Agreement dated September 28, 2000
10.2 Second Amended and Restated Revolving Credit Note dated
September 28, 2000
10.3 Amendment No. 4 to 1994 Stock and Incentive Plan of TESSCO
Technologies Incorporated
11. Statement re: computation of per share earnings
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
12
SIGNATURE
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.
TESSCO TECHNOLOGIES INCORPORATED
Date: November 2, 2000 By: /S/ROBERT C. SINGER
-------------------------------
Robert C. Singer
Senior Vice President and Chief Financial
Officer
(principal financial and accounting officer)
13